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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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Form 10-K

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(Mark One)

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

For the fiscal year ended December 31, 2005



OR



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



For the transition period from
                     to



Commission file number 0-20646

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CARAUSTAR INDUSTRIES, INC.

(Exact name of registrant as specified in its
charter)

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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|North Carolina                                                 |  | 581388387                           
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|5000 Austell Powder Springs Road, Suite 300 Austell, Georgia   |  | 30106                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(770) 948-3101

(Registrants telephone number, including area code)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $.10 par value

(Title
of Class)

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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.    Yes ̈No  x



Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes ̈No  x



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act.



Large accelerated
filer ̈Accelerated filer  x                        Non-accelerated filer ̈



Indicated by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes ̈No  x



The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2005, computed by reference to the closing sale
price on such date, was $292,921,041. For purposes of calculating this amount only, all directors and executive officers are treated as affiliates. This determination of affiliate status shall not be deemed conclusive for other purposes. As of
March 8, 2006, 29,058,770 shares of Common Stock, $.10 par value, were outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants definitive Proxy Statement pertaining to the 2006 Annual Meeting of Shareholders (the Proxy Statement) to be filed pursuant to Regulation 14A are incorporated herein by
reference into Part III.



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TABLE OF CONTENTS



|         |  |                                                                                                                 |  |   
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|         |  | PART I                                                                                                          |  |   
|         |  |                                                                                                                
|Item 1.  |  | Description of Business                                                                                         |  | 1 
|         |  |                                                                                                                
|Item 1A. |  | Risk Factors                                                                                                    |  | 8 
|         |  |                                                                                                                
|Item 1B. |  | Unresolved Staff Comments                                                                                       |  | 13
|         |  |                                                                                                                
|Item 2.  |  | Properties                                                                                                      |  | 14
|         |  |                                                                                                                
|Item 3.  |  | Legal Proceedings                                                                                               |  | 15
|         |  |                                                                                                                
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 15
|         |  |                                                                                                                
|         |  | PART II                                                                                                         |  |   
|         |  |                                                                                                                
|Item 5.  |  | Market of the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 16
|         |  |                                                                                                                
|Item 6.  |  | Selected Financial Data                                                                                         |  | 17
|         |  |                                                                                                                
|Item 7.  |  | Managements Discussion and Analysis Financial Condition and Results of Operations                              |  | 18
|         |  |                                                                                                                
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                      |  | 42
|         |  |                                                                                                                
|Item 8.  |  | Financial Statements and Supplementary Data                                                                     |  | 44
|         |  |                                                                                                                
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 93
|         |  |                                                                                                                
|Item 9A. |  | Controls and Procedures                                                                                         |  | 93
|         |  |                                                                                                                
|Item 9B. |  | Other Information                                                                                               |  | 94
|         |  |                                                                                                                
|         |  | PART III                                                                                                        |  |   
|         |  |                                                                                                                
|Item 10. |  | Directors and Executive Officers of Caraustar Industries, Inc.                                                  |  | 94
|         |  |                                                                                                                
|Item 11. |  | Executive Compensation                                                                                          |  | 94
|         |  |                                                                                                                
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 94
|         |  |                                                                                                                
|Item 13. |  | Certain Relationships and Related Transactions                                                                  |  | 95
|         |  |                                                                                                                
|Item 14. |  | Principal Accountant Fees and Services                                                                          |  | 95
|         |  |                                                                                                                
|         |  | PART IV                                                                                                         |  |   
|         |  |                                                                                                                
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                      |  | 95



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INTRODUCTION



Caraustar Industries, Inc. operated its business through 25 subsidiaries across the United States, Canada, Mexico and the United Kingdom as of the filing
date of this report. As used herein the terms, we, our, us (or similar terms), the Company or Caraustar includes Caraustar Industries, Inc. and its subsidiaries, except that when used with
reference to common shares or other securities described herein and in describing the positions held by management of the Company, the term includes only Caraustar Industries, Inc. Our corporate website is www.caraustar.com. You can access
our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those filings, as well as our other filings with the Securities and Exchange Commission (SEC), free of charge on our
website via hyperlink to a third party database of documents filed electronically with the SEC. These documents are available for access as soon as reasonably practicable after we electronically file these documents with the SEC.



FORWARD-LOOKING INFORMATION



This annual report on Form 10-K, contains various forward-looking
statements, that are based on our beliefs and assumptions, as well as information currently available to us. When possible, we tried to identify these forward-looking statements by using words such as believe,
anticipate, estimate, expect, intend, should, would, could, or may and similar expressions in discussing our plans, goals, expectations, forecasts,
contingencies, actions, events or other matters that may affect, or be affected by, future events. Our forward-looking statements are subject to numerous risks, assumptions and uncertainties that could cause our actual performance, operating results
or condition (financial or otherwise) to differ materially from our historical experience or from the experience we indicate or suggest by these forward-looking statements. Although it is impossible to predict or identify all such factors, we
discuss many of these risks, assumptions and uncertainties in the Risk Factors section below and elsewhere in this annual report and in our other reports on Forms 8-K, 10-Q and 10-K we file with the SEC from time to time. With respect to
such forward-looking statements, we claim protection under the Private Securities Litigation Reform Act of 1995. Our SEC filings are available from us, and also may be examined at public reference facilities maintained by the Securities and Exchange
Commission or, to the extent filed via EDGAR, accessed through the website of the SEC (http://www.sec.gov). We do not undertake any obligation to update any forward-looking statements we make.



PART I



ITEM 1. DESCRIPTION OF BUSINESS



Overview



We are a major manufacturer of 100% recycled paperboard
and converted paperboard products. We manufacture products primarily from recovered fiber, which is derived from recycled paper. We operate in four business segments:



| |  |  | Paperboard
| | - |  | ----------



| |  |  | Recovered fiber
| | - |  | ---------------



| |  |  | Tube, core and composite container
| | - |  | ----------------------------------



| |  |  | Folding carton and custom packaging
| | - |  | -----------------------------------



We report certain financial information, including sales, results from operations and assets, by segment in the notes to the consolidated financial
statements included in Part II, Item 8 of this annual report.



On December 30, 2005, management and an authorized committee of the Board of Directors approved the exit of our coated recycled paperboard business, our specialty packaging division and our partition operations. The coated recycled
paperboard business is a component of the paperboard segment and consists of three



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paperboard mills located in: Rittman, Ohio; Versailles, Connecticut; and Tama, Iowa. The specialty packaging division is a component of the folding carton
and custom packaging segment and consists of five facilities located in Robersonville, North Carolina; Bucyrus, Ohio; Strasburg, Ohio; Clifton, New Jersey and Pine Brook, New Jersey. The partition operations are a component of the tube, core and
composite container segment and consist of three facilities located in Litchfield, Illinois; Frenchtown, New Jersey and Covington, Georgia. The loss from discontinued operations was $72.1 million and $11.0 million in 2005 and 2004, respectively. See
Note 5 to our consolidated financial statements in Part II, Item 8 of this annual report for additional discussion of discontinued operations. The following information and descriptions exclude the businesses we have decided to exit.



Operations and Products



Paperboard. Our principal manufacturing activity is the production of
uncoated recycled paperboard. In this manufacturing process, we reduce recovered fiber to pulp, clean and refine it and then process it into various grades of paperboard for internal consumption by our converting facilities or sale in the following
four end-use markets:



| |  |  | Tube, core and composite containers
| | - |  | -----------------------------------



| |  |  | Folding cartons
| | - |  | ---------------



| |  |  | Gypsum wallboard facing paper
| | - |  | -----------------------------



| |  |  | Specialty paperboard products
| | - |  | -----------------------------



We currently operate a total of 12 paperboard mills, including one owned in our 50% owned Premier Boxboard joint venture. These mills are located in the
following states: Georgia, Indiana, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Washington and Virginia.



In 2005, approximately 51% of the recycled paperboard sold by our paperboard mills was consumed internally by our converting facilities; the remaining 49%
was sold to external customers and represented 20% of our 2005 sales of $862.4 million. Sales of unconverted paperboard to external customers as a percentage of total sales were as follows (excludes sales from the Premier Boxboard joint venture):



|                                    |  |                          |   |  |      |   |  |      |  
|----------------------------------- |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                    |  | Years Ended December 31, |  
|End-Use Market                      |  | 2003                     |   |  | 2004 |   |  | 2005 |  
|Tube, core and composite containers |  | 2                        | % |  | 2    | % |  | 2    | %
|Folding cartons                     |  | 2                        | % |  | 2    | % |  | 2    | %
|Gypsum wallboard facing paper       |  | 5                        | % |  | 5    | % |  | 4    | %
|Specialty paperboard products(1)    |  | 12                       | % |  | 12   | % |  | 12   | %
|                                    |  |                          |   |  |      |   |  |      |  
|                                    |  | 21                       | % |  | 21   | % |  | 20   | %

---

|(1) | Includes sales of unconverted paperboard and certain specialty converted products.
|--- | ----------------------------------------------------------------------------------



Three of our paperboard mills operate specialty converting facilities that supply other specialty converted and laminated
products to the bookbinding, game, printing and furniture industries. We operate a specialty converting facility that supplies die cut and foam laminated products and manufactures specialty paperboard products.



Recovered Fiber.We operate 8 stand-alone recovered fiber recycling
and brokerage facilities that collect, sell and broker recovered fiber to external customers and to our own mills. Our recovered fiber recycling and processing facilities sort and bale recovered fiber and then either transfer it to our mills for
processing or sell it to third parties. Sales of recovered fiber to external customers accounted for 6%, 9% and 10% of our sales in 2003, 2004 and 2005, respectively.



Tube, Core and Composite Container. Our largest integrated converting operation is the production of tubes and cores.
The principal applications of these products are cloth cores, paper mill cores, yarn carriers, carpet



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cores and film, foil and metal cores. Our 36 tube and core converting plants obtain approximately 85% of their paperboard needs from our paperboard mills and
the remaining 15% from other manufacturers. Paper tubes are designed to provide specific physical strength properties, resistance to moisture and abrasion, and resistance to delamination at extremely high rotational speeds. Because of the relatively
high cost of shipping tubes and cores, these facilities generally serve customers within a relatively small geographic area. Accordingly, most of our tube and core converting plants are located close to concentrations of customers.



We continually seek to expand our presence in the markets for more innovative
tubes and cores, which require stronger paper grades, higher skill and new converting technology. These markets include the yarn carrier and plastic film markets, as well as the market for cores used in certain segments of the paper industry. We
believe these markets offer growth potential, as well as potentially higher operating margins.



In addition to tube and core converting facilities, our tube, core and composite container division operates four facilities that produce specialty converted products used in industrial packaging protection
applications (edge protectors). Our tube, core and related sales to external customers accounted for 37%, 35% and 36% of our sales to external customers in 2003, 2004 and 2005, respectively.



Our tube, core and composite container segment also produces composite
containers used in the adhesive, sealant, food and food service markets, as well as grease cans, tubes, cartridges and other components. The group has 4 composite container plants located in Stevens Point, Wisconsin; Saint Paris, Ohio; Covington,
Georgia, and Orrville, Ohio and a transportation operation in Ohio. Composite container sales accounted for 5% of our sales to external customers in 2003, 2004 and 2005.



We manufacture injection-molded and extruded plastic products, including plastic cores for the textile industry, plastic
cores for the film, paper and other industries, plastic parts that are used as components of composite containers and other specialized products. These plastic products are, to a large extent, complementary to our tube and core products. We own a
company in Union, South Carolina that produces such plastic products. We produce plastic cartridges at a facility located in New Smyrna Beach, Florida. Plastic products and related sales to external customers accounted for 2% of our sales to
external customers in 2003, 2004 and 2005.



Folding Carton
and Custom Packaging. We manufacture folding cartons and rigid set-up boxes at 12 plants. These plants obtain approximately 57% of their paperboard needs from our paperboard mills and the remaining 43% from other manufacturers. The paperboard
purchased from other manufacturers is primarily paperboard grades not manufactured by our mill system. Our folding cartons and rigid set-up boxes are used principally as containers for paper goods, hardware, candy, sporting goods, frozen foods, dry
food, film and various other industrial applications, including textile and apparel.



Folding carton and custom packaging sales accounted for 28%, 27% and 26% of our sales to external customers in 2003, 2004 and 2005, respectively.



Sales by Segment. Our consolidated sales for the year ended December 31, 2005 were $862.4 million. Our four
business segments accounted for the following percentages of sales for that period:



| |  |  | Paperboard  20%
| | - |  | ----------------



| |  |  | Recovered fiber  10%
| | - |  | ---------------------



| |  |  | Tube, core and composite container  43%
| | - |  | ----------------------------------------



| |  |  | Folding carton and custom packaging  27%
| | - |  | -----------------------------------------



Joint Ventures. We currently operate one joint venture with Temple-Inland, Inc., Premier Boxboard Limited, in which we own a 50% interest and
manage the day-to-day operations. Premier Boxboard produces a



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lightweight gypsum facing paper along with containerboard grades. We believe that Premier Boxboard Limited is the lowest cost mill in the industry.



During 2005, we had a 50% interest in Standard Gypsum, L.P.,
another joint venture with Temple-Inland that manufactures gypsum wallboard. Temple-Inland managed the day-to-day operations of our Standard Gypsum joint venture. Effective January 17, 2006, we sold our 50% interest in Standard Gypsum to
Temple-Inland. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Subsequent Events for information about the sale of our Standard Gypsum, L.P. joint venture. Also, see
Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources  Off-Balance Sheet Arrangements  Joint Venture Financings, for more information about our joint
ventures.



In December 2003, the Company formed a joint
venture, C.W. Fiber Management LLC, with Wilmington Paper to own and operate a recovered fiber procurement and brokerage operation. Each joint venture partner contributed $150 thousand and owns a 50% interest in the entity. The joint venture is
managed by Wilmington Paper.



Raw Materials.



Recovered fiber, derived from recycled paperstock, is the most significant
raw material we use in our mill operations. We purchase approximately 24% of our recovered fiber requirements from independent sources, such as major retail stores, distribution centers and manufacturing plants. We obtain the balance from a
combination of other sources. We collect some recovered fiber from small collectors and waste collection businesses. Our recovered fiber recycling and processing facilities sort and bale this recovered fiber and then either transfer it to our mills
for processing or sell it to third parties. We also obtain recovered fiber from customers of our converting operations and from waste handlers and collectors who deliver loose recovered fiber to our mill sites for direct use without baling. We
obtain another portion of our requirements from our small baler program, in which we lease, sell or furnish small baling machines to businesses that bale their own recovered fiber for our periodic collection.



We closely monitor our recovered fiber costs, which can fluctuate
significantly and can materially affect our operating results due both to time lags in implementing responsive price increases and uncertainties regarding our ability to fully implement price increases in response to rising recovered fiber and other
operating costs. See Risk Factors  Our business and financial performance may be harmed by future increases in raw material and other operating costs. Our paperboard mills continually pursue operational methods and alternative
fiber sources to minimize our recovered fiber costs. One of these initiatives is to consolidate procurement of recovered fiber in order to maximize efficiency and leverage our scale.



Energy Costs.



Excluding raw materials and labor, energy is our most significant manufacturing cost. We use energy, including electricity, natural gas, fuel oil and
coal, to generate steam used in the paper making process and to operate our paperboard machines and our other converting machinery. We purchase energy from local suppliers at market rates. Our energy costs increased steadily throughout 2005 compared
to 2004. In 2004, the average energy cost in our mill system was approximately $57 per ton. In 2005, our energy costs increased by 28.1% to $73 per ton, due primarily to an increase in the cost of natural gas. Until the last several years, our
business had not been significantly affected by energy costs, and we historically have not passed energy cost increases through to our customers. Although we have responded to some more recent energy cost increases by raising our selling prices, our
ability to realize the full benefit of these price increases is dependent on, and limited by the dynamics described below under Risk Factors  Our business and financial performance may be harmed by future increases in raw material
and other operating costs, such as the customer relations, competitive, contractual commitments that affect our pricing strategies generally. For more information about our fluctuating energy costs, see  Risk Factors  Our
operating margins and cash flow may be adversely affected by rising energy costs.



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Product Distribution.



Some of our manufacturing and converting facilities have their own sales staff and maintain direct sales relationships with their customers while other
facilities use a centralized sales staff. We also employ divisional and corporate level sales personnel who support and coordinate the sales activities of individual facilities. Divisional and corporate sales personnel also provide sales management,
marketing and product development assistance in markets where customers are served by more than one of our facilities. Approximately 173 of our employees are devoted exclusively to sales and customer service activities, although many other employees
participate generally in sales efforts. We generally do not sell our products through independent sales representatives. Our advertising is limited to trade publications.



Customers.



We manufacture most of our converted products pursuant to customers orders. We do, however, maintain minimal inventory levels of certain products.
Our business generally is not dependent on any single customer or upon a small number of customers. We do not believe that the loss of any one customer would have a material adverse effect on our financial condition or results of operations. Sales
to external customers located in foreign countries accounted for approximately 5.6%, 6.4% and 7.1% of our sales for 2003, 2004 and 2005, respectively.



Competition.



Although we compete with numerous other manufacturers and converters, our competitive position varies greatly by geographic area and within the various
product markets of the recycled paperboard industry. In most of our markets, our competitors are capable of supplying products that would meet customer needs. Some of our competitors have greater financial resources than we do. We compete in our
markets on the basis of price, quality and service. We believe that it is important in all of our markets to work closely with our customers to develop or adapt products to meet customers specialized needs. We also believe that we compete
favorably on the basis of all of the above factors.



Tube, core and composite containers. In the southeastern United States, where we historically have marketed our tubes and cores, we believe that we and Sonoco Products Company are the major competitors. On a national level,
Sonoco is our largest competitor in the tube and core market. According to industry data, Sonoco had approximately 50% of the total tube and core market in the United States in 2005. We also compete with several regional companies and numerous small
local companies in the tube and core market.



Folding
Carton and Custom Packaging. The folding carton and custom packaging market in the United States is served by several large national and regional companies and numerous small local companies. Nationally, none of the major competitors is
dominant, although certain competitors may be stronger in particular geographic areas or market niches. In the markets served by our carton plants, the leading competitors are Graphic Packaging Inc., Rock-Tenn Company and Smurfit-Stone Container
Corporation.



Gypsum wallboard facing paper. The
gypsum wallboard industry is divided into independent gypsum wallboard manufacturers, which either do not produce their own gypsum wallboard facing paper or cannot fill all of their needs internally, and integrated wallboard manufacturers, which
supply most of their own gypsum wallboard facing paper requirements internally. We believe that the two largest integrated gypsum wallboard manufacturers, USG Corporation and National Gypsum Company, do not have significant sales of gypsum wallboard
facing paper to the independent gypsum wallboard manufacturers. We believe that we have the largest market share of the supply of gypsum wallboard facing paper to independent wallboard manufacturers in North America.



Up until the recent sale of our 50% interest in our Standard Gypsum joint
venture, we had competed in the gypsum wallboard industry through this interest. Standard Gypsum competes, primarily on the basis of product quality, dependability, timeliness of delivery and price, with larger integrated wallboard manufacturers
such as



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USG Corporation and National Gypsum, who have greater financial resources and superior marketing strength due to their greater number of locations and
national presence.



See Managements Discussion and
Analysis of Financial Condition and Results of Operations -Subsequent Events for information related to the recent sale of our interest in Standard Gypsum.



Specialty paperboard products. In our sales of specialty products and in sales of recycled paperboard to other
manufacturers for the production of tubes, cores and composite containers, folding cartons and boxes and miscellaneous converted products (other than gypsum wallboard facing paper), we compete with a number of recycled paperboard manufacturers,
including Rock-Tenn, Smurfit-Stone Container Corporation and The Newark Group, Inc. We believe that none of our competitors is dominant in any of these markets.



Competitive position.



Recovered fiber costs did not change, on average, in 2005 compared to 2004. Our average cost for recovered fiber per ton of recycled paperboard produced
was approximately $108 during 2005 and 2004. Although no specific information is available about competitors actual recovered fiber costs, we believe that our delivered recovered fiber costs are among the lowest in the recycled paperboard
industry. Relative to other competitors, we believe that our lower recovered fiber costs are attributable in part to lower shipping costs resulting from the location of our paperboard mills and recovered fiber facilities near major metropolitan
areas that generate substantial supplies of recovered fiber.



Our relatively low recovered fiber costs are also in part attributable to our emphasis on certain recovery methods that enable us to avoid baling operations. We believe that our competitors rely primarily on off-site, company-owned and
operated recovered fiber baling operations that collect and bale recovered fiber for shipment and processing at the mill site. We also operate such facilities, and our experience is that the baling operation results in $25-$30 per ton higher
recovered fiber costs. We equip most of our paperboard mills to accept unbaled recovered fiber for processing directly into their pulpers. In 2005 and 2004, unbaled recovered fiber represented approximately 3 percent and 4 percent, respectively, of
our total recovered fiber purchases. We also use other fiber recovery methods, such as our small baler program, that result in lower recovered fiber costs.



Environmental Matters.



Our operations are subject to various international, federal, state and local environmental laws and regulations that may be administered by
international, federal, state and local agencies. Among other things, these laws and regulations regulate the discharge of materials into the water, air and land, and govern the use and disposal of hazardous substances. We believe that our
operations are in substantial compliance with all applicable environmental laws and regulations, except for matters of non-compliance that we believe would not have a material adverse effect on our business or financial position. Where we believe
necessary or appropriate, we have initiated response actions or obtained indemnities from predecessor owners.



Our recycled paperboard mills use substantial amounts of water in the papermaking process. Our mills discharge process wastewater pursuant to wastewater
discharge permits into local sewer systems or directly into nearby waters. We use only small amounts of hazardous substances, and we believe the concentration of these substances in our wastewater discharge generally is below permitted maximums.
From time to time, the imposition of stricter limits on the solids, sulfides, BOD (biological oxygen demand) or metals content of a mills wastewater requires us to alter the content of our wastewater. We can effect reductions by, among other
things, additional screening of the wastewater, by otherwise changing the flow of process wastewater from the mill or from pretreatment ponds into the sewer system, and by adding chemicals to the wastewater. We also are subject to regulatory
requirements related to the disposal of solid wastes and certain air emissions from our facilities. We are not currently aware of any other required expenditures relating to wastewater discharge, solid waste disposal or air emissions that we expect
to have a material adverse effect on our business or financial condition, but we are unable to give assurance that we will not incur material expenditures in these areas in the future.



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In addition, under certain environmental laws, we can be held strictly liable if hazardous substances are
found on real property we have owned, operated or used as a disposal site. In recent years, we have adopted a policy of assessing real property for environmental risks prior to purchase. Although we are aware of issues regarding hazardous substances
located at certain owned, operated or off-site facilities in each case we believe that any possible liabilities will not have a material adverse effect on our business or financial position. See  Risk Factors  We are subject
to many environmental laws and regulations that require significant expenditures for compliance and remediation efforts, and changes in the law could increase those expenses and adversely affect our operations.



Employees.



As of the filing of this report, the 102 facilities we operate have approximately 5,440 employees, of whom approximately
4,250 are hourly and 1,190 are salaried. Approximately 2,000 of our hourly employees are represented by labor unions. All principal union contracts expire during the period 2006-2009. Although we consider our relations with our employees to be good,
we can give no assurance that we will be able to renegotiate on terms satisfactory to us our union contracts that expire in 2006 which cover approximately 554 of our hourly employees.



Executive Officers.



The names and ages, positions and period of service of each of our Companys executive officers are set forth below. The term of office for each
executive officer expires upon the earlier of the appointment and qualification of a successor or such officers death, resignation, retirement, removal or disqualification.



|                        |  |                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------------------- |  | ------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Age            |  | Position                                          |  | Period of Service as Executive Officer andpre-Executive Officer experience (if anExecutive Officer for
less than 5 years)                                                                                                                                                                                                                                                                                                                                     
|                        |  |                                                  
|Michael J. Keough (54)  |  | President and Chief Executive Officer; Director   |  | President and CEO since 1/2005; Senior Vice President and Chief Operating Officer 3/2002-2004; 2000-2002, President and Chief Operating
Officer and 1993-2000, Vice President and General Manager, Container Operations, of Gaylord Container Corporation, a manufacturer and distributor of corrugated containers. Director since 10/2002.                                                                                                                   
|                        |  |                                                  
|Ronald J. Domanico (47) |  | Senior Vice President and Chief Financial Officer |  | Senior Vice President and Chief Financial Officer since 1/2005; Vice President and CFO 10/2002-12/2004; 2000-2002, Executive Vice President
and Chief Financial Officer of AHL Services, Inc., a provider of marketing support services; 1997-2000, CFO, Nabisco International, a manufacturer and distributor of packaged foods; 1981-1997, Chief Financial Officer, Kraft, Inc., International
Operations, a manufacturer and distributor of packaged foods.



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|                         |  |                                                        |  |                                                                                                                                                                                                     
|------------------------ |  | ------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Age             |  | Position                                               |  | Period of Service as Executive Officer andpre-Executive Officer experience (if anExecutive Officer for
less than 5 years)                                                                           
|                         |  |                                                       
|William A. Nix, III (54) |  | Vice President, Treasurer and Chief Accounting Officer |  | Since 1/2005; Vice President, Treasurer and Controller 4/2001-2004; 1995-2000, Vice President, Treasurer, AGCO Corporation, a worldwide
manufacturer and distributor of agricultural equipment.     
|                         |  |                                                       
|Thomas C. Dawson (54)    |  | Vice President, Mill Group                             |  | Vice President since 12/2003; employed with Caraustar Mill Group since 1973.                                                                                                                        
|                         |  |                                                       
|Jimmy A. Russell (58)    |  | Vice President, Industrial and Consumer Products Group |  | Since 4/1993                                                                                                                                                                                        
|                         |  |                                                       
|Steven L. Kelchen (48)   |  | Vice President, Custom Packaging Group                 |  | Since 8/2004 ; 2000-2004 Vice President, Regional Manager, Folding Cartons & Labels Smurfit Stone Container Corporation, a leading
integrated manufacturer of paperboard and paper-based packaging.
|                         |  |                                                       
|Gregory B. Cottrell (48) |  | Vice President, Recovered Fiber Group                  |  | Since 10/2004; 1994  2004 President of Caraustar Recovered Fiber Group                                                                                                                             
|                         |  |                                                       
|John R. Foster (60)      |  | Vice President, Sales and Marketing                    |  | Since 9/1996                                                                                                                                                                                        
|                         |  |                                                       
|Barry A. Smedstad (59)   |  | Vice President, Human Resources and Public Relations   |  | Since 1/1999                                                                                                                                                                                        



Website.Our
corporate website is www.caraustar.com. There you can access general information about our company, as well as our SEC filings. See Introduction above for more information regarding our website.



ITEM 1A. RISK FACTORS



Investors
should consider the following risk factors, in addition to the other information presented in this annual report and the other reports and registration statements we file from time to time with the SEC, in evaluating us, our business and an
investment in our securities. Any of the following risks, as well as other risks, uncertainties, and possibly inaccurate assumptions underlying our plans and expectations, could result in harm to our business and financial results and cause the
value of our securities to decline, which in turn could cause investors to lose all or part of their investment in our Company. Investors are advised that it is impossible to identify or predict all risks that could affect us. Thus, the risks below
are not the only ones facing our Company, and additional risks not currently known to us or that we currently deem immaterial also may impair our business.



Our business and financial performance may be harmed by future increases in raw material and other operating costs.



Our primary raw material is recycled paper, which is known in our industry
as recovered fiber. The cost of recovered fiber has, at times, fluctuated greatly because of factors such as shortages or surpluses created by market or industry conditions. Although we have historically raised the selling prices of our
products in response to raw material price increases, sometimes raw material prices have increased so quickly or to such levels that we



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have been unable to pass the price increases through to our customers on a timely basis, which has adversely affected our operating margins. We cannot give
assurance that we will be able to pass such price changes through to our customers on a timely basis and maintain our margins in the face of raw material cost fluctuations in the future.



More recently, we have announced price increases on our products to help offset increases in other operating costs as well,
such as energy, freight, employee benefits and insurance. Although we seek to realize the full benefit of these announced price increases, our ability to do so is dependent on numerous factors, such as customer acceptance of these increases, pricing
strategies of our competitors, and contractual commitments that may limit our ability to raise prices. For all these reasons, we may not be able to realize the full benefits of pricing increases that we announce and attempt to implement.



Our operating margins and cash flow may be adversely affected by rising energy costs.



Excluding raw materials and labor, energy is our most
significant manufacturing cost. Energy consists of electrical purchases and fuel used to generate steam used in the paper making process and to operate our paperboard machines and all of our other converting machinery. Our energy costs increased
steadily throughout 2005 compared to 2004. In 2004, the average energy cost in our mill system was approximately $57 per ton. In 2005, our energy costs increased by 28.1% to $73 per ton, due primarily to an increase in the cost of natural gas. Until
the last several years, our business had not been significantly affected by energy costs, and we historically have not passed energy cost increases through to our customers. Although we have responded to some more recent energy cost increases by
raising our selling prices, our ability to realize the full benefit of these price increases is dependent on, and limited by the dynamics described above under  Our business and financial performance may be harmed by future increases in
raw material and other operating costs, such as the customer relations, competitive, contractual issues that affect our pricing strategies generally. Consequently, we have not been able to pass through to our customers all of the energy cost
increases we have incurred. As a result, our operating margins have been adversely affected. Although we continue to evaluate our energy costs and consider ways to factor energy costs into our pricing, we cannot give assurance that our operating
margins and results of operations will not continue to be adversely affected by rising energy costs.



Our business and financial performance may be adversely affected by downturns in industrial production, housing and construction and the consumption of nondurable and durable goods.



Demand for our products in our four principal end use markets is primarily
driven by the following factors:



| |  |  | Tube, core and composite container  industrial production, construction spending and consumer nondurable consumption
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Folding cartons  consumer nondurable consumption and industrial production
| | - |  | ---------------------------------------------------------------------------



| |  |  | Gypsum wallboard facing paper  long-term interest rates, single and multifamily construction, repair and remodeling construction and commercial construction
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Specialty paperboard products  consumer nondurable consumption and consumer durable consumption
| | - |  | ------------------------------------------------------------------------------------------------



Downturns in any of these sectors will result in decreased demand for our products. In particular, our business has been
adversely affected in recent periods by the general slow-down in industrial demand. These conditions are beyond our ability to control, but have had, and will continue to have, a significant impact on our sales and results of operations.



We are adversely affected by the cycles, conditions and problems inherent in our
industry.



Our operating results tend to reflect the
general cyclical nature of the business in which we operate. In addition, our industry has suffered from excess capacity. Our industry also is capital intensive, which leads to



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high fixed costs and generally results in continued production as long as prices are sufficient to cover variable costs. These conditions have contributed to
substantial price competition and volatility within our industry. In the event of a recession, demand and prices are likely to drop substantially. Our profitability historically has been more sensitive to price changes than to changes in volume.
Future decreases in prices for our products could adversely affect our operating results. These factors, coupled with our substantially leveraged financial position, may adversely affect our ability to respond to competition and to other market
conditions or to otherwise take advantage of business opportunities.



Our
business may suffer from risks associated with growth and acquisitions.



Historically, we have grown our business, revenues and production capacity to a significant degree through acquisitions. In the current difficult operating climate facing our industry and our financial position, the
pace of our acquisition activity, and accordingly, our revenue growth, has slowed significantly as we have focused on conserving cash and maximizing the productivity of our existing facilities. However, we expect to continue evaluating and pursuing
acquisition opportunities on a selective basis, subject to available funding and credit flexibility. Growth through acquisitions involves risks, many of which may continue to affect us based on acquisitions we have completed in the past. We cannot
give assurance that our acquired businesses will achieve the same levels of revenue, profit or productivity as our existing locations or otherwise perform as we expect.



Acquisitions also involve specific risks. Some of these risks include:



| |  |  | assumption of unanticipated liabilities and contingencies;
| | - |  | ----------------------------------------------------------



| |  |  | diversion of managements attention; and
| | - |  | ----------------------------------------



| |  |  | possible reduction of our reported earnings because of:
| | - |  | -------------------------------------------------------



| |  |  | goodwill and intangible asset impairment;
| | - |  | -----------------------------------------



| |  |  | increased interest costs;
| | - |  | -------------------------



| |  |  | issuances of additional securities or incurrence of debt; and
| | - |  | -------------------------------------------------------------



| |  |  | difficulties in integrating acquired businesses.
| | - |  | ------------------------------------------------



As we grow, we can give no assurance that we will be able to:



| |  |  | use the increased production capacity of any new or improved facilities;
| | - |  | ------------------------------------------------------------------------



| |  |  | identify suitable acquisition candidates;
| | - |  | -----------------------------------------



| |  |  | complete additional acquisitions; or
| | - |  | ------------------------------------



| |  |  | integrate acquired businesses into our operations.
| | - |  | --------------------------------------------------



If we cannot raise the necessary capital for, or use our stock to finance, acquisitions, expansion plans or other significant corporate opportunities, our growth may
be impaired.



As described under Managements
Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources, our senior credit facility and senior subordinated debt obligations impose limitations on our ability to make acquisitions or
other strategic investments. Without additional capital, we may have to curtail any acquisition and expansion plans or forego other significant corporate opportunities that may be vital to our long-term success. If our revenues and cash flow do not
meet expectations, then we may lose our ability to borrow money or to do so on terms that we consider favorable. Conditions in the capital markets also will affect our ability to borrow, as well as the terms of those borrowings. In addition, our
financial performance and the conditions of the capital markets will also affect the value of our common stock, which could make it a less attractive form of consideration in making acquisitions. All of these factors could also make it difficult or
impossible for us to expand in the future.



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Our substantial indebtedness could adversely affect our cash flow and our ability to fulfill our obligations under our
indebtedness.



We have a substantial amount of outstanding
indebtedness. See Selected Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources and the consolidated financial statements included
in Part II, Item 8 of this annual report. In addition, as described in Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources  Off-Balance Sheet Arrangements
 Joint Venture Financings, we have provided credit support to our joint ventures for which we could also be liable. We continually assess, and have made recent strategic decisions, including the sale of our Standard Gypsum joint venture,
aimed at reducing our overall indebtedness. Our substantial level of indebtedness, including the potential debt reduction mentioned above, increases the possibility that we may be unable to generate cash sufficient to pay when due the principal of,
interest on or other amounts due in respect of our indebtedness. We may also obtain additional long-term debt, increasing the risks discussed below. Our substantial leverage could have significant consequences to holders of our debt and equity
securities. For example, it could:



| |  |  | make it more difficult for us to satisfy our obligations with respect to our indebtedness, including compliance with financial covenants;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | limit our ability to obtain additional financing;
| | - |  | -------------------------------------------------



| |  |  | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the amount of our cash flow available for other purposes,
including capital expenditures and other general corporate purposes;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;
| | - |  | ------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | adversely affect the value of our common stock and
| | - |  | --------------------------------------------------



| |  |  | affect our viability as a going concern.
| | - |  | ----------------------------------------



We are subject to many environmental laws and regulations that require significant expenditures for compliance and remediation efforts, and changes in the law could
increase those expenses and adversely affect our operations.



Compliance with the environmental requirements of international, federal, state and local governments significantly affects our business. Among other things, these requirements regulate the discharge of materials into the water, air and
land and govern the use and disposal of hazardous substances. These regulations are complex, and our compliance with them can be affected by a myriad of factors, including rates of production, changes in applicable standards or interpretations,
human error, equipment malfunction and other factors. From time to time we have and may continue to find that we have inadvertently failed to meet specific regulations or standards despite our efforts to comply with them. Under environmental laws,
we also can be held strictly liable if hazardous substances are found on real property we have ever owned, operated or used as a disposal site. Despite our compliance efforts, risk of environmental liability is part of the nature of our business. We
maintain and generate hazardous substances at some facilities, and although we do not believe that any related liabilities or remedial costs will be material, we cannot give assurance that environmental liabilities, including compliance and response
costs, will not have a material adverse effect on our business. In addition, future events may lead to additional compliance or other costs that could have a material adverse effect on our business. Such



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future events could include changes in, or new interpretations of, existing laws, regulations or enforcement policies, discoveries of past releases, failure
of indemnitors to fulfill their obligations, or further investigation of the potential health hazards of certain products or business activities.



Our industry is highly competitive and price fluctuations and volatility could diminish our sales volume and revenues.



The industry in which we operate is highly competitive. Our competitors
include other large, vertically integrated paperboard, packaging and gypsum wall board manufacturing companies, including National Gypsum Company, The Newark Group, Inc., Rock-Tenn Company, Smurfit-Stone Container Corporation, Sonoco Products
Company and USG Corporation, along with numerous smaller paperboard and packaging companies. As a result of product substitution, we also compete indirectly with manufacturers of similar products using other materials. In addition, we face
increasing competition from foreign paperboard and packaging producers as a result of the continued migration of U.S. manufacturing offshore to lower labor cost environments and the emergence of new foreign competitors in these countries. We also
face competition due to product substitution such as flexible packaging. The industry in which we compete is particularly sensitive to price pressure, as well as other factors, including quality, service, innovation and design, with varying emphasis
on these factors depending on the product line. To the extent that one or more of our competitors becomes more successful with respect to any key competitive factors, our ability to attract and retain customers could be materially adversely
affected. Some of our competitors are less leveraged than we are and have access to greater resources. These companies may be able to adapt more quickly to new or emerging technologies, respond to changes in customer requirements and withstand
industry-wide pricing pressures. If our facilities are not as cost efficient as those of our competitors or if our competitors lower prices, we may need to temporarily or permanently close such facilities, which would negatively affect our sales
volume and revenues.



We have incurred and may incur additional material
restructuring charges in the future, and we may not be successful in achieving the cost reductions contemplated by our recent and future restructuring activities.



Restructuring has been a primary component of our managements strategy to address the decrease in demand resulting
from secular trends and generally weak domestic economic conditions. Between 2001 and 2005, restructuring and asset impairment charges have totaled $190.9 million, of which approximately $166.3 million have been noncash charges. We have also
experienced increases in near-term manufacturing and selling, general and administrative costs as a result of transitioning of business within our mill and converting systems to other company facilities. Our restructuring efforts have been directed
toward reducing costs through manufacturing and converting facilities rationalization. However, we can give no assurance that the cost reductions contemplated by our recent and future restructuring activities will be achieved within the expected
time frame, or at all. Any delays or failure in delivering products to our customers due to our facilities rationalization may result in order cancellations or termination of customer relationships, all of which could adversely impact our
competitive position and would offset any cost savings we might have achieved. Restructurings involve numerous risks, such as the diversion of management and employee attention, disruptions in customer relationships, production and capacity, and
execution risks. Although under current market conditions, we expect that restructuring charges will continue to decline, we may continue to incur material restructuring charges in the future, which may exceed our expectations if market conditions
change. The recognition of these restructuring charges can cause our reported financial results for a given period to differ materially from our own expectations and those of investors generally, and can accordingly cause the trading prices of our
securities to fluctuate significantly depending on the degree to which investors consider these charges relevant in evaluating our financial results and prospects.



Significant disruptions to our operations may materially and adversely affect our earnings.



We operate approximately 100 mills and converting facilities in the United
States and in certain foreign countries. Natural disasters, such as hurricanes, tornadoes, fires, ice storms, wind storms, floodings and other weather conditions, unforeseen operating problems and other events beyond our control may adversely affect
the



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operations of our mills and converting facilities, which in turn would materially and adversely affect our earnings. Any losses due to such events may not be
covered by our existing insurance policies. In the event that an occurrence of a natural disaster affected multiple locations, this event could materially and adversely affect our earnings.



In addition, a significant percentage of our hourly employees are represented
by labor unions, with all principal union contracts expiring between 2006 and 2009. Although we consider our relations with our employees to be good, we cannot provide any assurance that the union contracts will be renewed in a timely manner, on
terms acceptable to us, or at all, or that there will not be any work stoppage or other labor disturbance at any of our facilities. Work stoppages or other labor disturbances at one or more of our facilities may cause significant disruptions to our
operations at such facilities, which may materially and adversely impact our results of operations.



Our business is subject to changing regulation of corporate governance and public disclosure that have increased both our costs and the risk of noncompliance.



Because our common shares are publicly traded, we are subject to certain
rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting
Oversight Board, the SEC and Nasdaq, have in recent years issued new requirements and regulations, most notably the Sarbanes-Oxley Act of 2002. From time to time since the adoption of the Sarbanes-Oxley Act of 2002, these authorities have continued
to develop additional regulations or interpretations of existing regulations. Our ongoing efforts to comply with these regulations and interpretations have resulted in, and are likely to continue resulting in, increased general and administrative
expenses and diversion of management time and attention from revenue-generating activities to compliance activities.



In particular, our efforts to prepare to comply with Section 404 of the Sarbanes-Oxley Act and related regulations regarding our managements
required assessment of our internal control over financial reporting and our independent auditors attestation of that assessment has required the commitment of significant financial and managerial resources. In part to prepare for compliance
with Section 404, as well as to generally improve our internal control environment, we have undertaken substantial measures, including, among other things, costly projects to centralize our accounting functions and reorganize our information
technology department. These projects have represented operational risks requiring significant resources to complete in a timely manner in order to enable us to comply with the Section 404 requirements.



Because these new and changed laws, regulations and standards are subject to
varying interpretations, their application in practice may continue to evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and impose
additional costs on us to revise our disclosure and governance practices accordingly.



The failure to effectively modernize and implement our information systems will adversely affect our operations, and the failure to complete the transition to our new information infrastructure could adversely affect our business.



The success of our business has become increasingly dependent on our
ability to integrate computer technology into our operations. Complex computer systems have become indispensable to the timely processing of the volume of transactions generated by our daily operations. Our ability to obtain and service business
depends on our ability to convey, internally and externally, accurate and timely information processed on these complex systems. We are in the process of replacing our core systems and reengineering our processes. These systems are very complex and
interdependent and are critical to our success. Due to the extensive replacement of these systems and processes we are at risk for a system failure that could, among other problems, result in service interruptions or the production of incorrect
data. Such system, process or programming failures, or the cumulative effect of such failures, including any resulting reliance upon information found to be inaccurate or unreliable, could result in the loss of existing customers, difficulty
attracting new customers, problems in determining cost of production and establishing appropriate pricing, regulatory problems, increases in operating expenses and other material adverse consequences or material effects on our business, financial
condition and results of operations.



ITEM 1B. UNRESOLVED STAFF COMMENTS



There were no unresolved staff comments as of December 31, 2005.



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ITEM 2. PROPERTIES



Facilities. The following table sets forth certain information concerning our facilities as of the filing of this report. Unless otherwise indicated, we own these facilities.



|                                                     |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------- |  | ------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Type of Facility                                     |  | Number ofFacilities |  | Locations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                     |  |                    
|PAPERBOARD                                           |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                     |  |                    
|Paperboard Mills (1)                                 |  | 14                  |  | Versailles, CT; Austell, GA (Mill #1); Austell, GA (Mill #2); Austell, GA (Sweetwater); Tama, IA; Lafayette, IN; Charlotte, NC; Cincinnati,
OH; Rittman, OH; Sinking Spring, PA; Taylors, SC; Chattanooga, TN; Richmond, VA; Tacoma, WA                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                     |  |                    
|Specialty Converting Plants                          |  | 4                   |  | Austell, GA; Charlotte, NC; Mooresville, NC; Taylors, SC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                     |  |                    
|RECOVERED FIBER                                      |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                     |  |                    
|Recovered Fiber Collection and Processing Plants (2) |  | 8                   |  | Columbus, GA; Dalton, GA; Doraville, GA; Charlotte, NC; Cleveland, OH; Hardeeville, SC; Texarkana, TX (leased); Pasadena, CA
(leased)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                     |  |                    
|TUBE, CORE AND COMPOSITE CONTAINER                   |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                     |  |                    
|Tube and Core Plants                                 |  | 36                  |  | Linden, AL; Crossett, AR; McGehee, AR (leased); Phoenix, AZ (leased); Vacaville, CA; Kingston, Ontario, Canada; Scarborough, Ontario,
Canada; Cantonment, FL; Palatka, FL; Austell, GA; Cedar Springs, GA; Dalton, GA; Beardstown, IL; Franklin, KY; West Monroe, LA; Grand Rapids, MI; Saginaw, MI; Corinth, MS; Kernersville, NC; Minerva, OH; Toledo, OH; Lancaster, PA (leased); Rock Hill,
SC; Taylors, SC; Amarillo, TX (leased); Arlington, TX; Silsbee, TX; Texarkana, TX; Leyland, Lancaster, United Kingdom; Salt Lake City, UT (leased); Danville, VA; Franklin, VA; West Point, VA; Weyers Cave, VA; Tacoma, WA; Asheville,
NC
|                                                     |  |                    
|Composite Container Plants                           |  | 4                   |  | Orrville, OH; Saint Paris, OH; Stevens Point, WI; Covington, GA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                     |  |                    
|Specialty Converting Plants                          |  | 7                   |  | Austell, GA; Lancaster, PA; Arlington, TX; Tacoma, WA; Covington, GA; Litchfield, IL; Frenchtown, NJ                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                     |  |                    
|Plastics Plants                                      |  | 2                   |  | New Smyrna Beach, FL (leased); Union, SC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                     |  |                    
|Special Services and Other Facilities                |  | 2                   |  | Kernersville, NC (leased); Saint Paris, OH                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



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|                                                     |  |                     |  |                                                                                                                                                                            
|---------------------------------------------------- |  | ------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Type of Facility                                     |  | Number ofFacilities |  | Locations                                                                                                                                                                  
|                                                     |  |                    
|FOLDING CARTON AND CUSTOM PACKAGING                  |  |                     |  |                                                                                                                                                                            
|                                                     |  |                    
|Carton Plants                                        |  | 11                  |  | Denver, CO; Versailles, CT; Burlington, NC; Randleman, NC; Mentor, OH; Grand Rapids, MI; St. Louis, MO; York, PA; Kingston Springs, TN;
Chicago, IL (leased); Charlotte, NC
|                                                     |  |                    
|Contract Packaging and Contract Manufacturing Plants |  | 5                   |  | Robersonville, NC; Bucyrus, OH; Strasburg, OH; Clifton, NJ; Pine Brook, NJ (leased);                                                                                       
|                                                     |  |                    
|Special Services                                     |  | 3                   |  | Versailles, CT; Grand Rapids, MI; Cleveland, OH                                                                                                                            
|                                                     |  |                    
|JOINT VENTURES                                       |  |                     |  |                                                                                                                                                                            
|                                                     |  |                    
|Gypsum Wallboard (3)                                 |  | 2                   |  | Cumberland, TN (50% interest); McQueeney, TX (50% Interest)                                                                                                                
|                                                     |  |                    
|Paperboard Mill                                      |  | 1                   |  | Newport, IN (50% interest)                                                                                                                                                 
|                                                     |  |                    
|Tube and Core Plant                                  |  | 1                   |  | Mexico City, Mexico (65% interest)                                                                                                                                         
|                                                     |  |                    
|Tube and Core Specialty Converting Facility          |  | 1                   |  | Mexico City, Mexico (65% interest)                                                                                                                                         
|                                                     |  |                    
|Recovered Fiber Facility                             |  | 2                   |  | Los Angeles, CA (24.5% interest) Pinebrook, NJ (50% interest)                                                                                                              

---

|(1) | All of our paperboard mills produce uncoated recycled paperboard with the exceptions of our Rittman, OH, Tama, IA and Versailles, CT paperboard mills, which also produce clay-coated
recycled boxboard.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Recovered fiber collection and/or processing also occurs at each of our mill sites and all of our carton plants and tube and core plants.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(3) | The two gypsum wallboard facilities are managed by our joint venture partner.
|--- | -----------------------------------------------------------------------------



ITEM 3. LEGAL PROCEEDINGS



From time to time claims are asserted against the Company arising out of its operations in the normal course of business. Management does not believe that the Company is currently a party to any litigation that will have a material adverse
effect on its financial condition or results of operations.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



There were no matters submitted to a vote of the Companys security holders during the quarter ended December 31, 2005.



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PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



Our common shares, $.10 par value (the Common Shares), are traded on the National Association of Securities Dealers, Inc. NASDAQ National
Market System (NASDAQ) under the symbol CSAR. As of March 9, 2006, there were approximately 490 shareholders of record and, as of that date, we estimate that there were approximately 2,700 beneficial owners holding stock in nominee
or street name and approximately 1,300 holders of shares in the Companys 401(k) plan. The table below sets forth quarterly high and low stock prices during the years 2004 and 2005.



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|               |  | High |       | Low
|2004           |  |      |       |     |   |      
|               |  |      |       |     |   |      
|First Quarter  |  | $    | 15.26 |     | $ | 9.76 
|Second Quarter |  |      | 14.76 |     |   | 10.90
|Third Quarter  |  |      | 17.23 |     |   | 11.76
|Fourth Quarter |  |      | 17.42 |     |   | 14.25
|2005           |  |      |       |     |   |      
|               |  |      |       |     |   |      
|First Quarter  |  | $    | 17.00 |     | $ | 12.12
|Second Quarter |  |      | 13.95 |     |   | 8.12 
|Third Quarter  |  |      | 12.38 |     |   | 10.23
|Fourth Quarter |  |      | 11.38 |     |   | 8.53 



The Company suspended
dividend payments in 2002 and does not expect to distribute dividends until our earnings performance and cash flow performance improve. As described in Part II, Item 7 under  Liquidity and Capital Resources, our debt
agreements contain certain limitations on the payment of dividends and currently preclude us from doing so.



The following table sets forth all purchases made by or on behalf of the Company or an affiliated purchaser, as defined in Rule 10b-18(a)(3)
under the Exchange Act, of shares of the Companys common stock during each month for 2005.



|                                 |  |                                        |  |                               |       |                                                                                  |   |                                                                                                           |  
|-------------------------------- |  | -------------------------------------- |  | ----------------------------- | ----- | -------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------- | -
|Period                           |  | (a) Total Numberof SharesPurchased (1) |  | (b)AveragePrice Paidper Share |       | (c) Total Numberof SharesPurchased as part of PubliclyAnnounced Plansor Programs |   | (d) Maximum Number (or Approximate Dollar Value) ofshares that May YetBe Purchased UnderPlans or
Programs
|January 1  January 31, 2005     |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|February 1  February 28, 2005   |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|March 1  March 31, 2005         |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|April 1  April 30, 2005         |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|May 1  May 31, 2005             |  | 255                                    |  | $                             | 10.31 |                                                                                  |  |                                                                                                           | 
|June 1  June 30, 2005           |  | 1,534                                  |  | $                             | 11.14 |                                                                                  |  |                                                                                                           | 
|July 1  July 31, 2005           |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|August 1  August 31, 2005       |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|September 1  September 30, 2005 |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|October 1  October 31, 2005     |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|November 1  November 30, 2005   |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|December 1  December 31, 2005   |  |                                       |  |                               |      |                                                                                  |  |                                                                                                           | 
|                                 |  |                                        |  |                               |       |                                                                                  |   |                                                                                                           |  
|Total                            |  | 1,789                                  |  | $                             | 10.73 |                                                                                  |  |                                                                                                           | 



---

|(1) | These shares were surrendered by employees to satisfy the employees minimum withholding obligations in connection with the vesting of restricted common stock issued by the
Company. The Company does not consider the purchase of shares from employees in this context to be pursuant to a publicly announced plan or program. The table excludes shares withheld from employees in cashless exercises to satisfy
minimum tax withholding requirements and to pay the exercise price of options.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA



|                                                                                   |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------------------------ | -------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                   |  | Year Ended December 31,                          |         
|                                                                                   |  | 2005                                             |          |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                                                   |  | (In thousands, except per share data and ratios) |         
|Summary of Operations                                                              |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Sales                                                                              |  | $                                                | 862,421  |   |      | $ | 871,485 |      |  | $ | 808,368 |   |  | $    | 751,629 |   |  | $ | 726,624 |  
|Cost of sales                                                                      |  |                                                  | 728,047  |   |      |   | 721,171 |      |  |   | 657,941 |   |  |      | 622,808 |   |  |   | 566,717 |  
|Selling, general and administrative expenses                                       |  |                                                  | 122,270  |   |      |   | 119,752 |      |  |   | 128,464 |   |  |      | 118,532 |   |  |   | 124,263 |  
|Goodwill impairment                                                                |  |                                                  | 39,344   |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Restructuring and other impairment costs                                           |  |                                                  | 1,162    |   |      |   | 12,649  |      |  |   | 17,774  |   |  |      | 10,834  |   |  |   | 7,134   |  
|Gain on sale of real estate                                                        |  |                                                  |         |   |      |   | 10,323  |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                                   |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) from operations                                                      |  |                                                  | (28,402  | ) |      |   | 28,236  |      |  |   | 4,189   |   |  |      | (545    | ) |  |   | 28,510  |  
|Other (expense) income:                                                            |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest expense                                                                   |  |                                                  | (41,693  | ) |      |   | (41,892 | )    |  |   | (43,139 | ) |  |      | (37,847 | ) |  |   | (40,895 | )
|Interest income                                                                    |  |                                                  | 2,629    |   |      |   | 948     |      |  |   | 528     |   |  |      | 1,652   |   |  |   | 986     |  
|Loss on extinguishment of debt                                                     |  |                                                  |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | (4,305  | )
|Write-off of deferred debt costs                                                   |  |                                                  |         |   |      |   |        |      |  |   | (1,812  | ) |  |      |        |   |  |   |        |  
|Equity in income (loss) of unconsolidated affiliates                               |  |                                                  | 37,043   |   |      |   | 25,251  |      |  |   | 8,354   |   |  |      | 2,488   |   |  |   | (2,610  | )
|Other, net                                                                         |  |                                                  | 430      |   |      |   | (1,099  | )    |  |   | 92      |   |  |      | (246    | ) |  |   | (674    | )
|                                                                                   |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                                   |  |                                                  | (1,591   | ) |      |   | (16,792 | )    |  |   | (35,977 | ) |  |      | (33,953 | ) |  |   | (47,498 | )
|                                                                                   |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|(Loss) income from continuing operations before minority interest and income taxes |  |                                                  | (29,993  | ) |      |   | 11,444  |      |  |   | (31,788 | ) |  |      | (34,498 | ) |  |   | (18,988 | )
|Benefit (provision) for income taxes                                               |  |                                                  | (1,616   | ) |      |   | (4,273  | )    |  |   | 11,464  |   |  |      | 12,018  |   |  |   | 6,392   |  
|Minority interest in (income) losses                                               |  |                                                  | 273      |   |      |   | (184    | )    |  |   | 196     |   |  |      | 235     |   |  |   | 180     |  
|                                                                                   |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|(Loss) income from continuing operations                                           |  |                                                  | (31,336  | ) |      |   | 6,987   |      |  |   | (20,128 | ) |  |      | (22,245 | ) |  |   | (12,416 | )
|(Loss) income from discontinued operations                                         |  |                                                  | (105,922 | ) |      |   | (16,773 | )    |  |   | (10,542 | ) |  |      | 6,720   |   |  |   | (3,307  | )
|Benefit (provision) for income taxes ondiscontinued operations                     |  |                                                  | 33,872   |   |      |   | 5,807   |      |  |   | 3,635   |   |  |      | (2,395  | ) |  |   | 1,121   |  
|                                                                                   |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|(Loss) income from discontinued operations                                         |  |                                                  | (72,050  | ) |      |   | (10,966 | )    |  |   | (6,907  | ) |  |      | 4,325   |   |  |   | (2,186  | )
|                                                                                   |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net (Loss) income                                                                  |  | $                                                | (103,386 | ) |      | $ | (3,979  | )    |  | $ | (27,035 | ) |  | $    | (17,920 | ) |  | $ | (14,602 | )
|                                                                                   |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Diluted weighted average shares outstanding                                        |  |                                                  | 28,774   |   |      |   | 28,654  |      |  |   | 27,993  |   |  |      | 27,871  |   |  |   | 27,845  |  
|Per Share Data  Diluted                                                           |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|(Loss) income from continuing operations                                           |  | $                                                | (1.09    | ) |      | $ | 0.25    |      |  | $ | (0.72   | ) |  | $    | (0.80   | ) |  | $ | (0.44   | )
|(Loss) income from discontinued operations                                         |  |                                                  | (2.50    | ) |      |   | (0.39   | )    |  |   | (0.25   | ) |  |      | 0.16    |   |  |   | (0.08   | )
|Net (loss) income                                                                  |  |                                                  | (3.59    | ) |      |   | (0.14   | )    |  |   | (0.97   | ) |  |      | (0.64   | ) |  |   | (0.52   | )
|Cash dividends declared                                                            |  |                                                  | 0.00     |   |      |   | 0.00    |      |  |   | 0.00    |   |  |      | 0.00    |   |  |   | 0.18    |  
|Market price on December 31                                                        |  |                                                  | 8.69     |   |      |   | 16.82   |      |  |   | 13.80   |   |  |      | 9.48    |   |  |   | 6.93    |  
|Shares outstanding, December 31                                                    |  |                                                  | 28,786   |   |      |   | 28,753  |      |  |   | 28,222  |   |  |      | 27,907  |   |  |   | 27,854  |  
|Total Market Value of Common Stock                                                 |  | $                                                | 250,150  |   |      | $ | 483,625 |      |  | $ | 389,464 |   |  | $    | 264,558 |   |  | $ | 193,028 |  
|Balance Sheet and Other Data                                                       |  |                                                  |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents                                                          |  | $                                                | 95,152   |   |      | $ | 89,756  |      |  | $ | 85,551  |   |  | $    | 34,314  |   |  | $ | 64,244  |  
|Property, plant and equipment, net                                                 |  |                                                  | 255,037  |   |      |   | 388,134 |      |  |   | 410,772 |   |  |      | 443,395 |   |  |   | 450,376 |  
|Depreciation and amortization                                                      |  |                                                  | 28,493   |   |      |   | 30,089  |      |  |   | 30,991  |   |  |      | 54,246  |   |  |   | 64,340  |  
|Capital expenditures                                                               |  |                                                  | 24,272   |   |      |   | 20,891  |      |  |   | 20,006  |   |  |      | 22,542  |   |  |   | 28,059  |  
|Total assets                                                                       |  |                                                  | 859,132  |   |      |   | 959,705 |      |  |   | 960,255 |   |  |      | 990,333 |   |  |   | 960,981 |  
|Current maturities of long-term debt                                               |  |                                                  | 85       |   |      |   | 80      |      |  |   | 106     |   |  |      | 70      |   |  |   | 48      |  
|Long-term debt, less current maturities                                            |  |                                                  | 492,305  |   |      |   | 506,141 |      |  |   | 531,001 |   |  |      | 532,715 |   |  |   | 508,691 |  
|Shareholders equity                                                               |  |                                                  | 108,396  |   |      |   | 217,252 |      |  |   | 219,877 |   |  |      | 241,681 |   |  |   | 279,579 |  
|Total shareholders equity and debt                                                |  | $                                                | 600,786  |   |      | $ | 723,473 |      |  | $ | 750,984 |   |  | $    | 774,466 |   |  | $ | 788,318 |  



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



General



We are a major manufacturer of recycled paperboard and converted paperboard products. We operate in four business segments. The paperboard segment manufactures 100% recycled uncoated and clay-coated paperboard. The
recovered fiber segment collects and sells recycled paper and brokers recycled paper and other paper rolls. The tube, core and composite container segment produces spiral and convolute-wound tubes, cores and cans. The folding carton and custom
packaging segment produces printed and unprinted folding carton and set-up boxes and provides contract manufacturing and packaging services.



Our business is vertically integrated to a large extent. This means that our converting operations consume a large portion of our own paperboard
production, approximately 51% in 2005. The remaining 49% of our paperboard production is sold to external customers in any of the four recycled paperboard end-use markets: tube, core and composite containers; folding cartons; gypsum wallboard facing
paper and specialty paperboard products. These integration statistics do not include volume produced or converted by our 50% owned, unconsolidated joint ventures Premier Boxboard Limited and Standard Gypsum, LP. As part of our strategy to optimize
our operating efficiency, each of our mills can produce recycled paperboard for more than one end-use market. This allows us to shift production among mills in response to customer or market demands.



More recently, in light of the difficult operating climate we have faced, and
in an effort to reduce costs and improve our business mix, capacity deployment and profitability, restructuring activities have become an important element of our strategy. Our recent sale of our interest in Standard Gypsum, along with our recently
announced intention to exit the coated recycled paperboard, specialty contract packaging and partition businesses, are part of our strategic transformation plan to reduce our debt and better position us to compete and leverage our expertise in our
core businesses.



Historically, we have grown our business,
revenues and production capacity to a significant degree through acquisitions. Based on the difficult operating climate for our industry and our financial position over the last several years, the pace of our acquisition activity, and
correspondingly, our revenue growth, has slowed as we have focused on conserving cash and maximizing the productivity of our existing facilities.



We are a holding company that operates our business through 25 subsidiaries as of the date of this filing. We also own a 50% interest in one joint venture
with Temple-Inland, Inc. and owned another one during 2005 that we sold subsequent to year-end. We account for these interests in our joint ventures under the equity method of accounting. See  Liquidity and Capital Resources 
Off-Balance Sheet Arrangements  Joint Venture Financings below.



Key Business Indicator and Trends



Our
industry has historically been closely correlated with the domestic economy in general, and with consumer nondurable consumption (packaging segment) and industrial production (tube, core and composite containers segment), specifically. These demand
drivers tend to be cyclical in nature, with cycles lasting 3  5 years depending on such factors as gross domestic product, interest rates and other factors. As these demand drivers fluctuate, we typically experience variability in volume,
revenue and profitability in our business. From late 1999 through 2002, the recycled paperboard and converted paperboard products industry was in a down cycle. Since 2002 our industry has improved but has not returned to historical levels of demand
and capacity utilization. While we believe that future operating results may improve, we cannot ascertain when or to what extent this may occur.



The key operating indicator of our business is paperboard mill operating rates. Mill operating rates are calculated as the ratio of production compared
with capacity, assuming a normalized mill schedule of 355 days per year. As paperboard mill operating rates increase, cost per ton of paperboard generally decreases. As these



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tons are sold, profitability increases since fixed production costs are absorbed by more tons produced. Additionally, higher operating rates generally
provide enhanced opportunity to recover material and labor increases through improved pricing. This positively affects paperboard and converted products income from operations and cash flow.



Paperboard mill operating rates are affected by demand and by mill closures.
Industry demand decreased from 2000  2002 due primarily to a recessionary general economy, the continued migration of U.S. manufacturing offshore to lower labor cost environments and product substitution such as the replacement of paperboard
carton packaging with plastic standup pouches. The decrease in demand resulted in a decrease in operating rates for us and the industry as a whole. We expect the migration of U.S. manufacturing offshore and product substitution to continue, although
at a slower rate, which could continue to negatively affect operating results. We further expect these trends to be somewhat offset by the improving domestic economy, increased market share and our own paperboard mill capacity reductions. Recent
industry improvement in operating rates has been driven by paperboard mill closures, as over 1.7 million tons of capacity, or approximately 20% of the recycled paperboard mill total capacity, was closed from 2001 through 2004. We have closed
approximately 323 thousand tons of our own paperboard mill capacity during this period to better match our supply capabilities to demand.



LOGO





Industry Source: American Forest and Paper Association.



|(1) | The decline in 2005 was primarily driven by downtime associated with an equipment upgrade at our Sweetwater Paperboard mill. Also note that these rates exclude our 50% owned joint
venture, Premier Boxboard, which we operate.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Restructuring has been a primary component of managements strategy to address the decrease in demand resulting from secular trends, as discussed above, and generally weak domestic economic conditions. Between 2001 and 2005,
restructuring and asset impairment charges have totaled $190.9 million, of which approximately $166.3 million have been noncash charges, see Results of Operations 2005  2004 and Results of Operations 2004  2003.
We have also experienced increases in near-term manufacturing and selling, general and administrative costs as a result of our transitioning of business within our mill and converting systems to other company facilities. Our strategic initiatives
are designed to enhance our competitiveness through reduced costs, increase revenue through delivery of differentiated quality products and services to our customers, and promote



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compliance with recent changes in legal and regulatory requirements. Our restructuring efforts have been directed toward reducing costs through manufacturing
and converting facilities rationalization where we believed it was advantageous to do so due to geographic overlap, duplicative capabilities, changes in customer base and other factors. Rationalization of facilities typically results in increased
cash outlays and expenses initially, for example, severance costs. Restructuring charges increased in 2005 versus 2004 but we believe that future earnings and cash flows will be favorably impacted by our continued efforts to reconfigure our business
to increase efficiency and better match supply with customer demand.



Recovered fiber, which is derived from recycled paper stock, is our most significant raw material. Historically, the cost of recovered fiber has fluctuated significantly due to market and industry conditions. For example, our average
recovered fiber cost per ton of paperboard produced increased from $43 per ton in 1993 to $144 per ton in 1995, an increase of 235%, before dropping to $66 per ton in 1996. Recovered fiber cost per ton averaged $108 during 2004 and 2005.



Excluding raw materials and labor, energy is our most significant
manufacturing cost. Energy consists of fuel used to generate steam used in the paper making process and electrical purchases to operate our paperboard machines and all of our converting machinery. In 2003, the average energy cost in our mill system
was approximately $61 per ton compared to $57 per ton in 2004, a 6.1% decrease. In 2005 energy costs averaged $73 per ton, an increase of 28.1% from 2004. Until the last few years, our business had not been significantly affected by energy cost
increases, and we historically have not passed increases in energy costs through to our customers. Consequently, as the volatility of energy prices has increased dramatically over the last three years, we have not been able to pass through to our
customers all of the energy cost increases we have incurred. As a result, our operating margins have been adversely affected. Although we continue to evaluate our energy costs and consider ways to factor energy costs into our pricing, we cannot give
assurance that our operating margins and results of operations will not continue to be adversely affected by rising energy costs. See Part I, Item 1,  Risk Factors  Our operating margins may be adversely affected by
rising energy costs.



We raise our selling prices in
response to increases in raw material and energy costs. However, we often are unable to pass the full amount of these costs through to our customers on a timely basis due to supply and demand in the industry, and as a result often cannot maintain
our operating margins in the face of dramatic cost increases. We experience margin shrinkage during all periods of cost increases due to customary time lags in implementing our price increases. We cannot give assurance that we will be able to
recover any future increases in the cost of recovered fiber by raising the prices of our products. Even if we are able to recover future cost increases, our operating margins and results of operations may still be materially and adversely affected
by time delays in the implementation of price increases. See Part I, Item 1,  Risk Factors  Our business and financial performance may be harmed by future increases in raw material and other operating costs.



Critical Accounting Policies



Our accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical
accounting matters which are both very important to the portrayal of our financial condition and results of operations and require some of managements most difficult, subjective and complex judgments. The accounting for these matters involves
forming estimates based on current facts, circumstances and assumptions which, in managements judgment, could change in a manner that would materially affect managements future estimates with respect to such matters and, accordingly,
could cause future reported financial condition and results of operations to differ materially from financial results reported based on managements current estimates. Changes in these estimates are recorded periodically based on updated
information.



Revenue Recognition. We recognize revenue
and the related account receivable when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) ownership has transferred to the customer; (3) the selling price is fixed and determinable; and
(4) collectibility is reasonably assured. Determination of



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criteria (4) is based on managements judgments regarding the collectibility of our accounts receivable. Generally, we recognize revenue when we
ship our manufactured products or when we complete a service and title and risk of loss passes to our customers. Provisions for discounts, returns, allowances, customer rebates and other adjustments which have averaged less than 1% of sales for the
years ended December 31, 2005, 2004 and 2003 are provided for in the same period as the related revenues are recorded and are determined based on historical experience or specific customer arrangements.



Accounts Receivable. We perform periodic credit evaluations of our
customers and adjust credit limits based upon payment history and the customers current credit worthiness, as determined by our review of their current credit information. We monitor collections from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. When we become aware of a customer whose financial viability is questionable, we closely monitor collection of their
receivable balance and may require the customer to prepay for current shipments. If a customer enters a bankruptcy action, we monitor the progress of that action to determine when and if an additional provision for noncollectibility is warranted. We
evaluate the adequacy of the allowance for doubtful accounts on at least a quarterly basis. The allowance for doubtful accounts at December 31, 2005, 2004 and 2003 was $2.3 million, $3.1 million and $4.2 million, respectively, and our provision
for uncollectible accounts was $270 thousand, $1.8 million and $4.0 million for the years ending 2005, 2004 and 2003, respectively. The decline in our provision during 2005 primarily resulted from recoveries of previously reserved accounts. While
our credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. These estimates may prove to be
inaccurate, in which case we may have overstated or understated the reserve required for uncollectible accounts receivable.



Inventory. Inventories are carried at the lower of cost or market. Cost includes raw materials, direct and indirect labor, employee benefits,
energy and fuel, depreciation, chemicals and overhead. Market, with respect to all inventories, is replacement cost or net realizable value. Management reviews inventory at least quarterly to determine the necessity of write-offs for excess,
obsolete or unsaleable inventory. Inventory over six months old is generally deemed unsaleable at first quality prices unless customer arrangements or other special circumstances exist. We reserve for inventory obsolescence and shrinkage based on
managements judgment of future realization. These reviews require management to assess customer and market demand. These estimates may prove to be inaccurate, in which case we may have overstated or understated the write-offs required for
excess, obsolete or unsaleable inventory; however, in 2005, 2004 and 2003, these write-offs, other than those related to specific customer bankruptcies, were insignificant.



Goodwill. We test the carrying amount of goodwill at least annually as of the beginning of the fourth quarter and
whenever events or circumstances indicate that impairment may have occurred. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses.
Impairment testing is performed in accordance with SFAS No. 142, Goodwill and Other Intangible Assets and is based on a discounted cash flow approach to determine the fair value of each reporting unit. The determination of fair
value requires significant management judgment including estimating future sales volumes, growth rates of selling prices and costs, changes in working capital, investments in property and equipment and the selection of an appropriate discount rate.
We also test the sensitivities of fair value estimates to changes in our growth assumptions of sales volumes, selling prices and costs. If the carrying amount of a reporting unit that contains goodwill exceeds fair value, a possible impairment is
indicated. If a possible impairment is indicated, we estimate the implied fair value of goodwill by comparing the carrying amount of the net assets of the unit excluding goodwill to the total fair value of the unit attributed to those net assets. If
the carrying amount of goodwill exceeds its implied fair value, an impairment charge is recorded. We also use judgment in assessing whether we should test more frequently for impairment than annually. Factors such as unexpected adverse economic
conditions, competition, product changes and other external events may require more frequent assessments. Our most recent annual impairment test was performed November 1, 2005 and did not result in an impairment. However, recognizing certain
impairment indicators related to the decision to exit



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the coated recycled paperboard business, we retested goodwill as of December 31, 2005 and recorded a $39.3 million impairment. An additional $10.5
million of goodwill was impaired which was in our paperboard segment and was a result of our decision to exit the coated recycled paperboard business. See additional discussion regarding our discontinued operations in the notes to our financial
statements in Part II, Item 8. We believe that our remaining goodwill balance of $129.3 million is not impaired.



Impairment of Long-Lived Assets. Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
periodically evaluate long-lived assets, including property, plant and equipment and definite lived intangible assets whenever events or changes in conditions may indicate that the carrying value may not be recoverable. Factors that management
considers important that could initiate an impairment review include the following:



| |  |  | significant operating losses
| | - |  | ----------------------------



| |  |  | recurring operating losses
| | - |  | --------------------------



| |  |  | significant declines in demand for a product produced by an asset capable of producing only that product
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | assets that are idled or held for sale
| | - |  | --------------------------------------



| |  |  | assets that are likely to be divested
| | - |  | -------------------------------------



The impairment review requires management to estimate future undiscounted cash flows associated with an asset or group of assets and sum the estimated
future cash flows. If the future undiscounted cash flows is less than the carrying amount of the asset, then we must estimate the fair value of the asset. If the fair value of the asset is below the carrying value, then the difference will be
written-off. Estimating future cash flows requires management to make judgments regarding future economic conditions, product demand and pricing. Although we believe our estimates are appropriate, significant differences in the actual performance of
the asset or group of assets may materially affect our asset values and results of operations.



Impairment charges related to property plant and equipment of $83.7 million and $1.8 million were recorded in 2005 and 2004, respectively. Of the $83.7 million of impairment charges recorded in 2005, $82.7 million was
recorded in the results of discontinued operations during the fourth quarter of 2005. The charges represent the difference between the carrying value of the assets and estimated fair value. The 2005 impairment was primarily the result of our
decision to exit the coated recycled paperboard and specialty contract packaging business.



Self-Insurance. We are self-insured for the majority of our workers compensation costs and health care costs, subject to specific retention levels. Consulting actuaries and administrators assist us in
determining our liability for self-insured claims. Our self-insured workers compensation liability is estimated based on actual claims as established by a third party administrator, increased by factors that reflect our historical claim
development. The developed claim, net of amounts paid and discounted to present value, represents the liability that we record in our financial statements. The primary controllable driver of our workers compensation liability is
the loss development factor that estimates the amount to which one dollar in actual claims incurred will ultimately grow over the life of the claim, which may be several years. A 10.0% increase in the loss development factors utilized for 2005 would
have resulted in a $419 thousand increase in workers compensation expense and accrued liability at December 31, 2005. Our self-insured health care liability is estimated based on our actual claim experience and multiplied by a time lag
factor of 47 days. The lag factor represents an estimate based on historical experience of claims that have been incurred and should be recorded as a liability, but have not been reported. A 10.0% increase in the lag factor would have resulted in a
$316 thousand increase in our healthcare costs and accrued liability at December 31, 2005. Future actual costs related to self-insured coverages will depend on claims incurred, medical cost trends, which have increased in recent years, safety
performance and various other factors related to our employee population, which has decreased in recent years. While we believe that our



22



---

##### Table of Contents

assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our
workers compensation costs and group health insurance costs.



Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating
our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance.
To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.



Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our deferred tax assets. We record valuation allowances due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain state net
operating losses carried forward and state tax credits, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be
recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could have a material negative impact on our statement of
operations and our balance sheet.



At December 31, 2005
and 2004, we had net federal and state deferred tax assets related to net operating losses of $53.4 and $44.3 million, respectively. At December 31, 2005 and 2004 the Company established valuation allowances of $12.0 and $6.4 million for a
portion of these deferred tax assets, respectively. For additional information, see Note 12 to our consolidated financial statements included in Part II, Item 8 of this annual report.



Pension and Other Postretirement Benefits. We maintain a
noncontributory, defined benefit pension plan (the Pension Plan). The Pension Plan provides benefits to be paid to all eligible employees at retirement based primarily on years of service with the Company and compensation rates in effect
near retirement. Our policy is to fund benefits attributed to employees services to date as well as service expected to be earned in the future. During September 2005, the Company contributed $13.1 million to the Pension Plan relating to the
2004 plan year and there were no contributions made in 2004 relating to the 2003 plan year. Based on our current estimate of future funding requirements, we do not expect that we will be required to make a contribution during the year ended
December 31, 2006.



In September 2004, the Company
announced the suspension of any further pension benefits for certain employees covered by the Pension Plan. The suspension was effective as of December 31, 2004 and froze the accrued pension benefits for employees not subject to a collective
bargaining agreement and employees who do not qualify for continued benefits based on years of service and age requirements. The curtailment reduced the Companys December 31, 2004 projected benefit obligation by $3.9 million and increased
2004 pension expense by $97 thousand.



Certain executives
participate in a supplemental executive retirement plan (SERP), which provides retirement benefits to participants based on average compensation. The SERP was unfunded at December 31, 2005.



The determination of our Pension Plan and SERP benefit obligations and
expense is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the weighted average discount rate, the weighted average expected rate of return on plan assets and
the weighted average rate of compensation increase. The following table is a summary of the significant assumptions we used to determine our Pension Plans projected benefit obligation as of:



|                                               |  |              |   |  |      |  
|---------------------------------------------- |  | ------------ | - |  | ---- | -
|                                               |  | December 31, |  
|                                               |  | 2004         |   |  | 2005 |  
|Weighted average discount rate                 |  | 5.75         | % |  | 5.75 | %
|Weighted average rate of compensation increase |  | 3.00         | % |  | 3.00 | %



23



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##### Table of Contents

The following table is a summary of the significant assumptions to determine net periodic pension expense
for the years ended:



|                                                        |  |              |   |  |      |   |  |      |  
|------------------------------------------------------- |  | ------------ | - |  | ---- | - |  | ---- | -
|                                                        |  | December 31, |  
|                                                        |  | 2003         |   |  | 2004 |   |  | 2005 |  
|Weighted average discount rate                          |  | 6.75         | % |  | 6.25 | % |  | 5.75 | %
|Weighted average expected rate of return on plan assets |  | 9.00         | % |  | 9.00 | % |  | 8.50 | %
|Weighted average rate of compensation increase          |  | 3.00         | % |  | 3.00 | % |  | 3.00 | %



In developing the
weighted average discount rate, we evaluated input from our actuaries, including estimated timing of obligation payments and yields for long-term bonds that received one of the two highest ratings given by a recognized rating agency. The discount
rate, determined on this basis, was 5.75% at December 31, 2005 and December 31, 2004. Based on analysis of the rating and maturity of the long-term bonds, the timing of payment obligations and the input from our actuaries, we concluded
that a discount rate of 5.75% is appropriate and reflects the yield of a portfolio of high-quality bonds that has the same duration as the plan obligations. Future actual pension expense and benefit obligations will depend on future investment
performance, changes in future discount rates and various other factors related to populations participating in our pension plans. A 0.25% change in the discount rate would result in a change in the December 31, 2005 projected benefit
obligation of approximately $4.4 million and estimated 2005 net pension expense of approximately $549 thousand.



In developing our weighted average expected rate of return on plan assets, we evaluated such criteria as return expectations by asset class and long-term
inflation assumptions. Our expected weighted average rate of return is based on an asset allocation assumption of 54% equity, 25% fixed income and 21% investment in a portfolio of hedge funds. We regularly review our asset allocation and
periodically rebalance our investments to our targeted allocation when considered appropriate. As a result of this analysis, we concluded that the expected weighted average rate of return of 9.0% for December 31, 2004 should be lowered to 8.5%
for December 31, 2005. A 0.25% change in the weighted average expected rate of return would change estimated 2005 net pension expense $218 thousand.



Although no contribution was required in 2005, we contributed $13.1 million in the third quarter of 2005. Primarily as a result of a change in our
mortality assumptions, the under-funded status of our Pension Plan and the SERP increased by approximately $9.8 million in 2005. We believe the change in our mortality assumptions is more representative of the Plans participant demographics.
While we believe that the assumptions we have used are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our Pension Plan and SERP liability.



We also provide postretirement medical benefits at certain of our
subsidiaries. Our net periodic postretirement benefit cost for medical costs was approximately $195 thousand, $178 thousand and $503 thousand for the years ended December 31, 2003, 2004 and 2005, respectively. The accumulated postretirement
benefit obligations at December 31, 2004 and 2005 were determined using a weighted average discount rate of 5.75%, respectively. The rate of increase in the costs of covered health care benefits is assumed to be 10.0% in 2005, decreasing 1.0%
each year to 5.0% by the year 2010 and decreasing 0.5% to 4.5% by the year 2011. Increasing or decreasing the assumed health care costs trend rate by one percentage point would have increased or decreased the accumulated postretirement benefit
obligation as of December 31, 2005 by approximately $660 thousand and $565, respectively and this would have increased or decreased net periodic postretirement benefit cost by approximately $43 thousand and $37 thousand, respectively, for the
year ended December 31, 2006.



Depreciation.
Management is required to make estimates regarding useful lives and salvage values of long-lived assets. These estimates can significantly affect depreciation expense and accordingly, both results of operations and the asset values reflected on the
balance sheet.



24



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##### Table of Contents

Results of Operations 2004  2005



The following table shows paperboard shipment volume, selling price per ton, recovered fiber cost per ton for the paperboard
mills, and paperboard cost per ton for the tube and core operations for the periods indicated. The information below showing average selling price and average cost per ton, is presented because management believes they are the most significant
indicators of profitability for the paperboard segment and the tube, core and composite container segment. Historically, recovered fiber has been our largest raw material cost component and has fluctuated significantly due to market and industry
conditions. However, these drivers are not the only factors that can impact these segments. See Risk Factors in Part I, Item 1 for additional discussion of factors that impact our business. Also note that a portion of our sales do
not have related paperboard volume, such as sales of contract packaging services and sales of recovered fiber. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage volumes from
our business segments, excluding tonnage produced or converted by our unconsolidated joint ventures, are combined and presented along end-use market lines.



|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|------------------------------------------------------------ |  | ----------------------- | ------- | ------ | - | ------- | -------- | - | ----- | - |  | ----- | --
|                                                             |  | Years EndedDecember 31, |         | Change |   |         | % Change |  
|                                                             |  | 2004                    |         | 2005   |   |        
|Paperboard tons shipped by production source (in thousands): |  |                         |         |        |   |         |          |   |       |   |  |       |   
|From internal paperboard mill production                     |  |                         | 673.4   |        |   | 642.7   |          |   | (30.7 | ) |  | (4.6  | )%
|Purchases from external sources                              |  |                         | 123.4   |        |   | 113.8   |          |   | (9.6  | ) |  | (7.8  | )%
|Volume from discontinued operations                          |  |                         | 315.4   |        |   | 320.8   |          |   | 5.4   |   |  | 1.7   | % 
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Total paperboard tonnage                                     |  |                         | 1,112.2 |        |   | 1,077.3 |          |   | (34.9 | ) |  | (3.1  | )%
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Paperboard tons shipped by end-use market (in thousands):    |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Tube, core and composite container volume                    |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Paperboard (internal)                                        |  |                         | 246.6   |        |   | 235.9   |          |   | (10.7 | ) |  | (4.3  | )%
|Purchases from external sources                              |  |                         | 45.3    |        |   | 41.2    |          |   | (4.1  | ) |  | (9.1  | )%
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Tube, core and composite container converted products        |  |                         | 291.9   |        |   | 277.1   |          |   | (14.8 | ) |  | (5.1  | )%
|Unconverted paperboard shipped to external customers         |  |                         | 45.9    |        |   | 45.7    |          |   | (0.2  | ) |  | (0.4  | )%
|Volume from discontinued operations                          |  |                         | 1.0     |        |   | 1.0     |          |   |      |   |  |      |   
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Tube, core and composite container volume                    |  |                         | 338.8   |        |   | 323.8   |          |   | (15.0 | ) |  | (4.4  | )%
|Folding carton volume                                        |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Paperboard (internal)                                        |  |                         | 6.6     |        |   | 5.2     |          |   | (1.4  | ) |  | (21.2 | )%
|Purchases from external sources                              |  |                         | 70.2    |        |   | 66.0    |          |   | (4.2  | ) |  | (6.0  | )%
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Folding carton converted products                            |  |                         | 76.8    |        |   | 71.2    |          |   | (5.6  | ) |  | (7.3  | )%
|Unconverted paperboard shipped to external customers         |  |                         | 54.1    |        |   | 51.3    |          |   | (2.8  | ) |  | (5.2  | )%
|Volume from discontinued operations                          |  |                         | 275.4   |        |   | 281.4   |          |   | 6.0   |   |  | 2.2   | % 
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Folding carton volume                                        |  |                         | 406.3   |        |   | 403.9   |          |   | (2.4  | ) |  | (0.6  | )%
|Gypsum wallboard facing paper volume                         |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Unconverted paperboard shipped to external customers         |  |                         | 101.0   |        |   | 80.2    |          |   | (20.8 | ) |  | (20.6 | )%
|Specialty paperboard products volume                         |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Paperboard (internal)                                        |  |                         | 76.9    |        |   | 76.7    |          |   | (0.2  | ) |  | (0.3  | )%
|Purchases from external sources                              |  |                         | 7.9     |        |   | 6.6     |          |   | (1.3  | ) |  | (16.5 | )%
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Other specialty converted products                           |  |                         | 84.8    |        |   | 83.3    |          |   | (1.5  | ) |  | (1.8  | )%
|Unconverted paperboard shipped to external customers         |  |                         | 142.3   |        |   | 147.7   |          |   | 5.4   |   |  | 3.8   | % 
|Volume from discontinued operations                          |  |                         | 39.0    |        |   | 38.4    |          |   | (0.6  | ) |  | (1.5  | )%
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Specialty paperboard products volume                         |  |                         | 266.1   |        |   | 269.4   |          |   | 3.3   |   |  | 1.2   | % 
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Total paperboard tonnage                                     |  |                         | 1,112.2 |        |   | 1,077.3 |          |   | (34.9 | ) |  | (3.1  | )%
|                                                             |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Selling price and cost data ($/ton):                         |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Paperboard mills:                                            |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Average selling price                                        |  | $                       | 446     |        | $ | 459     |          | $ | 13    |   |  | 2.9   | % 
|Average recovered fiber cost                                 |  |                         | 108     |        |   | 108     |          |   |      |   |  |      |   
|Tube and core facilities:                                    |  |                         |         |        |   |         |          |   |       |   |  |       |   
|Average selling price                                        |  | $                       | 892     |        | $ | 947     |          | $ | 55    |   |  | 6.2   | % 
|Average paperboard cost                                      |  |                         | 479     |        |   | 494     |          |   | 15    |   |  | 3.1   | % 



25



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##### Table of Contents

The following table shows paperboard shipment volume on our business segment basis (in thousands of
tons).



|                                                                        |  |                         |  |         |  |       |          |  |       |   
|----------------------------------------------------------------------- |  | ----------------------- |  | ------- |  | ----- | -------- |  | ----- | --
|                                                                        |  | Years EndedDecember 31, |  | Change  |  |       | % Change | 
|                                                                        |  | 2004                    |  | 2005    |  |      
|Paperboard                                                              |  |                         |  |         |  |       |          |  |       |   
|Unconverted paperboard shipped to external customers                    |  | 343.4                   |  | 324.8   |  | (18.6 | )        |  | (5.4  | )%
|Paperboard shipped internally to converters in the paperboard segment   |  | 55.1                    |  | 54.0    |  | (1.1  | )        |  | (2.0  | )%
|Paperboard purchased externally by converters in the paperboard segment |  | 0.4                     |  | 0.6     |  | 0.2   |          |  | 50.0  | % 
|Volume from discontinued operations                                     |  | 208.5                   |  | 214.6   |  | 6.1   |          |  | 2.9   | % 
|                                                                        |  |                         |  |         |  |       |          |  |       |   
|Total volume                                                            |  | 607.4                   |  | 594.0   |  | (13.4 | )        |  | (2.2  | )%
|                                                                        |  |                         |  |        
|Tube, core and composite container                                      |  |                         |  |         |  |       |          |  |       |   
|Paperboard (internal)                                                   |  | 268.3                   |  | 258.6   |  | (9.7  | )        |  | (3.6  | )%
|Purchases from external sources                                         |  | 52.9                    |  | 47.2    |  | (5.7  | )        |  | (10.8 | )%
|Volume from discontinued operations                                     |  | 15.6                    |  | 16.2    |  | 0.6   |          |  | 3.8   | % 
|                                                                        |  |                         |  |         |  |       |          |  |       |   
|Total volume converted                                                  |  | 336.8                   |  | 322.0   |  | (14.8 | )        |  | (4.4  | )%
|                                                                        |  |                         |  |        
|Folding carton and custom packaging                                     |  |                         |  |         |  |       |          |  |       |   
|Paperboard (internal)                                                   |  | 6.6                     |  | 5.3     |  | (1.3  | )        |  | (19.7 | )%
|Purchases from external sources                                         |  | 70.1                    |  | 66.0    |  | (4.1  | )        |  | (5.8  | )%
|Volume from discontinued operations                                     |  | 91.3                    |  | 90.0    |  | (1.3  | )        |  | (1.4  | )%
|                                                                        |  |                         |  |         |  |       |          |  |       |   
|Total volume converted                                                  |  | 168.0                   |  | 161.3   |  | (6.7  | )        |  | (4.0  | )%
|                                                                        |  |                         |  |         |  |       |          |  |       |   
|Total paperboard tonnage                                                |  | 1,112.2                 |  | 1,077.3 |  | (34.9 | )        |  | (3.1  | )%
|                                                                        |  |                         |  |         |  |       |          |  |       |   



Paperboard
tonnage. Total paperboard tonnage, including discontinued operations, decreased 3.1% in 2005. Tons sold from paperboard mill production decreased 4.6% in 2005. Total tons sold to our converters, excluding discontinued operations, decreased 4.8%
in 2005.



Total paperboard tonnage decreased due to the
following factors:



| |  |  | Lower sales of unconverted paperboard shipped to our customers in the gypsum wall board facing paper end-user market is due to an equipment upgrade at our Sweetwater mill which
temporarily decreased production. In addition, certain volume was transferred to our 50% owned, unconsolidated, Premier Boxboard mill.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease in internal conversion by our tube, core and composite container segment, carton and custom packaging segment and other specialty converting operations. This decrease was
driven primarily by lower industry demand.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales. Our consolidated sales for the year ended December 31, 2005 decreased 1.0 % to $862.4 million from $871.5 million in 2004. The following table presents sales by business segment (in thousands):



|                                    |  |                          |         |          |   |         |          |   |         |   |  |      |   
|----------------------------------- |  | ------------------------ | ------- | -------- | - | ------- | -------- | - | ------- | - |  | ---- | --
|                                    |  | Years Ended December 31, |         | $ Change |   |         | % Change |  
|                                    |  | 2004                     |         | 2005     |   |        
|Paperboard                          |  | $                        | 185,486 |          | $ | 173,447 |          | $ | (12,039 | ) |  | (6.5 | )%
|Recovered fiber                     |  |                          | 82,373  |          |   | 86,180  |          |   | 3,807   |   |  | 4.6  | % 
|Tube, core and composite container  |  |                          | 368,604 |          |   | 373,766 |          |   | 5,162   |   |  | 1.4  | % 
|Folding carton and custom packaging |  |                          | 235,022 |          |   | 229,028 |          |   | (5,994  | ) |  | (2.6 | )%
|                                    |  |                          |         |          |   |         |          |   |         |   |  |      |   
|Total                               |  | $                        | 871,485 |          | $ | 862,421 |          | $ | (9,064  | ) |  | (1.0 | )%
|                                    |  |                          |         |          |   |         |          |   |         |   |  |      |   



26



---

##### Table of Contents

Paperboard Segment



Sales for the paperboard segment decreased due to the following factors:



| |  |  | Lower sales of approximately $11.1 million due to the June 2004 divestiture of our chemical sales operation combined with the closure of our puzzle operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower volume accounted for approximately $9.6 million of the decrease.
| | - |  | ----------------------------------------------------------------------



These factors were partially offset by higher selling prices for unconverted paperboard which accounted for an estimated $8.8 million increase in sales.



Recovered Fiber Segment



Sales for the recovered fiber segment increased primarily due to higher
volume which accounted for approximately $6.5 million of the increase partially offset by lower selling prices which accounted for a $3.8 million decrease in sales.



Tube, Core and Composite Container Segment



Sales for the tube, core and composite container segment increased due to higher tube and core selling prices which accounted for approximately $17.5
million of the increase.



This increase was partially offset by
the following factors:



| |  |  | Lower volume accounted for an approximate $7.7 million decrease in sales.
| | - |  | -------------------------------------------------------------------------



| |  |  | Lower volume for forming sales and other products accounted for an approximate $4.9 million decrease in sales.
| | - |  | --------------------------------------------------------------------------------------------------------------



Folding Carton and Custom Packaging Segment



Sales for the folding carton and custom packaging segment decreased due to a
volume decrease of approximately $5.9 million primarily as a result of ending a relationship with a significant customer with low margins and high credit risk.



Cost of Sales. Cost of sales for 2005 increased $6.9 million from $721.2 million in 2004 to $728.1 million in 2005. This increase was due to the
following factors:



| |  |  | Higher freight costs of $7.2 million.
| | - |  | -------------------------------------



| |  |  | Higher other manufacturing costs of approximately $7.7 million. These cost increases were primarily driven by the increase in petroleum based products used in various manufacturing
processes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher energy and fuel costs in the paperboard segment of approximately $6.0 million.
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Higher pension and other employee costs of approximately $3.0 million.
| | - |  | ----------------------------------------------------------------------



| |  |  | Higher repair and maintenance costs in the paperboard segment of approximately $2.4 million.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Accelerated depreciation expense of approximately $1.1 million related to the closure of the Palmer carton plant.
| | - |  | -----------------------------------------------------------------------------------------------------------------



These factors were partially offset by the following:



| |  |  | Lower cost of sales of approximately $10.6 million due to the divestiture of our chemical sales operation and the closure of our puzzle operations in 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower cost of sales of approximately $5.4 million driven by lower volume in our carton segment.
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Lower recovered fiber costs in the paperboard segment, driven by lower volume, accounted for an approximate $3.2 million decrease in cost of sales.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



27



---

##### Table of Contents

Selling, General and Administrative Expenses. Selling, general and administrative expenses were
$122.3 million in 2005, an increase of 2.1% from 2004.



The
increase in selling, general and administrative expenses was the result of the following:



| |  |  | Higher pension and other employee costs of approximately $4.7 million.
| | - |  | ----------------------------------------------------------------------



| |  |  | Higher employee and administrative costs of approximately $2.0 million related to two initiatives: centralization of our accounting and finance operations and an investment in other
back office functions in order to reduce professional fees, purchasing and other costs in the long term.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher information technology costs of $1.7 related to compliance with the 2002 Sarbanes-Oxley Act and higher costs associated with the implementation of enterprise resource
planning software.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These factors were partially
offset by the following:



| |  |  | Lower professional and consultant fees related to internal control testing and compliance work associated with the Sarbanes-Oxley Act of 2002 and consolidated accounting costs
incurred in 2004 of approximately $1.9 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Elimination of approximately $2.3 million in expenses resulting from the divestiture of the paperboard segments chemical sales operation in June of 2004 and closure of the
puzzle operation in September 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Elimination of approximately $1.8 million in expenses in the carton segment related to the closure of our Charlotte, North Carolina carton plant.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expense of approximately $1.6 million in 2004 related to the vesting of performance accelerated restricted stock.
| | - |  | -----------------------------------------------------------------------------------------------------------------



Goodwill Impairment. For the year ended December 31, 2005, we
recorded a $39.3 million goodwill impairment resulting from the loss of synergies that exist between the coated recycled paperboard business and the folding carton and custom packaging segment. The folding carton and custom packaging segment will
lose these synergies upon the disposal of the coated recycled paperboard business.



Restructuring and Other Impairment Costs. For the year ended December 31, 2005, we recorded charges totaling $1.2 million for restructuring and other impairment costs. Included in this total were $640
thousand in severance and other termination benefit costs, $1.0 million in other exit costs and a reversal of $509 thousand in loss on disposals. For the year ended December 31, 2004, we recorded charges totaling $12.6 million for restructuring
and impairment costs. Included in this total were $4.6 million in severance and other termination benefit costs, $4.4 million in other exit costs and $3.6 million in asset impairment charges. These restructuring plans are a component of
managements strategy to match supply with market demand, lower costs and streamline production capabilities. See Note 15 to our consolidated financial statements in Part II, Item 8 of this annual report for additional information related
to these restructuring plans and the associated costs.



Income (loss) from operations. Loss from continuing operations for 2005 was $28.4 million, a decrease of $56.6 million compared with operating income of $28.2 million in 2004. The following table presents income (loss) from
operations by business segment (in thousands):



|                                    |  |                          |         |   |          |   |         |          |  |   |         |   |  |        |   
|----------------------------------- |  | ------------------------ | ------- | - | -------- | - | ------- | -------- |  | - | ------- | - |  | ------ | --
|                                    |  | Years Ended December 31, |         |   | $ Change |   |         | % Change | 
|                                    |  | 2004                     |         |   | 2005     |   |         |         
|Paperboard                          |  | $                        | 42,748  |   |          | $ | 24,738  |          |  | $ | (18,010 | ) |  | (42.1  | )%
|Recovered fiber                     |  |                          | 3,897   |   |          |   | 253     |          |  |   | (3,644  | ) |  | (93.5  | )%
|Tube, core and composite container  |  |                          | 11,318  |   |          |   | 6,700   |          |  |   | (4,618  | ) |  | (40.8  | )%
|Folding carton and custom packaging |  |                          | (6,519  | ) |          |   | (36,812 | )        |  |   | (30,293 | ) |  | (464.7 | )%
|Corporate expense                   |  |                          | (23,208 | ) |          |   | (23,281 | )        |  |   | (73     | ) |  | (0.3   | )%
|                                    |  |                          |         |   |          |   |         |          |  |   |         |   |  |        |   
|Total                               |  | $                        | 28,236  |   |          | $ | (28,402 | )        |  | $ | (56,638 | ) |  | N/A    |   
|                                    |  |                          |         |   |          |   |         |          |  |   |         |   |  |        |   



28



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##### Table of Contents

Paperboard Segment



The decline in income from operations was a result of the following:



| |  |  | A gain on sale of real estate of $10.3 million was recorded in July 2004 related to the sale of our Chicago paperboard mill which was permanently closed in January 2001.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher energy and fuel costs of approximately $6.0 million.
| | - |  | -----------------------------------------------------------



| |  |  | Higher pension and other employee costs of approximately $3.9 million.
| | - |  | ----------------------------------------------------------------------



| |  |  | Lower volume accounted for approximately $3.2 million of the decrease.
| | - |  | ----------------------------------------------------------------------



| |  |  | Higher other manufacturing costs of approximately $2.1 million. These cost increases were primarily driven by the increase in petroleum based products used in various manufacturing
processes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher freight costs of approximately $1.9 million.
| | - |  | ---------------------------------------------------



| |  |  | Higher repair and maintenance costs of approximately $2.4 million.
| | - |  | ------------------------------------------------------------------



| |  |  | Higher selling and general administrative expenses of approximately $700 thousand.
| | - |  | ----------------------------------------------------------------------------------



These factors were partially offset by the following:



| |  |  | Higher selling prices for unconverted paperboard improved operating results approximately $8.8 million.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Lower restructuring costs and savings from closed facilities of approximately $4.4 million.
| | - |  | -------------------------------------------------------------------------------------------



Recovered Fiber Segment



The decrease in income from operations was primarily due to the following factors:



| |  |  | Higher freight costs of approximately $2.2 million.
| | - |  | ---------------------------------------------------



| |  |  | Higher other operating costs of approximately $2.2 million.
| | - |  | -----------------------------------------------------------



These factors were partially offset lower restructuring and impairment costs of approximately $400 thousand.



Tube, Core and Composite Container Segment



Income from operations decreased due to the following factors:



| |  |  | Higher other manufacturing costs accounted for approximately $3.4 million of the decrease. These costs increases were primarily driven by the increase in petroleum based products
used in various manufacturing processes.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower tube and core volume accounted for approximately $3.6 million of the decrease.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Higher pension and other employee costs accounted for approximately $2.7 million of the decrease.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Lower forming and other product sales volume and selling prices accounted for approximately $2.3 million of the decrease.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher freight costs accounted for approximately $2.4 million of the decrease.
| | - |  | ------------------------------------------------------------------------------



These factors were partially offset by the following:



| |  |  | Higher selling prices, partially offset by higher paperboard costs, increased income from operations by approximately $11.1 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



29



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##### Table of Contents

Folding Carton and Custom Packaging Segment



Loss from operations increased due to the following factors:



| |  |  | Goodwill of approximately $39.3 million was impaired resulting from lost synergies in the carton segment due to our decision to exit the coated recycled paperboard operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher direct material costs of approximately $1.2 million. These costs increase were primarily driven by the increase in petroleum based products used in various manufacturing
processes.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accelerated depreciation expense of $1.1 million related to the closure of our Palmer carton plant.
| | - |  | ---------------------------------------------------------------------------------------------------



These factors were partially offset by the following factors:



| |  |  | Lower restructuring costs of approximately $5.0 million.
| | - |  | --------------------------------------------------------



| |  |  | Improved operating results due to closing and consolidating operations and related cost reductions of $4.5 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Higher selling prices combined with shedding less profitable customers improved operating results by $2.0 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------



Other Income (Expense). Interest expense for 2005 and 2004 was $41.7
million and $41.9 million, respectively. Interest income increased $1.7 million in 2005 primarily as a result of higher cash balances.



Equity in income from unconsolidated affiliates was $37.0 million in 2005, an improvement of $11.8 million over 2004. This increase was due to a $7.9
million improvement in operating results for Standard Gypsum, our gypsum wallboard joint venture with Temple-Inland. The improved results were due primarily to an increase in selling prices and volume partially offset by higher freight and
distribution costs. Premier Boxboard Limiteds results improved $4.1 million in 2005 compared to 2004 primarily due to higher volume and selling prices.



Benefit for income taxes.The effective rate of income tax expense on continuing operations for the year ended December 31, 2005 was 5.4%
compared with 37.3% for the same period last year. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments. See Note 12 to our consolidated financial statements in Part II, Item 8
of this annual report for additional discussion of the change in the effective tax rate.



Discontinued operations.On December 30, 2005, management and an authorized committee of the Board of Directors approved the exit of our coated recycled paperboard business, our specialty packaging
division and our partition operations. The coated recycled paperboard business is a component of the paperboard segment and consists of three paperboard mills located in: Rittman, Ohio; Versailles, Connecticut; and Tama, Iowa. The specialty
packaging division is a component of the folding carton and custom packaging segment and consists of five facilities located in Robersonville, North Carolina; Bucyrus, Ohio; Strasburg, Ohio; Clifton, New Jersey and Pine Brook, New Jersey. The
partition operations are a component of the tube, core and composite container segment and consist of three facilities located in Litchfield, Illinois; Frenchtown, New Jersey and Covington, Georgia. The loss from discontinued operations was $72.1
million and $11.0 million in 2005 and 2004, respectively. See Note 5 to our consolidated financial statements in Part II, Item 8 of this annual report for additional discussion of discontinued operations.



Net Loss. Due to the factors discussed above, net loss for 2005 was
$103.4 million, or $3.59 net loss per common share, compared to net loss of $4.0 million, or $0.14 net loss per common share, in 2004.



30



---

##### Table of Contents

Results of Operations 2003  2004



The following table shows paperboard shipment volume, selling price per ton, recovered fiber cost per ton for the paperboard
mills, and paperboard cost per ton for the tube and core operations for the periods indicated. The information below showing average selling price and average cost per ton, is presented because management believes they are the most significant
indicators of profitability for the paperboard segment and the tube, core and composite container segment. Historically, recovered fiber has been our largest raw material cost component and has fluctuated significantly due to market and industry
conditions. However, these drivers are not the only factors that can impact these segments. See Risk Factors in Part I, Item 1 for additional discussion of factors that impact our business. Also note that a portion of our sales do
not have related paperboard volume, such as sales of contract packaging services and sales of recovered fiber. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage volumes from
our business segments, excluding tonnage produced or converted by our unconsolidated joint ventures, are combined and presented along end-use market lines.



|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|------------------------------------------------------------ |  | ----------------------- | ------- | ------ | - | ------- | ------- | - | ----- | - |  | ----- | --
|                                                             |  | Years EndedDecember 31, |         | Change |   |         | %Change |  
|                                                             |  | 2003                    |         | 2004   |   |        
|Paperboard tons shipped by production source (in thousands): |  |                         |         |        |   |         |         |   |       |   |  |       |   
|From internal paperboard mill production                     |  |                         | 632.2   |        |   | 673.4   |         |   | 41.2  |   |  | 6.5   | % 
|Purchases from external sources                              |  |                         | 105.6   |        |   | 123.4   |         |   | 17.8  |   |  | 16.9  | % 
|Volume from discontinued operations                          |  |                         | 339.6   |        |   | 315.4   |         |   | (24.2 | ) |  | (7.1  | )%
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Total paperboard tonnage                                     |  |                         | 1,077.4 |        |   | 1,112.2 |         |   | 34.8  |   |  | 3.2   | % 
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Paperboard tons shipped by end-use market (in thousands):    |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Tube, core and composite container volume                    |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Paperboard (internal)                                        |  |                         | 248.1   |        |   | 246.6   |         |   | (1.5  | ) |  | (0.6  | )%
|Purchases from external sources                              |  |                         | 32.7    |        |   | 45.3    |         |   | 12.6  |   |  | 38.5  | % 
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Tube, core and composite container converted products        |  |                         | 280.8   |        |   | 291.9   |         |   | 11.1  |   |  | 4.0   | % 
|Unconverted paperboard shipped to external customers         |  |                         | 42.5    |        |   | 45.9    |         |   | 3.4   |   |  | 8.0   | % 
|Volume from discontinued operations                          |  |                         | 0.8     |        |   | 1.0     |         |   | 0.2   |   |  | 25.0  | % 
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Tube, core and composite container volume                    |  |                         | 324.1   |        |   | 338.8   |         |   | 14.7  |   |  | 4.5   | % 
|Folding carton volume                                        |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Paperboard (internal)                                        |  |                         | 6.4     |        |   | 6.6     |         |   | 0.2   |   |  | 3.1   | % 
|Purchases from external sources                              |  |                         | 66.6    |        |   | 70.2    |         |   | 3.6   |   |  | 5.4   | % 
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Folding carton converted products                            |  |                         | 73.0    |        |   | 76.8    |         |   | 3.8   |   |  | 5.2   | % 
|Unconverted paperboard shipped to external customers         |  |                         | 55.4    |        |   | 54.1    |         |   | (1.3  | ) |  | (2.3  | )%
|Volume from discontinued operations                          |  |                         | 289.8   |        |   | 275.4   |         |   | (14.4 | ) |  | (5.0  | )%
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Folding carton volume                                        |  |                         | 418.2   |        |   | 406.3   |         |   | (11.9 | ) |  | (2.8  | )%
|Gypsum wallboard facing paper volume                         |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Unconverted paperboard shipped to external customers         |  |                         | 106.6   |        |   | 101.0   |         |   | (5.6  | ) |  | (5.5  | )%
|Specialty paperboard products volume                         |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Paperboard (internal)                                        |  |                         | 52.2    |        |   | 76.9    |         |   | 24.7  |   |  | 47.3  | % 
|Purchases from external sources                              |  |                         | 6.3     |        |   | 7.9     |         |   | 1.6   |   |  | 25.4  | % 
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Other specialty converted products                           |  |                         | 58.5    |        |   | 84.8    |         |   | 26.3  |   |  | 45.0  | % 
|Unconverted paperboard shipped to external customers         |  |                         | 121.0   |        |   | 142.3   |         |   | 21.3  |   |  | 17.6  | % 
|Volume from discontinued operations                          |  |                         | 49.0    |        |   | 39.0    |         |   | (10.0 | ) |  | (20.4 | )%
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Specialty paperboard products volume                         |  |                         | 228.5   |        |   | 266.1   |         |   | 37.6  |   |  | 16.5  | % 
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Total paperboard tonnage                                     |  |                         | 1,077.4 |        |   | 1,112.2 |         |   | 34.8  |   |  | 3.2   | % 
|                                                             |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Selling price and cost data ($/ton):                         |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Paperboard mills:                                            |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Average selling price                                        |  | $                       | 436     |        | $ | 446     |         | $ | 10    |   |  | 2.3   | % 
|Average recovered fiber cost                                 |  |                         | 89      |        |   | 108     |         |   | 19    |   |  | 21.3  | % 
|Tube and core facilities:                                    |  |                         |         |        |   |         |         |   |       |   |  |       |   
|Average selling price                                        |  | $                       | 862     |        | $ | 892     |         | $ | 30    |   |  | 3.5   | % 
|Average paperboard cost                                      |  |                         | 463     |        |   | 479     |         |   | 16    |   |  | 3.5   | % 



31



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##### Table of Contents

The following table shows paperboard shipment volume on our business segment basis (in thousands of
tons).



|                                                                        |  |                         |  |         |  |       |         |  |       |   
|----------------------------------------------------------------------- |  | ----------------------- |  | ------- |  | ----- | ------- |  | ----- | --
|                                                                        |  | Years EndedDecember 31, |  | Change  |  |       | %Change | 
|                                                                        |  | 2003                    |  | 2004    |  |      
|Paperboard                                                              |  |                         |  |         |  |       |         |  |       |   
|Unconverted paperboard shipped to external customers                    |  | 325.5                   |  | 343.4   |  | 17.9  |         |  | 5.5   | % 
|Paperboard shipped internally to converters in the paperboard segment   |  | 45.2                    |  | 55.1    |  | 9.9   |         |  | 21.9  | % 
|Paperboard purchased externally by converters in the paperboard segment |  | 2.0                     |  | 0.4     |  | (1.6  | )       |  | (80.0 | )%
|Volume from discontinued operations                                     |  | 229.1                   |  | 208.5   |  | (20.6 | )       |  | (9.0  | )%
|                                                                        |  |                         |  |         |  |       |         |  |       |   
|Total volume                                                            |  | 601.8                   |  | 607.4   |  | 5.6   |         |  | 0.9   | % 
|                                                                        |  |                         |  |        
|Tube, core and composite container                                      |  |                         |  |         |  |       |         |  |       |   
|Paperboard (internal)                                                   |  | 255.1                   |  | 268.3   |  | 13.2  |         |  | 5.2   | % 
|Purchases from external sources                                         |  | 37.0                    |  | 52.9    |  | 15.9  |         |  | 43.0  | % 
|Volume from discontinued operations                                     |  | 26.7                    |  | 15.6    |  | (11.1 | )       |  | (41.6 | )%
|                                                                        |  |                         |  |         |  |       |         |  |       |   
|Total volume converted                                                  |  | 318.8                   |  | 336.8   |  | 18.0  |         |  | 5.6   | % 
|                                                                        |  |                         |  |        
|Folding carton and custom packaging                                     |  |                         |  |         |  |       |         |  |       |   
|Paperboard (internal)                                                   |  | 6.4                     |  | 6.6     |  | 0.2   |         |  | 3.1   | % 
|Purchases from external sources                                         |  | 66.6                    |  | 70.1    |  | 3.5   |         |  | 5.3   | % 
|Volume from discontinued operations                                     |  | 83.8                    |  | 91.3    |  | 7.5   |         |  | 8.9   | % 
|                                                                        |  |                         |  |         |  |       |         |  |       |   
|Total volume converted                                                  |  | 156.8                   |  | 168.0   |  | 11.2  |         |  | 7.1   | % 
|                                                                        |  |                         |  |         |  |       |         |  |       |   
|Total paperboard tonnage                                                |  | 1,077.4                 |  | 1,112.2 |  | 34.8  |         |  | 3.2   | % 
|                                                                        |  |                         |  |         |  |       |         |  |       |   



Paperboard
tonnage. Total paperboard tonnage increased 3.2% in 2004. Tons sold from paperboard mill production increased 6.5% in 2004. Total tons sold to our converters increased 10.0% in 2004.



Total paperboard tonnage increased due to the following factors:



| |  |  | An increase in sales of unconverted paperboard to external customers in the other specialty and tube, core and composite container end-use markets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase in internal conversion by our specialty paperboard converting operations, tube, core and composite container segment and the folding carton and custom packaging segment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These increases were partially offset by:



| |  |  | A decrease in sales of unconverted paperboard to external customers in the folding carton end-use market, primarily driven by weak demand in our coated paperboard mill system,
combined with the closing of one of two coated recycled paperboard machines at our Rittman, Ohio facility.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower sales of unconverted paperboard shipped to our customers in the gypsum wallboard facing paper end-use market. This decrease was primarily due to the transfer of volume from
our Buffalo paperboard mill to our 50% owned, unconsolidated, Premier Boxboard joint venture.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales. Our consolidated sales for the year ended December 31, 2004 increased 7.8% to $871.5 million from $808.4 million in 2003. The following
table presents sales by business segment (in thousands):



|                                    |  |                         |         |         |   |         |  |   |        |  |      |  
|----------------------------------- |  | ----------------------- | ------- | ------- | - | ------- |  | - | ------ |  | ---- | -
|                                    |  | Years EndedDecember 31, |         | $Change |   | %Change | 
|                                    |  | 2003                    |         | 2004    |   |        
|Paperboard                          |  | $                       | 173,711 |         | $ | 185,486 |  | $ | 11,775 |  | 6.8  | %
|Recovered fiber                     |  |                         | 47,573  |         |   | 82,373  |  |   | 34,800 |  | 73.2 | %
|Tube, core and composite container  |  |                         | 357,372 |         |   | 368,604 |  |   | 11,232 |  | 3.1  | %
|Folding carton and custom packaging |  |                         | 229,712 |         |   | 235,022 |  |   | 5,310  |  | 2.3  | %
|                                    |  |                         |         |         |   |         |  |   |        |  |      |  
|Total                               |  | $                       | 808,368 |         | $ | 871,485 |  | $ | 63,117 |  | 7.8  | %
|                                    |  |                         |         |         |   |         |  |   |        |  |      |  



32



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##### Table of Contents

Paperboard Segment



Sales for the paperboard segment increased due to the following factors:



| |  |  | Higher volume accounted for approximately $10.6 million of the increase.
| | - |  | ------------------------------------------------------------------------



| |  |  | Higher selling prices for unconverted paperboard accounted for approximately $2.5 million of the increase.
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Higher selling prices and volume in our paperboard converting operations which accounted for approximately $1.2 million of the increase.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



These factors were partially offset by the June 2004 divestiture of the
chemical sales operation, which accounted for a $2.6 million decrease in sales.



Recovered Fiber Segment



Sales for the
recovered fiber segment increased due to the following factors:



| |  |  | Higher brokerage sales volume accounted for approximately $24.8 million of the increase.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Higher volume of recovered fiber sales accounted for approximately $6.2 million of the increase.
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Sales of approximately $3.8 million from a new greenfield brokerage facility which started operations in the second quarter of 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



Tube, Core and Composite Container Segment



Sales for the tube, core and composite container segment increased due to
the following factors:



| |  |  | Higher selling prices for the tube and core operations accounted for approximately $5.5 million of the increase.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Higher volume in our angle-board operations accounted for approximately $4.1 million of the increase.
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Higher volume in the composite container operations accounted for approximately $3.8 million of the increase.
| | - |  | -------------------------------------------------------------------------------------------------------------



These factors were partially offset by a decline in volume in the plastics
operations of approximately $1.6 million.



Folding Carton and Custom
Packaging Segment



Sales for the folding carton and custom
packaging segment increased due to higher carton volume offset by lower selling prices.



Cost of Sales. Cost of sales for 2004 increased 9.6% from $657.9 million in 2003 to $721.2 million. This increase was due primarily to the following factors:



| |  |  | A $36.0 million increase in brokered recovered fiber costs primarily due to higher brokered sales.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Higher other manufacturing costs of approximately $10.8 million primarily due to increase in sales.
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | An increase in recovered fiber costs of approximately $10.2 million.
| | - |  | --------------------------------------------------------------------



| |  |  | Higher energy and fuel costs of approximately $5.1 million, primarily due to higher sales volume.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Higher repair and maintenance costs in our paperboard segment of approximately $3.6 million.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Accelerated depreciation expense of approximately $1.9 million related to the closures of the Charlotte, North Carolina carton plant, the Georgetown, Kentucky plastics plant and the
Mooresville, North Carolina puzzle operation. The facilities ceased production in the fourth quarter of 2004 and are a part of our restructuring activities explained below, see  Restructuring and Impairment Costs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33



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##### Table of Contents

These factors were partially offset by a $5.3 million decrease in costs as a result of closed facilities.



Selling, General and Administrative Expenses. Selling,
general and administrative expenses decreased 6.8% from 2003 to $119.8 million in 2004. The decrease in selling, general and administrative expenses was the result of the following:



| |  |  | Savings of approximately $5.7 million as a result of closing and consolidating facilities.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Higher trucking costs of approximately $3.0 million recorded in selling, general and administrative expenses during 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower accounts receivable reserve expense of approximately $2.2 million.
| | - |  | ------------------------------------------------------------------------



| |  |  | Elimination of approximately $1.5 million in expenses resulting from the divestiture of the paperboard segments chemical sales operation in June of 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower information technology expenses of approximately $900 thousand.
| | - |  | ---------------------------------------------------------------------



These factors were partially offset by the following:



| |  |  | Fees for consultants to assist the company with internal control testing and compliance combined with higher consolidated accounting costs, resulted in a $2.4 million increase in
2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expense of approximately $1.6 million in 2004 related to the vesting of performance accelerated restricted stock.
| | - |  | -----------------------------------------------------------------------------------------------------------------



Restructuring and Other Impairment Costs. For the year ended
December 31, 2004, we recorded charges totaling $12.6 million for restructuring and other impairment costs. Included in this total were $4.6 million in severance and other termination benefit costs, $4.4 million in other exit costs and $3.6
million in asset impairment charges and loss on disposals. For the year ended December 31, 2003, we recorded charges totaling $17.8 million for restructuring and impairment costs. Included in this total were $2.1 million in severance and other
termination benefit costs, $3.6 million in other exit costs and $12.1 million in asset impairment charges. These restructuring plans are a component of managements strategy to match supply with market demand, lower costs and streamline
production capabilities. See Note 15 to our consolidated financial statements in Part II, Item 8 of this annual report for additional information related to these restructuring plans and the associated costs.



Gain on Sale of Real Estate.In October 2004, we sold the real estate
associated with our Chicago paperboard mill, which permanently closed in January 2001, for $11.1 million, net of expenses, and recorded a gain of $10.3 million.



Income (loss) from operations. Income from operations for 2004 was $28.2 million, an increase of $24.0 million compared with income from
operations of $4.2 million in 2003. The following table presents income (loss) from operations by business segment (in thousands):



|                                    |  |                          |         |   |         |   |         |         |  |   |        |   |  |       |   
|----------------------------------- |  | ------------------------ | ------- | - | ------- | - | ------- | ------- |  | - | ------ | - |  | ----- | --
|                                    |  | Years Ended December 31, |         |   | $Change |   |         | %Change | 
|                                    |  | 2003                     |         |   | 2004    |   |         |        
|Paperboard                          |  | $                        | 27,163  |   |         | $ | 42,748  |         |  | $ | 15,585 |   |  | 57.4  | % 
|Recovered fiber                     |  |                          | 3,012   |   |         |   | 3,897   |         |  |   | 885    |   |  | 29.4  | % 
|Tube, core and composite container  |  |                          | 8,703   |   |         |   | 11,318  |         |  |   | 2,615  |   |  | 30.0  | % 
|Folding carton and custom packaging |  |                          | (12,552 | ) |         |   | (6,519  | )       |  |   | 6,033  |   |  | 48.1  | % 
|Corporate expense                   |  |                          | (22,137 | ) |         |   | (23,208 | )       |  |   | (1,071 | ) |  | (4.8  | )%
|                                    |  |                          |         |   |         |   |         |         |  |   |        |   |  |       |   
|Total                               |  | $                        | 4,189   |   |         | $ | 28,236  |         |  | $ | 24,047 |   |  | 574.1 | % 
|                                    |  |                          |         |   |         |   |         |         |  |   |        |   |  |       |   



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Paperboard Segment



The increase in income from operations was a result of the following:



| |  |  | A gain on sale of real estate of $10.3 million was recorded in 2004 related to the sale of our Chicago paperboard mill which was permanently closed in January 2001.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher volume accounted for approximately $9.2 million of the increase.
| | - |  | -----------------------------------------------------------------------



| |  |  | Improved operating results of approximately $7.3 million resulting from closing and consolidating facilities.
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Lower restructuring and impairment costs of approximately $5.1 million.
| | - |  | -----------------------------------------------------------------------



These factors were partially offset by the following:



| |  |  | Higher labor, repairs and maintenance and other manufacturing costs of $11.2 million.
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Higher recovered fiber costs, partially offset by higher selling prices decreased income from operations approximately $5.6 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



Recovered Fiber Segment



The increase in income from operations was primarily due to higher sales in 2004.



Tube, Core and Composite Container Segment



Income from operations increased due to the following factors:



| |  |  | Cost savings initiatives accounted for an approximate $1.9 million of the increase.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Higher margin and volume accounted for approximately $600 thousand.
| | - |  | -------------------------------------------------------------------



| |  |  | Lower restructuring and impairment costs of approximately $400 thousand.
| | - |  | ------------------------------------------------------------------------



These increases were partially offset by higher accounts receivable reserve expense of approximately $300 thousand.



Folding Carton and Custom Packaging Segment



Loss from operations decreased due to the following factors:



| |  |  | Improved operating results of approximately $3.4 million resulting from closing and consolidating facilities.
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Higher sales contributed income from operations of approximately $1.8 million.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Lower accounts receivable reserve expense of approximately $1.3 million.
| | - |  | ------------------------------------------------------------------------



Other Income (Expense). Interest expense decreased 3.0% to $41.9 million for 2004 from $43.1 million in 2003. This decrease was primarily due to
the open market repurchases of our senior subordinated debt in 2004.



Equity in income from unconsolidated affiliates was $25.3 million in 2004, an improvement of $16.9 million over 2003. This increase was due to a $14.2 million improvement in operating results for Standard Gypsum, our gypsum wallboard joint
venture with Temple-Inland. The improved results were due primarily to an increase in selling prices, volume and lower freight and distribution costs. Premier Boxboard Limiteds results improved $2.4 million in 2004 compared to 2003 primarily
due to higher volume and selling prices.



Benefit for income
taxes.The effective rate of income tax expense on continuing operations for the year ended December 31, 2004 was 37.3% compared with a benefit of 36.1% for the same period last year. The



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effective rates for both periods are different from the statutory rates due to permanent tax adjustments. See Note 12 to our consolidated financial
statements in Part II, Item 8 of this annual report for additional discussion of the change in the effective tax rate.



Discontinued operations. The loss from discontinued operations was $11.0 million in 2004 and $7.0 million in 2003. See Note 5 to our consolidated
financial statements in Part II, Item 8 of this annual report for additional discussion of discontinued operations.



Net Loss. Due to the factors discussed above, net loss for 2004 was $4.0 million, or $0.14 net loss per common share, compared to net loss of $27.0
million, or $0.97 net loss per common share, in 2003.



Liquidity and Capital
Resources



Liquidity Sources and Risks. Our primary
sources of liquidity are cash from operations and borrowings under our senior credit facility, described below. Downturns in operations can significantly affect our ability to generate cash. Factors that can affect our operating results and
liquidity are discussed further in this annual report under  Risk Factors in Part I, Item 1. In 2005, we generated $23.9 million in cash from operations. At December 31, 2005 we had $95.2 million of cash on hand and $37.5
million borrowing availability under our senior credit facility. We believe that our cash on hand and borrowing availability under our existing, and expected replacement senior credit facility, will be sufficient to meet our cash requirements for
the next twelve months and the foreseeable future. Additionally, based on our historical ability to generate cash, we believe we will be able to meet our long-term cash requirements. However, if we are unable to generate cash at historic levels, our
ability to meet long-term requirements is uncertain. The following are factors that could affect our future ability to generate cash from operations:



| |  |  | A contraction in domestic demand for recycled paperboard and related packaging products similar to what our industry experienced in 2000, 2001 and 2002.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increased market acceptance of alternative products, such as flexible packaging and plastics, that have replaced or can replace certain of our packaging products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continued export of domestic industrial manufacturing operations.
| | - |  | -----------------------------------------------------------------



| |  |  | Continued increase in fuel costs.
| | - |  | ---------------------------------



| |  |  | Market acceptance of price increases and energy surcharges in response to rising operating costs; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Significant unforeseen adverse conditions in our industry or the markets we serve.
| | - |  | ----------------------------------------------------------------------------------



The occurrence, continuation or exacerbation of these conditions could require us to seek additional funds from external
sources in order to meet our liquidity requirements. In such event, our ability to obtain additional funds would depend on the various business and credit market conditions prevailing at the time, which are difficult to predict and many of which are
out of our control. Our ability to secure additional funds could also be materially adversely affected by our substantial indebtedness. Additional risks related to our substantial indebtedness are discussed in Part I, Item 1,  Risk
Factors  Our substantial indebtedness could adversely affect our cash flow and our ability to fulfill our obligations under our indebtedness.



The availability of liquidity from our existing borrowings is primarily affected by our continued compliance with the terms of the agreement governing our
senior credit facility, including the payment of interest and compliance with various covenants and financial maintenance tests. We were in compliance with the covenants under our senior credit facility during 2005. Absent a deterioration of the
U.S. economy as a whole or the specific sectors on which our business depends (see Part I, Item 1,  Risk Factors  Our business and financial performance may be adversely affected by downturns in industrial production, housing
and construction and the consumption of nondurable and durable goods), we believe we will be in compliance with our covenants under the senior credit agreement during the remainder of 2006. As noted below, however,



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our senior credit facility matures in June 2006, and we are negotiating to obtain a replacement credit facility. If we are unable to obtain a replacement
facility on terms acceptable to us, we may be required to seek funds from other sources in order to meet our liquidity requirements.



Borrowings. At December 31, 2004 and 2005, total debt (consisting of current maturities of debt and long-term debt, as reported on our
consolidated balance sheets) was as follows (in thousands):



|                                      |  |      |         |      |   |        
|------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                      |  | 2004 |         | 2005
|Senior credit facility                |  | $    |        |      | $ |       
|97/8%
senior subordinated notes       |  |      | 265,000 |      |   | 257,500
|73/8% senior notes                    |  |      | 189,750 |      |   | 189,750
|71/4%
senior notes                    |  |      | 29,000  |      |   | 29,000 
|Other notes payable (1)               |  |      | 9,735   |      |   | 4,955  
|Realized interest rate swap gains (2) |  |      | 12,736  |      |   | 11,185 
|                                      |  |      |         |      |   |        
|Total debt                            |  | $    | 506,221 |      | $ | 492,390
|                                      |  |      |         |      |   |        

---

|(1) | As of December 31, 2005, industrial revenue bonds of $4.7 million (the Sprague bonds) have been included in current liabilities of discontinued operations and are not reflected
in the schedule above.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Net of original issuance discounts and accumulated discount amortization related to the senior and senior subordinated notes. As described below under Interest Rate Swap
Agreements, realized gains resulting from unwinding interest rate swaps are recorded as a component of debt and will be accreted as a reduction to interest expense over the remaining term of the debt.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our senior credit facility provides for a revolving line of credit of $75.0
million and is secured primarily by a first priority security interest in our accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts
receivable and inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. As of December 31, 2005, no borrowings were outstanding under the facility; however,
an aggregate of $37.5 million in letter of credit obligations were outstanding. Availability under the facility at December 31, 2005 was limited to $37.5 million after taking into consideration outstanding letter of credit obligations.



Borrowings under the facility bear interest at a rate equal
to, at our option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility) plus a margin of between (0.25%) and 0.25% or (2) the adjusted London
Interbank Offered Rate (LIBOR) plus a margin of between 1.50% and 2.00%, with the applicable margin to be set based on our levels of available cash. The undrawn portion of the facility is subject to a facility fee at an annual rate of
0.375%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for LIBOR-based loans. At December 31, 2005, the applicable interest margin for Base Rate borrowings was (0.25%) and the applicable interest
margin for LIBOR borrowings was 1.50%.



The facility contains
covenants that restrict, among other things, our ability and our subsidiaries ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and
indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures in excess of $30.0 million per year or change the nature of our business. The facility also contains a fixed charge
coverage ratio covenant, which applies only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts receivable and
inventory (less reserves and aggregate credit outstandings) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstandings) in excess of $37.5 million. The fixed charge ratio covenant did not require
measurement at December 31, 2005.



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The facility contains events of default including, but not limited to, nonpayment of principal or
interest, violation of covenants, breaches of representations and warranties, cross-default to other indebtedness, bankruptcy and other insolvency events, material judgments, certain ERISA events, actual or asserted invalidity of loan documentation
and certain changes of control of our Company.



Effective
January 17, 2006, we amended our senior credit facility to permit, among other things, the sale of our 50% interest in Standard Gypsum, L.P. to our joint venture partner, Temple-Inland Inc., which we completed on January 17, 2006. See
 Subsequent Events for more information about the sale of Standard Gypsum, L.P.



As noted above, our senior credit facility matures in June 2006. We are currently negotiating to obtain a new senior credit facility, which we expect will
consist of a $110.0 million revolving credit facility and a $35.0 million term loan secured by a first priority security interest in substantially all of our non-real estate assets, including our accounts receivable, inventory and equipment. If we
complete this new credit facility, we expect to utilize borrowings under the facility, together with proceeds from the sale of our interest in Standard Gypsum, proceeds from other asset sales and existing cash, to retire long-term debt. Although we
believe we will be able secure a new credit facility on the terms described above, we have not obtained a commitment for this facility, and can give no assurance that we will be able obtain a new facility on these terms or other terms acceptable to
us. If we are unable to obtain a replacement credit facility, our plans to retire long-term debt and our ability to meet our long-term liquidity requirements could be materially and adversely affected.



On June 1, 1999, we issued $200.0 million in aggregate principal amount
of our 73/8% senior notes due June 1, 2009. Our 73/8% senior notes were issued at a discount to yield an effective interest rate of 7.47%, are unsecured obligations of our Company and pay interest
semiannually. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 73/8% senior notes is 6.3%. See  Interest Rate Swap Agreements below regarding transactions that lowered the effective interest rates of the 73/8% senior notes. In connection with the offering of our 71/4% senior notes and 97/8% senior subordinated notes, as described
below, our subsidiary guarantors also guaranteed our 73/8% senior notes. We have purchased an aggregate of $10.3
million of these notes in the open market. These purchases lowered our interest expense approximately $750 thousand annually.



On March 29, 2001, we issued $29.0 million in aggregate principal amount of 71/4% senior notes due May 1, 2010 and $285.0 million in aggregate principal amount of 97/8% senior subordinated notes due April 1, 2011. The 71/4% senior notes and 97/8% senior subordinated notes were issued at a discount to yield effective interest rates of
9.4% and 10.5%, respectively. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 97/8% senior subordinated notes is 9.4%. See  Interest Rate Swap Agreements below regarding transactions that lowered the effective interest rates of the
97/8% senior subordinated notes. These publicly traded notes are unsecured, but are guaranteed, on a joint and
several basis, by all but one of our domestic subsidiaries. During 2005 and 2004 we purchased $7.5 million and $20.0 million in principal amount of our 97/8% senior subordinated notes in the open market, respectively. These purchases lowered our interest expense approximately $2.7 million annually.



We have
certain obligations and commitments to make future payments under contracts, such as debt and lease agreements. See  Contractual Obligations below and the notes to the consolidated financial statements, which detail these future
obligations and commitments.



Interest Rate Swap
Agreements. Historically, we have used interest rate swaps to effectively convert our fixed rate debt obligations into variable rate obligations. This strategy has been employed in order to effect an optimal balance between fixed rate and
variable rate obligations since, historically, variable rate debt obligations are lower cost than fixed rate debt. During 2003, 2004 and 2005 we entered into several interest rates swaps and then unwound those swaps opportunistically for a gain.
These gains provided cash to us upon unwinding and lowered our interest expense over the remaining duration of the related debt obligation. As of December 31, 2005 we had no outstanding interest rate swap agreements.



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For more information about our interest rate swaps see Note 6 to our consolidated financial statements in
Part II, Item 8 of this annual report.



Off-Balance
Sheet Arrangements  Joint Venture Financings. As noted above, as of December 31, 2005 we owned a 50% interest in two joint ventures with Temple-Inland, Inc.: Standard Gypsum, L.P. and Premier Boxboard Limited LLC. Because we account
for these interests in our joint ventures under the equity method of accounting, the indebtedness of these joint ventures is not reflected in the liabilities included on our consolidated balance sheets. Standard Gypsum manufactures gypsum wallboard,
and Premier Boxboard is a low-cost recycled paperboard mill that produces a lightweight gypsum facing paper along with containerboard grades. See Note 7 to our consolidated financial statements in Part II, Item 8 of this annual report for
summarized financial information for these joint ventures.



On
September 22, 2005 Standard Gypsum refinanced its outstanding letter of credit reimbursement obligations with borrowings under a new term loan in the principal amount of $56.2 million from a replacement lender. The term loan matures in full one
year from the agreement date. At December 31, 2005, we were severally obligated for 50% of Standard Gypsums obligations for principal, interest, fees and other amounts with respect to the term loan. The other Standard Gypsum partner,
Temple-Inland, guaranteed 50% of Standard Gypsums obligations. As of December 31, 2005, the outstanding principal balance under the term loan totaled $56.2 million, of which we were obligated for one-half ($28.1 million). Our obligation
with respect to the Standard Gypsum term loan was supported by a letter of credit in the face amount of $29.5 million, issued in favor of the Standard Gypsum lender. This letter of credit was issued under our senior credit facility and was scheduled
to expire in October 2006. The letter of credit permitted the Standard Gypsum lender to draw in the event of a default under the Standard Gypsum loan agreement, including failure by Standard Gypsum to pay any principal, interest or other amounts
owing under the term loan. In connection with the term loan, we amended our senior credit facility effective September 20, 2005 to permit the issuance of this letter of credit.



As noted below, on January 17, 2006 we completed the sale of our 50% interest in Standard Gypsum to our joint venture
partner, Temple-Inland Inc., for $150.0 million in cash and eliminated our guaranty and letter of credit support obligation with respect to Standard Gypsums debt. As a result of this sale, we no longer have any support obligation with respect
to Standard Gypsums debt.



At December 31, 2004,
Premier Boxboard was the borrower under a credit facility with an aggregate outstanding principal amount of $632 thousand, consisting solely of an undrawn letter of credit. On January 5, 2005, Premier Boxboards revolving credit facility
expired. The only outstanding obligation under the facility at the time of expiration was the $632 thousand letter of credit balance, which expired on June 20, 2005 and was not renewed. Premier Boxboard placed $614 thousand of available cash
into a trust account to replace the expired letter of credit.



Funding for Premier Boxboard is generated by its internal cash flow and any cash contributions that we and our joint venture partner are permitted to make. Premier Boxboard generated sufficient cash flow in 2005 to distribute $13.0 million
to us and $13.0 million to our joint venture partner. Based on the 2005 cash flows and expected future cash flows, we do not expect Premier Boxboard to require external funding in the foreseeable future. However, if Premier Boxboard were to require
additional funding, our liquidity could be adversely affected. In addition, if we and our joint venture partner were unable to adequately satisfy Premier Boxboards funding requirements, its operations, and accordingly, our interest in it,
could be adversely affected.



In addition, a substantial
portion of the assets of Premier Boxboard are pledged as security for $50.0 million in outstanding principal amount of senior notes under which Premier Boxboard is the obligor. These notes are guaranteed by Temple-Inland, but are not guaranteed by
us. In the event of a default under these notes, the holders would also have recourse to the assets of Premier Boxboard that are pledged to secure these notes. Thus, any resulting default under these notes could result in the assets of Premier
Boxboard being utilized to satisfy creditor claims, which would have a material adverse effect on the financial condition and operations of Premier Boxboard and, accordingly, our interest in Premier Boxboard. As of December 31, 2005, Premier
Boxboard was in compliance with its debt covenants.



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Additional contingencies relating to our Premier Boxboard joint venture that could affect our liquidity
include possible additional capital contributions and buy-sell triggers which, under certain circumstances, give us and our joint venture partner either the right, or the obligation, to purchase the others interest or to sell an interest to
the other. We are required, to the extent necessary, to make additional capital contributions to enable the joint venture to meet existing obligations. Under the Premier Boxboard joint venture agreement, in general, mutual buy-sell rights are
triggered upon the occurrence of involuntary transfers, and in the event of change of control, actual or imminent, of Temple-Inland or its subsidiaries or in the event of a Deadlock, as defined in the joint venture agreement. The buy-sell provisions
are structured such that we are contemplated to be the purchaser in the event of any voluntary transfer of membership interest.



We generally consider our relationship with Temple-Inland to be good with respect to our Premier Boxboard joint venture. However, as described above, we
could be required to fund Premier Boxboards operations with additional cash contributions to the extent it is unable to fund operations with internally generated cash. We cannot give assurance that material liquidity events will not arise with
respect to our joint venture, and the occurrence of any such events could materially and adversely affect our liquidity and financial condition.



Contractual Obligations. The following table summarizes our contractual obligations as of December 31, 2005, and the effect such obligations
are expected to have on our liquidity and cash flows in future periods (in thousands):



|                              |  |                        |         |                  |   |           |  |           |         |                  |   |         |  |   |        
|----------------------------- |  | ---------------------- | ------- | ---------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------- |  | - | -------
|                              |  | Payments due by period
|Contractual Obligations       |  | Total                  |         | Less than 1 year |   | 1-3 years |  | 3-5 years |         | More than5 years
|Long-term debt obligations1   |  | $                      | 481,205 |                  | $ | 85        |  | $         | 195     |                  | $ | 218,980 |  | $ | 261,945
|Interest payment obligations2 |  |                        | 216,951 |                  |   | 45,157    |  |           | 90,292  |                  |   | 67,083  |  |   | 14,419 
|Capital lease obligations     |  |                        | 1,190   |                  |   | 578       |  |           | 599     |                  |   | 13      |  |   |       
|Operating lease obligations   |  |                        | 53,256  |                  |   | 14,142    |  |           | 18,606  |                  |   | 7,783   |  |   | 12,725 
|Purchase obligations          |  |                        | 1,550   |                  |   | 626       |  |           | 924     |                  |   |        |  |   |       
|Other long-term liabilities3  |  |                        | 1,826   |                  |   | 8         |  |           | 413     |                  |   | 360     |  |   | 1,045  
|                              |  |                        |         |                  |   |           |  |           |         |                  |   |         |  |   |        
|Total                         |  | $                      | 755,978 |                  | $ | 60,596    |  | $         | 111,029 |                  | $ | 294,219 |  | $ | 290,134
|                              |  |                        |         |                  |   |           |  |           |         |                  |   |         |  |   |        

---

|1 | The long-term debt obligation included in this table represents the principal amount to be
paid in future periods. The amounts reported on our consolidated balance sheet include realized interest rate swap gains and the mark-to-market value of interest rate swaps. See note 7 to our consolidated financial statements in Part II, Item 8
of this report.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | The long-term debt obligation and interest payment obligation schedule excludes debt and
interest from the Sprague bonds of $4.7 million and $4.3 million, respectively. The debt is included in current liabilities of discontinued operations.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | Other long-term liabilities excludes future pension liabilities, other postretirement benefit
liabilities and deferred compensation benefit liabilities.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------



For the purposes of this table, purchase obligations included in the table above are agreements for purchase of goods or services that are enforceable and legally binding on Caraustar and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions. However, this table does not include the aggregate amount of routine purchase orders
outstanding as of December 31, 2005, because they are not enforceable and legally binding.



Cash from Operations. Cash generated from operations was $23.9 million for the year ended December 31, 2005, compared with $36.9 million in
2004. The decline in operating cash flow from 2005 to 2004 is primarily attributable to the following factors:



| |  |  | A $3.0 million decrease in pension liabilities compared with a $9.1 million increase in pension liabilities for 2004 resulted in a year over year decrease in operating cash flow of
$12.1 million. This decrease was primarily attributable to a $13.1 million pension contribution in 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | A $2.4 million decrease in accrued liabilities compared with a $2.9 million increase in accrued liabilities for 2004 resulted in a year over year decrease in operating cash flow of
$5.3 million. This decrease was primarily attributable to a $2.4 million settlement of a lease obligation.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The above factors were partially offset by the following:



| |  |  | A $5.7 million decrease in inventories compared with a $1.4 million increase in inventories in 2004 resulted in a year over year increase in operating cash flow of $7.1 million.
This increase was primarily the result of management initiatives to reduce inventory levels.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Capital Expenditures. Capital expenditures were $24.2 million in 2005 versus $20.9 million in 2004. Aggregate capital expenditures of approximately
$25 million are anticipated for 2006.



Acquisition. In
December 2005, we acquired a folding carton plant in Charlotte, North Carolina from the Sonoco Products Company for $11.0 million. We believe that this acquisition is in line with our long-term strategy and will provide solid value to our folding
carton and custom packaging segment in the Charlotte area.



Divestiture.In December 2005, we completed the sale of our Maryland based Hunt Valley corrugated operations to Green Bay Packaging, Inc. for $16.8 million. This facility was sold since it was our only corrugated manufacturing plant
and had incurred significant losses. We recorded a $3.3 million loss on disposal which was recorded in the results of discontinued operations.



Dividends. In 2002, we suspended dividend payments on our common stock until our earnings performance and cash flow performance improve. As
described under  Liquidity and Capital Resources, our debt agreements contain certain limitations on the payment of dividends and currently preclude us from doing so.



Inflation



Raw material and energy cost changes have had, and continue to have, a material negative effect on our operations. We do not
believe that general economic inflation is a significant determinant of our raw material and energy cost increases or that it has a material effect on our operations.



Subsequent Event



On February 27, 2006, we sold our partition business to RTS, a joint venture between the Rock-Tenn Company and the Sonoco Products Company, for
approximately $5.8 million. This business was classified as a discontinued operation as of December 31, 2005.



New Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board issued Statement No. 151, Inventory Costs (SFAS No. 151).
SFAS No. 151 amends Accounting Research Bulletin No. 43, chapter 4,  Inventory Pricing. It states that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as
current period charges. In addition, this statement requires that the allocation of overhead costs be based upon normal capacity for the production facilities and that any overhead costs not allocated due to lower production, be recognized as
current period charges and not capitalized in inventory. The effective date of this statement is for fiscal years beginning after June 15, 2005. The Company does not believe the adoption of this statement will have a material impact on its
financial statements.



In December 2004, the Financial
Accounting Standards Board issued Statement No. 153, Exchanges of Nonmonetary Assets (SFAS No. 153). SFAS No. 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions. This
statement specifies that a nonmonetary exchange has commercial substance if



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the future cash flows of the entity are expected to change significantly as a result of the exchange. The effective date of this statement is for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this Statement did not have a material impact on the Companys financial statements.



In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R), Share-Based Payment
SFAS 123 (R) (SFAS No. 123R) which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation SFAS No. 123. SFAS No. 123(R) supersedes APB 25, Accounting for Stock Issued to
Employees, and amends SFAF No. 95, Statement of Cash Flows. The approach in SFAS No. 123(R) is generally similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the earnings statements based on their fair values. Pro forma disclosure will no longer be an alternative.



We adopted SFAS No. 123(R) as of January 1, 2006 using the modified
prospective method. Under this transition method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. As permitted by SFAS No. 123, through December 31,
2005 we accounted for share-based payments to employees using APB 25s intrinsic value method and, as such, generally have not recognized compensation costs for employee stock options. We estimate that pretax compensation expense for stock
options will be approximately $520 thousand in 2006.



SFAS
No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as previously required. This requirement will reduce net operating
cash flows and increase net financing cash flows. We cannot estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options. This change would not have impacted operating cash flows
for the years ended December 31, 2005, 2004 and 2003 since we incurred tax losses and any such benefit would have been deferred.



In March 2005, the Financial Accounting Standards Board issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligation (FIN 47) an interpretation of SFAS No. 143, Accounting for Asset Retirement Obligations. The primary objective of FIN 47 is to clarify that the term conditional asset retirement obligation as
used in SFAS No. 143 refers to a legal obligation to perform as asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may of may not be within the control of the entity. The
interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective for fiscal years ending after December 15, 2005. The
Company adopted this interpretation December 15, 2005 and it did not have a material impact on the Companys consolidated financial statements or disclosures.



See Notes to our consolidated financial statements included in Part II, Item 8 regarding other new accounting
pronouncements that did not have a material impact on our consolidated financial statements.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



At December 31, 2005, we had outstanding borrowings of approximately $476.3 million related to the issuance of debt securities registered with the
SEC. In June of 1999, we issued $200.0 million of 73/8% senior notes at a discount to yield an effective
interest rate of 7.47%. After taking into account realized gains from unwinding various interest rates swap agreements, the current effective interest rate is 6.3%. The 73/8% senior



42



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notes pay interest semiannually, and are our unsecured obligations. In March of 2001, we issued $285.0 million of 97/8% senior subordinated notes and $29.0 million of 71/4% senior notes. These notes were issued at a discount to yield effective interest rates of 10.5% and 9.4%, respectively. After taking into account realized
gains from unwinding various interest rate swap agreements, the current effective interest rate of the 97/8%
senior subordinated notes is 9.4%. The 97/8% senior subordinated notes and the 71/4% senior notes pay interest semiannually, and are unsecured, but they are guaranteed, on a joint and several basis,
by all but one of our domestic subsidiaries.



Our senior credit facility provides a revolving line of credit of $75.0 million and is secured primarily by a first priority security interest in our accounts receivable and inventory. The facility matures in June
2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts receivable and inventory. The facility includes a subfacility of $50 million for letters of credit, usage of which reduces availability under the
facility. Borrowings under the facility bear interest at a rate equal to, at our option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility) plus a
margin of between (0.25%) and 0.25% or (2) the adjusted London Interbank Offered Rate (LIBOR) plus a margin of between 1.50% and 2.00%, with the applicable margin to be set based on our levels of available cash. The undrawn portion
of the facility is subject to a facility fee at an annual rate of 0.375%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for LIBOR-based loans. At December 31, 2005, the applicable interest margin for
Base Rate borrowings was (0.25%) and the applicable interest margin for LIBOR borrowings was 1.50%. No borrowings were outstanding under the facility as of December 31, 2005, although approximately $37.5 million in letter of credit obligations
were outstanding.



In March 2005, the Company entered into an
interest rate swap agreement in the notional amount of $50.0 million. This agreement, effectively converted $50.0 million of the Companys fixed rate 73/8% senior notes into variable rate obligations. The variable rates were based on three-month LIBOR plus a fixed margin.



In June 2005, the Company unwound the March 2005 $50.0 million interest rate swap agreement related to the 73/8% senior notes and received approximately $826 thousand from the bank counter party. The $826 thousand gain was
classified as a component of debt, and is being accreted over the remaining life of the notes and will partially offset the increase in interest expense. We unwound the interest rate swaps in order to take advantage of market conditions.



There were no interest rate swap agreements outstanding
as of December 31, 2005.



Our senior management
establishes parameters, which are approved by the Board of Directors, for our financial risk. We do not utilize derivatives for speculative purposes.



The table below provides information about our debt obligations and principal cash flows and related interest rates by expected maturity dates.



|                                   |  |                            |         |   |            |   |         |       |  |   |         |  
|---------------------------------- |  | -------------------------- | ------- | - | ---------- | - | ------- | ----- |  | - | ------- | -
|                                   |  | Contractual Maturity Dates |        
|                                   |  | 2006 to 2010               |         |   | Thereafter |   |         | Total | 
|                                   |  | (In thousands)             |        
|Debt Obligations                   |  |                            |         |   |            |   |         |       |  |   |         |  
|97/8%
Senior Subordinated Notes(1) |  |                            |        |   |            | $ | 257,500 |       |  | $ | 257,500 |  
|Average interest rate              |  |                            |        |   |            |   | 9.875   | %     |  |   | 9.875   | %
|71/4%
Senior Notes(1)              |  | $                          | 29,000  |   |            |   |        |       |  | $ | 29,000  |  
|Average interest rate              |  |                            |        |   |            |   | 7.25    | %     |  |   | 7.25    | %
|73/8%
Senior Notes(1)              |  | $                          | 189,750 |   |            |   |        |       |  | $ | 189,750 |  
|Average interest rate              |  |                            | 7.375   | % |            |   |        |       |  |   | 7.375   | %

---

|(1) | See notes to our consolidated financial statements included in Part II, Item 8.
|--- | -------------------------------------------------------------------------------



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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                                |  |              |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                |  | December 31, |         
|                                                                                                                                                                |  | 2005         |          |   | 2004 |  
|ASSETS                                                                                                                                                          |  |              |          |   |      |   |          |  
|CURRENT ASSETS:                                                                                                                                                 |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                       |  | $            | 95,152   |   |      | $ | 89,756   |  
|Receivables, net of allowances for doubtful accounts, returns, and discounts of $3,393 and $4,418 in 2005 and 2004,
respectively                                |  |              | 91,061   |   |      |   | 102,644  |  
|Inventories                                                                                                                                                     |  |              | 70,959   |   |      |   | 89,044   |  
|Refundable income taxes                                                                                                                                         |  |              | 56       |   |      |   | 409      |  
|Current deferred tax asset                                                                                                                                      |  |              | 40,259   |   |      |   | 11,035   |  
|Other current assets                                                                                                                                            |  |              | 21,613   |   |      |   | 11,059   |  
|Investment in unconsolidated affiliate                                                                                                                          |  |              | 13,212   |   |      |   |         |  
|Assets of discontinued operations held for sale                                                                                                                 |  |              | 76,665   |   |      |   |         |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Total current assets                                                                                                                                            |  |              | 408,977  |   |      |   | 303,947  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                                  |  |              |          |   |      |   |          |  
|Land                                                                                                                                                            |  |              | 7,931    |   |      |   | 11,856   |  
|Buildings and improvements                                                                                                                                      |  |              | 97,536   |   |      |   | 138,872  |  
|Machinery and equipment                                                                                                                                         |  |              | 424,503  |   |      |   | 616,791  |  
|Furniture and fixtures                                                                                                                                          |  |              | 15,071   |   |      |   | 15,725   |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|                                                                                                                                                                |  |              | 545,041  |   |      |   | 783,244  |  
|Less accumulated depreciation                                                                                                                                   |  |              | (290,004 | ) |      |   | (395,110 | )
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Property, plant and equipment, net                                                                                                                              |  |              | 255,037  |   |      |   | 388,134  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|GOODWILL                                                                                                                                                        |  |              | 129,275  |   |      |   | 183,130  |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES                                                                                                                         |  |              | 44,037   |   |      |   | 59,676   |  
|OTHER ASSETS                                                                                                                                                    |  |              | 21,806   |   |      |   | 24,818   |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|                                                                                                                                                                |  | $            | 859,132  |   |      | $ | 959,705  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                            |  |              |          |   |      |   |          |  
|CURRENT LIABILITIES:                                                                                                                                            |  |              |          |   |      |   |          |  
|Current maturities of debt                                                                                                                                      |  | $            | 85       |   |      | $ | 80       |  
|Accounts payable                                                                                                                                                |  |              | 78,015   |   |      |   | 84,890   |  
|Accrued interest                                                                                                                                                |  |              | 7,976    |   |      |   | 8,810    |  
|Accrued compensation                                                                                                                                            |  |              | 9,146    |   |      |   | 11,742   |  
|Capital lease obligations                                                                                                                                       |  |              | 542      |   |      |   |         |  
|Other accrued liabilities                                                                                                                                       |  |              | 34,711   |   |      |   | 34,959   |  
|Liabilities of discontinued operations                                                                                                                          |  |              | 31,373   |   |      |   |         |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                                                                       |  |              | 161,848  |   |      |   | 140,481  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|OTHER LONG-TERM DEBT, less current maturities                                                                                                                   |  |              | 492,305  |   |      |   | 506,141  |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS                                                                                                                             |  |              | 561      |   |      |   |         |  
|DEFERRED INCOME TAXES                                                                                                                                           |  |              | 48,699   |   |      |   | 57,320   |  
|PENSION LIABILITY                                                                                                                                               |  |              | 41,877   |   |      |   | 32,897   |  
|OTHER LIABILITIES                                                                                                                                               |  |              | 5,446    |   |      |   | 5,614    |  
|COMMITMENTS AND CONTINGENCIES (Note 8)                                                                                                                          |  |              |          |   |      |   |          |  
|SHAREHOLDERS EQUITY:                                                                                                                                           |  |              |          |   |      |   |          |  
|Preferred stock, $.10 par value; 5,000,000 shares authorized, no shares issued                                                                                  |  |              |         |   |      |   |         |  
|Common stock, $.10 par value; 60,000,000 shares authorized, 28,785,519 and 28,753,390 shares issued and outstanding at December 31, 2005
and 2004, respectively |  |              | 2,879    |   |      |   | 2,875    |  
|Additional paid-in capital                                                                                                                                      |  |              | 192,673  |   |      |   | 191,903  |  
|Unearned compensation                                                                                                                                           |  |              | (3,442   | ) |      |   | (4,334   | )
|Retained (deficit) earnings                                                                                                                                     |  |              | (54,834  | ) |      |   | 48,552   |  
|Accumulated other comprehensive (loss) income:                                                                                                                  |  |              |          |   |      |   |          |  
|Minimum pension liability adjustment                                                                                                                            |  |              | (29,796  | ) |      |   | (22,621  | )
|Foreign currency translation                                                                                                                                    |  |              | 916      |   |      |   | 877      |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Total accumulated other comprehensive loss                                                                                                                      |  |              | (28,880  | ) |      |   | (21,744  | )
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Total Shareholders Equity                                                                                                                                      |  |              | 108,396  |   |      |   | 217,252  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|                                                                                                                                                                |  | $            | 859,132  |   |      | $ | 959,705  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  



The accompanying notes
are an integral part of these consolidated financial statements.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                        |  | For the Years Ended December 31, |         
|                                                                        |  | 2005                             |          |   | 2004 |   |         | 2003 | 
|SALES                                                                   |  | $                                | 862,421  |   |      | $ | 871,485 |      |  | $ | 808,368 |  
|COST OF SALES                                                           |  |                                  | 728,047  |   |      |   | 721,171 |      |  |   | 657,941 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                            |  |                                  | 122,270  |   |      |   | 119,752 |      |  |   | 128,464 |  
|GOODWILL IMPAIRMENT                                                     |  |                                  | 39,344   |   |      |   |        |      |  |   |        |  
|RESTRUCTURING AND OTHER IMPAIRMENT COSTS                                |  |                                  | 1,162    |   |      |   | 12,649  |      |  |   | 17,774  |  
|GAIN ON SALE OF REAL ESTATE                                             |  |                                  |         |   |      |   | 10,323  |      |  |   |        |  
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|Income (loss) from operations                                           |  |                                  | (28,402  | ) |      |   | 28,236  |      |  |   | 4,189   |  
|OTHER (EXPENSE) INCOME:                                                 |  |                                  |          |   |      |   |         |      |  |   |         |  
|Interest expense                                                        |  |                                  | (41,693  | ) |      |   | (41,892 | )    |  |   | (43,139 | )
|Interest income                                                         |  |                                  | 2,629    |   |      |   | 948     |      |  |   | 528     |  
|Write-off of deferred debt costs                                        |  |                                  |         |   |      |   |        |      |  |   | (1,812  | )
|Equity in income of unconsolidated affiliates                           |  |                                  | 37,043   |   |      |   | 25,251  |      |  |   | 8,354   |  
|Other, net                                                              |  |                                  | 430      |   |      |   | (1,099  | )    |  |   | 92      |  
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|                                                                        |  |                                  | (1,591   | ) |      |   | (16,792 | )    |  |   | (35,977 | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                  | (29,993  | ) |      |   | 11,444  |      |  |   | (31,788 | )
|BENEFIT (PROVISION) FOR INCOME TAXES                                    |  |                                  | (1,616   | ) |      |   | (4,273  | )    |  |   | 11,464  |  
|MINORITY INTEREST IN LOSS (INCOME)                                      |  |                                  | 273      |   |      |   | (184    | )    |  |   | 196     |  
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                                |  |                                  | (31,336  | ) |      |   | 6,987   |      |  |   | (20,128 | )
|DISCONTINUED OPERATIONS:                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                       |  |                                  | (105,922 | ) |      |   | (16,773 | )    |  |   | (10,542 | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                     |  |                                  | 33,872   |   |      |   | 5,807   |      |  |   | 3,635   |  
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                       |  |                                  | (72,050  | ) |      |   | (10,966 | )    |  |   | (6,907  | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|NET LOSS                                                                |  | $                                | (103,386 | ) |      | $ | (3,979  | )    |  | $ | (27,035 | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|OTHER COMPREHENSIVE LOSS:                                               |  |                                  |          |   |      |   |         |      |  |   |         |  
|Minimum pension liability adjustment                                    |  | $                                | (7,175   | ) |      | $ | (3,377  | )    |  | $ | 3,069   |  
|Foreign currency translation adjustment                                 |  |                                  | 39       |   |      |   | 275     |      |  |   | 1,189   |  
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|COMPREHENSIVE LOSS                                                      |  | $                                | (110,522 | ) |      | $ | (7,081  | )    |  | $ | (22,777 | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|BASIC                                                                   |  |                                  |          |   |      |   |         |      |  |   |         |  
|INCOME (LOSS) PER COMMON SHARE FOR CONTINUING OPERATIONS                |  | $                                | (1.09    | ) |      | $ | 0.25    |      |  | $ | (0.72   | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|LOSS PER COMMON SHARE FOR DISCONTINUED OPERATIONS                       |  | $                                | (2.50    | ) |      | $ | (0.39   | )    |  | $ | (0.25   | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|NET LOSS PER COMMON SHARE                                               |  | $                                | (3.59    | ) |      | $ | (0.14   | )    |  | $ | (0.97   | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                           |  |                                  | 28,774   |   |      |   | 28,479  |      |  |   | 27,993  |  
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|DILUTED                                                                 |  |                                  |          |   |      |   |         |      |  |   |         |  
|INCOME (LOSS) PER COMMON SHARE FOR CONTINUING OPERATIONS                |  | $                                | (1.09    | ) |      | $ | 0.25    |      |  | $ | (0.72   | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|LOSS PER COMMON SHARE FOR DISCONTINUED OPERATIONS                       |  | $                                | (2.50    | ) |      | $ | (0.39   | )    |  | $ | (0.25   | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|NET LOSS PER COMMON SHARE                                               |  | $                                | (3.59    | ) |      | $ | (0.14   | )    |  | $ | (0.97   | )
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                   |  |                                  | 28,774   |   |      |   | 28,654  |      |  |   | 27,993  |  
|                                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



45



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

For the Years Ended December 31, 2005, 2004 and 2003

(In thousands, except share data)



|                                                                 |  |              |   |  |                          |       |   |                      |   |         |                  |  |   |                                           |   |  |       |          |   |  |   |         |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------ | - |  | ------------------------ | ----- | - | -------------------- | - | ------- | ---------------- |  | - | ----------------------------------------- | - |  | ----- | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                                 |  | Common Stock |   |  | AdditionalPaid-InCapital |       |   | UnearnedCompensation |   |         | RetainedEarnings |  |   | AccumulatedOtherComprehensive(Loss)Income |   |  | Total |         
|                                                                 |  | Shares       |   |  | Amount                   |       |   |                      |   |         |                 
|BALANCE, December 31, 2002                                       |  | 27,906,674   |   |  | $                        | 2,791 |   |                      | $ | 182,369 |                  |  | $ | (145                                      | ) |  | $     | 79,566   |   |  | $ | (22,900 | ) |  | $ | 241,681  |  
|Net loss                                                         |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                          |   |  |       | (27,035  | ) |  |   |        |   |  |   | (27,035  | )
|Forfeiture of common stock under 1993 stock purchase plan        |  | (572         | ) |  |                          |      |   |                      |   | (4      | )                |  |   |                                          |   |  |       |         |   |  |   |        |   |  |   | (4       | )
|Issuance of common stock under 1998 stock purchase plan          |  | 75,402       |   |  |                          | 7     |   |                      |   | 718     |                  |  |   |                                          |   |  |       |         |   |  |   |        |   |  |   | 725      |  
|Issuance of common stock under long-term equity incentive plan   |  | 229,900      |   |  |                          | 23    |   |                      |   | 1,855   |                  |  |   | (1,878                                    | ) |  |       |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock under director equity plan              |  | 10,801       |   |  |                          | 1     |   |                      |   | 93      |                  |  |   |                                          |   |  |       |         |   |  |   |        |   |  |   | 94       |  
|Amortization of unearned compensation expense                    |  |             |   |  |                          |      |   |                      |   |        |                  |  |   | 158                                       |   |  |       |         |   |  |   |        |   |  |   | 158      |  
|Minimum pension liability adjustment, net of taxes of $1,871     |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                          |   |  |       |         |   |  |   | 3,069   |   |  |   | 3,069    |  
|Foreign currency translation adjustment                          |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                          |   |  |       |         |   |  |   | 1,189   |   |  |   | 1,189    |  
|                                                                 |  |              |   |  |                          |       |   |                      |   |         |                  |  |   |                                           |   |  |       |          |   |  |   |         |   |  |   |          |  
|BALANCE, December 31, 2003                                       |  | 28,222,205   |   |  | $                        | 2,822 |   |                      | $ | 185,031 |                  |  | $ | (1,865                                    | ) |  | $     | 52,531   |   |  | $ | (18,642 | ) |  | $ | 219,877  |  
|Net loss                                                         |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                          |   |  |       | (3,979   | ) |  |   |        |   |  |   | (3,979   | )
|Issuance of common stock under 1998 stock purchase plan          |  | 338,488      |   |  |                          | 33    |   |                      |   | 2,684   |                  |  |   | (86                                       | ) |  |       |         |   |  |   |        |   |  |   | 2,631    |  
|Forfeiture of common stock under 1998 stock purchase plan        |  | (6,396       | ) |  |                          | (1    | ) |                      |   | (78     | )                |  |   | 15                                        |   |  |       |         |   |  |   |        |   |  |   | (64      | )
|Issuance of common stock under long-term equity incentive plan   |  | 265,602      |   |  |                          | 27    |   |                      |   | 4,358   |                  |  |   | (4,270                                    | ) |  |       |         |   |  |   |        |   |  |   | 115      |  
|Forfeiture of common stock under long-term equity incentive plan |  | (72,039      | ) |  |                          | (7    | ) |                      |   | (1,115  | )                |  |   |                                          |   |  |       |         |   |  |   |        |   |  |   | (1,122   | )
|Issuance of common stock under director equity plan              |  | 5,530        |   |  |                          | 1     |   |                      |   | 63      |                  |  |   |                                          |   |  |       |         |   |  |   |        |   |  |   | 64       |  
|Amortization of unearned compensation expense                    |  |             |   |  |                          |      |   |                      |   | 960     |                  |  |   | 1,872                                     |   |  |       |         |   |  |   |        |   |  |   | 2,832    |  
|Minimum pension liability adjustment, net of taxes of $1,992     |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                          |   |  |       |         |   |  |   | (3,377  | ) |  |   | (3,377   | )
|Foreign currency translation adjustment                          |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                          |   |  |       |         |   |  |   | 275     |   |  |   | 275      |  
|                                                                 |  |              |   |  |                          |       |   |                      |   |         |                  |  |   |                                           |   |  |       |          |   |  |   |         |   |  |   |          |  
|BALANCE, December 31, 2004                                       |  | 28,753,390   |   |  | $                        | 2,875 |   |                      | $ | 191,903 |                  |  | $ | (4,334                                    | ) |  | $     | 48,552   |   |  | $ | (21,744 | ) |  | $ | 217,252  |  
|Net loss                                                         |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                          |   |  |       | (103,386 | ) |  |   |        |   |  |   | (103,386 | )
|Issuance of common stock under 1998 stock purchase plan          |  | 23,252       |   |  |                          | 2     |   |                      |   | 196     |                  |  |   | 4                                         |   |  |       |         |   |  |   |        |   |  |   | 202      |  
|Forfeiture of common stock under 1998 stock purchase plan        |  | (2,639       | ) |  |                          |      |   |                      |   | (31     | )                |  |   |                                          |   |  |       |         |   |  |   |        |   |  |   | (31      | )
|Issuance of common stock under long-term equity incentive plan   |  | 21,366       |   |  |                          | 3     |   |                      |   | 240     |                  |  |   | (78                                       | ) |  |       |         |   |  |   |        |   |  |   | 165      |  
|Forfeiture of common stock under long-term equity incentive plan |  | (9,850       | ) |  |                          | (1    | ) |                      |   | (162    | )                |  |   | 162                                       |   |  |       |         |   |  |   |        |   |  |   | (1       | )
|Amortization of unearned compensation expense                    |  |             |   |  |                          |      |   |                      |   | 527     |                  |  |   | 804                                       |   |  |       |         |   |  |   |        |   |  |   | 1,331    |  
|Minimum pension liability adjustment, net of taxes of $4,365     |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                          |   |  |       |         |   |  |   | (7,175  | ) |  |   | (7,175   | )
|Foreign currency translation adjustment                          |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                          |   |  |       |         |   |  |   | 39      |   |  |   | 39       |  
|                                                                 |  |              |   |  |                          |       |   |                      |   |         |                  |  |   |                                           |   |  |       |          |   |  |   |         |   |  |   |          |  
|BALANCE, December 31, 2005                                       |  | 28,785,519   |   |  | $                        | 2,879 |   |                      | $ | 192,673 |                  |  | $ | (3,442                                    | ) |  | $     | (54,834  | ) |  | $ | (28,880 | ) |  | $ | 108,396  |  
|                                                                 |  |              |   |  |                          |       |   |                      |   |         |                  |  |   |                                           |   |  |       |          |   |  |   |         |   |  |   |          |  



The accompanying notes
are an integral part of these consolidated financial statements.



46



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                |  | For the Years Ended December 31, |         
|                                                                                |  | 2005                             |          |   | 2004 |   |         | 2003 | 
|OPERATING ACTIVITIES:                                                           |  |                                  |          |   |      |   |         |      |  |   |         |  
|Net loss                                                                        |  | $                                | (103,386 | ) |      | $ | (3,979  | )    |  | $ | (27,035 | )
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                  |          |   |      |   |         |      |  |   |         |  
|(Gain) loss from extinguishment of debt                                         |  |                                  | (212     | ) |      |   | 931     |      |  |   |        |  
|Depreciation and amortization                                                   |  |                                  | 28,493   |   |      |   | 30,089  |      |  |   | 30,991  |  
|Stock-based compensation expense                                                |  |                                  | 811      |   |      |   | 1,610   |      |  |   |        |  
|Write-off of deferred debt costs                                                |  |                                  |         |   |      |   |        |      |  |   | 1,812   |  
|Disposal of property, pant and equipment, net                                   |  |                                  |         |   |      |   |        |      |  |   | 3,507   |  
|Gain on sale of real estate                                                     |  |                                  |         |   |      |   | (10,323 | )    |  |   |        |  
|Equity in income of unconsolidated affiliates                                   |  |                                  | (37,043  | ) |      |   | (25,251 | )    |  |   | (8,354  | )
|Distributions from unconsolidated affiliates                                    |  |                                  | 34,175   |   |      |   | 20,250  |      |  |   | 6,150   |  
|Deferred income taxes                                                           |  |                                  | (32,951  | ) |      |   | (2,256  | )    |  |   | (9,631  | )
|Goodwill impairment                                                             |  |                                  | 49,859   |   |      |   |        |      |  |   |        |  
|Restructuring and other impairment costs                                        |  |                                  | 85,591   |   |      |   | 13,079  |      |  |   | 11,862  |  
|Changes in operating assets and liabilities, net of acquisitions:               |  |                                  |          |   |      |   |         |      |  |   |         |  
|Receivables                                                                     |  |                                  | (8,917   | ) |      |   | (8,752  | )    |  |   | 12,180  |  
|Inventories                                                                     |  |                                  | 5,661    |   |      |   | (1,436  | )    |  |   | 20,036  |  
|Other assets and liabilities                                                    |  |                                  | (1,316   | ) |      |   | (731    | )    |  |   | (1,309  | )
|Accounts payable                                                                |  |                                  | 8,529    |   |      |   | 9,877   |      |  |   | 14,831  |  
|Accrued liabilities                                                             |  |                                  | (5,728   | ) |      |   | 13,932  |      |  |   | (9,172  | )
|Income taxes                                                                    |  |                                  | 353      |   |      |   | (159    | )    |  |   | 13,348  |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|Total                                                                           |  |                                  | 127,305  |   |      |   | 40,860  |      |  |   | 86,251  |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                       |  |                                  | 23,919   |   |      |   | 36,881  |      |  |   | 59,216  |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|INVESTING ACTIVITIES:                                                           |  |                                  |          |   |      |   |         |      |  |   |         |  
|Purchases of property, plant and equipment                                      |  |                                  | (24,272  | ) |      |   | (20,891 | )    |  |   | (20,006 | )
|Acquisition of businesses, net of cash acquired                                 |  |                                  |         |   |      |   |        |      |  |   | (695    | )
|Proceeds from disposal of property, plant and equipment                         |  |                                  | 3,446    |   |      |   | 2,786   |      |  |   | 2,321   |  
|Return of investment in unconsolidated affiliates                               |  |                                  | 5,325    |   |      |   |        |      |  |   |        |  
|Proceeds from sale of real estate and business                                  |  |                                  | 15,096   |   |      |   | 11,086  |      |  |   |        |  
|Investment in restricted cash                                                   |  |                                  | (11,164  | ) |      |   | (3,656  | )    |  |   | (3,834  | )
|Investment in unconsolidated affiliates                                         |  |                                  | (40      | ) |      |   | (160    | )    |  |   |        |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                           |  |                                  | (11,609  | ) |      |   | (10,835 | )    |  |   | (22,214 | )
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|FINANCING ACTIVITIES:                                                           |  |                                  |          |   |      |   |         |      |  |   |         |  
|Repayments of short and long-term debt                                          |  |                                  | (7,468   | ) |      |   | (24,951 | )    |  |   | (95     | )
|Payments for capital lease obligations                                          |  |                                  | (508     | ) |      |   |        |      |  |   |        |  
|Proceeds from swap agreement unwinds                                            |  |                                  | 826      |   |      |   | 385     |      |  |   | 15,950  |  
|Deferred debt costs                                                             |  |                                  |         |   |      |   |        |      |  |   | (2,214  | )
|Issuances of stock, net of forfeitures                                          |  |                                  | 236      |   |      |   | 2,725   |      |  |   | 594     |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by financing activities                             |  |                                  | (6,914   | ) |      |   | (21,841 | )    |  |   | 14,235  |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                       |  |                                  | 5,396    |   |      |   | 4,205   |      |  |   | 51,237  |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                  |  |                                  | 89,756   |   |      |   | 85,551  |      |  |   | 34,314  |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                        |  | $                                | 95,152   |   |      | $ | 89,756  |      |  | $ | 85,551  |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|SUPPLEMENTAL DISCLOSURES:                                                       |  |                                  |          |   |      |   |         |      |  |   |         |  
|Cash payments for interest                                                      |  | $                                | 46,164   |   |      | $ | 42,750  |      |  | $ | 42,990  |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|Income tax payments (refunds)                                                   |  | $                                | 778      |   |      | $ | 1,293   |      |  | $ | (18,783 | )
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|Property acquired under capital leases                                          |  | $                                | 1,532    |   |      |   |        |      |  | $ | 294     |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  
|Short-term payable for acquisition                                              |  | $                                | 11,000   |   |      | $ |        |      |  | $ |        |  
|                                                                                |  |                                  |          |   |      |   |         |      |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003



1. Nature of Business and Summary of Significant Accounting Policies



Nature of Business



Caraustar Industries, Inc. (the Parent Company) and subsidiaries (collectively, the Company) are engaged in manufacturing,
converting, and marketing paperboard and related products.



Consolidation



The consolidated financial statements include the
accounts of the Parent Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.



Cash and Cash Equivalents



The Company considers cash on deposit and investments with an original maturity of three months or less to be cash equivalents. Outstanding checks are
recorded as a component of accounts payable since there is no right of offset between our disbursements account and our cash investment account. Outstanding checks totaled $24.5 million and $18.3 million as of December 31, 2005 and 2004.



Restricted Cash



Restricted cash as of December 31, 2005 and December 31, 2004 was
approximately $18.7 million and $7.5 million, respectively, and is recorded in other assets. Restricted cash are funds deposited in escrow accounts as collateral support for workers compensation insurance. In addition to the
workers compensation collateral at December 31, 2005, approximately $11.0 million was held in escrow to effect a like-kind tax exchange for the sale of the Companys Hunt Valley corrugated facility and the acquisition of a carton
facility located in Charlotte, North Carolina. The $11.0 million held in escrow was disbursed to acquire the Charlotte carton plant from the Sonoco Products Company on January 3, 2006.



In the consolidated statements of cash flows for the years ended
December 31, 2004 and 2003, we changed the classification of changes in restricted cash balances to present such changes as an investing activity. We previously reported such changes as an operating activity. The consolidated statements of cash
flows for the years ended December 31, 2004 and 2003, reflect an increase of $3.7 million and $3.8 million, respectively, in operating cash flows and a corresponding decrease in investing cash flow from the amounts previously reported.



Inventories



Inventories are carried at the lower of cost or market. The costs included
in inventory include raw materials (recovered fiber for paperboard products and paperboard for converted products), direct and indirect labor and employee benefits, energy and fuel, depreciation, chemicals, general manufacturing overhead and various
other costs of manufacturing. General and administrative costs are not included in inventory costs.



Market, with respect to all inventories, is replacement cost or net realizable value. The Company reviews inventory at least quarterly to determine the
necessity of write-offs for excess, obsolete or unsaleable inventory. The Company estimates reserves for inventory obsolescence and shrinkage based on managements judgment of future realization. These reviews require management to assess
customer and market demand. All inventories are valued using the first-in, first-out method.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



Inventories at December 31, 2005 and 2004 were as follows (in thousands):



|                                   |  |      |        |      |   |       
|---------------------------------- |  | ---- | ------ | ---- | - | ------
|                                   |  | 2005 |        | 2004
|Raw materials and supplies         |  | $    | 38,555 |      | $ | 40,094
|Finished goods and work in process |  |      | 32,404 |      |   | 48,950
|                                   |  |      |        |      |   |       
|Total inventory                    |  | $    | 70,959 |      | $ | 89,044
|                                   |  |      |        |      |   |       



Property, Plant and Equipment



Property, plant and equipment are stated at cost.
Expenditures for repairs and maintenance not considered to substantially lengthen the asset lives or increase capacity or efficiency are charged to expense as incurred.



Depreciation is computed using the straight-line method over the following estimated useful lives:



|                             |  |            
|---------------------------- |  | -----------
|Buildings and improvements   |  | 10-45 years
|Furniture and fixtures       |  | 5-10 years 
|Machinery and equipment:     |  |            
|Small tools                  |  | 1 year     
|Computer software            |  | 3 years    
|Small machinery and vehicles |  | 4-8 years  
|Production equipment         |  | 20-25 years



Depreciation expense
was $28.5 million, $29.6 million, and $29.4 million for the years ended December 2005, 2004 and 2003.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant management judgment is required in determining: the credit worthiness of customers and
collectibility of accounts receivable; excess, obsolete or unsaleable inventory reserves; the potential impairment of long-lived assets, goodwill and intangibles; the accounting for income taxes; the liability for self-insured claims; and the
Companys obligation and expense for pension and other postretirement benefits. Actual results could differ from the Companys estimates and the differences could be significant.



Revenue Recognition



The Company recognizes revenue and the related account receivable when the
following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) ownership has transferred to the customer; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (4) is based on managements judgments regarding the collectibility of the Companys accounts receivable. Generally, the Company recognizes revenue when it ships its manufactured products or when it completes
a service and title and risk of loss passes to its customers. Provisions for discounts, returns, allowances, customer rebates, and other adjustments are provided for in the same period as the related revenues are recorded.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



Shipping Costs



The costs of delivering finished goods to the Companys customers are recorded as a component of cost of sales. Those
costs include the amounts paid to a third party to deliver the finished goods or the Companys cost of using its own delivery trucks and drivers. Any freight costs billed to and paid by a customer are included in revenue.



Self-Insurance



The Company is self-insured for the majority of its workers compensation costs and health care costs, subject to
specific retention levels. Consulting actuaries and administrators assist the Company in determining its liability for self-insured claims. The Companys self-insured workers compensation liability is estimated based on actual claims as
established by a third party administrator, increased by factors that reflect the Companys historical claim development. The developed claim, net of amounts paid and a present value factor, represents the liability that the Company
records in its financial statements. The Companys self-insured health care liability is estimated based on its actual claim experience and multiplied by a time lag factor. The lag factor represents an estimate of claims that have been incurred
and should be recorded as a liability, but have not been reported to the Company.



Foreign Currency Translation



The
financial statements of the Companys non-U.S. subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. Assets and
liabilities of the non-U.S. subsidiaries are translated at current rates of exchange. The resulting translation adjustments were recorded in accumulated other comprehensive loss. Income and expense items were translated at the average exchange rate
for the year. Gains and losses were reported in the net loss and were not material in any year.



Goodwill



The
Company accounts for goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. This statement requires the Company to perform a goodwill impairment test at least annually. The Companys most recent annual
impairment test was performed as of November 1, 2005 and did not result in an impairment. However, the Company, recognizing certain impairment indicators related to the decision to exit the coated recycled paperboard business (See Note 4),
retested goodwill as of December 31, 2005 and recorded a $39.3 million impairment. The impairment resulted from the loss of synergies that exist between the coated recycled paperboard business and the folding carton and custom packaging
segment. The folding carton and custom packaging segment will lose these synergies upon the disposal of the coated recycled paperboard business. The $39.3 million impairment was recorded by the folding carton and custom packaging segment at
December 31, 2005.



Impairment of Long-Lived Assets



Pursuant to SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the Company periodically evaluates long-lived assets, including property, plant and equipment and definite lived intangible assets whenever events or changes in conditions may indicate that the
carrying value may not be recoverable. Factors that management considers important that could initiate an impairment review include the following:



| |  |  | significant operating losses;
| | - |  | -----------------------------



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



| |  |  | recurring operating losses;
| | - |  | ---------------------------



| |  |  | significant declines in demand for a product produced by an asset capable of producing only that product;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | assets that are idled or held for sale;
| | - |  | ---------------------------------------



| |  |  | assets that are likely to be divested
| | - |  | -------------------------------------



The impairment review requires the Company to estimate future undiscounted cash flows associated with an asset or group of assets and sum the estimated
future cash flows. If the future undiscounted cash flows is less than the carrying amount of the asset, the Company must estimate the fair value of the asset. If the fair value of the asset is below the carrying value, then the difference will be
written-off. Estimating future cash flows requires the Company to make judgments regarding future economic conditions, product demand and pricing. Although the Company believes its estimates are appropriate, significant differences in the actual
performance of the asset or group of assets may materially affect the Companys asset values and results of operations.



Impairment charges of $83.7 million, $1.2 million and $2.1 million related to assets held for sale were recorded in 2005, 2004 and 2003, respectively. Of
the $83.7 million of impairment charges recorded in 2005, $82.7 million was recorded in the results of discontinued operations. These assets include land and buildings related to operations that were permanently closed in conjunction with the
Companys restructuring activities or for discontinued assets the Company is operating but are held for sale. The charges represent the difference between the carrying value of the assets and the estimated fair value. Fair value for assets held
for sale were estimated based on considerations of preliminary indication of values from potential buyers, supported by industry multiples of earnings before interest, taxes and depreciation, and discounted cash flows for businesses in operation and
brokers opinions of value for real estate.



Income Taxes



The Company accounts for income taxes in accordance
with SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. In accordance with SFAS No. 109, deferred income tax assets and liabilities
are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax (expense) benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.



Under SFAS No. 109, a valuation allowance is required when it is more
likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income.



Loss Per Share



The Company computes basic and diluted earnings or loss per share in accordance with SFAS No. 128, Earnings Per Share. Basic income or
loss per share excludes dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution that
could occur if convertible securities were converted into common stock, or other contracts to issue common stock resulted in the issuance of common stock. Since the Company reported net losses for the years ended December 31, 2005 and 2003, the
impact of stock options was antidilutive.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



Stock-Based Compensation



The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations (APB No. 25) in accounting for its employee stock options. However, pro forma information regarding net income and earnings per share is required by SFAS No. 123, which requires that
the information be determined as if the Company has accounted for its employee stock options granted under the fair value method of that statement. The fair values for these options were estimated as of the grant dates using a Black-Scholes option
pricing model. The following assumptions were used for options granted for the years ended December 31, 2005, 2004 and 2003:



|                        |  |               |  |               |  |              
|----------------------- |  | ------------- |  | ------------- |  | -------------
|                        |  | 2005          |  | 2004          |  | 2003         
|Risk-free interest rate |  | 4.34%  4.49% |  | 3.88%  4.31% |  | 3.54%  4.22%
|Expected dividend yield |  | 0%            |  | 0%            |  | 0%           
|Expected option lives   |  | 8 years       |  | 8-10 years    |  | 8-10 years   
|Expected volatility     |  | 41-43%        |  | 40%           |  | 39%          



The total fair values
of the options granted during the years ended December 31, 2005, 2004 and 2003 were computed to be approximately $160 thousand, $2.3 million and $1.0 million, respectively. If the Company had accounted for these plans in accordance with SFAS
No. 123 and included the amortization expense related to options vesting each year, the Companys reported and pro forma net loss and net loss per share for the years ended December 31, 2005, 2004 and 2003 would have been as follows
(in thousands, except per share data):



|                                                                                                         |  |      |          |   |      |   |        |      |  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                         |  | 2005 |          |   | 2004 |   |        | 2003 | 
|Net loss:                                                                                                |  |      |          |   |      |   |        |      |  |   |         |  
|As reported                                                                                              |  | $    | (103,386 | ) |      | $ | (3,979 | )    |  | $ | (27,035 | )
|Incremental stock based compensation expense determined pursuant to SFAS 123, net of related tax effects |  |      | (1,819   | ) |      |   | (1,206 | )    |  |   | (1,440  | )
|                                                                                                         |  |      |          |   |      |   |        |      |  |   |         |  
|Pro forma net loss                                                                                       |  | $    | (105,205 | ) |      | $ | (5,185 | )    |  | $ | (28,475 | )
|                                                                                                         |  |      |          |   |      |   |        |      |  |   |         |  
|Diluted loss per common share:                                                                           |  |      |          |   |      |   |        |      |  |   |         |  
|As reported                                                                                              |  | $    | (3.59    | ) |      | $ | (0.14  | )    |  | $ | (0.97   | )
|Pro forma                                                                                                |  |      | (3.66    | ) |      |   | (0.18  | )    |  |   | (1.02   | )



On December 9,
2005, the Company accelerated the vesting of 247 thousand stock options, representing 15% of the Companys outstanding options. This action resulted in an increase in incremental stock based compensation expense of $663 thousand, net of
tax. The decision to accelerate vesting of these options was made primarily to avoid recognizing the related compensation cost in future periods upon the adoption of SFAS No. 123(R), Share-Based Payment for options with exercise
prices significantly higher than the market price.



See
 Accounting Pronouncements below for discussion of recent accounting pronouncements impacting stock based compensation.



Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board issued Statement No. 151, Inventory Costs (SFAS No. 151).
SFAS No. 151 amends Accounting Research Bulletin No. 43, chapter 4, Inventory Pricing. It states that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage)



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



should be recognized as current period charges. In addition, this statement requires that the allocation of overhead costs be based upon normal capacity for
the production facilities and that any overhead costs not allocated due to lower production be recognized as current period charges and not capitalized in inventory. The effective date of this statement is for fiscal years beginning after
June 15, 2005. The Company does not believe the adoption of this statement will have a material impact on its financial statements.



In December 2004, the Financial Accounting Standards Board issued Statement No. 153, Exchanges of Nonmonetary Assets (SFAS
No. 153). SFAS No. 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions. This statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The effective date of this statement is for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement did not have a
material impact on the Companys financial statements.



In
December 2004, the Financial Accounting Standards Board issued Statement No. 123(R), Share-Based Payment (SFAS 123R) which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (FAS 123). SFAS 123R
supersedes APB 25, Accounting for Stock Issued to Employees, and amends SFAF No. 95, Statement of Cash Flows. The approach in SFAS 123R is generally similar to the approach described in SFAS 123. However, SFAS 123R requires
all share-based payments to employees, including grants of employee stock options, to be recognized in the earnings statements based on their fair values. Pro forma disclosure will no longer be an alternative.



The Company adopted SFAS 123R as of January 1, 2006 using the modified
prospective method. Under this transition method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on
the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. As permitted by SFAS 123, through December 31, 2005 we accounted for share-based payments to
employees using APB 25s intrinsic value method and, as such, generally have not recognized compensation costs for employee stock options. We estimate that pretax compensation expense for stock options will be approximately $520 thousand in
2006.



SFAS 123R also requires the benefits of tax deductions
in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as previously required. This requirement will reduce net operating cash flows and increase net financing cash flows. The Company
cannot estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options. This change would not have impacted operating cash flows for the years ended December 31, 2005, 2004 and
2003 since the Company incurred tax losses and any such benefit would have been deferred.



In March 2005, the Financial Accounting Standards Board issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligation (FIN 47) an interpretation of SFAS
No. 143, Accounting for Asset Retirement Obligations. The primary objective of FIN 47 is to clarify that the term conditional asset retirement obligation as used in SFAS No. 143 refers to a legal obligation to
perform as asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may of may not be within the control of the entity. The interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective for fiscal years ending after December 15, 2005. The Company adopted this interpretation during the year ended
December 31, 2005 and it did not have a material impact on the Companys consolidated financial statements or disclosures.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



2. Shareholders Equity



Preferred Stock



The Company has authorized 5.0 million shares of $0.10 par value preferred stock. The preferred stock is issuable in one or more series and with such
designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the board of directors of the Company. The board of directors is authorized by the
Companys articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. No shares of preferred stock have been issued by the Company.



3. Acquisitions and Divesture



Each of the following acquisitions was accounted for applying the provisions
of SFAS No. 141 Business Combination. As a result, the Company recorded the assets and liabilities of the acquired companies at their estimated fair values with the excess of the purchase price over these amounts being recorded as
goodwill. Actual allocations of goodwill and other identifiable assets may change during the allocation period, generally one year following the date of acquisition. The financial statements for the years ended December 31, 2005, 2004 and 2003
reflect the operating results of the acquired businesses for the periods after their respective dates of acquisition.



Caraustar Northwest



In January 2003, the Company acquired its venture partners 50% interest in the equity of Caraustar Northwest, LLC, located in Tacoma, WA, for
approximately $695 thousand. The Tacoma facility, which manufactures tubes, cores and edge protectors and performs custom slitting for customers on the West coast, became a part of the tube, core and composite container segment.



Carolina Carton Plant



In December 2005, the Company acquired a folding carton plant in Charlotte,
North Carolina from the Sonoco Products Company for approximately $11.0 million. Ownership and risk of loss was transferred to the Company as of December 31, 2005 and the acquisition price was paid January 3, 2006. The Company believes
that this acquisition is in line with its long-term strategy and will fit well in the Companys folding carton and custom packaging segments operations. The Company allocated $3.1 million of the purchase price to current assets, $8.8
million to fixed assets and $900 thousand to current liabilities. There was no goodwill or other intangible asset associated with this acquisition.



Hunt Valley Corrugated Plant  Divestiture



In December 2005, the Company completed the sale of its corrugated box plant located in Hunt Valley, Maryland to Green Bay Packaging, Inc. for $16.8
million, of which $15.1 million was received on December 30, 2005. Of the total purchase price, $11.0 million was held in escrow in order to effect a like-kind tax exchange for the Charlotte Carton plant. This $11.0 million was classified as
restricted cash as of December 31, 2005. The remaining $1.7 million of the purchase price will be received in the first quarter of 2006 upon final calculations of working capital. Since this facility was the only corrugated operation within the
folding carton and custom packaging segment, and has clearly distinguishable cash flows, operationally and for financial reporting purposes, its results are reported as a component of discontinued operations. The Company recorded a $3.3 million
impairment loss associated with this divestiture which is recorded in discontinued operations.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



4. Goodwill and Other Intangible Assets



Goodwill



The following is a summary of the changes in the carrying amount of goodwill, by segment, for the years ended December 31, 2004 and 2005 (in
thousands):



|                                         |  |            |         |   |                |   |                           |  |   |                                   |   |       |   |        |  |   |         |  
|---------------------------------------- |  | ---------- | ------- | - | -------------- | - | ------------------------- |  | - | --------------------------------- | - | ----- | - | ------ |  | - | ------- | -
|                                         |  | Paperboard |         |   | RecoveredFiber |   | Carton andCustomPackaging |  |   | Tube, Core andCompositeContainers |   | Total |  
|Balance as of December 31, 2003 and 2004 |  | $          | 78,911  |   |                | $ | 3,777                     |  | $ | 43,340                            |   |       | $ | 57,102 |  | $ | 183,130 |  
|Goodwill impairment                      |  |            | (10,515 | ) |                |   |                          |  |   | (39,344                           | ) |       |   |       |  |   | (49,859 | )
|Disposal of Hunt Valley corrugated plant |  |            |        |   |                |   |                          |  |   | (3,996                            | ) |       |   |       |  |   | (3,996  | )
|                                         |  |            |         |   |                |   |                           |  |   |                                   |   |       |   |        |  |   |         |  
|Balance as of December 31, 2005          |  | $          | 68,396  |   |                | $ | 3,777                     |  |   |                                  |   |       | $ | 57,102 |  | $ | 129,275 |  
|                                         |  |            |         |   |                |   |                           |  |   |                                   |   |       |   |        |  |   |         |  



The Company recognized
a goodwill impairment of approximately $10.5 million in the paperboard segment due to the Companys decision to exit the coated recycled paperboard business. This impairment was recorded in discontinued operations. The Company recognized a $4.0
million disposal of goodwill in the folding carton and custom packaging segment associated with the divesture of the Hunt Valley corrugated plant. This impairment was also recorded in discontinued operations. As disclosed above in Note 1, a $39.3
million impairment was recorded based on the goodwill impairment test performed as of December 31, 2005.



Intangible Assets



As of December 31, 2005 and 2004, the Company had an intangible asset of $6.7 million, net of $1.9 million of accumulated amortization, and $7.2 million, net of $1.4 million of accumulated amortization, respectively, which is
classified with other assets. Amortization expense for the years ended December 31, 2005 and 2004 was $568 thousand. The intangible asset is associated with the acquisition of certain assets of the Smurfit Industrial Packaging Group and is
attributable to the acquired customer relationships. This intangible asset is being amortized over 15 years. Scheduled amortization of the intangible asset for the next five years is as follows (in thousands):



|                |  |   |      
|--------------- |  | - | -----
|2006            |  | $ | 568  
|2007            |  |   | 568  
|2008            |  |   | 568  
|2009            |  |   | 568  
|2010            |  |   | 568  
|                |  |   |      
|Five year total |  | $ | 2,840
|                |  |   |      



5. Discontinued Operations and
Assets Held for Sale



Discontinued Operations



On December 30, 2005, management and an authorized committee of the
Board of Directors approved the exit of the Companys coated recycled paperboard business, the specialty packaging division and the partition operations. The coated recycled paperboard business is a component of the paperboard segment and
consist of three paperboard mills located in Rittman, Ohio; Versailles, Connecticut; and Tama, Iowa. The specialty packaging division is a component of the folding carton and custom packaging segment and consists of five



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



facilities located in Robersonville, North Carolina; Bucyrus, Ohio; Strasburg, Ohio; Clifton, New Jersey and Pine Brook, New Jersey. The partition operations
are a component of the tube, core and composite container segment and consist of three facilities located in Litchfield, Illinois; Frenchtown, New Jersey and Covington, Georgia. The Company made the decision to exit these businesses due to recurring
losses, poor strategic fit with the Companys other assets and the long-term prospects for the businesses. The Company is evaluating sale opportunities and expects to sell these facilities within the next twelve months.



As discussed in Note 3 above, the company sold its Hunt Valley Corrugated
operation in December 2005. Since this operation was the only corrugated operation within the folding carton and custom packaging segment and is a component of that segment, the operating results have been reported as a discontinued operation in the
consolidated statements of operations.



The Company classified
the results of operations for these assets as discontinued operations in the consolidated statements of operations for all periods presented, therefore, certain line items reported in prior years were adjusted.



Operating Results Data



The following table shows the results of discontinued operations for the
three years ended December 31, 2005, 2004 and 2003:



|                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  
|----------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                      |  | For the Years Ended December 31, |         
|                                                      |  | 2005                             |          |   | 2004 |   |         | 2003 | 
|Sales                                                 |  | $                                | 206, 369 |   |      | $ | 188,790 |      |  | $ | 183,852 |  
|Cost of sales                                         |  |                                  | 197,816  |   |      |   | 179,197 |      |  |   | 174,291 |  
|Selling, general and administrative expenses          |  |                                  | 17,649   |   |      |   | 16,693  |      |  |   | 19,534  |  
|Restructuring and other impairment costs              |  |                                  | 97,296   |   |      |   | 9,463   |      |  |   | 417     |  
|                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  
|Loss from operations                                  |  |                                  | (106,392 | ) |      |   | (16,563 | )    |  |   | (10,390 | )
|Other (income) expense, net                           |  |                                  | (470     | ) |      |   | 210     |      |  |   | 152     |  
|                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  
|Loss from operations before benefit from income taxes |  |                                  | (105,922 | ) |      |   | (16,773 | )    |  |   | (10,542 | )
|Benefit for income taxes                              |  |                                  | 33,872   |   |      |   | 5,807   |      |  |   | 3,635   |  
|                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  
|Loss from discontinued operations                     |  | $                                | (72,050  | ) |      | $ | (10,966 | )    |  | $ | (6,907  | )
|                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  



In
December 2005, in connection with the decision to exit these operations and hold them for sale, the Company recorded pre-tax impairment charges of approximately $82.7 million. Approximately $74.6 million related to the property plant and equipment
associated with the Companys coated recycled paperboard business and approximately $8.1 million was related to the property plant and equipment of the Companys specialty packaging division. In addition, the Company also impaired
approximately $10.5 million of goodwill related to its coated recycled paperboard business.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



Assets and Liabilities Held for Sale



The assets classified as held for sale at December 31, 2005 are summarized below (in thousands):



|                                                |  |   |       
|----------------------------------------------- |  | - | ------
|Accounts receivable                             |  | $ | 19,251
|Inventory                                       |  |   | 12,167
|Property, plant and equipment                   |  |   | 43,621
|Other assets                                    |  |   | 1,626 
|                                                |  |   |       
|Assets of discontinued operations held for sale |  | $ | 76,665
|                                                |  |   |       
|Accounts payable                                |  | $ | 16,228
|Accrued compensation                            |  |   | 1,687 
|Notes payable                                   |  |   | 4,700 
|Other liabilities                               |  |   | 8,758 
|                                                |  |   |       
|Liabilities of discontinued operations          |  | $ | 31,373
|                                                |  |   |       



6. Equity Interest in
Unconsolidated Affiliates



Standard Gypsum



The Company owned a 50% interest in a limited liability company, Standard
Gypsum, L.P. (Standard) Standard owns two gypsum wallboard manufacturing facilities. One facility is located in McQueeney, Texas and the other is in Cumberland City, Tennessee. Standard is operated as a joint venture and is managed by
Temple-Inland, Inc., (Temple Inland) which also owns 50% of the joint venture. The Company accounted for its interest in Standard under the equity method of accounting. The Companys equity interest in the earnings of Standard for
the years ended December 31, 2005, 2004 and 2003 was $28.6 million, $20.6 million, and $6.8 million, respectively. The Company received distributions based on its equity interest in Standard of $26.5 million, $19.3 million, and $6.2 million in
2005, 2004 and 2003, respectively.



On January 17, 2006
the Company sold its 50% ownership interest in Standard to Standards other 50% owner, Temple-Inland. Pursuant to the purchase and sale agreement, Temple-Inland purchased the Companys 50% ownership interest for $150 million, which
resulted in a gain of approximately $134.0 million. Temple-Inland also assumed all of Standards $56.2 million in debt obligations and other liabilities of Standard. As a result of this transaction, the Company ceased to be entitled to further
distributions from Standard for all periods subsequent to January 1, 2006, and all of the rights and obligations as a partner in Standard pursuant to the Partnership Agreement for Standard, dated December 31, 2000, ceased. A final net cash
distribution is expected to be paid in the first quarter of 2006. The Company provided certain environmental indemnifications not to exceed $5.0 million for any claims related to events that occurred prior to the formation of the Standard joint
venture on April 1, 1996. This indemnification will terminate on January 17, 2011.



During 1999, Standard received financing from two industrial revenue bond issuances by Stewart County, Tennessee, totaling $56.2 million, in order to complete the financing for the construction of the Cumberland City,
Tennessee facility. Standard was the obligor under reimbursement agreements pursuant to which direct-pay letters of credit in the aggregate amount of approximately $56.2 million were originally issued for its account in support of the outstanding
industrial revenue bond obligations. Standard replaced these letters of credit in October 2003 with new direct-pay letters of credit in the aggregate amount of $57.4 million, issued by a replacement lender.



In October 2004, Standard redeemed these industrial revenue bonds in full
with the proceeds of drawings on the direct-pay letters of credit in the aggregate amount of $57.4 million. These letters of credit were



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



required to be repaid in full by October 21, 2005. The Companys obligation with respect to the reimbursement of these letters of credit drawings
were supported by a letter of credit in the face amount of $28.7 million, issued in favor of the Standard lender. This letter of credit was issued under the Companys senior credit facility and expired on October 24, 2005.



On September 22, 2005 Standard refinanced its outstanding letter of
credit reimbursement obligations with borrowings under a new term loan in the principal amount of $56.2 million, from a replacement lender. The term loan matures in full one year from the agreement date. The Company was severally obligated for 50%
of Standards obligations for principal, interest, fees and other amounts with respect to the term loan. The other Standard partner, Temple-Inland, had guaranteed 50% of Standards obligations. As of September 2005, the outstanding
principal balance under the term loan totaled $56.2 million, for one half of which the Company is obligated ($28.1 million). The Companys obligation with respect to the Standard term loan was supported by a letter of credit in the face amount
of $29.5 million, issued in favor of the Standard lender. This letter of credit was issued under the Companys senior credit facility and would have expired in October 2006. In connection with the term loan the Company amended its senior credit
facility effective September 20, 2005 to permit the issuance of this letter of credit.



As of December 31, 2005, the outstanding letters of credit totaled approximately $59.0 million for one-half of which the Company was obligated (approximately $29.5 million). If either joint venture partner had
defaulted under its support arrangements, the Companys total obligation would have been $29.5 million at December 31, 2005 and 2004, respectively. Based on the cash flows generated by Standard Gypsum, the Company assigned no carrying
value to the debt obligation guarantee.



The Company also
obtained an amendment, dated as of December 27, 2005 and effective as of January 17, 2006, to its $75 million senior revolving Credit Agreement, dated as of June 24, 2003, with Bank of America, N.A. as Administrative Agent, to permit
the sale transaction to Temple-Inland. The $29.5 million letter of credit was terminated as of January 25, 2006 since the Company is no longer obligated to guarantee one half of Standards $56.2 million in debt obligations.



Summarized financial information for Standard Gypsum at December 31,
2005 and January 1, 2005, and for the fiscal years ended December 31, 2005, January 1, 2005, and January 3, 2004 , respectively, is as follows (in thousands):



|                      |  |      |        |      |   |       
|--------------------- |  | ---- | ------ | ---- | - | ------
|                      |  | 2005 |        | 2004
|Current assets        |  | $    | 33,353 |      | $ | 27,990
|Noncurrent assets     |  |      | 62,016 |      |   | 61,968
|Current liabilities   |  |      | 12,873 |      |   | 11,631
|Current debt          |  |      | 56,200 |      |   | 56,200
|Long-term debt        |  |      |       |      |   |      
|Long-term liabilities |  |      |       |      |   |      
|Net assets            |  |      | 26,296 |      |   | 22,132



|                 |  |      |         |      |   |         |  |   |        
|---------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                 |  | 2005 |         | 2004 |   | 2003   
|Sales            |  | $    | 197,131 |      | $ | 153,714 |  | $ | 103,391
|Gross profit     |  |      | 71,995  |      |   | 52,594  |  |   | 22,820 
|Operating income |  |      | 60,580  |      |   | 44,126  |  |   | 14,806 
|Net income       |  |      | 57,164  |      |   | 41,210  |  |   | 13,598 



Note that Standard
Gypsums fiscal year-end is the Saturday closest to December 31.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



Premier Boxboard



During 1999, the Company formed a joint venture with Temple-Inland to own and operate a paperboard mill located in Newport,
Indiana. Under the joint venture agreement, the Company contributed $50.0 million to the joint venture, Premier Boxboard Limited, LLC, (Premier Boxboard) and Temple-Inland contributed the net assets of the mill valued at approximately
$100.0 million, and received $50.0 million in notes issued by Premier Boxboard. Upon formation, Premier Boxboard undertook an $82.0 million project to modify the mill to enable it to produce a new lightweight gypsum facing paper along with other
containerboard grades. Premier Boxboard is operated as a joint venture managed by the Company. The modified mill began operations on June 27, 2000. The Company and Temple-Inland each have a 50% interest in the joint venture, which is being
accounted for under the equity method of accounting. Funding for Premier Boxboard is generated by its internal cash flow and any cash contributions that the Company and our joint venture partner are permitted to make. Premier Boxboard generated
sufficient cash flow in 2004 to pay down the remaining $10.0 million revolving loan balance under the credit facility.



As of December 31, 2004, Premier Boxboard was the borrower under a credit facility with an aggregate outstanding principal amount of $632 thousand
consisting solely of an undrawn letter of credit. On January 5, 2005, Premier Boxboards revolving credit facility expired. The only outstanding obligation under the facility at the time of expiration was the $632 thousand letter of credit
balance, which expired on June 20, 2005 and was not renewed. Premier Boxboard placed $621 thousand of available cash into a trust account to replace the expired letter of credit.



The Company received $13.0 million and $1.0 million in cash distributions in 2005 and 2004, respectively, and no
distributions in 2003. The Companys equity interest in the earnings or loss of Premier Boxboard for 2005, 2004 and 2003 were approximately $8.4 million, $4.3 million and $2.2 million in earnings, respectively.



In addition to the general default risks discussed above with respect to the
joint ventures, a substantial portion of the assets of Premier Boxboard are pledged as security for $50.0 million in outstanding principal amount of senior notes under which Premier Boxboard is the obligor. These notes are guaranteed by
Temple-Inland, but are not guaranteed by the Company. In the event of default under these notes, the holders would also have recourse to the assets of Premier Boxboard that are pledged to secure these notes. Thus, any resulting default under these
notes could result in the assets of Premier Boxboard being utilized to satisfy creditor claims, which would have a material adverse effect on the financial condition and operations of Premier Boxboard and, accordingly, the Companys interest in
Premier Boxboard. As of December 31, 2005, Premier Boxboard was in compliance with its debt covenants.



Summarized financial information for Premier Boxboard at December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003,
respectively, is as follows (in thousands):



|                      |  |      |         |      |   |        
|--------------------- |  | ---- | ------- | ---- | - | -------
|                      |  | 2005 |         | 2004
|Current assets        |  | $    | 15,562  |      | $ | 20,845 
|Noncurrent assets     |  |      | 135,497 |      |   | 140,434
|Current liabilities   |  |      | 12,607  |      |   | 13,676 
|Long-term liabilities |  |      | 693     |      |   | 698    
|Long-term debt        |  |      | 50,000  |      |   | 50,000 
|Net assets            |  |      | 87,759  |      |   | 96,905 



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



|                 |  |      |         |      |   |         |  |   |       
|---------------- |  | ---- | ------- | ---- | - | ------- |  | - | ------
|                 |  | 2005 |         | 2004 |   | 2003   
|Sales            |  | $    | 122,063 |      | $ | 109,371 |  | $ | 89,818
|Gross profit     |  |      | 36,436  |      |   | 28,007  |  |   | 23,161
|Operating income |  |      | 20,909  |      |   | 12,949  |  |   | 9,016 
|Net income       |  |      | 16,873  |      |   | 8,654   |  |   | 4,387 



Additional
contingencies relating to the Premier Boxboard joint venture that could affect liquidity include possible additional capital contributions and buy-sell triggers which, under certain circumstances, give the Company and the joint venture partner
either the right, or the obligation, to purchase the others interest or to sell an interest to the other. The Company is required, to the extent necessary, to make additional capital contributions to enable the joint venture to meet existing
obligations. Under the Premier Boxboard joint venture agreement, in general, mutual buy-sell rights are triggered upon the occurrence of involuntary transfers, and in the event of change of control, actual or imminent, of Temple-Inland or its
subsidiaries or in the event of a Deadlock, as defined in the joint venture agreement. The buy-sell provisions are structured such that the Company is contemplated to be the purchaser in the event of any voluntary transfer of membership interest.



7. Senior Credit Facility and Long-Term Debt



At December 31, 2005 and 2004, total long-term debt consisted of the
following (in thousands):



|                                      |  |      |         |   |      |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                      |  | 2005 |         |   | 2004 |  
|Senior credit facility                |  | $    |        |   |      | $ |        |  
|97/8%
senior subordinated notes       |  |      | 257,500 |   |      |   | 265,000 |  
|73/8%
senior notes                    |  |      | 189,750 |   |      |   | 189,750 |  
|71/4%
senior notes                    |  |      | 29,000  |   |      |   | 29,000  |  
|Other notes payable (1)               |  |      | 4,955   |   |      |   | 9,735   |  
|Realized interest rate swap gains (2) |  |      | 11,185  |   |      |   | 12,736  |  
|                                      |  |      |         |   |      |   |         |  
|Total debt                            |  |      | 492,390 |   |      |   | 506,221 |  
|Less current maturities               |  |      | (85     | ) |      |   | (80     | )
|                                      |  |      |         |   |      |   |         |  
|Total long-term debt                  |  | $    | 492,305 |   |      | $ | 506,141 |  
|                                      |  |      |         |   |      |   |         |  

---

|(1) | At December 31, 2005, industrial revenue bonds (the Sprague bonds) of $4.7 million are included in current liabilities of discontinued operations and are not reflected in the
schedule above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Net of original issuance discounts and accumulated discount amortization. As described below under Interest Rate Swap Agreements, realized gains resulting from unwinding
interest rate swaps are recorded as a component of debt and will be accreted as a reduction to interest expense over the remaining term of the debt.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The carrying value of total debt outstanding at December 31, 2005 maturing during the next five years and thereafter is
as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2006       |  | $ | 85     
|2007       |  |   | 95     
|2008       |  |   | 100    
|2009       |  |   | 196,195
|2010       |  |   | 26,934 
|Thereafter |  |   | 268,981
|           |  |   |        
|Total debt |  | $ | 492,390
|           |  |   |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



Senior Credit Facility



Effective June 24, 2003, the Company completed a refinancing of its senior credit facility. This facility provides for
a revolving line of credit of $75.0 million and is secured primarily by a first priority security interest in the Companys accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing
base requirements established by eligible accounts receivable and inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. As of December 31, 2005 and 2004,
no borrowings were outstanding under the facility; however, an aggregate of $37.5 million and $38.4 million in letter of credit obligations were outstanding at December 31, 2005 and 2004, respectively. Availability under the facility at
December 31, 2005 was limited to $37.5 million after taking into consideration outstanding letter of credit obligations.



Borrowings under the facility bear interest at a rate equal to, at our option, either (1) the base rate (which is the prime rate most recently
announced by Bank of America, N.A., the administrative agent under the facility) plus a margin of between (0.25%) and 0.25% or (2) the adjusted London Interbank Offered Rate (LIBOR) plus a margin of between 1.50% and 2.00%, with the
applicable margin to be set based on the Companys levels of available cash. The undrawn portion of the facility is subject to a facility fee at an annual rate of 0.375%. Outstanding letters of credit are subject to an annual fee equal to the
applicable margin for LIBOR based loans. At December 31, 2005, the applicable interest margin for Base Rate borrowings was (0.25%) and the applicable interest margin for LIBOR based borrowings was 1.50%.



The facility contains covenants that restrict, among other things, the
Companys ability and its subsidiaries ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or
acquisitions, enter into certain transactions with affiliates, make capital expenditures in excess of $30.0 million per year or change the nature of the Companys business. The facility also contains a fixed charge coverage ratio covenant,
which applies only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts receivable and inventory (less reserves and
aggregate credit outstandings) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstandings) in excess of $37.5 million. The fixed charge ratio covenant did not require measurement at
December 31, 2005 or 2004.



The facility contains events
of default including, but not limited to, nonpayment of principal or interest, violation of covenants, incorrectness of representations and warranties, cross-default to other indebtedness, bankruptcy and other insolvency events, material judgments,
certain ERISA events, actual or asserted invalidity of loan documentation and certain changes of control of the Company.



Senior and Senior Subordinated Notes



On March 29, 2001, the Company issued $285.0 million of 97/8% senior subordinated notes due April 1, 2011 and $29.0 million of 71/4% senior notes due May 1, 2010. These senior subordinated notes and senior notes were issued at a discount to yield effective interest rates of 10.5% and 9.4%, respectively. After taking into account realized gains from
unwinding various interest rate swap agreements, the current effective interest rate of the 97/8% senior
subordinated notes is 9.4%. See  Interest Rate Swap Agreements below regarding transactions that lowered the effective interest rate of the 97/8% senior subordinated notes. These publicly traded senior subordinated and senior notes are unsecured, but are guaranteed, on a joint and several basis, by all but one, of the
Companys domestic subsidiaries.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



On or after April 1, 2006, the Company may redeem all or a part of the senior subordinated notes
at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years
indicated below:



|                    |  |            |  
|------------------- |  | ---------- | -
|Year                |  | Percentage |  
|2006                |  | 105.25     | %
|2007                |  | 103.50     | %
|2008                |  | 101.75     | %
|2009 and thereafter |  | 100.00     | %



During 2004 and 2005,
the Company purchased $20.0 million and $7.5 million, respectively, of these notes in the open market. The Companys Board of Directors has authorized purchases of up to an additional $5 million of the Companys senior subordinated notes
as market conditions warrant; however, these purchases may be limited by compliance with certain debt agreements.



On June 1, 1999, the Company issued $200.0 million in aggregate principal amount of 73/8% senior notes due June 1, 2009. The 73/8% senior notes were issued at a discount to yield an effective interest rate of 7.47% and pay interest semiannually. After taking into account realized gains from unwinding various interest rate swap
agreements, the current effective interest rate of the 73/8% senior notes is 6.3%. See  Interest
Rate Swap Agreements below regarding transactions that lowered the effective interest rate of the 73/8%
senior notes. The 73/8% senior notes are unsecured obligations of the Company. As of December 31, 2005, the
Company had purchased an aggregate of $10.3 million of these notes in the open market.



Interest Rate Swap Agreements



During 2001 and 2002, the Company entered into multiple interest rate swap agreements which had payment and expiration dates that corresponded to the
terms of the note obligations they covered. These agreements effectively converted the Companys fixed rate 97/8% senior subordinated notes and the 73/8% senior notes into variable rate obligations. These
agreements were subsequently unwound except for a $135.0 million interest rate swap agreement outstanding as of December 31, 2002. The gains on the interest rate swaps unwound in 2001 and 2002 generated cash proceeds to the Company of $11.7
million. These gains were recorded as a component of debt and will be accreted to interest expense over the life of the notes.



In January 2003, the Company effectively unwound $85.0 million of its $135.0 million interest rate swap agreement related to the 97/8% senior subordinated notes by assigning the Companys rights and obligations under the swap to one of the
Companys lenders under the senior credit facility. In exchange, the Company received approximately $4.3 million. The $4.3 million gain, which was classified as a component of debt, will be accreted to interest expense over the life of the
notes and will partially offset the increase in interest expense. The gain lowered the effective interest rate of the 97/8% senior subordinated notes by approximately 30 basis points.



In May 2003, the Company unwound the remaining $50.0 million of its interest rate swap agreement related to the 97/8% senior subordinated notes, and received approximately $4.6 million from the bank counter-party. Simultaneously, the Company unwound $50.0 million of its remaining interest rate swap agreement related
to the 73/8% senior notes, and received approximately $7.1 million. The $11.7 million gain, which was classified
as a component of debt, will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The $4.6 million gain lowered the effective interest rate of the 97/8% senior subordinated notes by approximately 30 basis points. The $7.1 million gain lowered the effective interest
rate of the 73/8% senior notes by approximately 80 basis points.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



In July 2003, the Company entered into an interest rate swap agreement in the notional amount of
$50.0 million. This agreement, which had payment and expiration dates that corresponded to the terms of the note obligations it covered, effectively converted $50.0 million of the Companys fixed rate 97/8% senior subordinated notes into variable rate obligations. The variable rates were based on six-month LIBOR plus a
fixed margin.



In December 2003, the Company entered
into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which had payment and expiration dates that corresponded to the terms of the note obligation it covered, effectively converted $50.0 million of the
Companys fixed rate 97/8% senior subordinated notes into variable rate obligations. The variable rates
were based on six-month LIBOR plus a fixed margin.



In
March 2004, the Company unwound the July 2003 $50.0 million interest rate swap agreement related to the 97/8%
senior subordinated notes and received approximately $380 thousand from the bank counter-party. The $380 thousand gain, which is classified as a component of debt, will be accreted to interest expense over the remaining life of the notes and will
partially offset the increase in interest expense.



In
April 2004, the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which had payment and expiration dates that corresponded to the terms of the note obligations it covered, effectively
converted $50.0 million of the Companys fixed rate 97/8% senior subordinated notes into variable rate
obligations. The variable rates were based on six-month LIBOR plus a fixed margin.



In October 2004, the Company unwound the $50.0 million December 2003 and the $50.0 million April 2004 interest rate swap agreements related to the 97/8% senior subordinated notes and received approximately $5 thousand from the bank counter-party. The unwinding of these two agreements eliminated all of the Companys
remaining interest rate swap agreements.



In March 2005,
the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, effectively converted $50.0 million of the Companys fixed rate 73/8% senior notes into variable rate obligations. The variable rates were based on three-month LIBOR plus a fixed margin.



In June 2005, the Company unwound the March 2005 $50.0 million interest rate
swap agreement related to the 73/8% senior notes and received approximately $826 thousand from the bank counter
party. The $826 thousand gain was classified as a component of debt, and is being accreted over the remaining life of the notes and will partially offset the increase in interest expense.



Under the provisions of SFAS No. 133, the Company designated and
accounted for its interest rate swap agreements as fair value hedges. The Company has assumed no ineffectiveness with regard to these agreements as they qualified for the short-cut method of accounting for fair value hedges of debt obligations, as
prescribed by SFAS No. 133. The Company has no liability related to interest rate swaps at December 31, 2005.



8. Commitments and Contingencies



Leases



The Company leases certain buildings, machinery, and transportation equipment under operating lease agreements expiring at various dates through 2022.
Certain rental payments for transportation equipment are based on a fixed rate plus an additional contingent amount for mileage. Rental expense on operating leases for the years ended December 31, 2005, 2004 and 2003 is as follows (in
thousands):



|                   |  |      |        |      |   |        |  |   |       
|------------------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                   |  | 2005 |        | 2004 |   | 2003  
|Minimum rentals    |  | $    | 16,056 |      | $ | 19,374 |  | $ | 21,363
|Contingent rentals |  |      | 1,073  |      |   | 348    |  |   | 463   
|                   |  |      |        |      |   |        |  |   |       
|Total              |  | $    | 17,129 |      | $ | 19,722 |  | $ | 21,826
|                   |  |      |        |      |   |        |  |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



The following is a schedule of future minimum rental payments required under leases that have initial
or remaining noncancelable lease terms in excess of one year as of December 31, 2005 (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2006       |  | $ | 14,142
|2007       |  |   | 11,519
|2008       |  |   | 7,087 
|2009       |  |   | 4,497 
|2010       |  |   | 3,286 
|Thereafter |  |   | 12,725
|           |  |   |       
|Total      |  | $ | 53,256
|           |  |   |       



Litigation



The Company is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Companys financial condition or results of operations or cash flows.



Contingencies



During the year ended December 31, 2005 the Company recorded a $1.9 million reserve for a customer claim arising from the
Companys specialty packaging division. The reserve represents the Companys estimated potential liability for costs associated with a product recall, for which the customer claims that the product was packaged in a manner not compliant
with customer quality assurance protocols. The Company expects to resolve this matter in 2006.



9. Loss Per Share



The
following is a reconciliation of the numerators and denominators of the basic and diluted loss per share computations for net loss (in thousands, except per share information):



|                                                             |  |                                  |         |   |      |   |        |  |   |         |  
|------------------------------------------------------------ |  | -------------------------------- | ------- | - | ---- | - | ------ |  | - | ------- | -
|                                                             |  | For the Years Ended December 31, |        
|                                                             |  | 2005                             |         |   | 2004 |   | 2003   | 
|Income (loss) from continuing operations                     |  | $                                | (31,336 | ) |      | $ | 6,987  |  | $ | (20,128 | )
|Weighted average number of common shares outstanding basic   |  |                                  | 28,774  |   |      |   | 28,479 |  |   | 27,993  |  
|Common share equivalents                                     |  |                                  |        |   |      |   | 175    |  |   |        |  
|                                                             |  |                                  |         |   |      |   |        |  |   |         |  
|Weighted average number of common shares outstanding-diluted |  |                                  | 28,774  |   |      |   | 28,654 |  |   | 27,993  |  
|                                                             |  |                                  |         |   |      |   |        |  |   |         |  
|Loss per share-basic                                         |  | $                                | (1.09   | ) |      | $ | 0.25   |  | $ | (0.72   | )
|                                                             |  |                                  |         |   |      |   |        |  |   |         |  
|Loss per share-diluted                                       |  | $                                | (1.09   | ) |      | $ | 0.25   |  | $ | (0.72   | )
|                                                             |  |                                  |         |   |      |   |        |  |   |         |  



Since all periods
presented were net losses, the impact of the dilutive effect of stock options, if any, was not added to the weighted average shares. The number of options not included in the computation of diluted weighted average shares, because they were
antidilutive, for the years ended 2005, 2004 and 2003 were 1,618,959, 1,817,187 and 2,099,965, respectively.



10. Stock Option and Deferred Compensation Plans



Director Equity Plan



The Companys Board of Directors participates in a director equity plan. Under the plan, directors who are not employees or former employees of the Company (Eligible Directors) are paid a portion of their fees in the
Companys common stock. Additionally, each Eligible Director is granted options each year to purchase 1,000 shares of the Companys common stock at an option price equal to the fair market value at the date of grant.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



These options are immediately exercisable and expire ten years following the grant. A maximum of 100 thousand shares of common stock may be granted
under this plan. During 2004 and 2003, 5 thousand and 11 thousand shares, respectively, of common stock were issued under this plan. Options to purchase 7 thousand and 6 thousand shares of common stock were issued under this plan
in 2004 and 2003 , respectively. After the grant in July of 2004 there were no remaining authorized shares of common stock that could be issued under this plan which effectively terminated this plan.



Incentive Stock Option and Bonus Plans



During 1992, the Companys board of directors and shareholders approved
a qualified incentive stock option and bonus plan (the 1993 Plan), which became effective January 1, 1993 and terminated December 31, 1997. Under the provisions of the 1993 Plan, selected members of management received one
share of common stock (bonus share) for each two shares purchased at market value. In addition, the 1993 Plan provided for the issuance of options at prices not less than market value at the date of grant. The options and bonus shares
awarded under the 1993 Plan were subject to four-year and five-year respective vesting periods. The options expire after eight years. The Companys board of directors authorized 1.4 million common shares for grant under the 1993 Plan. No
compensation expense was recorded in 2005, 2004, or 2003 related to this plan.



During 1998, the Companys board of directors and shareholders approved a qualified incentive stock option and bonus plan (the 1998 Plan), which became effective March 10, 1998. Under the
provisions of the 1998 Plan, selected members of management could receive the right to acquire one share of restricted stock contingent upon the direct purchase of two shares of unrestricted common stock at market value. In addition, the 1998 Plan
provided for the issuance of both traditional and performance stock options at market price and 120% of market price, respectively. Restricted stock and options awarded under the 1998 Plan are subject to five-year vesting periods and the options
expire after ten years. The Companys board of directors authorized 3.8 million common shares for grant under the 1998 Plan. The plan expired in 2003 and no more options will be granted under this plan. The Company issued no restricted
stock in 2005 and issued 8 thousand and 1thousand shares in 2004 and 2003, respectively. The Company recorded approximately $22 thousand, $55 thousand and $69 thousand of compensation expense related to the issuance of restricted stock during
2005, 2004 and 2003, respectively.



Long-Term Equity Incentive Plan



In May 2003, the Companys board of directors
and shareholders approved a long-term equity incentive plan, which became effective May 7, 2003. Under the provisions of the plan, participating key employees are rewarded, in the form of common share purchase options, restricted common shares,
or a combination of both, for improving the Companys financial performance in a manner that is consistent with the creation of increased shareholder value. All options awarded under the plan will have an exercise price not less than 100% of
the fair market value of a share of common stock on the date of grant. Options will have a vesting schedule of up to five years and expire after ten years. The restricted shares issued by the Company have a vesting schedule up to seven years from
the date of grant or accelerated vesting occurs when the price of Caraustar stock meets a specific target price and trades at this price or higher for twenty consecutive trading days. The Companys board of directors authorized and shareholders
approved an aggregate of 4.0 million common shares for issuance under this plan.



In May 2005, the shareholders approved an amendment to allow the Companys directors to participate in the Long-Term Equity incentive plan. Under this plan, each director that is not an employee of the Company is
granted 3,000 options annually.



During the years ended
December 31, 2005, 2004 and 2003, 32 thousand, 254 thousand and 233 thousand stock options were issued, respectively. Restricted stock of 2 thousand, 252 thousand, and 230 thousand of restricted shares were granted
under this plan in 2005, 2004 and 2003, respectively. The number of outstanding



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



restricted shares is 238,294 at a weighted average share grant price of $17.37 as of December 31, 2005. The Company recorded compensation expense of
$811 thousand, $1.9 million and $89 thousand related to the issuance of restricted stock in 2005, 2004 and 2003, respectively.



On March 2, 2006, the Companys Board of Directors approved the issuance of 230 thousand stock options valued at $1.4 million using the
Black-Scholes option pricing model.



The following is a summary
of stock option activity for the years ended December 31, 2005, 2004 and 2003:



|                                 |  |           |   |  |                       |      
|-------------------------------- |  | --------- | - |  | --------------------- | -----
|                                 |  | Shares    |   |  | Weighted AveragePrice
|Outstanding at December 31, 2002 |  | 2,191,788 |   |  | $                     | 18.14
|Granted                          |  | 239,600   |   |  |                       | 8.13 
|Forfeited                        |  | (255,747  | ) |  |                       | 20.02
|Exercised                        |  | (76,426   | ) |  |                       | 7.78 
|                                 |  |           |   |  |                       |      
|Outstanding at December 31, 2003 |  | 2,099,215 |   |  | $                     | 17.14
|Granted                          |  | 261,294   |   |  |                       | 16.86
|Forfeited                        |  | (197,685  | ) |  |                       | 21.31
|Exercised                        |  | (345,637  | ) |  |                       | 7.86 
|                                 |  |           |   |  |                       |      
|Outstanding at December 31, 2004 |  | 1,817,187 |   |  | $                     | 18.42
|Granted                          |  | 32,000    |   |  |                       | 10.71
|Forfeited                        |  | (202,072  | ) |  |                       | 25.80
|Exercised                        |  | (28,156   | ) |  |                       | 8.39 
|                                 |  |           |   |  |                       |      
|Outstanding at December 31, 2005 |  | 1,618,959 |   |  | $                     | 17.51
|                                 |  |           |   |  |                       |      
|Options exercisable at:          |  |           |   |  |                       |      
|December 31, 2005                |  | 1,390,797 |   |  | $                     | 19.04
|December 31, 2004                |  | 1,131,421 |   |  | $                     | 21.83
|December 31, 2003                |  | 1,173,649 |   |  | $                     | 21.75



The following table is
a summary of information about the Companys stock options outstanding at December 31, 2005:



|                        |  |                                  |  |                                            |  |                                 |       |                                  |           |                                 |   |      
|----------------------- |  | -------------------------------- |  | ------------------------------------------ |  | ------------------------------- | ----- | -------------------------------- | --------- | ------------------------------- | - | -----
|Range of Exercise Price |  | Outstanding at December 31, 2005 |  | Weighted Average Remaining Life (In Years) |  | Weighted Average Exercise Price |       | Exercisable at December 31, 2005 |           | Weighted Average Exercise Price
|$  6.94    $16.88      |  | 639,543                          |  | 6.7                                        |  | $                               | 8.92  |                                  | 411,381   |                                 | $ | 9.31 
|17.05      23.75       |  | 596,290                          |  | 5.8                                        |  |                                 | 18.61 |                                  | 596,290   |                                 |   | 18.61
|24.44      28.50       |  | 186,189                          |  | 2.8                                        |  |                                 | 25.73 |                                  | 186,189   |                                 |   | 25.73
|30.90      40.80       |  | 196,937                          |  | 2.6                                        |  |                                 | 34.34 |                                  | 196,937   |                                 |   | 34.34
|                        |  |                                  |  |                                            |  |                                 |       |                                  |           |                                 |   |      
|$  6.94    $40.80      |  | 1,618,959                        |  | 5.4                                        |  | $                               | 17.51 |                                  | 1,390,797 |                                 | $ | 19.04



Deferred Compensation Plans



The Parent Company and certain of its subsidiaries
have deferred compensation plans for several of their present and former officers and key employees. These plans provide for retirement, involuntary termination, and death benefits. The involuntary termination and retirement benefits are accrued
over the period of active employment from the execution dates of the plans to the normal retirement dates (age 65) of the employees covered. In 2005 and 2004 the Company recalculated a reduction in the deferred compensation liability which resulted
in a credit to expense of $4 thousand and $173 thousand, respectively. Deferred Compensation expense of $190 thousand was recorded in 2003. Accruals of approximately $856 thousand and $1.1 million related to these plans are included in other
liabilities in the accompanying balance sheets at December 31, 2005 and 2004.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



The Company also provides a voluntary nonqualified deferred compensation plan for key employees and
the Companys board of directors. The plan is funded by the participants. The plan allows employees to defer compensation on a pre-tax basis via contributions to a grantor trust. The plan provides the participants with six investment options to
invest on a tax-deferred basis.



11. Pension Plan and Other Postretirement
Benefits



Pension Plan and Supplemental Executive Retirement Plan



Substantially all of the Companys employees
hired prior to December 31, 2004 participate in a noncontributory defined benefit Pension Plan (the Pension Plan). The Pension Plan calls for benefits to be paid to all eligible employees at retirement based primarily on years of
service with the Company and compensation rates in effect near retirement. The Pension Plans assets consist of shares held in collective investment funds. The Companys policy is to fund benefits attributed to employees service to
date as well as service expected to be earned in the future. The Company made a $13.1 million contribution to the Pension Plan in 2005, no contributions in 2004 and approximately $11.7 million in 2003. Based on estimates at December 31, 2005,
no contributions will be required during 2006.



In September
2004, the Company announced the suspension of any further pension benefits for certain employees covered by the defined benefit pension plan. The suspension was effective December 31, 2004 and froze the accrued pension benefits for employees
not subject to a collective bargaining agreement and employees that do not qualify for continued benefits based on years of service and age requirements. The impact of the curtailment on the Companys pension liability and 2004 pension expense
was a reduction in the projected benefit obligation of $3.9 million and an increase in expense of approximately $97 thousand.



Certain executives participate in a supplemental executive retirement plan (SERP), which provides retirement benefits to participants based on
average compensation. The SERP is unfunded at December 31, 2005.



Pension expense for the Pension Plan and the SERP includes the following components for the years ended December 31, 2005, 2004 and 2003 (in thousands):



|                                              |  |      |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | 2005 |        |   | 2004 |   |        | 2003 | 
|Service cost of benefits earned               |  | $    | 3,340  |   |      | $ | 5,933  |      |  | $ | 5,266  |  
|Interest cost on projected benefit obligation |  |      | 7,189  |   |      |   | 6,035  |      |  |   | 5,600  |  
|Settlement and curtailment                    |  |      | 681    |   |      |   | 96     |      |  |   |       |  
|Expected return on plan assets                |  |      | (6,412 | ) |      |   | (6,380 | )    |  |   | (5,083 | )
|Net amortization and deferral                 |  |      | 5,209  |   |      |   | 3,525  |      |  |   | 4,207  |  
|                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net pension expense                           |  | $    | 10,007 |   |      | $ | 9,209  |      |  | $ | 9,990  |  
|                                              |  |      |        |   |      |   |        |      |  |   |        |  



Net pension expense
for 2006 is estimated to be $9.3 million.



Below is a summary
of benefits for the Pension and SERP plans that the Company expects to pay over the next ten years (in thousands):



|          |  |      |       |             |   |       
|--------- |  | ---- | ----- | ----------- | - | ------
|Years     |  | SERP |       | PensionPlan
|2006      |  | $    | 420   |             | $ | 4,673 
|2007      |  | $    | 278   |             | $ | 5,122 
|2008      |  | $    | 278   |             | $ | 5,529 
|2009      |  | $    | 278   |             | $ | 6,102 
|2010      |  | $    | 278   |             | $ | 6,583 
|2011-2015 |  | $    | 4,002 |             | $ | 41,256



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



The table below presents various obligation, plan asset and financial statement information for the
Pension Plan and the SERP as of the Companys measurement date, December 31, 2005 and 2004 (in thousands):



|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ---- | ------ | - | ------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                     |  | SERP |        |   | Pension Plan |  
|                                                                     |  | 2005 |        |   | 2004         |   |        | 2005 |  |   | 2004    |  
|Change in benefit obligation:                                        |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Projected benefit obligation at end of prior year                    |  | $    | 6,319  |   |              | $ | 6,119  |      |  | $ | 102,712 |   |  | $ | 91,584  |  
|Service cost                                                         |  |      | 280    |   |              |   | 205    |      |  |   | 3,060   |   |  |   | 5,728   |  
|Interest cost                                                        |  |      | 424    |   |              |   | 336    |      |  |   | 6,765   |   |  |   | 5,699   |  
|Actuarial (Gain) loss                                                |  |      | 1,096  |   |              |   | (363   | )    |  |   | 16,238  |   |  |   | 8,333   |  
|Curtailment                                                          |  |      |       |   |              |   |       |      |  |   |        |   |  |   | (3,892  | )
|Plan amendments                                                      |  |      | 977    |   |              |   | 22     |      |  |   | 894     |   |  |   | 687     |  
|Benefits paid                                                        |  |      |       |   |              |   |       |      |  |   | (5,196  | ) |  |   | (5,427  | )
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Projected benefit obligation at end of year                          |  | $    | 9,096  |   |              | $ | 6,319  |      |  | $ | 124,473 |   |  | $ | 102,712 |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Change in plan assets:                                               |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Fair value of plan assets at end of prior year                       |  | $    |       |   |              | $ |       |      |  | $ | 72,096  |   |  | $ | 73,322  |  
|Actual return on plan assets                                         |  |      |       |   |              |   |       |      |  |   | 6,858   |   |  |   | 4,201   |  
|Employer contributions                                               |  |      |       |   |              |   |       |      |  |   | 13,100  |   |  |   |        |  
|Benefits paid                                                        |  |      |       |   |              |   |       |      |  |   | (5,196  | ) |  |   | (5,427  | )
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Fair value of plan assets at end of year                             |  | $    |       |   |              | $ |       |      |  | $ | 86,858  |   |  | $ | 72,096  |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Funded status of the plans:                                          |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Ending funded status                                                 |  | $    | (9,096 | ) |              | $ | (6,319 | )    |  | $ | (37,615 | ) |  | $ | (30,616 | )
|Unrecognized transition obligation                                   |  |      | 683    |   |              |   | 796    |      |  |   |        |   |  |   |        |  
|Unrecognized prior service cost                                      |  |      | 931    |   |              |   | 37     |      |  |   | 1,513   |   |  |   | 1,695   |  
|Unrecognized net actuarial loss                                      |  |      | 2,323  |   |              |   | 1,277  |      |  |   | 49,865  |   |  |   | 38,642  |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Net amount recognized                                                |  | $    | (5,159 | ) |              | $ | (4,209 | )    |  | $ | 13,763  |   |  | $ | 9,721   |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Amounts recognized in the balance sheet:                             |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Accrued benefit liability                                            |  | $    | (6,368 | ) |              | $ | (4,832 | )    |  | $ | (35,509 | ) |  | $ | (28,203 | )
|Intangible asset                                                     |  |      | 1,209  |   |              |   | 623    |      |  |   | 1,513   |   |  |   | 1,695   |  
|Deferred tax asset                                                   |  |      |       |   |              |   |       |      |  |   | 18,081  |   |  |   | 13,716  |  
|Accumulated other comprehensive loss                                 |  |      |       |   |              |   |       |      |  |   | 29,678  |   |  |   | 22,513  |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Net amount recognized                                                |  | $    | (5,159 | ) |              | $ | (4,209 | )    |  | $ | 13,763  |   |  | $ | 9,721   |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Plans with accumulated benefit obligations in excess of plan assets: |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Projected benefit obligation                                         |  | $    | 9,096  |   |              | $ | 6,319  |      |  | $ | 124,473 |   |  | $ | 102,712 |  
|Accumulated benefit obligation                                       |  |      | 6,368  |   |              |   | 4,832  |      |  |   | 122,367 |   |  |   | 100,298 |  
|Plan assets                                                          |  |      |       |   |              |   |       |      |  |   | 86,858  |   |  |   | 72,096  |  
|                                                                     |  |      |        |  
|Other comprehensive income (loss):                                   |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|(Increase) decrease in additional minimum liability                  |  | $    | (587   | ) |              | $ | 879    |      |  | $ | (11,348 | ) |  | $ | (6,073  | )
|Increase (decrease) in intangible asset                              |  |      | 587    |   |              |   | (304   | )    |  |   | (182    | ) |  |   | 237     |  
|(Increase) decrease in deferred tax                                  |  |      |       |   |              |   | (218   | )    |  |   | 4,365   |   |  |   | 2,210   |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Other comprehensive income (loss)                                    |  | $    |       |   |              | $ | 357    |      |  | $ | (7,165  | ) |  | $ | (3,626  | )
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



In accordance with SFAS No. 87, the Company has recorded an additional minimum pension liability
related to its Pension Plan and SERP plan representing the excess of unfunded accumulated benefit obligations over previously recorded pension liabilities. The Companys additional minimum liability for its Pension Plan was $49.3 million and
$37.9 million at December 31, 2005 and 2004, respectively. The December 31, 2005 and 2004 additional minimum liability was offset by an intangible asset of $1.5 million and $1.7 million, respectively, which represents unrecognized prior
service cost. The additional minimum liability for the SERP totaled $1.2 million and $623 thousand at December 31, 2005 and 2004, respectively. The December 31, 2005 and 2004 additional liability for the SERP was offset by an intangible
asset of $1.2 million and $623 thousand, respectively.



The
determination of the Companys pension expense and benefit obligation is dependent on its selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the weighted average discount
rate, the weighted average expected rate of return on plan assets and the weighted average rate of compensation increase. The following table is a summary of the significant assumptions used to determine the projected benefit obligations as of:



|                                               |  |              |   |  |      |  
|---------------------------------------------- |  | ------------ | - |  | ---- | -
|                                               |  | December 31, |  
|                                               |  | 2005         |   |  | 2004 |  
|Weighted average discount rate                 |  | 5.75         | % |  | 5.75 | %
|Weighted average rate of compensation increase |  | 3.00         | % |  | 3.00 | %



The following table is
a summary of the significant assumptions to determine net periodic pension expense for the years ended:



|                                                        |  |              |   |  |      |   |  |      |  
|------------------------------------------------------- |  | ------------ | - |  | ---- | - |  | ---- | -
|                                                        |  | December 31, |  
|                                                        |  | 2005         |   |  | 2004 |   |  | 2003 |  
|Weighted average discount rate                          |  | 5.75         | % |  | 6.25 | % |  | 6.75 | %
|Weighted average expected rate of return on plan assets |  | 8.50         | % |  | 9.00 | % |  | 9.00 | %
|Weighted average rate of compensation increase          |  | 3.00         | % |  | 3.00 | % |  | 3.00 | %



In developing the
weighted average discount rate, the Company evaluated input from its actuaries, including estimated timing of obligation payments and yields for long-term bonds that received one of the two highest ratings given by a recognized rating agency. The
discount rate, determined on this basis remained at 5.75% at December 31, 2005 and December 31, 2004. Based on analysis of the rating and maturity of the long-term bonds, the timing of payment obligations and the input from the
Companys actuaries, the Company concluded that a discount rate of 5.75% is appropriate and reflects the yield of a portfolio of high-quality bonds that has the same duration as the plan obligations. Future actual pension expense and benefit
obligations will depend on future investment performance, changes in future discount rates and various other factors related to populations participating in the Companys pension plans. A 0.25% change in the discount rate would result in a
change in the December 31, 2005, projected benefit obligation of approximately $4.4 million and would change estimated 2006 net pension expense by approximately $549 thousand.



In developing the Companys weighted average expected rate of return on plan assets, the Company evaluated such
criteria as return expectations by asset class, historical returns by asset class and long-term inflation assumptions. The Companys expected weighted average rate of return is based on an asset allocation assumption of 54% equity, 25% fixed
income and a 21% investment in a portfolio of hedge funds. The Company regularly reviews its asset allocation and periodically rebalances its investments to its targeted allocation when considered appropriate. As a result of this analysis, the
Company concluded that the expected weighted average



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



rate of return of 9.0% for December 31, 2004 should be lowered to 8.5% for December 31, 2005. A 0.25% change in the weighted average expected rate
of return would change estimated 2006 net pension expense by $218 thousand.



The Companys pension plan weighted-average asset allocations as of December 31, 2005 and 2004, respectively, were as follows:



|                                            |  |      |  |     
|------------------------------------------- |  | ---- |  | ----
|                                            |  | 2005 |  | 2004
|Large capitalization U.S. equity            |  | 31%  |  | 32% 
|Small capitalization U.S. equity            |  | 10%  |  | 10% 
|International equity                        |  | 13%  |  | 13% 
|                                            |  |      |  |     
|Total equity                                |  | 54%  |  | 55% 
|                                            |  |      |  |     
|Portfolio of hedge funds                    |  | 21%  |  | 19% 
|                                            |  |     
|Short term fixed                            |  |     |  | 3%  
|Fixed income (intermediate-term maturities) |  | 25%  |  | 23% 
|                                            |  |      |  |     
|Total fixed income                          |  | 25%  |  | 26% 
|                                            |  |      |  |     



The Companys
investment policy includes the following objectives:



| |  |  | Provide a long-term investment return greater than the actuarial assumptions.
| | - |  | -----------------------------------------------------------------------------



| |  |  | Maximize investment return commensurate with appropriate levels of risk.
| | - |  | ------------------------------------------------------------------------



| |  |  | Comply with the Employee Retirement Income Security Act of 1974 (ERISA) by investing the funds in a manner consistent with ERISAs fiduciary standards.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys policy is to allocate Pension
Plan funds based on percentages for each major asset category as follows:



|                                            |  |    |  
|------------------------------------------- |  | -- | -
|Large capitalization U.S. equity            |  | 34 | %
|Small capitalization U.S. equity            |  | 9  | %
|International equity                        |  | 12 | %
|                                            |  |    |  
|Total equity                                |  | 55 | %
|Investment in a portfolio of hedge funds    |  | 20 | %
|Short term fixed                            |  | 5  | %
|Fixed income (intermediate-term maturities) |  | 20 | %
|                                            |  |    |  
|Total fixed income                          |  | 25 | %



The Companys
actual investment allocation at December 31, 2005 approximates the policy above.



Other Postretirement Benefits



The
Company provides postretirement medical benefits to retired employees of certain of its subsidiaries. The Company accounts for these postretirement medical benefits in accordance with SFAS No. 106, Employers Accounting for
Postretirement Benefits Other than Pensions.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



Net periodic postretirement benefit cost for the years ended December 31, 2005, 2004 and 2003
included the following components (in thousands):



|                                                               |  |      |     |      |   |      |      |  |   |      |  
|-------------------------------------------------------------- |  | ---- | --- | ---- | - | ---- | ---- |  | - | ---- | -
|                                                               |  | 2005 |     | 2004 |   |      | 2003 | 
|Service cost of benefits earned                                |  | $    | 37  |      | $ | 24   |      |  | $ | 80   |  
|Interest cost on accumulated postretirement benefit obligation |  |      | 359 |      |   | 311  |      |  |   | 405  |  
|Amortization                                                   |  |      | 107 |      |   | (157 | )    |  |   | (290 | )
|                                                               |  |      |     |      |   |      |      |  |   |      |  
|Net periodic postretirement benefit cost                       |  | $    | 503 |      | $ | 178  |      |  | $ | 195  |  
|                                                               |  |      |     |      |   |      |      |  |   |      |  



Postretirement
benefits totaling $407 thousand, $578 thousand and $541 thousand were paid during 2005, 2004 and 2003, respectively. Benefit payments of $423 thousand are estimated for 2006.



Below is a summary of post retirement benefits that the Company expects to pay over the next ten years (in thousands):



|          |  |                          |      
|--------- |  | ------------------------ | -----
|Years     |  | Post Retirement Benefits
|2006      |  | $                        | 423  
|2007      |  | $                        | 445  
|2008      |  | $                        | 463  
|2009      |  | $                        | 500  
|2010      |  | $                        | 506  
|2011-2015 |  | $                        | 2,389



The accrued
postretirement benefit cost as of December 31, 2005 and 2004 consists of the following (in thousands):



|                                                  |  |      |        |   |      |   |        |  
|------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                  |  | 2005 |        |   | 2004 |  
|Change in benefit obligation:                     |  |      |        |   |      |   |        |  
|Projected benefit obligation at end of prior year |  | $    | 5,753  |   |      | $ | 5,542  |  
|Service cost                                      |  |      | 37     |   |      |   | 24     |  
|Interest cost                                     |  |      | 359    |   |      |   | 311    |  
|Actuarial loss                                    |  |      | 626    |   |      |   | 1,351  |  
|Amendments                                        |  |      | (51    | ) |      |   | (897   | )
|Benefits paid                                     |  |      | (407   | ) |      |   | (578   | )
|                                                  |  |      |        |   |      |   |        |  
|Projected benefit obligation at end of year       |  | $    | 6,317  |   |      | $ | 5,753  |  
|                                                  |  |      |        |   |      |   |        |  
|Funded status                                     |  | $    | (6,317 | ) |      | $ | (5,753 | )
|Unrecognized net loss                             |  |      | 3,587  |   |      |   | 3,172  |  
|                                                  |  |      |        |   |      |   |        |  
|Net amount recognized                             |  | $    | (2,730 | ) |      | $ | (2,581 | )
|                                                  |  |      |        |   |      |   |        |  



The accumulated
postretirement benefit obligations at December 31, 2005 and 2004 were determined using a weighted average discount rate of 5.65% and 5.75%, respectively. The rate of increase in the costs of covered health care benefits is assumed to be 10.0%
in 2005, decreasing 1.0% each year to 5.0% by the year 2010 and decreasing 0.5% to 4.5% by the year 2011. Increasing or decreasing the assumed health care costs trend rate by one percentage point would have increased or decreased the accumulated
postretirement benefit obligation as of December 31, 2005 by approximately $660 thousand and $565, respectively, and this would have increased or



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



decreased net periodic postretirement benefit cost by approximately $43 thousand and $37 thousand, respectively, for the year ended December 31, 2006.



Retirement Savings Plan (401(k) Plan)



The Company sponsors and maintains a 401(k) retirement savings plan that
permits participants to make contributions by salary deductions pursuant to Section 401(k) of the Internal Revenue Code. During 2003 and 2004, the Company matched 50% of contributions up to a maximum of 6% of compensation as defined by the
401(k) Plan. Effective January 1, 2005, the 401(k) plan matches 100% of contributions up to 3% of an employees salary and 50% of all contributions that are greater than 3% of employees salary but less than 5% of an employees
salary. The Company will make an additional contribution to all non-union employees based upon an employees years of service ranging from 1% for employees with less than 5 years of service up to 4% for employees with 25 or more years of
service. During the years ended December 31, 2005, 2004, and 2003, the Company recorded matching expense of approximately $5.7 million, $3.8 million, and $4.0 million, respectively, related to the 401(k) Plan.



12. Income Taxes



The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which
requires the use of the liability method of accounting for deferred income taxes.



The (benefit) provision for income taxes for the years ended December 31, 2005, 2004 and 2003 consisted of the following (in thousands):



|         |  |      |         |   |      |   |        |      |  |   |         |  
|-------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|         |  | 2005 |         |   | 2004 |   |        | 2003 | 
|Current: |  |      |         |   |      |   |        |      |  |   |         |  
|Federal  |  | $    |        |   |      | $ | 598    |      |  | $ | (6,248  | )
|State    |  |      | 695     |   |      |   | 124    |      |  |   | 780     |  
|         |  |      |         |   |      |   |        |      |  |   |         |  
|         |  |      | 695     |   |      |   | 722    |      |  |   | (5,468  | )
|Deferred |  |      | (32,951 | ) |      |   | (2,256 | )    |  |   | (9,631  | )
|         |  |      |         |   |      |   |        |      |  |   |         |  
|         |  | $    | (32,256 | ) |      | $ | (1,534 | )    |  | $ | (15,099 | )
|         |  |      |         |   |      |   |        |      |  |   |         |  



Income tax expense
(benefit) is included in accompanying consolidated statement of operations as follows:



|                                    |  |      |         |   |      |   |        |      |  |   |         |  
|----------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                    |  | 2005 |         |   | 2004 |   |        | 2003 | 
|Continuing Operations               |  |      |         |   |      |   |        |      |  |   |         |  
|Current federal and state           |  | $    | 695     |   |      | $ | 598    |      |  | $ | (6,248  | )
|Deferred federal and state          |  |      | 921     |   |      |   | 3,675  |      |  |   | (5,216  | )
|                                    |  |      |         |   |      |   |        |      |  |   |         |  
|Tax expense continuing operations   |  |      | 1,616   |   |      |   | 4,273  |      |  |   | (11,464 | )
|Discontinued operations             |  |      |         |   |      |   |        |      |  |   |         |  
|Deferred federal and state          |  |      | (33,872 | ) |      |   | (5,807 | )    |  |   | (3,635  | )
|                                    |  |      |         |   |      |   |        |      |  |   |         |  
|Tax expense discontinued operations |  |      | (33,872 | ) |      |   | (5,807 | )    |  |   | (3,635  | )
|                                    |  |      |         |   |      |   |        |      |  |   |         |  
|Total income tax expense            |  | $    | (32,256 | ) |      | $ | (1,534 | )    |  | $ | (15,099 | )
|                                    |  |      |         |   |      |   |        |      |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



The effective tax rate on income (loss) from continuing operations before taxes differs from the U.S.
statutory rate. The following summary reconciles taxes at the U.S. statutory rate with the effective rates:



|                                 |  |       |    |  |      |   |  |      |   
|-------------------------------- |  | ----- | -- |  | ---- | - |  | ---- | --
|                                 |  | 2005  |    |  | 2004 |   |  | 2003 |   
|Federal                          |  | 35.0  | %  |  | 35.0 | % |  | 35.0 | % 
|State taxes, net federal benefit |  | 1.4   | %  |  | 1.1  | % |  | 2.2  | % 
|Non-deductible impaired goodwill |  | (39.7 | )% |  |     |   |  |     |   
|Other                            |  | (2.1  | )% |  | 1.2  | % |  | (1.1 | )%
|                                 |  |       |    |  |      |   |  |      |   
|Effective tax rate               |  | (5.4  | )% |  | 37.3 | % |  | 36.1 | % 
|                                 |  |       |    |  |      |   |  |      |   



Significant components
of the Companys deferred income tax assets and liabilities as of December 31, 2005 and 2004 are summarized as follows (in thousands):



|                                           |  |      |         |   |      |   |          |  
|------------------------------------------ |  | ---- | ------- | - | ---- | - | -------- | -
|                                           |  | 2005 |         |   | 2004 |  
|Deferred income tax assets:                |  |      |         |   |      |   |          |  
|Deferred employee benefits                 |  | $    | 324     |   |      | $ | 429      |  
|Postretirement benefits other than pension |  |      | 1,486   |   |      |   | 4,760    |  
|Post employment benefits                   |  |      | 15,701  |   |      |   | 12,507   |  
|Accounts receivable                        |  |      | 679     |   |      |   | 925      |  
|Insurance                                  |  |      | 3,344   |   |      |   | 2,810    |  
|Tax loss carryforwards and credits         |  |      | 54,813  |   |      |   | 46,004   |  
|Inventories                                |  |      | 2,121   |   |      |   | 2,687    |  
|Other                                      |  |      | 3,078   |   |      |   | 1,351    |  
|                                           |  |      |         |   |      |   |          |  
|Total deferred income tax assets           |  |      | 81,546  |   |      |   | 71,473   |  
|                                           |  |      |         |   |      |   |          |  
|Deferred income tax liabilities:           |  |      |         |   |      |   |          |  
|Depreciation and amortization              |  |      | (74,008 | ) |      |   | (105,779 | )
|Losses on contractual sales commitments    |  |      | (2,554  | ) |      |   | (4,446   | )
|                                           |  |      |         |   |      |   |          |  
|Total deferred income tax liabilities      |  |      | (76,562 | ) |      |   | (110,225 | )
|                                           |  |      |         |   |      |   |          |  
|Valuation allowance                        |  |      | (13,424 | ) |      |   | (7,533   | )
|                                           |  |      |         |   |      |   |          |  
|Net deferred tax liability                 |  | $    | (8,440  | ) |      | $ | (46,285  | )
|                                           |  |      |         |   |      |   |          |  



The tax effect of the
Companys federal net operating losses was $35.8 million and $28.2 million at December 31, 2005 and December 31, 2004. The Companys federal net operating loss was reclassified on the balance sheet from long-term deferred
liability to current deferred asset due to projected utilization in 2006. The tax effect of the Companys state net operating losses was $17.6 and $16.1 million at December 31, 2005 and 2004, respectively, and these losses will expire in
varying amounts between 2006 and 2025. The Company has a valuation allowance related to state losses of $12.0 million at December 31, 2005, which increased by $5.6 million from $6.4 million at December 31, 2004, for estimated future
impairment related to the state net operating losses. The Company also has state tax credit carryforwards of approximately $1.4 million and $1.7 million at December 31, 2005 and 2004, respectively, which will expire in varying amounts between
2005 and 2019. The Company has a valuation allowance related to state tax credits of $1.4 million at December 31, 2005, which increased by $0.3 from $1.1 million at December 31, 2004, for estimated future impairment related to the state
tax credit carryforwards.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



13. Quarterly Financial Data (Unaudited)



The following table sets forth certain quarterly financial data for the periods indicated (in thousands, except per share
data):



|                                                                                   |  |               |         |   |                |   |         |               |  |   |                |   |  |   |          |  
|---------------------------------------------------------------------------------- |  | ------------- | ------- | - | -------------- | - | ------- | ------------- |  | - | -------------- | - |  | - | -------- | -
|                                                                                   |  | First Quarter |         |   | Second Quarter |   |         | Third Quarter |  |   | Fourth Quarter |  
|2005                                                                               |  |               |         |   |                |   |         |               |  |   |                |   |  |   |          |  
|Sales from continuing operations                                                   |  | $             | 220,222 |   |                | $ | 217,223 |               |  | $ | 213,991        |   |  | $ | 210,985  |  
|Cost of sales from continuing operations                                           |  |               | 182,842 |   |                |   | 181,050 |               |  |   | 182,854        |   |  |   | 181,301  |  
|Income (loss) from continuing operations before income taxes and minority interest |  |               | 3,282   |   |                |   | 5,194   |               |  |   | 1,847          |   |  |   | (40,316  | )
|(Loss) income from discontinued operations before income taxes                     |  |               | (2,390  | ) |                |   | (1,480  | )             |  |   | (1,652         | ) |  |   | (100,400 | )
|Net income (loss)                                                                  |  |               | 454     |   |                |   | 114     |               |  |   | 45             |   |  |   | (103,999 | )
|Diluted loss per common share                                                      |  | $             | 0.02    |   |                | $ | 0.00    |               |  | $ | 0.00           |   |  | $ | (3.61    | )
|2004                                                                               |  |               |         |   |                |   |         |               |  |   |                |   |  |   |          |  
|Sales from continuing operations                                                   |  | $             | 212,922 |   |                | $ | 223,151 |               |  | $ | 223,694        |   |  | $ | 211,718  |  
|Cost of sales from continuing operations                                           |  |               | 178,168 |   |                |   | 180,269 |               |  |   | 186,289        |   |  |   | 176,445  |  
|(Loss) income from continuing operations before income taxes and minority interest |  |               | (7,634  | ) |                |   | 6,866   |               |  |   | (291           | ) |  |   | 12,503   |  
|(Loss) income from discontinued operations before income taxes                     |  |               | (2,327  | ) |                |   | (3,889  | )             |  |   | (194           | ) |  |   | (10,363  | )
|Net (loss) income                                                                  |  |               | (6,773  | ) |                |   | 1,743   |               |  |   | (596           | ) |  |   | 1,647    |  
|Diluted (loss) income per common share                                             |  | $             | (0.24   | ) |                | $ | 0.06    |               |  | $ | (0.02          | ) |  | $ | 0.06     |  



14. Segment Information



The Company operates principally in four business segments
organized by products. The paperboard segment consists of facilities that manufacture 100% recycled uncoated and clay-coated paperboard. The recovered fiber segment consists of facilities that collect and sell recycled paper and broker recycled
paper and other paper rolls. The tube, core, and composite container segment is principally made up of facilities that produce spiral and convolute-wound tubes, cores, and composite cans. The folding carton and custom packaging segment consists of
facilities that produce printed and unprinted folding cartons and set-up boxes and facilities that provide contract manufacturing and contract packaging services. Intersegment sales are recorded at prices which approximate market prices. Sales to
external customers located in foreign countries accounted for approximately 7.1%, 6.4% and 5.6% of the Companys sales for 2005, 2004 and 2003, respectively.



Operating results include all costs and expenses directly related to the segment involved. Corporate expenses include
corporate, general, administrative and unallocated information systems expenses.



Identifiable assets are accumulated by facility within each business segment. Corporate assets consist primarily of cash and cash equivalents; deferred tax assets; property, plant and equipment; and investments in
unconsolidated affiliates.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



The following table presents certain business segment information as of and for the years ended
December 31, 2005, 2004 and 2003 (in thousands):



|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|---------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ------- | -
|                                               |  | 2005 |           |   | 2004 |   |           | 2003 | 
|Sales (aggregate):                             |  |      |           |   |      |   |           |      |  |   |         |  
|Paperboard                                     |  | $    | 310,506   |   |      | $ | 325,095   |      |  | $ | 304,288 |  
|Recovered fiber                                |  |      | 168,759   |   |      |   | 147,398   |      |  |   | 96,798  |  
|Tube, core, and composite container            |  |      | 378,885   |   |      |   | 373,531   |      |  |   | 361,782 |  
|Folding carton and custom packaging            |  |      | 229,868   |   |      |   | 236,204   |      |  |   | 230,760 |  
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Total                                          |  | $    | 1,088,018 |   |      | $ | 1,082,228 |      |  | $ | 993,628 |  
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Sales (intersegment):                          |  |      |           |   |      |   |           |      |  |   |         |  
|Paperboard                                     |  | $    | 137,059   |   |      | $ | 139,609   |      |  | $ | 130,577 |  
|Recovered fiber                                |  |      | 82,579    |   |      |   | 65,025    |      |  |   | 49,225  |  
|Tube, core, and composite container            |  |      | 5,119     |   |      |   | 4,927     |      |  |   | 4,410   |  
|Folding carton and custom packaging            |  |      | 840       |   |      |   | 1,182     |      |  |   | 1,048   |  
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Total                                          |  | $    | 225,597   |   |      | $ | 210,743   |      |  | $ | 185,260 |  
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Sales (external customers):                    |  |      |           |   |      |   |           |      |  |   |         |  
|Paperboard                                     |  | $    | 173,447   |   |      | $ | 185,486   |      |  | $ | 173,711 |  
|Recovered fiber                                |  |      | 86,180    |   |      |   | 82,373    |      |  |   | 47,573  |  
|Tube, core, and composite container            |  |      | 373,766   |   |      |   | 368,604   |      |  |   | 357,372 |  
|Folding carton and custom packaging            |  |      | 229,028   |   |      |   | 235,022   |      |  |   | 229,712 |  
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Total                                          |  | $    | 862,421   |   |      | $ | 871,485   |      |  | $ | 808,368 |  
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Income (loss) from operations:                 |  |      |           |   |      |   |           |      |  |   |         |  
|Paperboard (A)                                 |  | $    | 24,738    |   |      | $ | 42,748    |      |  | $ | 27,163  |  
|Recovered fiber (B)                            |  |      | 253       |   |      |   | 3,897     |      |  |   | 3,012   |  
|Tube, core, and composite container (C)        |  |      | 6,700     |   |      |   | 11,318    |      |  |   | 8,703   |  
|Folding carton and custom packaging (D)        |  |      | (36,812   | ) |      |   | (6,519    | )    |  |   | (12,552 | )
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|                                               |  |      | (5,121    | ) |      |   | 51,444    |      |  |   | 26,326  |  
|Corporate expense (E)                          |  |      | (23,281   | ) |      |   | (23,208   | )    |  |   | (22,137 | )
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Income (loss) from operations                  |  |      | (28,402   | ) |      |   | 28,236    |      |  |   | 4,189   |  
|Interest expense                               |  |      | (41,693   | ) |      |   | (41,892   | )    |  |   | (43,139 | )
|Interest income                                |  |      | 2,629     |   |      |   | 948       |      |  |   | 528     |  
|Write-off of deferred debt costs               |  |      |          |   |      |   |          |      |  |   | (1,812  | )
|Equity in income of unconsolidated affiliates  |  |      | 37,043    |   |      |   | 25,251    |      |  |   | 8,354   |  
|Other, net                                     |  |      | 430       |   |      |   | (1,099    | )    |  |   | 92      |  
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Loss before income taxes and minority interest |  |      | (29,993   | ) |      |   | 11,444    |      |  |   | (31,788 | )
|Provision for income taxes                     |  |      | (1,616    | ) |      |   | (4,273    | )    |  |   | 11,464  |  
|Minority interest in (income) losses           |  |      | 273       |   |      |   | (184      | )    |  |   | 196     |  
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Income (loss) from continuing operations       |  | $    | (31,336   | ) |      | $ | 6,987     |      |  | $ | (20,128 | )
|                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Identifiable assets:                           |  |      |           |   |      |   |           |      |  |   |         |  
|Paperboard                                     |  | $    | 190,162   |   |      | $ | 336,139   |      |  | $ | 352,778 |  
|Recovered fiber                                |  |      | 28,746    |   |      |   | 28,249    |      |  |   | 23,666  |  
|Tube, core, and composite container            |  |      | 194,776   |   |      |   | 205,417   |      |  |   | 204,123 |  



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December 31, 2005, 2004 and 2003



|                                                                                  |  |      |         |      |   |         |  |   |        
|--------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                                                  |  | 2005 |         | 2004 |   | 2003   
|Folding carton and custom packaging                                               |  | $    | 134,372 |      | $ | 204,350 |  | $ | 212,035
|Corporate                                                                         |  |      | 234,411 |      |   | 185,550 |  |   | 167,653
|Discontinued operations                                                           |  |      | 76,665  |      |   |        |  |   |       
|                                                                                  |  |      |         |      |   |         |  |   |        
|Total                                                                             |  | $    | 859,132 |      | $ | 959,705 |  | $ | 960,255
|                                                                                  |  |      |         |      |   |         |  |   |        
|Depreciation and amortization:                                                    |  |      |         |      |   |         |  |   |        
|Paperboard                                                                        |  | $    | 5,852   |      | $ | 7,030   |  | $ | 7,607  
|Recovered fiber                                                                   |  |      | 728     |      |   | 765     |  |   | 784    
|Tube, core, and composite container                                               |  |      | 5,361   |      |   | 5,429   |  |   | 5,109  
|Folding carton and custom packaging                                               |  |      | 6,738   |      |   | 6,188   |  |   | 5,502  
|Corporate                                                                         |  |      | 2,094   |      |   | 1,465   |  |   | 2,907  
|Discontinued operations                                                           |  |      | 7,720   |      |   | 9,212   |  |   | 9,082  
|                                                                                  |  |      |         |      |   |         |  |   |        
|Total                                                                             |  | $    | 28,493  |      | $ | 30,089  |  | $ | 30,991 
|                                                                                  |  |      |         |      |   |         |  |   |        
|Purchases of property, plant and equipment, excluding acquisitions of businesses: |  |      |         |      |   |         |  |   |        
|Paperboard                                                                        |  | $    | 10,284  |      | $ | 6,451   |  | $ | 6,167  
|Recovered fiber                                                                   |  |      | 911     |      |   | 511     |  |   | 926    
|Tube, core, and composite container                                               |  |      | 3,387   |      |   | 5,254   |  |   | 3,610  
|Folding carton and custom packaging                                               |  |      | 2,693   |      |   | 2,771   |  |   | 2,918  
|Corporate                                                                         |  |      | 4,743   |      |   | 2,070   |  |   | 1,724  
|Discontinued operations                                                           |  |      | 2,254   |      |   | 3,834   |  |   | 4,661  
|                                                                                  |  |      |         |      |   |         |  |   |        
|Total                                                                             |  | $    | 24,272  |      | $ | 20,891  |  | $ | 20,006 
|                                                                                  |  |      |         |      |   |         |  |   |        

---

|(A) | Results for 2005, 2004 and 2003 include charges and (reversals of charges) to operations for restructuring and impairment costs of ($1.7 million), $2.7 million and $8.3 million,
respectively, related to closing and consolidating operations and impairment of fixed assets with in the paperboard segment. Results for 2004 also include a $10.3 gain on sale of real estate.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Results for 2005, 2004 and 2003 include charges to operations for restructuring and impairment costs of $20 thousand, $414 thousand and $758 thousand, respectively, related to
closing and consolidating operations and impairment of fixed assets with in the recovered fiber segment.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Results for 2005, 2004 and 2003 include charges to operations for restructuring and impairment costs of $1.3 million, $1.1 million and $1.5 million, respectively, related to closing
and consolidating operations and impairment of fixed assets with in the tube, core and composite container segment.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Results for 2005, 2004 and 2003 include charges to operations for restructuring and impairment costs of $40.8 million, $6.5 million and $7.2 million, respectively, related to
closing and consolidating operations and impairment of fixed assets with in the folding carton and custom packaging segment. Results for 2005 also include a charge of $39.4 million related to impairment of goodwill.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(E) | Results for 2005 and 2004 include charge to operations of $25 thousand and $1.9 million related to the centralization of the accounting and finance operations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



15. Restructuring and Other Impairment Costs



2005 Restructuring Initiatives



In June 2005, the Company announced the permanent closure of its Palmer
carton plant located in Thorndike, Massachusetts. During the year ended December 31, 2005, the Company recorded a $427 thousand



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



charge for severance and other termination benefits and a $186 thousand charge for other exit costs. The Company paid $360 thousand for severance and other
termination benefits and $165 thousand for other exit costs, leaving accruals for severance and other termination benefits and other exit costs of $67 thousand and $21 thousand, respectively. Substantially all of Palmer cartons production was
transferred to the Companys other carton operations. As of December 31, 2005, the restructuring plan was substantially complete except for the sale of property, which the Company is currently marketing.



In September 2005, the Company announced the permanent closure of its Mobile,
Alabama tube and core facility. During the year ended December 31, 2005, the Company recorded a $235 thousand charge for severance and other termination benefits and a $734 thousand charge for other exit costs, which includes a $716 thousand
charge for an ongoing lease. The Company paid $120 thousand for severance and other termination benefits and $18 thousand for other exit costs, leaving accruals for severance and other termination benefits and other exit costs of $115 thousand and
$716 thousand, respectively. Substantially all of Mobiles production was transferred to the Companys other tube and core operations. As of December 31, 2005, the restructuring plan was substantially complete except for fulfilling
the obligations under the real estate lease.



In October 2005,
the Company announced the permanent closure of its DeQuincy, Louisiana tube and core facility. During the year ended December 31, 2005, the Company recorded a $95 thousand charge for severance and other termination benefits and a $44 thousand
charge for other exit costs. The Company paid $18 thousand for severance and other termination benefits and $44 thousand for other exit costs, leaving an accrual for severance and other termination benefits of $77 thousand at December 31, 2005.
The Company expects to incur an additional accrual for severance and other termination benefits of $47 during the first quarter of 2006. Substantially all of DeQuincys production was transferred to the Companys other tube and core
operations. The Company expects the restructuring plan to be substantially complete by the end of the first quarter 2006.



Also included in the 2005 restructuring and other impairment costs was a net reversal of $509 thousand loss for routine disposals of production machinery
and equipment.



2004 Restructuring Initiatives



In January 2004, the Company announced the permanent closure of the
Cedartown paperboard mill located in Cedartown, Georgia. During the year ended December 31, 2004, the Company recorded a $500 thousand impairment charge for assets, a $188 thousand charge for severance and other termination benefits and a $621
thousand charge for other exit costs. All of these costs were paid during 2004 and no accrual remained as of December 31, 2004. As of December 31, 2004, there were no employees remaining at the mill. Substantially all of Cedartowns
paperboard production was transferred to the Companys other paperboard mills. As of December 31, 2005, the exit plan for Cedartown was complete except for the sale of the property, which the Company is currently marketing.



In January 2004, the Company initiated a plan to centralize the accounting
and finance operations to the Companys headquarters located in Austell, Georgia. This action was initiated to enhance the accounting control environment and reduce costs. During the year ended December 31, 2004, the Company recorded a
charge of approximately $1.7 million for other exit costs related to consulting fees and relocation expenses and $199 thousand for severance and other termination benefits in connection with this plan. Severance and other termination benefit costs
of $74 thousand were paid and all other exit costs were paid during the period. An accrued liability of $125 thousand remained related to severance and other termination benefits as of December 31, 2004. During the year ended December 31,
2005, the Company reversed an accrual related to severance and other termination benefits for $17 thousand, paid $108 thousand related to severance and other



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



termination benefits and incurred and paid $43 thousand related to other exit costs. There was no accrual balance as of December 31, 2005 and the
restructuring plan was complete and no additional charges are expected.



In June 2004, the Company announced the permanent closure of its Charlotte, North Carolina carton facility. During the year ended December 31, 2004, the Company recorded $499 thousand related to severance and other termination benefits
and $381 thousand related to other exit costs and paid $286 thousand related to severance and other termination benefits and $381 thousand for other exit costs, leaving an accrual of $213 thousand for severance and other termination benefits. During
the year ended December 31, 2005, the Company paid $204 thousand related to severance and other termination benefits and incurred and paid $345 thousand related to other exit costs. Also during 2005, the Company sold the real estate related to
this facility and reduced restructuring and impairment costs by $432 thousand. Substantially all of Charlotte Cartons production was transferred to the Companys other carton facilities. As of December 31, 2005, this plan was
complete.



In June 2004, the Company announced the permanent
closure of its Georgetown, Kentucky plastics plant. During the year ended December 31, 2004, the Company recorded $141 thousand related to severance and other termination benefits and $163 thousand related to other exit costs and paid $61
thousand related to severance and other termination benefits and $163 thousand for other exit costs, leaving an accrual of $80 thousand for severance and other termination benefits. During the year ended 2005, the Company reversed an accrual related
to severance and other termination benefits for $46 thousand, paid $34 thousand related to severance and other termination benefits and incurred, and paid $49 thousand related to other exit costs and an impairment charge of $16 thousand.
Substantially all of Georgetowns production was transferred to the Companys plastics manufacturing facility in Union, South Carolina. As of December 31, 2005, this plan was complete except for the sale of the property, which is
being marketed.



In August 2004, the Company announced the
permanent closure of its puzzle manufacturing operations component of its specialty converting plant in Mooresville, North Carolina. During the year ended December 31, 2004, the Company recorded $166 thousand related to severance and other
termination benefits and $407 thousand related to other exit costs and paid $104 thousand related to severance and other termination benefits and $58 thousand for other exit costs, leaving an accrual of $62 thousand for severance and other
termination benefits and an accrual of $349 thousand for other exit costs. During the year ended December 31, 2005, the Company paid $62 thousand for severance and other termination benefits, paid $114 thousand related to other exit costs and
reversed $105 thousand related to other exit costs related to a lease liability that was settled. As of December 31, 2005, a $130 thousand liability for other exit costs remained and this plan was complete other than fulfilling the remaining
lease obligations.



In November 2004, the Company initiated a
plan to reorganize the management structure of the Custom Packaging Group. During the year ended December 31, 2004, the Company recorded a charge of approximately $765 thousand for severance and other termination benefits in connection with
this plan. Severance and other termination benefits of $164 thousand were paid during the year ended December 31, 2004, leaving an accrual of $601 thousand related to severance and other termination benefits. During the year ended
December 31, 2005 the Company reversed an accrual $47 thousand and paid $554 thousand related to severance and other termination benefits. There was no accrual balance at December 31, 2005, the plan was complete and no additional charges
are expected.



In December 2004, the Company announced the
permanent closure of the No. 2 paper machine, which was idled in March 2003, at the Companys Rittman, Ohio paperboard mill. During the year ended December 31, 2004, the Company incurred a charge of approximately $8.8 million for
impairment of assets in connection with this plan. This plan was completed in December 2004 and no additional charges are expected.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



Also included in the 2004 restructuring and other impairment costs was a net loss of $1.8 million for
routine disposals of production machinery and equipment.



2003
Restructuring Initiatives



In March 2003, the Company
announced the permanent closure of its Buffalo Paperboard mill located in Lockport, New York. The Company recorded a charge of approximately $4.4 million in connection with this closure. The $4.4 million charge included a $3.2 million impairment
charge for assets, a $670 thousand accrual for severance and other termination benefits, and a $607 thousand accrual for other exit costs. During 2003, $670 thousand of the accrual was paid for severance and other termination benefits, $604 thousand
was paid for other exit costs and an accrual of $3 thousand remained at December 31, 2003 for other exit costs. During the year ended December 31, 2004, the remaining accrued other exit costs were paid and an additional $22 thousand was
paid and expensed for other exit costs. The exit plan for Buffalo was completed in May 2004, when the Company sold the property.



In June 2003, the Company initiated a plan to permanently close its Ashland, Ohio carton facility. As mentioned below, the Company downsized this facility
in December 2002; however, due to severe margin pressure and excess industry capacity, the Company decided to close the facility. During 2003, the Company recorded a charge of approximately $6.7 million, which included a $4.1 million impairment
charge for assets, a $1.2 million accrual for severance and other termination benefits and an accrual of $1.4 million for other exit costs. At December 31, 2003, an accrual of $302 thousand for severance and other termination benefits remained
and an accrual of $43 thousand remained for other exit costs. During the year ended December 31, 2004, the Company recorded an additional $429 thousand impairment charge for assets and an additional $2.6 million in severance and other
termination benefit costs and $1.0 million for other exit costs. During the year ended December 31, 2004, the Company paid $290 thousand related to severance and other termination benefits and paid $1.0 million for other exit costs, leaving an
accrual of $2.6 million for severance and other termination benefits and no accrual for other exit costs as of December 31, 2004. During the year ended December 31, 2005, the Company paid $588 thousand related to severance and termination
benefits and incurred and paid $382 thousand related to other exit costs. An accrued liability of $2.0 million remained related to severance and other termination benefits as of December 31, 2005. Substantially all of Ashland carton sales were
transferred to the Companys other carton manufacturing facilities. As of December 31, 2005, the exit plan was substantially complete except for the sale of property, which the Company is currently marketing.



In December 2003, the Company recorded a $986 thousand asset impairment
charge related to closing the Hendersonville tube and core facility located in Hendersonville, North Carolina and a $223 thousand asset impairment charge related to closing the Jacksonville tube and core facility located in Jacksonville, Florida. An
additional $225 thousand impairment charge was recorded in 2004 for the Jacksonville facility. The facilities were acquired as a part of the Smurfit Industrial Packaging Division. The Company previously announced the closure of these facilities.
These impairment charges represent the decline in estimated fair value of the real estate held for sale subsequent to the acquisition. During the year ended December 31, 2005, the Company sold the Jacksonville facility and reduced restructuring
and impairment costs by $26 thousand.



In December 2003, the
Company recorded a $609 thousand asset impairment charge related to the closure of the Halifax Recycling plant located in Roanoke Rapids, North Carolina. In 2004, an additional $414 thousand asset impairment charge was recorded. This facility was
closed along with the Halifax paperboard mill in December 2002, but there were no significant restructuring or impairment charges related to this closure until December 2003. During the year ended December 31, 2005, the Company sold the Halifax
Recycling plant and



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



reduced restructuring and impairment costs by $59 thousand. As of December 31, 2005, this plan was complete except for the sale of the Halifax
paperboard mill, which is being marketed.



Also included in the
2003 restructuring and other impairment costs was a net loss of $2.6 million for routine disposals of production machinery and equipment.



Previous Restructuring Initiatives



For restructuring plans that were initiated prior to January 1, 2003 we paid $1.8 million during the year ended December 31, 2005 to settle a
lease obligation related to a closed facility and recorded a gain which reduced restructuring and impairment costs $654 thousand. Also during 2005, the Company sold real estate of a closed facility for $1.7 million and recorded a gain of $957
thousand.



The following is a summary of restructuring and
other costs and the restructuring liability for the years ended December 31, 2005, 2004 and 2003 (in thousands):



|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|------------------------------------ |  | -------------------------------------------- | ------ | - | ------------------------------------------- | - | ------ | ---------------- |  | - | --------------------------- | - |  | --------- | ------ | - |  | - | ------
|                                     |  | Asset Impairment Charges andLoss onDisposals |        |   | Severance andOtherTerminationBenefits Costs |   |        | Other Exit Costs |  |   | RestructuringLiabilityTotal |   |  | Total (1)
|Liability balance, December 31, 2002 |  |                                              |        |   |                                             | $ | 494    |                  |  | $ | 4,805                       |   |  | $         | 5,299  |   |  |   |       
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|2003 costs                           |  | $                                            | 12,130 |   |                                             |   | 2,094  |                  |  |   | 3,550                       |   |  |           | 5,644  |   |  | $ | 17,774
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|Expenditures and adjustment          |  |                                              |        |   |                                             |   | (2,286 | )                |  |   | (4,125                      | ) |  |           | (6,411 | ) |  |   |       
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|Liability balance, December 31, 2003 |  |                                              |        |   |                                             | $ | 302    |                  |  | $ | 4,230                       |   |  | $         | 4,532  |   |  |   |       
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|2004 costs                           |  | $                                            | 3,616  |   |                                             |   | 4,589  |                  |  |   | 4,444                       |   |  |           | 9,033  |   |  | $ | 12,649
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|Expenditures                         |  |                                              |        |   |                                             |   | (1,175 | )                |  |   | (5,924                      | ) |  |           | (7,099 | ) |  |   |       
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|Liability balance, December 31, 2004 |  |                                              |        |   |                                             | $ | 3,716  |                  |  | $ | 2,750                       |   |  | $         | 6,466  |   |  |   |       
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|2005 (reversals) costs               |  | $                                            | (509   | ) |                                             |   | 640    |                  |  |   | 1,031                       |   |  |           | 1,671  |   |  | $ | 1,162 
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|Expenditures                         |  |                                              |        |   |                                             |   | (2,093 | )                |  |   | (2,914                      | ) |  |           | (5,007 | ) |  |   |       
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       
|Liability balance, December 31, 2005 |  |                                              |        |   |                                             | $ | 2,263  |                  |  | $ | 867                         |   |  | $         | 3,130  |   |  |   |       
|                                     |  |                                              |        |   |                                             |   |        |                  |  |   |                             |   |  |           |        |   |  |   |       

---

|(1) | Asset impairment charges and loss on disposals, severance and other termination benefit costs and other exit costs are aggregated and reported as restructuring and
impairment costs on the statement of operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following tables summarize restructuring activities by segment for those plans initiated during 2005, 2004, and 2003, which were accounted for under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (in thousands).



|                                    |  |             |        |             |   |             |  |   |                                                             |   |                                                         |   |     |  |   |       
|----------------------------------- |  | ----------- | ------ | ----------- | - | ----------- |  | - | ----------------------------------------------------------- | - | ------------------------------------------------------- | - | --- |  | - | ------
|2003 Restructuring Initiatives:     |  | Costin 2003 |        | Costin 2004 |   | Costin 2005 |  |   | Estimated Cost toComplete Initiativesas ofDecember 31, 2005 |   | Total Cost toComplete Initiativesas ofDecember 31, 2005
|Mill Segment                        |  | $           | 4,433  |             | $ | 23          |  | $ |                                                            |   |                                                         | $ |    |  | $ | 4,456 
|Recovered Fiber Segment             |  |             | 609    |             |   | 414         |  |   | (59                                                         | ) |                                                         |   |    |  |   | 964   
|Carton and Custom Packaging Segment |  |             | 6,712  |             |   | 3,992       |  |   | 381                                                         |   |                                                         |   | 113 |  |   | 11,198
|                                    |  |             |        |             |   |             |  |   |                                                             |   |                                                         |   |     |  |   |       
|                                    |  | $           | 11,754 |             | $ | 4,429       |  | $ | 322                                                         |   |                                                         | $ | 113 |  | $ | 16,618
|                                    |  |             |        |             |   |             |  |   |                                                             |   |                                                         |   |     |  |   |       



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



|                                    |  |             |        |             |   |      |                                                             |  |                                                         |    |  |   |       
|----------------------------------- |  | ----------- | ------ | ----------- | - | ---- | ----------------------------------------------------------- |  | ------------------------------------------------------- | -- |  | - | ------
|                                    |  |             |        |            
|2004 Restructuring Initiatives:     |  | Costin 2004 |        | Costin 2005 |   |      | Estimated Cost toComplete Initiativesas ofDecember 31, 2005 |  | Total Cost toComplete Initiativesas ofDecember 31, 2005
|Mill Segment                        |  | $           | 10,647 |             | $ | (105 | )                                                           |  |                                                         |   |  | $ | 10,542
|Recovered Fiber Segment             |  |             | 1,645  |             |   | (8   | )                                                           |  | $                                                       | 79 |  |   | 1,716 
|Carton and Custom Packaging Segment |  |             | 529    |             |   | (133 | )                                                           |  |                                                         |   |  |   | 396   
|Corporate                           |  |             | 1,944  |             |   | 26   |                                                             |  |                                                         |   |  |   | 1,970 
|                                    |  |             |        |             |   |      |                                                             |  |                                                         |    |  |   |       
|                                    |  | $           | 14,765 |             | $ | (220 | )                                                           |  | $                                                       | 79 |  | $ | 14,624
|                                    |  |             |        |             |   |      |                                                             |  |                                                         |    |  |   |       



|                                    |  |             |       |                                                             |   |                                                         |  |   |      
|----------------------------------- |  | ----------- | ----- | ----------------------------------------------------------- | - | ------------------------------------------------------- |  | - | -----
|                                    |  |             |      
|2005 Restructuring Initiatives:     |  | Costin 2005 |       | Estimated Cost toComplete Initiativesas ofDecember 31, 2005 |   | Total Cost toComplete Initiativesas ofDecember 31, 2005
|Mill Segment                        |  |             |      |                                                             |   |                                                        |  |   |     
|Recovered Fiber Segment             |  | $           | 1,108 |                                                             | $ | 516                                                     |  | $ | 1,624
|Carton and Custom Packaging Segment |  |             | 613   |                                                             |   | 79                                                      |  |   | 692  
|Corporate                           |  |             |      |                                                             |   |                                                        |  |   |     
|                                    |  |             |       |                                                             |   |                                                         |  |   |      
|                                    |  | $           | 1,721 |                                                             | $ | 595                                                     |  | $ | 2,316
|                                    |  |             |       |                                                             |   |                                                         |  |   |      



16. Disclosures About Fair Value of
Financial Instruments



The following table sets forth the
fair values and carrying amounts of the Companys significant financial instruments as of December 31, 2005 where the carrying amount differs from the fair value. The carrying amount of cash and cash equivalents, short-term debt and
long-term variable-rate debt approximates fair value. The fair value of long-term debt is based on quoted market prices (in thousands).



|                                |  |            |         |                |   |        
|------------------------------- |  | ---------- | ------- | -------------- | - | -------
|                                |  | Fair Value |         | CarryingAmount
|97/8%
senior subordinated notes |  | $          | 262,650 |                | $ | 264,536
|71/4%
senior notes              |  |            | 27,043  |                |   | 26,814 
|73/8%
senior notes              |  |            | 182,634 |                |   | 196,085
|                                |  |            |         |                |   |        
|                                |  | $          | 472,327 |                | $ | 487,435
|                                |  |            |         |                |   |        



17. Related Party Transactions



A director and former Chairman of the Board of Directors
is a shareholder in the firm of Robinson, Bradshaw & Hinson, P.A., the Companys principal outside legal counsel which performed services for the company during the last three years. The amounts of fees paid were $777 thousand, $993
thousand, and $1.2 million for the years ended December 31, 2005, 2004 and 2003, respectively.



A director of the Companys Board of Directors is also the President and Chief Executive Officer of Printpack, Inc., a customer of the Company. The
Company sold tubes and cores to Printpack, Inc. in the amounts



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005, 2004 and 2003



of $5.0 million, $4.4 million and $4.5 million for the years ended December 31, 2005, 2004 and 2003, respectively. The accounts receivable due from
Printpack, Inc. as of December 31, 2005 and December 31, 2004 were $302 thousand and $165 thousand, respectively. The accounts payable at December 31, 2005 were $61 thousand and no accounts payable were outstanding at
December 31, 2004.



The Company sold gypsum facing paper
in the amounts of $6.3 million, $9.6 million and $13.9 million for the years ended December 31, 2005, 2004 and 2003, respectively, to Standard Gypsum, a 50% owned joint venture. The accounts receivable due from Standard Gypsum as of
December 31, 2005 and December 31, 2004 were $139 thousand and $288 thousand, respectively.



The Company sold recovered fiber in the amounts of $8.9 million, $2.1 million and $7.8 million for the years ended December 31, 2005, 2004 and 2003,
respectively, to Premier Boxboard, a 50% owned joint venture. Accounts receivable due from Premier Boxboard were $5.4 million and $150 thousand as of December 31, 2005 and 2004, respectively. The Company purchased paperboard totaling $3.0
million, $4.3 million and $3.8 million for the years ended December 31, 2005, 2004 and 2003, respectively, from Premier Boxboard. Payables due to Premier Boxboard were $210 thousand and $700 thousand as of December 31, 2005 and 2004,
respectively. During 2005, 2004 and 2003, Premier Boxboard paid marketing fees to Caraustar of approximately $2.8 million, $2.1 million, and $1.1 million, respectively.



The Company performs certain treasury functions on behalf of Premier Boxboard. As a result, the Company had a receivable due
from Premier Boxboard of $1.4 million and $1.7 million as of December 31, 2005 and 2004, respectively.



18. Subsequent Event



On February 27, 2006, the Company sold its partition business to RTS, a joint venture between the Rock-Tenn Company and the Sonoco Products Company, for approximately $5.8 million. This business was classified as a discontinued
operation as of December 31, 2005.



19. Guarantor Condensed
Consolidating Financial Statements



These condensed
consolidating financial statements reflect Caraustar Industries, Inc. and its Subsidiary Guarantors, which consist of all but one of the Companys wholly-owned subsidiaries other than foreign subsidiaries. These nonguarantor subsidiaries are
herein referred to as Nonguarantor Subsidiaries. Separate financial statements of the Subsidiary Guarantors are not presented because the subsidiary guarantees are joint and several and full and unconditional and the Company believes
that the condensed consolidating financial statements presented are more meaningful in understanding the financial position of the Subsidiary Guarantors.



82



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

CONSOLIDATING BALANCE SHEETS

(In
thousands)



|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|----------------------------------------------- |  | ----------------------- | -------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                |  | As of December 31, 2005 |         
|                                                |  | Parent                  |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                          | 
|                                                |  |                         |          |   |                      
|CURRENT ASSETS:                                 |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                       |  | $                       | 93,998   |   |                       | $ | 63       |                          |  | $ | 1091         |   |  | $            |         |   |  | $ | 95,152   |  
|Intercompany funding                            |  |                         | (123,246 | ) |                       |   | 136,057  |                          |  |   | (12,811      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                  |  |                         |         |   |                       |   | 86,098   |                          |  |   | 4,963        |   |  |              |         |   |  |   | 91,061   |  
|Intercompany accounts receivable                |  |                         |         |   |                       |   | 285      |                          |  |   | 389          |   |  |              | (674     | ) |  |   |         |  
|Inventories                                     |  |                         |         |   |                       |   | 66,936   |                          |  |   | 4,023        |   |  |              |         |   |  |   | 70,959   |  
|Refundable income taxes                         |  |                         | 56       |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 56       |  
|Current deferred tax asset                      |  |                         | 40,259   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 40,259   |  
|Other current assets                            |  |                         | 18,723   |   |                       |   | 2,716    |                          |  |   | 174          |   |  |              |         |   |  |   | 21,613   |  
|Investment in unconsolidated affiliate          |  |                         | 13,212   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 13,212   |  
|Assets of discontinued operations held for sale |  |                         |         |   |                       |   | 76,665   |                          |  |   |             |   |  |              |         |   |  |   | 76,665   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                            |  |                         | 43,002   |   |                       |   | 368,820  |                          |  |   | (2,171       | ) |  |              | (674     | ) |  |   | 408,977  |  
|PROPERTY, PLANT, AND EQUIPMENT                  |  |                         | 20,310   |   |                       |   | 498,441  |                          |  |   | 26,290       |   |  |              |         |   |  |   | 545,041  |  
|Less accumulated depreciation                   |  |                         | (10,968  | ) |                       |   | (265,036 | )                        |  |   | (14,000      | ) |  |              |         |   |  |   | (290,004 | )
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant, and equipment, net             |  |                         | 9,342    |   |                       |   | 233,405  |                          |  |   | 12,290       |   |  |              |         |   |  |   | 255,037  |  
|INVESTMENT IN CONSOLIDATED SUBSIDARIES          |  |                         | 583,924  |   |                       |   | 131,669  |                          |  |   |             |   |  |              | (715,593 | ) |  |   |         |  
|GOODWILL                                        |  |                         |         |   |                       |   | 125,773  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 129,275  |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES         |  |                         | 44,037   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 44,037   |  
|OTHER ASSETS                                    |  |                         | 15,192   |   |                       |   | 6,592    |                          |  |   | 22           |   |  |              |         |   |  |   | 21,806   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                       | 695,497  |   |                       | $ | 866,259  |                          |  | $ | 13,643       |   |  | $            | (716,267 | ) |  | $ | 859,132  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY            | 
|                                                |  |                         |          |   |                      
|CURRENT LIABILITIES:                            |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                      |  | $                       | 85       |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 85       |  
|Accounts payable                                |  |                         | 26,368   |   |                       |   | 46,033   |                          |  |   | 5,614        |   |  |              |         |   |  |   | 78,015   |  
|Intercompany accounts payable                   |  |                         |         |   |                       |   | 389      |                          |  |   | 285          |   |  |              | (674     | ) |  |   |         |  
|Accrued interest                                |  |                         | 7,976    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 7,976    |  
|Accrued compensation                            |  |                         | 1,657    |   |                       |   | 7,274    |                          |  |   | 215          |   |  |              |         |   |  |   | 9,146    |  
|Capital lease obligations                       |  |                         | 527      |   |                       |   | 15       |                          |  |   |             |   |  |              |         |   |  |   | 542      |  
|Accrued pension                                 |  |                         |         |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   |         |  
|Other accrued liabilities                       |  |                         | 8,055    |   |                       |   | 26,129   |                          |  |   | 527          |   |  |              |         |   |  |   | 34,711   |  
|Liabilities of discontinued operations          |  |                         |         |   |                       |   | 31,373   |                          |  |   |             |   |  |              |         |   |  |   | 31,373   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                       |  |                         | 44,668   |   |                       |   | 111,213  |                          |  |   | 6,641        |   |  |              | (674     | ) |  |   | 161,848  |  
|SENIOR CREDIT FACILITY                          |  |                         |         |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   |         |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS             |  |                         | 520      |   |                       |   | 41       |                          |  |   |             |   |  |              |         |   |  |   | 561      |  
|                                                |  |                         |          |   |                      
|OTHER LONG-TERM DEBT, less current maturities   |  |                         | 488,805  |   |                       |   | 3,500    |                          |  |   |             |   |  |              |         |   |  |   | 492,305  |  
|DEFERRED INCOME TAXES                           |  |                         | 35,056   |   |                       |   | 12,165   |                          |  |   | 1,478        |   |  |              |         |   |  |   | 48,699   |  
|PENSION LIABILITY                               |  |                         | 41,877   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 41,877   |  
|OTHER LIABILITIES                               |  |                         | 804      |   |                       |   | 4,227    |                          |  |   |             |   |  |              | 415      |   |  |   | 5,446    |  
|SHAREHOLDERS EQUITY:                           |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                    |  |                         | 2,765    |   |                       |   | 772      |                          |  |   | 523          |   |  |              | (1,181   | ) |  |   | 2,879    |  
|Additional paid-in capital                      |  |                         | 197,825  |   |                       |   | 682,288  |                          |  |   | 9,167        |   |  |              | (696,607 | ) |  |   | 192,673  |  
|Unearned compensation                           |  |                         | (3,442   | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (3,442   | )
|Retained (deficit) earnings                     |  |                         | (83,585  | ) |                       |   | 52,053   |                          |  |   | (5,082       | ) |  |              | (18,220  | ) |  |   | (54,834  | )
|Accumulated other comprehensive (loss) income   |  |                         | (29,796  | ) |                       |   |         |                          |  |   | 916          |   |  |              |         |   |  |   | (28,880  | )
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total Shareholders Equity                      |  |                         | 83,767   |   |                       |   | 735,113  |                          |  |   | 5,524        |   |  |              | (716,008 | ) |  |   | 108,396  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                       | 695,497  |   |                       | $ | 866,259  |                          |  | $ | 13,643       |   |  | $            | (716,267 | ) |  | $ | 859,132  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



83



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

CONSOLIDATING BALANCE SHEETS

(In
thousands)



|                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|--------------------------------------------- |  | ----------------------- | ------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                              |  | As of December 31, 2004 |        
|                                              |  | Parent                  |         |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                        | 
|                                              |  |                         |         |   |                      
|CURRENT ASSETS:                               |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                     |  | $                       | 88,998  |   |                       | $ | 125      |                          |  | $ | 633          |   |  | $            |         |   |  | $ | 89,756   |  
|Intercompany funding                          |  |                         | (65,837 | ) |                       |   | 79,577   |                          |  |   | (13,740      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                |  |                         |        |   |                       |   | 96,933   |                          |  |   | 5,711        |   |  |              |         |   |  |   | 102,644  |  
|Intercompany accounts receivable              |  |                         |        |   |                       |   | 175      |                          |  |   | 272          |   |  |              | (447     | ) |  |   |         |  
|Inventories                                   |  |                         |        |   |                       |   | 84,808   |                          |  |   | 4,236        |   |  |              |         |   |  |   | 89,044   |  
|Refundable income taxes                       |  |                         | 409     |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 409      |  
|Current deferred tax asset                    |  |                         | 11,035  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 11,035   |  
|Other current assets                          |  |                         | 4,502   |   |                       |   | 5,094    |                          |  |   | 1,463        |   |  |              |         |   |  |   | 11,059   |  
|                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                          |  |                         | 39,107  |   |                       |   | 266,712  |                          |  |   | (1,425       | ) |  |              | (447     | ) |  |   | 303,947  |  
|PROPERTY, PLANT, AND EQUIPMENT                |  |                         | 14,169  |   |                       |   | 743,218  |                          |  |   | 25,857       |   |  |              |         |   |  |   | 783,244  |  
|Less accumulated depreciation                 |  |                         | (9,140  | ) |                       |   | (373,279 | )                        |  |   | (12,691      | ) |  |              |         |   |  |   | (395,110 | )
|                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant, and equipment, net           |  |                         | 5,029   |   |                       |   | 369,939  |                          |  |   | 13,166       |   |  |              |         |   |  |   | 388,134  |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES       |  |                         | 572,865 |   |                       |   | 131,669  |                          |  |   |             |   |  |              | (704,534 | ) |  |   |         |  
|GOODWILL                                      |  |                         |        |   |                       |   | 179,628  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 183,130  |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES       |  |                         | 59,676  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 59,676   |  
|OTHER ASSETS                                  |  |                         | 16,138  |   |                       |   | 8,564    |                          |  |   | 116          |   |  |              |         |   |  |   | 24,818   |  
|                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                              |  | $                       | 692,815 |   |                       | $ | 956,512  |                          |  | $ | 15,359       |   |  | $            | (704,981 | ) |  | $ | 959,705  |  
|                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY          | 
|                                              |  |                         |         |   |                      
|CURRENT LIABILITIES:                          |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                    |  | $                       | 80      |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 80       |  
|Accounts payable                              |  |                         | 20,352  |   |                       |   | 59,880   |                          |  |   | 4,658        |   |  |              |         |   |  |   | 84,890   |  
|Intercompany accounts payable                 |  |                         |        |   |                       |   | 272      |                          |  |   | 175          |   |  |              | (447     | ) |  |   |         |  
|Accrued interest                              |  |                         | 8,743   |   |                       |   | 67       |                          |  |   |             |   |  |              |         |   |  |   | 8,810    |  
|Accrued compensation                          |  |                         | 2,002   |   |                       |   | 9,583    |                          |  |   | 157          |   |  |              |         |   |  |   | 11,742   |  
|Other accrued liabilities                     |  |                         | 4,109   |   |                       |   | 29,970   |                          |  |   | 880          |   |  |              |         |   |  |   | 34,959   |  
|                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                     |  |                         | 35,286  |   |                       |   | 99,772   |                          |  |   | 5,870        |   |  |              | (447     | ) |  |   | 140,481  |  
|OTHER LONG-TERM DEBT, less current maturities |  |                         | 497,941 |   |                       |   | 8,200    |                          |  |   |             |   |  |              |         |   |  |   | 506,141  |  
|DEFERRED INCOME TAXES                         |  |                         | 43,599  |   |                       |   | 12,240   |                          |  |   | 1,481        |   |  |              |         |   |  |   | 57,320   |  
|PENSION LIABILITY                             |  |                         | 32,897  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 32,897   |  
|OTHER LIABILITIES                             |  |                         | 1,080   |   |                       |   | 3,846    |                          |  |   |             |   |  |              | 688      |   |  |   | 5,614    |  
|SHAREHOLDERS EQUITY:                         |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                  |  |                         | 2,761   |   |                       |   | 772      |                          |  |   | 523          |   |  |              | (1,181   | ) |  |   | 2,875    |  
|Additional paid-in capital                    |  |                         | 197,055 |   |                       |   | 671,229  |                          |  |   | 9,167        |   |  |              | (685,548 | ) |  |   | 191,903  |  
|Unearned compensation                         |  |                         | (4,334  | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (4,334   | )
|Retained (deficit) earnings                   |  |                         | (90,849 | ) |                       |   | 160,453  |                          |  |   | (2,559       | ) |  |              | (18,493  | ) |  |   | 48,552   |  
|Accumulated other comprehensive (loss) income |  |                         | (22,621 | ) |                       |   |         |                          |  |   | 877          |   |  |              |         |   |  |   | (21,744  | )
|                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total Shareholders Equity                    |  |                         | 82,012  |   |                       |   | 832,454  |                          |  |   | 8,008        |   |  |              | (705,222 | ) |  |   | 217,252  |  
|                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                              |  | $                       | 692,815 |   |                       | $ | 956,512  |                          |  | $ | 15,359       |   |  | $            | (704,981 | ) |  | $ | 959,705  |  
|                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)



|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|-------------------------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | - | --------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                         |  | For the Year Ended December 31, 2005 |        
|                                                         |  | Parent                               |         |   | GuarantorSubsidiaries |   |           | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                    |  | $                                    |        |   |                       | $ | 1,113,693 |                          |  | $ | 42,994       |   |  | $            | (294,266 | ) |  | $ | 862,421  |  
|COST OF SALES                                            |  |                                      |        |   |                       |   | 982,254   |                          |  |   | 40,059       |   |  |              | (294,266 | ) |  |   | 728,047  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES             |  |                                      | 23,256  |   |                       |   | 93,762    |                          |  |   | 5,252        |   |  |              |         |   |  |   | 122,270  |  
|GOODWILL IMPAIRMENT                                      |  |                                      |        |   |                       |   | 39,344    |                          |  |   |             |   |  |              |         |   |  |   | 39,344   |  
|RESTRUCTURING AND OTHER IMPAIRMENT COSTS                 |  |                                      | 27      |   |                       |   | 1,056     |                          |  |   | 79           |   |  |              |         |   |  |   | 1,162    |  
|GAIN ON SALE OF REAL ESTATE                              |  |                                      |        |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   |         |  
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|(Loss) income from operations                            |  |                                      | (23,283 | ) |                       |   | (2,723    | )                        |  |   | (2,396       | ) |  |              |         |   |  |   | (28,402  | )
|OTHER (EXPENSE) INCOME:                                  |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Interest expense                                         |  |                                      | (41,592 | ) |                       |   | (99       | )                        |  |   | (2           | ) |  |              |         |   |  |   | (41,693  | )
|Interest income                                          |  |                                      | 2,628   |   |                       |   | 1         |                          |  |   |             |   |  |              |         |   |  |   | 2,629    |  
|Write-off of deferred debt costs                         |  |                                      |        |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   |         |  
|Equity in income of unconsolidated affiliates            |  |                                      | 37,043  |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | 37,043   |  
|Other, net                                               |  |                                      | 212     |   |                       |   | 343       |                          |  |   | (125         | ) |  |              |         |   |  |   | 430      |  
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                         |  |                                      | (1,709  | ) |                       |   | 245       |                          |  |   | (127         | ) |  |              |         |   |  |   | (1,591   | )
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS |  |                                      | (24,992 | ) |                       |   | (2,478    | )                        |  |   | (2,523       | ) |  |              |         |   |  |   | (29,993  | )
|BENEFIT FROM INCOME TAXES                                |  |                                      | (1,616  | ) |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | (1,616   | )
|MINORITY INTEREST IN INCOME                              |  |                                      |        |   |                       |   |          |                          |  |   |             |   |  |              | 273      |   |  |   | 273      |  
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                 |  |                                      | (26,608 | ) |                       |   | (2,478    | )                        |  |   | (2,523       | ) |  |              | 273      |   |  |   | (31,336  | )
|DISCONTINUED OPERATIONS                                  |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LOSS FROM DISCONTINUED OPERATIONS                        |  |                                      |        |   |                       |   | (105,922  | )                        |  |   |             |   |  |              |         |   |  |   | (105,922 | )
|BENEFIT FROM INCOME TAXES OF DISCONTINUED OPERATIONS     |  |                                      |        |   |                       |   | 33,872    |                          |  |   |             |   |  |              |         |   |  |   | 33,872   |  
|LOSS FROM DISCONTINUED OPERATIONS                        |  |                                      |        |   |                       |   | (72,050   | )                        |  |   |             |   |  |              |         |   |  |   | (72,050  | )
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|NET LOSS                                                 |  | $                                    | (26,608 | ) |                       | $ | (74,528   | )                        |  | $ | (2,523       | ) |  | $            | 273      |   |  | $ | (103,386 | )
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)



|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|-------------------------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | - | --------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                         |  | For the Year Ended December 31, 2004 |        
|                                                         |  | Parent                               |         |   | GuarantorSubsidiaries |   |           | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                    |  | $                                    |        |   |                       | $ | 1,107,875 |                          |  | $ | 38,900       |   |  | $            | (275,290 | ) |  | $ | 871,485 |  
|COST OF SALES                                            |  |                                      |        |   |                       |   | 961,744   |                          |  |   | 34,717       |   |  |              | (275,290 | ) |  |   | 721,171 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES             |  |                                      | 21,488  |   |                       |   | 93,640    |                          |  |   | 4,624        |   |  |              |         |   |  |   | 119,752 |  
|RESTRUCTURING AND OTHER IMPAIRMENT COSTS                 |  |                                      | 1,945   |   |                       |   | 10,704    |                          |  |   |             |   |  |              |         |   |  |   | 12,649  |  
|GAIN ON SALE OF REAL ESTATE                              |  |                                      |        |   |                       |   | 10,323    |                          |  |   |             |   |  |              |         |   |  |   | 10,323  |  
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                            |  |                                      | (23,433 | ) |                       |   | 52,110    |                          |  |   | (441         | ) |  |              |         |   |  |   | 28,236  |  
|OTHER (EXPENSE) INCOME:                                  |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                         |  |                                      | (41,831 | ) |                       |   | (56       | )                        |  |   | (404         | ) |  |              | 399      |   |  |   | (41,892 | )
|Interest income                                          |  |                                      | 1,346   |   |                       |   | 1         |                          |  |   |             |   |  |              | (399     | ) |  |   | 948     |  
|Write-off of deferred debt costs                         |  |                                      |        |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   |        |  
|Equity in income of unconsolidated affiliates            |  |                                      | 25,251  |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | 25,251  |  
|Other, net                                               |  |                                      | (1,197  | ) |                       |   | 353       |                          |  |   | (255         | ) |  |              |         |   |  |   | (1,099  | )
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                         |  |                                      | (16,431 | ) |                       |   | 298       |                          |  |   | (659         | ) |  |              |         |   |  |   | (16,792 | )
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS |  |                                      | (39,864 | ) |                       |   | 52,408    |                          |  |   | (1,100       | ) |  |              |         |   |  |   | 11,444  |  
|BENEFIT FROM INCOME TAXES                                |  |                                      | (4,273  | ) |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | (4,273  | )
|MINORITY INTEREST IN INCOME                              |  |                                      |        |   |                       |   |          |                          |  |   |             |   |  |              | (184     | ) |  |   | (184    | )
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                 |  |                                      | (44,137 | ) |                       |   | 52,408    |                          |  |   | (1,100       | ) |  |              | (184     | ) |  |   | 6,987   |  
|DISCONTINUED OPERATIONS                                  |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                        |  |                                      |        |   |                       |   | (16,773   | )                        |  |   |             |   |  |              |         |   |  |   | (16,773 | )
|BENEFIT FROM INCOME TAXES OF DISCONTINUED OPERATIONS     |  |                                      |        |   |                       |   | 5,807     |                          |  |   |             |   |  |              |         |   |  |   | 5,807   |  
|LOSS FROM DISCONTINUED OPERATIONS                        |  |                                      |        |   |                       |   | (10,966   | )                        |  |   |             |   |  |              |         |   |  |   | (10,966 | )
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET LOSS                                                 |  | $                                    | (44,137 | ) |                       | $ | 41,442    |                          |  | $ | (1,100       | ) |  | $            | (184     | ) |  | $ | (3,979  | )
|                                                         |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)



|                                                         |  |                                      |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|-------------------------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                         |  | For the Year Ended December 31, 2003 |        
|                                                         |  | Parent                               |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                    |  | $                                    |        |   |                       | $ | 986,151 |                          |  | $ | 36,871       |   |  | $            | (214,654 | ) |  | $ | 808,368 |  
|COST OF SALES                                            |  |                                      |        |   |                       |   | 838,631 |                          |  |   | 33,964       |   |  |              | (214,654 | ) |  |   | 657,941 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES             |  |                                      | 24,517  |   |                       |   | 98,588  |                          |  |   | 5,359        |   |  |              |         |   |  |   | 128,464 |  
|RESTRUCTURING AND OTHER IMPAIRMENT COSTS                 |  |                                      |        |   |                       |   | 17,774  |                          |  |   |             |   |  |              |         |   |  |   | 17,774  |  
|                                                         |  |                                      |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                            |  |                                      | (24,517 | ) |                       |   | 31,158  |                          |  |   | (2,452       | ) |  |              |         |   |  |   | 4,189   |  
|OTHER (EXPENSE) INCOME:                                  |  |                                      |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                         |  |                                      | (43,083 | ) |                       |   | (43     | )                        |  |   | (422         | ) |  |              | 409      |   |  |   | (43,139 | )
|Interest income                                          |  |                                      | 938     |   |                       |   | (2      | )                        |  |   | 1            |   |  |              | (409     | ) |  |   | 528     |  
|Write-off of deferred debt costs                         |  |                                      | (1,812  | ) |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | (1,812  | )
|Equity in income of unconsolidated affiliates            |  |                                      | 8,354   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 8,354   |  
|Other, net                                               |  |                                      |        |   |                       |   | 170     |                          |  |   | (78          | ) |  |              |         |   |  |   | 92      |  
|                                                         |  |                                      |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                         |  |                                      | (35,603 | ) |                       |   | 125     |                          |  |   | (499         | ) |  |              |         |   |  |   | (35,977 | )
|                                                         |  |                                      |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS |  |                                      | (60,120 | ) |                       |   | 31,283  |                          |  |   | (2,951       | ) |  |              |         |   |  |   | (31,788 | )
|BENEFIT (PROVISION) FOR INCOME TAXES                     |  |                                      | 15,089  |   |                       |   | (3,635  | )                        |  |   | 10           |   |  |              |         |   |  |   | 11,464  |  
|MINORITY INTEREST IN LOSSES                              |  |                                      |        |   |                       |   |        |                          |  |   |             |   |  |              | 196      |   |  |   | 196     |  
|                                                         |  |                                      |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                 |  |                                      | (45,031 | ) |                       |   | 27,648  |                          |  |   | (2,941       | ) |  |              | 196      |   |  |   | (20,128 | )
|DISCONTINUED OPERATIONS                                  |  |                                      |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                        |  |                                      |        |   |                       |   | (10,542 | )                        |  |   |             |   |  |              |         |   |  |   | (10,542 | )
|BENEFIT FROM INCOME TAXES OF DISCONTINUED OPERATIONS     |  |                                      |        |   |                       |   | 3,635   |                          |  |   |             |   |  |              |         |   |  |   | 3,635   |  
|LOSS FROM DISCONTINUED OPERATIONS                        |  |                                      |        |   |                       |   | (6,907  | )                        |  |   |             |   |  |              |         |   |  |   | (6,907  | )
|                                                         |  |                                      |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET LOSS                                                 |  | $                                    | (45,031 | ) |                       | $ | 20,741  |                          |  | $ | (2,941       | ) |  | $            | 196      |   |  | $ | (27,035 | )
|                                                         |  |                                      |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)



|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|------------------------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                        |  | For the Year Ended December 31, 2005 |        
|                                                        |  | Parent                               |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by (used in) operating activities     |  | $                                    | 22,527  |   |                       | $ | 314     |                          |  | $ | 1,078        |   |              | $ |  |  | $ | 23,919  |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Investing activities:                                   |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Purchases of property, plant and equipment              |  |                                      | (4,743  | ) |                       |   | (18,909 | )                        |  |   | (620         | ) |              |   |  |  |   | (24,272 | )
|Proceeds from disposal of property, plant and equipment |  |                                      |        |   |                       |   | 3,446   |                          |  |   |             |   |              |   |  |  |   | 3,446   |  
|Return of investment in unconsolidated affiliates       |  |                                      | 5,325   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 5,325   |  
|Proceeds from sale of real estate and business          |  |                                      |        |   |                       |   | 15,096  |                          |  |   |             |   |              |   |  |  |   | 15,096  |  
|Investment in restricted cash                           |  |                                      | (11,164 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (11,164 | )
|Investment in unconsolidated affiliates                 |  |                                      | (40     | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (40     | )
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                   |  |                                      | (10,622 | ) |                       |   | (367    | )                        |  |   | (620         | ) |              |   |  |  |   | (11,609 | )
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Financing activities:                                   |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Repayments of short and long-term debt                  |  |                                      | (7,468  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (7,468  | )
|Payments for capital lease obligations                  |  |                                      | (499    | ) |                       |   | (9      | )                        |  |   |             |   |              |   |  |  |   | (508    | )
|Proceeds from swap agreement unwind                     |  |                                      | 826     |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 826     |  
|Issuances of stock, net of forfeitures                  |  |                                      | 236     |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 236     |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in financing activities                   |  |                                      | (6,905  | ) |                       |   | (9      | )                        |  |   |             |   |              |   |  |  |   | (6,914  | )
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents    |  |                                      | 5,000   |   |                       |   | (62     | )                        |  |   | 458          |   |              |   |  |  |   | 5,396   |  
|Cash and cash equivalents at beginning of period        |  |                                      | 88,998  |   |                       |   | 125     |                          |  |   | 633          |   |              |   |  |  |   | 89,756  |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period              |  | $                                    | 93,998  |   |                       | $ | 63      |                          |  | $ | 1,091        |   |              | $ |  |  | $ | 95,152  |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  



88



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)



|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|------------------------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                        |  | For the Year Ended December 31, 2004 |        
|                                                        |  | Parent                               |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by (used in) operating activities     |  | $                                    | 32,405  |   |                       | $ | 4,521   |                          |  | $ | (45          | ) |              | $ |  |  | $ | 36,881  |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Investing activities:                                   |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Purchases of property, plant and equipment              |  |                                      | (2,070  | ) |                       |   | (18,118 | )                        |  |   | (703         | ) |              |   |  |  |   | (20,891 | )
|Proceeds from disposal of property, plant and equipment |  |                                      |        |   |                       |   | 2,653   |                          |  |   | 133          |   |              |   |  |  |   | 2,786   |  
|Proceeds from sale of real estate and business          |  |                                      |        |   |                       |   | 11,086  |                          |  |   |             |   |              |   |  |  |   | 11,086  |  
|Investment in restricted cash                           |  |                                      | (3,656  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (3,656  | )
|Investment in unconsolidated affiliates                 |  |                                      | (160    | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (160    | )
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                   |  |                                      | (5,886  | ) |                       |   | (4,379  | )                        |  |   | (570         | ) |              |   |  |  |   | (10,835 | )
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Financing activities:                                   |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Repayments of short and long-term debt                  |  |                                      | (24,934 | ) |                       |   | (17     | )                        |  |   |             |   |              |   |  |  |   | (24,951 | )
|Proceeds from swap agreement unwind                     |  |                                      | 385     |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 385     |  
|Issuances of stock, net of forfeitures                  |  |                                      | 2,725   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 2,725   |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in financing activities                   |  |                                      | (21,824 | ) |                       |   | (17     | )                        |  |   |             |   |              |   |  |  |   | (21,841 | )
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents    |  |                                      | 4,695   |   |                       |   | 125     |                          |  |   | (615         | ) |              |   |  |  |   | 4,205   |  
|Cash and cash equivalents at beginning of period        |  |                                      | 84,303  |   |                       |   |        |                          |  |   | 1,248        |   |              |   |  |  |   | 85,551  |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period              |  | $                                    | 88,998  |   |                       | $ | 125     |                          |  | $ | 633          |   |              | $ |  |  | $ | 89,756  |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)



|                                                        |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|------------------------------------------------------- |  | ------------------------------------ | ------ | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                        |  | For the Year Ended December 31, 2003 |       
|                                                        |  | Parent                               |        |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by operating activities               |  | $                                    | 42,057 |   |                       | $ | 15,615  |                          |  | $ | 1,544        |   |              | $ |  |  | $ | 59,216  |  
|                                                        |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Investing activities:                                   |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Purchases of property, plant and equipment              |  |                                      | (1,724 | ) |                       |   | (17,009 | )                        |  |   | (1,273       | ) |              |   |  |  |   | (20,006 | )
|Acquisitions of businesses, net of cash acquired        |  |                                      |       |   |                       |   | (695    | )                        |  |   |             |   |              |   |  |  |   | (695    | )
|Proceeds from disposal of property, plant and equipment |  |                                      |       |   |                       |   | 2,114   |                          |  |   | 207          |   |              |   |  |  |   | 2,321   |  
|Investment in restricted cash                           |  |                                      | (3,834 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (3,834  | )
|                                                        |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                   |  |                                      | (5,558 | ) |                       |   | (15,590 | )                        |  |   | (1,066       | ) |              |   |  |  |   | (22,214 | )
|                                                        |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Financing activities:                                   |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Repayments of short and long-term debt                  |  |                                      | (70    | ) |                       |   | (25     | )                        |  |   |             |   |              |   |  |  |   | (95     | )
|Proceeds from swap agreement unwind                     |  |                                      | 15,950 |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 15,950  |  
|Deferred debt costs                                     |  |                                      | (2,214 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (2,214  | )
|Issuances of stock, net of forfeitures                  |  |                                      | 594    |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 594     |  
|                                                        |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities     |  |                                      | 14,260 |   |                       |   | (25     | )                        |  |   |             |   |              |   |  |  |   | 14,235  |  
|                                                        |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net increase in cash and cash equivalents               |  |                                      | 50,759 |   |                       |   |        |                          |  |   | 478          |   |              |   |  |  |   | 51,237  |  
|Cash and cash equivalents at beginning of period        |  |                                      | 33,544 |   |                       |   |        |                          |  |   | 770          |   |              |   |  |  |   | 34,314  |  
|                                                        |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period              |  | $                                    | 84,303 |   |                       | $ |        |                          |  | $ | 1,248        |   |              | $ |  |  | $ | 85,551  |  
|                                                        |  |                                      |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of

Caraustar Industries, Inc.

Austell, Georgia



We have
audited the accompanying consolidated balance sheets of Caraustar Industries, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders equity,
and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the 2003 financial statements of Standard Gypsum LP,
the Companys investment in which is accounted for by use of the equity method. The Companys equity in income of $6,799,000 in that companys net income for the year ended December 31, 2003 is included in the accompanying
consolidated financial statements. The financial statements of Standard Gypsum were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such company is based solely on
the report of such other auditors.



We conducted our audits 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 the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.



In our opinion, based on our audits and the report of other auditors, such consolidated financial statements present fairly,
in all material respects, the financial position of Caraustar Industries, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set forth therein.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the
Companys internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 14, 2006 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting and an unqualified opinion on the effectiveness
of the Companys internal control over financial reporting.



/s/    Deloitte & Touche LLP



Atlanta,
Georgia

March 14, 2006



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of

Caraustar Industries, Inc.

Austell, Georgia



We have audited managements assessment, included in the accompanying
Managements Report on Internal Control Over Financial Reporting, that Caraustar Industries, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations 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 an opinion on managements assessment and an opinion on the effectiveness of the Companys
internal control over financial reporting based on our audit.



We conducted our audit 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. Our audit included 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 considered 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 by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.



Because of
the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the 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, 2005, is fairly stated, in all material respects, based on the criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2005, based on the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2005 of the Company and our report dated March 14, 2006 expressed an unqualified
opinion on those financial statements and financial statement schedule.



/s/    Deloitte & Touche LLP



Atlanta,
Georgia

March 14, 2006



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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.



Not applicable.



ITEM 9A. CONTROLS AND PROCEDURES



Changes in
Internal Control Over Financial Reporting



There were no
changes to our internal control over financial reporting during the fourth quarter of 2005 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.



Disclosure Controls and Procedures.



Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2005. Based on this evaluation, our
chief executive officer and chief financial officer concluded that, as of December 31, 2005, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to
be disclosed by the Companys reports that it files or submits under the Securities Exchange Act of 1934.



The following is managements and our Independent Registered Public Accounting Firms reports on internal control over financial reporting:



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial
statements in conformity with generally accepted accounting principles.



All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.



Management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated
Framework. Based on our assessment, management has determined that as of December 31, 2005, our internal control over financial reporting is effective based on those criteria.



Our Independent Registered Public Accounting Firm, Deloitte & Touche LLP, has audited managements assessment
of the effectiveness of internal control over financial reporting, as stated in their report which appears herein.



March 14, 2006



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ITEM 9B. OTHER INFORMATION



Not
applicable.



PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CARAUSTAR INDUSTRIES, INC.



Information contained under the captions Election of Directors and Governance of the Company Section 16(a) Beneficial
Ownership Reporting Compliance in the Proxy Statement is incorporated herein by reference in response to this Item 10.



The Board of Directors has determined that, Daniel P. Casey and Eric R. Zarnikow are audit committee financial experts, as that term is
defined in SEC regulations. Specifically, the Board determined that each of Mr. Casey, by virtue of his background and experience as the retired chief financial officer of Gaylord Container Corporation, and Mr. Zarnikow by virtue of his
senior financial management experience with Service Master and other businesses, has the following attributes:



| |  |  | an understanding of generally accepted accounting principles and financial statements;
| | - |  | --------------------------------------------------------------------------------------





| |  |  | the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | experience in preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to
the breadth and complexity of issues that can reasonably be expected to be raised by the Companys financial statements, or experience actively supervising persons engaged in such activities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an understanding of internal control over financial reporting; and
| | - |  | ------------------------------------------------------------------



| |  |  | an understanding of audit committee functions.
| | - |  | ----------------------------------------------



The Board of Directors has also determined that Mr. Casey and Mr. Zarnikow are independent directors within the meaning of NASDAQ
rules.



The Company has a code of ethics that governs the
conduct of the Companys directors and all salaried employees, including the Chief Executive Officer, Chief Financial Officer and principal accounting officer. This code, which we call Standards of Business Conduct, is posted on our
corporate website at www.caraustar.com, and we intend to post on our website any substantive changes to the code and any waivers granted under it to the specified officers. The Company also has a code of ethics, called Standards of
Business Conduct, that governs the conduct of the Companys hourly employees. The Standards of Business Conduct for hourly employees are similar to those for salaried employees, with modifications that we believe appropriately reflect the
hourly employees different employment circumstances. These Standards are also posted on our website.



ITEM 11. EXECUTIVE COMPENSATION



Information contained under the caption Executive Compensation in the Proxy Statement, except the item captioned Compensation Committee Report, is incorporated herein by reference in response to this
Item 11.



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS



Information contained under the captions Equity Compensation Plan Information and Share Ownership in the Proxy Statement is
incorporated by reference herein in response to this Item 12.



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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Russell M. Robinson, II, a member of the Board of Directors and former Chairman of the Board of Directors, is a shareholder in the firm of Robinson, Bradshaw & Hinson, P.A., the Companys principal
outside legal counsel, which performed services for the Company during the last fiscal year and during the current fiscal year. Certain members of such firm beneficially owned approximately 122,574 shares of the Companys common stock as of
March 11, 2005.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



Information appearing under the caption Approval of Independent Public Accountants in the Proxy Statement is incorporated herein in response to this Item 14.



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



a. Documents filed as part of this annual report



(1) The following financial statements of the Company and Report of Independent Registered Public Accounting Firm are included in Part II,
Item 8 above.



Consolidated Financial Statements:



Consolidated Balance Sheets as of December 31, 2005 and
2004



Consolidated Statements of Operations for the years
ended December 31, 2005, 2004 and 2003



Consolidated
Statements of Shareholders Equity for the years ended December 31, 2005, 2004 and 2003



Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003



Notes to Consolidated Financial Statements



Report of Independent Registered Public Accounting Firm



Financial Statements of Standard Gypsum, L.P. and Premier Boxboard
LLC, together in each case with the Report of Independent Registered Public Accounting Firm thereon, are filed as Exhibits 99.01 and 99.02 respectively, and are incorporated by reference into Part II, Item 8.



All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, or the required information is included elsewhere in the financial statements.



b. The Exhibits to this report on Form 10-K are listed in the accompanying
Exhibit Index.



c. Schedule II  Valuation and Qualifying
Accounts and Reserves



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##### Table of Contents

SCHEDULE II



CARAUSTAR INDUSTRIES, INC.



VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

For the Years Ended December 31, 2005, 2004 and 2003

(In Thousands)



|                                             |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|-------------------------------------------- |  | ---------------------------- | ----- | ----------------------------- | - | --------------------------------- |  | - | ---------------------- | ---- |  | - | -----
|                                             |  |                              |       | Additions                     |   | Deductions                        |  |   |                       
|                                             |  | Balance at Beginning of Year |       | Charged to Costs and Expenses |   | Write-offsand Deduct-ions Allowed |  |   | Balance at End of Year
|December 31, 2005                            |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|Allowances deducted from accounts receivable |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|Allowance for doubtful accounts              |  | $                            | 3,147 |                               | $ | 270                               |  | $ | (1,145                 | )(a) |  | $ | 2,272
|Allowance for sales returns and discounts    |  |                              | 1,271 |                               |   | 6,670                             |  |   | (6,820                 | )(b) |  |   | 1,121
|                                             |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|Total                                        |  | $                            | 4,418 |                               | $ | 6,940                             |  | $ | (7,965                 | )    |  | $ | 3,393
|                                             |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|December 31, 2004                            |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|Allowances deducted from accounts receivable |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|Allowance for doubtful accounts              |  | $                            | 4,235 |                               | $ | 1,847                             |  | $ | (2,935                 | )(a) |  | $ | 3,147
|Allowance for sales returns and discounts    |  |                              | 1,067 |                               |   | 5,121                             |  |   | (4,917                 | )(b) |  |   | 1,271
|                                             |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|Total                                        |  | $                            | 5,302 |                               | $ | 6,968                             |  | $ | (7,852                 | )    |  | $ | 4,418
|                                             |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|December 31, 2003                            |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|Allowances deducted from accounts receivable |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|Allowance for doubtful accounts              |  | $                            | 4,139 |                               | $ | 3,997                             |  | $ | (3,901                 | )(a) |  | $ | 4,235
|Allowance for sales returns and discounts    |  |                              | 1,247 |                               |   | 7,041                             |  |   | (7,221                 | )(b) |  |   | 1,067
|                                             |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      
|Total                                        |  | $                            | 5,386 |                               | $ | 11,038                            |  | $ | (11,122                | )    |  | $ | 5,302
|                                             |  |                              |       |                               |   |                                   |  |   |                        |      |  |   |      

---

|(a) | Primarily uncollectible accounts receivables written-off.
|--- | ---------------------------------------------------------

|(b) | Sales discounts and returns allowed.
|--- | ------------------------------------



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.



CARAUSTAR INDUSTRIES, INC.By:

/s/    Ronald J. DomanicoRonald J. DomanicoSenior Vice President and Chief Financial OfficerDate: March 14, 2006




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated on.



|                                                                                                   
|---------------------------------------------------------------------------------------------------
|Signature                                                                                          
|                                                                                                   
|/s/    Michael J. Keough                                                                           
|Michael J. Keough, President and Chief Executive Officer (Principal Executive Officer);
Director   
|                                                                                                   
|Date: March 14, 2006                                                                               
|                                                                                                   
|/s/    Ronald J. Domanico                                                                          
|Ronald J. Domanico, Senior Vice President and Chief Financial Officer (Principal Financial
Officer)
|                                                                                                   
|Date: March 14, 2006                                                                               
|                                                                                                   
|/s/    William A. Nix, III                                                                         
|William A. Nix, III, Vice President, Treasurer and Controller (Principal Accounting Officer)       
|                                                                                                   
|Date: March 14, 2006                                                                               
|                                                                                                   
|/s/    James E. Rogers                                                                             
|James E. Rogers, Chairman of the Board                                                             
|                                                                                                   
|Date: March 14, 2006                                                                               
|                                                                                                   
|/s/    L. Celeste Bottorff                                                                         
|L. Celeste Bottorff, Director                                                                      
|                                                                                                   
|Date: March 14, 2006                                                                               

|                                               
|-----------------------------------------------
|                                               
|/s/    Daniel P. CaseyDaniel P. Casey, Director
|                                               
|Date: March 14, 2006                           



97



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##### Table of Contents

|                                                         
|---------------------------------------------------------
|Signature                                                
|                                                         
|/s/    Robert J. ClaninRobert J. Clanin, Director        
|                                                         
|Date: March 14, 2006                                     
|                                                         
|/s/    Charles Greiner, Jr.Charles Greiner, Jr., Director
|                                                         
|Date: March 14, 2006                                     
|                                                         
|John T. Heald, Jr. Director                              
|                                                         
|Date: March     , 2006                                   
|                                                         
|Dennis M. Love, Director                                 
|                                                         
|Date: March     , 2006                                   
|                                                         
|/s/    Bob M. PrillamanBob M. Prillaman, Director        
|                                                         
|Date: March 14, 2006                                     
|                                                         
|Russell M. Robinson, II, Director                        
|                                                         
|Date: March     , 2006                                   
|                                                         
|Eric R. Zarnikow, Director                               
|                                                         
|Date: March     , 2006                                   



98



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EXHIBIT INDEX



|           |  |   |  |                                                                                                                                                                                                                                                                                                       
|---------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  |   |  | Description                                                                                                                                                                                                                                                                                           
|3.01       |  |  |  | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference  Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646])                                                                                                                                
|           |  |  
|3.02       |  |  |  | Third Amended and Restated Bylaws of the Company (Incorporated by reference  Exhibit 3.02 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])                                                                                                                                             
|           |  |  
|4.01       |  |  |  | Specimen Common Stock Certificate (Incorporated by reference  Exhibit 4.01 to Registration Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                            
|           |  |  
|4.02       |  |  |  | Articles 3 and 4 of the Companys Amended and Restated Articles of Incorporation (included in Exhibit 3.01)                                                                                                                                                                                           
|           |  |  
|4.03       |  |  |  | Article II of the Companys Third Amended and Restated Bylaws (included in Exhibit 3.02)                                                                                                                                                                                                              
|           |  |  
|4.04       |  |  |  | Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee, regarding The Companys 7 3/8% Notes due 2009 (Incorporated by
reference  Exhibit 4.05 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])    
|           |  |  
|4.05       |  |  |  | First Supplemental Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee (Incorporated by reference  Exhibit 4.06 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])                                
|           |  |  
|4.06       |  |  |  | Second Supplemental Indenture, dated as of March 29, 2001, between the Company, the Subsidiary Guarantors and The Bank of New York, as Trustee, regarding the Companys 7 3/8% Notes due
2009 (Incorporated by reference  Exhibit 4.07 to Annual Report for 2000 on Form 10-K [SEC File No. 0-20646])
|           |  |  
|4.07       |  |  |  | Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank of New York, as Trustee, regarding the Companys 9 7/8% Senior Subordinated Notes due 2011
(Incorporated by reference  Exhibit 10.02 to Annual Report for 2000 on Form 10-K [SEC File No. 0-20646])          
|           |  |  
|10.01      |  |  |  | Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank of New York, as Trustee, regarding the Companys 7 1/4% Senior Notes due 2010 (Incorporated by
reference  Exhibit 10.01 to Annual Report for 2000 on Form 10-K [SEC File No. 0-20646])                       
|           |  |  
|10.02*     |  |  |  | Consulting Agreement, dated as of August 5, 2005, between the Company and Thomas V. Brown (Incorporated by reference  Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005 [SEC File No. 0-20646])                                                                      
|           |  |  
|10.03*     |  |  |  | Amended and Restated Employment Agreement, dated July 15, 2004, between the Company and Michael J. Keough (Incorporated by reference  Exhibit 10.01 to Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004 [SEC File No. 0-20646])                                                
|           |  |  
|10.04*     |  |  |  | Employment Agreement, dated October 1, 2002, between the Company and Ronald J. Domanico (Incorporated by reference  Exhibit 10.27 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 [SEC File No. 0-20646])                                                                  
|           |  |  
|10.05#*    |  |  |  | Form of Change in Control Severance Agreement, dated November 7, 2005, between the Company and the officers of the Company (Incorporated by reference  Exhibit 10.4 to Quarterly Report
on Form 10-Q for the quarter ended September 30, 2005 [SEC File No. 0-20646])                                
|           |  |  
|10.06#*    |  |  |  | Deferred Compensation Plan, together with copies of existing individual deferred compensation agreements (Incorporated by reference  Exhibit 10.08 to Registration Statement on Form S-1
[SEC File No. 33-50582])                                                                                    



99



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|           |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.07*    |  |  |  | Senior Manager Incentive Compensation Plan for 2005.                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |  |  
|10.08*    |  |  |  | Senior Manager Incentive Compensation Plan for 2006.                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |  |  
|10.09*     |  |  |  | 1996 Director Equity Plan of the Company (Incorporated by reference  Exhibit 10.12 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 [SEC File No.
0-20646])                                                                                                                                                                                                                                                                                       
|           |  |  
|10.10*     |  |  |  | Amendment No. 1 to the Companys 1996 Director Equity Plan, dated July 16, 1998 (Incorporated by reference  Exhibit 10.2 to Current Report on Form 8-K dated June 1, 1999 [SEC File
No. 0-20646])                                                                                                                                                                                                                                                                      
|           |  |  
|10.11*     |  |  |  | Second Amended and Restated 1998 Key Employee Incentive Compensation Plan (Incorporated by reference  Exhibit 10.13 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
[SEC File No. 0-20646])                                                                                                                                                                                                                                                      
|           |  |  
|10.12*     |  |  |  | 2003 Long-Term Equity Incentive Plan of the Company (Incorporated by reference Appendix A to Definitive Schedule 14-A for the 2003 Annual Meeting of Shareholders filed April 7, 2003
[SEC File No. 0-20646])                                                                                                                                                                                                                                                          
|           |  |  
|10.13*     |  |  |  | First Amendment to 2003 Long-Term Equity Incentive Plan of the Company (Incorporated by reference  Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 [SEC
File No. 0-20646])                                                                                                                                                                                                                                                           
|           |  |  
|10.14      |  |  |  | Operating Agreement of Premier Boxboard Limited LLC (Incorporated by reference  Exhibit 10.22 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                                           
|           |  |  
|10.15      |  |  |  | Asset Purchase Agreement between Caraustar Industries, Inc. and Smurfit-Stone Container Corporation, dated as of July 22, 2002 (Incorporated by reference  Exhibit 2 to Current Report on
Form 8-K dated October 15, 2002)                                                                                                                                                                                                                                             
|           |  |  
|10.16      |  |  |  | First Amendment to Asset Purchase Agreement between Caraustar Industries, Inc. and Smurfit-Stone Container Corporation, dated as of September 9, 2002 (Incorporated by reference  Exhibit
10.25 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])                                                                                                                                                                      
|           |  |  
|10.17      |  |  |  | Master Lease Agreement, with Riders Nos. 1 through 3 and Equipment Schedules Nos. 1 through 4, dated September 30, 2002, between Caraustar Industries, Inc. and Banc of America Leasing &
Capital, LLC (Incorporated by reference  Exhibit 10.29 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])                                                                                                                     
|           |  |  
|10.18      |  |  |  | Credit Agreement, dated as of June 24, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors
listed therein, and Bank of America, N.A. as the Administrative Agent regarding the Companys $75.0 million senior credit facility (Incorporated by reference  Exhibit 10.01 to Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 [SEC File No. 0-20646]).
|           |  |  
|10.19      |  |  |  | Security Agreement, dated as of June 24, 2003, by and among the Company and certain subsidiaries identified therein, as guarantors, and Bank of America, N.A, as Administrative Agent
(Incorporated by reference  Exhibit 10.02 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No. 0-20646])                                                                                                                                           
|           |  |  
|10.20      |  |  |  | First Amendment to Credit Agreement, dated as of July 8, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company
identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference  Exhibit 10.03 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No.
0-20646])                                               



100



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|           |    |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---------- | -- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |    |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |    | 
|10.21     |    |  |  |  | Second Amendment to Credit Agreement, dated as of December 22, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company
identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent                                                                                                                                            
|           |    | 
|10.22     |    |  |  |  | Third Amendment to Credit Agreement, dated as of August 3, 2004, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company
identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent                                                                                                                                                
|           |    | 
|10.23      |    |  |  |  | Fourth Amendment to Credit Agreement, dated as of October 25, 2004, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company
identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference  Exhibit 10.03 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 [SEC File No.
0-20646])
|           |    | 
|10.24      |    |  |  |  | Fifth Amendment to Credit Agreement, dated as of March 29, 2005, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company
identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference  Exhibit 10.01 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 [SEC File No.
0-20646])       
|           |    | 
|10.25      |    |  |  |  | Sixth Amendment to Credit Agreement, dated as of September 20, 2005, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company
identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference  Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 [SEC File No.
0-20646])
|           |    | 
|10.26     | ** |  |  |  | Seventh Amendment to Credit Agreement, dated as of December 27, 2005, by and among the Company and certain subsidiaries identified therein, as borrower, identified as guarantors listed
therein, and Bank of America, N.A., as Administrative Agent.                                                                                                                                                                              
|           |    | 
|10.27*     |    |  |  |  | Insurance Security Option Plan (Incorporated by reference  Exhibit 10.22 to Annual Report for 2003 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                           
|           |    | 
|10.28*     |    |  |  |  | Caraustar Industries, Inc. Restoration Plan (Incorporated by reference  Exhibit 10.23 to Annual Report for 2004 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                                              
|           |    | 
|10.29*     |    |  |  |  | Caraustar Industries, Inc. Restoration Plan Amendment, dated as of August 11, 2005 (Incorporated by reference  Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005 [SEC File No. 0-20646])                                                                                                                                                                                                     
|           |    | 
|10.30*     |    |  |  |  | Caraustar Industries, Inc. Restoration Plan Amendment, dated as of November 7, 2005 (Incorporated by reference  Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005 [SEC File No. 0-20646])                                                                                                                                                                                                    
|           |    | 
|10.31*     |    |  |  |  | Director Compensation Arrangements (Incorporated by reference  Exhibit 10.1 to Current Report on Form 8-K filed with SEC on March 1, 2005)                                                                                                                                                                                                                                                                                        
|           |    | 
|10.32     |    |  |  |  | Agreement for Purchase and Sale of Partnership Interests in Standard Gypsum, L.P., dated as of January 17, 2006, by and among the Company, TIN Inc., f/k/a Temple-Inland Forest Products
Corporation, Temple Gypsum Company, Gypsum MGC, Inc., and McQueeny Gypsum Company, LLC                                                                                                                                                    
|           |    | 
|12.01     |    |  |  |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                  
|21.01     |    |  |  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                     



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|           |  |   |  |                                                                                                                                  
|---------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  |   |  | Description                                                                                                                      
|           |  |  
|23.01     |  |  |  | Consent of Deloitte & Touche LLP with respect to the consolidated financial statements of the Company                            
|           |  |  
|23.02     |  |  |  | Consent of Deloitte & Touche LLP with respect to the financial statements of Standard Gypsum, L.P.                               
|           |  |  
|23.03     |  |  |  | Consent of Deloitte & Touche LLP with respect to the financial statements of Premier Boxboard Limited LLC                        
|           |  |  
|23.04     |  |  |  | Consent of Ernst & Young LLP with respect to the financial statements of Standard Gypsum, L.P.                                   
|           |  |  
|31.01     |  |  |  | Certification of CEO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|           |  |  
|31.02     |  |  |  | Certification of CFO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|           |  |  
|32.01     |  |  |  | Certification of CEO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  
|           |  |  
|32.02     |  |  |  | Certification of CFO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  
|           |  |  
|99.01     |  |  |  | Financial Statements of Standard Gypsum, L.P.                                                                                    
|           |  |  
|99.02     |  |  |  | Financial Statements of Premier Boxboard Limited LLC                                                                             

---

| | Filed herewith
|- | --------------

|* | Management contract or compensatory plan required to be filed under Item 15(c) of Form 10-K and Item 601 of Regulation S-K of the Securities and Exchange Commission.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|# | This Exhibit is substantially identical to Change in Control Severance Agreements for the following individuals: Michael J. Keough, Ronald J. Domanico, William A. Nix, III, Jimmy A.
Russell, Thomas C. Dawson, John R. Foster, Steven L. Kelchen, Gregory B. Cottrell and Barry A. Smedstad.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | A request for confidential treatment with respect to this exhibit has been submitted to the SEC, and the information for which confidential treatment has been requested has been
redacted from this exhibit. A complete copy of this document, including the information that has been redacted from the exhibit, is being separately filed with the SEC.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



102