EXHIBIT 99.3
                                                                   ------------



===============================================================================






ABITIBI-CONSOLIDATED INC.

Consolidated Financial Statements

DECEMBER 31, 2006, 2005 AND 2004







===============================================================================
<PAGE>

ABITIBI-CONSOLIDATED INC.
-------------------------------------------------------------------------------

Index to Consolidated Financial Statements


                                                                           PAGE
                                                                           ----

Management's Report.........................................................(i)

Management's Report on internal control over financial reporting...........(ii)

Auditors' Report.....................................................(iii)-(iv)

Consolidated Statements of Earnings and Consolidated
        Statements of Deficit...............................................(v)

Consolidated Statements of Cash Flows......................................(vi)

Consolidated Balance Sheets...............................................(vii)

Consolidated Business Segments...........................................(viii)

Consolidated Geographic Segments...........................................(ix)

Notes to Consolidated Financial Statements..............................1 to 36


<PAGE>


MANAGEMENT'S REPORT

The consolidated  financial  statements and all other information in the Annual
Report  are the  responsibility  of the  Company's  management  and  have  been
approved by its Board of Directors.

The  consolidated  financial  statements  have been prepared in accordance with
Canadian  generally  accepted  accounting  principles and include some amounts,
which are based on best estimates and judgment.  Financial information provided
elsewhere  in  the  Annual  Report  is  consistent   with  that  shown  in  the
consolidated financial statements.

Senior  management of the Company is responsible for the design,  establishment
and maintenance of appropriate  internal  controls and procedures for financial
reporting, to ensure that financial statements for external purposes are fairly
presented in conformity with generally accepted accounting principles. Pursuant
to these  internal  controls and  procedures,  processes  have been designed to
ensure that the Company's  transactions are properly authorized,  the Company's
assets are safeguarded against  unauthorized or improper use, and the Company's
transactions  are properly  recorded and reported to permit the  preparation of
the  Company's  financial  statements  in conformity  with  generally  accepted
accounting  principles.  A team of internal  auditors  regularly  evaluates the
effectiveness  of the  Company's  accounting  systems,  policies  and  internal
controls and procedures for financial  reporting,  and presents its findings to
senior  management and informs the Audit Committee of its  conclusions  arising
from this evaluation.

External and internal  auditors have free and  independent  access to the Audit
Committee,  which is  comprised  of five  independent  members  of the Board of
Directors. The Audit Committee,  which meets regularly throughout the year with
members of financial management and the external and internal auditors, reviews
the  consolidated  financial  statements and  recommends  their approval to the
Board of Directors.

The accompanying  consolidated  financial  statements have been examined by the
external auditors, PricewaterhouseCoopers LLP, whose report appears herein.



/s/ John W. Weaver                                /s/ Pierre Rougeau
------------------------                          ------------------------
JOHN W. WEAVER                                    PIERRE ROUGEAU
President and Chief Executive Officer             Senior Vice-President,
                                                  Corporate Development and
                                                  Chief Financial Officer


March 6, 2007
Montreal, Quebec, Canada




                                                                            (i)
<PAGE>


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's  management,  more specifically,  the Chief Executive Officer and
the Chief Financial  Officer,  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, 2006
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  based on those  criteria as at December 31,
2006. There are no material  weaknesses that have been identified by management
in this regard, as of December 31, 2006.

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.

Management's  assessment of the effectiveness of the Company's internal control
over  financial  reporting  as  at  December  31,  2006  has  been  audited  by
PricewaterhouseCoopers LLP, our independent auditors, as stated in their report
which follows.



/s/ John W. Weaver                                /s/ Pierre Rougeau
------------------------                          ------------------------
JOHN W. WEAVER                                    PIERRE ROUGEAU
President and Chief Executive Officer             Senior Vice-President,
                                                  Corporate Development and
                                                  Chief Financial Officer


March 6, 2007
Montreal, Quebec, Canada




                                                                           (ii)
<PAGE>


AUDITORS' REPORT

TO THE SHAREHOLDERS OF ABITIBI-CONSOLIDATED INC.

We have completed an integrated audit of the consolidated  financial statements
and internal control over financial reporting of Abitibi-Consolidated Inc. (the
"Company") as of December 31, 2006 and audits of its December 31, 2005 and 2004
consolidated  financial  statements.  Our  opinions,  based on our audits,  are
presented below.

CONSOLIDATED FINANCIAL STATEMENTS

We have audited the accompanying  consolidated balance sheets of the Company as
at December  31,  2006 and 2005,  and the related  consolidated  statements  of
earnings,  deficit  and cash  flows for each of the three  years in the  period
ended  December 31,  2006.  These  consolidated  financial  statements  are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audit of the Company's financial statements as at December 31,
2006 and for the year then ended in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight
Board (United  States).  We conducted our audits of the Company's  consolidated
financial  statements  as at December 31, 2005 and for each of the two years in
the period  ended  December  31, 2005 in  accordance  with  Canadian  generally
accepted auditing  standards.  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.

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, 2006 and 2005 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2006 in accordance
with Canadian generally accepted accounting principles.

INTERNAL CONTROL OVER FINANCIAL REPORTING

We have also  audited  management's  assessment,  included in the  accompanying
Management's  report on internal  control over  financial  reporting,  that the
Company maintained  effective  internal control over financial  reporting as of
December  31,  2006,  based on  criteria  established  in  INTERNAL  CONTROL  -
INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations (COSO)
of the  Treadway  Commission.  The  Company's  management  is  responsible  for
maintaining  effective  internal  control over financial  reporting and for its
assessment of the  effectiveness of internal control over financial  reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial  reporting based
on our audit.

We  conducted  our  audit of  internal  control  over  financial  reporting  in
accordance with the standards of the Public Company Accounting  Oversight Board
(United States).  Those standards require that we plan and perform the audit to
obtain  reasonable  assurance  about whether  effective  internal  control over
financial  reporting  was  maintained  in all  material  respects.  An audit of
internal control over financial  reporting  includes obtaining an understanding
of  internal  control  over  financial   reporting,   evaluating   management's
assessment,  testing and evaluating the design and operating  effectiveness  of
internal control, and performing such other procedures as we consider necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our opinions.

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


                                                                          (iii)
<PAGE>

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.

In our opinion,  management's  assessment that the Company maintained effective
internal  control  over  financial  reporting as of December 31, 2006 is fairly
stated,  in all material  respects,  based on criteria  established in Internal
Control  --  Integrated  Framework  issued  by the  COSO.  Furthermore,  in our
opinion, the Company maintained,  in all material respects,  effective internal
control  over  financial  reporting  as of December  31, 2006 based on criteria
established in Internal Control -- Integrated Framework issued by the COSO.


/s/ PRICEWATERHOUSECOOPERS LLP

CHARTERED ACCOUNTANTS
Montreal, Quebec, Canada
March 6, 2007





                                                                           (iv)
<PAGE>

ABITIBI-CONSOLIDATED INC.
Consolidated Statements of Earnings

YEARS ENDED DECEMBER 31
(in millions of Canadian dollars, unless otherwise noted)

<TABLE>
<CAPTION>
                                                                                   2006              2005              2004
------------------------------------------------------------------------------------------------------------------------------
                                                                                      $                 $                 $
<S>                                                                               <C>               <C>               <C>
Sales                                                                             4,851             5,342             5,299
------------------------------------------------------------------------------------------------------------------------------
                                                                                  3,612             3,866             3,770
Cost of products sold, excluding amortization
Distribution costs                                                                  517               591               592
Countervailing, anti-dumping and other duties (note 4)                             (169)               67                50
Selling, general and administrative expenses                                        133               169               169
Mill closure and other elements (note 6)                                            (9)                46                39
Amortization of plant and equipment (note 5 and note 15)                            424               863               919
Amortization of intangible assets (note 16)                                          16                16                16
------------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) from continuing operations                                  327              (276)             (256)
Financial expenses (note 7)                                                         307               412               375
Gain on translation of foreign currencies                                           (10)             (101)             (317)
Other expenses (income) (note 8)                                                     28                10               (16)
------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before the following items                 2              (597)             (298)
Income tax recovery (note 10)                                                       (85)             (271)             (176)
Share of earnings from investments subject to significant influence                   4                 2                 6
Non-controlling interests                                                           (37)              (29)              (10)
------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations                                           54              (353)             (126)
Earnings from discontinued operations (note 9)                                        -                 3                90
------------------------------------------------------------------------------------------------------------------------------

Net earnings (loss)                                                                  54              (350)              (36)
==============================================================================================================================

Per common share (in dollars, basic and diluted) (note 23)
   Earnings (loss) from continuing operations                                      0.12             (0.81)            (0.29)
   Net earnings (loss)                                                             0.12             (0.80)            (0.08)
==============================================================================================================================

Weighted average number of common shares outstanding (in millions)                  440               440               440
Common shares outstanding, end of year (in millions)                                440               440               440
==============================================================================================================================


<CAPTION>
Consolidated Statements of Deficit

YEARS ENDED DECEMBER 31
(in millions of Canadian dollars)                                                  2006              2005              2004
------------------------------------------------------------------------------------------------------------------------------
                                                                                      $                 $                 $
<S>                                                                               <C>               <C>                <C>
Deficit, beginning of year                                                         (875)             (481)              (401)
Net earnings (loss)                                                                  54              (350)               (36)
Dividends declared                                                                  (22)              (44)               (44)
------------------------------------------------------------------------------------------------------------------------------
Deficit, end of year                                                               (843)             (875)              (481)
==============================================================================================================================
</TABLE>

See accompanying Notes to consolidated financial statements.

                                                                            (v)
<PAGE>

ABITIBI-CONSOLIDATED INC.
Consolidated Statements of Cash Flows

YEARS ENDED DECEMBER 31
(in millions of Canadian dollars)

<TABLE>
<CAPTION>
                                                                                     2006             2005              2004
-------------------------------------------------------------------------------------------------------------------------------
                                                                                        $                $                 $
<S>                                                                                 <C>            <C>               <C>
CONTINUING OPERATING ACTIVITIES
Earnings (loss) from continuing operations                                             54             (353)             (126)
Amortization                                                                          440              879               935
Future income taxes (note 10)                                                         (68)            (194)             (182)
Loss (gain) on translation of foreign currency long-term debt                           6             (154)             (356)
Employee future benefits, excess of funding over expense                              (73)             (65)             (116)
Long-term portion of countervailing and anti-dumping duties receivable
   (note 4)                                                                            41                -               (44)
Non-cash mill closure elements                                                          -               19                28
Gain on disposal of assets (note 6)                                                   (20)             (58)                -
Gain on disposal of an investment (note 8)                                              -               (2)              (25)
Non-controlling interests                                                              37               29                10
Other non-cash items                                                                  (18)              30                19
-------------------------------------------------------------------------------------------------------------------------------
                                                                                      399              131               143
Changes in non-cash operating working capital components (note 11)                   (167)              33              (146)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) continuing operating activities                             232              164                (3)
-------------------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Increase in long-term debt                                                            558            1,172             1,004
Repayment of long-term debt (note 20)                                                (470)          (1,881)             (766)
Financing fees                                                                          -              (14)               (9)
Dividends paid to shareholders                                                        (22)             (44)              (55)
Dividends and cash distributions paid to non-controlling interests                    (44)             (31)              (16)
Other                                                                                   -                1                 3
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities of continuing operations                22             (797)              161
-------------------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES OF CONTINUING OPERATIONS
Additions to property, plant and equipment                                           (165)            (177)             (256)
Additions to intangible assets                                                         (3)               -                 -
Business acquisitions, net of cash and cash equivalents (note 3)                        -              (13)                8
Acquisition of non-controlling interests (note 3)                                       -                -                (7)
Net proceeds on disposal of discontinued operations (note 3)                            -              693               112
Net proceeds on disposal of an investment (note 8)                                      1                2                57
Net proceeds on disposal of property, plant and equipment and other assets             32               64                 4
Receipt on note receivable                                                             10                -                 -
Other                                                                                   2               (3)               (4)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investing activities of continuing operations              (123)             566               (86)
-------------------------------------------------------------------------------------------------------------------------------

Cash generated by (used in) continuing operations                                     131              (67)               72
Cash generated by discontinued operations (note 9)                                      -                3                15
-------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                                      131              (64)               87
Foreign currency translation adjustment on cash                                         5               (4)               (5)
Cash and cash equivalents, beginning of year                                           67              135                53
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                                203               67               135
===============================================================================================================================

Cash and cash equivalents, end of year, related to:
   Continuing operations                                                              203               67               115
   Discontinued operations                                                              -                -                20
-------------------------------------------------------------------------------------------------------------------------------
                                                                                      203               67               135
===============================================================================================================================
</TABLE>

See accompanying Notes to consolidated financial statements.

                                                                           (vi)
<PAGE>

ABITIBI-CONSOLIDATED INC.
Consolidated Balance Sheets

YEARS ENDED DECEMBER 31
(in millions of Canadian dollars)

<TABLE>
<CAPTION>
                                                                         2006               2005
---------------------------------------------------------------------------------------------------
                                                                            $                  $
<S>                                                                    <C>                 <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 12)                                       203                 67
Accounts receivable                                                       362                436
Inventories (note 13)                                                     683                652
Prepaid expenses                                                           53                 52
Future income taxes (note 10)                                              70                  -
---------------------------------------------------------------------------------------------------
                                                                        1,371              1,207

Property, plant and equipment (note 15)                                 3,984              4,260
Intangible assets (note 16)                                               460                473
Employee future benefits (note 21)                                        328                248
Future income taxes (note 10)                                             322                414
Other assets (note 18)                                                    200                146
Goodwill (note 17)                                                      1,297              1,296
---------------------------------------------------------------------------------------------------
                                                                        7,962              8,044
===================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 19)                        785                933
Long-term debt due within one year (note 20)                               72                 18
---------------------------------------------------------------------------------------------------
                                                                          857                951

Long-term debt (note 20)                                                3,792              3,744
Employee future benefits (note 21)                                        162                154
Future income taxes (note 10)                                             629                716
Non-controlling interests                                                  71                 78

SHAREHOLDERS' EQUITY
Capital stock (note 22)                                                 3,518              3,518
Contributed surplus (note 24)                                              40                 34
Deficit                                                                  (843)              (875)
Foreign currency translation adjustment (note 25)                        (264)              (276)
---------------------------------------------------------------------------------------------------
                                                                        2,451              2,401
---------------------------------------------------------------------------------------------------

                                                                        7,962              8,044
===================================================================================================
</TABLE>

Commitments and contingencies (note 27)

See accompanying Notes to consolidated financial statements.


Approved by The Board:


/s/ John W. Weaver                            /s/ Gary J. Lukassen
------------------------                      ------------------------
JOHN W. WEAVER                                GARY J. LUKASSEN
President and Chief Executive Officer         Chairman of the Audit Committee


                                                                          (vii)
<PAGE>

ABITIBI-CONSOLIDATED INC.
Consolidated Business Segments

YEARS ENDED DECEMBER 31
(in millions of Canadian dollars, unless otherwise noted)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                   AMORTIZATION    OPERATING                         ADDITIONS         SALES
                                                            AND       PROFIT                        TO CAPITAL        VOLUME
                                        SALES    IMPAIRMENT (1)   (LOSS) (1)            ASSETS      ASSETS (2)   (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------------
                                            $                $            $                  $              $
<S>                                     <C>                <C>          <C>          <C>                   <C>        <C>
2006
Newsprint                               2,607              237          215              4,358             84         3,486  (a)
Commercial printing papers              1,511              156          (32)             2,742             52         1,748  (a)
Wood products (3)                         733               47          144                862             32         1,858  (b)
---------------------------------------------------------------------------------------------------------------------------------
Continuing operations                   4,851              440          327              7,962            168
=================================================================================================================================

2005
Newsprint                               2,892              531         (228)             4,490             70         3,972  (a)
Commercial printing papers              1,552              297          (89)             2,701             69         1,782  (a)
Wood products (3)                         898               51           41                853             38         1,965  (b)
---------------------------------------------------------------------------------------------------------------------------------
Continuing operations                   5,342              879         (276)             8,044            177
=================================================================================================================================

2004
Newsprint                               2,795              702         (362)                               96         3,971  (a)
Commercial printing papers              1,479              177          (52)                              141         1,738  (a)
Wood products (3)                       1,025               56          158                                19         2,169  (b)
---------------------------------------------------------------------------------------------------------------------------------
Continuing operations                   5,299              935         (256)                              256
=================================================================================================================================
</TABLE>

 (1) Specific items affecting:

<TABLE>
<CAPTION>
                                 MILL CLOSURE AND OTHER ELEMENTS
                             ------------------------------------------
                                  MILL    GAIN ON SALE       OTHER      COUNTERVAILING,       SG&A    AMORTIZATION      TOTAL
                               CLOSURE       OF ASSETS    ELEMENTS         ANTI-DUMPING   EXPENSES             AND   SPECIFIC
                                 COSTS                          (4)    AND OTHER DUTIES         (5)     IMPAIRMENT      ITEMS
    --------------------------------------------------------------------------------------------------------------------------
                                     $               $           $                    $          $               $          $
    <S>                             <C>                          <C>                                           <C>        <C>
    2006
    Newsprint                       (7)            (18)          8                    -         (6)              -        (23)
    Commercial printing
    papers                           -               -           7                    -         (3)              -          4
    Wood products                    -               -           1                 (171)        (2)              -       (172)
                             -------------------------------------------------------------------------------------------------
                                    (7)            (18)         16                 (171)       (11)              -       (191)
                             =================================================================================================

    2005
    Newsprint                       89               -           9                    -          -             247        345
    Commercial printing
    papers                           -             (53)          -                    -          -             124         71
    Wood products                    1               -           -                    -          -               -          1
                             -------------------------------------------------------------------------------------------------
                                    90             (53)          9                    -          -             371        417
                             =================================================================================================

    2004
    Newsprint                       17               -           8                    -          -             364        389
    Commercial printing
    papers                           7               -           7                    -          -               -         14
    Wood products                    -               -           -                  (32)         -               -        (32)
                             -------------------------------------------------------------------------------------------------
                                    24               -          15                  (32)         -             364        371
                             =================================================================================================
</TABLE>

 (2) Capital  assets  include  property,  plant and  equipment  and  intangible
     assets.
 (3) Wood products  sales exclude  inter-segment  sales of $162 million in 2006
     (2005 - $172 million, 2004 - $177 million).
 (4) Other elements include early retirement program,  labour force reductions,
     start-up  costs and air emission  credits.
 (5) Related to the reversal of prior years'  provision of capital tax included
     in selling, general and administrative expenses.

 (a) in thousands of tonnes
( b) in millions of board feet


See accompanying Notes to consolidated financial statements.

                                                                         (viii)

<PAGE>

ABITIBI-CONSOLIDATED INC.
Consolidated Geographic Segments

YEARS ENDED DECEMBER 31
(in millions of Canadian dollars)

Sales, capital assets (1) and goodwill by geographic manufacturing location are
as follows:

<TABLE>
<CAPTION>
                                                                                     CAPITAL ASSETS
                                                                           SALES       AND GOODWILL
------------------------------------------------------------------------------------------------------
                                                                               $                  $
<S>                                                                        <C>                <C>
2006
Canada                                                                     3,938              4,341
United States                                                                752              1,147
United Kingdom                                                               161                253
------------------------------------------------------------------------------------------------------

Continuing operations                                                      4,851              5,741
======================================================================================================


2005
Canada                                                                     4,417              4,587
United States                                                                741              1,192
United Kingdom                                                               184                250
------------------------------------------------------------------------------------------------------

Continuing operations                                                      5,342              6,029
======================================================================================================


2004
Canada                                                                     4,453
United States                                                                663
United Kingdom                                                               183
------------------------------------------------------------------------------------

Continuing operations                                                      5,299
====================================================================================
</TABLE>


Sales by final destination are as follows:

<TABLE>
<CAPTION>
                                                           2006             2005               2004
------------------------------------------------------------------------------------------------------
                                                              $                $                  $
<S>                                                        <C>             <C>                <C>
Canada                                                       750             710                817
United States                                              3,190           3,547              3,508
Other countries                                              911           1,085                974
------------------------------------------------------------------------------------------------------

Continuing operations                                      4,851           5,342              5,299
======================================================================================================
</TABLE>

(1) Capital assets include property, plant and equipment and intangible assets.






See accompanying Notes to consolidated financial statements.

                                                                           (ix)
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

1    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     These consolidated financial statements of Abitibi-Consolidated  Inc. (the
     "Company")  are  expressed  in  Canadian   dollars  and  are  prepared  in
     accordance  with  Canadian   generally  accepted   accounting   principles
     ("Canadian  GAAP").  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 29  "Differences  between  Canadian  and United  States
     generally accepted accounting principles".

     PRINCIPLES OF CONSOLIDATION
     The consolidated  financial statements include the accounts of the Company
     and its  subsidiaries,  as  well  as its  joint  ventures.  The  Company's
     interests in joint  ventures  are  accounted  for using the  proportionate
     consolidation  method.  The investments in entities subject to significant
     influence are accounted for using the equity method.

     BUSINESS OF THE COMPANY
     The Company operates an integrated business in forest products. Operations
     are  located in  Canada,  the United  States and the United  Kingdom.  The
     woodlands  operations  supply logs to sawmills  and certain pulp and paper
     mills.  Sawmills process logs to produce wood products and wood chips. The
     production and selling of wood products  constitutes  the "Wood  products"
     segment.  Chips  are  used  in the  production  of  newsprint,  commercial
     printing papers and market pulp. The remaining fibre  requirements for the
     production of newsprint and commercial  printing papers is obtained mainly
     from the paper  recycling  facilities  operated  by the  Company  and from
     long-term supply  agreements.  The  manufacturing and selling of newsprint
     and the collection of old papers  constitute the "Newsprint"  segment.  As
     newsprint is used to print  newspapers and advertising  flyers,  demand is
     determined by circulation and advertising.  The  manufacturing and selling
     of commercial printing papers and a small volume of market pulp constitute
     the "Commercial  printing papers" segment.  Commercial printing 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.

     Most of the  Company's  products are marketed  globally with a significant
     concentration in the United States. The Company does not have any customer
     for which sales exceed 10% of total sales.

     The accounting  policies used in each of these  business  segments are the
     same  as  those  described  in  this  summary  of  significant  accounting
     policies.  The head office costs are distributed to the different segments
     using an appropriate method. Inter-segment transfers of wood chips and old
     papers are recorded at the exchange  value,  which is the amount agreed to
     by the parties.

     The business segments are managed separately because each segment requires
     different technology and marketing strategies.  Business segment operating
     profit  takes into  account  sales,  cost of products  sold,  distribution
     costs, countervailing, anti-dumping and other duties, selling, general and
     administrative expenses, mill closure and other elements, amortization and
     impairment  of  plant  and  equipment  and  intangible  assets  as well as
     goodwill impairment for each business segment. Financial expenses, loss or
     gain on  translation  of foreign  currencies,  other  expenses and income,
     income tax expense or recovery, share of earnings from investments subject
     to significant  influence,  as well as  non-controlling  interests are not
     allocated to specific business segments.

     USE OF ESTIMATES
     The  preparation of consolidated  financial  statements in conformity with
     Canadian GAAP requires  management to make estimates and assumptions  that
     affect the reported amounts of assets and  liabilities,  the disclosure of
     contingent assets and liabilities at the date of the financial  statements
     and the  amounts  of  revenues  and  expenses  for the  reporting  period.
     Significant  areas  requiring the use of management  estimates are: useful
     lives  of  plant  and  equipment,  impairment  of  long-lived  assets  and
     goodwill,   employee  future  benefits,  income  taxes,  asset  retirement
     obligations and environmental  accruals.  Actual results could differ from
     those estimates.

     REVENUE

     The Company's  revenues are essentially  derived from sales of goods. Such
     revenues are recognized when persuasive evidence of an arrangement exists,
     the goods  have been  delivered,  there are no  uncertainties  surrounding
     product  acceptance,  the  related  revenue is fixed or  determinable  and
     collection is reasonably assured. Sales are reported net of allowances and
     rebates.



                                                                              1
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     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 the
     foreign currency translation  adjustment account 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.

     CASH AND CASH EQUIVALENTS
     Cash and cash equivalents include cash on hand, demand deposits,  banker's
     acceptances  and commercial  paper with a maturity of three months or less
     from the date of purchase  that are recorded at cost,  which  approximates
     market value.

     ACCOUNTS RECEIVABLE
     Accounts  receivable are recorded at cost, net of a provision for doubtful
     accounts that is based on expected collectibility.  Any gains or losses on
     the sale of accounts receivable 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 values are determined on a
     discounted  cash  flow  basis.  Costs  related  to the  sale  of  accounts
     receivable are recognized in "Other expenses (income)" in the consolidated
     statements of earnings in the period in which they are incurred.

     As at December 31, 2006, accounts receivable recorded on the balance sheet
     are net of an  allowance  for doubtful  accounts of $3 million  (2005 - $4
     million).

     INVENTORIES
     Wood products,  newsprint and commercial  printing papers  inventories are
     valued at the lower of cost,  determined on an average cost basis, and net
     realizable value.

     Logs,  chips,  other raw materials as well as production  and  maintenance
     supply  inventories  are  valued  at the lower of cost,  determined  on an
     average cost basis, and replacement cost.

     INVESTMENTS
     Investments in entities subject to significant influence are accounted for
     using the equity method. Other investments are recorded at cost.

     PROPERTY, PLANT AND EQUIPMENT AND AMORTIZATION
     Property,  plant and equipment are recorded at cost, including capitalized
     interest and pre-production  costs.  Investment tax credits and government
     capital grants received reduce the cost of the related assets.

     Amortization is provided  principally using the  straight-line  method, at
     rates which amortize the assets' cost over the useful lives as follows:

                                                                      YEARS
                                                                    ---------
          Buildings, pulp and paper mill production equipment        20 - 25
          Sawmill production equipment                               10 - 12
          Woodlands, roads, timberlands, camps and equipment         10 - 20
          Hydroelectric power plants                                      40

     Additions to plant and equipment are amortized from the date of operation.
     Repairs  and  maintenance  as well as  planned  shutdown  maintenance  are
     charged to expense as incurred.


                                                                              2
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     INTANGIBLE ASSETS AND AMORTIZATION
     Intangible assets are recorded at cost. Amortization is provided using the
     straight-line method over the useful lives of the intangible assets.

                                                                     YEARS
                                                                  -----------
        Water rights                                                    40
        Cutting rights                                               25-33

     IMPAIRMENT OF LONG-LIVED ASSETS
     Long-lived  assets are  reviewed for  impairment  upon the  occurrence  of
     events or changes in  circumstances  indicating that the book value of the
     assets may not be  recoverable,  as measured by  comparing  their net book
     value to the estimated  undiscounted  future cash flows generated by their
     use.  Impaired assets are recorded at fair value,  determined  principally
     using  discounted  future cash flows  expected from their use and eventual
     disposition.

     OTHER ASSETS
     Other assets are reported at cost.  Deferred  financing fees are amortized
     over the life of the related long-term debt, which generally ranges from 5
     to 30 years.

     GOODWILL
     Goodwill  is subject to an annual  impairment  test  performed  during the
     fourth quarter of each year. The test will be performed more frequently if
     events  or  changes  in  circumstances  indicate  that  goodwill  might be
     impaired.  Testing for  impairment is  accomplished  mainly by determining
     whether  the fair value of a  reporting  unit,  based on  discounted  cash
     flows,  exceeds the book value of the net assets of that reporting unit as
     at the assessment  date. If the fair value is greater than the book value,
     no further  impairment  testing is  necessary.  In the event that the book
     value exceeds the fair value, a second test must be performed  whereby the
     fair value of the reporting unit's goodwill must be 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.

     ENVIRONMENTAL COSTS
     The Company is subject to  environmental  laws and regulations  enacted by
     federal,   provincial,   state   and  local   authorities.   Environmental
     expenditures that will benefit the Company 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 the Company in future periods are accrued on a non-discounted
     basis  and  expensed  to  earnings,   on  a  site-by-site  basis,  when  a
     requirement to remedy an environmental exposure is probable and a cost can
     reasonably be estimated.

     ASSET RETIREMENT OBLIGATIONS
     Asset  retirement  obligations  are  recognized in the period in which the
     Company  incurs a legal  obligation  associated  to the  retirement  of an
     asset. The obligation is initially measured at fair value and subsequently
     adjusted  for the  passage  of  time,  using a credit  adjusted  risk-free
     interest rate, and any changes in the underlying cash flows. The costs are
     to be  capitalized  as part of the book  value of the  related  asset  and
     depreciated over its remaining useful life.

     EMPLOYEE FUTURE BENEFITS
     PENSION BENEFIT PLANS
     The Company accrues the cost of defined benefit plans based on assumptions
     determined by the Company.  The  determination of the net periodic benefit
     cost includes:

       o    the cost of pension  benefits  provided in  exchange of  employees'
            services rendered during the year;

       o    the interest cost of pension obligations;

       o    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;

       o    gains or losses on  settlements,  curtailments  and  special  early
            retirement;

       o    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 11 years); and

       o    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.


                                                                              3
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     The pension  plans'  obligations  are  determined in  accordance  with the
     projected benefit method prorated on services.

     OTHER BENEFIT PLANS
     The  Company  accrues  the cost of  post-retirement  benefits  other  than
     pensions based on assumptions  determined by the Company.  These benefits,
     which are funded by the Company as they become due, include life insurance
     programs as well as medical and dental benefits. The Company amortizes the
     cumulative unrecognized net actuarial gains and losses in excess of 10% of
     the accrued  benefit  obligation  at the  beginning of the year,  over the
     average  remaining  service period of the active employee group covered by
     the plans.

     INCOME TAXES
     Future income tax assets and  liabilities  are  recognized  for the future
     income tax consequences of events that have been included in the financial
     statements  or income tax returns of the Company.  Future income taxes are
     provided  for using the  liability  method.  Under the  liability  method,
     future  income  taxes  are  recognized  for  all   significant   temporary
     differences  between  the tax and  financial  statement  bases of  assets,
     liabilities and carry forward items,  and measured using the tax rates and
     laws  expected  to apply in the years in which the assets and  liabilities
     are expected to be recovered or settled.  The Company does not provide for
     income taxes on undistributed  earnings of foreign  subsidiaries  that are
     not expected to be repatriated in the foreseeable future.

     Future  income tax assets are  recognized  only to the extent that, in the
     opinion of  management,  it is more likely than not that the future income
     tax assets will be realized.  Future income tax assets and liabilities are
     adjusted  for the  effect of  changes in tax laws and rates on the date of
     enactment or substantive enactment.

     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.

     STOCK-BASED COMPENSATION PLANS
     The Company has  stock-based  compensation  plans,  which are described in
     note 24. The Company records,  as a charge to earnings,  the fair value of
     stock options at the grant date.  Any  consideration  paid by employees on
     exercise  of stock  options or  purchase  of stock is credited to "Capital
     stock".  Stock-based  compensation expense, related to stock option plans,
     is recognized using the straight-line  method over the vesting period. The
     contributed   surplus   component  of  the  stock-based   compensation  is
     transferred to capital stock upon the issuance of common shares.

     All costs related to the other stock-based  compensation plans are accrued
     and expensed to earnings when earned or over the vesting period, if any.

     DERIVATIVE INSTRUMENTS
     The Company  utilizes  derivative  instruments  in the  management  of its
     foreign  currency and interest  rate  exposures.  The Company uses hedging
     instruments  to hedge  changes  in fair value or cash flows for items with
     identified  exposures.  The  Company  also  assesses,  both at the hedge's
     inception  and  on  an  ongoing  basis,   the   effectiveness  of  hedging
     instruments.  The  Company  uses  hedge  accounting  to  account  for  the
     derivative  instruments formally designated as hedging instruments and the
     fair value method for  derivative  instruments  not  designated as hedging
     instruments.

     Realized  and  unrealized   gains  or  losses   associated   with  hedging
     instruments for which the underlying hedged items are either sold, paid or
     terminated  are recognized to earnings.  Realized and unrealized  gains or
     losses when hedging  instruments have ended or cease to be effective prior
     to their  maturity are deferred and  recognized  in earnings  concurrently
     with the recognition of the items being hedged.

     The Company  hedges part of its foreign  exchange  exposure on anticipated
     cash  inflows  in US dollars  and Euros  through  the use of  options  and
     forward exchange contracts. Resulting gains and losses, including premiums
     on options,  are recognized when the designated hedge is exercised and are
     included in "Sales".

     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 "Financial expenses".


                                                                              4
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     ACCOUNTING PRINCIPLES ISSUED BUT NOT YET IMPLEMENTED
     FINANCIAL INSTRUMENTS, HEDGES AND COMPREHENSIVE INCOME
     In January 2005, the Canadian Institute of Chartered  Accountants ("CICA")
     published the following  three new sections of the CICA Handbook:  Section
     3855, FINANCIAL  INSTRUMENTS - RECOGNITION AND MEASUREMENT,  Section 3865,
     HEDGES and Section 1530,  COMPREHENSIVE INCOME.  Together, these standards
     introduce  new   requirements  for  the  recognition  and  measurement  of
     financial instruments, hedge accounting and comprehensive income that are,
     for the most part,  harmonized  with standards  issued by the US Financial
     Accounting  Standards  Board  ("FASB").   While  management  is  currently
     assessing  the effects of these new  recommendations,  impacts  consistent
     with  the  adjustments  described  under  note 29 d) 1, 2 and e) of  these
     financial  statements  are  expected.  These new  recommendations  must be
     adopted by the Company for the fiscal year  beginning  on January 1, 2007.
     The  application  of these new  recommendations  is not expected to have a
     significant effect on the Company's financial  position,  earnings or cash
     flows but will  require  the Company to present a new  statement  entitled
     "Comprehensive Income".

     ACCOUNTING CHANGES
     During the year,  the CICA has issued a new section of the 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. The Company will apply this standard on January 1, 2007.

     COMPARATIVE FIGURES
     Certain  comparative  figures  disclosed  in  the  consolidated  financial
     statements  have  been   reclassified  to  conform  to  the  present  year
     presentation.


2    MEASUREMENT UNCERTAINTY

     IMPAIRMENT OF GOODWILL
     The Company  performs the required annual  impairment test as of September
     30 during the fourth  quarter of each year.  As at December 31, 2006,  the
     Company  had $1,297  million of  goodwill,  from which $858  million  were
     related to the  "Newsprint"  segment and $439  million to the  "Commercial
     printing  papers"  segment.   The  Company  performed  the  2006  goodwill
     impairment  test and  found  that the fair  value of both  paper  segments
     exceeded  book  value  by  at  least  20%.  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.  Key
     assumptions  include  estimated  useful  life  of the  long-lived  assets,
     projections of trend price,  production levels,  production costs,  market
     supply and demand,  foreign  exchange rates,  inflation,  weighted average
     cost of capital ("WACC") and capital spending. The assumptions are derived
     from (1)  information  generated  internally,  such as existing sales data
     based on current product lines and assumed  production  levels, as well as
     manufacturing  costs;  (2) independent  industry  research firms;  and (3)
     other external published reports and forecasts. The Company's products are
     commodity  products,  therefore,  pricing is inherently volatile and often
     follows a cyclical  pattern.  Trend  prices  are  derived  from  forecasts
     prepared by Resource  Information  Systems Inc.  ("RISI"),  an independent
     external firm, taking into  consideration the specific  characteristics of
     the Company's  products.  The Company also uses RISI's  currency  exchange
     long-term forecast of CDN$1.00 equals US$0.86.  To assure consistency with
     market valuation,  the Company estimates its market valuation and compares
     it with results obtained with the discounted cash flow method.

     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  exceed book value by 12% for the  "Newsprint"  segment and would be
     about equal to book value in the "Commercial  printing papers" segment. If
     the WACC,  which is used to discount the projected cash flows,  was lower,


                                                                              5
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     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 excess of the fair values of each of the reporting
     units would continue to exceed their book values amounts by at least 16%.

     Future changes in assumptions or the  interrelationship of the assumptions
     may negatively impact future  valuations.  In future  measurements of fair
     value, adverse changes in discounted cash flow assumptions could result in
     an  impairment  of goodwill  that would  require a non-cash  charge to the
     consolidated  statements of earnings and may have a material effect on the
     Company's consolidated financial statements.

     IMPAIRMENT OF LONG-LIVED ASSETS
     During the fourth quarter of 2006, the Company  conducted the initial step
     of the impairment tests on the Bridgewater,  United Kingdom paper mill and
     on the "Wood  products"  segment  as a result  of  operating  losses.  The
     Company also conducted the initial step on the indefinitely  idled Lufkin,
     Texas  paper  mill.  Estimates  of  future  cash  flows  used to test  the
     recoverability of a long-lived asset are mainly derived in the same manner
     as the  projections of cash flows used in the initial step of the goodwill
     impairment  test. In addition,  the  impairment  test for the Lufkin paper
     mill was performed in light of a scenario of the mill's restart  producing
     lightweight coated paper under a partnership structure.

     The Company concluded that the recognition of an impairment charge for the
     business  units analyzed was not required,  as the estimated  undiscounted
     cash flows  exceeded the book values by at least 32%.  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 $250  million,  $174 million and
     $344 million for the "Newsprint",  "Commercial  printing papers" and "Wood
     products" segments, respectively, as at December 31, 2006.

     See note 5  [Impairment  of  long-lived  assets]  for the write  downs and
     impairment charges recorded by the Company in 2005 and 2004.


3    ACQUISITIONS AND DIVESTITURE

     2005

     i)  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, 2006. The
         Company  recorded a gain of $3  million  (loss of $10  million  net of
         income  taxes)  related to this  transaction.  The $10 million loss is
         included  in   "Earnings   from   discontinued   operations"   in  the
         consolidated statements of earnings.

     ii) 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,  Quebec.  The  results  of  the  acquired
         business have been included in the consolidated  financial  statements
         since January 1, 2005.

     2004

     i)  ACQUISITION OF NON-CONTROLLING INTERESTS

         On  June  2,  2004,   the  Company   exercised  its  option,   at  the
         predetermined  amount of $7 million  (US$5  million),  to acquire  the
         other joint venture partner's 50% non-controlling  interest in Alabama
         River  Newsprint  Company  ("Alabama")  and  Alabama  River  Recycling
         Company  ("Alabama  Recycling").  As  part of  this  transaction,  the
         Company  renounced  its  loan  receivable  from the  partner,  and the
         partner  renounced its right to the  subordinated  long-term debt. The
         book value of the non-controlling  interest amounted to $90 million as
         at June 2, 2004. The $12 million excess of consideration over the book
         value of  non-controlling  interest  has been  allocated  to property,
         plant and equipment.

     ii) BUSINESS ACQUISITIONS

         On May 17,  2004,  the  Company  acquired  the  assets of  Cooperative
         Forestiere  Laterriere for a cash  consideration  of $10 million.  The
         consideration  paid was  entirely  allocated  to  property,  plant and
         equipment.  The results of the acquired business have been included in
         the consolidated  financial statements since the effective date of the
         acquisition.


                                                                              6
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

         On July 1, 2004, the Company acquired, for a cash consideration of $14
         million  (US$10.5  million)  an  additional  2.5%  interest in Augusta
         Newsprint  Company  ("Augusta"),  a company operating a newsprint mill
         located in  Augusta,  Georgia.  As a result of this  transaction,  the
         Company's  interest  rose from 50% to 52.5% and control was  obtained.
         Effective as at the date of acquisition and in accordance with Section
         1590  of the  CICA  Handbook,  the  Company's  consolidated  financial
         statements  include all the  accounts  of Augusta,  which is no longer
         included on a proportionate  consolidation  basis.  The effect of this
         business transaction has been reflected in the consolidated  financial
         statements since the effective date of the acquisition.

         These  acquisitions  were  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:

<TABLE>
<CAPTION>
                                                                                        2005                  2004
      --------------------------------------------------------------------------------------------------------------------------
                                                                            Net assets         Net assets     Net liabilities
                                                                                  sold           acquired             assumed
      --------------------------------------------------------------------------------------------------------------------------
                                                                                     $                  $                   $
      <S>                                                                   <C>                <C>            <C>
      Net assets acquired, net liabilities assumed or net assets
            sold
         Current assets, excluding cash and cash
         equivalents                                                               174                  8                  21
         Property, plant and equipment                                             814                  5                  78
         Intangible assets                                                           5                 21                   -
         Other non-current assets                                                    4                  -                   1
         Goodwill                                                                   75                  -                   4
         Current liabilities                                                       (81)                (1)                (11)
         Long-term debt                                                           (346)                (1)                (37)
         Employee future benefits                                                    -                  -                  (9)
         Future income tax liabilities                                             (46)                (8)                  -
         Non-controlling interests                                                 (33)                 -                 (55)
         Foreign currency translation adjustment                                   120                  -                   -
      --------------------------------------------------------------------------------------------------------------------------
      Fair value of net assets acquired or net liabilities
         assumed or book value of net assets sold                                  686                 24                  (8)
      ==========================================================================================================================

      Consideration paid (received)
         Cash (net of cash and cash equivalents)                                  (689)                13                  (8)
         Transaction costs payable                                                  (4)                 -                   -
         Book value of investment in Gestofor Inc.                                   -                 11                   -
      --------------------------------------------------------------------------------------------------------------------------
                                                                                  (693)                24                  (8)

      ==========================================================================================================================
</TABLE>

4    COUNTERVAILING, ANTI-DUMPING AND OTHER DUTIES

     In December 2006,  the Company  received a refund of $270 million (US $239
     million)  in  countervailing  and  anti-dumping   deposits.   Taking  into
     consideration  the  account  receivable  of $59  million  (US$52  million)
     recorded in 2004,  revenue of $171 million was recognized in 2006,  mostly
     related to the agreement and  settlement by the  governments of Canada and
     the United  States on the softwood  lumber  dispute,  as well as a related
     interest  income of $32 million  (note 7). The $171  million  revenue is a
     reversal of previous years' countervailing and anti-dumping duties.

     The new export tax  expense on  softwood  lumber  effective  in the fourth
     quarter of 2006 amounted to $2 million.


                                                                              7
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

5    IMPAIRMENT OF LONG-LIVED ASSETS

     2005
     In 2005, the Company recorded asset write downs and impairment  charges of
     $203  million  ($138  million  net of  income  taxes),  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 ($77 million net of income
     taxes)  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,  Ontario  paper mill to fair value and  recognized  an impairment
     charge of $43  million  ($29  million  net of income  taxes).  Of the $371
     million of write downs and impairment  charges,  $247 million was included
     in  the  "Newsprint"   segment  and  $124  million  was  included  in  the
     "Commercial  printing  papers"  segment.  The  revenues  that  used  to be
     generated from those closed assets are now generated by the other mills of
     the Company.

     2004
     During the fourth  quarter of 2004,  the  Company  recognized  asset write
     downs of $364 million ($235  million net of income  taxes)  related to the
     property,  plant and equipment located in Sheldon, Texas, and Port-Alfred,
     Quebec, as these long-lived assets were no longer recoverable and exceeded
     their fair value. The Company subsequently announced, on January 26, 2005,
     the permanent shutdown of the Sheldon and Port-Alfred mills, due to excess
     paper  production  capacity in the general  business  and high  production
     costs.  The book value of the  property,  plant and  equipment was written
     down to its fair value,  representing  the present  value of the estimated
     net  proceeds  from  dismantling,  redeployment  and  disposal,  based  on
     experience  with  disposal  value of  similar  assets.  Those  assets  are
     included  in  the  "Newsprint"  segment.  The  revenues  that  used  to be
     generated from those closed assets are now generated by the other mills of
     the Company.


6    MILL CLOSURE AND OTHER ELEMENTS

     2006
     In 2006, the Company  recorded  favourable mill closure and other elements
     of $9 million ($4 million net of income taxes),  resulting mainly from the
     sale of the Sheldon mill and from the reversal of related asset retirement
     obligations.  These favourable  elements were partially offset,  mainly by
     mill  closure  and other  elements  charges,  in most part  related to the
     Company's  initiative  to review its Selling,  General and  Administrative
     expenses at Head Office, as well as its general and  administrative  costs
     incurred  at the mills,  where  these  expenses  are  included  in cost of
     products  sold.  The mill  closure  and  other  elements  included  in the
     "Newsprint",  "Commercial  printing  papers" and "Wood products"  segments
     were a credit of $17  million,  a charge of $7 million  and a charge of $1
     million, respectively.

     2005
     With respect to the permanent closure of the Kenora and Stephenville paper
     mills, as well as the Champneuf,  Quebec  sawmill,  and the closure of one
     paper machine at the  Bridgewater  paper mill  announced in December 2005,
     the Company  recorded a charge of $90 million  ($62  million net of income
     taxes) in 2005.  The Company also  recorded in 2005 a charge of $9 million
     ($6 million net of income  taxes) of early  retirement  program and labour
     force  reductions.  Of those mill closure and other elements,  $98 million
     was included in the "Newsprint" segment and $1 million was included in the
     "Wood  products"  segment.  During the fourth  quarter,  the Company  also
     recorded a gain on the sale of  timberlands in the Thunder Bay area for an
     amount of $53 million  ($48  million net of income  taxes).  This gain was
     included in the "Commercial printing papers" segment.

     2004
     With respect to the permanent closure of its Sheldon and Port-Alfred paper
     mills,  the Company  recorded a charge of $28 million  ($18 million net of
     income  taxes)  for   obsolescence  of  inventory  and  asset   retirement
     obligations related to environmental matters.

     During the year 2004,  $12 million of additional  costs ($7 million net of
     income taxes) resulting from the 2003 idling of the Lufkin and Port-Alfred
     mills were  recorded,  as well as $7  million  ($4  million  net of income
     taxes) of start-up costs related to the Alma project.

     During the year 2004,  following the 2002 indefinite idling of the Sheldon
     mill,  the Company sold some air emission  credits.  The resulting gain on
     disposal  amounted to $8 million ($5 million net of income  taxes) and was
     included in "Mill closure and other elements".

     The mill closure and other elements  included in the  "Newsprint"  segment
     and in the "Commercial  printing  papers" segment were $25 million and $14
     million, respectively.


                                                                              8
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     The following  table provides the components of the mill closure and other
     elements for the years ended December 31:

<TABLE>
<CAPTION>
                                                                                      2006             2005            2004
     --------------------------------------------------------------------------------------------------------------------------
                                                                                         $                $               $
<S>                                                                                 <C>              <C>              <C>
     Severance and other labour-related costs                                           13               32               3
     Defined benefit pension and other benefits costs                                    -               12               -
     Early retirement program                                                            2                9               -
     Inventory obsolescence                                                              1               18              17
     Asset retirement obligations related to environmental matters                      (7)              12              11
     Gain on sale of assets                                                            (18)             (53)              -
     Gain on sale of air emission credits                                                -                -              (8)
     Contractual obligations                                                            (2)              10               -
     Start-up costs                                                                      -                -               7
     Costs incurred for idling and other                                                 2                6               9
     --------------------------------------------------------------------------------------------------------------------------
                                                                                        (9)              46              39
     ==========================================================================================================================
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                                                     2006              2005             2004
     --------------------------------------------------------------------------------------------------------------------------
                                                                                        $                 $                $
<S>                                                                                 <C>              <C>              <C>
     Mill closure elements provision, beginning of year                                 38               17               62
     Mill closure elements incurred during the year                                      -               49               12
     Mill closure elements reversed during the year                                     (4)               -                -
     Payments                                                                          (27)             (28)             (57)
     --------------------------------------------------------------------------------------------------------------------------
     Mill closure elements provision, end of year                                        7               38               17
     ==========================================================================================================================
</TABLE>

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


7    FINANCIAL EXPENSES

<TABLE>
<CAPTION>
                                                                                      2006             2005            2004
     --------------------------------------------------------------------------------------------------------------------------
                                                                                         $                $               $
<S>                                                                                  <C>              <C>              <C>
     Interest on long-term debt                                                        321              364              352
     Amortization of deferred financing elements related to debt                        16               23               19
     Premium on early retirement of debt and other elements related to
        early debt retirement                                                            -               32                -
     Interest income                                                                   (37)             (17)              (3)
     Other                                                                              7                10                7
     --------------------------------------------------------------------------------------------------------------------------
                                                                                       307              412              375
     ==========================================================================================================================
</TABLE>

     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.

     During 2005, due to early long-term debt retirements, the Company recorded
     a write off of $3 million for unamortized deferred financing fees.

     Net payment of interest on long-term debt in 2006 amounted to $321 million
     (2005 - $376 million, 2004 - $359 million).


                                                                              9
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

8        OTHER EXPENSES (INCOME)

<TABLE>
<CAPTION>
                                                                                      2006              2005            2004
     --------------------------------------------------------------------------------------------------------------------------
                                                                                         $                 $               $
<S>                                                                                  <C>               <C>              <C>
     Discount on sale of accounts receivable (note 26 d)                                28                17               7
     Gain on disposal of an investment                                                   -                (2)            (25)
     Other                                                                               -                (5)              2
     --------------------------------------------------------------------------------------------------------------------------
                                                                                        28                10             (16)
     ==========================================================================================================================
</TABLE>

     On May 19,  2004,  the Company  sold its 21%  interest  in Voyageur  Panel
     Limited for gross proceeds of $57 million.  The Company recorded a gain of
     $25 million,  before income taxes,  related to this transaction.  In 2005,
     the Company  received a purchase price adjustment of $2 million related to
     this transaction.


9    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.  Comparative  figures were  reclassified to exclude
     PanAsia's results from the Company's continuing operations.

     On February 27, 2004,  the Company sold the  remaining 25% interest in SFK
     GP for gross proceeds of $118 million.  The Company recorded a gain of $85
     million,  before income taxes,  after considering the original cost of the
     investment, the reversal of a deferred gain related to this investment and
     $6 million of transaction costs.

     Condensed earnings from discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                                                      2006             2005            2004
     --------------------------------------------------------------------------------------------------------------------------
                                                                                         $                $               $
<S>                                                                                   <C>              <C>             <C>
     Sales                                                                               -              430             502
     --------------------------------------------------------------------------------------------------------------------------

     Operating profit                                                                    -               33              37
     Financial expenses                                                                  -               13              13
     Gain (loss) on disposal of business, net of income taxes (2005 -
        tax recovery of $13 million, 2004 - tax expense of $15 million)                  -              (10)             75
     --------------------------------------------------------------------------------------------------------------------------
     Earnings from discontinued operations                                               -                3              90
     --------------------------------------------------------------------------------------------------------------------------
                                                                                         -             0.01            0.21
     Earnings per common share from discontinued operations
     ==========================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
     Condensed cash flows from discontinued operations are as follows:
                                                                                      2006             2005             2004
     --------------------------------------------------------------------------------------------------------------------------
                                                                                         $                $                $
<S>                                                                                  <C>               <C>             <C>
     Cash flows from operating activities                                                -               36              69
     Cash flows from financing activities                                                -               33              78
     Cash flows used in investing activities                                             -              (66)           (132)
     --------------------------------------------------------------------------------------------------------------------------

     Cash flows generated by discontinued operations                                     -                3              15
     ==========================================================================================================================
</TABLE>


                                                                             10
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     Condensed business segments from discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                                                       2006             2005             2004
     ---------------------------------------------------------------------------------------------------------------------------
                                                                                          $                $                $
<S>                                                                                  <C>              <C>              <C>
     NEWSPRINT
     Sales                                                                                -              354              410
     Amortization                                                                         -               40               40
     Operating profit                                                                     -               26               30
     Additions to capital assets                                                          -               64              128

     COMMERCIAL PRINTING PAPERS
     Sales                                                                                -               76               92
     Amortization                                                                         -                6                7
     Operating profit                                                                     -                7                7
     Additions to capital assets                                                          -                1                2
</TABLE>

10   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:

<TABLE>
<CAPTION>
                                                                                       2006             2005              2004
         -----------------------------------------------------------------------------------------------------------------------
                                                                                          $                $                 $
<S>                                                                                  <C>              <C>              <C>
         Income tax expense (recovery) based on combined basic Canadian federal
            and provincial tax rates (2006 - 33.5%, 2005 - 31.6%,
            2004 - 32.4%)                                                                 1              (189)             (97)
         Manufacturing and processing allowances                                          -                3                (7)
         Difference in tax rates for foreign subsidiaries                                 5               (6)               (8)
         Charge (recovery) from change in tax rates                                     (63)              38                 -
         Non-taxable portion of foreign exchange gain and loss                            2              (30)              (45)
         Canadian large corporations tax                                                  -                6                 7
         Re-evaluation of current and future income tax assets and
            liabilities                                                                 (31)             (29)              (17)
         Tax exempt items                                                                 -              (50)               12
         Non-taxable portion of gain on disposal of capital assets                        -              (11)                -
         Charges for calculation of temporary differences  (1)                           12                -                 -
         Other                                                                          (11)              (3)              (21)
         -----------------------------------------------------------------------------------------------------------------------

         Income tax recovery                                                            (85)            (271)             (176)
         =======================================================================================================================
</TABLE>

         Significant components of the income tax recovery are as follows:

<TABLE>
<CAPTION>
                                                                                       2006             2005              2004
         -----------------------------------------------------------------------------------------------------------------------
                                                                                          $                $                 $
<S>                                                                                  <C>              <C>              <C>
         Current income tax expense (recovery)                                          (17)             (77)                6
         Future income tax expense (recovery) relating to movement in
            timing differences                                                           34             (198)             (117)
         Future income tax recovery relating to operating loss carry
            forwards                                                                    (51)             (34)              (65)
         Charges for calculation of temporary differences  (1)                           12                -                 -
         Future income tax charge (recovery) resulting from rate changes                (63)              38                 -
         -----------------------------------------------------------------------------------------------------------------------

         Income tax recovery                                                            (85)            (271)             (176)
         =======================================================================================================================
</TABLE>


                                                                             11
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

         (1)  The  Company  completed  a  calculation  of the tax  value of the
              temporary  differences,  using the income tax rates applicable in
              the years in which the assets and  liabilities are expected to be
              recovered or settled.

     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:

<TABLE>
<CAPTION>
                                                                                        2006             2005
          ------------------------------------------------------------------------------------------------------
                                                                                           $                $
          <S>                                                                           <C>              <C>
          Future income tax assets
             Research and development expenditure pool                                   133                -
             Loss carry forwards                                                         532              870
          ------------------------------------------------------------------------------------------------------
                                                                                         665              870
          ------------------------------------------------------------------------------------------------------
          Future income tax liabilities
             Property, plant and equipment and intangible assets                        (647)            (972)
             Long-term debt                                                             (171)            (190)
             Other                                                                       (84)             (10)
          ------------------------------------------------------------------------------------------------------
                                                                                        (902)          (1,172)
          ------------------------------------------------------------------------------------------------------

                                                                                        (237)            (302)
          ------------------------------------------------------------------------------------------------------

          Classified in the consolidated balance sheets as
             Net current future income tax assets                                         70                -
             Net non-current future income tax assets                                    322              414
             Net non-current future income tax liabilities                              (629)            (716)
          ------------------------------------------------------------------------------------------------------
                                                                                        (237)            (302)
          ======================================================================================================
</TABLE>

     c)  LOSS CARRY FORWARDS AND RESEARCH AND DEVELOPMENT EXPENDITURE POOL

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

         CANADA FEDERAL AND PROVINCIAL TAX JURISDICTIONS

         At December 31, 2006 and 2005, the Company had Canadian and provincial
         (other than Quebec) net operating  loss carry forwards of $104 million
         and $1,032 million,  respectively, and Quebec net operating loss carry
         forwards of $105 million and $1,299 million, respectively.  These loss
         carry  forwards  expire at various  dates  between  2009 and 2026.  In
         addition,  $114  million  of  Canadian  investment  tax  credit  carry
         forwards  expiring  between  2011 and 2026  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  and  provincial  tax
         purposes.

         At December 31, 2006, the Company had Canadian and  provincial  (other
         than Quebec) research and development expenditure pool of $430 million
         (2005 - nil) and Quebec research and development  expenditures pool of
         $435 million (2005 - nil). These research and development  expenditure
         pools do not have an expiry date.

         UNITED STATES FEDERAL AND STATE TAX JURISDICTIONS
         At December 31, 2006 and 2005,  the Company had United States  federal
         and  state  net  operating  loss  carry  forwards  of  $1,310  million
         (US$1,124   million)   and   $1,301   million   (US$1,119    million),
         respectively.  These  loss  carry  forwards  expire at  various  dates
         between 2007 and 2026.

         OTHER TAX JURISDICTIONS
         At December 31, 2006 and 2005, the Company had other tax jurisdictions
         net  operating  loss carry  forwards  totalling  $68  million  and $67
         million, respectively. These loss carry forwards do not have an expiry
         date.


                                                                             12
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     d)  GEOGRAPHIC INFORMATION RELATED TO INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                        2006            2005           2004
         ----------------------------------------------------------------------------------------------------------------------
                                                                                           $               $              $
<S>                                                                                    <C>           <C>              <C>
            Domestic                                                                     (77)          (460)            (27)
            Foreign                                                                       79           (137)           (271)
         ----------------------------------------------------------------------------------------------------------------------
                                                                                           2           (597)           (298)
         ======================================================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                        2006           2005            2004
         ----------------------------------------------------------------------------------------------------------------------
                                                                                           $              $               $
<S>                                                                                    <C>           <C>             <C>
         Current income taxes
            Domestic                                                                     (19)           (80)              5
            Foreign                                                                        2              3               1
         ----------------------------------------------------------------------------------------------------------------------
                                                                                         (17)           (77)              6
         ======================================================================================================================

         Future income taxes
            Domestic                                                                     (95)          (139)            (70)
            Foreign                                                                       27            (55)           (112)
         ----------------------------------------------------------------------------------------------------------------------
                                                                                         (68)          (194)           (182)
         ----------------------------------------------------------------------------------------------------------------------

          Income tax recovery                                                            (85)          (271)           (176)
         ======================================================================================================================
</TABLE>

     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.

         Net cash  receipts  for income  taxes in 2006  amounted  to $4 million
         (2005 - cash  receipts  amounted to $40  million,  2004 - net payments
         amounted to $12 million).

11       SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                       2006            2005             2004
     --------------------------------------------------------------------------------------------------------------------------
                                                                                          $               $                $
<S>                                                                                   <C>            <C>              <C>
     Changes in non-cash operating working capital from continuing
        operations
        Accounts receivable                                                              12             (51)             (87)
        Inventories                                                                     (29)              7               35
        Prepaid expenses                                                                 (1)              4               (9)
        Accounts payable and accrued liabilities                                       (149)             73              (85)
     --------------------------------------------------------------------------------------------------------------------------
                                                                                       (167)             33             (146)
     ==========================================================================================================================
</TABLE>


                                                                             13
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

12       CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                                                                                       2006              2005
     --------------------------------------------------------------------------------------------------------------------------
                                                                                                          $                 $
<S>                                                                                                   <C>              <C>
     Cash                                                                                                55               51
     Cash equivalents                                                                                   148               16
     --------------------------------------------------------------------------------------------------------------------------

                                                                                                        203               67
     ==========================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
13       INVENTORIES

                                                                                                        2006             2005
     --------------------------------------------------------------------------------------------------------------------------
                                                                                                           $                $
<S>                                                                                                   <C>              <C>
     Newsprint and commercial printing papers                                                             99               88
     Wood products                                                                                       110              108
     Logs, chips and other raw materials                                                                 257              239
     Production and maintenance supplies                                                                 217              217
     --------------------------------------------------------------------------------------------------------------------------

                                                                                                         683              652
     ==========================================================================================================================
</TABLE>

14   INVESTMENTS IN JOINT VENTURES

     The Company's  consolidated financial position as at December 31, 2006 and
     2005 and  consolidated  results of operations and cash flows for the years
     ended  December 31,  2006,  2005,  and 2004  include,  on a  proportionate
     consolidation  basis,  its 51% joint  venture  interest in Star Lake Hydro
     Partnership, and its investments in joint venture I-Joist mills in Quebec.

     The Company's  consolidated  results of operations  and cash flows for the
     six-month   period  ended  June  30,  2004  include  on  a   proportionate
     consolidation  basis, it's then 50% owned US joint venture  partnership of
     Augusta (see note 3).

<TABLE>
<CAPTION>
     CONDENSED STATEMENTS OF EARNINGS                                                 2006            2005             2004
     ------------------------------------------------------------------------------------------------------------------------
                                                                                         $               $                $
     <S>                                                                              <C>             <C>              <C>
     Sales                                                                              65              76              136
     Operating expenses                                                                 57              70              116
     ------------------------------------------------------------------------------------------------------------------------
     Operating profit                                                                    8               6               20
     Non-operating expenses                                                              3               3                5
     ------------------------------------------------------------------------------------------------------------------------
     Net earnings                                                                        5               3               15
     ========================================================================================================================


     CONDENSED STATEMENTS OF CASH FLOWS                                               2006            2005             2004
     ------------------------------------------------------------------------------------------------------------------------
                                                                                         $               $                $
     Cash flows from operating activities                                                7               8               20
     Cash flows used in financing activities                                            (1)             (1)              (7)
     Cash flows used in investing activities                                            (1)             (1)             (37)
     ========================================================================================================================
</TABLE>


                                                                             14
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
     CONDENSED BALANCE SHEETS                                                         2006            2005
     --------------------------------------------------------------------------------------------------------
                                                                                         $               $
     <S>                                                                              <C>             <C>
     ASSETS
     Current assets                                                                     21               20
     Property, plant and equipment, intangible assets and other
        non-current assets                                                              42               41

     LIABILITIES
     Current liabilities                                                                 8                9
     Long-term debt (including current portion)                                         24               24
     Other non-current liabilities                                                       1                1
     --------------------------------------------------------------------------------------------------------
</TABLE>

15   PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                           2006                                              2005
     ----------------------------------------------------------------------------------------------------------------------------
                                                       ACCUMULATED         NET BOOK                     Accumulated    Net book
                                            COST      AMORTIZATION            VALUE          Cost      amortization       value
     ----------------------------------------------------------------------------------------------------------------------------
                                               $                 $                $             $                 $           $
<S>                                        <C>               <C>              <C>           <C>               <C>         <C>
     Buildings, pulp and paper
        mill production equipment          6,220             3,015            3,205         7,005             3,543       3,462
     Sawmill production equipment            640               458              182           625               428         197
     Woodlands, roads,
        timberlands, camps and
        equipment                            347               170              177           337               153         184
     Hydroelectric power plants              554               141              413           534               123         411
     Construction in progress                  7                 -                7             6                 -           6
     -----------------------------------------------------------------------------------------------------------------------------
                                           7,768             3,784            3,984         8,507             4,247       4,260
     =============================================================================================================================
</TABLE>

     During 2005, the Company recorded asset write downs and impairment charges
     for an amount of $203 million  mainly due to the permanent  closure of its
     Stephenville and Kenora newsprint mills.  Also, the Company  recognized an
     impairment  charge of $125  million  related  to the  property,  plant and
     equipment 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 fair  value  and  recognized  an  impairment  charge of $43
     million.

      The  related   expenses  are  included  in  "Amortization  of  plant  and
      equipment" in the consolidated statements of earnings.

      During 2006, no interest (2005 - no interest  amount,  2004 - $4 million)
      has been capitalized in connection with capital projects.

      As at  December  31,  2006,  the net book value of idled and  permanently
      closed plant facilities amounted to $273 million (2005 - $317 million).

16       INTANGIBLE ASSETS

<TABLE>
<CAPTION>
                                                          2006                                        2005
     ---------------------------------------------------------------------------------------------------------------------------
                                              COST     ACCUMULATED     NET BOOK                    Accumulated     Net book
                                                      AMORTIZATION        VALUE          Cost     amortization         value
     ---------------------------------------------------------------------------------------------------------------------------
                                                 $               $            $             $                $             $
<S>                                          <C>      <C>              <C>           <C>          <C>              <C>
       Water rights                            503              84          419           500               72            428
       Cutting rights                           97              56           41            97               52             45
     ---------------------------------------------------------------------------------------------------------------------------

                                               600             140          460           597              124            473
     ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

     Based on the current value of intangible  assets subject to  amortization,
     the estimated  amortization  expense will be $16 million in each year from
     2007 through 2011. As acquisitions and  dispositions  occur in the future,
     these amounts may vary.


                                                                             15
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

17   GOODWILL

<TABLE>
<CAPTION>
                                                        2006                                          2005
      -------------------------------------------------------------------------------------------------------------------------
                                                      COMMERCIAL                                 Commercial
                                                        PRINTING                                   printing
                                        NEWSPRINT         PAPERS           TOTAL    Newsprint        papers           Total
      -------------------------------------------------------------------------------------------------------------------------
                                                $             $                $             $            $               $
      <S>                                     <C>           <C>            <C>             <C>          <C>           <C>
      Goodwill, beginning of year             857           439            1,296           857          439           1,296
      Foreign exchange adjustment               1             -                1             -            -               -
      -------------------------------------------------------------------------------------------------------------------------

      Goodwill, end of year                   858           439            1,297           857          439           1,296
      -------------------------------------------------------------------------------------------------------------------------
</TABLE>


18   OTHER ASSETS

<TABLE>
<CAPTION>
                                                                                                      2006              2005
     --------------------------------------------------------------------------------------------------------------------------
                                                                                                         $                 $
     <S>                                                                                              <C>
     Research and development tax credits                                                              114                 -
     Deferred financing fees                                                                            39                46
     Countervailing and anti-dumping duties receivable
        (2005 - US$52 million) (note 4)                                                                  -                60
     Investments                                                                                        10                 9
     Other                                                                                              37                31
     --------------------------------------------------------------------------------------------------------------------------
                                                                                                       200               146
     ==========================================================================================================================
</TABLE>

     In December 2006, the Company reclassified an amount of $85 million of
     research and development tax credits from accounts receivable to other
     assets due to the likely scenario of not using these deductions in 2007.


19   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

<TABLE>
<CAPTION>
                                                                                                     2006              2005
     -------------------------------------------------------------------------------------------------------------------------
                                                                                                        $                 $
     <S>                                                                                             <C>               <C>
       Trade payables                                                                                 386               431
       Payroll-related liabilities                                                                     72                75
       Compensated absences accrued                                                                    76                81
       Accrued interest                                                                                79                78
       Stumpage fees and silviculture payable                                                          26                35
       Freight payable                                                                                 30                27
       Payable on capital projects                                                                     15                21
       Provision for environment (note 27 b)                                                           19                23
       Income and other taxes payable                                                                  17                55
       Provision for mill closure elements (note 6)                                                     7                38
       Provision for asset retirement obligations (note 27 b)                                          18                24
       Other                                                                                           40                45
     -------------------------------------------------------------------------------------------------------------------------
                                                                                                      785               933
     =========================================================================================================================
</TABLE>


                                                                             16
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

20       LONG-TERM DEBT

<TABLE>
<CAPTION>
      a) RECOURSE AND NON-RECOURSE DEBT
                                                                                                       2006        2005
         ---------------------------------------------------------------------------------------------------------------
                                                                                                          $           $
         <S>                                                                                            <C>         <C>
         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
                December 2008                                                                           180          70
              US$15 million 6.95% notes matured on December 15, 2006                                      -          17
              US$61 million 7.625% notes due May 15, 2007                                                71          71
              US$196 million 6.95% notes due April 1, 2008 (2005 - US$200 million)                      223         225
              US$150 million 5.25% notes due June 20, 2008                                              175         175
              US$150 million 7.875% notes due August 1, 2009                                            173         171
              US$395 million 8.55% notes due August 1, 2010                                             460         460
              US$200 million 7.75% notes due June 15, 2011                                              233         233
              US$200 million, three-month LIBOR plus 3.5% floating-rate notes due June 15,
              2011                                                                                      233         233
              US$350 million 6.00% notes due June 20, 2013                                              408         407
              US$450 million 8.375% notes due April 1, 2015                                             524         523
              US$100 million 7.40% debentures due April 1, 2018                                         102         101
              US$250 million 7.50% debentures due April 1, 2028                                         244         241
              US$250 million 8.50% debentures due August 1, 2029                                        276         274
              US$450 million 8.85% debentures due August 1, 2030                                        524         523
              Other recourse debt                                                                        14          14
         Non-recourse (9.2% amortized loan maturing  April 1, 2023) (1)                                  24          24
         ---------------------------------------------------------------------------------------------------------------
                                                                                                      3,864       3,762
         Less: Due within one year                                                                       72          18
         ---------------------------------------------------------------------------------------------------------------
                                                                                                      3,792       3,744
         ===============================================================================================================
</TABLE>
         (1) This loan is  described as  non-recourse  as it has no recourse to
             the  Company  but is secured by the Star Lake Hydro  Partnership's
             assets.

         On September 28, 2006, the Company increased its credit agreement from
         $700  million  to $750  million as a new  lender  joined  the  banking
         syndicate.  On October 3, 2005, the Credit  Agreement was renewed into
         two new Bank Credit facilities. The $550 million Facility A is secured
         by certain  fixed assets and the $200 million  Facility B (2005 - $150
         million) is secured by certain  working  capital  elements.  Available
         liquidities  were $477  million as at  December  31, 2006 (2005 - $545
         million).  Amounts  drawn on Facility A do not  require  reimbursement
         before maturity.  As at December 31, 2006, the Company had outstanding
         letters of credit pursuant to this revolving  facility,  for an amount
         of $93  million  (2005  - $85  million).  The  unused  portion  of the
         facilities  incurs a commitment fee of 0.6%. The bank credit  facility
         requires the Company to meet specific financial ratios,  which are met
         as at December 31, 2006.

         On December 15, 2006, the Company  repaid the remaining  US$15 million
         of 6.95% notes due 2006 and US$4 million of 6.95% notes due 2008.

         On December 16,  2005,  the Company  repaid a total of US$579  million
         comprised of US$185 million of 6.95% notes due 2006, US$139 million of
         7.625% notes due 2007,  US$50 million of 6.95% notes due 2008,  US$100
         million of 7.875% notes due 2009 and US$105 million of 8.55% notes due
         2010.

         On August 1, 2005, the Company  repaid the remaining  US$64 million of
         the 8.30% notes due 2005.

         On March 28, 2005,  the Company  issued US$450 million of 8.375% notes
         due 2015.  The net proceeds of the issue were used to repay,  on March
         29,  2005,  US$337  million  of 8.30%  notes due August 1, 2005 and on
         April 5, 2005, US$100 million of 6.95% notes due December 15, 2006.

         On June 15,  2004,  the  Company  issued  through a private  placement
         US$200  million  of  7.75%  notes  due  2011  and  US$200  million  of
         three-month LIBOR plus 3.5% floating-rate  notes due 2011. These notes
         have  subsequently  been exchanged for public notes,  with essentially
         the same terms and conditions,  pursuant to an exchange offer. The net
         proceeds of these issues were used to repay  Alabama's  US$118 million
         floating-rate  term loan, to repay bank  indebtedness  and for general
         corporate purposes.


                                                                             17
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
     b)  SCHEDULED LONG-TERM DEBT REPAYMENTS

                                                                                             $
         ---------------------------------------------------------------------------------------
         <S>                                                                              <C>
         2007                                                                                72
         2008 (1)                                                                           579
         2009                                                                               177
         2010                                                                               465
         2011                                                                               471
         Thereafter                                                                       2,100
         ---------------------------------------------------------------------------------------
                                                                                          3,864
         =======================================================================================
</TABLE>
         (1) Includes $180 million from bank credit facilities.

     c)  FAIR VALUE OF LONG-TERM DEBT
         The estimated fair value of the long-term debt as at December 31, 2006
         is at $3,499 million (2005 - $3,528  million) and has been  determined
         based on  management's  best estimate of the fair value to renegotiate
         debt with similar terms at December 31, 2006.


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 2006 pension expense was
         $15 million (2005 - $14 million, 2004 - $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   in
         consultation with independent actuaries.

     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   in   consultation   with
         independent actuaries.

     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:

                                                Target
                                            Allocation         2006         2005
         -----------------------------------------------------------------------
                                                     %            %            %
         Debt securities                            50           47           49
         Equity and other securities                50           53           51
         -----------------------------------------------------------------------
                                                   100          100          100
         =======================================================================

     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.

<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

         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 Canadian  pension plans,  the latest  actuarial  valuations
         were  conducted  as  at  December  31,  2005  for  plans  representing
         approximately  55% of the total plan assets fair value, as at December
         31, 2004 for plans  representing  approximately  15% of the total plan
         assets fair  value,  and as at  December  31,  2003 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  $205  million in 2007,  including  $16
         million  related to mill  closures,  compared to $206  million paid in
         2006 (2005 - $180 million, 2004 - $182 million).

     f)  INVESTMENT POLICY
         The Company follows a disciplined investment strategy,  which provides
         diversification  of  investments  by asset  class,  foreign  currency,
         sector or company.  The Human Resources and Compensation  Committee of
         the  Board  of  Directors  has  approved  an  investment  policy  that
         establishes   long-term  asset  mix  targets  based  on  a  review  of
         historical   returns  achieved  by  world-wide   investment   markets.
         Investment   managers  may  deviate  from  these   targets  but  their
         performance is evaluated in relation to the market  performance on the
         target  mix.  The Pension  Investment  Committee  reviews  investments
         regularly.  The policy also  permits the use of  derivative  financial
         instruments  to implement  asset mix decisions or to hedge existing or
         anticipated  exposures.  The Pension  Fund's  segregated  accounts are
         prohibited  from  investing  in the  securities  of the Company or its
         subsidiaries.

     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.

     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:

<TABLE>
<CAPTION>
                                                              PENSION BENEFIT PLANS    OTHER BENEFIT PLANS
         -------------------------------------------------------------------------------------------------
                                                                2006          2005       2006        2005
         -------------------------------------------------------------------------------------------------
                                                                   $             $          $           $
         <S>                                                   <C>           <C>          <C>         <C>
         CHANGE IN ACCRUED BENEFIT OBLIGATION
         Accrued benefit obligation, beginning of year         4,167         3,771        256         219
         Current service cost                                     94            85          4           3
         Interest cost                                           215           222         13          13
         Plan amendments                                           9            10          -          20
         Actuarial loss (gain) on accrued benefit
            obligation                                             7           354        (6)          23
         Curtailment and special early retirement                  -            (6)         -          (3)
         Settlement                                                -            (9)         -           -
         Foreign exchange loss (gain)                             15           (23)         -          (4)
         Benefits paid                                          (273)         (237)       (16)        (15)
         -------------------------------------------------------------------------------------------------
         Accrued benefit obligation, end of year               4,234         4,167        251         256
         =================================================================================================

         CHANGE IN FAIR VALUE OF PLAN ASSETS
         Fair value of plan assets, beginning of year          3,293         2,992          -           -
         Actual return on plan assets                            363           350          -           -
         Employer's contributions                                206           180         16          15
         Plan participants' contributions                         28            30          -           -
         Benefits paid                                          (273)         (237)       (16)        (15)
         Settlement                                                -            (9)         -           -
         Foreign exchange gain (loss) and other                   10           (13)         -           -
         -------------------------------------------------------------------------------------------------
         Fair value of plan assets, end of year                3,627         3,293          -           -
         =================================================================================================
</TABLE>

                                                                             19
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              PENSION BENEFIT PLANS    OTHER BENEFIT PLANS
         --------------------------------------------------------------------------------------------------
                                                                2006          2005       2006        2005
         --------------------------------------------------------------------------------------------------
                                                                   $             $          $           $
         <S>                                                   <C>           <C>          <C>         <C>
         FUNDED STATUS OF THE PLANS
         Funded status of the plans (deficit)                  (607)          (874)       (251)       (256)
         Unrecognized prior service cost                         96            100          24          26
         Unrecognized actuarial loss                            837          1,022          64          75
         Other components                                         2              -           1           1
         --------------------------------------------------------------------------------------------------
         Net amount recognized in balance sheets                328            248        (162)       (154)
         ==================================================================================================
</TABLE>

         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:
<TABLE>
<CAPTION>
                                                              PENSION BENEFIT PLANS    OTHER BENEFIT PLANS
         -------------------------------------------------------------------------------------------------
                                                                2006          2005       2006        2005
         -------------------------------------------------------------------------------------------------
                                                                   $             $          $           $
         <S>                                                   <C>           <C>         <C>         <C>
         Accrued benefit obligation                            4,021         3,991        251         256
         Fair value of plan assets                             3,395         3,108          -           -
         --------------------------------------------------------------------------------------------------
                                                                 626           883        251         256
         ==================================================================================================
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                                                    2006      2005    2004
         --------------------------------------------------------------------------------------------------
                                                                                        $       $       $
         <S>                                                                       <C>       <C>     <C>
         Current service cost, net of participant contributions                       66        55      54
         Interest cost                                                               215       222     212
         Actual return on assets                                                    (363)     (350)   (265)
         Plan amendments                                                               9        10      83
         Recognized actuarial loss on accrued benefit obligation                       7       354     193
         Settlement, curtailment and special early retirement                          -        16      10
         --------------------------------------------------------------------------------------------------
         Benefit costs before adjustments to recognize the long-term nature
            of plans                                                                 (66)      307     287

         ADJUSTMENTS TO RECOGNIZE THE LONG-TERM NATURE OF PLANS:
         Difference between expected return and actual return on plan
            assets                                                                   132       123      35
          Difference between actuarial loss recognized for year and actual
            actuarial loss on accrued benefit obligation for year                     55      (323)   (188)
         Difference between amortization of past service costs for year and
            actual plan amendments for year                                            4         3     (74)
         --------------------------------------------------------------------------------------------------
         Defined benefit pension cost recognized                                     125       110      60
         ==================================================================================================
</TABLE>

                                                                             20
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

         The following  table  presents the periodic cost for the other benefit
         plans:

<TABLE>
<CAPTION>
                                                                                    2006      2005    2004
         --------------------------------------------------------------------------------------------------
                                                                                        $       $       $
         <S>                                                                       <C>       <C>     <C>
         Current service cost, net of participant contributions                        4         3       2
         Interest cost                                                                13        13      13
         Plan amendments                                                               -        20      12
         Actuarial loss (gain) on accrued benefit obligation                          (6)       23      28
         Curtailment and special early retirement                                      -         -       3
         --------------------------------------------------------------------------------------------------
         Benefit costs before adjustments to recognize the long-term nature
            of plans                                                                  11        59      58

         ADJUSTMENTS TO RECOGNIZE THE LONG-TERM NATURE OF PLANS:

         Difference between actuarial loss (gain) recognized for year and
            actual actuarial loss (gain) on accrued benefit obligation for
            year                                                                      10       (20)    (25)
         Difference between amortization of past service costs
            for year and actual plan amendments for year                               3       (19)    (11)
         --------------------------------------------------------------------------------------------------
         Other benefit cost recognized                                                24        20      22
         ==================================================================================================
</TABLE>


     j)  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:

<TABLE>
<CAPTION>
                                                                                    2006      2005    2004
         --------------------------------------------------------------------------------------------------
                                                                                       %         %       %
         <S>                                                                       <C>       <C>     <C>
            Discount rate                                                           5.25      6.00    6.25
            Expected long-term return on plan assets                                7.00      7.25    7.50
            Rate of compensation increase                                           3.10      3.10    3.55
</TABLE>

         Weighted average  assumptions used to determine benefit obligations as
         of December 31, were as follows:

<TABLE>
<CAPTION>
                                                                                    2006              2005
                                                                                --------------------------
                                                                                       %                 %
           <S>                                                                      <C>               <C>
           Discount rate                                                            5.25              5.25
           Rate of compensation increase                                            3.10              3.10

         Assumed  health  care cost  trend rate for other  benefit  plans as of
         December 31, was as follows:

                                                                                    2006              2005
                                                                                --------------------------
                                                                                       %                 %
           Initial health care cost trend rate                                      9.75              9.43
           Cost trend rate declines to                                              6.13              6.14

           Year that the rate reaches the rate it is assumed to
           remain at                                                                2014              2014
</TABLE>

                                                                             21
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     k)  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:

<TABLE>
<CAPTION>
                                                                            INCREASE OF 1%  DECREASE OF 1%
                                                                            ------------------------------
                                                                                         $               $
           <S>                                                                          <C>            <C>
           Net periodic benefit cost                                                     1              (1)
           Accrued benefit obligation                                                   20             (17)
</TABLE>

     l) 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:

<TABLE>
<CAPTION>
                                                          PENSION BENEFITS       OTHER    EXPECTED SUBSIDY
                                                                              BENEFITS        RECEIPTS (1)
                                                          ------------------------------ -----------------
                                                                         $           $                  $
           <S>                                                       <C>           <C>                <C>
           2007                                                        365          17                  -
           2008                                                        230          18                  -
           2009                                                        235          19                  -
           2010                                                        241          20                  -
           2011                                                        249          21                  -
           2012-2016                                                 1,389         114                  2
         =================================================================================================
</TABLE>

         (1)  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
         our US other benefit plans.

         The estimates are based on  assumptions  about future  events.  Actual
         benefit payments may vary significantly from these estimates.


22       CAPITAL STOCK

     a)  AUTHORIZED
         The Company is incorporated under the Canada Business Corporations Act
         and is authorized to issue an unlimited number of preferred shares and
         common shares.

<TABLE>
<CAPTION>
     b)  ISSUED COMMON SHARES
                                                    2006                         2005                           2004
         -------------------------------------------------------------------------------------------------------------------
                                          MILLION                     Million                       Million
                                           SHARES       $              shares         $              shares          $
         -------------------------------------------------------------------------------------------------------------------
         <S>                              <C>           <C>           <C>             <C>           <C>              <C>
         Common shares, beginning of
            year                              440       3,518             440         3,517             440         3,517
         Share purchase financing
            agreements                          -           -               -             1               -             -
         -------------------------------------------------------------------------------------------------------------------
         Common shares, end of year           440       3,518             440         3,518             440        3,517
         ===================================================================================================================
</TABLE>

                                                                             22
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

         The  outstanding   employee  stock  purchase  loans   receivable  from
         employees  totalled  $2 million  as at  December  31,  2006 (2005 - $2
         million,  2004 - $3  million).  Those  loans  were  granted to certain
         designated  executives in an amount equal to the purchase price of the
         common shares acquired and are recorded against "Capital stock" in the
         consolidated  balance  sheets.  The loans mature at various dates from
         2007 to 2009.  Interest  is charged  at the  lesser of the  prevailing
         prime rate and the amount of  dividends  attributable  to ownership of
         the common  shares.  The common shares are held as security  until the
         loan is repaid.

         On a per share basis,  dividends  declared for the year ended December
         31, 2006 totalled $0.05 (2005 - $0.10, 2004 - $0.10).

         On July 25, 2006, the Company's Board of Directors  suspended dividend
         payments.


23   EARNINGS (LOSS) PER SHARE

     Basic earnings (loss) per share is calculated by dividing the net earnings
     (loss)  attributable  to common shares by the weighted  average  number of
     common shares outstanding during the year.

     Diluted  earnings  (loss)  per share is  calculated  by  dividing  the net
     earnings  (loss)  attributable  to common  shares by the weighted  average
     number of common  shares  during  the year,  plus the  potential  dilutive
     effect of the exercise of stock options.  The diluted  earnings (loss) per
     share is  calculated  using the treasury  method.  Under this method,  the
     proceeds from  potential  exercise of such stock options are assumed to be
     used to purchase common shares.

     For the years ended  December  31,  2006,  2005 and 2004,  the exercise of
     outstanding  stock  options  would have had a  non-dilutive  effect on the
     earnings (loss) per share.


24   STOCK-BASED COMPENSATION PLANS

     a)  EMPLOYEE SHARE OWNERSHIP PLAN
         On January 1, 2002, the Company  introduced a stock ownership plan for
         its non-unionized employees,  including senior executives.  Under this
         plan, participants may contribute,  through payroll deductions,  up to
         $3,000  annually.  On  January  31  of  each  year,  provided  certain
         conditions are met, the Company will  contribute an additional  amount
         equal to 33% of the total contribution made by each participant during
         the preceding year. The shares are purchased on the open market.  Over
         the last three years,  the Company has not  incurred  any  significant
         expense under this plan.

     b)  DEFERRED SHARE UNITS PLANS
         The Company has established a deferred share units plan for designated
         senior executives. Under the terms of this plan, senior executives can
         elect to have a portion of their annual incentive remuneration paid to
         them  in the  form of  deferred  share  units  ("DSUs").  Each  DSU is
         equivalent in value to a common share of the Company and is notionally
         credited with dividends when  shareholders  receive dividends from the
         Company.  A DSU is paid to an executive upon termination of employment
         and is payable,  at the executive's option, in the form of either cash
         or common  shares of the  Company,  which  are  purchased  on the open
         market. As at December 31, 2006, 623,126 DSUs were outstanding (2005 -
         565,804 DSUs), and no significant amount was payable under this plan.

         Non-employee  directors  of the  Company  are also given the option to
         receive part of their annual  retainer,  meeting fees and awards under
         the Directors'  Share Award Plan in the form of DSUs. A DSU is paid to
         a director  upon  termination  of Board  service and is payable in the
         form of cash. As at December 31, 2006,  272,636 DSUs were  outstanding
         (2005 - 180,956  DSUs),  and no  significant  amount was payable under
         this plan.

         In addition,  over the last three years,  no  significant  expense was
         incurred as a result of these plans.

                                                                             23
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     c)  RESTRICTED SHARE UNITS PLAN
         Effective  January 1, 2004,  the Company  implemented a new restricted
         share units ("RSUs") plan. This plan provides for the granting of RSUs
         to executives and senior managers and, on an exceptional  basis, other
         selected high  potential  an/or high  performing  key  employees.  The
         vesting of RSUs will be  entirely  subject to the  Company's  relative
         average financial performance versus other companies that comprise the
         comparator group during a set period (usually over 3 years). The Human
         Resources and Compensation Committee approves, on an annual basis, the
         RSU  grants,  the  financial   benchmarks,   the  composition  of  the
         comparator  group,  the period during which the Company's  performance
         will be evaluated, as well as the vesting conditions.  During the year
         ended  December 31,  2006,  the Company  granted  909,565 RSUs (2005 -
         747,895 RSUs).  As at December 2006,  2,298,508 RSUs were  outstanding
         (2005 - 1,432,754 RSUs). During the year, under this plan, the Company
         has not incurred any significant expense, and there was no significant
         amount payable.

     d)  STOCK OPTION PLANS
         The  Company  has  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  granting  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.  A  maximum  of  19,000,000  stock
         options  may  be  granted  under  the  plan  for  eligible  employees.
         Following a decision from the Board of Directors,  there are no longer
         any options granted under the Directors' Stock Options Plan.

         Effective  January 1, 2004,  and  retroactive  to January 1, 2002, the
         Company records a stock options' expense based on the fair value-based
         method.

         During the year ended December 31, 2006, under the stock option plans,
         as described above, an amount of $6 million (2005 - $8 million, 2004 -
         $6 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.

         The fair value of each option  granted during the years ended December
         31, 2006,  2005 and 2004, was estimated on the granting date using the
         Black &  Scholes  option-pricing  model  with the  following  weighted
         average assumptions:

<TABLE>
<CAPTION>
                                                                      2006      2005    2004
         ------------------------------------------------------------------------------------
         <S>                                                         <C>       <C>      <C>
         Assumptions
            Dividend yield                                            2.5%      1.6%     1.0%
            Volatility                                               36.6%     25.4%    32.5%
            Risk-free interest rate                                   4.1%      4.1%     4.1%
            Expected option lives (in years)                           6.1      6.1      6.1

         Weighted average fair value of each option ($/option)        1.32     2.11     4.19
</TABLE>

                                                                             24
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

         A summary of the status of the stock  option  plans as at December 31,
         2006, 2005 and 2004, and changes during the years ended on those dates
         is presented below:

<TABLE>
<CAPTION>
                                                 2006                           2005                          2004
         -----------------------------------------------------------------------------------------------------------------------
                                            OPTIONS       WEIGHTED          Options     Weighted           Options     Weighted
                                       (IN MILLIONS        AVERAGE     (in millions      average   (in millions of      average
                                         OF SHARES)       EXERCISE       of shares)     exercise           shares)     exercise
                                                             PRICE                         price                          price
         -----------------------------------------------------------------------------------------------------------------------
                                                          $/OPTION                      $/option                       $/option
         <S>                            <C>               <C>          <C>              <C>         <C>                <C>
         Outstanding, beginning
           of year                             13.6          12.61             13.9        13.61             13.0         13.95
         Granted                                1.5           4.06              1.4         6.12              1.3         10.45
         Forfeited                             (0.2)         13.18             (1.3)       15.06             (0.3)        13.91
         Expired                               (0.4)         17.78             (0.4)       17.29             (0.1)        15.54
         -----------------------------------------------------------------------------------------------------------------------
         Outstanding, end of year              14.5          11.51             13.6        12.61             13.9         13.61
         =======================================================================================================================

         Options exercisable, end
           of year                             10.7          13.19              9.7        13.89              9.5         14.61
         =======================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
         The  following  table  summarizes   information  about  stock  options
         outstanding as at December 31, 2006:

                                                         OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
         ----------------------------------------------------------------------------------------------------------------------
          RANGE OF EXERCISE PRICES                OPTIONS         AVERAGE         WEIGHTED           OPTIONS         WEIGHTED
                                              OUTSTANDING       REMAINING          AVERAGE       EXERCISABLE          AVERAGE
                                             (IN MILLIONS            LIFE         EXERCISE      (IN MILLIONS         EXERCISE
                                               OF SHARES)      (IN YEARS)            PRICE        OF SHARES)            PRICE
         ----------------------------------------------------------------------------------------------------------------------
                                                                                  $/OPTION                           $/OPTION
         <S>                                 <C>                <C>               <C>            <C>                 <C>
          $ 4.06                                      1.5               9             4.06                -              4.06
          $ 6.12 to $9.82                             1.4               8             6.27              0.4              6.65
          $ 9.93 to $10.66                            1.3               7            10.45              0.6             10.45
          $10.97 to $11.73                            2.2               6            10.98              1.6             10.98
          $11.77 to $12.23                            1.8               4            11.82              1.8             11.82
          $12.86 to $13.33                            2.3               5            13.32              2.3             13.32
          $13.42 to $14.27                            1.3               3            13.45              1.3             13.45
          $14.40 to $15.37                            1.5               2            14.43              1.5             14.43
          $16.42 to $21.53                            1.2               1            19.54              1.2             19.54
         ----------------------------------------------------------------------------------------------------------------------
                                                     14.5               5            11.51             10.7             13.19
         ======================================================================================================================
</TABLE>


25    FOREIGN CURRENCY TRANSLATION ADJUSTMENT

      Regarding investments in self-sustaining operations, the foreign currency
      translation  adjustment  represents  the  unrealized  gain or loss on the
      Company's net investment.  These valuation  adjustments are recognized in
      earnings  only when there is a reduction in the  Company's  investment in
      the respective foreign operations.

<TABLE>
<CAPTION>
                                                                                                      2006              2005
      -----------------------------------------------------------------------------------------------------------------------
                                                                                                         $                 $
      <S>                                                                                             <C>               <C>
      Foreign currency translation adjustment, beginning of
      year                                                                                            (276)             (336)
      Unrealized gain (loss) for the year on translation of net assets                                  12               (60)
      Business divestiture (note 3)                                                                      -               120
      -----------------------------------------------------------------------------------------------------------------------

      Foreign currency translation adjustment, end of year                                            (264)             (276)
      =======================================================================================================================
</TABLE>

                                                                             25
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

26   FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

     a)  FOREIGN EXCHANGE RISK MANAGEMENT
         The Company uses various financial  instruments to reduce its exposure
         to foreign  currency  exchange risk.  Furthermore,  the long-term debt
         expressed in US dollars is also considered an effective economic hedge
         against  the  exchange  risk  related  to the future  revenue  streams
         originating from sales denominated in US dollars.

         The Company  had the  following  US dollar zero cost tunnel  contracts
         outstanding as at December 31:

<TABLE>
<CAPTION>
                                                                                                           Contract amount
                                                                                                        (in millions of US
         Maturity                        Contract rates to convert US$ into Canadian dollars                      dollars)
         --------------------------------------------------------------------------------------------------------------------
                                                2006                            2005                   2006           2005
         --------------------------------------------------------------------------------------------------------------------
                                         AVERAGE         AVERAGE         Average       Average
                                           FLOOR         CEILING           floor       ceiling
         <S>                             <C>             <C>             <C>           <C>             <C>            <C>
         2006                                  -               -          1.2157         1.2754          -           407
         2007                             1.1123          1.1669               -              -        217             -
         ====================================================================================================================

         The Company had the  following US dollar  forward  exchange  contracts
         outstanding as at December 31:

                                                                                                           Contract amount
                                                                                                        (in millions of US
         Maturity                        Contract rates to convert US$ into Canadian dollars                      dollars)
         --------------------------------------------------------------------------------------------------------------------
                                                2006                            2005                   2006           2005
         --------------------------------------------------------------------------------------------------------------------

         2006                                      -                          1.1866                      -            195
         2007                                 1.1414                               -                    415              -
         ====================================================================================================================

         The  Company  had  the  following  Euro  zero  cost  tunnel  contracts
         outstanding as at December 31:

                                       Contract rates to convert Euros into Canadian dollars               Contract amount
         Maturity                                                                                   (in millions of Euros)
         --------------------------------------------------------------------------------------------------------------------
                                                2006                            2005                   2006          2005
         --------------------------------------------------------------------------------------------------------------------
                                         AVERAGE        AVERAGE          Average       Average
                                           FLOOR        CEILING            floor       ceiling
         2006
         2007                             1.5000         1.5553                -             -           60             -
         ====================================================================================================================
</TABLE>

         The gains and losses on foreign  exchange  contracts are recognized in
         earnings when the related hedged  revenue is recorded.  As at December
         31,  2006,  the  Company  would have paid a net amount of $10  million
         (2005 - $32  million  received)  had it settled  its then  outstanding
         foreign exchange contracts.

     b)  INTEREST RATE RISK MANAGEMENT
         The Company uses interest rate swap agreements to manage the fixed and
         floating  interest rate mix of 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 related amount
         receivable  or payable  from  counterparts  is included  in  "Accounts
         receivable" or "Accounts payable and accrued liabilities".

         As at December 31, 2006,  in order to hedge changes in fair value that
         are due to changes in market interest rates for a portion of the debt,
         the Company  had US$800  million  (2005 - US$800  million) of interest
         rate swap  contracts  designated as hedges of various fixed rate notes
         that are maturing in 2008 through 2011.  The interest paid under these
         agreements is based on the six month LIBOR rate.

         The Company  would have paid $37 million  (2005 - $41  million) had it
         settled its interest  rate swap  contracts  designated as hedges as at
         December 31, 2006.

                                                                             26
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

         As at December 31, 2004,  the Company had $6 million of deferred  gain
         realized on the early termination of interest rates swap contracts. In
         2005,  the Company  recorded the gain in  "Financial  expenses" in the
         consolidated  statements  of  earnings  due to the  repayment  of debt
         related to that deferred gain.

         Interest on bank facilities can fluctuate depending upon the Company's
         ratings.

     c)  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  favorable  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.

     d)  SECURITIZATION AND ACCOUNTS RECEIVABLE
         The Company sells most of its trade  accounts  receivable  through two
         securitization  programs  in  order  to  reduce  its  working  capital
         requirements.  The  Company  has  an  ongoing  securitization  program
         committed  until  October 2008 to obtain  aggregate  proceeds of up to
         $350 million (US$300 million) from North American accounts  receivable
         as well as an  ongoing  uncommitted  securitization  program to obtain
         aggregate  proceeds  of up  to  $146  million  (US$125  million)  from
         international  accounts receivable,  pursuant to sale agreements.  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.

         Under the programs,  outstanding proceeds as at December 31, 2006 were
         $433 million out of total trade receivables sold of $588 million for a
         difference of $155 million, which is included in "Accounts receivable"
         in the  consolidated  balance sheets (2005 - $459 million out of total
         trade  receivables  sold  of $599  million  for a  difference  of $140
         million).

         The net cash paid  during the year,  $27  million  (2005 - $29 million
         received,  2004 - $39  million  paid),  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.

     e)  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  Company  does not hold
         financial  instruments for speculative  purposes and the effect on the
         financial  statements may vary depending on future changes in interest
         and exchange rates.  See note 20 "Long-term  debt" for a comparison of
         the carrying and the fair value of the Company's long-term debt.


27   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,  2006,  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.

                                                                             27
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     b)  ENVIRONMENTAL MATTERS
         The Company is subject to environmental laws and regulations,  enacted
         by Federal, Provincial, State and local authorities.

         In  2006,  the  Company's  operating  expenditures  for  environmental
         matters,  which comprise air emission,  effluent  treatment,  landfill
         operation  and  closure,   bark  pile   management  and   silviculture
         activities,  amounted to $82 million  (2005 - $89 million,  2004 - $80
         million ). The Company made  capital  expenditures  for  environmental
         matters  of $20  million  in  2006  (2005  - $17  million,  2004 - $35
         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.

         As at December 31, 2006, the Company had an aggregate provision of $19
         million (2005 - $23 million) for  environmental  matters.  The Company
         anticipates that most of the liability as at December 31, 2006 will be
         paid out  over  the next  five  years.  Provisions  for  environmental
         matters are not discounted  and are included in "Accounts  payable and
         accrued liabilities" on the consolidated balance sheets.

         As at December 31, 2006, the Company had an aggregate provision of $18
         million  (2005 - $24 million) for asset  retirement  obligations.  The
         Company  anticipates  that most of the  liability at December 31, 2006
         will be paid out  over  the  next  five  years.  Provision  for  asset
         retirement  obligations  is  discounted  and is included in  "Accounts
         payable and accrued liabilities" on the consolidated balance sheets.

         The Company has also identified other asset retirement obligations for
         which no liability has been  recorded.  These relate to assets with an
         undetermined  useful  life,  for  which  the  Company  does  not  have
         sufficient   information  to  set  a  realistic   obligation  maturity
         schedule. 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  equipment,  office  operating  leases and
         purchase  obligations  for expected  cash  outflows for the  following
         years as presented herein:

                                                                           $
         -----------------------------------------------------------------------

         2007                                                              78
         2008                                                              47
         2009                                                              42
         2010                                                              38
         2011                                                              35
         Thereafter                                                       111
         -----------------------------------------------------------------------
         Total                                                            351
         =======================================================================

     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.

                                                                             28
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

28   SUBSEQUENT EVENTS

     INDEFINITELY IDLED PAPER MILL
     On February 25, 2007,  the Fort William paper mill located in Thunder Bay,
     Ontario has been idled for an indefinite period.

     ABITIBI-CONSOLIDATED INC. AND BOWATER INCORPORATED MERGER
     On January 29, 2007,  Abitibi-Consolidated  Inc. and Bowater  Incorporated
     announced a  definitive  agreement  to combine in an  all-stock  merger of
     equals. The combined company,  to be called  AbitibiBowater  Inc., will be
     incorporated  in Delaware as the new parent company and will apply to list
     its shares on the New York and Toronto stock exchanges.

     Under   the   terms   of   the   transaction,   each   common   share   of
     Abitibi-Consolidated  will  be  exchanged  for  0.06261  common  share  of
     AbitibiBowater,  and each Bowater  common share will be exchanged for 0.52
     common share of  AbitibiBowater.  The exchange ratio will result in 48% of
     AbitibiBowater being owned by former Abitibi-Consolidated shareholders and
     52% of AbitibiBowater being owned by former Bowater shareholders.

     The combination  has been approved  unanimously by the Boards of Directors
     of both companies,  which received fairness opinions from their respective
     financial  advisors.  The  combination  is  subject  to  approval  by  the
     shareholders  of  both  companies,  regulatory  approvals,  and  customary
     closing conditions. It is expected to be completed in the third quarter of
     2007. Abitibi-Consolidated and Bowater will continue to operate separately
     until the transaction closes.

     PARTNERSHIP IN ENERGY GENERATION
     On January 26, 2007,  Abitibi-Consolidated  announced  that it had entered
     into a binding  letter of intent with the Caisse de depot et  placement du
     Quebec  (Caisse)  to  create  a  partnership  for  the  Company's  Ontario
     hydroelectric  assets,   consisting  of  approximately  137  Megawatts  of
     installed capacity. The Company retains a 75% interest in the partnership,
     called  ACH  Limited  Partnership,  while the  Caisse  will  acquire a 25%
     interest.  The  Caisse  has also  provided  a  commitment  to ACH  Limited
     Partnership  for a 10  year  unsecured  term  loan of  $250  million,  non
     recourse  to  the  Company,  to  partially  fund  the  acquisition  of the
     facilities. The transaction, on a consolidated basis, is expected to yield
     gross proceeds of $297.5 million to  Abitibi-Consolidated.  Closing of the
     transaction  is  expected  to take  place in the first half of 2007 and is
     subject to execution of definitive agreements and certain other conditions
     and approvals.

<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

29   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:

<TABLE>
<CAPTION>
                                                                          2006      2005      2004
         --------------------------------------------------------------------------------------------
                                                                             $         $        $
         <S>                                                              <C>       <C>       <C>
         Net earnings (loss), as reported in the consolidated statements
            of earnings per Canadian GAAP                                   54      (350)      (36)
         Current year adjustments
            Contract for the purchase of energy (12)                         2         -         -
             Stock option expense (7)                                        -         -        (2)
            Income tax expense (12)                                         (1)        -         -
         --------------------------------------------------------------------------------------------
         Net earnings (loss), as adjusted per US GAAP                       55      (350)      (38)
         ============================================================================================

         Composition of net earnings, as adjusted per US GAAP
            Earnings (loss) from continuing operations                      55      (350)     (113)
            Earnings from discontinued operations (9)                        -         -        75
         --------------------------------------------------------------------------------------------
         Net earnings (loss), as adjusted per US GAAP                       55      (350)      (38)
         ============================================================================================

         Per common share (basic and diluted), as adjusted per US GAAP
            Earnings (loss) from continuing operations                    0.12     (0.80)    (0.26)
            Earnings from discontinued operations (9)                        -         -      0.17
         --------------------------------------------------------------------------------------------
         Net earnings (loss), as adjusted per US GAAP                     0.12     (0.80)    (0.09)
         ============================================================================================
</TABLE>

         All numerical references in this table relate to note 29 d).

     b)  CONDENSED CONSOLIDATED BALANCE SHEETS

         The following table presents the condensed consolidated balance sheets
         under Canadian and US GAAP:

<TABLE>
<CAPTION>
                                                              2006                        2005
        -----------------------------------------------------------------------------------------------
                                                     CANADIAN GAAP       US    Canadian GAAP        US
                                                                       GAAP                       GAAP
        -----------------------------------------------------------------------------------------------
                                                               $          $              $           $
        <S>                                          <C>              <C>      <C>               <C>
        ASSETS
        Current assets (1) (3) (6)                         1,371      1,354          1,207       1,218
        Investments (3)                                       10         32              9          31
        Property, plant and equipment (3)                  3,984      3,950          4,260       4,226
        Intangible assets (5)                                460        460            473         568
        Employee future benefits (5)                         328         19            248          33
        Future income taxes (5)                              322        354            414         428
        Other assets                                         190        190            137         137
        Goodwill (4)                                       1,297      1,254          1,296       1,253
        -----------------------------------------------------------------------------------------------
                                                           7,962      7,613          8,044       7,894
        ===============================================================================================
</TABLE>

                                                                             30
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                 2006                            2005
        -------------------------------------------------------------------------------------------------
                                                          CANADIAN         US     Canadian            US
                                                              GAAP       GAAP         GAAP          GAAP
        -------------------------------------------------------------------------------------------------
                                                              $          $            $             $
        <S>                                               <C>           <C>       <C>              <C>
        LIABILITIES AND SHAREHOLDERS' EQUITY
        Current liabilities (1) (2) (3)                        857        896          951           984
        Long-term debt (2)  (3)                              3,792      3,731        3,744         3,679
        Employee future benefits (5)                           162        877          154           700
        Future income taxes (5) (12)                           629        322          716           528
        Other long-term liability (12)                           -         17            -             -
        Non-controlling interests (5)                           71         65           78            78
        Shareholders' equity (1) (5) (7) (12)                2,451      1,705        2,401         1,925
        -------------------------------------------------------------------------------------------------
                                                             7,962      7,613        8,044         7,894
        =================================================================================================
</TABLE>

         All numerical references in this table relate to note 29 d).

     c)  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

         The following table presents the condensed consolidated  statements of
         cash flows under Canadian and US GAAP:

<TABLE>
<CAPTION>
                                                              2006                    2005                      2004
        -----------------------------------------------------------------------------------------------------------------------
                                                     CANADIAN          US     Canadian            US    Canadian            US
                                                         GAAP        GAAP         GAAP          GAAP        GAAP          GAAP
        -----------------------------------------------------------------------------------------------------------------------
                                                            $           $             $            $           $             $
        <S>                                          <C>             <C>      <C>               <C>     <C>               <C>
        Cash flows from (used in) operating
           activities (3)                                 232         225          164           159          (3)            8
        Cash flows from (used in) financing
           activities (3)                                  22          23         (797)         (796)        161           168
        Cash flows from (used in) investing
           activities (3)                                (123)       (117)         566           592         (86)          (49)
        Cash generated by discontinued
            operations (9)                                  -          -             3             -          15             -
        -----------------------------------------------------------------------------------------------------------------------
        Increase (decrease) in cash and cash
          equivalents                                     131         131          (64)          (45)         87           127
        Currency translation adjustment on cash             5           5           (4)           (4)         (5)           (4)
        Cash and cash equivalents (bank
          indebtedness), beginning of year (3)             67          62          135           111          53           (12)
        -----------------------------------------------------------------------------------------------------------------------
        Cash and cash equivalents, end of year (3)        203         198           67            62         135           111
        =======================================================================================================================
</TABLE>

         All numerical references in this table relate to note 29 d).

     d)  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.  In
              accordance with this  statement,  the Company has recorded in its
              balance sheets 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 are no similar fair
              value  recognitions  under  Canadian  GAAP.  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.


<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

              Based on the  current  value,  the  estimated  net  amount of the
              existing loss for options and forward  exchange  contracts on the
              reporting  date that is expected to be  reclassified  to earnings
              within the next 12 months amounts to $10 million.

         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, an  outstanding  interest rate swap
              contract's fair value is not recognized on the balance sheets. In
              US GAAP under SFAS 133,  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  COMBINATION and these costs would have
              been recorded in earnings.

         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)".  SFAS also eliminates the early  measurement date
              option  and  provides  for  additional  annual  disclosures.  The
              Company   currently   measures   its  plan   assets  and  benefit
              obligations  as of  December  31  each  year.  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:

<TABLE>
<CAPTION>
                                                         Before application of   Incremental effect of  After application of
                                                                  SFAS No. 158   applying SFAS No. 158          SFAS No. 158
              --------------------------------------------------------------------------------------------------------------
                                                                          $                        $                     $
              <S>                                                       <C>                      <C>                   <C>
              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
              ==============================================================================================================
</TABLE>

                                                                             32
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
              Components of net periodic benefit cost:

                                                                  Pension benefit plans            Other benefit plans
              ------------------------------------------------------------------------------------------------------------
                                                              2006        2005        2004      2006        2005      2004
              ------------------------------------------------------------------------------------------------------------
                                                                 $           $           $         $           $        $
              <S>                                             <C>         <C>         <C>       <C>         <C>       <C>
              Service cost                                      66          55         54         4            3        2
              Interest cost                                    215         222        212        13           13       13
              Expected return on plan assets                  (231)       (227)      (230)        -            -        -
              Amortization of past service cost                 13          13          9         3            1        1
              Amortization of unrecognized actuarial loss       62          31          5         4            3        3
              Settlement, curtailment and special early
                retirement                                       -          16         10         -            -        3
              ------------------------------------------------------------------------------------------------------------
              Net periodic benefit cost                        125         110         60        24           20       22
              ============================================================================================================
</TABLE>

              Amounts expected to be recognized in net periodic benefit cost:

<TABLE>
<CAPTION>
                                                                               Pension benefit plans   Other benefit plans
              -------------------------------------------------------------------------------------------------------------
                                                                                                2007                  2007
              -------------------------------------------------------------------------------------------------------------
                                                                                                   $                     $
              <S>                                                                               <C>                   <C>
              Past service cost amortization                                                      13                     3
              Net actuarial loss amortization                                                     61                     3
              =============================================================================================================
</TABLE>

              Until  the  adoption  of SFAS  158,  the  provisions  of SFAS 87,
              EMPLOYERS' ACCOUNTING FOR PENSIONS required 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
              $2,509 million, $2,292 million and $1,930 million,  respectively,
              as at December 31, 2006 (2005 - $3,926  million,  $3,590  million
              and $3,041 million, respectively).

              Accumulated  benefit  obligation as of December 31, 2006 amounted
              to $3,916 million (2005 - $3,823 million).

         6)   ACCOUNTS RECEIVABLE
              As at December 31, 2006, accounts receivable included $90 million
              of non-trade  receivables and nil of income tax receivables (2005
              - $94 million of non-trade  receivables and $85 million of income
              tax receivables).

         7)   STOCK-BASED COMPENSATION PLANS
              Effective   January  1,  2006,  the  Company   adopted  SFAS  123
              (Revised).   This  standard   amends  SFAS  123   ACCOUNTING  FOR
              STOCK-BASED  COMPENSATION  and supersedes SFAS 148 ACCOUNTING FOR
              STOCK-BASED   COMPENSATION  -  TRANSITION  AND  DISCLOSURE  -  AN
              AMENDMENT OF FASB  STATEMENT  NO. 123. The  principal  amendments
              relate to the  requirement  to use a fair value  method to record
              stock-based  compensation,  to  the  measurement  methodology  to
              evaluate equity  instruments such as options and to the financial
              statement disclosure  requirements.  The measurement  methodology
              must  specifically  provide for an estimation of  forfeitures  of
              employee stock awards,  and compensation  cost shall only include
              cost for awards expected to vest. As the fair value provisions of
              SFAS No. 123 (R) are  consistent  with the Company's  stock-based
              compensation  plans, the application of this standard has not had
              significant impacts on its consolidated financial statements.

              Effective  January 1, 2004,  for US GAAP  purposes,  the  Company
              adopted the fair value  method of  accounting  using the modified
              prospective  method of SFAS 148.  Accordingly,  the  compensation
              expense  for 2004  reflects  the fair value of all stock  options
              granted since January 1, 2004 as well as the relevant  portion of
              grants made prior to January 1, 2004 that were not vested at that
              date.

              Under Canadian GAAP, the Company adopted the  recommendations  of
              Section 3870 of the Handbook,  STOCK-BASED COMPENSATION AND OTHER
              STOCK-BASED  PAYMENTS  which also  states that a fair value based
              measurement  must be  used.  However,  the  recommendations  were
              applied  retroactively  with  restatement  for all stock  options
              granted since January 1, 2002.

                                                                             33
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

              Consequently,  under  US  GAAP,  there  is no  difference  in the
              compensation  expense for 2006 and 2005 (2004 - the  compensation
              expense was $2 million higher).

         8)   DIVIDENDS FROM INVESTMENTS SUBJECT TO SIGNIFICANT INFLUENCE
              For the year  ended  December  31,  2006,  the  Company  received
              dividends or cash  distributions in the amount of $5 million from
              its joint ventures (2005 - $25 million, 2004 - $31 million).

         9)   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 9 would be presented
              directly on the statement of cash flows.

         10)  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  products  sold,  when the  Company  has made the
              qualifying  expenditures and has a reasonable  assurance 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, 2006 amounted to $29
              million (2005 - $52 million, 2004 - $13 million).

         11)  INVENTORY COSTS
              Effective   January  1,  2006,  the  Company  adopted  SFAS  151,
              INVENTORY  COSTS - AN AMENDMENT OF FASB STATEMENT NO. 43, CHAPTER
              4, issued by the FASB.  This standard  requires the allocation of
              fixed production overheads over normal capacity and the expensing
              of abnormal amounts of idled facility expense,  freight, handling
              costs, and wasted material.  The application of this standard has
              not  had  significant  impacts  on  the  Company's   consolidated
              financial statements.

         12)  CONTRACT  FOR THE  PURCHASE OF ENERGY AND  QUANTIFYING  FINANCIAL
              STATEMENT MISSTATEMENTS
              In September 2006, the SEC staff issued Staff Accounting Bulletin
              ("SAB")   No.  108,   CONSIDERING   THE  EFFECTS  OF  PRIOR  YEAR
              MISSTATEMENTS  WHEN  QUANTIFYING  MISSTATEMENTS  IN CURRENT  YEAR
              FINANCIAL  STATEMENTS.  SAB 108 was issued in order to  eliminate
              the  diversity  of  practice  surrounding  how  public  companies
              quantify financial statement misstatements.

              Traditionally,  there have been two widely-recognized methods for
              quantifying the effects of financial statement misstatements: the
              "roll-over"  method and the "iron curtain" method.  The roll-over
              method focuses  primarily on the impact of a misstatement  on the
              income  statement - including the reversing  effect of prior year
              misstatements  - but  its use can  lead  to the  accumulation  of
              misstatements in the balance sheet. The iron-curtain  method,  on
              the other hand, focuses primarily on the effect of correcting the
              period-end  balance  sheet with less  emphasis  on the  reversing
              effects of prior year  errors on the income  statement.  Prior to
              the  application of the guidance in SAB 108, the Company used the
              roll-over    method   for   quantifying    financial    statement
              misstatements.

              In SAB 108, the SEC staff  established  an approach that requires
              quantification of financial statement  misstatements based on the
              effects of the  misstatements on each of the Company's  financial
              statements and the related financial statement disclosures.  This
              model is  commonly  referred to as a "dual  approach"  because it
              requires quantification of errors under both the iron curtain and
              the roll-over methods.

<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

              SAB 108  permits the Company to  initially  apply its  provisions
              either by (i)  restating  prior  financial  statements  as if the
              "dual  approach"  had always been applied or (ii)  recording  the
              cumulative  effect of initially  applying the "dual  approach" as
              adjustments  to the book values of assets and  liabilities  as of
              January 1, 2006 with an  offsetting  adjustment  recorded  to the
              opening  balance of  retained  earnings  (deficit).  The  Company
              previously  quantified  the  errors  described  below  under  the
              roll-over     method    and    concluded     that    they    were
              immaterial--individually and in the aggregate for all the periods
              in which the  misstatement  originated.  The  Company  elected to
              record  the  effects  of  applying  SAB 108 using the  cumulative
              effect  transition  method.  The following  table  summarizes the
              effects up to January 1, 2006 of  applying  the  guidance  in SAB
              108:

<TABLE>
<CAPTION>
                                                                 Period in which the misstatement originated
              ---------------------------------------------------------------------------------------------------------------
                                                               Cumulative                                         ADJUSTMENT
                                                                 prior to                                        RECORDED AS
                                                                  January            Years ended December 31    OF JANUARY 1,
                                                                     2004               2004            2005            2006
              ---------------------------------------------------------------------------------------------------------------
                                                                        $                  $               $               $
              <S>                                                    <C>                <C>             <C>             <C>
              Other long-term liability (i)                            26                 (3)             (6)             17
              Future income tax liabilities (ii)                       (8)                 1               2              (5)
              Foreign currency translation adjustment                   -                  -               2               2
              Impact on net earnings (loss) (iii)                     (18)                 2               2
              Deficit (iv)                                                                                               (14)
</TABLE>


              i)    A contract for the purchase of energy,  containing embedded
                    derivatives  signed in 1998 was  deemed  acquired  in April
                    2000 in the business combination of the Company and Donohue
                    Inc.   Therefore,    this   contract   should   have   been
                    marked-to-market with changes in fair value flowing through
                    net earnings (loss) since the adoption of SFAS 133 in 2001.
                    As a result of this error,  the Company's  cost of products
                    sold was understated by $26 million (cumulatively) in years
                    prior to 2004,  overstated  by $3 million in 2004 and by $3
                    million  in  2005.  The  Company  recorded  a  $17  million
                    increase in long term  liability as of January 1, 2006 with
                    $14   million   increase   in  deficit  to  correct   these
                    misstatements.

              ii)   As a result of the misstatements  described,  the Company's
                    provision  for income  taxes was  overstated  by $8 million
                    (cumulatively)  in years prior to 2004,  understated  by $1
                    million in 2004 and by $1 million in 2005.

              iii)  Represents the net under-statement  (over-statement) of net
                    earnings  (loss) for the indicated  periods  resulting from
                    these misstatements

              iv)   Represents  the net  increase  to  deficit  recorded  as of
                    January 1, 2006 to record the  initial  application  of SAB
                    108.

              The  effect  on the  statement  of  earnings  for the year  ended
              December  31,  2006  was a  reduction  of $2  million  of cost of
              products  sold  and an  increase  of $1  million  of  income  tax
              expense. In addition, foreign currency translation adjustment was
              positively impacted by $1 million in 2006 in "Other comprehensive
              income (loss)".

                                                                             35
<PAGE>

ABITIBI-CONSOLIDATED INC.
Notes to Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(in millions of Canadian dollars, unless otherwise noted)
-------------------------------------------------------------------------------

     e)  COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME
         (LOSS)

         i)   COMPREHENSIVE INCOME (LOSS)
              Under US GAAP,  the  Company  is  required  to prepare a distinct
              statement of comprehensive income (loss). This statement would be
              as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                                                      2006           2005            2004
              ------------------------------------------------------------------------------------------------------------
                                                                                         $              $               $
               <S>                                                                    <C>            <C>             <C>
               Net earnings (loss) in accordance with US GAAP                           55          (350)            (38)

               Other comprehensive income (loss)
                 Foreign currency translation adjustment (12)                           11             60            (70)
                 Loss on currency options and forward exchange contracts
                   qualifying as a cash flow hedge, net of taxes of  $14
                   million (2005 - $18 million, 2004 - $3 million) (1)                (29)           (42)             (6)
                 Additional minimum liability adjustment of defined
                   benefit pension plans, net of taxes of $112 million
                   (2005 - $38 million, 2004 - $76 million) (5)                        256           (80)           (175)
              ------------------------------------------------------------------------------------------------------------
                                                                                       238           (62)           (251)
              ------------------------------------------------------------------------------------------------------------

               Comprehensive income (loss)                                             293           (412)          (289)
              ------------------------------------------------------------------------------------------------------------
</TABLE>

              All numerical references in this table relate to note 29 d).

         ii)  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

<TABLE>
<CAPTION>
                                                                                                     2006            2005
              ------------------------------------------------------------------------------------------------------------
                                                                                                        $               $
               <S>                                                                                   <C>             <C>
               Foreign currency translation adjustment (12)                                         (263)           (276)
               Unrealized gain (loss) on currency options and forward exchange contracts,
                 net of taxes (1)                                                                     (7)             22
               Additional minimum liability of defined benefit pension plans, net of taxes (5)         -            (454)
               Unrecognized actuarial gains and losses and past service cost on defined
                 benefit pension and other benefit plans, net of taxes (5)                          (683)              -
              ------------------------------------------------------------------------------------------------------------

               Accumulated other comprehensive loss                                                 (953)           (708)
              ============================================================================================================
</TABLE>

              All numerical references in this table relate to note 29 d).


     f)  RECENT ACCOUNTING DEVELOPMENTS

         ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
         During  the  year,  the  FASB  has  issued  FIN  48,   ACCOUNTING  FOR
         UNCERTAINTY IN INCOME TAXES. This standard prescribes  recognition and
         measurement model for tax positions taken or expected to be taken in a
         tax   return,    and   provides    guidance   on   the    recognition,
         reclassification,   interest  and  penalties,  accounting  in  interim
         period,  disclosure  and  transition.  The  Company  will  apply  this
         standard on January 1, 2007.  The  application of this standard is not
         expected  to have  significant  impact on the  Company's  consolidated
         financial statements.

         FAIR VALUE MEASUREMENTS
         During  the  year,   the  FASB  has  issued   SFAS  157,   FAIR  VALUE
         MEASUREMENTS. This standard establishes a framework for measuring fair
         value in GAAP and expands  disclosures about fair value  measurements.
         The Company must apply this standard at the latest on January 1, 2008.
         The  Company  will  evaluate  the  effect  of  this  standard  on  its
         consolidated financial statements.


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