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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



Form 10-K



(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, 2007

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



CARAUSTAR INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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)



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, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ̈    Accelerated filer  x    Non-accelerated filer   ̈    Smaller
reporting company   ̈

Indicate 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, 2007, computed by reference to the closing sale
price on such date, was $149,666,827. 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 12, 2008, 29,481,060 shares of Common Stock, $.10 par value, were outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants definitive Proxy Statement pertaining to the 2008 Annual Meeting of Shareholders (the Proxy Statement) to be filed pursuant to Regulation 14A are incorporated by reference
in Part III of this Form 10-K to the extent stated herein.









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TABLE OF CONTENTS



|         |  |                                                                                                                 |  |   
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|         |  | PART I                                                                                                          |  |   
|         |  |                                                                                                                
|Item 1.  |  | Business                                                                                                        |  | 1 
|         |  |                                                                                                                
|Item 1A. |  | Risk Factors                                                                                                    |  | 7 
|         |  |                                                                                                                
|Item 1B. |  | Unresolved Staff Comments                                                                                       |  | 11
|         |  |                                                                                                                
|Item 2.  |  | Properties                                                                                                      |  | 12
|         |  |                                                                                                                
|Item 3.  |  | Legal Proceedings                                                                                               |  | 12
|         |  |                                                                                                                
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 12
|         |  |                                                                                                                
|         |  | PART II                                                                                                         |  |   
|         |  |                                                                                                                
|Item 5.  |  | Market of the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 13
|         |  |                                                                                                                
|Item 6.  |  | Selected Financial Data                                                                                         |  | 14
|         |  |                                                                                                                
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 15
|         |  |                                                                                                                
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                      |  | 34
|         |  |                                                                                                                
|Item 8.  |  | Financial Statements and Supplementary Data                                                                     |  | 36
|         |  |                                                                                                                
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 81
|         |  |                                                                                                                
|Item 9A. |  | Controls and Procedures                                                                                         |  | 81
|         |  |                                                                                                                
|Item 9B. |  | Other Information                                                                                               |  | 83
|         |  |                                                                                                                
|         |  | PART III                                                                                                        |  |   
|         |  |                                                                                                                
|Item 10. |  | Directors and Executive Officers and Corporate Governance.                                                      |  | 83
|         |  |                                                                                                                
|Item 11. |  | Executive Compensation                                                                                          |  | 83
|         |  |                                                                                                                
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 83
|         |  |                                                                                                                
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                       |  | 83
|         |  |                                                                                                                
|Item 14. |  | Principal Accountant Fees and Services                                                                          |  | 84
|         |  |                                                                                                                
|         |  | PART IV                                                                                                         |  |   
|         |  |                                                                                                                
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                      |  | 84



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INTRODUCTION



Caraustar Industries, Inc. operated its business through 22 subsidiaries
across the United States and Canada 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, including
Managements Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, that represent our expectations, anticipations or beliefs about future events, including our operating results, financial condition, liquidity, expenditures, and compliance with legal and
regulatory requirements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ
materially depending on a variety of important factors, including, but not limited to, fluctuations in raw material prices and energy costs, our ability to refinance our substantial indebtedness at maturity, downturns in industrial production,
housing and construction and the consumption of durable and nondurable goods, the degree and nature of competition, demand for our products, the degree of success achieved by our new product initiatives, increases in pension and insurance costs,
changes in government regulations, the application or interpretation of those regulations or in the systems, personnel, technologies or other resources we devote to compliance with regulations, our ability to complete acquisitions and successfully
integrate the operations of acquired businesses, the impact on the company of its results of operations in recent years and the sufficiency of its financial resources to absorb the impact, our ability to successfully dispose of our assets held for
sale, unforeseen difficulties with the integration of our IT systems. Additional relevant risk factors that could cause actual results to differ materially are discussed 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. 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 and core
| | - |  | -------------



| |  |  | Folding carton.
| | - |  | ---------------



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.



Operations and Products



Paperboard.
Our principal manufacturing activity is the production of uncoated recycled paperboard, however, we do have one manufacturing facility that is used solely for the production of clay-coated recycled paperboard. In this manufacturing



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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 external sale in the following four end-use markets:



| |  |  | Tube and core
| | - |  | -------------



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



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



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



We currently operate a total of 11 paperboard mills, including our 50% owned Premier Boxboard Limited, LLC joint venture (Premier Boxboard).
These mills are located in the following states: Georgia, Indiana, Iowa, North Carolina, Ohio, South Carolina, Tennessee, Washington and Virginia.



In 2007, approximately 52% of the recycled paperboard sold by our paperboard mills was consumed internally by our converting facilities; the remaining 48%
was sold to external customers and represented 24% of our 2007 sales of $854.2 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 EndedDecember 31, |  
|End-Use Market                    |  | 2005                    |   |  | 2006 |   |  | 2007 |  
|Tube and core                     |  | 2                       | % |  | 2    | % |  | 3    | %
|Folding cartons                   |  | 13                      | % |  | 10   | % |  | 6    | %
|Gypsum wallboard facing paper     |  | 3                       | % |  | 4    | % |  | 3    | %
|Specialty paperboard products (1) |  | 11                      | % |  | 11   | % |  | 12   | %
|                                  |  |                         |   |  |      |   |  |      |  
|                                  |  | 29                      | % |  | 27   | % |  | 24   | %



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



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



Recovered Fiber.We operate seven 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 10%, 13% and 17% of our sales in 2005, 2006 and 2007, respectively.



Tube and Core. Our largest integrated converting operation is the production of tubes and cores. The principal
applications of these products are textile cores, paper mill cores, yarn carriers, carpet cores and film, foil and metal cores. Our 31 tube and core converting plants obtain approximately 89% of their paperboard needs from our paperboard mills and
the remaining 11% 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 manufacturing skill and new converting technology. These markets include the yarn carrier and plastic film markets, cores used in certain segments of the paper industry and applications
for the construction 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 and core division operates five facilities that produce specialty converted products used in
industrial packaging protection applications (edge protectors). Our tube and core and related sales to external customers accounted for 34%, 33% and 34% of our total sales in 2005, 2006 and 2007, respectively.



In 2005 and 2006 our tube and core segment also manufactured composite
containers and plastics, producing composite containers used in the adhesive, sealant, food and food service markets, as well as grease cans, tubes, cartridges and other components. We sold these operations in October 2007.



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Folding Carton. We
manufacture folding cartons and rigid set-up boxes at nine plants. During 2007, these plants obtained approximately 12% of their paperboard needs from our paperboard mills and the remaining 88% 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 sales accounted for 25% of our sales in 2005, 2006 and 2007, respectively.



Sales by Segment. Our consolidated sales for the year ended December 31, 2007 were $854.2 million. Our four business segments accounted for
the following percentages of sales for that period:



| |  |  | Paperboard  24%
| | - |  | ----------------



| |  |  | Recovered fiber  17%
| | - |  | ---------------------



| |  |  | Tube and core  34%
| | - |  | -------------------



| |  |  | Folding carton  25%.
| | - |  | ---------------------



Joint Ventures. We currently operate one joint venture with Temple-Inland, Inc. (Temple-Inland), Premier Boxboard, in which we own a
50% interest and manage the day-to-day operations. Premier Boxboard produces a lightweight gypsum facing paper along with containerboard grades. We believe that Premier Boxboard is the lowest cost gypsum facing paper mill in the industry.



As of January 1, 2006, we had a 50% interest in Standard
Gypsum, L.P. (Standard Gypsum), another joint venture with Temple-Inland that manufactured gypsum wallboard. 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  Liquidity and Capital Resources  Off-Balance Sheet Arrangements  Joint Venture Financings and the notes to the consolidated financial statements
included in Part II, Item 8 of this annual report.



Raw Materials.



Recovered fiber, derived from recycled paperstock, is the
most significant raw material we use in our mill operations. Our paper board mills purchased approximately 96% of their recovered fiber requirements from our recovered fiber segment. We obtain the balance from a combination of other sources such as
small waste collectors and waste collection businesses. Our recovered fiber segment sorts and bales recovered fiber and then either transfers 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 adversely affected 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. During 2006 we
consolidated the procurement of recovered fiber in order to maximize efficiency and leverage our scale. As a result of this initiative we purchased approximately 96% of our recovered fiber requirements from our recovered fiber segment during 2006
and 2007, as compared to 76% in 2005.



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. In 2006, the average energy cost in our mill system was approximately $74 per ton and in 2007 it was $65 per ton, a 12.2% decrease. Until the last three years, our business had not been significantly affected by
fluctuating energy costs, and we historically have not passed energy cost increases through to our customers. Although we have responded to recent energy cost increases by raising our selling prices, our ability to realize the full benefit of these
price increases is dependent upon, and limited by market dynamics including supply and demand and contractual commitments that may prescribe the timing and amount of future price increases, without



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direct market correlation. 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.



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 170 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 7.1%, 6.7% and 7.0% of our sales for 2005, 2006 and 2007, 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 our customers 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 and core.



In the southeastern United States, where we historically have marketed our tubes and cores, we believe that we and the Sonoco Products Company
(Sonoco) 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 nearly half of the total tube and core market in the United States in 2007. We
also compete with several regional companies and numerous small local companies in the tube and core market.



Folding Carton.



The
folding carton 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., the Rock-Tenn Company and Altivity Packaging. The merger between Graphic Packaging Inc. and Altivity
Packaging could result in the emergence of a strong national competitor.



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.



Specialty paperboard products.



In our sales of specialty products and in sales of recycled paperboard to
other manufacturers for the production of tubes and cores, folding cartons and boxes and miscellaneous converted products (other than gypsum wallboard facing paper), we



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compete with a number of recycled paperboard manufacturers, including the Rock-Tenn Company and The Newark Group, Inc. We believe that none of our
competitors are dominant in any of these markets.



Competitive Position.



Recovered fiber costs were considerably higher on average
in 2007 as compared to 2006. Our average cost for recovered fiber per ton of recycled paperboard produced was approximately $146 during 2007, a 42.1% increase from $103 per ton in 2006. Although no specific information is available about our
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 each of 2007 and 2006, unbaled recovered fiber represented approximately 4% 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 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.



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.



We operate 71 facilities (69 in the United States and two in Canada) and
have approximately 3,570 employees, of whom approximately 2,770 are hourly and 800 are salaried. Approximately 1,030 of our hourly employees are represented by labor unions. All principal union contracts expire during the period 2008-2010. Our union
contracts that expire in 2008 cover approximately 435 of our hourly employees. Although we consider our relations with our employees to be good, we can give no assurance that we will be able to renegotiate union contracts with 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.



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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 and pre-Executive Officer experience (if an Executive Officer for less than 5 years)                                                                                                                                      
|                           |  |                                                            
|Michael J. Keough (56)     |  | President and Chief Executive Officer; Director             |  | President and CEO since 1/2005; Director since 10/2002; Senior Vice President and Chief Operating Officer 3/2002-2004.                                                                                                                                           
|                           |  |                                                            
|Ronald J. Domanico (49)    |  | Senior Vice President and Chief Financial Officer; Director |  | Senior Vice President and Chief Financial Officer since 1/2005; Director since 5/2006; Vice President and CFO
10/2002-12/2004.                                                                                                                                   
|                           |  |                                                            
|Steven L. Kelchen (50)     |  | Vice President, Converted Products Group                    |  | Since 5/2006; 8/2004-2006 Vice President, Caraustar Custom Packaging Group; 2000-2004 Vice President, Regional Manager, Folding
Cartons & Labels Smurfit Stone Container Corporation, a leading integrated manufacturer of paperboard and paper-based packaging.
|                           |  |                                                            
|Thomas C. Dawson, Jr. (56) |  | Vice President, Mill Group                                  |  | Vice President since 12/2003; employed with Caraustar Mill Group since 1973.                                                                                                                                                                                     
|                           |  |                                                            
|John R. Foster (62)        |  | Vice President, Sales and Marketing                         |  | Since 9/1996.                                                                                                                                                                                                                                                    
|                           |  |                                                            
|Gregory B. Cottrell (50)   |  | Vice President, Recovered Fiber Group                       |  | Since 10/2004; employed with Caraustar Recovered Fiber Group since 1994.                                                                                                                                                                                         
|                           |  |                                                            
|William A. Nix, III (56)   |  | Vice President, Finance and Chief Accounting Officer        |  | Since 1/2005; 4/2001-2004 Vice President, Treasurer and Controller.                                                                                                                                                                                              
|                           |  |                                                            
|Barry A. Smedstad (61)     |  | Vice President, Human Resources and Public Relations        |  | Since 1/1999.                                                                                                                                                                                                                                                    
|                           |  |                                                            
|Wilma E. Beaty (41)        |  | Vice President, General Counsel and Secretary               |  | Since 1/2007; employed with Caraustar since 2004; May 1999 through 2003 Corporate Counsel, Wegmans Food Markets, Inc. a regional food retail
chain with stores in New York, Pennsylvania, New Jersey, Virginia and Maryland.                                     



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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 part or all 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 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. Our substantial level of indebtedness, including our Senior Notes due in 2009, increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on, or other amounts in respect of
our indebtedness. We are attempting to refinance our $200.0 million outstanding Senior Notes due in June 2009. We are evaluating various refinancing alternatives. We may not, however, be able to obtain refinancing on terms acceptable to us, or at
all. We may also incur additional long-term debt, increasing these risks. 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;
| | - |  | --------------------------------------------------------------------------------



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



| |  |  | 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 disadvantage compared to our competitors that have less debt;
| | - |  | ------------------------------------------------------------------------------------



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



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 and core  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.
| | - |  | -------------------------------------------------------------------------------------------------



7



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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 and housing and construction. 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 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 and financial performance may be adversely affected 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 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 increases 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, market
dynamics including supply and demand, and contractual commitments that may prescribe the timing and amount of future price increases, without direct market correlation. For all these reasons, we may not be able to realize the full benefits of
pricing increases that we announce and work 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 in 2007 decreased 12.2% compared to 2006. In 2006, the average energy cost in our mill system was approximately $74 per ton and in 2007 it was $65 per ton. In 2006, we
experienced a 1.4% increase in energy costs compared to 2005. Until the last several years, our business had not been significantly affected by fluctuating energy costs, and we historically have not passed energy cost increases through to our
customers. Although we have responded to 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 dynamics such as pricing strategies of our
competitors and contractual commitments that affect our ability to raise prices as fast as our costs increase. 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 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 to evaluate and pursue acquisition opportunities
strategically, subject to available funding and credit flexibility. Growth through acquisition involves risks, many of which may continue to affect us based on previous acquisitions. 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.



8



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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 Notes 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 have to do so on terms that we consider less 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.



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
previously 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 remediation 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 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 wallboard manufacturing companies, including National Gypsum Company, The Newark Group, Inc., the Rock-Tenn Company, Smurfit-Stone Container Corporation, Altivity Packaging,
the Sonoco Products Company, Graphic Packaging and USG Corporation, along with numerous smaller paperboard and packaging companies. As a result of product substitution, we also compete indirectly with manufacturers selling to the same end-use
markets, which products use other materials including flexible packaging. 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 find lower
labor cost and the emergence of new, foreign competitors in these countries. 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



9



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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 certain facilities, which could 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 2007, restructuring and impairment costs have totaled $241.8 million, of which approximately
$195.8 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 rationalization of manufacturing and converting facilities. However, we can give no assurance that the cost reductions contemplated by our recent and future
restructuring activities will be achieved within the expected timeframe, 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 71 mills and
converting facilities (69 in the United States and two in Canada). Natural disasters, such as hurricanes, tornadoes, fires, ice storms, wind storms, floods and other weather conditions, unforeseen operating problems and other events beyond our
control may adversely affect the 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 2008
and 2010. 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.



10



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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 effort required to replace these systems and reengineer our 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, 2007.



11



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##### Table of Contents



ITEM 2. PROPERTIES



Facilities. The following table sets forth certain information concerning our facilities. Unless otherwise indicated, we own these facilities.



|                                                     |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------------------------------------------- |  | ------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Type of Facility                                     |  | Number ofFacilities |  | Locations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                     |  |                    
|PAPERBOARD                                           |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                     |  |                    
|Paperboard Mills (1)                                 |  | 10                  |  | Austell, GA (Mill #1); Austell, GA (Mill #2); Austell, GA (Sweetwater); Tama, IA; Charlotte, NC; Cincinnati, OH; Taylors, SC;
Chattanooga, TN; Richmond, VA; Tacoma, WA                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                     |  |                    
|Specialty Converting Plants                          |  | 3                   |  | Austell, GA; Charlotte, NC; Taylors, SC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                     |  |                    
|RECOVERED FIBER                                      |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                     |  |                    
|Recovered Fiber Collection and Processing Plants (2) |  | 7                   |  | Columbus, GA; Dalton, GA (leased); Doraville, GA; Charlotte, NC; Cleveland, OH; Hardeeville, SC; Texarkana,
TX (leased)                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                     |  |                    
|TUBE AND CORE                                        |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                     |  |                    
|Tube and Core Plants                                 |  | 31                  |  | Linden, AL; Crossett, AR; McGehee, AR (leased); Phoenix, AZ (leased); Kingston, Ontario, Canada; Scarborough, Ontario, Canada; Cantonment,
FL; Palatka, FL; Austell, GA; Cedar Springs, GA; Dalton, GA; Beardstown, IL; Franklin, KY (leased); West Monroe, LA; Saginaw, MI; Corinth, MS; Asheville, NC; Kernersville, NC; Minerva, OH; Toledo, OH; Lancaster, PA (leased); Rock Hill, SC;
Taylors, SC; Arlington, TX (leased); Silsbee, TX; Texarkana, TX; Salt Lake City, UT (leased); Franklin, VA; West Point, VA (leased); Weyers Cave, VA (leased); Tacoma, WA (leased)
|                                                     |  |                    
|Specialty Converting Plants                          |  | 5                   |  | Austell, GA; Lancaster, PA (leased); Arlington, TX; Tacoma, WA (leased); Beardstown, IL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                     |  |                    
|Special Services and Other Facilities                |  | 1                   |  | Kernersville, NC (leased)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                     |  |                    
|FOLDING CARTON                                       |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                     |  |                    
|Carton Plants                                        |  | 9                   |  | Denver, CO; Versailles, CT; Burlington, NC; Charlotte, NC; Randleman, NC; Grand Rapids, MI; St. Louis, MO; Kingston Springs, TN; Chicago,
IL (leased);                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                     |  |                    
|Special Services                                     |  | 3                   |  | Versailles, CT; Cleveland, OH (leased); Charlotte, NC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                     |  |                    
|JOINT VENTURES                                       |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                     |  |                    
|Paperboard Mill                                      |  | 1                   |  | Newport, IN (50% interest)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                     |  |                    
|Recovered Fiber Facility                             |  | 1                   |  | Los Angeles, CA (49% interest)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



|(1) | All of our paperboard mills produce uncoated recycled paperboard with the exception of our Tama, IA paperboard mill, which produces clay-coated recycled boxboard.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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, 2007.



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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 Nasdaq Global Market
(Nasdaq) under the symbol CSAR. As of March 12, 2008, there were approximately 610 shareholders of record and, as of that date, we estimate that there were approximately 3,360 beneficial owners holding stock in nominee or
street name and approximately 837 holders of shares in the Companys 401(k) plan. The table below sets forth quarterly high and low stock prices during the years 2006 and 2007.



|               |  |      |       |      |   |      |  |     |      |  |   |     
|-------------- |  | ---- | ----- | ---- | - | ---- |  | --- | ---- |  | - | ----
|               |  | 2006 |       | 2007
|               |  | High |       | Low  |   | High |  | Low
|First Quarter  |  | $    | 12.08 |      | $ | 8.57 |  | $   | 8.44 |  | $ | 6.15
|Second Quarter |  |      | 10.75 |      |   | 7.60 |  |     | 7.86 |  |   | 5.15
|Third Quarter  |  |      | 9.03  |      |   | 6.63 |  |     | 5.53 |  |   | 3.20
|Fourth Quarter |  |      | 11.00 |      |   | 7.00 |  |     | 5.00 |  |   | 2.91



The Company suspended
dividend payments in 2002 and does not expect to distribute dividends until our cash flow and financial performance improves. As described in Part II, Item 7 under Managements Discussion and Analysis of Financial Condition and
Results of Operations  Liquidity and Capital Resources, our debt agreements contain certain limitations on the payment of dividends and currently preclude us from doing so.



There were no 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 2007.



Information with respect to securities authorized for issuance under equity compensation plans can be found under the captions Equity Compensation
Plan Information and Share Ownership in the Definitive Proxy Statement to be filed with the SEC in connection with the Companys 2008 Annual Meeting of shareholders (the Proxy Statement) pursuant to Regulation 14A
and is incorporated herein by reference.



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ITEM 6. SELECTED FINANCIAL DATA



|                                                                                   |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|---------------------------------------------------------------------------------- |  | ------------------------------------- | -------- | ---- | - | ----------- |  | ---- | --------- | ---- | - | --------- |  | - | --------
|                                                                                   |  | Year Ended December 31,              
|                                                                                   |  | 2007                                  |          | 2006 |   | 2005        |  | 2004 |           | 2003
|                                                                                   |  | (In thousands, except per share data)
|Summary of Operations                                                              |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|Sales                                                                              |  | $                                     | 854,219  |      | $ | 933,044     |  | $    | 905,711   |      | $ | 905,902   |  | $ | 849,129 
|Cost of sales                                                                      |  |                                       | 747,780  |      |   | 801,351     |  |      | 777,523   |      |   | 762,140   |  |   | 706,141 
|Selling, general and administrative expenses                                       |  |                                       | 103,193  |      |   | 122,529     |  |      | 125,725   |      |   | 123,390   |  |   | 133,993 
|Goodwill impairment                                                                |  |                                       |         |      |   |            |  |      | (C)49,859 |      |   |          |  |   |        
|Restructuring and impairment costs                                                 |  |                                       | 13,183   |      |   | 37,790      |  |      | 75,502    |      |   | 21,402    |  |   | 14,887  
|Gain on sale of real estate                                                        |  |                                       |         |      |   |            |  |      |          |      |   | (D)10,323 |  |   |        
|                                                                                   |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|(Loss) income from operations                                                      |  |                                       | (9,937)  |      |   | (28,626)    |  |      | (122,898) |      |   | 9,293     |  |   | (5,892) 
|Other (expense) income:                                                            |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|Interest expense                                                                   |  |                                       | (18,760) |      |   | (25,913)    |  |      | (41,961)  |      |   | (42,160)  |  |   | (43,897)
|Interest income                                                                    |  |                                       | 208      |      |   | 3,829       |  |      | 2,629     |      |   | 948       |  |   | 1,026   
|Write-off of deferred debt costs                                                   |  |                                       |         |      |   |            |  |      |          |      |   |          |  |   | (1,812) 
|Equity in income of unconsolidated affiliates                                      |  |                                       | 1,770    |      |   | 5,613       |  |      | 37,043    |      |   | 25,251    |  |   | 8,354   
|Gain on sale of interest in unconsolidated affiliate                               |  |                                       | 19       |      |   | (A)135,247  |  |      |          |      |   |          |  |   |        
|Loss on redemption of senior subordinated notes                                    |  |                                       |         |      |   | (B)(10,272) |  |      |          |      |   |          |  |   |        
|Other, net                                                                         |  |                                       | 370      |      |   | 52          |  |      | 537       |      |   | (847)     |  |   | 552     
|                                                                                   |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|                                                                                   |  |                                       | (16,393) |      |   | 108,556     |  |      | (1,752)   |      |   | (16,808)  |  |   | (35,777)
|                                                                                   |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|(Loss) income from continuing operations before income taxes and minority interest |  |                                       | (26,330) |      |   | 79,930      |  |      | (124,650) |      |   | (7,515)   |  |   | (41,669)
|Benefit (provision) for income taxes                                               |  |                                       | 8,712    |      |   | (27,984)    |  |      | 29,601    |      |   | 2,336     |  |   | 14,867  
|Minority interest in (income) losses                                               |  |                                       |         |      |   | (102)       |  |      | 273       |      |   | (184)     |  |   | 196     
|                                                                                   |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|(Loss) income from continuing operations                                           |  |                                       | (17,618) |      |   | 51,844      |  |      | (94,776)  |      |   | (5,363)   |  |   | (26,606)
|(Loss) income from discontinued operations before income taxes                     |  |                                       | (8,221)  |      |   | (6,809)     |  |      | (11,265)  |      |   | 2,186     |  |   | (661)   
|Benefit (provision) for income taxes of discontinued operations                    |  |                                       | 1,323    |      |   | 2,297       |  |      | 2,655     |      |   | (802)     |  |   | 232     
|                                                                                   |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|(Loss) income from discontinued operations                                         |  |                                       | (6,898)  |      |   | (4,512)     |  |      | (8,610)   |      |   | 1,384     |  |   | (429)   
|                                                                                   |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|Net (loss) income                                                                  |  | $                                     | (24,516) |      | $ | 47,332      |  | $    | (103,386) |      | $ | (3,979)   |  | $ | (27,035)
|                                                                                   |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|Diluted weighted average shares outstanding                                        |  |                                       | 28,621   |      |   | 28,607      |  |      | 28,774    |      |   | 28,479    |  |   | 27,993  
|Diluted Per Share and Market Data                                                  |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|(Loss) income from continuing operations                                           |  | $                                     | (0.62)   |      | $ | 1.82        |  | $    | (3.29)    |      | $ | (0.19)    |  | $ | (0.95)  
|(Loss) income from discontinued operations                                         |  |                                       | (0.24)   |      |   | (0.16)      |  |      | (0.30)    |      |   | 0.05      |  |   | (0.02)  
|Net (loss) income                                                                  |  |                                       | (0.86)   |      |   | 1.66        |  |      | (3.59)    |      |   | (0.14)    |  |   | (0.97)  
|Market price on December 31                                                        |  |                                       | 3.09     |      |   | 8.09        |  |      | 8.69      |      |   | 16.82     |  |   | 13.80   
|Shares outstanding, December 31                                                    |  |                                       | 29,465   |      |   | 29,084      |  |      | 28,786    |      |   | 28,753    |  |   | 28,222  
|Total Market Value of Common Stock                                                 |  | $                                     | 91,048   |      | $ | 235,290     |  | $    | 250,150   |      | $ | 483,625   |  | $ | 389,464 
|Balance Sheet and Other Data                                                       |  |                                       |          |      |   |             |  |      |           |      |   |           |  |   |         
|Cash and cash equivalents                                                          |  | $                                     | 6,548    |      | $ | 1,022       |  | $    | 95,152    |      | $ | 89,756    |  | $ | 85,551  
|Property, plant and equipment, net                                                 |  |                                       | 239,909  |      |   | 263,605     |  |      | 255,037   |      |   | 388,134   |  |   | 410,772 
|Depreciation and amortization                                                      |  |                                       | 19,907   |      |   | 24,171      |  |      | 28,493    |      |   | 30,089    |  |   | 30,991  
|Capital expenditures                                                               |  |                                       | 26,601   |      |   | 38,169      |  |      | 24,272    |      |   | 20,891    |  |   | 20,006  
|Total assets                                                                       |  |                                       | 572,020  |      |   | 624,275     |  |      | 859,132   |      |   | 959,705   |  |   | 960,255 
|Current maturities of long-term debt                                               |  |                                       | 5,830    |      |   | 5,830       |  |      | 85        |      |   | 80        |  |   | 106     
|Long-term debt, less current maturities                                            |  |                                       | 253,012  |      |   | 260,092     |  |      | 492,305   |      |   | 506,141   |  |   | 531,001 
|Shareholders equity                                                               |  |                                       | 139,819  |      |   | 161,586     |  |      | 108,396   |      |   | 217,252   |  |   | 219,877 
|Total shareholders equity and debt                                                |  | $                                     | 398,661  |      | $ | 427,508     |  | $    | 600,786   |      | $ | 723,473   |  | $ | 750,984 



|(A) | For additional information see Note 6 to our consolidated financial statements included in Part II, Item 8 of this annual report.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(B) | For additional information see Note 7 to our consolidated financial statements included in Part II, Item 8 of this annual report.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(C) | Goodwill impairment in the paperboard segment due to the decision to sell the coated paperboard mills in Rittman, Ohio and Versailles, Connecticut.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Gain on the sale of paperboard mill in Chicago, Illinois.
|--- | ---------------------------------------------------------



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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 and
operates a specialty converting operation. The recovered fiber segment collects and sells recycled paper and brokers recycled paper and other paper rolls. The tube and core segment produces spiral and convolute-wound tubes and cores. The folding
carton segment produces printed and unprinted folding cartons and set-up boxes.



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 52% in 2007. The remaining 48% of our
paperboard production is sold to external customers in any of the four recycled paperboard end-use markets: tube and core; 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 venture Premier Boxboard. 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. The previous sales of our interest in Standard Gypsum, our corrugated box plant and partition businesses, our two coated recycled paperboard mills and our specialty packaging businesses, as well as the recent sale
of our composite container and plastics businesses, are all part of our strategic transformation plan to reduce our debt and better position ourselves to compete and leverage our expertise in our core businesses.



We are a holding company that operates our business through 22 subsidiaries
as of the date of this filing. We also own a 50% interest in a joint venture with Temple-Inland. We have one additional joint venture with an unrelated entity in which our investment and share of earnings are immaterial. We had an additional joint
venture during 2007, which interest we sold. Our investment and share of earnings in that joint venture were immaterial. 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.



Our results of operations described below reflect the results for our continuing operations and the results for the various periods described have been
adjusted to eliminate the results of discontinued operations.



Key Business
Indicator and Trends



Historically, demand in our industry
has been closely correlated with the domestic economy in general, and with consumer nondurable consumption (packaging segment) and industrial production (tube and core segment), specifically. Demand tends to be cyclical in nature, with cycles
lasting three to five years depending on 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 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.



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Paperboard mill operating
rates are affected by demand and by mill closures. Industry demand decreased from 2000 to 2002 due primarily to a recessionary general economy, the continued migration of U.S. manufacturing offshore to find lower labor cost 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, which could continue to negatively affect operating results.



LOGO



Industry Source: American Forest and
Paper Association.



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 2007, restructuring and impairment costs have totaled $241.8
million, of which approximately $195.8 million have been noncash charges. See Results of Operations 2007  2006 and Results of Operations 2006  2005. 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 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 decreased by 65% in 2007 versus 2006, and 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 approximately $103 and $146 during 2006 and 2007, respectively.



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 2005, the average energy cost in our mill system was approximately $73 per ton compared to $74 per ton in 2006, a 1.4% increase. In
2007 energy costs averaged $65 per ton, a decrease of 12.2% from 2006. Until the last several years, our business had not been significantly affected by fluctuating energy costs, and we historically have not passed increases in energy costs through
to our customers. 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



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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 1A, Risk Factors  Our business
and financial performance may be adversely affected 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 conditions 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 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, 2006 and 2007 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 future 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, 2006 and 2007 was $2.3 million, $2.2 million and $3.7 million, respectively, and our provision for uncollectible accounts was $270 thousand, $1.4 million and $2.5 million for the years ending 2005, 2006 and 2007,
respectively. The increase in our provision during 2007 was primarily the result of a customer bankruptcy. The low 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 material (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. 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, 2006 and 2007, 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



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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.



In December 2005, we recognized certain impairment indicators related to our
decision, at that time, to exit the coated recycled paperboard business. As a result, we retested our goodwill as of December 31, 2005 and recorded impairment charges of approximately $10.5 million in our paperboard segment and $39.3 million in
our folding carton segment. The goodwill impairment recorded in our folding carton segment resulted from the expected loss of synergies that existed between the coated recycled paperboard business and the folding carton segment resulting from the
proposed disposition of the coated recycled paperboard business at that time. Additionally, in 2007 we wrote off approximately $5.0 million of goodwill related to the divestiture of our composite container and plastics businesses.



Our most recent annual goodwill impairment test was performed in December
2007 and did not result in any additional goodwill impairment. We believe that our remaining goodwill balance of $122.5 million as of December 31, 2007 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
recognized as an impairment by reducing the carrying value of the asset to its estimated fair value. 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 of $85.6 million, $28.7 million and $9.7 million related to property, plant and equipment were recorded
in 2005, 2006 and 2007, respectively. Of these amounts $11.7 million, $100 thousand and $8.7 million were recorded in discontinued operations during 2005, 2006 and 2007, respectively. During 2005 and 2006, respectively, approximately $75.4 million
and $16.9 million of the impairments were related to the disposition of the Sprague, Connecticut and Rittman, Ohio coated paperboard mills. The assets impaired include real estate and machinery and equipment related to operations that permanently
closed in conjunction with our restructuring activities, discontinued businesses and routine asset disposals. The charges represent the difference between the carrying value of the assets and the estimated fair value. Fair value for assets held for
sale as of December 31, 2005 were estimated based on considerations of preliminary indication of values from potential buyers, supported by industry multiples of earnings before interest, taxes and depreciation, discounted cash flows, and
brokers opinions of value for real estate. Real estate held for sale as of December 31, 2007 of $1.7 million is recorded as a component of other current assets.



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



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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 2007 would have resulted in a $345 thousand increase in workers compensation expense and accrued liability at December 31, 2007. Our self-insured health care liability is estimated based on our actual claim experience
and multiplied by a time lag factor of 37 days. The lag factor represents an estimate of the number of days based on historical experience that claims have been incurred but not yet reported and, therefore, should be recorded as a liability. A 10.0%
increase in the lag factor would have resulted in a $181 thousand increase in our healthcare costs and accrued liability at December 31, 2007. Future actual costs related to self-insured coverage 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 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.



Effective January 1, 2007, we adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of SFAS No. 109. FIN
No. 48 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. As a result of implementing FIN No. 48, the Company recognized a net increase of $3.1 million in the reserve for unrecognized tax benefits, which was accounted for as a reduction to the
January 1, 2007 retained earnings balance.



At
December 31, 2007 and 2006, we had net federal and state deferred tax assets related to net operating losses of $35.5 million and $22.2 million, respectively. At December 31, 2007 and 2006 we established valuation allowances of $9.8
million and $15.8 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. We contributed approximately $13.1 million, $0, and $11.9 million during 2005, 2006, and 2007,
respectively. Based on our current estimate of future funding requirements, we expect to make contributions of approximately $9.4 million during 2008.



In September 2004, we 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 all employees other than those 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 our 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, 2007.



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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 and SERP projected benefit obligations as
of:



|                                               |  |      |   |  |              |   |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | - |  | ------------ | - |  | ---- | - |  | ---- | -
|                                               |  | SERP |   |  | Pension Plan |  
|                                               |  | 2006 |   |  | 2007         |   |  | 2006 |   |  | 2007 |  
|Weighted average discount rate                 |  | 5.85 | % |  | 6.10         | % |  | 6.05 | % |  | 6.30 | %
|Weighted average rate of compensation increase |  | 4.00 | % |  | 4.00         | % |  | 3.00 | % |  | 3.00 | %



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



|                                                        |  |      |   |  |              |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------------------------------- |  | ---- | - |  | ------------ | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                                        |  | SERP |   |  | Pension Plan |  
|                                                        |  | 2005 |   |  | 2006         |   |  | 2007 |   |  | 2005 |   |  | 2006 |   |  | 2007 |  
|Weighted average discount rate                          |  | 5.75 | % |  | 5.75         | % |  | 5.85 | % |  | 5.75 | % |  | 5.75 | % |  | 6.14 | %
|Weighted average expected rate of return on plan assets |  | N/A  |   |  | N/A          |   |  | N/A  |   |  | 8.50 | % |  | 8.50 | % |  | 8.00 | %
|Weighted average rate of compensation increase          |  | 3.00 | % |  | 4.00         | % |  | 4.00 | % |  | 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 6.30% and 6.05% at December 31, 2007 and 2006, respectively. 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 6.30% 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 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, 2007 projected benefit
obligation of approximately $3.9 million and estimated 2008 net pension expense of approximately $420 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 approximately 58% equity, 36% fixed income and 6% 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 of December 31, 2007 and 2006, we used expected weighted average rates of return of 8.0% and 8.5%, respectively. A 0.25% change in the
weighted average expected rate of return would change estimated 2008 net pension expense approximately $274 thousand.



In the year ending December 31, 2007, we made contributions of approximately $11.9 million. No contribution was required or made in the year ending
December 31, 2006. We expect to make contributions of approximately $9.4 million during 2008. Primarily as a result of our contributions of approximately $11.9 million, the under-funded status of our Pension Plan and the SERP decreased by
approximately $10.6 million in 2007. 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 $503 thousand, $571 thousand and $390 thousand for the years ended December 31, 2005, 2006 and 2007, respectively. The
accumulated postretirement benefit obligations at December 31, 2006 and 2007 were determined using a weighted average discount rate of 5.90% and 6.10%, respectively. The rate of increase in the costs of covered health care benefits is assumed
to be 7.0% in 2008, decreasing 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, 2007 by approximately $507 thousand and $438 thousand, respectively and this would have increased or decreased net periodic postretirement benefit cost by approximately $33 thousand and $28 thousand, respectively, for the year
ended December 31, 2007.



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.



20



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##### Table of Contents



Results of Operations 2006  2007



The volume information shown below includes shipments of
paperboard products (excluding volume shipped by our unconsolidated joint ventures) combined and presented by end-use market as well as by reporting segments. It is important to note, however, that portions of our sales do not have related
paperboard volume, such as sales of recovered fiber.



|                                                          |  |                         |  |        |  |        |         |  |        |   
|--------------------------------------------------------- |  | ----------------------- |  | ------ |  | ------ | ------- |  | ------ | --
|                                                          |  | Years EndedDecember 31, |  | Change |  |        | %Change | 
|                                                          |  | 2006                    |  | 2007   |  |       
|Paperboard volume by end-use market (tons in thousands):  |  |                         |  |        |  |        |         |  |        |   
|Tube and core market                                      |  |                         |  |        |  |        |         |  |        |   
|Volume shipped to internal converters                     |  | 272.3                   |  | 254.5  |  | (17.8  | )       |  | (6.5   | )%
|Mill volume shipped to external customers                 |  | 52.5                    |  | 50.5   |  | (2.0   | )       |  | (3.8   | )%
|                                                          |  |                         |  |        |  |        |         |  |        |   
|Total                                                     |  | 324.8                   |  | 305.0  |  | (19.8  | )       |  | (6.1   | )%
|Folding carton market                                     |  |                         |  |        |  |        |         |  |        |   
|Volume shipped to internal converters                     |  | 156.1                   |  | 129.5  |  | (26.6  | )       |  | (17.0  | )%
|Mill volume shipped to external customers                 |  | 190.5                   |  | 92.5   |  | (98.0  | )       |  | (51.4  | )%
|                                                          |  |                         |  |        |  |        |         |  |        |   
|Total                                                     |  | 346.6                   |  | 222.0  |  | (124.6 | )       |  | (36.0  | )%
|Gypsum wallboard facing paper market                      |  |                         |  |        |  |        |         |  |        |   
|Mill volume shipped to external customers                 |  | 88.7                    |  | 71.0   |  | (17.7  | )       |  | (20.0  | )%
|Specialty paperboard products market                      |  |                         |  |        |  |        |         |  |        |   
|Volume shipped to internal converters                     |  | 97.7                    |  | 100.5  |  | 2.8    |         |  | 2.9    | % 
|Mill volume shipped to external customers                 |  | 140.9                   |  | 93.9   |  | (47.0  | )       |  | (33.4  | )%
|Volume related to discontinued operations                 |  | 2.4                     |  |       |  | (2.4   | )       |  | (100.0 | )%
|                                                          |  |                         |  |        |  |        |         |  |        |   
|Total                                                     |  | 241.0                   |  | 194.4  |  | (46.6  | )       |  | (19.3  | )%
|Total paperboard volume                                   |  | 1,001.1                 |  | 792.4  |  | (208.7 | )       |  | (20.8  | )%
|Total paperboard volume excluding discontinued operations |  | 998.7                   |  | 792.4  |  | (206.3 | )       |  | (20.7  | )%
|Paperboard volume by reporting segment (in thousands):    |  |                         |  |        |  |        |         |  |        |   
|Paperboard                                                |  | 534.5                   |  | 373.2  |  | (161.3 | )       |  | (30.2  | )%
|Tube and core                                             |  | 308.1                   |  | 289.7  |  | (18.4  | )       |  | (6.0   | )%
|Folding carton                                            |  | 156.1                   |  | 129.5  |  | (26.6  | )       |  | (17.0  | )%
|Volume related to discontinued operations                 |  | 2.4                     |  |       |  | (2.4   | )       |  | 100.0  | % 
|                                                          |  |                         |  |        |  |        |         |  |        |   
|Total paperboard volume                                   |  | 1,001.1                 |  | 792.4  |  | (208.7 | )       |  | (20.8  | )%
|                                                          |  |                         |  |        |  |        |         |  |        |   



Paperboard
Volume. Total paperboard volume from continuing operations for the year ended December 31, 2007, decreased 20.7% to 792.4 thousand tons from 998.7 thousand tons for the same period in 2006. Tons sold from paperboard mill
production decreased 25.4% in 2007. The total volume of paperboard converted decreased 7.9% for the year ended December 31, 2007.



Total paperboard volume decreased due to a decrease in sales of unconverted paperboard to the tube and core, folding carton, gypsum wallboard facing paper
and the specialty paperboard products end-use markets, combined with lower converted volume in the tube and core and the folding carton segments.



Sales. Our consolidated sales for the year ended December 31, 2007, decreased by 8.4% to $854.2 million from $933.0 million for the same
period in 2006. The following table presents sales by business segment (in thousands):



|                |  |                         |         |         |   |         |         |   |         |   |  |       |   
|--------------- |  | ----------------------- | ------- | ------- | - | ------- | ------- | - | ------- | - |  | ----- | --
|                |  | Years EndedDecember 31, |         | $Change |   |         | %Change |  
|                |  | 2006                    |         | 2007    |   |        
|Paperboard      |  | $                       | 270,015 |         | $ | 206,758 |         | $ | (63,257 | ) |  | (23.4 | )%
|Recovered fiber |  |                         | 117,336 |         |   | 140,173 |         |   | 22,837  |   |  | 19.5  | % 
|Tube and core   |  |                         | 310,531 |         |   | 293,437 |         |   | (17,094 | ) |  | (5.5  | )%
|Folding carton  |  |                         | 235,162 |         |   | 213,851 |         |   | (21,311 | ) |  | (9.1  | )%
|                |  |                         |         |         |   |         |         |   |         |   |  |       |   
|Total           |  | $                       | 933,044 |         | $ | 854,219 |         | $ | (78,825 | ) |  | (8.4  | )%
|                |  |                         |         |         |   |         |         |   |         |   |  |       |   





21



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##### Table of Contents



Paperboard Segment



Sales for the paperboard segment decreased due to lower volume which
accounted for $104.0 million of the decrease. Approximately $58.5 million of the volume decrease was due to the disposition of our Rittman and Sprague coated paperboard mills. This decrease was partially offset by higher selling prices in our
uncoated paperboard operations which accounted for an estimated increase of $40.3 million in sales.



Recovered Fiber Segment



Sales for the recovered fiber segment increased primarily due to higher selling prices which accounted for an increase of approximately $30.9 million. This increase was partially offset by a decrease in volume which accounted for a decrease
of approximately $8.1 million.



Tube and Core Segment



Sales for the tube and core segment decreased primarily due to lower volume
which accounted for a decrease of $33.3 million. This decrease was partially offset by higher tube and core selling prices which accounted for an estimated increase of $16.2 million in sales.



Folding Carton



Sales for the folding carton segment decreased primarily due to lower volume of approximately $21.3 million resulting from
closing and consolidating certain operations and evaluation and refinement of the customer portfolio and book of business.



Cost of Sales. Cost of sales for the year ended December 2007, decreased $53.6 million from $801.4 million in 2006 to $747.8 million in 2007. This
decrease was primarily due to the following factors:



| |  |  | Lower direct material, labor, freight , and other manufacturing costs of approximately $49.8 million in the paperboard segment related to the disposition of the
Rittman and Sprague coated paperboard operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Lower direct material, labor, repairs and maintenance, freight and other manufacturing costs of approximately $9.8 million in the tube and core segment primarily
due to lower volume related to facility closures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Lower labor costs in the paperboard segment of approximately $2.2 million.
| | - |  | --------------------------------------------------------------------------

| |  |  | Lower direct material, labor, freight and other manufacturing costs of approximately $17.6 million in the folding carton segment primarily due to lower volume.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Lower repairs and maintenance and energy costs of $3.8 million in the paperboard segment.
| | - |  | -----------------------------------------------------------------------------------------

| |  |  | Lower depreciation expense of approximately $3.9 million in the paperboard, folding carton, and tube and core segments primarily due to lower accelerated
depreciation related to the disposition or closure of facilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These factors were partially offset by the following increased expenses:



| |  |  | Higher direct material costs of approximately $19.0 million in the recovered fiber segment.
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | Higher direct material costs in the paperboard segment of approximately $14.4 million.
| | - |  | --------------------------------------------------------------------------------------



Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 2007, decreased by 15.8% to $103.2 million from $122.5 million for the same period in 2006. This decrease was primarily due to the following factors:



| |  |  | Elimination of approximately $11.6 million of selling, general and administrative expenses in the paperboard segment related to the disposition of facilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Elimination of approximately $4.2 million of selling, general and administrative expenses in the folding carton segment related primarily to facility closures.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Elimination of approximately $2.5 million of selling, general and administrative expenses in the tube and core segment related primarily to the disposition of
facilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Selling, general and administrative expenses in 2006 included a $1.2 million reserve established for the settlement of a patent infringement dispute.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



These improvements were partially offset by
the following factor:



| |  |  | Higher bad debt expense of $0.9 million.
| | - |  | ----------------------------------------





22



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##### Table of Contents



Restructuring and
Impairment Costs. For the year ended December 31, 2007, we incurred charges totaling $13.2 million for restructuring and impairment costs. Of this total, approximately $1.0 million was for impairment of assets, $3.4 million for severance
and other termination benefits, and $8.8 million for other exit costs. During 2007 we made payments of $3.3 million for severance and other termination benefits and $6.8 million for other exit costs. For the year ended December 31, 2006,
we incurred charges totaling $37.8 million for restructuring and impairment costs. Included in this total were $5.7 million in severance and other termination benefits , $3.5 million in other exit costs, and $28.6 million for the impairment of
assets. These restructuring plans are a component of managements strategy to internally match supply with our customers 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.



Loss From Operations. Loss from operations for the year ended December 31, 2007, was $9.9 million, an improvement of $18.7 million compared
with an operating loss of $28.6 million reported for the same period in 2006. The following table presents (loss) income from operations by business segment (in thousands):



|                  |  |                         |         |   |         |   |         |         |  |   |        |   |  |       |   
|----------------- |  | ----------------------- | ------- | - | ------- | - | ------- | ------- |  | - | ------ | - |  | ----- | --
|                  |  | Years EndedDecember 31, |         |   | $Change |   |         | %Change | 
|                  |  | 2006                    |         |   | 2007    |   |         |        
|Paperboard        |  | $                       | (10,948 | ) |         | $ | (1,453  | )       |  | $ | 9,495  |   |  | 86.7  | % 
|Recovered fiber   |  |                         | 4,381   |   |         |   | 6,454   |         |  |   | 2,073  |   |  | 47.3  | % 
|Tube and core     |  |                         | 6,994   |   |         |   | 9,473   |         |  |   | 2,479  |   |  | 35.4  | % 
|Folding carton    |  |                         | (4,329  | ) |         |   | 2,065   |         |  |   | 6,394  |   |  | 147.7 | % 
|Corporate expense |  |                         | (24,724 | ) |         |   | (26,476 | )       |  |   | (1,752 | ) |  | (7.1  | )%
|                  |  |                         |         |   |         |   |         |         |  |   |        |   |  |       |   
|Total             |  | $                       | (28,626 | ) |         | $ | (9,937  | )       |  | $ | 18,689 |   |  | 65.3  | % 
|                  |  |                         |         |   |         |   |         |         |  |   |        |   |  |       |   



Paperboard Segment



Loss from operations improved primarily due to the following factors:



| |  |  | Lower restructuring costs of $17.4 million.
| | - |  | -------------------------------------------

| |  |  | Approximately $4.8 million of the improvement was related to the disposition of the Rittman and Sprague coated paperboard mills.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



These improvements were partially offset by the following factors:



| |  |  | Lower volume reduced income from operations by an estimated $11.0 million.
| | - |  | --------------------------------------------------------------------------

| |  |  | Higher bad debt expense of $0.9 million.
| | - |  | ----------------------------------------



Recovered Fiber Segment



Income from operations increased primarily due to higher selling prices.



Tube and Core Segment



Income from operations increased primarily due to the following factors:



| |  |  | Lower restructuring costs of approximately $5.4 million.
| | - |  | --------------------------------------------------------

| |  |  | Higher selling prices improved income from operations by approximately $2.6 million.
| | - |  | ------------------------------------------------------------------------------------



These factors were partially offset by lower volume which decreased income from operations by approximately $5.7 million.



Folding Carton Segment



Income from operations improved primarily due to lower selling, general and
administrative expense of $4.2 million related to facility closures and lower restructuring costs of approximately $1.7 million.



Discontinued Operations. The loss from discontinued operations for the years ended December 31, 2007 and 2006 was $6.9 million and $4.5
million, respectively. See Note 5 to our consolidated financial statements in Part II, Item 8 of this annual report for additional discussion of discontinued operations.



23



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##### Table of Contents



Other (Expense) Income. Interest expense for the years ended December 31, 2007 and 2006 was approximately $18.8 million and $25.9 million, respectively. The decrease was primarily due to the redemption of
our 97/8% senior subordinated notes on May 1, 2006. We recorded a $10.3 million loss in the second quarter of 2006 related
to this debt redemption. See Liquidity and Capital Resources for additional information regarding our debt, interest expense and interest rate swap agreements.



Gain on Sale of Interest in Unconsolidated AffiliatesOn January 17, 2006, we sold our 50% membership interest
in Standard Gypsum to Standard Gypsums other 50% owner, Temple-Inland. Pursuant to the purchase and sale agreement, Temple-Inland purchased our 50% membership interest for $150 million, which resulted in a gain of approximately $135.2 million.



Equity in Income of Unconsolidated Affiliates. Equity
in income from unconsolidated affiliates was $1.8 million for the year December 31, 2007, a decrease of $3.8 million in equity in income from unconsolidated affiliates compared to $5.6 million in the same period in 2006. This decrease was
primarily due to the decrease in demand for gypsum wallboard facing paper at Premier Boxboard which was impacted by the downturn in the housing market.



Benefit (Provision) for Income Taxes. The effective rate of income tax benefit for continuing operations for the year ended December 31, 2007
was 33.1% compared with an income tax expense of 35.0% for the same period in 2006. 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.



Net Income. Due to the factors discussed above, net loss for the year ended December 31, 2007 was $24.5 million, or $0.86 net loss per common
share, compared to net income of $47.3 million, or $1.66 net income per common share, for the same period in 2006.



24



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##### Table of Contents



Results of Operations 2005  2006



The volume information shown below includes shipments of
paperboard products (excluding volume shipped by our unconsolidated joint ventures) combined and presented by end-use market as well as by reporting segments. It is important to note, however, that portions of our sales do not have related
paperboard volume, such as sales of recovered fiber.



|                                                          |  |                         |  |         |  |       |         |  |       |   
|--------------------------------------------------------- |  | ----------------------- |  | ------- |  | ----- | ------- |  | ----- | --
|                                                          |  | Years EndedDecember 31, |  | Change  |  |       | %Change | 
|                                                          |  | 2005                    |  | 2006    |  |      
|Paperboard volume by end-use market (tons in thousands):  |  |                         |  |         |  |       |         |  |       |   
|Tube and core market                                      |  |                         |  |         |  |       |         |  |       |   
|Volume shipped to internal converters                     |  | 277.1                   |  | 272.3   |  | (4.8  | )       |  | (1.7  | )%
|Mill volume shipped to external customers                 |  | 46.7                    |  | 52.5    |  | 5.8   |         |  | 12.4  | % 
|                                                          |  |                         |  |         |  |       |         |  |       |   
|Total                                                     |  | 323.8                   |  | 324.8   |  | 1.0   |         |  | 0.3   | % 
|Folding carton market                                     |  |                         |  |         |  |       |         |  |       |   
|Volume shipped to internal converters                     |  | 161.3                   |  | 156.1   |  | (5.2  | )       |  | (3.2  | )%
|Mill volume shipped to external customers                 |  | 242.6                   |  | 190.5   |  | (52.1 | )       |  | (21.5 | )%
|                                                          |  |                         |  |         |  |       |         |  |       |   
|Total                                                     |  | 403.9                   |  | 346.6   |  | (57.3 | )       |  | (14.2 | )%
|Gypsum wallboard facing paper market                      |  |                         |  |         |  |       |         |  |       |   
|Mill volume shipped to external customers                 |  | 80.2                    |  | 88.7    |  | 8.5   |         |  | 10.6  | % 
|Specialty paperboard products market                      |  |                         |  |         |  |       |         |  |       |   
|Volume shipped to internal converters                     |  | 86.3                    |  | 97.7    |  | 11.4  |         |  | 13.2  | % 
|Mill volume shipped to external customers                 |  | 166.9                   |  | 140.9   |  | (26.0 | )       |  | (15.6 | )%
|Volume related to discontinued operations                 |  | 16.2                    |  | 2.4     |  | (13.8 | )       |  | (85.2 | )%
|                                                          |  |                         |  |         |  |       |         |  |       |   
|Total                                                     |  | 269.4                   |  | 241.0   |  | (28.4 | )       |  | (10.5 | )%
|                                                          |  |                         |  |        
|Total paperboard volume                                   |  | 1,077.3                 |  | 1,001.1 |  | (76.2 | )       |  | (7.1  | )%
|Total paperboard volume excluding discontinued operations |  | 1,061.1                 |  | 998.7   |  | (62.4 | )       |  | (5.9  | )%
|                                                          |  |                         |  |        
|Paperboard volume by reporting segment (in thousands):    |  |                         |  |         |  |       |         |  |       |   
|                                                          |  |                         |  |        
|Paperboard                                                |  | 577.8                   |  | 534.5   |  | (43.3 | )       |  | (7.5  | )%
|Tube and core                                             |  | 322.0                   |  | 308.1   |  | (13.9 | )       |  | (4.3  | )%
|Folding carton                                            |  | 161.3                   |  | 156.1   |  | (5.2  | )       |  | (3.2  | )%
|Volume related to discontinued operations                 |  | 16.2                    |  | 2.4     |  | (13.8 | )       |  | (85.2 | )%
|                                                          |  |                         |  |         |  |       |         |  |       |   
|Total paperboard volume                                   |  | 1,077.3                 |  | 1,001.1 |  | (76.2 | )       |  | (7.1  | )%
|                                                          |  |                         |  |         |  |       |         |  |       |   



Paperboard
Volume. Total paperboard volume from continuing operations for the year ended December 31, 2006, decreased 5.9% to 998.7 thousand tons from 1,061.1 thousand tons for the same period in 2005. Tons sold from paperboard mill
production decreased 9.2% in 2006. The total volume of paperboard converted was essentially unchanged with only a slight increase of 0.3% for the year ended December 31, 2006.



Total paperboard volume decreased due to a decrease in sales of unconverted paperboard to the folding carton and the
specialty paperboard products end-use markets, combined with lower converted volume in the tube and core and the folding carton segments. These decreases were partially offset by higher sales of unconverted paperboard to the tube and core and the
gypsum wallboard facing paper markets as well as higher sales of converted paperboard to the specialty paperboard market.



Sales. Our consolidated sales for the year ended December 31, 2006, increased by 3.0% to $933.0 million from $905.7 million for the same
period in 2005. The following table presents sales by business segment (in thousands):



|                |  |                         |         |         |   |         |         |   |        |   |  |      |   
|--------------- |  | ----------------------- | ------- | ------- | - | ------- | ------- | - | ------ | - |  | ---- | --
|                |  | Years EndedDecember 31, |         | $Change |   |         | %Change |  
|                |  | 2005                    |         | 2006    |   |        
|Paperboard      |  | $                       | 278,655 |         | $ | 270,015 |         | $ | (8,640 | ) |  | (3.1 | )%
|Recovered fiber |  |                         | 86,180  |         |   | 117,336 |         |   | 31,156 |   |  | 36.2 | % 
|Tube and core   |  |                         | 311,848 |         |   | 310,531 |         |   | (1,317 | ) |  | (0.4 | )%
|Folding carton  |  |                         | 229,028 |         |   | 235,162 |         |   | 6,134  |   |  | 2.7  | % 
|                |  |                         |         |         |   |         |         |   |        |   |  |      |   
|Total           |  | $                       | 905,711 |         | $ | 933,044 |         | $ | 27,333 |   |  | 3.0  | % 
|                |  |                         |         |         |   |         |         |   |        |   |  |      |   



25



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##### Table of Contents



Paperboard Segment



Sales for the paperboard segment decreased due to lower volume which
accounted for $27.9 million of the decrease and was primarily due to the disposition of our Rittman and Sprague coated paperboard mills. This decrease was partially offset by higher selling prices in our uncoated paperboard operations which
accounted for an estimated increase of $19.3 million in sales.



Recovered
Fiber Segment



Sales for the recovered fiber segment
increased primarily due to higher volume and selling prices. The increased volume was primarily due to increased sales to our 50% owned joint venture, Premier Boxboard, which accounted for approximately $29.3 million of the $31.2 million increase.



Tube and Core



Sales for the tube and core segment decreased primarily due to lower volume,
as a result of soft industry conditions, which accounted for a decrease of $15.7 million. This decrease was partially offset by higher tube and core selling prices which accounted for an estimated increase of $13.9 million in sales.



Folding Carton Segment



Sales for the folding carton segment increased primarily due to $20.0 million in sales from the Carolina Carton plant which
was acquired from Sonoco Products Company on December 31, 2005. This increase in sales was partially offset by lower volume of approximately $14.7 million resulting from closing and consolidating operations and eliminating customers with low
margins and high credit risk.



Cost of Sales. Cost of
sales for the year ended December 2006, increased $23.9 million from $777.5 million in 2005 to $801.4 million in 2006. This increase was primarily due to the following factors:



| |  |  | Higher recovered fiber costs of approximately $20.8 million due to higher volume in the recovered fiber segment.
| | - |  | ----------------------------------------------------------------------------------------------------------------

| |  |  | Higher freight costs of $5.4 million.
| | - |  | -------------------------------------

| |  |  | Higher energy and fuel costs of $6.7 million in the paperboard segment.
| | - |  | -----------------------------------------------------------------------

| |  |  | Higher employee labor and benefit costs of $3.9 million in the paperboard segment.
| | - |  | ----------------------------------------------------------------------------------

| |  |  | Higher direct material costs of $4.9 million in the folding carton segment primarily due to higher volume.
| | - |  | ----------------------------------------------------------------------------------------------------------

| |  |  | Higher repairs and maintenance expense of $4.3 million in the paperboard segment.
| | - |  | ---------------------------------------------------------------------------------

| |  |  | Higher other manufacturing costs of $4.1 million in the folding carton segment primarily due to accelerated depreciation expenses related to plant closures.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Higher direct material costs of $2.1 million in the paperboard segment primarily due to higher volume.
| | - |  | ------------------------------------------------------------------------------------------------------

| |  |  | Higher labor costs of $1.4 million in the folding carton segment.
| | - |  | -----------------------------------------------------------------

| |  |  | Accelerated depreciation expense of approximately $1.1 million in the paperboard segment related to a mill closure.
| | - |  | -------------------------------------------------------------------------------------------------------------------



These factors were partially offset by the following improvements:



| |  |  | Lower direct materials costs, energy and fuel costs, depreciation expense, and other manufacturing costs of approximately $27.6 million in the paperboard segment
primarily due to the disposition of the Rittman and Sprague coated paperboard mills in 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Lower direct material costs of $2.9 million in the tube and core segment primarily due to lower volume.
| | - |  | -------------------------------------------------------------------------------------------------------

| |  |  | Lower indirect labor costs and employee benefit expenses of $2.3 million in the tube and core segment primarily due to lower workers compensation expenses and lower
group health costs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Selling, General and
Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2006, decreased by 2.5% to $122.5 million from $125.7 million for the same period in 2005. This decrease was primarily due to the
following factors:



| |  |  | Elimination of approximately $4.0 million in selling, general and administrative expenses in the paperboard segment due to ceasing manufacturing operations at the
Rittman, Ohio mill and the divestiture of the Sprague, Connecticut coated mill.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Lower expenses in the information technology department of $2.8 million primarily due to lower employee salaries expenses, equipment lease expenses, and outside
professional services costs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents



These factors were partially
offset by the following expenses:



| |  |  | Higher accounts receivable reserve expense of $1.0 million in the recovered fiber segment.
| | - |  | ------------------------------------------------------------------------------------------

| |  |  | A $1.0 million increase in equity-based compensation expense.
| | - |  | -------------------------------------------------------------

| |  |  | A $900 thousand increase in expenses related to the implementation of an enterprise resource planning software system.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

| |  |  | An expense of $500 thousand for deferred compensation related to the retirement of an officer of the company.
| | - |  | -------------------------------------------------------------------------------------------------------------



Restructuring and Impairment Costs. For the year ended
December 31, 2006, we incurred charges totaling $37.8 million for restructuring and impairment costs. Of this total, approximately $28.6 million was for impairment of assets, $5.7 million for severance and other termination benefits, and $3.5
million for other exit costs. During 2006 we made payments of $4.7 million for severance and other termination benefits and $4.3 million for other exit costs. For the year ended December 31, 2005, we incurred charges totaling
$75.5 million for restructuring and impairment costs. Included in this total were $0.6 million in severance and other termination benefit costs, $0.9 million in other exit costs, and $74.0 million of impairment costs related primarily to the
disposition of two of our coated recycled paperboard facilities. 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.



Loss From Operations. Loss from operations for the year ended December 31, 2006, was $28.6 million, an improvement of $94.3
million compared with an operating loss of $122.9 million reported for the same period in 2005. The following table presents (loss) income from operations by business segment (in thousands):



|                  |  |                         |          |   |         |   |         |         |  |   |        |   |  |        |   
|----------------- |  | ----------------------- | -------- | - | ------- | - | ------- | ------- |  | - | ------ | - |  | ------ | --
|                  |  | Years EndedDecember 31, |          |   | $Change |   |         | %Change | 
|                  |  | 2005                    |          |   | 2006    |   |         |        
|Paperboard        |  | $                       | (70,102  | ) |         | $ | (10,948 | )       |  | $ | 59,154 |   |  | 84.4   | % 
|Recovered fiber   |  |                         | 253      |   |         |   | 4,381   |         |  |   | 4,128  |   |  | 1631.6 | % 
|Tube and core     |  |                         | 7,044    |   |         |   | 6,994   |         |  |   | (50    | ) |  | (0.7   | )%
|Folding carton    |  |                         | (36,812  | ) |         |   | (4,329  | )       |  |   | 32,483 |   |  | 88.2   | % 
|Corporate expense |  |                         | (23,281  | ) |         |   | (24,724 | )       |  |   | (1,443 | ) |  | (6.2   | )%
|                  |  |                         |          |   |         |   |         |         |  |   |        |   |  |        |   
|Total             |  | $                       | (122,898 | ) |         | $ | (28,626 | )       |  | $ | 94,272 |   |  | 76.7   | % 
|                  |  |                         |          |   |         |   |         |         |  |   |        |   |  |        |   



Paperboard Segment



Loss from operations improved primarily due to the following factors:



| |  |  | Lower restructuring costs of $53.8 million.
| | - |  | -------------------------------------------

| |  |  | Approximately $11.5 million of the improvement was related to the disposition of the Rittman and Sprague coated paperboard mills.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  |  | Higher selling prices in the paperboard segment accounted for $12.0 million.
| | - |  | ----------------------------------------------------------------------------



These factors were partially offset by the following costs in the paperboard segments uncoated paperboard group:



| |  |  | Higher energy and fuel costs of $6.7 million.
| | - |  | ---------------------------------------------

| |  |  | Higher repair and maintenances costs of $4.3 million.
| | - |  | -----------------------------------------------------

| |  |  | Higher employee labor and benefit costs of $3.9 million.
| | - |  | --------------------------------------------------------

| |  |  | Lower volume reduced income from operation by an estimated $1.8 million.
| | - |  | ------------------------------------------------------------------------

| |  |  | Accelerated depreciation expense of approximately $1.1 million related to a mill closure.
| | - |  | -----------------------------------------------------------------------------------------



Recovered Fiber Segment



Income from operations increased primarily due to higher volume. This improvement, however, was partially offset by $1.0
million of higher accounts receivable reserve expense.



Tube and Core
Segment



Income from operations decreased primarily due to
the following factors:



| |  |  | Higher restructuring costs of approximately $3.1 million.
| | - |  | ---------------------------------------------------------



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| |  |  | Lower volume reduced income from operations by an estimated $2.8 million.
| | - |  | -------------------------------------------------------------------------

| |  |  | Higher freight costs and repair and maintenance costs of $2.1 million.
| | - |  | ----------------------------------------------------------------------



These factors were partially offset by higher selling prices which improved income from operations by approximately $8.5
million.



Folding Carton Segment



Loss from operations improved primarily due to lower restructuring costs of
approximately $36.8 million. This improvement was partially offset by higher accelerated depreciation expense of $3.3 million related to plant closures and a $1.2 million reversal of a reserve in the second quarter of 2005 related to the subsequent
collection from a customer that filed Chapter 11 bankruptcy in 2004.



Discontinued Operations. The loss from discontinued operations for the years ended December 31, 2006 and 2005 was $4.5 million and $8.6 million, respectively. See Note 5 to our consolidated financial statements in Part II,
Item 8 of this annual report for additional discussion of discontinued operations.



Other (Expense) Income. Interest expense for the years ended December 31, 2006 and 2005
was approximately $25.9 million and $42.0 million, respectively. The decrease was primarily due to the redemption of our 97/8%
senior subordinated notes on May 1, 2006. We recorded a $10.3 million loss in the second quarter of 2006 related to this debt redemption. See  Liquidity and Capital Resources for additional information regarding our debt,
interest expense and interest rate swap agreements.



Gain on Sale of Interest in Unconsolidated AffiliatesOn January 17, 2006, we sold our 50% membership interest in Standard Gypsum to Standard Gypsums other 50% owner, Temple-Inland. Pursuant to the purchase and sale
agreement, Temple-Inland purchased our 50% membership interest for $150 million, which resulted in a gain of approximately $135.2 million.



Equity in Income of Unconsolidated Affiliates. Equity in income from unconsolidated affiliates was $5.6 million for the year December 31,
2006, a decrease of $31.4 million in equity in income from unconsolidated affiliates of $37.0 million in the same period in 2005. This decrease was primarily due to the sale of our interest in Standard Gypsum, a joint venture with Temple-Inland,
whereby, effective January 1, 2006, we were no longer entitled to earnings or distributions from Standard Gypsum; this accounted for approximately $28.6 million of the $31.4 million decrease.



(Provision) Benefit for Income Taxes. The effective rate of income tax
expense for continuing operations for the year ended December 31, 2006 was 35.0% compared with an income tax benefit of 23.8% for the same period in 2005. 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.



Net Income (loss). Due to the factors discussed above, net income for
the year ended December 31, 2006 was $47.3 million, or $1.66 net income per common share, compared to a net loss of $103.4 million, or $3.59 net loss per common share, for the same period in 2005.



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 1A. At December 31, 2007 we had $6.5 million of cash on hand and $31.3 million borrowing availability under our Senior Credit Facility. We believe that our cash on
hand together with our borrowing availability under our Senior Credit Facility will be sufficient to meet our cash requirements for the next 12 months. We are attempting to refinance our $200.0 million outstanding Senior Notes which mature in June
2009. We are evaluating various refinancing alternatives. If we are unable to generate cash at projected levels, our ability to generate cash sufficient to meet our long-term requirements may be uncertain. Some of the factors that could affect our
future ability to generate cash from operations are as follows:



| |  |  | Continued volatility in the debt markets.
| | - |  | -----------------------------------------

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



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| |  |  | 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.
| | - |  | -----------------------------------------------------------------

| |  |  | Potential increases in fuel and energy costs.
| | - |  | ---------------------------------------------

| |  |  | Potential increases in the cost of recovered fiber.
| | - |  | ---------------------------------------------------

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

| |  |  | 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 1A of this annual
report under 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 Senior Credit Facility is primarily affected by our collateral base and our continued
compliance with the terms of the Senior Credit Facility, including the payment of interest and compliance with various covenants. On May 22, 2007, the Company purchased additional units in our PaperLink, LLC unconsolidated affiliate, for
approximately $78,000, which increased our membership interest to greater than fifty percent. We failed to timely pledge the assets of PaperLink as a co-borrower or guarantor of our debt (which debt includes our Senior Credit Facility and Senior
Notes). We subsequently determined that this failure was a technical violation of the debt covenants of both our Senior Credit Facility and our Senior Notes, which require  within a specified time period  that we pledge the assets of any
affiliate in which our membership interest exceeds fifty percent. Upon determination, we decreased our membership interest in PaperLink to forty-nine percent. We notified the administrative agent for our Senior Credit Facility and the Trustee which
administers our Senior Notes of the technical and inadvertent violation. On June 29, 2007, the bank group that holds our Senior Credit Facility consented to and waived any defaults regarding our violation. We were in compliance with the
covenants under our Senior Credit Facility as of December 31, 2007. Absent a deterioration of the U.S. economy as a whole or the specific sectors on which our business depends (see Part I, Item 1A, 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 for the next 12 months.



Borrowings.At
December 31, 2006 and December 31, 2007, total debt (consisting of current maturities of debt and long-term debt, as reported on our condensed consolidated balance sheets) was as follows (in thousands):



|                                      |  |                  |         |                  |   |        
|------------------------------------- |  | ---------------- | ------- | ---------------- | - | -------
|                                      |  | December 31,2006 |         | December 31,2007
|Senior Credit Facility-revolver       |  | $                | 5,000   |                  | $ | 10,339 
|Senior Credit Facility-term loan      |  |                  | 31,111  |                  |   | 20,048 
|73/8% Senior Notes                    |  |                  | 189,750 |                  |   | 189,750
|71/4% Senior Notes                    |  |                  | 29,000  |                  |   | 29,000 
|Other notes payable                   |  |                  | 8,200   |                  |   | 8,200  
|Realized interest rate swap gains (1) |  |                  | 2,861   |                  |   | 1,505  
|                                      |  |                  |         |                  |   |        
|Total debt                            |  | $                | 265,922 |                  | $ | 258,842
|                                      |  |                  |         |                  |   |        



|(1) | Consists of realized interest rate swap gains less the original issuance discounts and accumulated discount amortization related to the senior and senior subordinated notes.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 30, 2006, we amended our Senior
Credit Facility by entering into an Amended and Restated Credit Agreement. The agreement provides for a $145.0 million senior secured credit facility consisting of a $110.0 million five-year revolver and a $35.0 million five-year term loan. The
five-year revolver was reduced from $110.0 million to $100.0 million in October 2006. On May 14, 2007, we amended our Senior Credit Facility which impacted the calculation of the availability under the Senior Credit Facility and changed the
applicable margins in the pricing grid which is discussed in more detail below. The Senior Credit Facility is secured by substantially all of our assets and our domestic subsidiaries other than real property, including accounts receivable, general
intangibles, inventory, and equipment. These subsidiaries are parties to the Senior Credit Facility either as co-borrowers with us or as guarantors. At December 31, 2007, we had $20.0 million outstanding under the five-year term loan and $10.3
million outstanding under the revolver.





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The revolver matures on
March 30, 2011 and includes a sublimit of $25.0 million for letters of credit. Borrowing availability under the revolver is determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and
inventory and reduced by usage of the revolver, including outstanding letters of credit, and any reserves. Aggregate availability under the revolver was $31.3 million at December 31, 2007. The term loan was drawn in full at closing and is
required to be repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding principal due on March 30, 2011.



Outstanding principal of the term loan initially bears 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 Senior Credit Facility) plus 0.50%, or (2) the adjusted one, two, three, or six-month LIBOR rate plus 2.00%. Outstanding
principal under the revolver initially bears interest at a rate equal to, at our option, either (1) the base rate plus .25% or (2) the adjusted one, two, three, or six-month LIBOR rate plus 1.75%. Pricing under the Senior Credit Facility
is determined by reference to a pricing grid under which margins shall be adjusted prospectively on a quarterly basis as determined by the average availability and fixed charge coverage ratio measured as of the last day of each fiscal quarter,
commencing with the fiscal quarter ended June 30, 2007. Under the pricing grid, the applicable margins for the term loan range from 0.0% to 1.0% for base rate loans and from 1.50% to 2.50% for LIBOR loans, and the applicable margins for the
revolver range from 0.0% to 0.75% for base rate loans and from 1.25% to 2.25% for LIBOR loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of credit are subject to
an annual fee equal to the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%. The actual rates in effect at December 31, 2007 were
7.25% and 7.26% for outstanding revolver and term loan borrowings, respectively.



The Senior Credit 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, enter into sale and leaseback transactions, or change the nature of our
business. The Senior Credit Facility contains no financial maintenance covenants at this time; however, we must maintain a $15.0 million Minimum Availability Reserve at all times. The availability disclosed is net of this reserve. There
is a one-time option to convert to a springing covenant financial structure where the $15.0 million Minimum Availability Reserve would be eliminated; however, a fixed charge ratio would be tested in the event borrowing availability falls below $20.0
million. Currently, we would not meet the fixed charge coverage ratio and, therefore, do not anticipate exercising this option. The Senior Credit 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 events with respect to the Employee Retirement Income Security Act of 1974
(ERISA), actual or asserted invalidity of loan documentation, and certain changes of control of the Company.



On June 1, 1999, we 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%. The 73/8% Senior Notes are unsecured obligations. As of December 31, 2006, we have purchased an aggregate of $10.3 million of these notes in the open market.



On March 29, 2001, we 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. The publicly traded senior subordinated notes were, and the Senior Notes are, unsecured but guaranteed, on a joint and several basis, by all but one
of the Companys wholly-owned domestic subsidiaries.



During 2004 and 2005, we purchased $20.0 million and $7.5 million, respectively, of senior
subordinated and Senior Notes in the open market. On May 1, 2006, we redeemed our outstanding 97/8% senior subordinated
notes in full at a price of $105.25 for each $100 of outstanding principal amount of the notes plus $2.1 million of accrued and unpaid interest from April 1, 2006 to May 1, 2006. At the time of redemption, the aggregate outstanding
principal amount of the notes was $257.5 million, and the total redemption price (including accrued and unpaid interest and redemption premium) was $273.1 million. We used proceeds from borrowings at closing under the Senior Credit Facility,
together with available cash, to fund the redemption. The redemption resulted in a $10.3 million loss, which was recognized in May of 2006.



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



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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 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. We did not enter into any interest rate swap agreements during 2006 or 2007.



Off-Balance Sheet Arrangements  Joint Venture Financings. On
January 17, 2006 we completed the sale of our 50% interest in our joint venture Standard Gypsum to the joint ventures other 50% partner, Temple- Inland, for $150.0 million in cash and eliminated our guaranty and letter of credit support
obligations with respect to Standard Gypsums debt. As a result of this sale, we no longer have any support obligation with respect to our half of Standard Gypsums debt, which was $28.1 million as of December 31, 2005, and we ceased
to be entitled to any distributions from Standard Gypsum for all periods subsequent to January 1, 2006. We provided certain environmental indemnification not to exceed $5.0 million for any claims related to events that occurred prior to
the formation of the Standard Gypsum joint venture on April 1, 1996. This indemnification will terminate January 17, 2011. We did not record a liability related to this indemnification since the probability of an asserted claim was
considered remote.



As of December 31, 2007 we owned a 50%
interest in one joint venture, Premier Boxboard LLC, with Temple-Inland. Because we account for the interest in this joint venture under the equity method of accounting, the indebtedness of the joint venture is not reflected in the liabilities
included on our consolidated balance sheets. Premier Boxboard is a low-cost recycled paperboard mill that produces a lightweight gypsum facing paper along with containerboard grades. See Note 6 to our consolidated financial statements in Part II,
Item 8 of this annual report for summarized financial information for this joint venture.



Funding for Premier Boxboard is generated by its internal cash flow and any cash contributions that we and our joint venture partner are required to make. Premier Boxboard generated sufficient cash flow in 2007 to
distribute $4.0 million to us and $4.0 million to our joint venture partner. Based on the 2007 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, 2007,
Premier Boxboard was in compliance with its debt covenants.



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.



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Contractual
Obligations. The following table summarizes our contractual obligations as of December 31, 2007, 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 than1 year |   | 1-3 years |  | 3-5 years |         | More than5 years
|Long-term debt obligations (1)  |  | $                      | 257,337 |                 | $ | 5,830     |  | $         | 230,417 |                  | $ | 16,390 |  | $ | 4,700 
|Interest payment obligations    |  |                        | 37,063  |                 |   | 19,155    |  |           | 13,866  |                  |   | 1,631  |  |   | 2,411 
|Capital lease obligations       |  |                        | 88      |                 |   | 75        |  |           | 13      |                  |   |       |  |   |      
|Operating lease obligations     |  |                        | 39,068  |                 |   | 10,269    |  |           | 14,260  |                  |   | 9,040  |  |   | 5,499 
|Purchase obligations            |  |                        | 459     |                 |   | 457       |  |           | 2       |                  |   |       |  |   |      
|Other long-term liabilities (2) |  |                        | 4       |                 |   | 4         |  |           |        |                  |   |       |  |   |      
|                                |  |                        |         |                 |   |           |  |           |         |                  |   |        |  |   |       
|Total                           |  | $                      | 334,019 |                 | $ | 35,790    |  | $         | 258,558 |                  | $ | 27,061 |  | $ | 12,610
|                                |  |                        |         |                 |   |           |  |           |         |                  |   |        |  |   |       



|(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) | Other long-term liabilities exclude future pension liabilities, other postretirement benefit liabilities and deferred compensation benefit liabilities because we are unable to
reasonably estimate the amount and period in which these liabilities will be settled.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As of December 31, 2007, the noncurrent portion of our FIN 48 liability, including interest and penalties related to unrecognized tax benefits, is $13.8 million. At this time
the settlement period for the noncurrent portion of our FIN 48 liability cannot be determined and therefore is excluded from this table.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, 2007.



Operating Cash Flows. Cash provided by operations was $436 thousand for the year ended December 31, 2007, compared with cash used in
operations of $3.1 million in 2006. The improvement was primarily due to a $13.8 million reduction in cash payments for interest which was partially offset by a $11.9 million increase in pension contributions.



Capital Expenditures. Capital expenditures were $26.6 million for the
year ended December 31, 2007, compared with $38.2 million in 2006. The decrease from prior years was primarily due to the implementation of an enterprise resource planning software system during 2006, as well as increased capital expenditures
in 2006 related to the upgrade of a machine component at one of our paperboard mills, and the installation of a new printing press at one of our carton facilities. Aggregate capital expenditures of approximately $12 million to $15 million are
anticipated for 2008.



Acquisition. We did not make any
acquisitions in the year ended December 31, 2007. In December 2005, we acquired a folding carton plant in Charlotte, North Carolina from the Sonoco Products Company for $11.1 million. We believe that this acquisition is in line with our
long-term strategy and will provide value to our folding carton segment in the Charlotte area.



Divestitures.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. For the year ended December 31, 2005, we recorded a $3.3 million loss on disposal which was recorded in the results of discontinued operations.



In February 2006, we completed the sale of our partition business to RTS
Packaging LLC, a joint venture between the Rock-Tenn Company and the Sonoco Products Company, for approximately $6.0 million. For the year ended December 31, 2005, we recorded a $1.9 million impairment loss associated with this divestiture
which was recorded in discontinued operations.



In
July 2006, we completed the sale of the assets of Sprague Paperboard, Inc. located in Versailles, Connecticut to Cascades Inc. for $14.5 million. In connection with this transaction we also entered into an agreement granting Cascades Inc. an
option to buy components of the coating equipment and the customer list of our Rittman, Ohio coated paperboard mill for $500



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thousand. Cascades Inc. exercised its option in August 2006 and, as a result, we ceased our coated recycled paperboard production at the Rittman, Ohio
location, which resulted in a $1.8 million charge for severance benefits during 2006. For the year ended December 31, 2006, we also recorded an additional $12.2 million asset impairment as a result of this transaction.



During the fourth quarter of 2006, we concluded the sale of our Specialty
Packaging Division. The division was sold to several buyers for an aggregate purchase price of $5.1 million. We recorded a loss of approximately $10.9 million associated with this divestiture which was recorded as restructuring and impairment costs
of discontinued operations. Approximately $8.1 million of the loss was recorded in 2005 and $2.7 million was recorded in 2006.



On October 2, 2007, we completed the sale of our composite container and plastics businesses to the Sonoco Products Company for a net purchase price
of approximately $20.2 million. We recorded a loss of approximately $10.3 million associated with this divestiture which was recorded in restructuring and impairment costs of discontinued operations. Included in this amount is the write-off of
approximately $5.0 million of related goodwill.



Dividends.In February 2002, we announced that we would suspend future dividend payments on our common stock until our earnings performance and cash flow improve. 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.



New Accounting Pronouncements



In June 2006, the FASB issued Interpretation No. 48 Accounting
for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109) (FIN 48). This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by
prescribing a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, financial statement classification, tax-related interest and
penalties, and additional disclosure requirements. We adopted FIN 48 effective January 1, 2007.



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it
applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with
any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for the fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued FASB Staff Position (FSP) FAS 157-2, which delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those years for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized at fair value in the financial statements on a recurring basis (at least annually). We are evaluating the effect, if any, the adoption of this statement will have on our financial position
or results of operations.



In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115. This pronouncement permits entities to use the fair value method to measure certain
financial assets and liabilities by electing an irrevocable option to use the fair value method at specified election dates. After election of the option, subsequent changes in fair value would result in the recognition of unrealized gains or losses
as period costs during the period the change occurred. SFAS No. 159 becomes effective as of the beginning of the first fiscal year that begins after November 15, 2007, with early adoption permitted. However, entities may not retroactively
apply the provisions of SFAS No. 159 to fiscal years preceding the date of adoption. We are evaluating the effect, if any, the adoption of this statement will have on our financial position or results of operations.



In December 2007, the FASB issued SFAS No. 141(R), Business
Combinations. SFAS No. 141(R) requires the acquiring entity in a business combination to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable assets acquired. In addition, immediate expense recognition is required for transaction costs. SFAS No. 141(R) is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and adoption is prospective only. As such, if we enter into any business combinations after adoption of SFAS 141(R), a transaction may significantly affect our financial position and earnings, but
not cash flows, compared to our past acquisitions.



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In December 2007, the FASB
issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-and amendment of ARB No. 51. SFAS No. 160 requires entities to report noncontrolling (minority) interest as a component of
shareholders equity on the balance sheet; include all earnings of a consolidated subsidiary in consolidated results of operations; and treat all transactions between an entity and noncontrolling interest as equity transactions. SFAS
No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and adoption is prospective only; however, presentation and disclosure requirements must be applied retrospectively. We have not yet
determined the effect, if any, SFAS No. 160 will have on our consolidated financial statements.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



At December 31, 2007, we had outstanding borrowings of approximately $257.3 million. 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 Notes pay interest semiannually, and are 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.



On May 1, 2006, we redeemed our outstanding 97/8% senior subordinated notes in full at a price of $105.25 for each $100 of outstanding principal amount of the notes plus $2.1 million of accrued and unpaid interest from
April 1, 2006 to May 1, 2006. At the time of redemption, the aggregate outstanding principal amount of the notes was $257.5 million, and the total redemption price (including accrued and unpaid interest and redemption premium) was $273.1
million. We used proceeds from borrowings under the Senior Credit Facility, together with available cash, to fund the redemption. The redemption resulted in a $10.3 million loss, which was recognized during the three months ended June 30, 2006.



On March 30, 2006, we amended our Senior Credit
Facility (as previously defined) by entering into an Amended and Restated Credit Agreement. The agreement provides for a $145.0 million senior secured credit facility consisting of a $110.0 million five-year revolver and a $35.0 million five-year
term loan. The five-year revolver was reduced from $110.0 million to $100.0 million in October 2006. On May 14, 2007, we amended our Senior Credit Facility which impacted the calculation of the availability under the Senior Credit Facility and
changed the applicable margins in the pricing grid which is discussed in more detail below. The Senior Credit Facility is secured by substantially all of our assets and our domestic subsidiaries other than real property, including accounts
receivable, general intangibles, inventory, and equipment. These subsidiaries are parties to the Senior Credit Facility either as co-borrowers with us or as guarantors. At December 31, 2007, we had $20.0 million outstanding under the five-year
term loan and $10.3 million outstanding under the revolver.



The revolver matures on March 30, 2011 and includes a sublimit of $25.0 million for letters of credit. Borrowing availability under the revolver is determined by reference to a borrowing base, defined as specified percentages of
eligible accounts receivable and inventory and reduced by usage of the revolver, including outstanding letters of credit, and any reserves. Aggregate availability under the revolver was $31.3 million at December 31, 2007. The term loan was
drawn in full at closing and is required to be repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding principal due on March 30, 2011.



Outstanding principal of the term loan initially bears 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 Senior Credit Facility) plus 0.50%, or (2) the adjusted one, two, three, or
six-month LIBOR rate plus 2.00%. Outstanding principal under the revolver initially bears interest at a rate equal to, at our option, either (1) the base rate plus .25% or (2) the adjusted one, two, three, or six-month LIBOR rate plus
1.75%. Pricing under the Senior Credit Facility is determined by reference to a pricing grid under which margins shall be adjusted prospectively on a quarterly basis as determined by the average availability and fixed charge coverage ratio measured
as of the last day of each fiscal quarter, commencing with the fiscal quarter ending September 30, 2007. Under the pricing grid, the applicable margins for the term loan range from 0.0% to 1.0% for base rate loans and from 1.50% to 2.50% for
LIBOR loans, and the applicable margins for the revolver range from 0.0% to 0.75% for base rate loans and from 1.25% to 2.25% for LIBOR loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of
0.25%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%. The
actual rates in effect at December 31, 2007 were 7.25% and 7.26% for outstanding revolver and term loan borrowings, respectively.



The Company did not enter in to any interest rate swap agreements during 2007.



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.



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



|                                       |  |                            |         |   |            |   |       |   |         |  
|-------------------------------------- |  | -------------------------- | ------- | - | ---------- | - | ----- | - | ------- | -
|                                       |  | Contractual Maturity Dates |        
|                                       |  | 2008 to 2011               |         |   | Thereafter |   | Total |  
|                                       |  | (In thousands)             |        
|Debt Obligations                       |  |                            |         |   |            |   |       |   |         |  
|73/8% Senior Notes (1)                 |  | $                          | 189,750 |   |            |  |       | $ | 189,750 |  
|Average interest rate                  |  |                            | 7.375   | % |            |  |       |   | 7.375   | %
|71/4% Senior Notes (1)                 |  | $                          | 29,000  |   |            |  |       | $ | 29,000  |  
|Average interest rate                  |  |                            | 7.25    | % |            |  |       |   | 7.25    | %
|Senior Credit Facility  Term Loan (1) |  | $                          | 20,048  |   |            |  |       | $ | 20,048  |  
|Average interest rate                  |  |                            | 7.23    | % |            |  |       |   | 7.23    | %
|Senior Credit Facility  Revolver (1)  |  | $                          | 10,339  |   |            |  |       | $ | 10,339  |  
|Average interest rate                  |  |                            | 7.35    | % |            |  |       |   | 7.35    | %



|(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, |         
|                                                                                                                                                                |  | 2007         |          |   | 2006 |  
|ASSETS                                                                                                                                                          |  |              |          |   |      |   |          |  
|CURRENT ASSETS:                                                                                                                                                 |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                       |  | $            | 6,548    |   |      | $ | 1,022    |  
|Receivables, net of allowances for doubtful accounts, returns, and discounts of $4,683 and $3,062 at December 31, 2007 and 2006,
respectively                   |  |              | 74,207   |   |      |   | 85,577   |  
|Inventories                                                                                                                                                     |  |              | 65,412   |   |      |   | 75,041   |  
|Refundable income taxes                                                                                                                                         |  |              | 104      |   |      |   | 172      |  
|Current deferred tax assets                                                                                                                                     |  |              | 5,841    |   |      |   | 9,272    |  
|Other current assets                                                                                                                                            |  |              | 7,061    |   |      |   | 8,354    |  
|Assets held for sale                                                                                                                                            |  |              | 96       |   |      |   |         |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Total current assets                                                                                                                                            |  |              | 159,269  |   |      |   | 179,438  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                                  |  |              |          |   |      |   |          |  
|Land                                                                                                                                                            |  |              | 9,803    |   |      |   | 10,316   |  
|Buildings and improvements                                                                                                                                      |  |              | 83,685   |   |      |   | 93,275   |  
|Machinery and equipment                                                                                                                                         |  |              | 402,968  |   |      |   | 436,705  |  
|Furniture and fixtures                                                                                                                                          |  |              | 32,345   |   |      |   | 29,975   |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|                                                                                                                                                                |  |              | 528,801  |   |      |   | 570,271  |  
|Less accumulated depreciation                                                                                                                                   |  |              | (288,892 | ) |      |   | (306,666 | )
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Property, plant and equipment, net                                                                                                                              |  |              | 239,909  |   |      |   | 263,605  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|GOODWILL                                                                                                                                                        |  |              | 122,542  |   |      |   | 127,574  |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES                                                                                                                         |  |              | 39,117   |   |      |   | 41,574   |  
|OTHER ASSETS                                                                                                                                                    |  |              | 11,183   |   |      |   | 12,084   |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|                                                                                                                                                                |  | $            | 572,020  |   |      | $ | 624,275  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                            |  |              |          |   |      |   |          |  
|CURRENT LIABILITIES:                                                                                                                                            |  |              |          |   |      |   |          |  
|Current maturities of debt                                                                                                                                      |  | $            | 5,830    |   |      | $ | 5,830    |  
|Accounts payable                                                                                                                                                |  |              | 63,968   |   |      |   | 65,033   |  
|Accrued interest                                                                                                                                                |  |              | 1,773    |   |      |   | 1,482    |  
|Accrued compensation                                                                                                                                            |  |              | 9,828    |   |      |   | 10,127   |  
|Accrued pension                                                                                                                                                 |  |              | 496      |   |      |   | 271      |  
|Capital lease obligations                                                                                                                                       |  |              | 72       |   |      |   | 544      |  
|Other accrued liabilities                                                                                                                                       |  |              | 20,913   |   |      |   | 27,187   |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                                                                       |  |              | 102,880  |   |      |   | 110,474  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|LONG-TERM DEBT, LESS CURRENT MATURITIES                                                                                                                         |  |              | 253,012  |   |      |   | 260,092  |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS                                                                                                                             |  |              | 14       |   |      |   | 91       |  
|DEFERRED INCOME TAXES                                                                                                                                           |  |              | 34,082   |   |      |   | 43,315   |  
|PENSION LIABILITY                                                                                                                                               |  |              | 27,980   |   |      |   | 38,854   |  
|OTHER LIABILITIES                                                                                                                                               |  |              | 14,233   |   |      |   | 9,863    |  
|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; 29,465,416 and 29,084,246 shares issued and outstanding at December 31, 2007
and 2006, respectively |  |              | 2,947    |   |      |   | 2,909    |  
|Additional paid-in capital                                                                                                                                      |  |              | 192,978  |   |      |   | 191,411  |  
|Unearned compensation                                                                                                                                           |  |              |         |   |      |   |         |  
|Retained deficit                                                                                                                                                |  |              | (35,127  | ) |      |   | (7,502   | )
|Accumulated other comprehensive (loss) income:                                                                                                                  |  |              |          |   |      |   |          |  
|Unrecognized pension and other benefit liabilities                                                                                                              |  |              | (22,772  | ) |      |   | (26,791  | )
|Foreign currency translation                                                                                                                                    |  |              | 1,793    |   |      |   | 1,559    |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Total accumulated other comprehensive loss                                                                                                                      |  |              | (20,979  | ) |      |   | (25,232  | )
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|Total Shareholders Equity                                                                                                                                      |  |              | 139,819  |   |      |   | 161,586  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  
|                                                                                                                                                                |  | $            | 572,020  |   |      | $ | 624,275  |  
|                                                                                                                                                                |  |              |          |   |      |   |          |  



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, |        
|                                                                                   |  | 2007                             |         |   | 2006 |   |         | 2005 | 
|SALES                                                                              |  | $                                | 854,219 |   |      | $ | 933,044 |      |  | $ | 905,711  |  
|COST OF SALES                                                                      |  |                                  | 747,780 |   |      |   | 801,351 |      |  |   | 777,523  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                       |  |                                  | 103,193 |   |      |   | 122,529 |      |  |   | 125,725  |  
|GOODWILL IMPAIRMENT                                                                |  |                                  |        |   |      |   |        |      |  |   | 49,859   |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                 |  |                                  | 13,183  |   |      |   | 37,790  |      |  |   | 75,502   |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|Loss from operations                                                               |  |                                  | (9,937  | ) |      |   | (28,626 | )    |  |   | (122,898 | )
|OTHER (EXPENSE) INCOME:                                                            |  |                                  |         |   |      |   |         |      |  |   |          |  
|Interest expense                                                                   |  |                                  | (18,760 | ) |      |   | (25,913 | )    |  |   | (41,961  | )
|Interest income                                                                    |  |                                  | 208     |   |      |   | 3,829   |      |  |   | 2,629    |  
|Equity in income of unconsolidated affiliates                                      |  |                                  | 1,770   |   |      |   | 5,613   |      |  |   | 37,043   |  
|Gain on sale of interest in unconsolidated affiliates.                             |  |                                  | 19      |   |      |   | 135,247 |      |  |   |         |  
|Loss on redemption of senior subordinated notes.                                   |  |                                  |        |   |      |   | (10,272 | )    |  |   |         |  
|Other, net                                                                         |  |                                  | 370     |   |      |   | 52      |      |  |   | 537      |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|                                                                                   |  |                                  | (16,393 | ) |      |   | 108,556 |      |  |   | (1,752   | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                  | (26,330 | ) |      |   | 79,930  |      |  |   | (124,650 | )
|BENEFIT (PROVISION) FOR INCOME TAXES                                               |  |                                  | 8,712   |   |      |   | (27,984 | )    |  |   | 29,601   |  
|MINORITY INTEREST IN (INCOME) LOSS                                                 |  |                                  |        |   |      |   | (102    | )    |  |   | 273      |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                                           |  |                                  | (17,618 | ) |      |   | 51,844  |      |  |   | (94,776  | )
|DISCONTINUED OPERATIONS:                                                           |  |                                  |         |   |      |   |         |      |  |   |          |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                              |  |                                  | (8,221  | ) |      |   | (6,809  | )    |  |   | (11,265  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                |  |                                  | 1,323   |   |      |   | 2,297   |      |  |   | 2,655    |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|LOSS FROM DISCONTINUED OPERATIONS                                                  |  |                                  | (6,898  | ) |      |   | (4,512  | )    |  |   | (8,610   | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|NET (LOSS) INCOME                                                                  |  | $                                | (24,516 | ) |      | $ | 47,332  |      |  | $ | (103,386 | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|OTHER COMPREHENSIVE INCOME (LOSS):                                                 |  |                                  |         |   |      |   |         |      |  |   |          |  
|Minimum pension liability adjustment                                               |  | $                                |        |   |      | $ | 9,213   |      |  | $ | (7,175   | )
|Pension gains and losses, net of tax                                               |  |                                  | 4,019   |   |      |   |        |      |  |   |         |  
|Foreign currency translation adjustment                                            |  |                                  | 505     |   |      |   | 95      |      |  |   | 39       |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|COMPREHENSIVE (LOSS) INCOME                                                        |  | $                                | (19,992 | ) |      | $ | 56,640  |      |  | $ | (110,522 | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|BASIC (LOSS) INCOME PER COMMON SHARE:                                              |  |                                  |         |   |      |   |         |      |  |   |          |  
|CONTINUING OPERATIONS                                                              |  | $                                | (0.62   | ) |      | $ | 1.82    |      |  |   | (3.29    | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|DISCONTINUED OPERATIONS                                                            |  | $                                | (0.24   | ) |      | $ | (0.16   | )    |  | $ | (0.30    | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|NET (LOSS) INCOME                                                                  |  | $                                | (0.86   | ) |      | $ | 1.66    |      |  | $ | (3.59    | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                                      |  |                                  | 28,621  |   |      |   | 28,575  |      |  |   | 28,774   |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|DILUTED (LOSS) INCOME PER COMMON SHARE:                                            |  |                                  |         |   |      |   |         |      |  |   |          |  
|CONTINUING OPERATIONS                                                              |  | $                                | (0.62   | ) |      | $ | 1.82    |      |  | $ | (3.29    | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|DISCONTINUING OPERATIONS                                                           |  | $                                | (0.24   | ) |      | $ | (0.16   | )    |  | $ | (0.30    | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|NET (LOSS) INCOME                                                                  |  | $                                | (0.86   | ) |      | $ | 1.66    |      |  | $ | (3.59    | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  
|DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                              |  |                                  | 28,621  |   |      |   | 28,607  |      |  |   | 28,774   |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |          |  



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



37



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC.
AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY

For the Years Ended December 31, 2007, 2006 and 2005

(In thousands, except share data)



|                                                                 |  |              |   |  |                          |       |   |                      |   |         |                  |  |   |                                            |   |  |       |          |   |  |   |         |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------ | - |  | ------------------------ | ----- | - | -------------------- | - | ------- | ---------------- |  | - | ------------------------------------------ | - |  | ----- | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                                 |  | Common Stock |   |  | AdditionalPaid-InCapital |       |   | UnearnedCompensation |   |         | RetainedEarnings |  |   | AccumulatedOtherComprehensive(Loss) Income |   |  | Total |         
|                                                                 |  | Shares       |   |  | Amount                   |       |   |                      |   |         |                 
|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  |  
|Net income                                                       |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       | 47,332   |   |  |   |        |   |  |   | 47,332   |  
|Adjustment to adopt SFAS No. 123(R) (Note 10)                    |  |             |   |  |                          |      |   |                      |   | (3,442  | )                |  |   | 3,442                                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock under 1998 stock purchase plan          |  | 8,787        |   |  |                          | 1     |   |                      |   | 67      |                  |  |   |                                           |   |  |       |         |   |  |   |        |   |  |   | 68       |  
|Forfeiture of common stock under 1998 stock purchase plan        |  | (1,523       | ) |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock under long-term equity incentive plan   |  | 315,169      |   |  |                          | 31    |   |                      |   | 363     |                  |  |   |                                           |   |  |       |         |   |  |   |        |   |  |   | 394      |  
|Forfeiture of common stock under long-term equity incentive plan |  | (23,706      | ) |  |                          | (2    | ) |                      |   | (45     | )                |  |   |                                           |   |  |       |         |   |  |   |        |   |  |   | (47      | )
|Amortization of stock-based compensation expense                 |  |             |   |  |                          |      |   |                      |   | 1,795   |                  |  |   |                                           |   |  |       |         |   |  |   |        |   |  |   | 1,795    |  
|Pension liability adjustment, net of taxes of $3,565 (Note 11)   |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       |         |   |  |   | 9,213   |   |  |   | 9,213    |  
|Adjustment to adopt SFAS No. 158, net of taxes of $3,805         |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       |         |   |  |   | (6,208  | ) |  |   | (6,208   | )
|Foreign currency translation adjustment                          |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       |         |   |  |   | 95      |   |  |   | 95       |  
|Disposal of foreign subsidiary                                   |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       |         |   |  |   | 548     |   |  |   | 548      |  
|                                                                 |  |              |   |  |                          |       |   |                      |   |         |                  |  |   |                                            |   |  |       |          |   |  |   |         |   |  |   |          |  
|BALANCE, December 31, 2006                                       |  | 29,084,246   |   |  |                          | 2,909 |   |                      |   | 191,411 |                  |  |   |                                           |   |  |       | (7,502   | ) |  |   | (25,232 | ) |  |   | 161,586  |  
|Net loss                                                         |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       | (24,516  | ) |  |   |        |   |  |   | (24,516  | )
|Issuance of common stock under 1998 stock purchase plan          |  | 3,000        |   |  |                          |      |   |                      |   | 21      |                  |  |   |                                           |   |  |       |         |   |  |   |        |   |  |   | 21       |  
|Issuance of common stock under long-term equity incentive plan   |  | 405,492      |   |  |                          | 40    |   |                      |   | 367     |                  |  |   |                                           |   |  |       |         |   |  |   |        |   |  |   | 407      |  
|Forfeiture of common stock under long-term equity incentive plan |  | (27,322      | ) |  |                          | (2    | ) |                      |   | 2       |                  |  |   |                                           |   |  |       |         |   |  |   |        |   |  |   |         |  
|Amortization of stock-based compensation expense                 |  |             |   |  |                          |      |   |                      |   | 1,177   |                  |  |   |                                           |   |  |       |         |   |  |   |        |   |  |   | 1,177    |  
|Pension liability adjustment, net of taxes of $2,440 (Note 11)   |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       |         |   |  |   | 4,019   |   |  |   | 4,019    |  
|Adjustment to adopt FIN No. 48                                   |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       | (3,109   | ) |  |   |        |   |  |   | (3,109   | )
|Foreign currency translation adjustment                          |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       |         |   |  |   | 505     |   |  |   | 505      |  
|Disposal of foreign subsidiary                                   |  |             |   |  |                          |      |   |                      |   |        |                  |  |   |                                           |   |  |       |         |   |  |   | (271    | ) |  |   | (271     | )
|                                                                 |  |              |   |  |                          |       |   |                      |   |         |                  |  |   |                                            |   |  |       |          |   |  |   |         |   |  |   |          |  
|BALANCE, December 31, 2007                                       |  | 29,465,416   |   |  | $                        | 2,947 |   |                      | $ | 192,978 |                  |  | $ |                                           |   |  | $     | (35,127  | ) |  | $ | (20,979 | ) |  | $ | 139,819  |  
|                                                                 |  |              |   |  |                          |       |   |                      |   |         |                  |  |   |                                            |   |  |       |          |   |  |   |         |   |  |   |          |  



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



38



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC.
AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|---------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                         |  | For the Years Ended December 31, |         
|                                                                                         |  | 2007                             |          |   | 2006 |   |          | 2005 | 
|OPERATING ACTIVITIES:                                                                    |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net (loss) income                                                                        |  | $                                | (24,516  | ) |      | $ | 47,332   |      |  | $ | (103,386 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                  |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                            |  |                                  | 19,907   |   |      |   | 24,171   |      |  |   | 28,493   |  
|Equity-based compensation expense                                                        |  |                                  | 1,335    |   |      |   | 1,795    |      |  |   | 811      |  
|Loss (gain) on redemption of debt                                                        |  |                                  |         |   |      |   | 10,272   |      |  |   | (212     | )
|Goodwill impairment                                                                      |  |                                  |         |   |      |   |         |      |  |   | 49,856   |  
|Restructuring and impairment costs                                                       |  |                                  | 9,692    |   |      |   | 28,678   |      |  |   | 85,594   |  
|Deferred income taxes                                                                    |  |                                  | (10,496  | ) |      |   | 23,702   |      |  |   | (32,951  | )
|Gain on sale of interest in unconsolidated affiliates                                    |  |                                  | (19      | ) |      |   | (135,247 | )    |  |   |         |  
|Loss on sale of assets held for sale                                                     |  |                                  |         |   |      |   | 4,862    |      |  |   |         |  
|Equity in income of unconsolidated affiliates                                            |  |                                  | (1,770   | ) |      |   | (5,613   | )    |  |   | (37,043  | )
|Distributions from unconsolidated affiliates                                             |  |                                  | 2,203    |   |      |   | 5,080    |      |  |   | 34,175   |  
|Changes in operating assets and liabilities, net of acquisitions:                        |  |                                  |          |   |      |   |          |      |  |   |          |  
|Receivables                                                                              |  |                                  | 11,532   |   |      |   | 14,685   |      |  |   | (8,917   | )
|Inventories                                                                              |  |                                  | 1,644    |   |      |   | 495      |      |  |   | 5,661    |  
|Other assets and liabilities                                                             |  |                                  | 2,931    |   |      |   | 5,940    |      |  |   | (1,316   | )
|Accounts payable                                                                         |  |                                  | (2,246   | ) |      |   | (21,474  | )    |  |   | 8,529    |  
|Accrued liabilities                                                                      |  |                                  | (11,145  | ) |      |   | (7,676   | )    |  |   | (5,728   | )
|Income taxes                                                                             |  |                                  | 1,384    |   |      |   | (116     | )    |  |   | 353      |  
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) operating activities                                      |  |                                  | 436      |   |      |   | (3,114   | )    |  |   | 23,919   |  
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|INVESTING ACTIVITIES:                                                                    |  |                                  |          |   |      |   |          |      |  |   |          |  
|Purchases of property, plant and equipment                                               |  |                                  | (26,601  | ) |      |   | (38,169  | )    |  |   | (24,272  | )
|Proceeds from disposal of property, plant and equipment                                  |  |                                  | 7,054    |   |      |   | 3,554    |      |  |   | 18,542   |  
|Proceeds from sale of assets held for sale                                               |  |                                  | 21,680   |   |      |   | 26,336   |      |  |   |         |  
|Acquisition of businesses, net of cash acquired                                          |  |                                  |         |   |      |   | (11,059  | )    |  |   |         |  
|Changes in restricted cash                                                               |  |                                  | (147     | ) |      |   | 14,841   |      |  |   | (11,164  | )
|Net proceeds from sale of interest in unconsolidated affiliates                          |  |                                  | 161      |   |      |   | 148,460  |      |  |   |         |  
|Return of investment in unconsolidated affiliates                                        |  |                                  | 1,838    |   |      |   | 2,920    |      |  |   | 5,325    |  
|Investment in unconsolidated affiliates                                                  |  |                                  | (78      | ) |      |   |         |      |  |   | (40      | )
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                      |  |                                  | 3,907    |   |      |   | 146,883  |      |  |   | (11,609  | )
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|FINANCING ACTIVITIES:                                                                    |  |                                  |          |   |      |   |          |      |  |   |          |  
|Proceeds from senior credit facility  revolver                                          |  |                                  | 143,160  |   |      |   | 74,027   |      |  |   |         |  
|Repayments for senior credit facility  revolver                                         |  |                                  | (137,821 | ) |      |   | (69,027  | )    |  |   |         |  
|Proceeds from senior credit facility  term loan                                         |  |                                  |         |   |      |   | 35,000   |      |  |   |         |  
|Repayments of senior credit facility  term loan                                         |  |                                  | (11,063  | ) |      |   | (3,889   | )    |  |   |         |  
|Repayments of long term debt                                                             |  |                                  |         |   |      |   | (272,474 | )    |  |   | (7,468   | )
|Proceeds from note payable                                                               |  |                                  | 7,436    |   |      |   |         |      |  |   |         |  
|Deferred debt costs                                                                      |  |                                  |         |   |      |   | (1,139   | )    |  |   |         |  
|Payments of capital lease obligations                                                    |  |                                  | (549     | ) |      |   | (504     | )    |  |   | (508     | )
|Proceeds from swap agreement unwinds                                                     |  |                                  |         |   |      |   |         |      |  |   | 826      |  
|Issuances of stock, net of forfeitures                                                   |  |                                  | 20       |   |      |   | 107      |      |  |   | 236      |  
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                                      |  |                                  | 1,183    |   |      |   | (237,899 | )    |  |   | (6,914   | )
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |  |                                  | 5,526    |   |      |   | (94,130  | )    |  |   | 5,396    |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                           |  |                                  | 1,022    |   |      |   | 95,152   |      |  |   | 89,756   |  
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                 |  | $                                | 6,548    |   |      | $ | 1,022    |      |  | $ | 95,152   |  
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|SUPPLEMENTAL DISCLOSURES:                                                                |  |                                  |          |   |      |   |          |      |  |   |          |  
|Cash payments for interest                                                               |  | $                                | 20,876   |   |      | $ | 34,643   |      |  | $ | 46,164   |  
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|Income tax (refund) payments                                                             |  | $                                | (958     | ) |      | $ | 2,520    |      |  | $ | 778      |  
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|Property acquired under capital leases                                                   |  | $                                |         |   |      | $ | 36       |      |  | $ | 1,532    |  
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  
|Short-term payable for acquisition                                                       |  | $                                |         |   |      | $ |         |      |  | $ | 11,000   |  
|                                                                                         |  |                                  |          |   |      |   |          |      |  |   |          |  



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



39



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC.
AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2007, 2006 and 2005



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 of 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.



Reclassifications



The Company classified the results of operations of its composite container and plastics business from continuing operations to discontinued operations
during 2007 for all periods presented. This business was determined to be discontinued operations following the receipt by the Company of an unsolicited offer to purchase the operations during the third quarter of 2007. See Note 5 for additional
discussion regarding this transaction.



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. The Company records outstanding checks, to the extent there is no right of offset against other cash accounts, as a component of accounts payable rather than as a reduction of
cash and cash equivalents. The total outstanding check balance reported as a component of accounts payable at December 31, 2007 and 2006 was $0 and $10.7 million, respectively.



Restricted Cash



Restricted cash as of December 31, 2007 and December 31, 2006 was approximately $4.0 million and $3.8 million, respectively, and is
recorded in other assets. Restricted cash are funds deposited in escrow accounts as collateral support for workers compensation insurance.



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.



Inventories at December 31, 2007 and 2006 were as follows (in
thousands):



|                                   |  |      |        |      |   |       
|---------------------------------- |  | ---- | ------ | ---- | - | ------
|                                   |  | 2007 |        | 2006
|Raw materials and supplies         |  | $    | 28,079 |      | $ | 35,682
|Finished goods and work in process |  |      | 37,333 |      |   | 39,359
|                                   |  |      |        |      |   |       
|Total inventory                    |  | $    | 65,412 |      | $ | 75,041
|                                   |  |      |        |      |   |       



40



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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 $20.2 million, $24.3 million, and $28.5 million for the years ended December 2007, 2006 and 2005, respectively.



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.



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.



41



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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, 2007 and did not result in an impairment. In December 2005,
however, the Company recognized certain impairment indicators related to the Companys decision at that time to exit the coated recycled paperboard business. As a result, the Company retested its goodwill as of December 31, 2005 and
recorded a goodwill impairment charge of $49.8 million at December 31, 2005. Of this amount, approximately $10.5 million was recorded in the Companys paperboard segment and the remaining $39.3 million was recorded in its folding carton
segment. The goodwill impairment recorded in the folding carton segment resulted from the loss of synergies that existed between the Companys coated recycled paperboard business and its folding carton segment. The folding carton segment lost
some of these synergies following the disposition of a portion of the coated recycled paperboard business.



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;
| | - |  | -----------------------------

| |  |  | 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 are 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 is
recognized as an impairment by reducing the carrying value of the asset to its estimated fair value. 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 $9.7 million, $28.7 million and $85.6 million related
to property plant and equipment were recorded in 2007, 2006 and 2005, respectively. Of these amounts $8.7 million, $100 thousand and $11.7 million were recorded in discontinued operations during 2007, 2006 and 2005, respectively. During 2006 and
2005, respectively, approximately $16.9 million and $75.4 million of the impairments were related to the disposition of the Sprague, Connecticut and Rittman, Ohio coated paperboard mills. The assets impaired include real estate and machinery and
equipment related to operations that permanently closed in conjunction with our restructuring activities, discontinued businesses and other disposals. The charges represent the difference between the carrying value of the assets and the estimated
fair value. Real estate held for sale as of December 31, 2007 of $1.7 million is recorded as a component of other current assets. Fair value for real estate held for sale at December 31, 2007 was estimated based on brokers opinions
of value.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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. Effective January 1, 2007, the Company implemented FASB Interpretation No. (FIN) 48. FIN 48 was issued to clarify the accounting for uncertainty in
income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Prior to
the adoption of FIN 48, we accounted for income tax contingencies solely in accordance with SFAS No. 5, Accounting for Contingencies.



Income (Loss) Per Common 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, 2007 and 2005 the
impact of all stock options was antidilutive and excluded from the diluted loss per share calculation for those years.



Recently Issued Accounting Pronouncements



In June 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement
No. 109) (FIN 48). This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for tax
positions taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, financial statement classification, tax-related interest and penalties, and additional disclosure requirements. The Company adopted
FIN 48 effective January 1, 2007.



In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles,
and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this
statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings.
The provisions of SFAS No. 157 are effective for the fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, which delays the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008, and interim periods within those years for all nonfinancial assets and nonfinancial liabilities, except those that are recognized at fair value in the financial statements on a recurring basis (at
least annually). The Company is still evaluating the effect, if any, the adoption of this statement will have on its financial position or results of operations.



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities  Including an Amendment of FASB Statement No. 115. This pronouncement permits entities to use the fair value method to measure certain financial assets and liabilities by electing an irrevocable option to use the
fair value method at specified election dates. After election of the option, subsequent changes in fair value would result in the recognition of unrealized gains or losses as period costs during the period the change occurred. SFAS No. 159
becomes effective as of the beginning of the first fiscal year that begins after November 15, 2007, with early adoption permitted. However, entities may not retroactively apply the provisions of SFAS No. 159 to fiscal years preceding the
date of adoption. The Company is still evaluating the effect, if any, the adoption of this statement will have on its financial position or results of operations.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) requires the acquiring entity in a business combination to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill
being the excess value over the net identifiable assets acquired. In addition, immediate expense recognition is required for transaction costs. SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and adoption is prospective only. As such, if the Company enters into any business combinations after adoption of SFAS 141(R), a transaction may significantly affect the Companys financial position and earnings, but,
not cash flows, compared to the Companys past acquisitions.



In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-and amendment of ARB No. 51. SFAS No. 160 requires entities to report noncontrolling (minority)
interest as a component of shareholders equity on the balance sheet; include all earnings of a consolidated subsidiary in consolidated results of operations; and treat all transactions between an entity and noncontrolling interest as equity
transactions. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and adoption is prospective only; however, presentation and disclosure requirements must be applied
retrospectively. The Company has not yet determined the effect, if any, SFAS No. 160 will have on its consolidated financial statements.



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. Acquisition and Divestitures



Carolina Carton Plant  Acquisition



In December 2005, the Company acquired a folding carton plant in Charlotte,
North Carolina from the Sonoco Products Company for approximately $11.1 million. Ownership and risk of loss was transferred to the Company as of December 31, 2005 and the purchase 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 segments operations. The Company allocated $3.2 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.



The Carolina Carton acquisition was accounted for by applying the provisions of SFAS No. 141 Business Combination. The Companys
estimated fair values of acquired assets were in excess of the purchase price. The excess fair value was allocated to property, plant and equipment. The financial statements include the operating results of the acquired business for the period after
the date of 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 acquisition of Carolina Carton. This $11.0 million was classified as restricted cash as of December 31, 2005. The remaining $1.7 million of the purchase price was received in January 2006 upon final calculations
of working capital. Since this facility was the only corrugated operation within the folding carton 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 at December 31, 2005 associated with this divestiture which was recorded in discontinued operations.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



Partition Business  Divestiture



On February 27, 2006, the Company completed the sale of its partition business to RTS Packaging LLC, a joint venture
between the Rock-Tenn Company and the Sonoco Products Company, for approximately $6.0 million. During 2006, the Company recorded a $1.9 million loss associated with this divestiture in discontinued operations.



Rittman and Sprague Coated Assets  Divestiture



On April 21, 2006, the Company entered into an agreement to sell the
assets of Sprague Paperboard, Inc. located in Versailles, Connecticut to Cascades Inc. for $14.5 million. This sale was completed on July 19, 2006.



The Company also entered into an agreement granting Cascades Inc. an option to buy the coating equipment and the customer list of the Rittman, Ohio coated
paperboard mill for $500 thousand. Cascades Inc. exercised its option on August 2, 2006. Upon Cascades Inc.s exercise of its option, the Company ceased its coated recycled paperboard production at the Rittman, Ohio location. The Company
recorded asset impairment charges of $16.9 million and $75.4 million in 2006 and 2005, respectively, as a result of these transactions.



These mills generated sales of $52.1 million and $ 80.1 million and losses from operations of $22.3 million and $101.8 million during the years
ended December 31, 2006 and 2005, respectively. These losses included restructuring and impairment costs of $16.9 million and $84.9 million during the years ended December 31, 2006 and 2005, respectively.



Specialty Packaging Division  Divestiture



The Company concluded the sale of the Specialty Packaging Division in
December 2006. The division was sold to several buyers for an aggregate purchase price of $5.1 million. The Company recorded a loss of approximately $10.8 million associated with this divestiture which was recorded in restructuring and impairment
costs of discontinued operations. Approximately $8.1 million of the loss was recorded in 2005 and $2.7 million was recorded in 2006.



Composite Container and Plastic Businesses  Divestiture



On October 2, 2007, the Company completed the sale of its composite container and plastics businesses to the Sonoco Products Company for a net
purchase price of approximately $20.2 million. These businesses were a component of the tube, core and composite container segment and consisted of six facilities located in Covington, Georgia; Orrville, Ohio; St. Paris, Ohio; Stevens Point,
Wisconsin; New Smyrna Beach, Florida and Union, South Carolina. The Company recorded a loss of approximately $10.3 million associated with this divestiture which is recorded in restructuring and impairment costs of discontinued operations. Included
in this amount is the write-off of approximately $5.0 million of related goodwill.



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, 2006 and 2007 (in thousands):



|                                                        |  |            |        |                |   |                           |  |               |   |  |       |        |   |  |   |         |  
|------------------------------------------------------- |  | ---------- | ------ | -------------- | - | ------------------------- |  | ------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                        |  | Paperboard |        | RecoveredFiber |   | Carton andCustomPackaging |  | Tube and Core |   |  | Total |       
|Balance as of December 31, 2005                         |  | $          | 68,396 |                | $ | 3,777                     |  | $             |  |  | $     | 57,102 |   |  | $ | 129,275 |  
|Disposal of partition operations                        |  |            |       |                |   |                          |  |               |  |  |       | (1,701 | ) |  |   | (1,701  | )
|                                                        |  |            |        |                |   |                           |  |               |   |  |       |        |   |  |   |         |  
|Balance as of December 31, 2006                         |  |            | 68,396 |                |   | 3,777                     |  |               |  |  |       | 55,401 |   |  |   | 127,574 |  
|Disposal of composite container and plastics operations |  |            |       |                |   |                          |  |               |  |  |       | (5,032 | ) |  |   | (5,032  | )
|                                                        |  |            |        |                |   |                           |  |               |   |  |       |        |   |  |   |         |  
|Balance as of December 31, 2007                         |  | $          | 68,396 |                | $ | 3,777                     |  |               |  |  | $     | 50,369 |   |  | $ | 122,542 |  
|                                                        |  |            |        |                |   |                           |  |               |   |  |       |        |   |  |   |         |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



In February 2006, the Company recognized a $1.7 million disposal of goodwill in the tube and core
segment related to the divesture of the segments partition operations. In September 2007, the Company recognized a $5.0 million disposal of goodwill in the tube and core segment related to the divestiture of the segments composite
container and plastics businesses. These impairments were also recorded in discontinued operations.



Intangible Assets



As of December 31, 2007 and 2006, the Company had an intangible asset of $5.0 million (net of $3.0 million of accumulated amortization) and $5.5 million (net of $2.5 million of accumulated amortization) respectively, which is
classified with other assets. Amortization expense for the years ended December 31, 2007, 2006 and 2005 was $511 thousand, $521 thousand and $568 thousand, respectively. The intangible asset is associated with the acquisition of certain assets
of the Smurfit Industrial Packaging Group, which was completed in 2002, 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):



|                |  |   |      
|--------------- |  | - | -----
|2008            |  | $ | 511  
|2009            |  |   | 511  
|2010            |  |   | 511  
|2011            |  |   | 511  
|2012            |  |   | 511  
|                |  |   |      
|Five year total |  | $ | 2,555
|                |  |   |      



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 from 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
consisted of three paperboard mills located in Rittman, Ohio; Versailles, Connecticut; and Tama, Iowa. The specialty packaging division was a component of the folding carton segment and, at such time, consisted of five facilities located in
Robersonville, North Carolina; Bucyrus, Ohio; Strasburg, Ohio; Clifton, New Jersey and Pine Brook, New Jersey. The partition operations were a component of the tube, core and composite container segment and consisted of three facilities located in
Litchfield, Illinois; Frenchtown, New Jersey and Covington, Georgia. The Company initially 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.



In its 2005 financial statements, the Company
included the results of operations of the coated recycled paperboard business, the specialty packaging division, the partition operations and the Hunt Valley corrugated operation as discontinued operations in the consolidated statements of
operations for all periods presented.



As discussed in Note 3
above, the Company sold its Hunt Valley Corrugated operation in December 2005. This operation was the only corrugated operation within the folding carton segment and was a component of that segment. Also, as discussed in Note 3, the Company
completed the sale of its partition business in February 2006. The Company sold the Sprague mill and coating components of the Rittman mill in July and August 2006, respectively, and concluded the sale of its Specialty Packaging Division during
December 2006.



In December 2006, the Company announced the
retention of its Tama, Iowa coated recycled paperboard mill. The Company exited the balance of its coated recycled paperboard business earlier this year and, as discussed in Note 3 above, Tama had been held for sale as part of that group. The
decision to retain the Tama mill was due to the significant improvements in both the performance and profitability of the mill throughout 2006. As a result of the decision to retain the Tama mill, the results of the operations for the Tama mill and
the Companys two other coated recycled paperboard mills, Sprague, CT and Rittman, OH, were reclassified from discontinued operations to continuing operations for all periods presented in the consolidated statements of operations. The Company
recorded a $770 thousand depreciation charge in December 2006 to



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



recognize depreciation expense for the period the Tama mill was classified as held for sale. The Company sold the Sprague mill and the coating components of
the Rittman mill in July and August of 2006, respectively.



On
October 2, 2007, the Company completed the sale of its composite container and plastics businesses to the Sonoco Products Company for a net purchase price of approximately $20.2 million. These businesses were a component of the tube, core and
composite container segment and consisted of six facilities located in Covington, Georgia; Orrville, Ohio; St. Paris, Ohio; Stevens Point, Wisconsin; New Smyrna Beach, Florida and Union, South Carolina.



For all periods presented in the accompanying consolidated statements of
operations, discontinued operations include the results of operations and losses associated with the divestitures of the specialty packaging division, the partition operations, the Hunt Valley corrugated division and the composite container and
plastics businesses.



Operating Results Data



The following table shows the results of discontinued operations for the
three years ended December 31, 2007, 2006 and 2005:



|                                                      |  |                                  |        |   |      |   |        |      |  |   |         |  
|----------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                      |  | For the Years Ended December 31, |       
|                                                      |  | 2007                             |        |   | 2006 |   |        | 2005 | 
|Sales                                                 |  | $                                | 41,622 |   |      | $ | 86,070 |      |  | $ | 163,079 |  
|Cost of sales                                         |  |                                  | 38,244 |   |      |   | 79,479 |      |  |   | 148,340 |  
|Selling, general and administrative expenses          |  |                                  | 2,344  |   |      |   | 8,377  |      |  |   | 14,194  |  
|Restructuring and other impairment costs              |  |                                  | 9,255  |   |      |   | 5,053  |      |  |   | 11,233  |  
|                                                      |  |                                  |        |   |      |   |        |      |  |   |         |  
|Loss from operations                                  |  |                                  | (8,221 | ) |      |   | (6,839 | )    |  |   | (10,688 | )
|Other (income) expense, net                           |  |                                  |       |   |      |   | 30     |      |  |   | (577    | )
|                                                      |  |                                  |        |   |      |   |        |      |  |   |         |  
|Loss from operations before benefit from income taxes |  |                                  | (8,221 | ) |      |   | (6,809 | )    |  |   | (11,265 | )
|Benefit for income taxes                              |  |                                  | 1,323  |   |      |   | 2,297  |      |  |   | 2,655   |  
|                                                      |  |                                  |        |   |      |   |        |      |  |   |         |  
|Loss from discontinued operations                     |  | $                                | (6,898 | ) |      | $ | (4,512 | )    |  | $ | (8,610  | )
|                                                      |  |                                  |        |   |      |   |        |      |  |   |         |  



During 2007, the
Company recorded pre-tax impairment charges of approximately $9.3 million in the results of discontinued operations. These impairment charges were related to the property, plant and equipment of the composite container and plastics operations.
During 2006, the Company recorded pre-tax impairment charges of approximately $5.1 million in the results of discontinued operations. Of this amount, approximately $2.9 million was impairment related to the property, plant and equipment of the
special packaging division, and $1.9 million was related to the property, plant and equipment of the Companys partition business. In December 2005, the Company recorded pre-tax impairment charges of approximately $11.2 million in the results
of discontinued operations. Of this amount, approximately $8.1 million was related to the property, plant and equipment associated with the Companys specialty packaging division, and approximately $3.0 million was related to restructuring and
impairment charges associated with the sale of the Companys Hunt Valley corrugated facility.



Assets Held for Sale and Related Liabilities  Discontinued Operations



At December 31, 2006, there were no assets held for sale related to discontinued operations. In 2006, all previously discontinued operations were
sold with the exception of the Tama, Iowa mill which was reclassified to property, plant and equipment. At December 31, 2007, assets held for sale related to discontinued operations were $96,000 and consisted solely of property, plant and
equipment.



6. Equity Interest in Unconsolidated Affiliates



Standard Gypsum



From April 1, 1996 to January 17, 2006, the Company owned a 50%
interest in a limited partnership, Standard Gypsum. Standard Gypsum owns two gypsum wallboard manufacturing facilities. One facility is located in McQueeney, Texas and the other is in Cumberland City, Tennessee. During such time Standard Gypsum was
operated as a joint venture and was managed



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



by Temple-Inland, Inc., (Temple Inland) which also owned 50% of the joint venture. The Company accounted for its interest in Standard Gypsum
under the equity method of accounting. The Companys equity interest in the earnings of Standard Gypsum for the year ended December 31, 2005 was $28.6 million. The Company received distributions based on its equity interest in Standard
Gypsum of $26.5 million in 2005.



On January 17, 2006 the
Company sold its 50% ownership interest in Standard Gypsum to Standard Gypsum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 $135.2 million. Temple-Inland also assumed all of Standard Gypsums $56.2 million in debt obligations and other liabilities. As a result of this transaction, the Company ceased to be entitled to further
distributions from Standard Gypsum for all periods subsequent to January 1, 2006; and all of the rights and obligations as a partner in Standard Gypsum pursuant to the Partnership Agreement for Standard Gypsum dated December 31, 2000,
ceased. The Company received a final cash distribution of $2.1 million in the first quarter of 2006, which was included in the calculation of the gain on sale. The Company limited its retained environmental indemnifications such that its liability
can not exceed $5.0 million for any claims related to events that occurred prior to the formation of the Standard Gypsum joint venture on April 1, 1996. This indemnification will terminate on January 17, 2011. The Company did not record a
liability related to this indemnification since the probability of an asserted claim was considered remote.



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 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 its joint venture partner are required to make.



The Company received $4.0 million, $8.0 million and $13.0 million in cash distributions from Premier Boxboard in 2007, 2006 and 2005, respectively. The Companys equity interest in the earnings of Premier Boxboard for 2007, 2006 and
2005 was approximately $1.8 million, $5.6 million and $8.4 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, 2007, Premier Boxboard was in compliance with its debt covenants.



Summarized financial information for Premier Boxboard at December 31,
2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005, respectively, is as follows (in thousands):



|                      |  |      |         |      |   |        
|--------------------- |  | ---- | ------- | ---- | - | -------
|                      |  | 2007 |         | 2006
|Current assets        |  | $    | 19,571  |      | $ | 15,254 
|Noncurrent assets     |  |      | 121,943 |      |   | 128,561
|Current liabilities   |  |      | 12,761  |      |   | 10,552 
|Long-term liabilities |  |      | 501     |      |   | 605    
|Long-term debt        |  |      | 50,000  |      |   | 50,000 
|Net assets            |  |      | 78,252  |      |   | 82,658 



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



|                 |  |      |         |      |   |         |  |   |        
|---------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                 |  | 2007 |         | 2006 |   | 2005   
|Sales            |  | $    | 128,721 |      | $ | 118,495 |  | $ | 122,063
|Gross profit     |  |      | 18,470  |      |   | 32,560  |  |   | 36,436 
|Operating income |  |      | 7,338   |      |   | 15,035  |  |   | 20,909 
|Net income       |  |      | 3,517   |      |   | 11,049  |  |   | 16,873 



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, 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, 2007 and 2006 total long-term debt consisted of the
following (in thousands):



|                                      |  |      |         |   |      |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                      |  | 2007 |         |   | 2006 |  
|Senior Credit Facility                |  | $    | 30,387  |   |      | $ | 36,111  |  
|73/8% Senior Notes                    |  |      | 189,750 |   |      |   | 189,750 |  
|71/4% Senior Notes                    |  |      | 29,000  |   |      |   | 29,000  |  
|Other notes payable (1)               |  |      | 8,200   |   |      |   | 8,200   |  
|Realized interest rate swap gains (2) |  |      | 1,505   |   |      |   | 2,861   |  
|                                      |  |      |         |   |      |   |         |  
|Total debt                            |  |      | 258,842 |   |      |   | 265,922 |  
|Less current maturities               |  |      | (5,830  | ) |      |   | (5,830  | )
|                                      |  |      |         |   |      |   |         |  
|Total long-term debt                  |  | $    | 253,012 |   |      | $ | 260,092 |  
|                                      |  |      |         |   |      |   |         |  



|(1) | In accordance with the Sprague sales agreement, which was executed during 2006, industrial revenue bonds (the Sprague bonds) were retained by the Company and, therefore, have been
included in the schedule above as of December 31, 2007 and 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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, 2007 maturing during the next five years and thereafter is
as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2008       |  | $ | 5,830  
|2009       |  |   | 198,374
|2010       |  |   | 33,548 
|2011       |  |   | 12,890 
|2012       |  |   | 3,500  
|Thereafter |  |   | 4,700  
|           |  |   |        
|Total debt |  | $ | 258,842
|           |  |   |        



Senior Credit Facility



On March 30, 2006, the Company amended its Senior Credit
Facility by entering into an Amended and Restated Credit Agreement. The agreement provides for a $145.0 million senior secured credit facility (the Senior Credit Facility) consisting of a $110.0 million five-year revolver and a $35.0
million five-year term loan. The five-year revolver was reduced from $110.0



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



million to $100.0 million in October 2006. On May 14, 2007, the Company amended its Senior Credit Facility which impacted the calculation of the
availability under the Senior Credit Facility and changed the applicable margins in the pricing grid which is discussed in more detail below. The Senior Credit Facility is secured by substantially all of the assets of the Company and its domestic
subsidiaries other than real property, including accounts receivable, general intangibles, inventory, and equipment. These subsidiaries are parties to the Senior Credit Facility either as co-borrowers with the Company or as guarantors. At
December 31, 2007, the Company had $20.0 million outstanding under the five-year term loan and $10.3 million outstanding under the revolver.



The revolver matures on March 30, 2011 and includes a sublimit of $25.0 million for letters of credit. Borrowing availability under the revolver is
determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and inventory and reduced by usage of the revolver, including outstanding letters of credit, and any reserves. Aggregate availability under
the revolver was $31.3 million at December 31, 2007. The term loan was drawn in full at closing and is required to be repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding principal due
on March 30, 2011.



Outstanding principal of the term loan
initially bears interest at a rate equal to, at the Companys 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 Senior Credit Facility) plus
0.50%, or (2) the adjusted one, two, three, or six-month LIBOR rate plus 2.00%. Outstanding principal under the revolver initially bears interest at a rate equal to, at the Companys option, either (1) the base rate plus .25% or
(2) the adjusted one, two, three, or six-month LIBOR rate plus 1.75%. Pricing under the Senior Credit Facility is determined by reference to a pricing grid under which margins shall be adjusted prospectively on a quarterly basis as determined
by the average availability and fixed charge coverage ratio measured as of the last day of each fiscal quarter, commencing with the fiscal quarter ending June 30, 2007. Under the pricing grid, the applicable margins for the term loan range from
0.0% to 1.0% for base rate loans and from 1.50% to 2.50% for LIBOR loans, and the applicable margins for the revolver range from 0.0% to 0.75% for base rate loans and from 1.25% to 2.25% for LIBOR loans. The undrawn portion of the revolver is
subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on
the undrawn amount thereof at an annual rate of 0.125%. The actual rates in effect at December 31, 2007 were 7.25% and 7.26% for outstanding revolver and term loan borrowings, respectively.



The Senior Credit Facility contains covenants that restrict, among other
things, the ability of the Company and its subsidiaries 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, enter into sale and leaseback transactions, or change the nature of their business. The Senior Credit Facility contains no financial maintenance covenants at this time; however, the
Company must maintain a $15.0 million Minimum Availability Reserve at all times. The availability disclosed is net of this reserve. There is a one-time option to convert to a springing covenant financial structure where the $15.0 million
Minimum Availability Reserve would be eliminated; however, a fixed charge ratio would be tested in the event borrowing availability falls below $20.0 million. Currently, the Company would not meet the fixed charge coverage ratio and,
therefore, does not anticipate exercising this option. The Senior Credit 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 the Company.



On May 22, 2007, the Company purchased additional units in its
PaperLink, LLC (PaperLink) unconsolidated affiliate, which increased the Companys membership interest to greater than fifty percent. The Company failed to timely pledge the assets of PaperLink as a co-borrower or guarantor of the
Companys debt (which debt includes the Companys Senior Credit Facility and Senior Notes). The Company subsequently determined that this failure was a technical violation of the debt covenants of both the Companys Senior Credit
Facility and its Senior Notes, which require  within a specified time period  that the Company pledge the assets of any affiliate in which its membership interest exceeds fifty percent. Upon determination, the Company decreased its
membership interest in PaperLink to forty-nine percent. The Company notified the administrative agent for its Senior Credit Facility and the Trustee which administers it Senior Notes of the technical and inadvertent violation. On June 29, 2007,
the bank group that holds the Companys Senior Credit Facility consented to and



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



waived any defaults regarding the Companys violation. The Company does not expect any adverse impact from notification to the Trustee. The Company was
in compliance with the Senior Credit Facility covenants as of December 31, 2007.



Senior and Senior Subordinated Notes



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%. The 73/8% Senior Notes are unsecured obligations of the Company. As of December 31, 2006, the Company has purchased an aggregate of $10.3 million of these notes in the open market.



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. The publicly traded senior subordinated notes were, and the Senior Notes are, unsecured
but guaranteed, on a joint and several basis, by all but one of the Companys wholly-owned domestic subsidiaries. The senior subordinated notes included a redemption provision which allowed the Company to redeem all or part of the outstanding
notes at 105.25% on April 1, 2006 or later.



During 2004 and 2005, the Company purchased $20.0 million and $7.5 million, respectively, of senior
subordinated and Senior Notes in the open market. On May 1, 2006, the Company redeemed its outstanding 97/8% senior subordinated notes in full at a price of $105.25 for each $100 of outstanding principal amount of the notes plus $2.1
million of accrued and unpaid interest from April 1, 2006 to May 1, 2006. At the time of redemption, the aggregate outstanding principal amount of the notes was $257.5 million, and the total redemption price (including accrued and unpaid
interest and redemption premium) was $273.1 million. The Company used proceeds from borrowings at closing under the Senior Credit Facility, together with available cash, to fund the redemption. The redemption resulted in a $10.3 million loss, which
was recognized in May of 2006.



Interest Rate Swap Agreements



During 2004 and 2005, 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 and generated cash proceeds to the Company of $826 thousand in 2005 and $385 thousand in 2004. These gains were recorded as a component of debt and lowered interest expense over the remaining duration of the related debt
obligation.



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 interest rate swaps or related liabilities at December 31, 2007 or 2006.



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, 2007, 2006 and 2005 is as follows (in
thousands):



|                   |  |      |        |      |   |        |  |   |       
|------------------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                   |  | 2007 |        | 2006 |   | 2005  
|Minimum rentals    |  | $    | 12,164 |      | $ | 14,589 |  | $ | 16,056
|Contingent rentals |  |      | 846    |      |   | 660    |  |   | 1,073 
|                   |  |      |        |      |   |        |  |   |       
|Total              |  | $    | 13,010 |      | $ | 15,249 |  | $ | 17,129
|                   |  |      |        |      |   |        |  |   |       





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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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, 2007 (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2008       |  | $ | 10,269
|2009       |  |   | 8,120 
|2010       |  |   | 6,140 
|2011       |  |   | 4,989 
|2012       |  |   | 4,051 
|Thereafter |  |   | 5,499 
|           |  |   |       
|Total      |  | $ | 39,068
|           |  |   |       



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.



Environmental



The Company is subject to various environmental and pollution control laws and regulations in all jurisdictions in which it
operates. Concerning environmental obligations, the Company records any liabilities and discloses the required information in accordance with SFAS No. 5 Accounting for Contingencies. The Company has identified environmental
contamination at one of its closed facilities that may require remediation. The Company currently does not have sufficient information available to assess the extent to which remediation will be required or to reasonably estimate the full extent of
the Companys potential obligation. For this location, management has used the best information available at this time and the recognition of any additional obligation will be based on further studies. The Company will continue to monitor the
developments at this facility.



9. (Loss) Income Per Common 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, |        
|                                                             |  | 2007                             |         |   | 2006 |   | 2005   | 
|(Loss) income from continuing operations                     |  | $                                | (17,618 | ) |      | $ | 51,844 |  | $ | (94,776 | )
|                                                             |  |                                  |         |   |      |   |        |  |   |         |  
|Weighted average number of common shares outstanding-basic   |  |                                  | 28,621  |   |      |   | 28,575 |  |   | 28,774  |  
|Common share equivalents                                     |  |                                  |        |   |      |   | 32     |  |   |        |  
|                                                             |  |                                  |         |   |      |   |        |  |   |         |  
|Weighted average number of common shares outstanding-diluted |  |                                  | 28,621  |   |      |   | 28,607 |  |   | 28,774  |  
|                                                             |  |                                  |         |   |      |   |        |  |   |         |  
|(Loss) income per common share-basic                         |  | $                                | (0.62   | ) |      | $ | 1.82   |  | $ | (3.29   | )
|                                                             |  |                                  |         |   |      |   |        |  |   |         |  
|(Loss) income per common share-diluted                       |  | $                                | (0.62   | ) |      | $ | 1.82   |  | $ | (3.29   | )
|                                                             |  |                                  |         |   |      |   |        |  |   |         |  



Since the years ended
2007 and 2005 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 that were not included in the computation of diluted weighted average shares for the years
ended 2007, 2006 and 2005 because they were antidilutive were, 2,090,645, 1,364,350 and 1,113,187, respectively.



10. Stock-Based Compensation



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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



Additionally, each Eligible Director is granted options each year to purchase one thousand shares of the Companys common stock at an option price equal
to the fair market value at the date of grant. 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, approximately
5 thousand shares of common stock were issued under this plan. Additionally during 2004, options to purchase approximately 7 thousand shares of common stock were issued under the plan. 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 the plan. In May 2005, the Directors began participating in the Companys Long-Term Equity Incentive 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 2007, 2006, or 2005 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 non-vested 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. Non-vested 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, therefore, no more options will be granted under this plan. The Company issued no
shares of non-vested stock in 2007, 2006 and 2005. The Company recorded approximately $0, $45 thousand, and $22 thousand of compensation expense related to non-vested stock under this plan during 2007, 2006 and 2005, 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, non-vested performance accelerated restricted
shares (PARS), non-vested Restricted Service Awards, non-vested Restricted Performance Awards, or a combination of any or all of the various awards, 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 PARS issued by the Company will vest seven years from the date of grant unless vesting is accelerated when the price of Company stock meets a specific target price and trades at this price or higher for
twenty consecutive trading days. The Restricted Service Awards issued by the Company will vest 50% two years from the date of grant and one hundred percent three years from the date of grant. The Restricted Performance Awards vest based on the
achievement of a three-year cumulative Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) financial objective. In May 2003 the Companys board of directors authorized and shareholders approved an aggregate of
4.0 million common shares for issuance under this plan. The Companys policy for issuing shares upon an exercise of options is to issue new shares.



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 non-employee director of the Company is granted 3,000 options annually.



During the year ended December 31, 2007, 2006 and 2005, the Company granted 466 thousand options, 250 thousand options and 32 thousand options. The weighted average grant-date fair value for
options granted during years ended December 31, 2007, 2006 and 2005 was $3.99, $5.81 and $5.85, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $0 thousand, $3
thousand and $8 thousand, respectively. The



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



Company recorded approximately $440 thousand of compensation expense for stock options for the year ended December 31, 2007. As of December 31,
2007, there was $1.3 million of total unrecognized compensation costs related to non-vested stock options. This cost is expected to be recognized over a period of 2.7 years. The Company amortizes this cost using the straight line method.



During the year ended December 31, 2007, 2006 and 2005, the Company
issued non-vested stock of 362 thousand shares, 282 thousand shares and 2 thousand shares. The weighted average grant-date fair value for non-vested stock granted during years ended December 31, 2007, 2006 and 2005 was $3.98,
$10.09 and $13.38, respectively. The total fair value of non-vested stock vested during the years ended December 31, 2007, 2006 and 2005 was approximately $0 thousand, $8 thousand and $181 thousand. The Company recorded approximately $0.9
million, $1.1 million and $0.8 million of compensation expense during the twelve months ended December 31, 2007, 2006, and 2005, respectively. As of December 31, 2007, there was $4.4 million of total unrecognized compensation
cost related to non-vested stock. The unrecognized cost is expected to be expensed over a weighted-average period of 3.8 years unless specific stock price targets are achieved, at which time the PARS will vest and be expensed during the period the
targets are achieved.



Total compensation expense for
non-vested stock and stock options for the twelve months ended December 31, 2007, 2006 and 2005 included in the Companys results from operations was $1.3 million, $1.8 million and $0.8 million, respectively.



The following table summarizes the stock option activity during the year
ended December 31, 2007:



|                                                    |  |           |   |  |                                |       |                                        |     |                                            |   |  
|--------------------------------------------------- |  | --------- | - |  | ------------------------------ | ----- | -------------------------------------- | --- | ------------------------------------------ | - | -
|                                                    |  | Shares    |   |  | Weighted AverageExercise Price |       | WeightedAverageRemainingLife(In Years) |     | AggregateIntrinsic Value (1)(in thousands)
|Outstanding at December 31, 2006                    |  | 1,701,712 |   |  | $                              | 16.30 |                                        |     |                                            |   |  
|Granted                                             |  | 466,130   |   |  |                                | 3.99  |                                        |     |                                            |   |  
|Forfeited or expired                                |  | (74,197   | ) |  |                                | 16.07 |                                        |     |                                            |   |  
|Exercised                                           |  | (3,000    | ) |  |                                | 7.05  |                                        |     |                                            |   |  
|                                                    |  |           |   |  |                                |       |                                        |     |                                            |   |  
|Outstanding at December 31, 2007                    |  | 2,090,645 |   |  | $                              | 13.58 |                                        | 5.5 |                                            | $ | 
|                                                    |  |           |   |  |                                |       |                                        |     |                                            |   |  
|Vested and expected to vest as of December 31, 2007 |  | 2,044,307 |   |  | $                              | 13.74 |                                        | 5.4 |                                            | $ | 
|                                                    |  |           |   |  |                                |       |                                        |     |                                            |   |  
|Options exercisable as of December 31, 2007         |  | 1,488,777 |   |  | $                              | 16.76 |                                        | 3.9 |                                            | $ | 
|                                                    |  |           |   |  |                                |       |                                        |     |                                            |   |  



|(1) | These amounts represent the difference between the exercise price and $3.09, the closing price of Caraustar stock on December 31, 2007 (the closing price closest to the last
day of the quarter) as reported on the Nasdaq Stock Market, for all the in-the-money options outstanding.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A summary of the status of Caraustars non-vested restricted shares as of December 31, 2007, and changes during the twelve months ended
December 31, 2007, is presented below:



|                                |  |         |   |  |                                        |      
|------------------------------- |  | ------- | - |  | -------------------------------------- | -----
|                                |  | Shares  |   |  | Weighted-Average Grant-Date Fair Value
|Non-vested at December 31, 2006 |  | 489,994 |   |  | $                                      | 13.21
|Granted                         |  | 362,200 |   |  |                                        | 3.98 
|Vested                          |  |        |   |  |                                        |     
|Forfeited or expired            |  | (20,255 | ) |  |                                        | 10.44
|                                |  |         |   |  |                                        |      
|Non-vested at December 31, 2007 |  | 831,939 |   |  | $                                      | 9.26 
|                                |  |         |   |  |                                        |      





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



Results for the year ended December 31, 2005 have not been restated to reflect compensation
expense for employee stock options. Had compensation expense for employee stock options been determined based on the fair value at the grant date consistent with SFAS 123, the Companys net income and earnings per share amounts for the year
ended December 31, 2005 would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):



|                                                                                                      |  |      |          |  
|----------------------------------------------------------------------------------------------------- |  | ---- | -------- | -
|                                                                                                      |  | 2005 |         
|Net loss:                                                                                             |  |      |          |  
|As reported                                                                                           |  | $    | (103,386 | )
|Share-based employee compensation cost, net of related tax effects, included in net loss, as reported |  |      | 527      |  
|Share-based employee compensation cost, net of related tax effects, under SFAS 123                    |  |      | (2,346   | )
|                                                                                                      |  |      |          |  
|Pro forma net loss, under SFAS 123                                                                    |  | $    | (105,205 | )
|                                                                                                      |  |      |          |  
|Net loss available to common stockholders per share, as reported:                                     |  |      |          |  
|Basic                                                                                                 |  | $    | (3.59    | )
|Diluted                                                                                               |  | $    | (3.59    | )
|Pro forma net loss per share, under SFAS 123:                                                         |  |      |          |  
|Basic                                                                                                 |  | $    | (3.66    | )
|Diluted                                                                                               |  | $    | (3.66    | )



The fair market value
of the stock options at the date of the grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:



|                        |  |               |  |               |  |              
|----------------------- |  | ------------- |  | ------------- |  | -------------
|                        |  | 2007          |  | 2006          |  | 2005         
|Risk-free interest rate |  | 3.78%  4.60% |  | 4.45%  4.65% |  | 4.34%  4.49%
|Expected dividend yield |  | 0%            |  | 0%            |  | 0%           
|Expected option lives   |  | 8 years       |  | 8 years       |  | 8 years      
|Expected volatility     |  | 47%  49%     |  | 44%  46%     |  | 41  43%     



The risk-free interest
rate is based on U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. Expected volatility and expected life are based on the Companys historical experience. Expected dividend yield was not
considered in the option pricing formula since the Companys debt agreements contain certain limitations on the payment of dividends and currently preclude the Company from doing so. As required by SFAS 123R, the Company will adjust the
estimated forfeiture rate based upon actual experience.



11. Pension Plan
and Other Postretirement Benefits



Pension Plan and Supplemental
Executive Retirement Plan



Effective December 31,
2006, the Company adopted SFAS No. 158 which requires the Companys Consolidated Balance Sheet reflect the funded status of the defined benefit pension plan (the Pension Plan), the Supplemental Executive Retirement Plan
(SERP) and Other Postretirement Benefits plans. The funded status of the plans is measured as the difference between the plan assets at fair value and the projected benefit obligation.



Substantially all of the Companys employees hired prior to
December 31, 2004 participate in a noncontributory defined benefit 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 contributions to the Pension Plan of $11.9 million, $0, and $13.1 million in the twelve month periods ended December 31, 2007, 2006 and 2005, respectively. Based on estimates at December 31, 2007, the Company
will make contributions of approximately $9.4 million during calendar year 2008.



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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 SERP which provides retirement benefits
to participants based on average compensation and years of credited service. Certain executives were given credited service for prior industry services. The SERP is unfunded at December 31, 2007 and 2006. The Company made contributions of $278
thousand in 2007, $420 thousand in 2006 and no contributions in 2005. The Company expects to make contributions of $511 thousand in 2008.



Pension expense for the Pension Plan and the SERP includes the following components for the years ended December 31, 2007, 2006 and 2005 (in
thousands):



|                                              |  |      |       |              |   |       |  |      |     |  |      |        |   |      |   |        |   |  |   |        |  
|--------------------------------------------- |  | ---- | ----- | ------------ | - | ----- |  | ---- | --- |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                                              |  | SERP |       | Pension Plan |  
|                                              |  | 2007 |       | 2006         |   | 2005  |  | 2007 |     |  | 2006 |        |   | 2005 |  
|Service cost of benefits earned               |  | $    | 363   |              | $ | 330   |  | $    | 280 |  | $    | 2,517  |   |      | $ | 2,666  |   |  | $ | 3,060  |  
|Interest cost on projected benefit obligation |  |      | 561   |              |   | 521   |  |      | 423 |  |      | 7,471  |   |      |   | 6,973  |   |  |   | 6,764  |  
|Settlement and curtailment                    |  |      |      |              |   |      |  |      |    |  |      | 195    |   |      |   | 108    |   |  |   | 684    |  
|Expected return on plan assets                |  |      |      |              |   |      |  |      |    |  |      | (7,808 | ) |      |   | (7,171 | ) |  |   | (6,412 | )
|Amortization of prior service cost            |  |      | 86    |              |   | 83    |  |      | 83  |  |      | 263    |   |      |   | 311    |   |  |   | 394    |  
|Amortization of net loss                      |  |      | 118   |              |   | 139   |  |      | 49  |  |      | 2,705  |   |      |   | 4,398  |   |  |   | 4,568  |  
|Amortization of transition obligation         |  |      | 114   |              |   | 114   |  |      | 114 |  |      |       |   |      |   |       |   |  |   |       |  
|                                              |  |      |       |              |   |       |  |      |     |  |      |        |   |      |   |        |   |  |   |        |  
|Net pension expense                           |  | $    | 1,242 |              | $ | 1,187 |  | $    | 949 |  | $    | 5,343  |   |      | $ | 7,285  |   |  | $ | 9,058  |  
|                                              |  |      |       |              |   |       |  |      |     |  |      |        |   |      |   |        |   |  |   |        |  



Total net pension
expense for 2008 is estimated to be $1.2 million for the SERP and $3.9 million for the Pension Plan. The following amounts in accumulated other comprehensive income are expected to be recognized as components of the 2008 net pension expense:



|                         |  |      |     |             |   |      
|------------------------ |  | ---- | --- | ----------- | - | -----
|                         |  | SERP |     | PensionPlan
|Estimated actuarial loss |  | $    | 55  |             | $ | 2,180
|Prior service cost       |  |      | 86  |             |   | 220  
|Transition obligation    |  |      | 114 |             |   |     



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
|2008      |  | $    | 511   |             | $ | 5,891 
|2009      |  |      | 462   |             |   | 6,336 
|2010      |  |      | 462   |             |   | 6,668 
|2011      |  |      | 695   |             |   | 6,964 
|2012      |  |      | 783   |             |   | 7,664 
|2013-2017 |  |      | 4,289 |             |   | 44,868



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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, 2007 and 2006 (in thousands):



|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ---- | ------ | - | ------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                     |  | SERP |        |   | Pension Plan |  
|                                                                     |  | 2007 |        |   | 2006         |   |        | 2007 |  |   | 2006    |  
|Change in benefit obligation:                                        |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Projected benefit obligation at end of prior year                    |  | $    | 9,624  |   |              | $ | 9,096  |      |  | $ | 122,507 |   |  | $ | 124,473 |  
|Service cost                                                         |  |      | 363    |   |              |   | 330    |      |  |   | 2,517   |   |  |   | 2,666   |  
|Interest cost                                                        |  |      | 562    |   |              |   | 521    |      |  |   | 7,471   |   |  |   | 6,973   |  
|Actuarial (Gain) loss                                                |  |      | (481   | ) |              |   | 42     |      |  |   | 148     |   |  |   | (6,165  | )
|Curtailment                                                          |  |      |       |   |              |   |       |      |  |   | (60     | ) |  |   | (83     | )
|Plan amendments                                                      |  |      | (25    | ) |              |   | 55     |      |  |   | 225     |   |  |   | 356     |  
|Benefits paid                                                        |  |      | (278   | ) |              |   | (420   | )    |  |   | (7,361  | ) |  |   | (5,713  | )
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Projected benefit obligation at end of year                          |  | $    | 9,765  |   |              | $ | 9,624  |      |  | $ | 125,447 |   |  | $ | 122,507 |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Change in plan assets:                                               |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Fair value of plan assets at end of prior year                       |  | $    |       |   |              | $ |       |      |  | $ | 93,014  |   |  | $ | 86,858  |  
|Actual return on plan assets                                         |  |      |       |   |              |   |       |      |  |   | 9,202   |   |  |   | 11,869  |  
|Employer contributions                                               |  |      | 278    |   |              |   | 420    |      |  |   | 11,881  |   |  |   |        |  
|Benefits paid                                                        |  |      | (278   | ) |              |   | (420   | )    |  |   | (7,361  | ) |  |   | (5,713  | )
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Fair value of plan assets at end of year                             |  | $    |       |   |              | $ |       |      |  | $ | 106,736 |   |  | $ | 93,014  |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Funded status of the plans:                                          |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Ending funded status                                                 |  | $    | (9,765 | ) |              | $ | (9,624 | )    |  | $ | (18,711 | ) |  | $ | (29,493 | )
|Unrecognized transition obligation                                   |  |      | N/A    |   |              |   | N/A    |      |  |   | N/A     |   |  |   | N/A     |  
|Unrecognized prior service cost                                      |  |      | N/A    |   |              |   | N/A    |      |  |   | N/A     |   |  |   | N/A     |  
|Unrecognized net actuarial loss                                      |  |      | N/A    |   |              |   | N/A    |      |  |   | N/A     |   |  |   | N/A     |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Net amount recognized                                                |  | $    | (9,765 | ) |              | $ | (9,624 | )    |  | $ | (18,711 | ) |  | $ | (29,493 | )
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Amounts recognized in the balance sheet:                             |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Accrued benefit liability                                            |  | $    | (9,765 | ) |              | $ | (9,624 | )    |  | $ | (18,711 | ) |  | $ | (29,493 | )
|Intangible asset                                                     |  |      | N/A    |   |              |   | N/A    |      |  |   | N/A     |   |  |   | N/A     |  
|Deferred tax asset                                                   |  |      | N/A    |   |              |   | N/A    |      |  |   | N/A     |   |  |   | N/A     |  
|Accumulated other comprehensive loss                                 |  |      | N/A    |   |              |   | N/A    |      |  |   | N/A     |   |  |   | N/A     |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Net amount recognized                                                |  | $    | (9,765 | ) |              | $ | (9,624 | )    |  | $ | (18,711 | ) |  | $ | (29,493 | )
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Plans with accumulated benefit obligations in excess of plan assets: |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Projected benefit obligation                                         |  | $    | 9,765  |   |              | $ | 9,624  |      |  | $ | 125,447 |   |  | $ | 122,507 |  
|Accumulated benefit obligation                                       |  |      | 7,470  |   |              |   | 6,762  |      |  |   | 124,179 |   |  |   | 120,765 |  
|Plan assets                                                          |  |      |       |   |              |   |       |      |  |   | 106,737 |   |  |   | 93,014  |  
|                                                                     |  |      |        |  
|Amounts in accumulated other comprehensive loss net of tax:          |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Transition obligation                                                |  | $    | 455    |   |              | $ | 353    |      |  | $ |        |   |  | $ |        |  
|Prior service cost                                                   |  |      | 792    |   |              |   | 559    |      |  |   | 1,217   |   |  |   | 900     |  
|Net actuarial loss                                                   |  |      | 1,628  |   |              |   | 1,381  |      |  |   | 30,511  |   |  |   | 21,469  |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  
|Total                                                                |  | $    | 2,875  |   |              | $ | 2,293  |      |  | $ | 31,728  |   |  | $ | 22,369  |  
|                                                                     |  |      |        |   |              |   |        |      |  |   |         |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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, 2007 and 2006:



|                                               |  |      |   |  |              |   |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | - |  | ------------ | - |  | ---- | - |  | ---- | -
|                                               |  | SERP |   |  | Pension Plan |  
|                                               |  | 2007 |   |  | 2006         |   |  | 2007 |   |  | 2006 |  
|Weighted average discount rate                 |  | 6.10 | % |  | 5.85         | % |  | 6.30 | % |  | 6.05 | %
|Weighted average rate of compensation increase |  | 4.00 | % |  | 4.00         | % |  | 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, 2007, 2006 and 2005:



|                                                        |  |      |   |  |              |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------------------------------- |  | ---- | - |  | ------------ | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                                        |  | SERP |   |  | Pension Plan |  
|                                                        |  | 2007 |   |  | 2006         |   |  | 2005 |   |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Weighted average discount rate                          |  | 5.85 | % |  | 5.75         | % |  | 5.75 | % |  | 6.14 | % |  | 5.75 | % |  | 5.75 | %
|Weighted average expected rate of return on plan assets |  | N/A  |   |  | N/A          |   |  | N/A  |   |  | 8.00 | % |  | 8.50 | % |  | 8.50 | %
|Weighted average rate of compensation increase          |  | 4.00 | % |  | 4.00         | % |  | 3.00 | % |  | 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 was 6.30% and 6.05% at December 31, 2007 and December 31, 2006. 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 6.30% 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 current and former participating employees in the Companys pension plans. A 0.25% change in the discount rate would
result in a change in the December 31, 2007, projected benefit obligation of approximately $3.9 million and would change estimated 2008 net pension expense by approximately $420 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 was based on an asset
allocation assumption of 58% equity, 36% fixed income and a 6% 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. The Company concluded that the expected weighted average rates of return of 8.0% and 8.5% for the years ended December 31, 2007 and December 31, 2006, respectively, were appropriate.



A 0.25% change in the weighted average expected rate of return would change
estimated 2008 net pension expense by $274 thousand.



The
Companys pension plan weighted-average asset allocations as of December 31, 2007 and 2006, respectively, were as follows:



|                                            |  |      |   |  |      |  
|------------------------------------------- |  | ---- | - |  | ---- | -
|                                            |  | 2007 |   |  | 2006 |  
|Large capitalization U.S. equity            |  | 29   | % |  | 29   | %
|Small capitalization U.S. equity            |  | 9    | % |  | 10   | %
|International equity                        |  | 20   | % |  | 13   | %
|                                            |  |      |   |  |      |  
|Total equity                                |  | 58   | % |  | 52   | %
|                                            |  |      |   |  |      |  
|Portfolio of hedge funds                    |  | 6    | % |  | 18   | %
|                                            |  |      |   |  |      |  
|Short term fixed                            |  |     |   |  | 5    | %
|Fixed income (intermediate-term maturities) |  | 36   | % |  | 25   | %
|                                            |  |      |   |  |      |  
|Total fixed income                          |  | 36   | % |  | 30   | %
|                                            |  |      |   |  |      |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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            |  | 30 | %
|Small capitalization U.S. equity            |  | 10 | %
|International equity                        |  | 20 | %
|                                            |  |    |  
|Total equity                                |  | 60 | %
|                                            |  |    |  
|Portfolio of hedge funds                    |  | 5  | %
|                                            |  |    |  
|Short-term fixed                            |  |   |  
|Fixed income (intermediate-term maturities) |  | 35 | %
|                                            |  |    |  
|Total fixed income                          |  | 35 | %
|                                            |  |    |  



The Companys
actual investment allocation at December 31, 2007 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 and SFAS No. 158.



Net periodic postretirement benefit cost for the years ended December 31, 2007, 2006 and 2005 included the following components (in thousands):



|                                                               |  |      |     |      |   |      |  |   |    
|-------------------------------------------------------------- |  | ---- | --- | ---- | - | ---- |  | - | ---
|                                                               |  | 2007 |     | 2006 |   | 2005
|Service cost of benefits earned                                |  | $    | 23  |      | $ | 33   |  | $ | 37 
|Interest cost on accumulated postretirement benefit obligation |  |      | 297 |      |   | 354  |  |   | 359
|Amortization                                                   |  |      | 70  |      |   | 184  |  |   | 107
|                                                               |  |      |     |      |   |      |  |   |    
|Net periodic postretirement benefit cost                       |  | $    | 390 |      | $ | 571  |  | $ | 503
|                                                               |  |      |     |      |   |      |  |   |    



Postretirement
benefits totaling $300 thousand, $151 thousand and $407 thousand were paid during 2007, 2006 and 2005, respectively. Contributions of $407 thousand are estimated for 2008.



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
|2008      |  | $                        | 407  
|2009      |  |                          | 437  
|2010      |  |                          | 445  
|2011      |  |                          | 434  
|2012      |  |                          | 399  
|2013-2017 |  |                          | 1,990



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



The accrued postretirement benefit cost as of December 31, 2007 and 2006 consists of the
following (in thousands):



|                                                  |  |      |        |   |      |   |        |  
|------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                  |  | 2007 |        |   | 2006 |  
|Change in benefit obligation:                     |  |      |        |   |      |   |        |  
|Projected benefit obligation at end of prior year |  | $    | 6,271  |   |      | $ | 6,317  |  
|Service cost                                      |  |      | 23     |   |      |   | 33     |  
|Interest cost                                     |  |      | 297    |   |      |   | 354    |  
|Actuarial (gain) loss                             |  |      | (1,215 | ) |      |   | (129   | )
|Amendments                                        |  |      | (66    | ) |      |   | (153   | )
|Benefits paid                                     |  |      | (302   | ) |      |   | (151   | )
|                                                  |  |      |        |   |      |   |        |  
|Projected benefit obligation at end of year       |  | $    | 5,008  |   |      | $ | 6,271  |  
|                                                  |  |      |        |   |      |   |        |  
|Funded status                                     |  | $    | (5,008 | ) |      | $ | (6,271 | )
|Unrecognized prior service cost                   |  |      | N/A    |   |      |   | N/A    |  
|Unrecognized net actuarial loss                   |  |      | N/A    |   |      |   | N/A    |  
|                                                  |  |      |        |   |      |   |        |  
|Net amount recognized in balance sheet            |  | $    | (5,008 | ) |      | $ | (6,271 | )
|                                                  |  |      |        |   |      |   |        |  
|Amounts in accumulated other comprehensive loss:  |  |      |        |   |      |   |        |  
|Prior service cost                                |  | $    | (746   | ) |      | $ | (518   | )
|Net actuarial loss                                |  |      | 2,514  |   |      |   | 2,453  |  
|                                                  |  |      |        |   |      |   |        |  
|Total                                             |  | $    | 1,768  |   |      | $ | 1,935  |  
|                                                  |  |      |        |   |      |   |        |  



The accumulated
postretirement benefit obligations at December 31, 2007 and 2006 were determined using a weighted average discount rate of 6.10% and 5.90%, respectively. The rate of increase in the costs of covered health care benefits is assumed to be 7.0% in
2008 decreasing 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, 2007 by
approximately $507 thousand and $438, respectively, and this would have increased or decreased net periodic postretirement benefit cost by approximately $33 thousand and $28 thousand, respectively, for the year ended December 31, 2007.



401(k) Retirement Savings 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 2004, the Company matched 50% of contributions up to a maximum of 6% of compensation as defined by the 401(k) Plan.
During 2006 and 2007, the 401(k) plan matched 100% of contributions up to 3% of an employees salary and 50% of all contributions that are greater than 3% of the employees salary but less than or equal to 5% of an employees salary.
In addition and pursuant to the Companys defined contribution plan effective January 1, 2005, the Company will make an additional contribution to all non-union employees 401(k) accounts based upon the 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, 2007, 2006, and 2005, the Company recorded matching expense of approximately $5.1
million, $5.4 million, and $5.7 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. Effective January 1, 2007, the Company implemented FIN 48. FIN
48 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return.



As a result of
implementing FIN 48, the Company recognized a net increase of $3.1 million in the reserve for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 retained earnings balance. As of December 31, 2007 and
January 1, 2007, the total amount of unrecognized tax benefits was $13.8 million and $13.3 million, respectively, of which $4.6 million and $4.5 million, respectively, would affect the effective tax rate if recognized. The difference between
the gross



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



amount of unrecognized tax benefits and the portion that would affect the annual effective tax rate is attributable to items that would be offset by an
existing valuation allowance and the federal benefit related to state tax items. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



|                                                             |  |   |        |  
|------------------------------------------------------------ |  | - | ------ | -
|Balance at January 1, 2007                                   |  | $ | 13,267 |  
|Additions based on tax positions related to the current year |  |   | 689    |  
|Additions for tax positions of prior years                   |  |   | 174    |  
|Reductions for tax positions of prior years                  |  |   | (372   | )
|                                                             |  |   |        |  
|Balance at December 31, 2007                                 |  | $ | 13,758 |  
|                                                             |  |   |        |  



The Company recognizes
accrued interest and penalties related to unrecognized tax benefits in the income tax provision. As of January 1, 2007 and December 31, 2007, accrued interest and penalties related to unrecognized tax benefits were $566 thousand and $667
thousand, respectively. As of December 31, 2007, we do not expect our unrecognized tax benefits to change significantly over the next 12 months.



The Company and its subsidiaries file U.S. federal income tax returns and returns for various U.S. states and foreign jurisdictions. For federal purposes,
the years that remain subject to examination by the IRS include 2003 through 2006. For state purposes, the years that remain subject to examination by state authorities include tax years 2000 through 2006. The Company is currently under audit by the
State of Illinois for tax years 2003 through 2005 and the State of New York for tax years 2001 through 2003. No material adjustments are expected to result from either audit.



The (benefit) provision for income taxes for the years ended December 31, 2007, 2006 and 2005 consisted of the
following (in thousands):



|         |  |      |         |   |      |   |        |  |   |         |  
|-------- |  | ---- | ------- | - | ---- | - | ------ |  | - | ------- | -
|         |  | 2007 |         |   | 2006 |   | 2005   | 
|Current: |  |      |         |   |      |   |        |  |   |         |  
|Federal  |  | $    | 32      |   |      | $ | 1,600  |  | $ |        |  
|State    |  |      | 56      |   |      |   | 226    |  |   | 695     |  
|Foreign  |  |      | 373     |   |      |   | 159    |  |   |        |  
|         |  |      |         |   |      |   |        |  |   |         |  
|         |  |      | 461     |   |      |   | 1,985  |  |   | 695     |  
|Deferred |  |      | (10,496 | ) |      |   | 23,702 |  |   | (32,951 | )
|         |  |      |         |   |      |   |        |  |   |         |  
|         |  | $    | (10,035 | ) |      | $ | 25,687 |  | $ | (32,256 | )
|         |  |      |         |   |      |   |        |  |   |         |  



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



|                                   |  |      |         |   |      |   |        |      |  |   |         |  
|---------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                   |  | 2007 |         |   | 2006 |   |        | 2005 | 
|Continuing operations              |  |      |         |   |      |   |        |      |  |   |         |  
|Current federal and state          |  | $    | 461     |   |      | $ | 2,175  |      |  | $ | 695     |  
|Deferred federal and state         |  |      | (9,173  | ) |      |   | 25,459 |      |  |   | (30,417 | )
|                                   |  |      |         |   |      |   |        |      |  |   |         |  
|Tax (benefit) expense              |  |      | (8,712  | ) |      |   | 27,634 |      |  |   | (29,722 | )
|                                   |  |      |        
|Discontinued operations            |  |      |         |   |      |   |        |      |  |   |         |  
|Current federal and state          |  |      |        |   |      |   | (190   | )    |  |   |        |  
|Deferred federal and state         |  |      | (1,323  | ) |      |   | (1,757 | )    |  |   | (2,534  | )
|                                   |  |      |         |   |      |   |        |      |  |   |         |  
|Tax (benefit) expense              |  |      | (1,323  | ) |      |   | (1,947 | )    |  |   | (2,534  | )
|                                   |  |      |         |   |      |   |        |      |  |   |         |  
|Total income tax (benefit) expense |  | $    | (10,035 | ) |      | $ | 25,687 |      |  | $ | (32,256 | )
|                                   |  |      |         |   |      |   |        |      |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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:



|                                 |  |      |    |  |      |    |  |      |   
|-------------------------------- |  | ---- | -- |  | ---- | -- |  | ---- | --
|                                 |  | 2007 |    |  | 2006 |    |  | 2005 |   
|Federal                          |  | 35.0 | %  |  | 35.0 | %  |  | 35.0 | % 
|State taxes, net federal benefit |  | (0.4 | )% |  | (0.7 | )% |  | (1.4 | )%
|Non-deductible impaired goodwill |  |     |    |  |     |    |  | (9.5 | )%
|Other                            |  | (1.5 | )% |  | 0.7  | %  |  | (0.3 | )%
|                                 |  |      |    |  |      |    |  |      |   
|Effective tax rate               |  | 33.1 | %  |  | 35.0 | %  |  | 23.8 | % 
|                                 |  |      |    |  |      |    |  |      |   



Significant components
of the Companys deferred income tax assets and liabilities as of December 31, 2007 and 2006 are summarized as follows (in thousands):



|                                                                |  |      |         |   |      |   |         |  
|--------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                |  | 2007 |         |   | 2006 |  
|Deferred income tax assets:                                     |  |      |         |   |      |   |         |  
|Deferred employee benefits                                      |  | $    | 207     |   |      | $ | 240     |  
|Postretirement benefits other than pension                      |  |      | 3,147   |   |      |   | 3,835   |  
|Post employment benefits                                        |  |      | 10,550  |   |      |   | 14,666  |  
|Account receivable                                              |  |      | 1,379   |   |      |   | 890     |  
|Insurance                                                       |  |      | 2,056   |   |      |   | 2,423   |  
|Tax loss carryforwards and credits                              |  |      | 27,090  |   |      |   | 25,132  |  
|Inventories                                                     |  |      | 1,533   |   |      |   | 1,703   |  
|Other                                                           |  |      | 5,358   |   |      |   | 2,478   |  
|                                                                |  |      |         |   |      |   |         |  
|Total deferred income tax assets                                |  |      | 51,320  |   |      |   | 51,367  |  
|                                                                |  |      |         |   |      |   |         |  
|Deferred income tax liabilities  depreciation and amortization |  |      | (68,961 | ) |      |   | (68,260 | )
|                                                                |  |      |         |   |      |   |         |  
|Valuation allowance                                             |  |      | (10,600 | ) |      |   | (17,150 | )
|                                                                |  |      |         |   |      |   |         |  
|Net deferred tax liability                                      |  | $    | (28,241 | ) |      | $ | (34,043 | )
|                                                                |  |      |         |   |      |   |         |  
|Amounts recognized in balance sheet:                            |  |      |         |   |      |   |         |  
|Current deferred tax assets                                     |  | $    | 5,841   |   |      | $ | 9,272   |  
|Long term deferred tax liabilities                              |  |      | (34,082 | ) |      |   | (43,315 | )
|                                                                |  |      |         |   |      |   |         |  
|Net deferred tax liability                                      |  | $    | (28,241 | ) |      | $ | (34,043 | )
|                                                                |  |      |         |   |      |   |         |  



The tax effect of the
Companys federal net operating losses was $14.1 million and $1.5 million at December 31, 2007 and December 31, 2006, respectively. These federal net operating losses will start to expire in varying amounts in 2025. The tax effect of
the Companys state net operating losses was $21.4 and $20.7 million at December 31, 2007 and 2006, respectively, and these losses will expire in varying amounts between 2007 and 2027. The Company has a valuation allowance related to state
losses of $9.8 million at December 31, 2007, which decreased by $6.0 million from $15.8 million at December 31, 2006, for estimated future impairment related to the state net operating losses. The Company also has state tax credit
carryforwards of approximately $0.8 million and $1.3 million at December 31, 2007 and 2006, respectively, which will expire in varying amounts between 2007 and 2020. The Company has a valuation allowance related to state tax credits of $0.8
million and $1.3 million at December 31, 2007 and 2006, respectively for estimated future impairment related to the state tax credit carryforwards.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



13. Quarterly Financial Data (Unaudited)



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



|                                                                                   |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------- | - | ------- | ------------ |  | - | ------------- | - |  | - | ------- | -
|                                                                                   |  | FirstQuarter |         |   | SecondQuarter |   |         | ThirdQuarter |  |   | FourthQuarter |  
|2007                                                                               |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Sales                                                                              |  | $            | 219,425 |   |               | $ | 221,248 |              |  | $ | 209,631       |   |  | $ | 203,915 |  
|Cost of sales                                                                      |  |              | 193,296 |   |               |   | 191,365 |              |  |   | 180,638       |   |  |   | 182,481 |  
|(Loss) income from continuing operations before income taxes and minority interest |  |              | (12,650 | ) |               |   | (4,174  | )            |  |   | 1,760         |   |  |   | (11,266 | )
|Income (loss) from discontinued operations before income taxes                     |  |              | 416     |   |               |   | 333     |              |  |   | (9,539        | ) |  |   | 569     |  
|Net loss                                                                           |  |              | (8,944  | ) |               |   | (2,308  | )            |  |   | (6,490        | ) |  |   | (6,774  | )
|Diluted loss per common share                                                      |  | $            | (0.32   | ) |               | $ | (0.08   | )            |  | $ | (0.22         | ) |  | $ | (0.24   | )
|2006                                                                               |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Sales                                                                              |  | $            | 247,592 |   |               | $ | 247,683 |              |  | $ | 234,736       |   |  | $ | 203,033 |  
|Cost of sales                                                                      |  |              | 211,772 |   |               |   | 210,130 |              |  |   | 200,930       |   |  |   | 178,519 |  
|Income (loss) from continuing operations before income taxes and minority interest |  |              | 126,786 |   |               |   | (24,190 | )            |  |   | (4,461        | ) |  |   | (18,205 | )
|(Loss) from discontinued operations before income taxes                            |  |              | (2,234  | ) |               |   | (18     | )            |  |   | (2,201        | ) |  |   | (2,356  | )
|Net income (loss)                                                                  |  |              | 80,652  |   |               |   | (15,756 | )            |  |   | (5,072        | ) |  |   | (12,492 | )
|Diluted income (loss) per common share                                             |  | $            | 2.82    |   |               | $ | (0.55   | )            |  | $ | (0.18         | ) |  | $ | (0.44   | )



The Company classified
the results of operations of its composite container and plastics business from continuing operations to discontinued operations during 2007 for all periods presented.



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 paperboard and one facility that manufactures clay-coated recycled paperboard. The recovered fiber segment consists of facilities that collect and sell recycled paper and broker recycled paper and other paper rolls. The tube and
core segment is principally made up of facilities that produce spiral and convolute-wound tubes and cores. The folding carton segment consists of facilities that produce printed and unprinted folding cartons and set-up boxes. Intersegment sales are
recorded at prices which approximate market prices. Sales to external customers located in foreign countries accounted for approximately 7.0%, 6.7% and 7.1% of the Companys sales for 2007, 2006 and 2005, 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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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



The following table presents certain business segment information as of and for the years ended
December 31, 2007, 2006 and 2005 (in thousands):



|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                        |  | 2007 |           |   | 2006 |   |           | 2005 | 
|Sales (aggregate):                                      |  |      |           |   |      |   |           |      |  |   |           |  
|Paperboard                                              |  | $    | 354,416   |   |      | $ | 433,795   |      |  | $ | 465,701   |  
|Recovered fiber                                         |  |      | 234,797   |   |      |   | 204,336   |      |  |   | 168,759   |  
|Tube and core                                           |  |      | 297,584   |   |      |   | 315,604   |      |  |   | 316,525   |  
|Folding carton                                          |  |      | 214,630   |   |      |   | 236,111   |      |  |   | 229,868   |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                                   |  | $    | 1,101,427 |   |      | $ | 1,189,846 |      |  | $ | 1,180,853 |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Sales (intersegment):                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Paperboard                                              |  | $    | 147,658   |   |      | $ | 163,780   |      |  | $ | 187,046   |  
|Recovered fiber                                         |  |      | 94,624    |   |      |   | 87,000    |      |  |   | 82,579    |  
|Tube and core                                           |  |      | 4,147     |   |      |   | 5,073     |      |  |   | 4,677     |  
|Folding carton                                          |  |      | 779       |   |      |   | 949       |      |  |   | 840       |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                                   |  | $    | 247,208   |   |      | $ | 256,802   |      |  | $ | 275,142   |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Sales (external customers):                             |  |      |           |   |      |   |           |      |  |   |           |  
|Paperboard                                              |  | $    | 206,758   |   |      | $ | 270,015   |      |  | $ | 278,655   |  
|Recovered fiber                                         |  |      | 140,173   |   |      |   | 117,336   |      |  |   | 86,180    |  
|Tube and core                                           |  |      | 293,437   |   |      |   | 310,531   |      |  |   | 311,848   |  
|Folding carton                                          |  |      | 213,851   |   |      |   | 235,162   |      |  |   | 229,028   |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                                   |  | $    | 854,219   |   |      | $ | 933,044   |      |  | $ | 905,711   |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|(Loss) income from operations:                          |  |      |           |   |      |   |           |      |  |   |           |  
|Paperboard (A)                                          |  | $    | (1,453    | ) |      | $ | (10,948   | )    |  | $ | (70,102   | )
|Recovered fiber (B)                                     |  |      | 6,454     |   |      |   | 4,381     |      |  |   | 253       |  
|Tube and core (C)                                       |  |      | 9,473     |   |      |   | 6,994     |      |  |   | 7,044     |  
|Folding carton (D)                                      |  |      | 2,065     |   |      |   | (4,329    | )    |  |   | (36,812   | )
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|                                                        |  |      | 16,539    |   |      |   | (3,902    | )    |  |   | (99,617   | )
|Corporate expense                                       |  |      | (26,476   | ) |      |   | (24,724   | )    |  |   | (23,281   | )
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|(Loss) income from operations                           |  |      | (9,937    | ) |      |   | (28,626   | )    |  |   | (122,898  | )
|Interest expense                                        |  |      | (18,760   | ) |      |   | (25,913   | )    |  |   | (41,961   | )
|Interest income                                         |  |      | 208       |   |      |   | 3,829     |      |  |   | 2,629     |  
|Equity in income of unconsolidated affiliates           |  |      | 1,770     |   |      |   | 5,613     |      |  |   | 37,043    |  
|Gain on sale of interest in unconsolidated affiliates   |  |      | 19        |   |      |   | 135,247   |      |  |   |          |  
|Loss on redemption of senior subordinated notes         |  |      |          |   |      |   | (10,272   | )    |  |   |          |  
|Other, net                                              |  |      | 370       |   |      |   | 52        |      |  |   | 537       |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|(Loss) income before income taxes and minority interest |  |      | (26,330   | ) |      |   | 79,930    |      |  |   | (124,650  | )
|Benefit (provision) for income taxes                    |  |      | 8,712     |   |      |   | (27,984   | )    |  |   | 29,601    |  
|Minority interest in (income) losses                    |  |      |          |   |      |   | (102      | )    |  |   | 273       |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|(Loss) income from continuing operations                |  | $    | (17,618   | ) |      | $ | 51,844    |      |  | $ | (94,776   | )
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Identifiable assets:                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Paperboard                                              |  | $    | 139,189   |   |      | $ | 138,176   |      |  | $ | 122,250   |  
|Recovered fiber                                         |  |      | 28,071    |   |      |   | 25,585    |      |  |   | 24,969    |  
|Tube and core                                           |  |      | 97,957    |   |      |   | 123,222   |      |  |   | 137,190   |  
|Folding carton                                          |  |      | 111,639   |   |      |   | 129,112   |      |  |   | 134,372   |  
|Corporate                                               |  |      | 195,068   |   |      |   | 208,180   |      |  |   | 363,686   |  
|Discontinued operations                                 |  |      | 96        |   |      |   |          |      |  |   | 76,665    |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                                   |  | $    | 572,020   |   |      | $ | 624,275   |      |  | $ | 859,132   |  
|                                                        |  |      |           |   |      |   |           |      |  |   |           |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



|                                                                                  |  |      |        |      |   |        |  |   |       
|--------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                                                  |  | 2007 |        | 2006 |   | 2005  
|Depreciation and amortization:                                                    |  |      |        |      |   |        |  |   |       
|Paperboard                                                                        |  | $    | 6,621  |      | $ | 8,024  |  | $ | 12,861
|Recovered fiber                                                                   |  |      | 822    |      |   | 773    |  |   | 728   
|Tube and core                                                                     |  |      | 4,030  |      |   | 5,435  |  |   | 5,361 
|Folding carton                                                                    |  |      | 6,849  |      |   | 9,053  |  |   | 6,738 
|Corporate                                                                         |  |      | 1,585  |      |   | 886    |  |   | 2,094 
|Discontinued operations                                                           |  |      |       |      |   |       |  |   | 711   
|                                                                                  |  |      |        |      |   |        |  |   |       
|Total                                                                             |  | $    | 19,907 |      | $ | 24,171 |  | $ | 28,493
|                                                                                  |  |      |        |      |   |        |  |   |       
|Purchases of property, plant and equipment, excluding acquisitions of businesses: |  |      |        |      |   |        |  |   |       
|Paperboard                                                                        |  | $    | 9,459  |      | $ | 14,880 |  | $ | 11,945
|Recovered fiber                                                                   |  |      | 1,635  |      |   | 878    |  |   | 911   
|Tube and core                                                                     |  |      | 4,675  |      |   | 1,546  |  |   | 3,387 
|Folding carton                                                                    |  |      | 6,276  |      |   | 7,350  |  |   | 2,693 
|Corporate                                                                         |  |      | 4,556  |      |   | 13,216 |  |   | 4,743 
|Discontinued operations                                                           |  |      |       |      |   | 299    |  |   | 593   
|                                                                                  |  |      |        |      |   |        |  |   |       
|Total                                                                             |  | $    | 26,601 |      | $ | 38,169 |  | $ | 24,272
|                                                                                  |  |      |        |      |   |        |  |   |       



|(A) | Results for 2007, 2006 and 2005 include charges to operations for restructuring and impairment costs of $12.0 million, $29.5 million and $83.3 million, respectively, related to
closing and consolidating operations and impairment of fixed assets in the paperboard segment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Results for 2007, 2006 and 2005 include (credits) and charges recorded to operations for restructuring and impairment costs of ($50) thousand, ($39) thousand and $20 thousand,
respectively, related to closing and consolidating operations and impairment of fixed assets in the recovered fiber segment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Results for 2007, 2006 and 2005 include (credits) and charges recorded to operations for restructuring and impairment costs of ($1.1) million, $4.3 million and $1.3 million,
respectively, related to closing and consolidating operations and impairment of fixed assets in the tube and core segment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Results for 2007, 2006 and 2005 include charges and (reversal of charges) to operations for restructuring and impairment costs of $2.3 million, $4.0 million and $40.8 million,
respectively, related to closing and consolidating operations and impairment of fixed assets in the folding carton segment. Results for 2005 also include a charge of $39.4 million for the impairment of goodwill.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15. Restructuring and Impairment Costs



2007 Restructuring Initiatives



In January 2007, the Company announced the permanent closure of its
Lafayette paperboard mill located in Lafayette, Indiana. The mill ceased production in January 2007. For the year ended December 31, 2007, the Company recorded charges of $1.7 million for severance and other termination benefits and $1.9
million for other exit costs. The Company paid $835 thousand of severance and other termination benefits and $1.9 million for other exit costs, leaving an accrual balance of $833 thousand for severance and other termination benefits as of
December 31, 2007. The Company also recorded $904 thousand of additional impairment related to fixed assets. The Company expects to incur additional charges of $177 thousand related to other exit costs. This plan will be complete upon the sale
of the real estate, which the Company is currently marketing.



In January 2007, the Company announced the permanent closure of its Amarillo, Texas tube and core facility. The facility ceased production in July 2007. For the year ended December 31, 2007, the Company recorded charges of $85 thousand
for severance and other termination benefits and $142 thousand for other exit costs. The Company paid $85 thousand of severance and other termination benefits and $142 thousand in other exit costs, leaving no accrual balance as of December 31,
2007. The Company expects to incur additional charges of $77 thousand of other exit costs. This facility is leased and the plan will be complete once the Company has vacated the leased facility and settled the lease obligation.



In January 2007, the Company announced the permanent closure of its Leyland,
England tube and core facility. The facility ceased production in April 2007. For the year ended December 31, 2007, the Company recorded charges of $354 thousand for



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



severance and other termination benefits and $61 thousand for other exit costs. The Company paid $354 thousand of severance and other termination benefits
and $61 thousand in other exit costs, leaving no accrual balance as of December 31, 2007. The Company expects to incur no additional charges for this facility. This plan was essentially complete upon the sale of the locations real estate,
which the Company sold in August 2007.



Also included in the
2007 restructuring and other impairment costs was a net loss of $978 thousand for other disposals of production machinery and equipment.



2006 Restructuring Initiatives



In January 2006, the Company announced the permanent closure of its Birmingham carton plant located in Birmingham, Alabama. For the year ended
December 31, 2006, the Company recorded charges of $211 thousand for severance and other termination benefits and charges of $231 thousand for other exit costs. The Company made payments for severance and other termination benefits of $211
thousand and payments for other exit costs of $175 thousand, leaving an accrual balance of $56 thousand related to a lease. To facilitate the transition of customers to other facilities, the Birmingham carton plant ceased operations at the end of
the second quarter of 2006. For the year ended December 31, 2007, the Company recorded charges of $87 thousand for other exit costs. The Company made payments totaling $143 thousand for other exit costs, leaving no accrual balance as of
December 31, 2007. This facility was leased and the plan has been completed now that the Company has vacated the leased facility and settled the lease obligation.



In April 2006, the Company announced the permanent closure of its Danville tube plant located in Danville, Virginia. Most of the customers
of the Danville tube plant were transitioned to the Companys other tube plants. For the year ended December 31, 2006, the Company recorded $843 thousand of severance and other termination benefits and $86 thousand of other exit costs. The
Company made payments for severance and other termination benefits of $843 thousand and $86 thousand for other exit costs. There was no accrual balance as of December 31, 2006. For the year ended December 31, 2007, the Company recorded
charges of $103 thousand for other exit costs. The Company made payments totaling $103 thousand for other exit costs, leaving no accrual balance as of December 31, 2007. This plan is essentially complete upon the sale of the locations
real estate, which the Company sold in November 2007.



In May
2006, the Company announced the permanent closure of its Mentor carton plant located in Mentor, Ohio. Most of the customers of the Mentor carton plant were transitioned to the Companys other carton operations. For the year ended
December 31, 2006, the Company recorded $817 thousand of severance and other termination benefits and $1.1 million of other exit costs and $50 thousand of impairment related to fix assets. The Company made payments for severance and other
termination benefits of $817 thousand and payments of $1.0 million for other exit costs, leaving an accrual balance of $25 thousand for other exit costs. For the year ended December 31, 2007, the Company recorded charges of $389 thousand
for other exit costs. The Company made payments totaling $394 thousand for other exit costs, leaving an accrual balance of $20 thousand as of December 31, 2007. With the sale of the real estate in the fourth quarter of 2006, this plan is
complete with the exception of paying for 2 remaining leased assets and the Company does not expect to incur any additional charges related to this plan.



In 2006, the Company recorded an impairment charge of $1.3 million related to a tube and core facility located in Mexico City, Mexico, which the Company
disposed of during the third quarter of 2006. For the year ended December 31, 2007 there were no costs related to this facility.



In August 2006, the Company ceased production of coated recycled paperboard at its Rittman, Ohio facility. The Company recorded and paid $1.8 million of
severance and other termination benefits and $1.6 million of other exit costs; there was no accrual balance as of December 31, 2006. For the year ended December 31, 2007, the Company recorded $75 thousand of severance and other termination
benefits and $5.0 million of other exit costs. The Company made payments for severance and other termination benefits of $75 thousand and payments of $2.9 million for other exit costs, leaving an accrual balance of $2.1 million for other exit
costs. The Company expects to incur an additional $2.0 million of other exit costs. This plan will be complete upon the sale of the locations real estate, which the Company is currently marketing.



In August 2006, the Company announced a plan to restructure certain functions
within its tube and core segment. The restructuring will allow the Company to streamline sales and marketing efforts, consolidate and outsource certain engineering



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



costs and close duplicative administrative facilities. During the year ended December 31, 2006, the Company recorded $894 thousand of severance and
other termination benefits and $216 thousand of other exit costs. The Company made payments for severance and other termination benefits of $241 thousand and other exits costs of $216 thousand, leaving an accrual balance of $653 thousand for
severance and other termination benefits. During the year ended December 31, 2007, the Company recorded $269 thousand of severance and other termination benefits and $10 thousand of other exit costs. The Company made payments for severance and
other termination benefits of $869 thousand and other exits costs of $10 thousand, leaving an accrual balance of $53 thousand for severance and other termination benefits. The Company expects no further charges related to this plan. The Company
settled a real estate lease in December 2006 and this plan is complete.



In October 2006, the Company announced the permanent closure of its Reading paperboard mill, located in Sinking Springs, Pennsylvania. The production volume, most of which was sold internally, was transitioned to the Companys other
paperboard operations during the fourth quarter of 2006. During the year ended December 31, 2006, the Company recorded $417 thousand of severance and other termination benefits and $110 thousand of other exit costs. The Company paid $172
thousand for severance and other termination benefits and $110 thousand for other exit costs, leaving an accrual balance of $245 thousand for severance and other termination benefits. During the year ended December 31, 2007, the Company
recorded $5 thousand of severance and other termination benefits and $169 thousand of other exit costs. The Company paid $5 thousand for severance and other termination benefits and $169 thousand for other exit costs, leaving an accrual balance of
$245 thousand for severance and other termination benefits. The Company expects to incur additional charges of $48 thousand of other exit costs. This plan will be completed upon sale of the locations real estate, which the Company is currently
marketing.



In November 2006, the Company announced the
permanent closure of its York, Pennsylvania carton facility. The Company ceased operations during the first quarter of 2007. Most of the customers of the York carton plant were transitioned to the Companys other carton operations. During the
year ended December 31, 2006, the Company recorded $205 thousand of severance and other termination benefits and paid $8 thousand of severance and other termination benefits leaving an accrual balance of $197 thousand as of December 31,
2006. During the year ended December 31, 2007, the Company recorded $260 thousand of severance and other termination benefits and $582 thousand of other exit costs. The Company paid $439 thousand for severance and other termination benefits and
$582 thousand for other exit costs, leaving an accrual balance of $18 thousand for severance and other termination benefits. The Company expects to incur an additional $115 thousand of other exit costs. This plan will be complete upon sale of the
locations real estate, which the Company is currently marketing.



In December 2006, the Company announced the permanent closure of its Vacaville, California tube and core facility. The Company ceased operations during the first quarter of 2007. During the year ended December 31, 2006, the Company
recorded $27 thousand of severance and other termination benefits. During the year ended December 31, 2007, the Company recorded $33 thousand of severance and other termination benefits and $102 thousand of other exit costs. The Company paid
$60 thousand for severance and other termination benefits and $102 thousand for other exit costs, leaving no accrual balance as of December 31, 2007. The Company expects to incur no additional costs and this plan was essentially complete upon
the settlement of a lease obligation.



In December 2006, the
Company announced the permanent closure of its Grand Rapids, Michigan tube and core facility. The Company ceased operations during the second quarter of 2007. Most of the customers of the Grand Rapids tube and core facility were transitioned to the
Companys other tube and core facilities. During the year ended December 31, 2006, the Company recorded and paid $59 thousand of severance and other termination benefits. During the year ended December 31, 2007, the Company recorded
and paid $52 thousand of severance and other termination benefits. The Company expects to incur no additional costs and this plan is essentially complete upon the settlement of a lease obligation.



Also included in the 2006 restructuring and other impairment costs was a net
loss of $3.3 million for other disposals of production machinery and equipment.



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 charge for severance and other termination benefits
and a $186 thousand charge for other exit costs. The Company paid $360 thousand for severance and



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



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. During the year ended December 31, 2006, the Company paid $67 thousand of severance and other termination benefits, recorded $320 thousand of other exit costs and paid $341 thousand related to other
exit costs. There was no accrual balance as of December 31, 2006. During the year ended December 31, 2007, the Company recorded and paid $73 thousand of other exit costs, leaving no accrual balance as of December 31, 2007.
Substantially all of Palmer cartons production was transferred to the Companys other carton operations. The Company expects to incur no additional charges for this facility. This plan is essentially complete upon the sale of the
locations real estate, which the Company sold in September 2007.



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. During the year ended December 31, 2006, the Company reversed an accrual related to severance and other exit costs of $72
thousand and paid $43 thousand of severance and other termination benefits. Also during the year ended December 31, 2006, the Company reversed an accrual related to other exit costs of $540, recorded $14 thousand of other exit costs and paid
$190 thousand related to other exit costs. During the year ended December 31, 2006 the Company settled its real estate lease obligation. Substantially all of Mobiles production was transferred to the Companys other tube and core
operations. As of December 31, 2006, this restructuring plan was complete and no additional charges are expected.



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 of severance and other termination benefits and $44 thousand of other exit
costs, leaving an accrual for severance and other termination benefits of $77 thousand at December 31, 2005. During the year ended December 31, 2006, the Company recorded $45 thousand of severance and other termination benefits, paid $122
thousand of severance and other termination benefits and recorded and paid $69 thousand of other exit costs. During the year ended December 31, 2007, the Company recorded and paid $81 thousand of other exit costs. Substantially all of
DeQuincys production was transferred to the Companys other tube and core operations. As of December 31, 2007, there was no accrual balance. The Company expects to incur approximately $55 thousand of other exit costs. This
restructuring plan is essentially complete pending the sale of real estate, which the Company is currently marketing.



In December 2005, the Company decided to exit the Companys coated recycled paperboard and the specialty packaging business. As a result of exiting
these two lines of business, the Company recorded impairment to goodwill of $49.9 million and impairment to the coated recycled paperboard business fixed assets of $74.4 million in 2005. During the year ended December 31, 2006, the Company
recorded additional impairment of $16.9 million related to the Companys coated recycled paperboard business and decided to retain its Tama, Iowa coated recycled paperboard facility.



Also included in the 2005 restructuring and other impairment costs was a net reversal of $487 thousand loss for other
disposals of production machinery and equipment.



Previous Restructuring
Initiatives



In connection with a restructuring plan
that was initiated prior to January 1, 2004, during the year ended December 31, 2006 the Company recorded $154 thousand of impairment related to real estate, $458 thousand of severance and other termination benefits and recorded $266
thousand of other exit costs. The Company paid $331 thousand of severance and other termination benefits and $227 thousand of other exit costs, leaving an accrual balance for this initiative of $2.1 million. During the year ended December 31,
2007 the Company recorded $146 thousand of severance and other termination benefits and recorded $339 thousand of other exit costs. The Company paid $359 thousand of severance and other termination benefits and $339 thousand of other exit costs,
leaving an accrual balance for this initiative of $1.9 million. The Company expects to incur an additional $148 thousand of severance and other termination benefits and an additional $317 thousand of other exit costs. This plan is essentially
complete except for settlement of a pension liability and sale of real estate, which the Company is currently marketing.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



The following is a summary of restructuring and other costs and the restructuring liability for the
years ended December 31, 2007, 2006 and 2005 (in thousands):



|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|------------------------------------ |  | ------------------------------------------ | ------ | ------------------------------------------ | - | ------ | --------------- |  | - | --------------------------- | - |  | --------- | ------- | - |  | - | ------
|                                     |  | AssetImpairmentCharges andLoss onDisposals |        | Severance andOtherTerminationBenefitsCosts |   |        | Other ExitCosts |  |   | RestructuringLiabilityTotal |   |  | Total (1)
|Liability balance, December 31, 2004 |  |                                            |        |                                            | $ | 3,716  |                 |  | $ | 2,750                       |   |  | $         | 6,466   |   |  |   |       
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|2005 costs                           |  | $                                          | 73,928 |                                            |   | 640    |                 |  |   | 934                         |   |  |           | 1,574   |   |  | $ | 75,502
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|Expenditures and adjustment          |  |                                            |        |                                            |   | (2,093 | )               |  |   | (2,817                      | ) |  |           | (4,910  | ) |  |   |       
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|Liability balance, December 31, 2005 |  |                                            |        |                                            | $ | 2,263  |                 |  | $ | 867                         |   |  | $         | 3,130   |   |  |   |       
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|2006 costs                           |  | $                                          | 28,563 |                                            |   | 5,682  |                 |  |   | 3,545                       |   |  |           | 9,227   |   |  | $ | 37,790
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|Expenditures                         |  |                                            |        |                                            |   | (4,699 | )               |  |   | (4,331                      | ) |  |           | (9,030  | ) |  |   |       
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|Liability balance, December 31, 2006 |  |                                            |        |                                            | $ | 3,246  |                 |  | $ | 81                          |   |  | $         | 3,327   |   |  |   |       
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|2007 costs                           |  | $                                          | 978    |                                            |   | 3,425  |                 |  |   | 8,780                       |   |  |           | 12,205  |   |  | $ | 13,183
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|Expenditures                         |  |                                            |        |                                            |   | (3,273 | )               |  |   | (6,757                      | ) |  |           | (10,030 | ) |  |   |       
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       
|Liability balance, December 31, 2007 |  |                                            |        |                                            | $ | 3,398  |                 |  | $ | 2,104                       |   |  | $         | 5,502   |   |  |   |       
|                                     |  |                                            |        |                                            |   |        |                 |  |   |                             |   |  |           |         |   |  |   |       



|(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 Statements of Operations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following tables summarize restructuring activities by segment for those plans initiated during 2007, 2006, 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: |  | CostPrior to 2005 |        | Costin 2005 |   |      | Costin 2006 |  | Costin 2007 |     | Estimated Cost toComplete Initiativesas ofDecember 31, 2007 |   | Total EstimatedCostof the Initiativesas ofDecember 31, 2007
|Mill Segment                    |  | $                 | 4,456  |             | $ |     |             |  | $           |    |                                                             | $ |                                                            |  | $ |    |  | $ | 4,456 
|Recovered Fiber Segment         |  |                   | 1,023  |             |   | (60  | )           |  |             |    |                                                             |   |                                                            |  |   |    |  |   | 963   
|Folding Carton Segment          |  |                   | 10,704 |             |   | 382  |             |  |             | 839 |                                                             |   | 485                                                         |  |   | 465 |  |   | 12,875
|                                |  |                   |        |             |   |      |             |  |             |     |                                                             |   |                                                             |  |   |     |  |   |       
|                                |  | $                 | 16,183 |             | $ | 322  |             |  | $           | 839 |                                                             | $ | 485                                                         |  | $ | 465 |  | $ | 18,294
|                                |  |                   |        |             |   |      |             |  |             |     |                                                             |   |                                                             |  |   |     |  |   |       
|                                |  |                   |        |             |   |     
|2004 Restructuring Initiatives: |  | CostPrior to 2005 |        | Costin 2005 |   |      | Costin 2006 |  | Costin 2007 |     | Estimated Cost toComplete Initiativesas ofDecember 31, 2007 |   | Total EstimatedCostof the Initiativesas ofDecember 31, 2007
|Mill Segment                    |  | $                 | 10,647 |             | $ | (105 | )           |  | $           |    |                                                             | $ |                                                            |  | $ |    |  | $ | 10,542
|Folding Carton Segment          |  |                   | 1,645  |             |   | (133 | )           |  |             | 6   |                                                             |   |                                                            |  |   |    |  |   | 1,518 
|Tube and Core Segment           |  |                   | 199    |             |   |     |             |  |             |    |                                                             |   |                                                            |  |   |    |  |   | 199   
|Corporate                       |  |                   | 1,944  |             |   | 26   |             |  |             |    |                                                             |   |                                                            |  |   |    |  |   | 1,970 
|                                |  |                   |        |             |   |      |             |  |             |     |                                                             |   |                                                             |  |   |     |  |   |       
|                                |  | $                 | 14,435 |             | $ | (212 | )           |  | $           | 6   |                                                             | $ |                                                            |  | $ |    |  | $ | 14,229
|                                |  |                   |        |             |   |      |             |  |             |     |                                                             |   |                                                             |  |   |     |  |   |       



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



|                                |  |             |       |             |   |      |             |  |                                                             |     |                                                             |   |    |  |   |      
|------------------------------- |  | ----------- | ----- | ----------- | - | ---- | ----------- |  | ----------------------------------------------------------- | --- | ----------------------------------------------------------- | - | -- |  | - | -----
|2005 Restructuring Initiatives: |  | Costin 2005 |       | Costin 2006 |   |      | Costin 2007 |  | Estimated Cost toComplete Initiativesas ofDecember 31, 2007 |     | Total EstimatedCostof the Initiativesas ofDecember 31, 2007
|Mill Segment                    |  | $           |      |             | $ |     |             |  | $                                                           |    |                                                             | $ |   |  | $ |     
|Tube and Core Segment           |  |             | 1,108 |             |   | (485 | )           |  |                                                             | 81  |                                                             |   | 55 |  |   | 759  
|Folding Carton Segment          |  |             | 613   |             |   | 321  |             |  |                                                             | 74  |                                                             |   |   |  |   | 1,008
|                                |  |             |       |             |   |      |             |  |                                                             |     |                                                             |   |    |  |   |      
|                                |  | $           | 1,721 |             | $ | (164 | )           |  | $                                                           | 155 |                                                             | $ | 55 |  | $ | 1,767
|                                |  |             |       |             |   |      |             |  |                                                             |     |                                                             |   |    |  |   |      



|                                |  |             |        |             |   |                                                             |  |                                                             |       |  |   |       
|------------------------------- |  | ----------- | ------ | ----------- | - | ----------------------------------------------------------- |  | ----------------------------------------------------------- | ----- |  | - | ------
|2006 Restructuring Initiatives: |  | Costin 2006 |        | Costin 2007 |   | Estimated Cost toComplete Initiativesas ofDecember 31, 2007 |  | Total EstimatedCostof the Initiativesas ofDecember 31, 2007
|Mill Segment                    |  | $           | 27,798 |             | $ | 5,247                                                       |  | $                                                           | 2,033 |  | $ | 35,078
|Tube and Core Segment           |  |             | 2,459  |             |   | 462                                                         |  |                                                             |      |  |   | 2,921 
|Folding Carton Segment          |  |             | 3,512  |             |   | 1,678                                                       |  |                                                             | 115   |  |   | 5,305 
|                                |  |             |        |             |   |                                                             |  |                                                             |       |  |   |       
|                                |  | $           | 33,769 |             | $ | 7,387                                                       |  | $                                                           | 2,148 |  | $ | 43,304
|                                |  |             |        |             |   |                                                             |  |                                                             |       |  |   |       



|                                |  |             |       |                                                             |   |                                                             |  |   |      
|------------------------------- |  | ----------- | ----- | ----------------------------------------------------------- | - | ----------------------------------------------------------- |  | - | -----
|2007 Restructuring Initiatives: |  | Costin 2007 |       | Estimated Cost toComplete Initiativesas ofDecember 31, 2007 |   | Total EstimatedCostof the Initiativesas ofDecember 31, 2007
|Mill Segment                    |  | $           | 3,538 |                                                             | $ | 177                                                         |  | $ | 3,715
|Tube and Core Segment           |  |             | 641   |                                                             |   | 77                                                          |  |   | 718  
|Folding Carton Segment          |  |             |      |                                                             |   |                                                            |  |   |     
|                                |  |             |       |                                                             |   |                                                             |  |   |      
|                                |  | $           | 4,179 |                                                             | $ | 254                                                         |  | $ | 4,433
|                                |  |             |       |                                                             |   |                                                             |  |   |      



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, 2007 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).



|                   |  |           |         |                |   |        
|------------------ |  | --------- | ------- | -------------- | - | -------
|                   |  | FairValue |         | CarryingAmount
|71/4% Senior Notes |  |           | 24,505  |                |   | 27,714 
|73/8% Senior Notes |  |           | 170,538 |                |   | 192,541
|                   |  |           |         |                |   |        
|                   |  | $         | 195,043 |                | $ | 220,255
|                   |  |           |         |                |   |        



17. Related Party Transactions



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 of $5.5 million, $5.5 million and $5.0 million for the years ended December 31, 2007,
2006 and 2005, respectively. The accounts receivable due from Printpack, Inc. as of December 31, 2007 and 2006, were $3 thousand and $380 thousand, respectively. The accounts payable at December 31, 2007 and 2006 were $300 and $1 thousand,
respectively.



The Company sold recovered fiber in the amounts
of $23.9 million, $38.4 million and $8.9 million for the years ended December 31, 2007, 2006 and 2005, respectively, to Premier Boxboard, a 50%-owned joint venture. Accounts receivable due from Premier Boxboard were $139 thousand and $4.5
million as of December 31, 2007 and 2006, respectively. The Company



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2007, 2006 and 2005



purchased paperboard totaling $4.7 million, $3.0 million and $3.0 million for the years ended December 31, 2007, 2006 and 2005, respectively, from
Premier Boxboard. Payables due to Premier Boxboard were $707 thousand and $493 thousand as of December 31, 2007 and 2006, respectively. During 2007, 2006 and 2005, Premier Boxboard paid marketing fees to Caraustar of approximately $3.1 million,
$2.4 million, and $2.8 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 $495 thousand and $1.7 million as of December 31, 2007 and 2006, respectively.



The Company sold recovered fiber in the amounts of $2.3 million, $4.9 million
and $4.6 million for the years ended December 31, 2007, 2006 and 2005, respectively, to PaperLink, a 49%-owned investee.



18. 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.



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CARAUSTAR INDUSTRIES, INC.
AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

CONSOLIDATING BALANCE SHEETS

(In thousands)



|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|----------------------------------------------- |  | ----------------------- | -------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                |  | As of December 31, 2007 |         
|                                                |  | Parent                  |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                          | 
|CURRENT ASSETS:                                 |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                       |  | $                       | 316      |   |                       | $ | 5,734    |                          |  | $ | 498          |   |  | $            |         |   |  | $ | 6,548    |  
|Intercompany funding                            |  |                         | (231,322 | ) |                       |   | 233,346  |                          |  |   | (2,024       | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                  |  |                         | 161      |   |                       |   | 71,408   |                          |  |   | 2,638        |   |  |              |         |   |  |   | 74,207   |  
|Inventories                                     |  |                         |         |   |                       |   | 64,469   |                          |  |   | 943          |   |  |              |         |   |  |   | 65,412   |  
|Refundable income taxes                         |  |                         | 104      |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 104      |  
|Current deferred tax assets                     |  |                         | 5,841    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 5,841    |  
|Other current assets                            |  |                         | 3,166    |   |                       |   | 3,895    |                          |  |   |             |   |  |              |         |   |  |   | 7,061    |  
|Assets of discontinued operations held for sale |  |                         | 96       |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 96       |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                            |  |                         | (221,638 | ) |                       |   | 378,852  |                          |  |   | 2,055        |   |  |              |         |   |  |   | 159,269  |  
|PROPERTY, PLANT AND EQUIPMENT                   |  |                         | 34,305   |   |                       |   | 488,769  |                          |  |   | 5,727        |   |  |              |         |   |  |   | 528,801  |  
|Less accumulated depreciation                   |  |                         | (14,932  | ) |                       |   | (272,802 | )                        |  |   | (1,158       | ) |  |              |         |   |  |   | (288,892 | )
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net              |  |                         | 19,373   |   |                       |   | 215,967  |                          |  |   | 4,569        |   |  |              |         |   |  |   | 239,909  |  
|GOODWILL                                        |  |                         |         |   |                       |   | 119,040  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 122,542  |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES         |  |                         | 610,689  |   |                       |   |         |                          |  |   |             |   |  |              | (610,689 | ) |  |   |         |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES         |  |                         | 39,117   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 39,117   |  
|OTHER ASSETS                                    |  |                         | 5,300    |   |                       |   | 5,883    |                          |  |   |             |   |  |              |         |   |  |   | 11,183   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                       | 452,841  |   |                       | $ | 719,742  |                          |  | $ | 10,126       |   |  | $            | (610,689 | ) |  | $ | 572,020  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY            | 
|CURRENT LIABILITIES:                            |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                      |  | $                       | 5,830    |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 5,830    |  
|Accounts payable                                |  |                         | 1,848    |   |                       |   | 60,812   |                          |  |   | 1,308        |   |  |              |         |   |  |   | 63,968   |  
|Accrued interest                                |  |                         | 1,707    |   |                       |   | 66       |                          |  |   |             |   |  |              |         |   |  |   | 1,773    |  
|Accrued compensation                            |  |                         | 1,238    |   |                       |   | 8,443    |                          |  |   | 147          |   |  |              |         |   |  |   | 9,828    |  
|Accrued pension                                 |  |                         | 496      |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 496      |  
|Capital lease obligations                       |  |                         | 44       |   |                       |   | 28       |                          |  |   |             |   |  |              |         |   |  |   | 72       |  
|Other accrued liabilities                       |  |                         | 3,333    |   |                       |   | 17,417   |                          |  |   | 163          |   |  |              |         |   |  |   | 20,913   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                       |  |                         | 14,496   |   |                       |   | 86,766   |                          |  |   | 1,618        |   |  |              |         |   |  |   | 102,880  |  
|LONG-TERM DEBT, less current maturities         |  |                         | 244,812  |   |                       |   | 8,200    |                          |  |   |             |   |  |              |         |   |  |   | 253,012  |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS             |  |                         |         |   |                       |   | 14       |                          |  |   |             |   |  |              |         |   |  |   | 14       |  
|DEFERRED INCOME TAXES                           |  |                         | 20,364   |   |                       |   | 12,186   |                          |  |   | 1,532        |   |  |              |         |   |  |   | 34,082   |  
|PENSION LIABILITY                               |  |                         | 27,980   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 27,980   |  
|OTHER LIABILITIES                               |  |                         | 5,370    |   |                       |   | 8,863    |                          |  |   |             |   |  |              |         |   |  |   | 14,233   |  
|SHAREHOLDERS EQUITY:                           |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                    |  |                         | 2,947    |   |                       |   | 772      |                          |  |   | 497          |   |  |              | (1,269   | ) |  |   | 2,947    |  
|Additional paid-in capital                      |  |                         | 192,978  |   |                       |   | 550,830  |                          |  |   | 8,339        |   |  |              | (559,169 | ) |  |   | 192,978  |  
|Retained (deficit) earnings                     |  |                         | (35,127  | ) |                       |   | 52,111   |                          |  |   | (3,653       | ) |  |              | (48,458  | ) |  |   | (35,127  | )
|Accumulated other comprehensive (loss) income   |  |                         | (20,979  | ) |                       |   |         |                          |  |   | 1,793        |   |  |              | (1,793   | ) |  |   | (20,979  | )
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total Shareholders Equity                      |  |                         | 139,819  |   |                       |   | 603,713  |                          |  |   | 6,976        |   |  |              | (610,689 | ) |  |   | 139,819  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                       | 452,841  |   |                       | $ | 719,742  |                          |  | $ | 10,126       |   |  | $            | (610,689 | ) |  | $ | 572,020  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



72



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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, 2006 |         
|                                              |  | Parent                  |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                        | 
|CURRENT ASSETS:                               |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                     |  | $                       | 154      |   |                       | $ | 88       |                          |  | $ | 780          |   |  | $            |         |   |  | $ | 1,022    |  
|Intercompany funding                          |  |                         | (161,221 | ) |                       |   | 173,562  |                          |  |   | (12,341      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                |  |                         |         |   |                       |   | 81,763   |                          |  |   | 3,814        |   |  |              |         |   |  |   | 85,577   |  
|Intercompany accounts receivable              |  |                         |         |   |                       |   | 8        |                          |  |   | 111          |   |  |              | (119     | ) |  |   |         |  
|Inventories                                   |  |                         |         |   |                       |   | 72,327   |                          |  |   | 2,714        |   |  |              |         |   |  |   | 75,041   |  
|Refundable income taxes                       |  |                         | 172      |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 172      |  
|Current deferred tax assets                   |  |                         | 9,272    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 9,272    |  
|Other current assets                          |  |                         | 4,154    |   |                       |   | 3,588    |                          |  |   | 612          |   |  |              |         |   |  |   | 8,354    |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                          |  |                         | (147,469 | ) |                       |   | 331,336  |                          |  |   | (4,310       | ) |  |              | (119     | ) |  |   | 179,438  |  
|PROPERTY, PLANT AND EQUIPMENT                 |  |                         | 31,897   |   |                       |   | 514,532  |                          |  |   | 23,842       |   |  |              |         |   |  |   | 570,271  |  
|Less accumulated depreciation                 |  |                         | (12,564  | ) |                       |   | (280,086 | )                        |  |   | (14,016      | ) |  |              |         |   |  |   | (306,666 | )
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net            |  |                         | 19,333   |   |                       |   | 234,446  |                          |  |   | 9,826        |   |  |              |         |   |  |   | 263,605  |  
|GOODWILL                                      |  |                         |         |   |                       |   | 124,072  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 127,574  |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES       |  |                         | 600,902  |   |                       |   |         |                          |  |   |             |   |  |              | (600,902 | ) |  |   |         |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES       |  |                         | 41,574   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 41,574   |  
|OTHER ASSETS                                  |  |                         | 5,478    |   |                       |   | 6,544    |                          |  |   | 62           |   |  |              |         |   |  |   | 12,084   |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                              |  | $                       | 519,818  |   |                       | $ | 696,398  |                          |  | $ | 9,080        |   |  | $            | (601,021 | ) |  | $ | 624,275  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY          | 
|CURRENT LIABILITIES:                          |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                    |  | $                       | 5,830    |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 5,830    |  
|Accounts payable                              |  |                         | 13,231   |   |                       |   | 49,236   |                          |  |   | 2,566        |   |  |              |         |   |  |   | 65,033   |  
|Intercompany accounts payable                 |  |                         |         |   |                       |   | 111      |                          |  |   | 8            |   |  |              | (119     | ) |  |   |         |  
|Accrued interest                              |  |                         | 1,415    |   |                       |   | 67       |                          |  |   |             |   |  |              |         |   |  |   | 1,482    |  
|Accrued compensation                          |  |                         | 1,415    |   |                       |   | 8,581    |                          |  |   | 131          |   |  |              |         |   |  |   | 10,127   |  
|Capital lease obligations                     |  |                         | 517      |   |                       |   | 27       |                          |  |   |             |   |  |              |         |   |  |   | 544      |  
|Other accrued liabilities                     |  |                         | 11,661   |   |                       |   | 15,179   |                          |  |   | 618          |   |  |              |         |   |  |   | 27,458   |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                     |  |                         | 34,069   |   |                       |   | 73,201   |                          |  |   | 3,323        |   |  |              | (119     | ) |  |   | 110,474  |  
|LONG-TERM DEBT, less current maturities       |  |                         | 251,892  |   |                       |   | 8,200    |                          |  |   |             |   |  |              |         |   |  |   | 260,092  |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS           |  |                         | 45       |   |                       |   | 46       |                          |  |   |             |   |  |              |         |   |  |   | 91       |  
|DEFERRED INCOME TAXES                         |  |                         | 30,118   |   |                       |   | 11,697   |                          |  |   | 1,500        |   |  |              |         |   |  |   | 43,315   |  
|PENSION LIABILITY                             |  |                         | 38,854   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 38,854   |  
|OTHER LIABILITIES                             |  |                         | 3,254    |   |                       |   | 6,609    |                          |  |   |             |   |  |              |         |   |  |   | 9,863    |  
|SHAREHOLDERS EQUITY:                         |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                  |  |                         | 2,909    |   |                       |   | 772      |                          |  |   | 497          |   |  |              | (1,269   | ) |  |   | 2,909    |  
|Additional paid-in capital                    |  |                         | 191,411  |   |                       |   | 550,830  |                          |  |   | 8,339        |   |  |              | (559,169 | ) |  |   | 191,411  |  
|Retained (deficit) earnings                   |  |                         | (7,502   | ) |                       |   | 45,043   |                          |  |   | (6,138       | ) |  |              | (38,905  | ) |  |   | (7,502   | )
|Accumulated other comprehensive (loss) income |  |                         | (25,232  | ) |                       |   |         |                          |  |   | 1,559        |   |  |              | (1,559   | ) |  |   | (25,232  | )
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total Shareholders Equity                    |  |                         | 161,586  |   |                       |   | 596,645  |                          |  |   | 4,257        |   |  |              | (600,902 | ) |  |   | 161,586  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                              |  | $                       | 519,818  |   |                       | $ | 696,398  |                          |  | $ | 9,080        |   |  | $            | (601,021 | ) |  | $ | 624,275  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



73



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC.
AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)



|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | - | --------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                                                    |  | For the Year Ended December 31, 2007 |        
|                                                                                    |  | Parent                               |         |   | GuarantorSubsidiaries |   |           | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                                               |  | $                                    |        |   |                       | $ | 1,118,661 |                          |  | $ | 12,289       |   |  | $            | (276,731 | ) |  | $ | 854,219 |  
|COST OF SALES                                                                       |  |                                      |        |   |                       |   | 1,015,039 |                          |  |   | 9,472        |   |  |              | (276,731 | ) |  |   | 747,780 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                        |  |                                      | 26,461  |   |                       |   | 75,695    |                          |  |   | 1,037        |   |  |              |         |   |  |   | 103,193 |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                  |  |                                      | (10     | ) |                       |   | 13,830    |                          |  |   | (637         | ) |  |              |         |   |  |   | 13,183  |  
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                                                       |  |                                      | (26,451 | ) |                       |   | 14,097    |                          |  |   | 2,417        |   |  |              |         |   |  |   | (9,937  | )
|OTHER (EXPENSE) INCOME:                                                             |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                                                    |  |                                      | (18,345 | ) |                       |   | (415      | )                        |  |   |             |   |  |              |         |   |  |   | (18,760 | )
|Interest income                                                                     |  |                                      | 206     |   |                       |   | 1         |                          |  |   | 1            |   |  |              |         |   |  |   | 208     |  
|Equity in income of consolidated affiliates                                         |  |                                      | 9,553   |   |                       |   |          |                          |  |   |             |   |  |              | (9,553   | ) |  |   |        |  
|Equity in income of unconsolidated affiliates                                       |  |                                      | 1,778   |   |                       |   | (8        | )                        |  |   |             |   |  |              |         |   |  |   | 1,770   |  
|Gain on sale of interest in unconsolidated affiliate                                |  |                                      | 19      |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | 19      |  
|Other, net                                                                          |  |                                      | 12      |   |                       |   | 415       |                          |  |   | (57          | ) |  |              |         |   |  |   | 370     |  
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                                                    |  |                                      | (6,777  | ) |                       |   | (7        | )                        |  |   | (56          | ) |  |              | (9,553   | ) |  |   | (16,393 | )
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS |  |                                      | (33,228 | ) |                       |   | 14,090    |                          |  |   | 2,361        |   |  |              | (9,553   | ) |  |   | (26,330 | )
|BENEFIT FOR INCOME TAXES                                                            |  |                                      | 8,712   |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | 8,712   |  
|MINORITY INTEREST IN INCOME                                                         |  |                                      |        |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   |        |  
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                                            |  |                                      | (24,516 | ) |                       |   | 14,090    |                          |  |   | 2,361        |   |  |              | (9,553   | ) |  |   | (17,618 | )
|DISCONTINUED OPERATIONS:                                                            |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                      |  |                                      |        |   |                       |   | (8,374    | )                        |  |   | 153          |   |  |              |         |   |  |   | (8,221  | )
|BENEFIT (PROVISION) FOR INCOME TAXES OF DISCONTINUED OPERATIONS                     |  |                                      |        |   |                       |   | 1,352     |                          |  |   | (29          | ) |  |              |         |   |  |   | 1,323   |  
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME FROM DISCONTINUED OPERATIONS                                          |  |                                      |        |   |                       |   | (7,022    | )                        |  |   | 124          |   |  |              |         |   |  |   | (6,898  | )
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET (LOSS) INCOME                                                                   |  | $                                    | (24,516 | ) |                       | $ | 7,068     |                          |  | $ | 2,485        |   |  | $            | (9,553   | ) |  | $ | (24,516 | )
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  



74



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC.
AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)



|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | - | --------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                                                    |  | For the Year Ended December 31, 2006 |        
|                                                                                    |  | Parent                               |         |   | GuarantorSubsidiaries |   |           | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                                               |  | $                                    |        |   |                       | $ | 1,162,827 |                          |  | $ | 32,369       |   |  | $            | (262,152 | ) |  | $ | 933,044 |  
|COST OF SALES                                                                       |  |                                      |        |   |                       |   | 1,034,786 |                          |  |   | 28,717       |   |  |              | (262,152 | ) |  |   | 801,351 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                        |  |                                      | 25,752  |   |                       |   | 93,813    |                          |  |   | 2,964        |   |  |              |         |   |  |   | 122,529 |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                  |  |                                      |        |   |                       |   | 36,527    |                          |  |   | 1,263        |   |  |              |         |   |  |   | 37,790  |  
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Loss from operations                                                                |  |                                      | (25,752 | ) |                       |   | (2,299    | )                        |  |   | (575         | ) |  |              |         |   |  |   | (28,626 | )
|OTHER (EXPENSE) INCOME:                                                             |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                                                    |  |                                      | (25,503 | ) |                       |   | (406      | )                        |  |   | (4           | ) |  |              |         |   |  |   | (25,913 | )
|Interest income                                                                     |  |                                      | 3,828   |   |                       |   | 1         |                          |  |   |             |   |  |              |         |   |  |   | 3,829   |  
|Equity in income of consolidated affiliates                                         |  |                                      | (8,066  | ) |                       |   |          |                          |  |   |             |   |  |              | 8,066    |   |  |   |        |  
|Equity in income of unconsolidated affiliates                                       |  |                                      | 5,613   |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | 5,613   |  
|Gain on sale of interest in Standard Gypsum, L.P.                                   |  |                                      | 135,247 |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | 135,247 |  
|Loss on redemption of senior subordinated notes                                     |  |                                      | (10,272 | ) |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | (10,272 | )
|Other, net                                                                          |  |                                      | (129    | ) |                       |   | 469       |                          |  |   | (390         | ) |  |              | 102      |   |  |   | 52      |  
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                                                    |  |                                      | 100,718 |   |                       |   | 64        |                          |  |   | (394         | ) |  |              | 8,168    |   |  |   | 108,556 |  
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS |  |                                      | 74,966  |   |                       |   | (2,235    | )                        |  |   | (969         | ) |  |              | 8,168    |   |  |   | 79,930  |  
|PROVISION FOR INCOME TAXES                                                          |  |                                      | (27,634 | ) |                       |   | (320      | )                        |  |   | (30          | ) |  |              |         |   |  |   | (27,984 | )
|MINORITY INTEREST IN INCOME                                                         |  |                                      |        |   |                       |   |          |                          |  |   |             |   |  |              | (102     | ) |  |   | (102    | )
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                                            |  |                                      | 47,332  |   |                       |   | (2,555    | )                        |  |   | (999         | ) |  |              | 8,066    |   |  |   | 51,844  |  
|DISCONTINUED OPERATIONS:                                                            |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                               |  |                                      |        |   |                       |   | (6,722    | )                        |  |   | (87          | ) |  |              |         |   |  |   | (6,809  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                 |  |                                      |        |   |                       |   | 2,267     |                          |  |   | 30           |   |  |              |         |   |  |   | 2,297   |  
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                                   |  |                                      |        |   |                       |   | (4,455    | )                        |  |   | (57          | ) |  |              |         |   |  |   | (4,512  | )
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET INCOME (LOSS)                                                                   |  | $                                    | 47,332  |   |                       | $ | (7,010    | )                        |  | $ | (1,056       | ) |  | $            | 8,066    |   |  | $ | 47,332  |  
|                                                                                    |  |                                      |         |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |         |  



75



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CARAUSTAR INDUSTRIES, INC.
AND SUBSIDIARIES



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                                                                            |  | $                                    |         |   |                       | $ | 1,159,378 |                          |  | $ | 29,971       |   |  | $            | (283,638 | ) |  | $ | 905,711  |  
|COST OF SALES                                                                    |  |                                      |         |   |                       |   | 1,034,045 |                          |  |   | 27,116       |   |  |              | (283,638 | ) |  |   | 777,523  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                     |  |                                      | 23,256   |   |                       |   | 98,588    |                          |  |   | 3,881        |   |  |              |         |   |  |   | 125,725  |  
|GOODWILL IMPAIRMENT                                                              |  |                                      |         |   |                       |   | 49,859    |                          |  |   |             |   |  |              |         |   |  |   | 49,859   |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                               |  |                                      | 27       |   |                       |   | 75,396    |                          |  |   | 79           |   |  |              |         |   |  |   | 75,502   |  
|                                                                                 |  |                                      |          |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Loss from operations                                                             |  |                                      | (23,283  | ) |                       |   | (98,510   | )                        |  |   | (1,105       | ) |  |              |         |   |  |   | (122,898 | )
|OTHER (EXPENSE) INCOME:                                                          |  |                                      |          |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Interest expense                                                                 |  |                                      | (41,592  | ) |                       |   | (367      | )                        |  |   | (2           | ) |  |              |         |   |  |   | (41,961  | )
|Interest income                                                                  |  |                                      | 2,628    |   |                       |   | 1         |                          |  |   |             |   |  |              |         |   |  |   | 2,629    |  
|Equity in income of consolidated affiliates                                      |  |                                      | (108,389 | ) |                       |   |          |                          |  |   |             |   |  |              | 108,389  |   |  |   |         |  
|Equity in income of unconsolidated affiliates                                    |  |                                      | 37,043   |   |                       |   |          |                          |  |   |             |   |  |              |         |   |  |   | 37,043   |  
|Other, net                                                                       |  |                                      | 485      |   |                       |   | 450       |                          |  |   | (125         | ) |  |              | (273     | ) |  |   | 537      |  
|                                                                                 |  |                                      |          |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                                                 |  |                                      | (109,825 | ) |                       |   | 84        |                          |  |   | (127         | ) |  |              | 108,116  |   |  |   | (1,752   | )
|                                                                                 |  |                                      |          |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND MINORITY INTEREST |  |                                      | (133,108 | ) |                       |   | (98,426   | )                        |  |   | (1,232       | ) |  |              | 108,116  |   |  |   | (124,650 | )
|BENEFIT (PROVISION) FOR INCOME TAXES                                             |  |                                      | 29,722   |   |                       |   | 268       |                          |  |   | (389         | ) |  |              |         |   |  |   | 29,601   |  
|MINORITY INTEREST IN INCOME                                                      |  |                                      |         |   |                       |   |          |                          |  |   |             |   |  |              | 273      |   |  |   | 273      |  
|                                                                                 |  |                                      |          |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                                         |  |                                      | (103,386 | ) |                       |   | (98,158   | )                        |  |   | (1,621       | ) |  |              | 108,389  |   |  |   | (94,776  | )
|DISCONTINUED OPERATIONS:                                                         |  |                                      |          |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LOSS FROM DISCONTINUED OPERATIONS                                                |  |                                      |         |   |                       |   | (9,974    | )                        |  |   | (1,291       | ) |  |              |         |   |  |   | (11,265  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                              |  |                                      |         |   |                       |   | 2,266     |                          |  |   | 389          |   |  |              |         |   |  |   | 2,655    |  
|                                                                                 |  |                                      |          |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LOSS FROM DISCONTINUED OPERATIONS                                                |  |                                      |         |   |                       |   | (7,708    | )                        |  |   | (902         | ) |  |              |         |   |  |   | (8,610   | )
|                                                                                 |  |                                      |          |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  
|NET (LOSS) INCOME                                                                |  | $                                    | (103,386 | ) |                       | $ | (105,866  | )                        |  | $ | (2,523       | ) |  | $            | 108,389  |   |  | $ | (103,386 | )
|                                                                                 |  |                                      |          |   |                       |   |           |                          |  |   |              |   |  |              |          |   |  |   |          |  



76



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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, 2007 |         
|                                                               |  | Parent                               |          |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by (used in) operating activities            |  | $                                    | (341     | ) |                       | $ | 4,538   |                          |  | $ | (3,761       | ) |              | $ |  |  | $ | 436      |  
|                                                               |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Investing activities:                                          |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Purchases of property, plant and equipment                     |  |                                      | (2,454   | ) |                       |   | (24,085 | )                        |  |   | (62          | ) |              |   |  |  |   | (26,601  | )
|Proceeds from disposal of property, plant and equipment        |  |                                      |         |   |                       |   | 4,983   |                          |  |   | 2,071        |   |              |   |  |  |   | 7,054    |  
|Proceeds from sale of assets held for sale                     |  |                                      |         |   |                       |   | 20,210  |                          |  |   | 1,470        |   |              |   |  |  |   | 21,680   |  
|Changes in restricted cash                                     |  |                                      | (147     | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (147     | )
|Net proceeds from sale of interest in unconsolidated affiliate |  |                                      | 161      |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 161      |  
|Investment in unconsolidated affiliate                         |  |                                      | (78      | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (78      | )
|Return of investment in unconsolidated affiliates              |  |                                      | 1,838    |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 1,838    |  
|                                                               |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net cash (used in) provided by investing activities            |  |                                      | (680     | ) |                       |   | 1,108   |                          |  |   | 3,479        |   |              |   |  |  |   | 3,907    |  
|                                                               |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Financing activities:                                          |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Proceeds from senior credit facility  revolver                |  |                                      | 143,160  |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 143,160  |  
|Repayments for senior credit facility  revolver               |  |                                      | (137,821 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (137,821 | )
|Repayments of senior credit facility  term loan               |  |                                      | (11,063  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (11,063  | )
|Proceeds from note payable                                     |  |                                      | 7,436    |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 7,436    |  
|Payments of capital lease obligations                          |  |                                      | (549     | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (549     | )
|Issuances of stock, net of forfeitures                         |  |                                      | 20       |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 20       |  
|                                                               |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net cash used in financing activities                          |  |                                      | 1,183    |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 1,183    |  
|                                                               |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net change in cash and cash equivalents                        |  |                                      | 162      |   |                       |   | 5,646   |                          |  |   | (282         | ) |              |   |  |  |   | 5,526    |  
|Cash and cash equivalents at beginning of year                 |  |                                      | 154      |   |                       |   | 88      |                          |  |   | 780          |   |              |   |  |  |   | 1,022    |  
|                                                               |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Cash and cash equivalents at end of year                       |  | $                                    | 316      |   |                       | $ | 5,734   |                          |  | $ | 498          |   |              | $ |  |  | $ | 6,548    |  
|                                                               |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  



77



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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, 2006 |         
|                                                                |  | Parent                               |          |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by (used in) operating activities             |  | $                                    | 475      |   |                       | $ | (3,423  | )                        |  | $ | (166         | ) |              | $ |  |  | $ | (3,114   | )
|                                                                |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Investing activities:                                           |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Purchases of property, plant and equipment                      |  |                                      | (11,601  | ) |                       |   | (26,539 | )                        |  |   | (29          | ) |              |   |  |  |   | (38,169  | )
|Proceeds from disposal of property, plant and equipment         |  |                                      |         |   |                       |   | 3,670   |                          |  |   | (116         | ) |              |   |  |  |   | 3,554    |  
|Proceeds from sale of assets held for sale                      |  |                                      |         |   |                       |   | 26,336  |                          |  |   |             |   |              |   |  |  |   | 26,336   |  
|Acquisition of businesses, net of cash acquired                 |  |                                      | (11,059  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (11,059  | )
|Changes in restricted cash                                      |  |                                      | 14,841   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 14,841   |  
|Net proceeds from sale of interest in unconsolidated affiliate. |  |                                      | 148,460  |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 148,460  |  
|Return of investment in unconsolidated affiliates               |  |                                      | 2,920    |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 2,920    |  
|                                                                |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net cash provided by (used in) investing activities             |  |                                      | 143,561  |   |                       |   | 3,467   |                          |  |   | (145         | ) |              |   |  |  |   | 146,883  |  
|                                                                |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Financing activities:                                           |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Proceeds from senior credit facility  revolver                 |  |                                      | 74,027   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 74,027   |  
|Repayments of senior credit facility  revolver                 |  |                                      | (69,027  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (69,027  | )
|Proceeds from senior credit facility  term loan                |  |                                      | 35,000   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 35,000   |  
|Repayments of senior credit facility  term loan                |  |                                      | (3,889   | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (3,889   | )
|Repayments of long-term debt                                    |  |                                      | (272,474 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (272,474 | )
|Deferred debt costs                                             |  |                                      | (1,139   | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (1,139   | )
|Payments of capital lease obligations                           |  |                                      | (485     | ) |                       |   | (19     | )                        |  |   |             |   |              |   |  |  |   | (504     | )
|Issuances of stock, net of forfeitures                          |  |                                      | 107      |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 107      |  
|                                                                |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net cash used in financing activities                           |  |                                      | (237,880 | ) |                       |   | (19     | )                        |  |   |             |   |              |   |  |  |   | (237,899 | )
|                                                                |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net change in cash and cash equivalents                         |  |                                      | (93,844  | ) |                       |   | 25      |                          |  |   | (311         | ) |              |   |  |  |   | (94,130  | )
|Cash and cash equivalents at beginning of year                  |  |                                      | 93,998   |   |                       |   | 63      |                          |  |   | 1,091        |   |              |   |  |  |   | 95,152   |  
|                                                                |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Cash and cash equivalents at end of year                        |  | $                                    | 154      |   |                       | $ | 88      |                          |  | $ | 780          |   |              | $ |  |  | $ | 1,022    |  
|                                                                |  |                                      |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  



78



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##### Table of Contents



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 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 |  |                                      |        |   |                       |   | 18,542  |                          |  |   |             |   |              |   |  |  |   | 18,542  |  
|Changes in restricted cash                              |  |                                      | (11,164 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (11,164 | )
|Return of investment in unconsolidated affiliates       |  |                                      | 5,325   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 5,325   |  
|Investment in unconsolidated affiliates                 |  |                                      | (40     | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (40     | )
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                   |  |                                      | (10,622 | ) |                       |   | (367    | )                        |  |   | (620         | ) |              |   |  |  |   | (11,609 | )
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Financing activities:                                   |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Repayments of long-term debt                            |  |                                      | (7,468  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (7,468  | )
|Payments of capital lease obligations                   |  |                                      | (499    | ) |                       |   | (9      | )                        |  |   |             |   |              |   |  |  |   | (508    | )
|Proceeds from swap agreement unwinds                    |  |                                      | 826     |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 826     |  
|Issuances of stock, net of forfeitures                  |  |                                      | 236     |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 236     |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in financing activities                   |  |                                      | (6,905  | ) |                       |   | (9      | )                        |  |   |             |   |              |   |  |  |   | (6,914  | )
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net change in cash and cash equivalents                 |  |                                      | 5,000   |   |                       |   | (62     | )                        |  |   | 458          |   |              |   |  |  |   | 5,396   |  
|Cash and cash equivalents at the beginning of the year  |  |                                      | 88,998  |   |                       |   | 125     |                          |  |   | 633          |   |              |   |  |  |   | 89,756  |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at the end of the year        |  | $                                    | 93,998  |   |                       | $ | 63      |                          |  | $ | 1,091        |   |              | $ |  |  | $ | 95,152  |  
|                                                        |  |                                      |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  



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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, 2007 and 2006, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the
period ended December 31, 2007. 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 the financial statements and financial statement schedules based on our audits.



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 provide a reasonable basis for
our opinion.



In our opinion, such consolidated financial
statements present fairly, in all material respects, the financial position of Caraustar Industries, Inc. and subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007, 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.



As described in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, on January 1, 2006 and the recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Plansan amendment of FASB Statements No. 87, 88, 106 and 132(R) effective December 31, 2006. As described in Notes 1 and 12 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes on January 1, 2007.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal
control over financial reporting as of December 31, 2007, 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, 2008 expressed an unqualified opinion on the Companys internal control over financial reporting.



/s/ DELOITTE & TOUCHE LLP



Atlanta, Georgia

March 14, 2008



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



Not applicable.



ITEM 9A. CONTROLS AND PROCEDURES



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 Rule 13a-15(e) under the Securities Exchange Act of 1934) as of
December 31, 2007. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2007, 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.



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.



Management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2007. 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, 2007, our internal control over financial reporting is effective based on those criteria.



Inherent Limitations on Internal Control



A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances
of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be
detected.



Changes in Internal Control Over Financial Reporting



In the first quarter of 2007, we began the implementation
of a new Enterprise Resource Planning system. Due to this implementation, internal controls have changed in various functional areas within the company. Management has taken steps to ensure appropriate controls are designed and implemented as each
functional area of the system is enacted. This implementation is anticipated to continue into 2008.



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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 internal control over financial reporting of Caraustar
Industries, Inc and subsidiaries (the Company) as of December 31, 2007, 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, included in the accompanying Managements
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



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, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2007, 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, 2007 of the Company and our report dated March 14, 2008 expressed an
unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the Companys adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, on January
1, 2006 and the recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87,
88, 106 and 132(R) effective December 31, 2006 and the Companys adoption on January 1, 2007 of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.



/s/ DELOITTE & TOUCHE LLP



Atlanta, Georgia

March 14, 2008



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|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



Not applicable.



PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------



Information contained under the captions Election of Directors and Governance of the Company Section 16(a) Beneficial
Ownership Reporting Compliance in the proxy statement to be filed with the SEC in connection with the Companys 2008 annual meeting of stockholders (the Proxy Statement) is incorporated herein by reference in response to this
Item 10.



The Board of Directors has determined that,
Robert J. Clanin 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. Clanin, by virtue of his background and experience as the
retired chief financial officer of United Parcel Services, and Mr. Zarnikow by virtue of his prior experience as a senior financial manager with The ServiceMaster Company 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. Clanin 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, the Chief Financial Officer and the 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 is incorporated herein by reference in response to this
Item 11. The item captioned Executive Compensation  Compensation Committee Report shall be deemed to be furnished in this annual report on 10-K and not filed, in accordance with the rules of the SEC.



|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.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------



Information appearing under the caption Certain Relationships and Related Transactions, and Director
Independence in the Proxy Statement is incorporated by reference in response to this Item 13.



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|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, 2007 and
2006



Consolidated Statements of Operations for the years
ended December 31, 2007, 2006 and 2005



Consolidated
Statements of Shareholders Equity for the years ended December 31, 2007, 2006 and 2005



Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005



Notes to Consolidated Financial Statements



Report of Independent Registered Public Accounting Firm



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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SCHEDULE II



CARAUSTAR INDUSTRIES, INC.



VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

For the Years Ended December 31, 2007, 2006 and 2005

(In Thousands)



|                                             |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      
|-------------------------------------------- |  | -------------------------- | ----- | --------------------------- | - | --------------------------------- |  | - | --------------------- | ---- |  | - | -----
|                                             |  |                            |       | Additions                   |   | Deductions                        |  |   |                      
|                                             |  | Balance atBeginningof Year |       | Charged toCosts andExpenses |   | Write-offsand Deduct-ions Allowed |  |   | Balance atEnd of Year
|December 31, 2007                            |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      
|Allowances deducted from accounts receivable |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      
|Allowance for doubtful accounts              |  | $                          | 2,203 |                             | $ | 2,295                             |  | $ | (765                  | )(a) |  | $ | 3,733
|Allowance for sales returns and discounts    |  |                            | 859   |                             |   | 2,790                             |  |   | (2,699                | )(b) |  |   | 950  
|                                             |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      
|Total                                        |  | $                          | 3,062 |                             | $ | 5,085                             |  | $ | (3,464                | )    |  | $ | 4,683
|                                             |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      
|December 31, 2006                            |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      
|Allowances deducted from accounts receivable |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      
|Allowance for doubtful accounts              |  | $                          | 2,272 |                             | $ | 1,474                             |  | $ | (1,543                | )(a) |  | $ | 2,203
|Allowance for sales returns and discounts    |  |                            | 1,121 |                             |   | 4,151                             |  |   | (4,413                | )(b) |  |   | 859  
|                                             |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      
|Total                                        |  | $                          | 3,393 |                             | $ | 5,625                             |  | $ | (5,956                | )    |  | $ | 3,062
|                                             |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      
|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
|                                             |  |                            |       |                             |   |                                   |  |   |                       |      |  |   |      



|(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 Officer; DirectorDate: March 14, 2008




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, 2008                                                                                         
|                                                                                                             
|/s/    RONALD J.
DOMANICO                                                                                    
|Ronald J. Domanico, Senior Vice President and Chief Financial Officer (Principal Financial Officer);
Director
|                                                                                                             
|Date: March 14, 2008                                                                                         
|                                                                                                             
|/s/    WILLIAM A. NIX,
III                                                                                   
|William A. Nix, III, Vice President, Finance and Chief Accounting Officer (Principal Accounting
Officer)     
|                                                                                                             
|Date: March 14, 2008                                                                                         
|                                                                                                             
|/s/    DANIEL P.
CASEY                                                                                       
|Daniel P. Casey, Chairman of the Board                                                                       
|                                                                                                             
|Date: March 14, 2008                                                                                         
|                                                                                                             
|/s/    JAMES E.
ROGERS                                                                                       
|James E. Rogers, Director                                                                                    
|                                                                                                             
|Date: March 14, 2008                                                                                         
|                                                                                                             
|/s/    L. CELESTE
BOTTORFF                                                                                   
|L. Celeste Bottorff, Director                                                                                
|                                                                                                             
|Date: March 14, 2008                                                                                         
|                                                                                                             
|/s/    ROBERT J.
CLANIN                                                                                      
|Robert J. Clanin, Director                                                                                   
|                                                                                                             
|Date: March 14, 2008                                                                                         



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|                              
|------------------------------
|Signature                     
|                              
|/s/    CHARLES GREINER,
JR.   
|Charles Greiner, Jr., Director
|                              
|Date: March 14, 2008          
|                              
|/s/    JOHN T. HEALD,
JR.     
|John T. Heald, Jr. Director   
|                              
|Date: March 14, 2008          
|                              
|/s/    DENNIS M.
LOVE         
|Dennis M. Love, Director      
|                              
|Date: March 14, 2008          
|                              
|/s/    ERIC R.
ZARNIKOW       
|Eric R. Zarnikow, Director    
|                              
|Date: March 14, 2008          



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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 73/8% 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 73/8% 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 97/8% 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 71/4% 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 Amendment to Terms of Employment, dated December 29, 2006, between the Company and the officers of the Company (Incorporated by reference  Exhibit 10.05 to Annual Report for
2006 on Form 10-K [SEC File No. 0-20646])                                                                     
|10.06*#    |  |  |  | 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])                               
|10.07*±    |  |  |  | Form of Amended and Restated Change in Control Severance Agreement, dated December 29, 2006, between the Company and the officers of the Company (Incorporated by reference  Exhibit
10.07 to Annual Report for 2006 on Form 10-K [SEC File No. 0-20646])                                           
|10.08*     |  |  |  | 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])                                                                                   
|10.09*     |  |  |  | Senior Manager Incentive Compensation Plan for 2005 (Incorporated by reference  Exhibit 10.07 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])                                                                                                                                        
|10.10*     |  |  |  | Senior Manager Incentive Compensation Plan for 2006 (Incorporated by reference  Exhibit 10.08 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])                                                                                                                                        



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|           |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.11*     |  |  |  | 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])                                                                                                                                                                                                                                                                                       
|10.12*     |  |  |  | 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])                                                                                                                                                                                                                                                                      
|10.13*     |  |  |  | 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])                                                                                                                                                                                                                                                      
|10.14*     |  |  |  | 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])                                                                                                                                                                                                                                                          
|10.15*     |  |  |  | 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])                                                                                                                                                                                                                                                           
|10.16      |  |  |  | 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])                                                                                                                                                                                                                                                                                                           
|10.17      |  |  |  | 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)                                                                                                                                                                                                                                             
|10.18      |  |  |  | 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])                                                                                                                                                                      
|10.19      |  |  |  | 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])                                                                                                                     
|10.20      |  |  |  | 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]).
|10.21      |  |  |  | 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])                                                                                                                                           
|10.22      |  |  |  | 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])                                               
|10.23      |  |  |  | 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 (Incorporated by reference  Exhibit 10.21 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])                                                                       
|10.24      |  |  |  | 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 (Incorporated by reference  Exhibit 10.22 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])                                                                           
|10.25      |  |  |  | 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])                                     
|10.26      |  |  |  | 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])                                            



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##### Table of Contents



|           |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.27      |  |  |  | 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])                                                                          
|10.28**    |  |  |  | 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. (Incorporated by reference  Exhibit 10.26 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])                                                                                                                                              
|10.29*     |  |  |  | Insurance Security Option Plan (Incorporated by reference  Exhibit 10.22 to Annual Report for 2003 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                                                                                                     
|10.30*     |  |  |  | Caraustar Industries, Inc. Amended and Restated Restoration Plan, dated as of December 29, 2006 (Incorporated by reference  Exhibit 10.30 to Annual Report for 2006 on Form 10-K [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)                                                                                                                                                                                                                                                                                                                                                                  
|10.33      |  |  |  | Second Amendment to Amended and Restated Credit Agreement and First Amendment to Amended and Restated Security Agreement, dated as of May 14, 2007, 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 10.33 to Quarterly Report on Form
10-Q for the quarter ended June 30, 2007 [SEC File No. 0-20646])
|10.34      |  |  |  | Agreement for Purchase and Sale of Composite Container and Plastics Companies, dated as of October 2, 2007, by and among the Company, Sonoco Products Company and Caraustar Industrial and
Consumer Products Group, Inc. (Incorporated by reference  Exhibit 10.01 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 [SEC File No. 0-20646])                                                                                                                                        
|12.01     |  |  |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|21.01     |  |  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|23.01     |  |  |  | Consent of Deloitte & Touche LLP with respect to the consolidated financial statements of the Company                                                                                                                                                                                                                                                                                                                                                                                                        
|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                                                                                                                                                                                                                                                                                                                                                                              



| | 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: William A. Nix, III, Jimmy A. Russell, Thomas C. Dawson, John R.
Foster, Gregory B. Cottrell and Barry A. Smedstad.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|% | This Exhibit is substantially identical to the Amendments to Terms of Employment for the following individuals: Michael J. Keough, Ronald J. Domanico, and Steven L. Kelchen.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | 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.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|± | This Exhibit is substantially identical to the Amended and Restated Change In Control Severance Agreements for the following individuals: Michael J. Keough and Steven L. Kelchen.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



90