----

----

**MANAGEMENT’S      RESPONSIBILITY**

**Management’s      Report on Financial Statements and Assessment of Internal Control Over Financial      Reporting**

| ·   | pertain                to the maintenance of records that, in reasonable detail, accurately                reflect the transactions of the                Company; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | provide                reasonable assurance that transactions are recorded as necessary                to permit                preparation of financial statements and footnote                disclosures; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | provide                reasonable assurance that receipts and expenditures of the Company                are                appropriately authorized by the Company’s management and directors;                and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | provide                reasonable assurance regarding the prevention or timely detection                of an                unauthorized use, acquisition or disposition of assets that could                have a                material effect on the consolidated financial                statements. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Russell                J. Horner       | Ralph                Leverton              |
|----------------------------------------|--------------------------------------------|
| President                and           | Vice-President,                Finance     |
| Chief                Executive Officer | and                Chief Financial Officer |

----

**AUDITORS’      REPORT ON FINANCIAL STATEMENTS**

----

**AUDITORS’      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING UNDER STANDARDS OF THE      PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (UNITED STATES)**

----

**CONSOLIDATED      STATEMENTS OF EARNINGS **

*(In      millions of dollars, except where otherwise stated)*

|                                                                                                  |   | ***Years                ended December 31,*** |        |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-------------|
|                                                                                                  |   | ***2006***                                    |        | *2005* |   | *2004* |   |
| **Sales**                                                                                             |   | **$**                                         | **1,882.5** |   | $ | 1,823.9 |   | $ | 1,878.2 |   |
| Operating                expenses                                                                     |   |                                          |        |   |   |   |   |   |   |   |
| Cost                of sales                                                                          |   |                                          | **1,609.3** |   |   | 1,611.0 |   |   | 1,674.9 |   |
| Selling,                general and administrative                                                    |   |                                          | **62.2**    |   |   | 57.7 |   |   | 50.5 |   |
| Amortization                (note 8)                                                                  |   |                                          | **207.1**   |   |   | 180.3 |   |   | 184.1 |   |
|                                                                                                  |   |                                          | **1,878.6** |   |   | 1,849.0 |   |   | 1,909.5 |   |
| **Operating                earnings (loss)**                                                          |   |                                          | **3.9**     |   |   | (25.1 | ) |   | (31.3 | ) |
| Foreign                exchange gain (loss) on translation of long-term debt                          |   |                                          | **(0.3**    | **)** |   | 24.7 |   |   | 53.5 |   |
| Loss                on repayment of long-term debt                                                    |   |                                          | **-**       |   |   | - |   |   | (5.2 | ) |
| Other                income (expense), net                                                            |   |                                          | **1.8**     |   |   | 4.5 |   |   | 1.2 |   |
| Interest                expense, net (note 4)                                                         |   |                                          | **(73.8**   | **)** |   | (75.7 | ) |   | (74.9 | ) |
| **Earnings                (loss) before income taxes and****non-controlling                interest** |   |                                          | **(68.4**   | **)** |   | (71.6 | ) |   | (56.7 | ) |
| Income                tax recovery (note 5)                                                           |   |                                          | **(54.0**   | **)** |   | (46.6 | ) |   | (28.1 | ) |
| Net                earnings (loss) before non-controlling interest                                    |   |                                          | **(14.4**   | **)** |   | (25.0 | ) |   | (28.6 | ) |
| Non-controlling                interest (note 3)                                                      |   |                                          | **(1.5**    | **)** |   | (0.6 | ) |   | - |   |
| **Net                earnings (loss)**                                                                |   | **$**                                         | **(15.9**   | **)** | $ | (25.6 | ) | $ | (28.6 | ) |
| Basic                and diluted earnings (loss) per share (note 6) (in                dollars)       |   | **$**                                         | **(0.07**   | **)** | $ | (0.12 | ) | $ | (0.13 | ) |
| Weighted                average common shares outstanding (in millions)                               |   |                                          | **214.6**   |   |   | 214.6 |   |   | 214.6 |   |

**CONSOLIDATED      STATEMENTS OF RETAINED EARNINGS**

*(In      millions of dollars)*

|                                                  |   | ***Years                ended December 31,*** |      |
|-------------------------------------------------------|--------|-----------------------------------------------|-----------|
|                                                  |   | ***2006***                                    |      | *2005* |   | *2004* |   |
| Retained                earnings at beginning of year |   | **$**                                         | **98.8**  |   | $ | 124.4 |   | $ | 153.0 |   |
| Net                earnings (loss)                    |   |                                          | **(15.9** | **)** |   | (25.6 | ) |   | (28.6 | ) |
| Retained                earnings at end of year       |   | **$**                                         | **82.9**  |   | $ | 98.8 |   | $ | 124.4 |   |

----

**CONSOLIDATED      BALANCE SHEETS**

*(In      millions of dollars)*

|                                                              |   | ***As                at December 31,*** |        |
|-------------------------------------------------------------------|--------|-----------------------------------------|-------------|
|                                                              |   | ***2006***                              |        | *2005* |   |
| **Assets**Current                assets                           |   |                                    |        |   |   |
| Cash                and cash equivalents                          |   | **$**                                   | **35.5**    |   | $ | - |   |
| Accounts                receivable                                |   |                                    | **277.9**   |   |   | 246.7 |   |
| Inventories                (note 7)                               |   |                                    | **245.0**   |   |   | 245.7 |   |
| Prepaids                and other                                 |   |                                    | **15.4**    |   |   | 24.1 |   |
|                                                              |   |                                    | **573.8**   |   |   | 516.5 |   |
| Property,                plant and equipment (note 8)             |   |                                    | **2,023.1** |   |   | 2,139.3 |   |
| Other                assets (note 9)                              |   |                                    | **40.8**    |   |   | 40.1 |   |
|                                                              |   | **$**                                   | **2,637.7** |   | $ | 2,695.9 |   |
| **Liabilities**Current                liabilities                 |   |                                    |        |   |   |   |   |
| Accounts                payable and accrued liabilities (note 10) |   | **$**                                   | **293.3**   |   | $ | 279.4 |   |
| Long-term                debt (note 11)                           |   |                                    | **854.5**   |   |   | 861.9 |   |
| Other                long-term obligations (note 12)              |   |                                    | **214.7**   |   |   | 209.7 |   |
| Future                income taxes (note 5)                       |   |                                    | **243.9**   |   |   | 300.9 |   |
| Deferred                credits (note 13)                         |   |                                    | **25.5**    |   |   | 24.3 |   |
|                                                              |   |                                    | **1,631.9** |   |   | 1,676.2 |   |
| **Shareholders’                Equity**                     |   |                                    |        |   |   |   |   |
| Share                capital (note 14)                            |   |                                    | **913.6**   |   |   | 913.6 |   |
| Contributed                surplus                                |   |                                    | **9.3**     |   |   | 7.3 |   |
| Retained                earnings                                  |   |                                    | **82.9**    |   |   | 98.8 |   |
|                                                              |   |                                    | **1,005.8** |   |   | 1,019.7 |   |
|                                                              |   | **$**                                   | **2,637.7** |   | $ | 2,695.9 |   |

| ON                BEHALF OF THE BOARD: |                              |
|----------------------------------------|-----------------------------------|
|                                   |                              |
|                                   |                              |
|                                   |                              |
|                                   |                              |
|                                   |                              |
| Russell                J. Horner       | Thomas                S. Chambers |
| Director                               | Director                          |

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

*(In      millions of dollars)*

|                                                                         |   | ***Years                ended December 31,*** |      |
|------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|
|                                                                         |   | ***2006***                                    |      | *2005* |   | *2004* |   |
| **Cash                flows provided (used) by:**                            |   |                                          |      |   |   |   |   |
| **Operations**                                                               |   |                                          |      |   |   |   |   |
| Net                earnings (loss)                                           |   | **$**                                         | **(15.9** | **)** | $ | (25.6 | ) | $ | (28.6 | ) |
| Items                not requiring (providing) cash                          |   |                                          |      |   |   |   |   |   |   |   |
| Amortization                                                                 |   |                                          | **183.7** |   |   | 180.3 |   |   | 184.1 |   |
| Impairment                loss on property, plant and equipment (note 8)     |   |                                          | **23.4**  |   |   | - |   |   | - |   |
| Future                income taxes (note 5)                                  |   |                                          | **(56.1** | **)** |   | (51.6 | ) |   | (31.3 | ) |
| Increase                in other long-term obligations                       |   |                                          | **40.5**  |   |   | 24.7 |   |   | 23.5 |   |
| Foreign                exchange loss (gain) on translation of long-term debt |   |                                          | **0.3**   |   |   | (24.7 | ) |   | (53.5 | ) |
| Loss                on repayment of long-term debt                           |   |                                          | **-**     |   |   | - |   |   | 5.2 |   |
| Non-controlling                interest                                      |   |                                          | **1.5**   |   |   | 0.6 |   |   | - |   |
| Other                                                                        |   |                                          | **(7.4**  | **)** |   | 0.8 |   |   | (10.5 | ) |
|                                                                         |   |                                          | **170.0** |   |   | 104.5 |   |   | 88.9 |   |
| Changes                in non-cash working capital                           |   |                                          |      |   |   |   |   |   |   |   |
| Accounts                receivable                                           |   |                                          | **(35.5** | **)** |   | (9.1 | ) |   | (18.1 | ) |
| Inventories                                                                  |   |                                          | **0.7**   |   |   | 12.4 |   |   | (22.2 | ) |
| Prepaids                and other                                            |   |                                          | **(0.9**  | **)** |   | (6.7 | ) |   | (0.9 | ) |
| Accounts                payable and accrued liabilities                      |   |                                          | **27.1**  |   |   | (8.1 | ) |   | 16.8 |   |
|                                                                         |   |                                          | **(8.6**  | **)** |   | (11.5 | ) |   | (24.4 | ) |
| Cash                flows provided by operations                             |   |                                          | **161.4** |   |   | 93.0 |   |   | 64.5 |   |
| **Investing**                                                                |   |                                          |      |   |   |   |   |   |   |   |
| Additions                to property, plant and equipment                    |   |                                          | **(93.2** | **)** |   | (95.2 | ) |   | (68.0 | ) |
| Proceeds                from sale of property, plant and equipment           |   |                                          | **3.5**   |   |   | 3.5 |   |   | 0.5 |   |
| Purchase                price adjustment (note 18)                           |   |                                          | **4.3**   |   |   | - |   |   | 26.6 |   |
| Increase                in other assets                                      |   |                                          | **(0.4**  | **)** |   | (1.3 | ) |   | (0.9 | ) |
| Cash                flows used by investing activities                       |   |                                          | **(85.8** | **)** |   | (93.0 | ) |   | (41.8 | ) |
| **Financing**                                                                |   |                                          |      |   |   |   |   |   |   |   |
| Increase                (decrease) in revolving loan                         |   |                                          | **(6.5**  | **)** |   | 6.4 |   |   | (12.5 | ) |
| Issue                of long-term debt                                       |   |                                          | **-**     |   |   | - |   |   | 333.1 |   |
| Repayment                of long-term debt                                   |   |                                          | **-**     |   |   | - |   |   | (266.1 | ) |
| Premium                and expenses on repayment of long-term debt           |   |                                          | **-**     |   |   | - |   |   | (15.0 | ) |
| Deferred                financing costs                                      |   |                                          | **-**     |   |   | 0.1 |   |   | (6.2 | ) |
| Decrease                in other long-term obligations                       |   |                                          | **(33.6** | **)** |   | (32.5 | ) |   | (30.0 | ) |
| Cash                flows provided (used) by financing activities            |   |                                          | **(40.1** | **)** |   | (26.0 | ) |   | 3.3 |   |
| Net                increase (decrease) in cash and cash equivalents          |   |                                          | **35.5**  |   |   | (26.0 | ) |   | 26.0 |   |
| Cash                and cash equivalents at beginning of year                |   |                                          | **-**     |   |   | 26.0 |   |   | - |   |
| **Cash                and cash equivalents at end of year**                  |   | **$**                                         | **35.5**  |   | $ | - |   | $ | 26.0 |   |
| Supplemental                information:                                     |   |                                          |      |   |   |   |   |   |   |   |
| Income                taxes paid                                             |   | **$**                                         | **2.7**   |   | $ | 3.9 |   | $ | 4.3 |   |
| Net                interest paid                                             |   |                                          | **71.5**  |   |   | 75.3 |   |   | 79.0 |   |

----

**CONSOLIDATED      BUSINESS SEGMENTS**

*(In      millions of dollars)*

|                                                                                                 |   | **Year                ended December 31, 2006** |        |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|-------------|
|                                                                                                 |   | **Specialty****Papers**                         |        | **Newsprint** |   | **Pulp** |   | **Corporate****adjustments** |   | **Consolidated** |   |
| **Sales                to external customers****1**                                                  |   | **$**                                           | **918.4**   |   | **$** | **529.8** |   | **$** | **434.3** |   | **$** | **-** |   | **$** | **1,882.5** |   |
| **Inter-segment                sales**                                                               |   |                                            | **-**       |   |   | **-** |   |   | **47.2** |   |   | **(47.2** | **)** |   | **-** |   |
| **Amortization**                                                                                     |   |                                            | **94.6**    |   |   | **45.8** |   |   | **43.3** |   |   | **-** |   |   | **183.7** |   |
| **Impairment                loss on property,** **plant                and equipment (note 8)** |   |                                            | **0.5**     |   |   | **19.1** |   |   | **3.8** |   |   | **-** |   |   | **23.4** |   |
| **Operating                earnings (loss)**                                                         |   |                                            | **9.7**     |   |   | **6.9** |   |   | **(12.7** | **)** |   | **-** |   |   | **3.9** |   |
| **Total                assets**                                                                      |   |                                            | **1,355.3** |   |   | **737.8** |   |   | **529.5** |   |   | **15.1** |   |   | **2,637.7** |   |
| **Additions                to property, plant and equipment**                                        |   |                                            | **48.4**    |   |   | **34.4** |   |   | **10.4** |   |   | **-** |   |   | **93.2** |   |

|                                                      |   | Year                ended December 31, 20052 |    |
|-----------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                      |   | SpecialtyPapers                              |    | Newsprint |   | Pulp |   | Corporateadjustments |   | Consolidated |   |
| Sales                to external customers1               |   | $                                            | 900.5   |   | $ | 529.1 |   | $ | 394.3 |   | $ | - |   | $ | 1,823.9 |   |
| Inter-segment                sales                        |   |                                         | -       |   |   | - |   |   | 46.6 |   |   | (46.6 | ) |   | - |   |
| Amortization                                              |   |                                         | 91.0    |   |   | 45.8 |   |   | 43.5 |   |   | - |   |   | 180.3 |   |
| Operating                earnings (loss)                  |   |                                         | 24.8    |   |   | 12.3 |   |   | (62.2 | ) |   | - |   |   | (25.1 | ) |
| Total                assets                               |   |                                         | 1,379.1 |   |   | 738.1 |   |   | 560.2 |   |   | 18.5 |   |   | 2,695.9 |   |
| Additions                to property, plant and equipment |   |                                         | 49.3    |   |   | 23.6 |   |   | 22.3 |   |   | - |   |   | 95.2 |   |

|                                                      |   | Year                ended December 31, 20042 |    |
|-----------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                      |   | SpecialtyPapers                              |    | Newsprint |   | Pulp |   | Corporateadjustments |   | Consolidated |   |
| Sales                to external customers1               |   | $                                            | 935.3   |   | $ | 553.1 |   | $ | 389.8 |   | $ | - |   | $ | 1,878.2 |   |
| Inter-segment                sales                        |   |                                         | -       |   |   | - |   |   | 89.7 |   |   | (89.7 | ) |   | - |   |
| Amortization                                              |   |                                         | 94.6    |   |   | 49.5 |   |   | 40.0 |   |   | - |   |   | 184.1 |   |
| Operating                earnings (loss)                  |   |                                         | 1.0     |   |   | (4.3 | ) |   | (28.0 | ) |   | - |   |   | (31.3 | ) |
| Total                assets                               |   |                                         | 1,363.1 |   |   | 741.3 |   |   | 619.8 |   |   | 21.7 |   |   | 2,745.9 |   |
| Additions                to property, plant and equipment |   |                                         | 28.2    |   |   | 10.1 |   |   | 29.7 |   |   | - |   |   | 68.0 |   |

| 1 | See                accompanying note 19 to the consolidated financial                statements. |
|---|--------------------------------------------------------------------------------------------------|

| 2 | Effective                January 1, 2006, the Company reclassified its containerboard activities                to                its pulp business segment from its specialty papers business segment                to                reflect the integrated nature of its pulp and containerboard paper                operations. Segment information for prior periods has been reclassified                to                reflect these changes. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***1.  *** | ***NATURE                OF OPERATIONS*** |
|----------------------|-------------------------------------------|

|   | Catalyst                Paper Corporation, together with its subsidiaries and partnerships                (collectively, the “Company”) is a significant newsprint and specialty                groundwood paper producer in North America. The Company operates                four                manufacturing divisions, and one paper recycling division in British                Columbia, Canada. The Company operates in three business                segments. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Specialty                Papers | - Manufacture                and sale of groundwood specialty printing paper.                                                                                                   |
|---------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Newsprint                       | - Manufacture                and sale of newsprint.                                                                                                                             |
| Pulp                            | - Manufacture                and sale of long and short fibre pulp and containerboard (containerboard                was previously referred to as kraft                paper). |

|   | The                segments are managed separately, and all manufacturing facilities                are                located in British Columbia. Inter-segment sales consist of pulp                transfers                at cost. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                primary market for the Company’s paper products is North America. The                primary markets for the Company’s pulp products are Asia, Australasia, and                Europe. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***2.  *** | ***SUMMARY                OF SIGNIFICANT ACCOUNTING                POLICIES*** |
|----------------------|--------------------------------------------------------------------------------|

|   | The                consolidated financial statements of the Company are expressed in                millions                of Canadian dollars and are prepared in accordance with Canadian                generally                accepted accounting principles (“Canadian GAAP”). These financial                statements differ in certain respects from those prepared in accordance                with United States generally accepted accounting principles (“U.S. GAAP”).                These measurement differences are described in note 23 “Reconciliation of                Canadian and United States generally accepted accounting                principles”. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(a)** | **Basis                of consolidation** |
|--------|---------|-------------------------------------------|

|   | The                consolidated financial statements include the accounts of the Company                and,                from their respective dates of acquisition of control or formation,                its                wholly owned subsidiaries and partnerships. In addition, the consolidated                financial statements include the accounts of the Company’s joint venture,                Powell River Energy Inc. (“PREI”), a variable interest entity. All                inter-company transactions and amounts have been eliminated on                consolidation. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(b)** | **Variable                interest entities** |
|--------|---------|-----------------------------------------------|

|   | **(c)** | **Use                of estimates** |
|--------|---------|-------------------------------------|

|   | **(d)** | **Revenue                   recognition** |
|--------|---------|-------------------------------------------|

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

|   | **(e)** | **Translation                of foreign currencies** |
|--------|---------|------------------------------------------------------|

|   | **(f)** | **Derivative                financial instruments** |
|--------|---------|-----------------------------------------------------|

|   | **(g)** | **Cash                and cash equivalents** |
|--------|---------|----------------------------------------------|

|   | **(h)** | **Inventories** |
|--------|---------|-----------------|

|   | **(i)** | **Property,                plant and equipment** |
|--------|---------|--------------------------------------------------|

|   | Buildings                                               | 2.5                  − 5.0% |   |
|--------|---------------------------------------------------------|-----------------------------------|--------|
|   | Pulp                  and paper machinery and equipment | 5.0%                              |   |

|   | **(j)** | **Impairment                of long-lived assets** |
|--------|---------|----------------------------------------------------|

|   | **(k)** | **Environmental                costs** |
|--------|---------|----------------------------------------|

|   | **(l)** | **Asset                retirement obligations** |
|--------|---------|-------------------------------------------------|

|   | **(m)** | **Deferred                financing costs** |
|--------|---------|---------------------------------------------|

|   | **(n)** | **Share                issue costs** |
|--------|---------|--------------------------------------|

|   | **(o)** | **Stock-based                compensation and other stock-based                payments** |
|--------|---------|-------------------------------------------------------------------------------------------|

|   | **(p)** | **Income                taxes** |
|--------|---------|---------------------------------|

|   | **(q)** | **Deferred                credits** |
|--------|---------|-------------------------------------|

|   | **(r)** | **Employee                future benefits** |
|--------|---------|---------------------------------------------|

**Pensions      and other employee future benefits**

| -   | the                cost of benefits provided in exchange for employees’ services rendered                during the year |
|---------------|--------------------------------------------------------------------------------------------------------------------------------|

| -   | the                interest cost of benefit                obligations |
|---------------|------------------------------------------------------------------------|

| -   | the                expected long-term return on plan assets based on the fair value                for all                asset classes |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------|

| -   | gains                or losses on settlements or                curtailments |
|---------------|------------------------------------------------------------------------------|

| -   | the                straight-line amortization of past service costs and plan amendments                over                the average remaining service period of the active employee group                covered                by the plans as of the date such costs are first recognized, unless                there                are no active employees or the period is less than five years, in                which                case such costs are amortized over five years and |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| -   | the                amortization of cumulative unrecognized net actuarial gains and losses                in                excess of 10% of the greater of the accrued benefit obligation and                the                fair value of plan assets at the beginning of year over the average                remaining service period of the active employee group covered by                the                plans, unless there are no active employees or the period is less                than                five years, in which case such costs are amortized over five                years. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                defined benefit plan obligations are determined in accordance with                the                projected benefit method prorated on                services. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(s)** | **Earnings                per share** |
|--------|---------|---------------------------------------|

|   | Basic                earnings (loss) per share is computed by dividing net earnings (loss)                for                the period by the weighted average shares outstanding during the                reporting                period. Diluted earnings (loss) per share is computed using the treasury                stock method. When the effect of options and other securities convertible                into common shares is anti-dilutive, including when the Company has                incurred a loss for the period, basic and diluted loss per share                are the                same. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(t)** | **Comparative                figures** |
|--------|---------|----------------------------------------|

| ***3.*** | ***VARIABLE                INTEREST ENTITIES*** |
|----------|-------------------------------------------------|

|   | The                Company consolidates 100% of Powell River Energy Inc. (“PREI”) in                accordance with Accounting Guideline 15, “Consolidation of Variable                Interest Entities”. PREI commenced operations February 2001, and consists                of an integrated hydroelectric power generating, transmission and                distribution system which includes two hydroelectric generating stations                that provide power to the Company. The Company purchases 100% of                the power                generated by PREI. The Company’s 50.0% interest in PREI, prior to January                1, 2005, was accounted for using the proportionate consolidation                method. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company has limited access to PREI’s assets, which generally takes the                form of interest on loans, management fees and earnings distributions                based on the Company’s interest in PREI. In addition, creditors of PREI                have recourse limited to the assets in                PREI. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company has identified two other potential VIEs, but has not been                able to                obtain the financial information necessary to evaluate whether the                entities are VIEs, or if the entities are VIEs, whether the Company                is the                primary beneficiary. The two potential VIEs are private entities                and, as                such, are unwilling to share financial information with the Company.                The                potential VIEs are related to each other, and together they provide                the                Company with warehousing services for a large portion of the Company’s                paper products. The Company first contracted with these entities                in 1999.                The amounts paid to these entities are not significant relative to                the                Company’s total distribution costs. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company has entered into a building lease agreement with one of the                potential VIEs whereby it has agreed to continue making the prescribed                lease payments directly to the financial institution holding the                mortgage                on the building in the event the lessor is no longer able to meet                its                contractual obligations. As at December 31, 2006, the principal amount                of                the mortgage was $11.9 million. This agreement does not increase                the                Company’s liability beyond the obligation under the building                lease. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

| ***4.*** | ***INTEREST                EXPENSE, NET*** |
|----------|--------------------------------------------|

|   | The                components of interest expense, net, for the years ended December                31 were                as follows: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------|

|                                                    |   | ***2006*** |     | *2005* |   | *2004* |   |
|---------------------------------------------------------|--------|------------|----------|--------|--------|--------|--------|
| Interest                on long-term debt               |   | **$**      | **72.5** |   | $      | 76.8   |   | $ | 78.6 |   |
| Fixed-to-floating                interest rate swaps    |   |       | **(1.2** | **)**  |   | (3.9   | )      |   | (6.8 | ) |
| Amortization                of deferred financing costs |   |       | **2.9**  |   |   | 3.0    |   |   | 3.7 |   |
| Capitalized                interest                     |   |       | **-**    |   |   | -      |   |   | (0.3 | ) |
| Interest                income                          |   |       | **(1.3** | **)**  |   | (0.9   | )      |   | (0.4 | ) |
| Other                                                   |   |       | **0.9**  |   |   | 0.7    |   |   | 0.1 |   |
|                                                    |   | **$**      | **73.8** |   | $      | 75.7   |   | $ | 74.9 |   |

| ***5.*** | ***INCOME                TAXES*** |
|----------|-----------------------------------|

|   | The                components of income tax recovery for the years ended December 31                were as                follows: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                    |   | ***2006*** |      | *2005* |   | *2004* |   |
|---------------------------------------------------------------------------------------------------------|--------|------------|-----------|--------|--------|--------|--------|
| Current                                                                                                 |   | **$**      | **2.1**   |   | $      | 5.0    |   | $ | 3.2 |   |
| Future                                                                                                  |   |       | **(33.2** | **)**  |   | (37.4  | )      |   | (31.3 | ) |
| Release                of future taxes related to reductionin                corporate income tax rates |   |       | **(22.9** | **)**  |   | (14.2  | )      |   | - |   |
|                                                                                                    |   | **$**      | **(54.0** | **)**  | $      | (46.6  | )      | $ | (28.1 | ) |

|   | The                reconciliation of income taxes calculated at the statutory rate to                the                actual income tax provision for the years ended December 31 was as                follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                            |   | ***2006*** |      | *2005* |   | *2004*   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|------------|-----------|--------|--------|----------|--------|
| Income                tax recovery at Canadian statutory income tax rates                                       |   | **$**      | **(23.3** | **)**  |   | **34.1** | **%**  | $ | (24.9 | ) |   | 34.8 | % | $ | (20.1 | ) |   | 35.5 | % |
| Increase                (decrease) in income taxes for:                                                         |   |       |      |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-taxable                income and expenses                                                                  |   |       | **0.8**   |   |   | **(1.2** | **)**  |   | (2.5 | ) |   | 3.5 |   |   | (8.1 | ) |   | 14.3 |   |
| Difference                in foreign tax rate                                                                   |   |       | **(1.8**  | **)**  |   | **2.6**  |   |   | (2.0 | ) |   | 2.8 |   |   | (2.3 | ) |   | 4.0 |   |
| Release                of future income taxes related to reduction in corporate income tax                rates |   |       | **(22.9** | **)**  |   | **33.5** |   |   | (14.2 | ) |   | 19.8 |   |   | - |   |   | - |   |
| Change                in the future income tax estimate                                                         |   |       | **(4.5**  | **)**  |   | **6.6**  |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Adjustment                to deferred credits                                                                   |   |       | **1.0**   |   |   | **(1.4** | **)**  |   | (5.0 | ) |   | 7.0 |   |   | - |   |   | - |   |
| Large                corporations tax                                                                           |   |       | **(0.3**  | **)**  |   | **0.4**  |   |   | 3.5 |   |   | (4.9 | ) |   | 4.3 |   |   | (7.6 | ) |
| Other                                                                                                           |   |       | **(3.0**  | **)**  |   | **4.4**  |   |   | (1.5 | ) |   | 2.1 |   |   | (1.9 | ) |   | 3.3 |   |
| Income                tax recovery                                                                              |   | **$**      | **(54.0** | **)**  |   | **79.0** | **%**  | $ | (46.6 | ) |   | 65.1 | % | $ | (28.1 | ) |   | 49.5 | % |

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

|   | The                tax effects of temporary differences that give rise to significant                future                tax liabilities (assets) were as follows at December                31: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                           |   | ***2006*** |       | *2005* |   |
|------------------------------------------------|--------|------------|------------|--------|--------|
| Future                income tax liabilities   |   |       |       |   |   |
| Property,                plant and equipment   |   | **$**      | **396.1**  |   | $      | 486.0 |   |
| Other                                          |   |       | **92.6**   |   |   | 90.4 |   |
|                                           |   |       | **488.7**  |   |   | 576.4 |   |
| Future                income tax assets        |   |       |       |   |   |   |   |
| Non-capital                loss carry-forwards |   |       | **(179.4** | **)**  |   | (203.2 | ) |
| Employee                future benefits        |   |       | **(60.7**  | **)**  |   | (64.3 | ) |
| Other                                          |   |       | **(10.5**  | **)**  |   | (13.9 | ) |
|                                           |   |       | **(250.6** | **)**  |   | (281.4 | ) |
| Valuation                allowance             |   |       | **5.8**    |   |   | 5.9 |   |
|                                           |   |       | **(244.8** | **)**  |   | (275.5 | ) |
| Net                future income tax liability |   | **$**      | **243.9**  |   | $      | 300.9 |   |

| ***6.*** | ***EARNINGS                PER SHARE*** |
|----------|-----------------------------------------|

|   | The                following table provides the reconciliation between basic and diluted                earnings (loss) per share: |
|--------|------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                 |   | ***2006*** |      | *2005* |   | *2004* |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|--------|--------|--------|--------|
| Net                earnings (loss) reported                                                                                          |   | **$**      | **(15.9** | **)**  | $      | (25.6  | )      | $ | (28.6 | ) |
| Weighted                average shares used in computation of basic earnings per share (in                millions)                  |   |       | **214.6** |   |   | 214.6  |   |   | 214.6 |   |
| Weighted                average shares from assumed conversion of dilutive options (in                millions)                      |   |       | **-**     |   |   | -      |   |   | - |   |
| Weighted                average shares used in computation of diluted earnings per share                (in                millions) |   |       | **214.6** |   |   | 214.6  |   |   | 214.6 |   |
| Basic                and diluted earnings (loss) per share (in dollars)                                                              |   | **$**      | **(0.07** | **)**  | $      | (0.12  | )      | $ | (0.13 | ) |

| ***7.*** | ***INVENTORIES*** |
|----------|-------------------|

|   | The                components of inventories were as follows at December                31: |
|--------|---------------------------------------------------------------------------------------------|

|                                                         |   | ***2006*** |      | *2005* |   |
|--------------------------------------------------------------|--------|------------|-----------|--------|--------|
| Specialty                papers                              |   | **$**      | **44.4**  |   | $      | 48.9 |   |
| Newsprint                                                    |   |       | **27.0**  |   |   | 23.5 |   |
| Pulp                                                         |   |       | **26.2**  |   |   | 25.0 |   |
| Total                finished goods and work in progress     |   |       | **97.6**  |   |   | 97.4 |   |
| Wood                chips, pulp logs and other raw materials |   |       | **33.0**  |   |   | 36.1 |   |
| Operating                and maintenance supplies            |   |       | **114.4** |   |   | 112.2 |   |
|                                                         |   | **$**      | **245.0** |   | $      | 245.7 |   |

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

| ***8.*** | ***PROPERTY,                PLANT AND EQUIPMENT*** |
|----------|----------------------------------------------------|

|   | The                components of property, plant and equipment were as follows at December                31: |
|--------|---------------------------------------------------------------------------------------------------------------|

|                                          |   | ***2006*** |        |
|-----------------------------------------------|--------|------------|-------------|
|                                          |   | ***Cost*** |        | ***Accumulated******amortization*** |   | ***Net                book******value*** |   |
| Buildings                and land             |   |       |        |   |   |   |   |
| Specialty                papers and newsprint |   | $          | **471.4**   |   | $ | **158.4** |   | $ | **313.0** |   |
| Pulp                                          |   |       | **116.4**   |   |   | **54.0** |   |   | **62.4** |   |
| Machinery                and equipment        |   |       |        |   |   |   |   |   |   |   |
| Specialty                papers and newsprint |   |       | **2,518.9** |   |   | **1,181.4** |   |   | **1,337.5** |   |
| Pulp                                          |   |       | **881.1**   |   |   | **570.9** |   |   | **310.2** |   |
|                                          |   | $          | **3,987.8** |   | $ | **1,964.7** |   | $ | **2,023.1** |   |

|                                          |   | *2005* |    |
|-----------------------------------------------|--------|--------|---------|
|                                          |   | *Cost* |    | *Accumulated**amortization* |   | *Net                book**value* |   |
| Buildings                and land             |   |   |    |   |   |   |   |
| Specialty                papers and newsprint |   | $      | 474.3   |   | $ | 149.7 |   | $ | 324.6 |   |
| Pulp                                          |   |   | 115.9   |   |   | 50.5 |   |   | 65.4 |   |
| Machinery                and equipment        |   |   |    |   |   |   |   |   |   |   |
| Specialty                papers and newsprint |   |   | 2,435.2 |   |   | 1,040.3 |   |   | 1,394.9 |   |
| Pulp                                          |   |   | 884.6   |   |   | 530.2 |   |   | 354.4 |   |
|                                          |   | $      | 3,910.0 |   | $ | 1,770.7 |   | $ | 2,139.3 |   |

|   | During                the first quarter of 2006, the Company undertook an operational review                of                its Port Alberni No. 3 paper machine and ancillary assets. Based                on this                review, the Company decided to permanently close this previously                idled                paper machine. In accordance with the CICA Handbook Section 3063,                “Impairment of Long-Lived Assets,” the Company determined that the                carrying value of this paper machine and ancillary assets was not                recoverable and, accordingly, recorded an impairment loss to write                down                the machine assets to their estimated fair value. The Company recorded                an                impairment loss of $19.1 million in its newsprint segment as an                amortization expense in the year ended December 31, 2006. The estimated                fair value of these assets was based on the present value of the                estimated                asset proceeds net of dismantling and selling                costs. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                addition, the Company recorded an impairment loss of $4.3 million                during                the current year on assets that were previously idled and where the                Company determined the assets would not be used again in the future.                The                impairment loss is included in amortization expense. The estimated                fair                value of these assets was based on the present value of the estimated                asset proceeds net of dismantling and selling                costs. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During                2006, no interest amount was capitalized in connection with capital                projects (2005 - $nil). |
|--------|----------------------------------------------------------------------------------------------------------------------------------|

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

| ***9.*** | ***OTHER                ASSETS*** |
|----------|-----------------------------------|

|   | The                components of other assets were as follows at December                31: |
|--------|----------------------------------------------------------------------------------------------|

|                                             |   | ***2006*** |     | *2005* |   |
|--------------------------------------------------|--------|------------|----------|--------|--------|
| Deferred                financing costs          |   | **$**      | **14.9** |   | $      | 18.3 |   |
| Non-controlling                interest (note 3) |   |       | **15.5** |   |   | 16.4 |   |
| Deferred                charges and other        |   |       | **10.4** |   |   | 5.4 |   |
|                                             |   | **$**      | **40.8** |   | $      | 40.1 |   |

| ***10.*** | ***ACCOUNTS                PAYABLE AND ACCRUED                LIABILITIES*** |
|-----------|------------------------------------------------------------------------------|

|   | The                components of accounts payable and accrued liabilities were as follows                at                December 31: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

|                                                   |   | ***2006*** |      | *2005* |   |
|--------------------------------------------------------|--------|------------|-----------|--------|--------|
| Trade                accounts payable                  |   | **$**      | **150.8** |   | $      | 142.9 |   |
| Accrued                payroll and related liabilities |   |       | **85.1**  |   |   | 82.5 |   |
| Pension                plans (note 16)                 |   |       | **4.5**   |   |   | 11.6 |   |
| Post-retirement                benefit plans (note 16) |   |       | **6.3**   |   |   | 5.5 |   |
| Accrued                interest                        |   |       | **10.6**  |   |   | 10.8 |   |
| Other                                                  |   |       | **36.0**  |   |   | 26.1 |   |
|                                                   |   | **$**      | **293.3** |   | $      | 279.4 |   |

| ***11.*** | ***LONG-TERM                DEBT*** |
|-----------|-------------------------------------|

|   | The                Company’s long-term debt, all of which matures beyond one year, was as                follows at December 31: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------|

|                                                                              |   | ***2006*** |      | *2005* |   |
|-----------------------------------------------------------------------------------|--------|------------|-----------|--------|--------|
| **Recourse**                                                                      |   |       |      |   |   |
| Senior                notes, 8.625% due June 2011 (US$400.0 million)              |   | **$**      | **468.7** |   | $      | 469.4 |   |
| Senior                notes, 7.375% due March 2014 (US$250.0 million)             |   |       | **291.3** |   |   | 291.5 |   |
|                                                                              |   |       | **760.0** |   |   | 760.9 |   |
| Revolving                operating facility of up to $350.0 million due July 2009 |   |       | **-**     |   |   | 6.5 |   |
|                                                                              |   |       | **760.0** |   |   | 767.4 |   |
| **Non-recourse                (PREI)**                                            |   |       |      |   |   |   |   |
| First                mortgage bonds, 6.387% due July 2009                         |   |       | **75.0**  |   |   | 75.0 |   |
| Subordinated                promissory notes                                      |   |       | **19.5**  |   |   | 19.5 |   |
|                                                                              |   |       | **94.5**  |   |   | 94.5 |   |
|                                                                              |   | **$**      | **854.5** |   | $      | 861.9 |   |

|   | In                2006, the maturity of the $350.0 million revolving operating facility                (the                “Facility”) was extended by one year, to July 2009. Borrowings under the                Facility bear interest at a rate based on Canadian dollar banker’s                acceptance/prime or U.S. dollar LIBOR/base rates, plus a margin that                varies with the Company’s credit rating. The interest rates on borrowings                under the Facility averaged 7.3% in 2006 (2005 - 5.1%). A commitment                fee                at a percentage of the margin applies to the undrawn portion of the                Facility. Substantially all of the assets of the Company are pledged                as                security under the Facility. Its availability is determined by a                borrowing                base which is calculated based on accounts receivable and inventory                balances, and includes covenants to maintain the funded                debt/capitalization ratio below 60%, secured debt/capitalization                ratio                below 30% and shareholders’ equity above $779.3 million as at December 31,                2006. At December 31, 2006, the Company’s Shareholders’ equity was                $1,005.8 million (2005 - $1,019.7 million). The Company’s Facility was                undrawn at December 31, 2006 and after outstanding letters of credit                of                $26.4 million, $323.6 million was available to the Company. An interest                coverage covenant is applicable in certain circumstances if the Company                incurs secured debt other than under the Facility. As of December                31,                2006, no such debt has been incurred. The Company’s net debt to net                capitalization rate as at December 31, 2006 was 45% (2005 -                46%). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                indentures and agreements governing the Company’s senior notes and the                Facility contain customary restrictive covenants, including restrictions                on incurring additional indebtedness, certain payments including                dividends                and investments in other persons, the creation of liens, sale and                leaseback transactions, certain amalgamations, mergers, consolidations                and                the use of proceeds arising from certain sales of assets and certain                transactions with affiliates. At December 31, 2006 and 2005, the                Company                was in compliance with the covenants under both its Facility and                senior                notes. The Company’s Consolidated Fixed Charge Coverage Ratio (“CFCC                Ratio”) under the senior note indentures calculated on a 12-month trailing                average, was 3.0:1 at December 31, 2006 (2005 - 2.0:1). In the event                that                the CFCC Ratio is below 2.0:1, the Company is limited in the amount                of                additional debt it may incur beyond drawings under the Facility or                other                debt as permitted under the senior notes. Also, the Company’s restricted                payments basket under the 8.625% and 7.375% senior notes was negative                $72.5 million and negative $47.5 million, respectively, as at December                31,                2006 (2005 - negative $69.1 million and negative $44.1 million,                respectively), as a result of accumulated losses in recent years.                Under                the senior notes covenants, the Company cannot pay dividends unless                the                balances in these baskets are                positive. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **Scheduled                long-term****debt                repayments** |
|--------|--------------------------------------------------------------------------|

|       |   | **Recourse****debt** |      | **Non-recourse****debt** |   |
|------------|--------|----------------------|-----------|--------------------------|--------|
| 2007       |   | **$**                | **-**     |                     | **$**  | **-** |   |
| 2008       |   |                 | **-**     |                     |   | **-** |   |
| 2009       |   |                 | **-**     |                     |   | **75.0** |   |
| 2010       |   |                 | **-**     |                     |   | **-** |   |
| 2011       |   |                 | **468.7** |                     |   | **-** |   |
| Thereafter |   |                 | **291.3** |                     |   | **19.5** |   |
|       |   | **$**                | **760.0** |                     | **$**  | **94.5** |   |

|   | **Fair                value of long-term debt** |
|--------|-------------------------------------------------|

|   | The                following estimated fair values of the Company’s long-term debt at                December 31 have been determined based on management’s best estimate of                the fair value to refinance debt with similar terms at the respective                year-end dates: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|         |   | ***2006*** |      | ***2005*** |   |
|--------------|--------|------------|-----------|------------|--------|
| Recourse     |   | **$**      | **745.1** |       | $      | 706.1 |   |
| Non-recourse |   |       | **96.5**  |       |   | 97.3 |   |
|         |   | **$**      | **841.6** |       | $      | 803.4 |   |

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

| ***12.*** | ***OTHER                LONG-TERM OBLIGATIONS*** |
|-----------|--------------------------------------------------|

|   | The                components of other long-term obligations were as follows at December                31: |
|--------|-------------------------------------------------------------------------------------------------------------|

|                                                                     |   | ***2006*** |      | *2005* |   |
|--------------------------------------------------------------------------|--------|------------|-----------|--------|--------|
| Pension                plans (note 16)                                   |   | **$**      | **30.4**  |   | $      | 27.8 |   |
| Other                post-retirement benefit plans (note 16)             |   |       | **156.8** |   |   | 143.8 |   |
| Forward                foreign currency contracts hedging long-term debt |   |       | **4.2**   |   |   | 25.2 |   |
| Deferred                gain on termination of interest rate swaps       |   |       | **-**     |   |   | 1.1 |   |
| Environmental,                remedial and other                         |   |       | **23.3**  |   |   | 11.8 |   |
|                                                                     |   | **$**      | **214.7** |   | $      | 209.7 |   |

| ***13.*** | ***DEFERRED                CREDITS*** |
|-----------|---------------------------------------|

|   | Continuity                of deferred credits for the years ended December 31 was as                follows: |
|--------|--------------------------------------------------------------------------------------------------------------|

|                                                                             |   | ***2006*** |     | *2005* |   |
|----------------------------------------------------------------------------------|--------|------------|----------|--------|--------|
| Beginning                of year                                                 |   | **$**      | **24.3** |   | $      | 27.5 |   |
| Net                price adjustment related to acquired tax losses               |   |       | **1.4**  |   |   | 2.4 |   |
| Adjustment                related to utilization of acquired tax losses          |   |       | **1.0**  |   |   | (5.0 | ) |
| Adjustment                resulting from reduction in corporate income tax rates |   |       | **(1.2** | **)**  |   | (0.6 | ) |
| End                of year                                                       |   | **$**      | **25.5** |   | $      | 24.3 |   |

|   | In                prior years, the Company acquired from wholly owned subsidiaries                of                Fletcher Challenge Limited (“FCL”), a major shareholder up to July 28,                2000, companies with available tax losses. The purchase price of                these                companies is subject to adjustment under certain conditions. In 2006,                the                Company recorded an adjustment of $1.4 million, net of taxes of $0.2                million on the interest component (2005 - net $2.4 million), reflecting                a                reduction to the purchase price. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***14.*** | ***SHARE                CAPITAL*** |
|-----------|------------------------------------|

|   | **(a)** | **Authorized** |
|--------|---------|----------------|

|   | The                Company is authorized to issue 100,000,000 preferred shares and an                unlimited number of common shares. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | **(b)** | **Issued****and                outstanding** |
|--------|---------|----------------------------------------------|

|                                   | ***2006***      |      | *2005* |
|----------------------------------------|-----------------|-----------|--------|
|                                   | ***Shares***    | ***$***   |   | *Shares* | *$* |
| Issued                and outstanding: |            |      |   |   |   |
| Common                shares           | **214,604,120** | **913.6** |   | 214,604,120 | 913.6 |

| ***15.*** | ***STOCK-BASED                COMPENSATION PLANS*** |
|-----------|-----------------------------------------------------|

|   | **(a)** | **Stock                option plans** |
|--------|---------|---------------------------------------|

|   | The                Company has an employee share option plan (the “Plan”) for its key                officers, directors and employees. Options granted prior to January                31,                2003, have a term of five years and the options granted thereafter                have a                term of ten years. These options are exercisable as to one-third                on and                after the first anniversary date, as to two-thirds on and after the                second                anniversary date and as to all on and after the third anniversary                date,                unless the market price of the common shares exceeds a specified                acceleration price, in which case all of the options are exercisable                at                that date. Market price is determined by the weighted average price                per                share for all sales of the shares on the Toronto Stock Exchange (“TSX”)                during the ten consecutive trading days preceding the date on which                a                determination of Market Price is required under the Plan. The Plan                provides for the issuance of up to a maximum of 10.0 million common                shares. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company applies the fair value method for recording share options                granted                to directors, officers and employees. Under the fair value method,                compensation cost is measured at fair value at the date of grant,                and is                expensed over the award’s vesting period. For the year ended December 31,                2006, the Company recorded $2.0 million as an expense for the stock-based                compensation plans (2005 - $2.2 million; 2004 - $2.5                million). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                fair value of share options was estimated on the date of grant using                the                Black-Scholes option-pricing model with the following                assumptions: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                              |   | ***2006*** |     | *2005* |   | *2004* |   |
|-------------------------------------------------------------------|--------|------------|----------|--------|--------|--------|--------|
| Risk-free                interest rate                            |   |       | **4.0**  | **%**  |   | 3.7    | %      |   | 4.5 | % |
| Annual                dividends per share                         |   |       | **Nil**  |   |   | Nil    |   |   | Nil |   |
| Expected                stock price volatility                    |   |       | **30.6** | **%**  |   | 30.3   | %      |   | 28.3 | % |
| Expected                option life (in years)                    |   |       | **4.0**  |   |   | 4.0    |   |   | 4.0 |   |
| Average                fair value of options granted (in dollars) |   | **$**      | **1.02** |   | $      | 1.11   |   | $ | 1.50 |   |

|   | Changes                in the number of options outstanding during the years ended December                31,                were as follows: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|                                |   | ***2006***                             |           | *2005*                                                                                          |   | *2004*                             |   |
|-------------------------------------|--------|----------------------------------------|----------------|-------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                |   | ***Number                of options*** |           | ***Weighted                average******exercise******price******(in                dollars)*** |   | *Number                of options* |   | *Weighted**average**exercise**price**(in                dollars)* |   | *Number                of options* |   | *Weighted**average**exercise**price**(in                dollars)* |   |
| Beginning                of year    |   |                                   | **8,409,500**  |                                                                                            | $      | **5.00**                           |   |   | 5,951,333 |   | $ | 5.62 |   |   | 4,495,500 |   | $ | 6.07 |   |
| Granted                             |   |                                   | **1,836,000**  |                                                                                            |   | **3.37**                           |   |   | 2,886,000 |   |   | 3.58 |   |   | 1,637,500 |   |   | 4.39 |   |
| Exercised                           |   |                                   | **-**          |                                                                                            |   | **-**                              |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Expired                or cancelled |   |                                   | **(2,074,500** | **)**                                                                                           |   | **6.08**                           |   |   | (427,833 | ) |   | 4.14 |   |   | (181,667 | ) |   | 5.67 |   |
| End                of year          |   |                                   | **8,171,000**  |                                                                                            | $      | **4.35**                           |   |   | 8,409,500 |   | $ | 5.00 |   |   | 5,951,333 |   | $ | 5.62 |   |

|   | The                following table summarizes information about stock options outstanding                and                exercisable at December 31, 2006: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                 |   | ***Options                Outstanding*** |          | ***Options                Exercisable***                            |   |                                                                                  |   |
|--------------------------------------|--------|------------------------------------------|---------------|---------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|
| ***Exercise                prices*** |   | ***Number                of options***   |          | ***Weighted                average remaining option life (years)*** |   | ***Weighted                average exercise price******(in                dollars)*** |   | ***Number                of options*** |   | ***Weighted                average exercise price******(in                dollars)*** |   | ***Accelerated                price******(in                dollars)*** |   |
| **$****7.13**                        |   |                                     | **830,500**   |                                                                |   | **0.1**                                                                               |   | **$** | **7.13** |   |   | **830,500** |   | **$** | **7.13** |   | **$** | **10.00** |   |
| **5.25**                             |   |                                     | **1,536,000** |                                                                |   | **0.8**                                                                               |   |   | **5.25** |   |   | **1,536,000** |   |   | **5.25** |   |   | **7.54** |   |
| **5.81**                             |   |                                     | **20,000**    |                                                                |   | **1.1**                                                                               |   |   | **5.81** |   |   | **20,000** |   |   | **5.81** |   |   | **8.35** |   |
| **4.39**                             |   |                                     | **1,358,333** |                                                                |   | **7.1**                                                                               |   |   | **4.39** |   |   | **905,554** |   |   | **4.39** |   |   | **6.30** |   |
| **3.62**                             |   |                                     | **2,310,167** |                                                                |   | **8.0**                                                                               |   |   | **3.62** |   |   | **770,056** |   |   | **3.62** |   |   | **5.20** |   |
| **3.18**                             |   |                                     | **220,000**   |                                                                |   | **8.5**                                                                               |   |   | **3.18** |   |   | **73,333** |   |   | **3.18** |   |   | **4.57** |   |
| **3.31**                             |   |                                     | **60,000**    |                                                                |   | **8.6**                                                                               |   |   | **3.31** |   |   | **20,000** |   |   | **3.31** |   |   | **4.75** |   |
| **3.39**                             |   |                                     | **1,532,000** |                                                                |   | **9.1**                                                                               |   |   | **3.39** |   |   | **-** |   |   | **3.39** |   |   | **4.87** |   |
| **3.29**                             |   |                                     | **304,000**   |                                                                |   | **9.3**                                                                               |   |   | **3.29** |   |   | **-** |   |   | **3.29** |   |   | **4.72** |   |
|                                 |   |                                     | **8,171,000** |                                                                |   | **5.9**                                                                               |   | **$** | **4.35** |   |   | **4,155,443** |   | **$** | **5.09** |   | **$** | **7.27** |   |

|   | **(b)** | **Deferred                share unit plan** |
|--------|---------|---------------------------------------------|

|   | The                Company has established a deferred share unit (“DSU”) plan for its                directors. Under the terms of this plan, directors may elect to receive                their annual remuneration in DSUs, cash or a combination thereof.                Each DSU                initially has a value equivalent to the Company’s weighted average share                price on the TSX, during the ten consecutive trading days prior to                the                issuance date of the DSU. A director’s DSU account is credited with                dividend equivalents in the form of additional DSUs when dividends                are                paid on common shares. A director may elect the date of redemption                by                filing an irrevocable written election with the Company no later                than                December 15 of the calendar year commencing immediately after the                director’s termination date. The value shall be paid by the Company as a                lump sum in cash, equal to the fair value of the notional underlying                common shares plus accrued dividend equivalents at that date, after                deduction of applicable taxes and other source deductions required                to be                withheld. In 2006, the Company recognized $0.9 million in expense                (2005 -                $0.6 million) related to DSUs. As at December 31, 2006, 448,533 DSUs                were                outstanding under this plan (2005 - 320,982 DSUs) and approximately                $1.5                million was payable (2005 - $1.0                million). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***16.*** | ***EMPLOYEE                FUTURE BENEFITS*** |
|-----------|-----------------------------------------------|

|   | **Description                of benefit plans** |
|--------|-------------------------------------------------|

|   | The                Company maintains pension benefit plans for all salaried employees,                which                include defined benefit and defined contribution segments. Employees                hired                subsequent to January 1, 1994, enroll in the defined contribution                segment. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                defined benefit segment provides a pension based on years of service                and                earnings. For the defined contribution segment, the Company’s                contributions are based on a percentage of an employee’s earnings with the                Company’s funding obligations being satisfied upon crediting contributions                to an employee’s account. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company also maintains pension benefits for hourly employees that                are not                covered by union pension plans. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company provides other benefit plans consisting of provincial medical                plan                premiums, extended health care and dental benefits to eligible retired                employees and their dependents. Assumed health care trend rates have                a                significant effect on the amounts reported for the post-retirement                medical                plans. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **Total                cash payments** |
|--------|----------------------------------------|

|   | Total                cash payments for employee future benefits for the year ending December                31, 2006, consisting of cash contributed by the Company to its funded                pension plans, cash payments directly to beneficiaries for its unfunded                benefit plans and cash contributed to its defined contribution plans,                was                $33.9 million (2005 - $32.3                million). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **Defined                benefit plan** |
|--------|-----------------------------------------|

|   | The                Company measures the fair value of plan assets and the accrued benefit                obligations for accounting purposes as at December 31 of each year.                The                most recent actuarial valuation of the majority of pension plans                for                funding purposes was as of December 31, 2003, and the next required                valuation will be as of December 31,                2006. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **Change                in accrued defined benefit plan                obligation** |
|--------|-------------------------------------------------------------------------------------|

|   | The                following table represents the change in the accrued benefit obligation                as                determined by independent                actuaries: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                              |   | *Pension                benefit plans* |      | *Other                benefit plans* |   |
|-------------------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|--------|
|                                                              |   | ***2006***                             |      | *2005*                               |   | ***2006*** |   | *2005* |   |
| Accrued                benefit obligations at beginning of year   |   | **$**                                  | **364.9** |                                 | $      | 335.4 |   | **$** | **216.8** |   | $ | 178.2 |   |
| Service                cost for the year                          |   |                                   | **6.9**   |                                 |   | 5.4 |   |   | **5.6** |   |   | 4.2 |   |
| Interest                cost                                      |   |                                   | **17.8**  |                                 |   | 19.4 |   |   | **10.9** |   |   | 10.7 |   |
| Employee                contributions                             |   |                                   | **0.4**   |                                 |   | 0.4 |   |   | **-** |   |   | - |   |
| Benefit                payments                                   |   |                                   | **(27.7** | **)**                                |   | (26.9 | ) |   | **(6.1** | **)** |   | (5.2 | ) |
| Actuarial                loss (gain) and other adjustments        |   |                                   | **14.2**  |                                 |   | 31.2 |   |   | **0.4** |   |   | 28.9 |   |
| Accrued                benefit obligations balance at end of year |   | **$**                                  | **376.5** |                                 | $      | 364.9 |   | **$** | **227.6** |   | $ | 216.8 |   |

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

|   | **Change                in fair value of defined benefit plan                assets** |
|--------|---------------------------------------------------------------------------------------|

|   | The                following table represents the change in the fair value of assets                of the                defined benefit plans: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                         |   | *Pension                benefit plans* |      | *Other                benefit plans* |   |
|----------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|--------|
|                                                                                         |   | ***2006***                             |      | *2005*                               |   | ***2006*** |   | *2005* |   |
| Fair                value of defined benefit plan assets at beginning of                year |   | **$**                                  | **250.8** |                                 | $      | 233.3 |   | **$** | **0.2** |   | $ | - |   |
| Actual                return on plan assets                                                  |   |                                   | **37.7**  |                                 |   | 21.4 |   |   | **-** |   |   | - |   |
| Employee                contributions                                                        |   |                                   | **0.4**   |                                 |   | 0.4 |   |   | **-** |   |   | - |   |
| Company                contributions                                                         |   |                                   | **22.3**  |                                 |   | 22.3 |   |   | **6.1** |   |   | 5.3 |   |
| Other                                                                                        |   |                                   | **-**     |                                 |   | 0.3 |   |   | **-** |   |   | - |   |
| Benefit                payments                                                              |   |                                   | **(27.7** | **)**                                |   | (26.9 | ) |   | **(6.3** | **)** |   | (5.1 | ) |
| Fair                value of defined benefit plan assets at end of year                      |   | **$**                                  | **283.5** |                                 | $      | 250.8 |   | **$** | **-** |   | $ | 0.2 |   |

|   | The                asset allocation for the Company’s defined benefit pension plans, by asset                category, was as follows: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

| *Plan                assets at December 31,* | ***2006*** |   | *2005* |
|----------------------------------------------|------------|--------|--------|
|                                         |       |   |   |
| Equity                securities             | **59.4%**  |   | 59.3%  |
| Fixed                income securities       | **40.6%**  |   | 40.7%  |
| Total                                        | **100.0%** |   | 100.0% |

|   | **Reconciliation                of the funded status of the benefit plans to the amounts in the                consolidated balance                sheets** |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                following table presents the difference between the fair value of                the                defined benefit pension assets and the actuarially determined accrued                benefit obligations as at December 31, 2006 and 2005. This difference                is                also referred to as either the deficit or surplus, as the case may                be, or                the funded status of the plans. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                table also reconciles the amount of the surplus or deficit (funded                status)                to the accrued benefit obligation in the consolidated balance sheets.                This                difference between the funded status and the obligation recognized                in the                consolidated balance sheets, in accordance with Canadian GAAP, represents                the portion of the surplus or deficit not yet recognized for accounting                purposes. Deferred recognition is a key element of the Canadian GAAP                pension accounting. This approach allows for a gradual recognition                of                changes in accrued benefit obligations and fund performance over                the                expected average remaining service life of the employee group covered                by                the plans. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As                at December 31, 2006, there was a total funding deficit of $93.0                million                (2005 - $114.1 million) in the Company’s various defined benefit pension                plans. Of this amount, $39.9 million (2005 - $69.7 million) related                to                funded defined benefit pension plans and $53.1 million (2005 - $44.4                million) to “pay-as-you-go” unfunded defined benefit pension plans. In                addition, the Company has other “pay-as-you-go” post-retirement benefit                plans, consisting of group health care and life insurance, which                had a                deficit of $227.6 million at December 31, 2006 (2005 - $216.6                million). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                   |   | *Pension                benefit plans* |      | *Other                benefit plans* |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|--------|
|                                                                                                   |   | ***2006***                             |      | *2005*                               |   | ***2006*** |   | *2005* |   |
| Accrued                benefit obligation at end of year                                               |   | **$**                                  | **376.5** |                                 | $      | 364.9 |   | **$** | **227.6** |   | $ | 216.8 |   |
| Fair                value of plan assets at end of year                                                |   |                                   | **283.5** |                                 |   | 250.8 |   |   | **-** |   |   | 0.2 |   |
| Funded                status-deficit                                                                   |   |                                   | **(93.0** | **)**                                |   | (114.1 | ) |   | **(227.6** | **)** |   | (216.6 | ) |
| Unrecognized                past service costs                                                         |   |                                   | **0.1**   |                                 |   | 0.2 |   |   | **(1.9** | **)** |   | (2.1 | ) |
| Unrecognized                actuarial losses                                                           |   |                                   | **59.8**  |                                 |   | 74.7 |   |   | **66.4** |   |   | 69.4 |   |
| Accrued                benefit obligation recognized in the consolidated balance                sheets |   | **$**                                  | **(33.1** | **)**                                | $      | (39.2 | ) | **$** | **(163.1** | **)** | $ | (149.3 | ) |

|   | **Classification                of accrued obligations** |
|--------|----------------------------------------------------------|

|   | The                accrued benefit obligation is included in the Company’s balance sheet as                follows: |
|--------|---------------------------------------------------------------------------------------------------------------------------|

|                                                    |   | *Pension                benefit plans* |      | *Other                benefit plans* |   |
|---------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|--------|
|                                                    |   | ***2006***                             |      | *2005*                               |   | ***2006*** |   | *2005* |   |
| Other                assets                             |   | **$**                                  | **1.8**   |                                 | $      | 0.2 |   | **$** | **-** |   | $ | − |   |
| Accounts                payable and accrued liabilities |   |                                   | **(4.5**  | **)**                                |   | (11.6 | ) |   | **(6.3** | **)** |   | (5.5 | ) |
| Other                long-term obligations              |   |                                   | **(30.4** | **)**                                |   | (27.8 | ) |   | **(156.8** | **)** |   | (143.8 | ) |
|                                                    |   | **$**                                  | **(33.1** | **)**                                | $      | (39.2 | ) | **$** | **(163.1** | **)** | $ | (149.3 | ) |

|   | **Components                of net periodic benefit cost recognized in the                year** |
|--------|--------------------------------------------------------------------------------------------------|

| ***Pension                benefit plans***                                    |   | ***2006*** |      | *2005* |   | *2004* |   |
|-------------------------------------------------------------------------------|--------|------------|-----------|--------|--------|--------|--------|
| **Defined                benefit costs**                                      |   |       |      |   |   |   |   |
| Service                cost for the year                                      |   | **$**      | **6.9**   |   | $      | 5.4    |   | $ | 4.5 |   |
| Interest                cost                                                  |   |       | **17.8**  |   |   | 19.4   |   |   | 19.8 |   |
| Actual                return on assets                                        |   |       | **(37.7** | **)**  |   | (21.4  | )      |   | (23.9 | ) |
| Actuarial                (gain)/loss                                          |   |       | **14.2**  |   |   | 31.2   |   |   | 9.0 |   |
| Difference                between actual and expected return                  |   |       | **20.3**  |   |   | 4.6    |   |   | 7.8 |   |
| Difference                between actual and recognized actuarial (gain)/loss |   |       | **(7.7**  | **)**  |   | (28.5  | )      |   | (5.7 | ) |
| Difference                between actual and recognized prior service costs   |   |       | **-**     |   |   | 0.1    |   |   | 0.2 |   |
| Amortization                of transitional balance                           |   |       | **-**     |   |   | 0.1    |   |   | (0.3 | ) |
|                                                                          |   |       | **13.8**  |   |   | 10.9   |   |   | 11.4 |   |
| **Defined                contribution cost**                                  |   |       |      |   |   |   |   |   |   |   |
| Service                cost for the year                                      |   |       | **5.5**   |   |   | 5.1    |   |   | 5.2 |   |
| Net                periodic benefit cost for pension benefit plans            |   | **$**      | **19.3**  |   | $      | 16.0   |   | $ | 16.6 |   |

| ***Other                benefit plans***                                      |   | ***2006*** |     | *2005* |   | *2004* |   |
|-------------------------------------------------------------------------------|--------|------------|----------|--------|--------|--------|--------|
| **Defined                benefit costs**                                      |   |       |     |   |   |   |   |
| Service                cost for the year                                      |   | **$**      | **5.6**  |   | $      | 4.2    |   | $ | 4.3 |   |
| Interest                cost                                                  |   |       | **10.9** |   |   | 10.7   |   |   | 11.2 |   |
| Actuarial                (gain)/loss                                          |   |       | **0.4**  |   |   | 28.9   |   |   | (15.2 | ) |
| Difference                between actual and recognized actuarial (gain)/loss |   |       | **3.0**  |   |   | (27.1  | )      |   | 17.8 |   |
| Difference                between actual and recognized prior service costs   |   |       | **(0.2** | **)**  |   | (0.2   | )      |   | (0.2 | ) |
| Net                periodic benefit cost for other benefit plans              |   | **$**      | **19.7** |   | $      | 16.5   |   | $ | 17.9 |   |

|   | **Multi-employer                pension plans** |
|--------|-------------------------------------------------|

|   | Unionized                employees of the Company are members of industry-wide pension plans                to                which the Company contributes a predetermined amount per hour worked                by an                employee. The pension expense for these plans is equal to the Company’s                contribution of $18.0 million in 2006 (2005 - $18.3 million; 2004                - $18.4                million). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

|   | **Significant                assumptions** |
|--------|--------------------------------------------|

|   | Actuarial                assumptions used in accounting for the Company-maintained benefit                plans                were: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|

|                                                                   | ***2006*** |   | *2005* |
|------------------------------------------------------------------------|------------|--------|--------|
| **Benefit                obligations at December 31,**                 |       |   |   |
| Discount                rate                                           | **5.00%**  |   | 5.00%  |
| Rate                of compensation increase                           | **3.00%**  |   | 3.00%  |
| **Net                expense for year ended December 31,**             |       |   |   |
| Discount                rate                                           | **5.00%**  |   | 6.00%  |
| Rate                of compensation increase                           | **3.00%**  |   | 3.00%  |
| Expected                rate of return on plan assets                  | **7.00%**  |   | 7.25%  |
| **Assumed                health care cost trend rate at December 31,** |       |   |   |
| *Extended                health benefits*                              |       |   |   |
| Initial                health care cost trend rate                     | **9.00%**  |   | 10.00% |
| Annual                rate of decline in trend rate                    | **1.00%**  |   | 1.00%  |
| Ultimate                health care cost trend rate                    | **5.00%**  |   | 5.00%  |
| *Dental                benefits*                                       |       |   |   |
| Dental                care cost trend rate                             | **4.50%**  |   | 5.00%  |
| *Medical                services plan benefits*                        |       |   |   |
| Premium                trend rate                                      | **2.00%**  |   | 2.00%  |

|   | **Sensitivity                analysis** |
|--------|-----------------------------------------|

|   | Assumed                health care cost trend rates have a significant effect on the amounts                reported for the health care plans. A 1% change in assumed health                care                cost rates would have the following effects for                2006: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                     |   | *Other                benefit plans* |     |
|----------------------------------------------------------|--------|--------------------------------------|----------|
|                                                     |   | *Increase*                           |     | *Decrease* |   |
| Total                of service and interest cost        |   | **$**                                | **3.6**  |   | **$** | **(2.8** | **)** |
| Accrued                benefit obligation at December 31 |   | **$**                                | **41.6** |   | **$** | **(33.0** | **)** |

| ***17.*** | ***FINANCIAL                INSTRUMENTS*** |
|-----------|--------------------------------------------|

|   | **Derivative                financial instruments** |
|--------|-----------------------------------------------------|

|   | The                Company uses derivative financial instruments to reduce its exposure                to                foreign currency and price risk associated with its revenues, energy                costs                and long-term debt. The Company also uses interest rate swaps to                manage                its net exposure to interest rate                changes. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

|   | **(a)** | **Revenue                risk management                instruments** |
|--------|---------|-----------------------------------------------------------------------|

|   | Foreign                currency options and forward contracts outstanding to sell U.S. dollars                were as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------|

|                                         |   | Options                          |    |                              |   |                             |   |
|----------------------------------------------|--------|----------------------------------|---------|-----------------------------------|--------|----------------------------------|--------|
|                                         |   | Purchased                options |    | Sold                options       |   | Forward                contracts |   |
|  Term                                   |   | NotionalUS$millions              |    | Average                rateC$/US$ |   | NotionalUS$millions              |   | Average                rateC$/US$ |   | NotionalUS$millions |   | Average                rateC$/US$ |   |
| ***As                at December 31, 2006*** |   |                             |    |                              |   |                             |   |   |   |   |   |   |   |
| **0                to 12 months**            |   | **$**                            | **485** |                              |   | **1.1073**                       |   | **$** | **205** |   |   | **1.1620** |   | **$** | **109** |   |   | **1.1459** |   |
| **13                to 24 months**           |   |                             | **34**  |                              |   | **1.1133**                       |   |   | **32** |   |   | **1.1238** |   |   | **-** |   |   | **-** |   |
|                                         |   | **$**                            | **519** |                              |   | **1.1077**                       |   | **$** | **237** |   |   | **1.1569** |   | **$** | **109** |   |   | **1.1459** |   |
| *As                at December 31, 2005*     |   |                             |    |                              |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 0                to 12 months                |   | $                                | 450     |                              |   | 1.1930                           |   | $ | 232 |   |   | 1.2899 |   | $ | 60 |   |   | 1.1705 |   |
| 13                to 24 months               |   |                             | 50      |                              |   | 1.1447                           |   |   | - |   |   | - |   |   | - |   |   | - |   |
|                                         |   | $                                | 500     |                              |   | 1.1881                           |   | $ | 232 |   |   | 1.2899 |   | $ | 60 |   |   | 1.1705 |   |

|   | Foreign                exchange translation gains and losses on the above instruments designated                as hedges are recognized concurrently with the hedged revenue in“Sales”.                At December 31, 2006, instruments having a notional principal of                US$385                million are designated as hedging instruments and instruments of                US$243                million are marked to market, where the related gains and losses                are                recognized as “Sales”. At period-end exchange rates, the net amount the                Company would pay to settle the above contracts and options is $3.8                million, of which $6.0 million is included in “Prepaids and other”, $3.0                million is included in “Accounts payable and accrued liabilities”, and the                remaining negative $6.8 million is not yet recorded in the financial                statements. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | At                December 31, 2006, commodity swap agreements to fix the sales price                on                NBSK pulp within the next 12 months are outstanding for 8,800 metric                tonnes (mt) at a weighted average PIX price of US$702 per mt. These                contracts are not designated as hedging instruments for accounting                purposes and are reported at their fair value, which was negative                $0.3                million at the end of 2006. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(b)** | **Cost                risk management                instruments** |
|--------|---------|--------------------------------------------------------------------|

|   | Oil                and gas contracts outstanding were as                follows: |
|--------|----------------------------------------------------------------------------------|

|                                         |   | ***Oil                contracts******(Fixed                WTI NYMEX price)*** |   | ***Natural                gas contracts******(Fixed                AECO/Sumas price)*** |   | ***Natural                gas contracts******(Purchased                AECO call options)*** |   |
|----------------------------------------------|--------|--------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|--------|
| ***Term***                                   |   | ***Barrels                (“bbls”) (000’s)***                |   | ***Average                rate******US$/bbl***                                          |   | ***MMBTU                (millions)***                                                        |   | ***Average******rate******US$/MMBTU*** |   | ***MMBTU                (millions)*** |   | ***Average******rate******US$/MMBTU*** |   |
| ***As                at December 31, 2006*** |   |                                                                           |   |                                                                                    |   |                                                                                         |   |   |   |   |   |   |   |
| **0                to 12 months**            |   |                                                                           | **30** |                                                                                    | $      | **31.55**                                                                                    |   |   | **1.0** |   | $ | **7.54** |   |   | **0.3** |   | $ | **7.16** |   |
| **13                to 36 months**           |   |                                                                           | **-**  |                                                                                    |   | -                                                                                            |   |   | **-** |   |   | **-** |   |   | **-** |   |   | **-** |   |
|                                         |   |                                                                           | **30** |                                                                                    | $      | **31.55**                                                                                    |   |   | **1.0** |   | $ | **7.54** |   |   | **0.3** |   | $ | **7.16** |   |
| *As                at December 31, 2005*     |   |                                                                           |   |                                                                                    |   |                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 0                to 12 months                |   |                                                                           | 20     |                                                                                    | $      | 23.30                                                                                        |   |   | 0.2 |   | $ | 6.67 |   |   | - |   | $ | - |   |
| 13                to 36 months               |   |                                                                           | 30     |                                                                                    |   | 31.55                                                                                        |   |   | - |   |   | - |   |   | - |   |   | - |   |
|                                         |   |                                                                           | 50     |                                                                                    | $      | 28.25                                                                                        |   |   | 0.2 |   | $ | 6.67 |   |   | - |   | $ | - |   |

|   | The                above instruments are not designated as hedging instruments for accounting                purposes and are reported under “Accounts payable and accrued liabilities”                on the balance sheet at their fair value. At period-end contract                rates,                the net amount the Company would pay to settle these commodity swaps                is                $0.6 million, all of which is included in “Accounts payable and accrued                liabilities” and has been recognized in “Cost of                sales”. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

|   | **(c)** | **Long-term                debt risk management                instruments** |
|--------|---------|------------------------------------------------------------------------------|

|   | The                Company is party to forward foreign currency contracts and options                to                acquire U.S. dollars totalling US$23.0 million over a 5-year period                at                rates averaging C$/US$1.3486. These instruments are not designated                as                hedging instruments for accounting purposes and are included in “Other                long-term obligations” on the balance sheet at their fair value.                Settlements and changes in fair value are recognized in “Foreign exchange                gain (loss) on translation of long-term debt”. At period-end exchange                rates, the net amount the Company would pay to settle these contracts                is                $4.0 million. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(d)** | **Interest                rate swaps** |
|--------|---------|----------------------------------------|

|   | The                Company has entered into fixed-to-floating interest rate swaps on                US$100.0                million, under which it will receive a fixed rate of 7.375%, and                pay a                floating rate of U.S. six-month LIBOR plus 2.0%. The swaps mature                March 1,                2014, although US$30 million are cancellable at the counterparties’ option                between March 1, 2009 and March 1, 2014, for premiums which mirror                the                call premiums on the 7.375% senior notes. These instruments are designated                as fair value hedging instruments, with settlement amounts recognized                in                interest expense. At period-end rates, the net amount the Company                would                receive to settle these contracts is $1.2                million. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(e)** | **Credit                risk** |
|--------|---------|--------------------------------|

|   | The                Company is exposed to credit risk on accounts receivable from its                customers who are mainly in the newspaper publishing, commercial                printing                and paper manufacturing businesses. The Company manages its credit                risk                principally through credit policies, which include the analysis of                the                financial position of its customers and the regular review of their                credit                limits. The Company also subscribes to credit insurance for a majority                of                its receivables, and obtains bank letters of credit for some export                markets or customers. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company is exposed to credit risk with counterparties to the Company’s                derivative financial instruments. The credit risk arises from the                potential for a counterparty to default on its contractual obligations,                and is limited to those contracts where the Company would incur a                loss in                replacing the defaulted transaction. The Company manages this risk                by                diversifying through counterparties that are of strong credit quality,                normally major financial                institutions. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(f)** | **Fair                value** |
|--------|---------|-------------------------------|

|   | Estimated                fair values of financial instruments, which differ from carrying                values,                were as follows at December 31: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                  |   | ***2006***                |     | *2005*                |   |
|-------------------------------------------------------------------------------------------------------|--------|---------------------------|----------|-----------------------|--------|
|                                                                                                  |   | ***Carrying******value*** |     | ***Fair******value*** |   | *Carrying                value* |   | *Fair**value* |   |
| Forward                contracts and options hedging future  U.S.                dollar receipts |   | **$**                     | **3.0**  |                  | **$**  | **(3.8** | **)** | $ | 13.1 |   | $ | 23.6 |   |
| Instruments                related to long-term debt risk  management                            |   |                      |     |                  |   |   |   |   |   |   |   |   |   |
| Forward                contracts to buy U.S. dollars                                                  |   |                      | **(4.2** | **)**                 |   | **(4.0** | **)** |   | (25.2 | ) |   | (24.3 | ) |
| Fixed                to floating interest swaps                                                       |   |                      | **-**    |                  |   | **1.2** |   |   | - |   |   | 0.4 |   |

|   | The                fair value of options and forward foreign currency contracts is based                on                mid-market rates from financial                institutions. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***18.*** | ***RELATED                PARTY TRANSACTIONS*** |
|-----------|-------------------------------------------------|

|   | Related                parties include Third Avenue Management LLC (“TAM”), which has control or                direction over client accounts holding approximately 38% of the Company’s                common shares, effective October 23, 2006. The Company has not undertaken                any transactions with TAM during the year ended December 31,                2006. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Related                parties also included Norske Skogindustrier ASA (“Norske Skog”), together                with its subsidiaries and affiliates, up to February 16, 2006 when                Norske                Skog disposed of its 29.4% interest in the Company and Norske Skog                North                America LLC (“NSNALLC”), which was a joint venture between Norske Skog and                the Company until the shareholders of NSNALLC announced the dissolution                of                its U.S. marketing joint venture effective October 1, 2005. After                the                dissolution, the Company returned to marketing its specialty papers                directly to North American                customers. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Transactions                or balances with these related parties not otherwise disclosed in                these                financial statements were as                follows: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                               |   | ***2006*** |    | *2005* |   | *2004* |   |
|----------------------------------------------------|--------|------------|---------|--------|--------|--------|--------|
| Norske                Skog                         |   |       |    |   |   |   |   |
| Selling,                general and administrative |   | **$**      | **0.2** |   | $      | 0.1    |   | $ | 0.1 |   |
| Accounts                receivable                 |   |       | **-**   |   |   | 2.7    |   |   | - |   |
| Norske                Skog North America LLC       |   |       |    |   |   |   |   |   |   |   |
| Commission                expenses                 |   |       | **-**   |   |   | 4.4    |   |   | 4.8 |   |
| Net                loss                            |   |       | **-**   |   |   | 0.1    |   |   | 0.1 |   |
| Investment                (US$0.5 million)         |   |       | **-**   |   |   | 0.8    |   |   | 0.8 |   |

|   | The                Company has entered into agency and distribution agreements with                affiliates of Norske Skog whereby all sales of the Company’s newsprint and                specialty papers in certain international markets are effected through                affiliates of Norske Skog. For the period ended February 16, 2006,                product                sales to these affiliates were $13.6 million (2005 - $118.1 million;                2004                - $121.7 million). These transactions are in accordance with normal                third-party trade practices. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                prior years, the Company acquired from wholly-owned subsidiaries                of FCL                (now subsidiaries of Norske Skog), companies with tax losses. The                purchase                price of these companies is subject to adjustment under certain                conditions. At December 31, 2006, there was no outstanding balance                with                respect to such adjustments (2005 - $2.7 million; 2004 - nil). During                2006, the Company collected $4.3 million in respect of the adjustments.                The $4.3 million was comprised of the $2.7 million accounts receivable                at                December 31, 2005 and a further adjustment and interest totalling                $1.6                million. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company undertakes certain transactions with companies affiliated                with its                directors. These transactions are in the normal course of business                and are                on the same terms as those accorded to third parties. During 2006,                the                Company paid aggregate fees of approximately $0.4 million (2005 -                nil;                2004 - $0.4 million) primarily for legal services to companies affiliated                with a director of the Company. The Company charged the costs to“Selling,                general and administrative” expenses. The Company also paid $3.9 million                (2005 - $1.8 million; 2004 - less than $0.1 million) primarily for                chemicals used in the manufacturing process to a company affiliated                with                an officer and director of the Company. The Company charged these                costs to                “Cost of sales”. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company has advanced interest-free loans to its officers. As at December                31, 2006, the balance outstanding was $0.1 million (2005 - $0.4 million).                These loans were issued prior to the enactment of the United                States*Sarbanes-Oxley Act of 2002*,                which prohibits such loans effective July 30, 2002. The Company has                made                no loans to any of its directors or officers since that                date. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***19.*** | ***SEGMENTED                INFORMATION*** |
|-----------|--------------------------------------------|

|   | The                Company operates in three business                segments: |
|--------|--------------------------------------------------------------------------------|

| Specialty                papers | - Manufacture                and sale of groundwood specialty printing paper.                                                                                                   |
|---------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Newsprint                       | - Manufacture                and sale of newsprint.                                                                                                                             |
| Pulp                            | - Manufacture                and sale of long and short fibre pulp and containerboard (containerboard                was previously referred to as kraft                paper). |

|   | Effective                January 1, 2006, the Company reclassified its containerboard activities                to                its pulp segment from its specialty papers business segment to reflect                the                integrated nature of its pulp and containerboard paper operations.                Segment                information for prior periods has been reclassified to reflect these                changes. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                accounting policies of the segments are the same as described in                the                Summary of Significant Accounting Policies in note 2. Segment performance                is evaluated based on operating earnings (loss). Inter-segment sales                consist of pulp transfers at cost. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                             |   | ***2006***              |      |
|--------------------------------------------------|--------|-------------------------|-----------|
| **Sales                by shipment destination** |   | **Specialty****Papers** |      | **Newsprint** |   | **Pulp** |   | **Total** |   |
| **Canada**                                       |   | **$**                   | **104.0** |   | **$** | **88.7** |   | **$** | **13.9** |   | **$** | **206.6** |   |
| **United                States**                 |   |                    | **759.3** |   |   | **256.7** |   |   | **37.8** |   |   | **1,053.8** |   |
| **Asia                and Australasia**          |   |                    | **15.6**  |   |   | **106.0** |   |   | **201.0** |   |   | **322.6** |   |
| **Latin                America**                 |   |                    | **38.5**  |   |   | **78.0** |   |   | **55.4** |   |   | **171.9** |   |
| **Europe                and Other**              |   |                    | **1.0**   |   |   | **0.4** |   |   | **126.2** |   |   | **127.6** |   |
|                                             |   | **$**                   | **918.4** |   | **$** | **529.8** |   | **$** | **434.3** |   | **$** | **1,882.5** |   |

|                                             |   | *2005*          |   |
|--------------------------------------------------|--------|-----------------|--------|
| **Sales                by shipment destination** |   | SpecialtyPapers |   | Newsprint |   | Pulp |   | Total |   |
| Canada                                           |   | $               | 91.7   |   | $ | 85.2 |   | $ | 19.8 |   | $ | 196.7 |   |
| United                States                     |   |            | 743.6  |   |   | 269.3 |   |   | 37.5 |   |   | 1,050.4 |   |
| Asia                and Australasia              |   |            | 24.4   |   |   | 108.1 |   |   | 150.2 |   |   | 282.7 |   |
| Latin                America                     |   |            | 39.9   |   |   | 66.1 |   |   | 41.9 |   |   | 147.9 |   |
| Europe                and Other                  |   |            | 0.9    |   |   | 0.4 |   |   | 144.9 |   |   | 146.2 |   |
|                                             |   | $               | 900.5  |   | $ | 529.1 |   | $ | 394.3 |   | $ | 1,823.9 |   |

|                                             |   | *2004*          |   |
|--------------------------------------------------|--------|-----------------|--------|
| **Sales                by shipment destination** |   | SpecialtyPapers |   | Newsprint |   | Pulp |   | Total |   |
| Canada                                           |   | $               | 89.8   |   | $ | 80.7 |   | $ | 27.4 |   | $ | 197.9 |   |
| United                States                     |   |            | 713.6  |   |   | 283.0 |   |   | 37.0 |   |   | 1,033.6 |   |
| Asia                and Australasia              |   |            | 63.6   |   |   | 115.4 |   |   | 162.8 |   |   | 341.8 |   |
| Latin                America                     |   |            | 53.5   |   |   | 74.0 |   |   | 39.3 |   |   | 166.8 |   |
| Europe                and Other                  |   |            | 14.8   |   |   | - |   |   | 123.3 |   |   | 138.1 |   |
|                                             |   | $               | 935.3  |   | $ | 553.1 |   | $ | 389.8 |   | $ | 1,878.2 |   |

| ***20.*** | ***COMMITMENTS*** |
|-----------|-------------------|

|   | (a) | The                Company has entered into operating leases for property, plant and                equipment. The minimum future payments under various operating leases                in                each of the years ended December 31 are as                follows: |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **2007**                            |   | $      | **13.1** |   |
|-------------------------------------|--------|--------|----------|--------|
| **2008**                            |   |   | **11.3** |   |
| **2009**                            |   |   | **10.1** |   |
| **2010**                            |   |   | **9.2**  |   |
| **2011**                            |   |   | **8.8**  |   |
| **Subsequent                years** |   |   | **39.5** |   |
|                                |   | $      | **92.0** |   |

|   | The                total lease expense amounted to $13.0 million in 2006 (2005 - $13.8                million; 2004 - $14.5 million). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | The                Company has entered into a six-year take-or-pay contract for the                purchase                of recycled paper used in the production of its paper products. The                agreement, effective May 1, 2006, provides for minimum purchase quantities                of recycled paper and prices are based on market rates at the beginning                of                each month. Total purchases in 2006 amounted to $0.9 million. At                current                market rates, the Company is expected to pay approximately $1.6 million                per year for the duration of the                contract. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***21.*** | ***GUARANTEES                AND INDEMNITIES*** |
|-----------|-------------------------------------------------|

|   | The                Company has, over time, provided various indemnities with respect                to tax,                environment, and employment liabilities, as well as general                representations and warranties on sales of portions of its business,                acquisitions, and commodity contracts. Significant existing indemnities                are as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | The                Company sold a portion of its operations in June 2001. In this regard,                the                Company provided a 10-year environmental indemnity with a maximum                liability to the Company of $12.5 million. This liability has subsequently                been reduced by expenditures related to certain decommissioning projects.                The Company provided a tax indemnity, which continues while the relevant                tax years of the indemnified parties remain open to audit. The Company                also provided a general indemnity, capped at $5 million, which expired                in                2004. The purchaser of the operations has advised the Company that,                based                on the terms of the purchase and sale agreement, it believes it may                be                entitled to indemnification under the general indemnity in connection                with                certain labour matters. The Company is unable to estimate any potential                liability under these indemnities as the amounts are dependent upon                the                outcome of future contingent events, the nature and likelihood of                which                cannot be determined at this time. As such, no liability has been                recorded                for these potential obligations. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | In                connection with the acquisition of the paper recycling business in                December 2003, the Company has provided indemnities with respect                to                representations and warranties related to general corporate matters                and to                the shares that have been issued to the vendors. Liability under                these                indemnities expires in November 2008, except that the indemnity related                to                title to the shares does not expire. The Company does not expect                any                significant claims with respect to these indemnities. The Company                has also                provided indemnities with respect to general environmental matters                under                its lease of the land and buildings. The Company has agreed to indemnify                the landlord for all costs, claims and damages related to any release                by                the Company of any hazardous substances on the property or the breach                by                the Company of its environmental covenants under the lease or any                environmental laws. This indemnity is indefinite and survives after                the                lease is terminated. The Company is not liable for pre-existing                environmental conditions. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | The                Company has entered a building lease agreement whereby it has agreed                to                continue making the prescribed lease payments directly to the financial                institution holding the mortgage on the building in the event the                lessor                is no longer able to meet its contractual obligations. As at December                31,                2006, the value of the mortgage was $11.9 million (2005 - $13.0 million).                This agreement does not increase the Company’s liability beyond the                obligation under the building                lease. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***22.*** | ***CONTINGENT                LIABILITIES*** |
|-----------|---------------------------------------------|

|   | In                the normal course of its business activities, the Company is subject                to a                number of claims and legal actions that may be made by customers,                suppliers and others. While the final outcome with respect to actions                outstanding or pending as at December 31, 2006, cannot be predicted                with                certainty, the Company believes an adequate provision has been made,                or                the resolution will not have a material effect on the Company’s                consolidated financial position, earnings or cash                flows. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **Change                of Control Agreements** |
|--------|-------------------------------------------------|

|   | Refer                to “Subsequent Event” (note 24) related to the Amended and Restated Change                of Control Agreements (“Agreements”) with the Company’s President and                Chief Executive Officer and Vice-President Finance and Chief Financial                Officer. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                Company has entered into Agreements dated April 28, 2006 with seven                other                key senior officers of the Company whereby if such senior officers’                employment is terminated by the Company without cause or through                constructive dismissal within a two-year period after the change                of                control date, he or she will be entitled to a two-year termination                leave.                Under the Agreements, the Company would be obligated to pay approximately                $3.7 million with additional pension contributions of $0.4 million.                The                recent acquisition by TAM of control or direction over an additional                39                million common shares of the Company constitutes a change of control                under                the Agreements. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **Class                Action Lawsuits** |
|--------|------------------------------------------|

|   | In                early 2004, the European Commission began an investigation into possible                anti-competitive practices by certain European paper producers. Shortly                after the investigation was announced, the Company and certain of                its                affiliates were named, together with a number of other paper producers,                in                several United States class action lawsuits brought by direct and                indirect                purchasers alleging an ongoing conspiracy to fix prices of magazine                and                other publication papers. In late 2006, the European Commission reportedly                completed its investigation. The Company was also conditionally dismissed                from the class action brought against it by direct purchasers. The                Company                remains a defendant in class actions brought by indirect purchasers.                The                Company believes there is no merit to the lawsuits with respect to                the                Company, but will nonetheless continue to incur related costs to                defend                itself. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***23.*** | ***RECONCILIATION                OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED*** |
|-----------|--------------------------------------------------------------------------------------|

***ACCOUNTING      PRINCIPLES***

|   | The                Company’s consolidated financial statements have been prepared in                accordance with Canadian GAAP, which differ in some respects from                U.S.                GAAP. The following are the significant differences in accounting                principles as they pertain to the consolidated earnings and consolidated                balance sheets. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **Net                earnings adjustments** |
|--------|---------------------------------------------|

|   | The                following table provides a reconciliation of the net earnings (loss)                for                the years ended December 31 under Canadian GAAP to U.S.                GAAP: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                         |   | ***2006*** |      | *2005* |   | *2004* |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|--------|--------|--------|--------|
| Net                earnings (loss) in accordance with Canadian GAAP                                                                                                          |   | **$**      | **(15.9** | **)**  | $      | (25.6  | )      | $ | (28.6 | ) |
| U.S.                dollar revenue hedges (a)                                                                                                                                |   |       | **(9.4**  | **)**  |   | (32.4  | )      |   | (22.8 | ) |
| U.S.                dollar long-term debt hedges (b)                                                                                                                         |   |       | **(0.7**  | **)**  |   | (1.5   | )      |   | (3.0 | ) |
| Fixed                to floating interest swaps (c)                                                                                                                          |   |       | **(0.8**  | **)**  |   | (3.4   | )      |   | (5.4 | ) |
| Commodity                swaps (d)                                                                                                                                           |   |       | **-**     |   |   | (0.3   | )      |   | (3.3 | ) |
| Stock                based compensation expense                                                                                                                              |   |       | **-**     |   |   | -      |   |   | (0.6 | ) |
| Income                tax impact of above items                                                                                                                              |   |       | **1.1**   |   |   | 12.8   |   |   | 11.7 |   |
| Net                earnings (loss) in accordance with U.S. GAAP                                                                                                              |   |       | **(25.7** | **)**  |   | (50.4  | )      |   | (52.0 | ) |
| Other                comprehensive income:                                                                                                                                   |   |       |      |   |   |   |   |   |   |   |
| Minimum                pension liability adjustment, net of future income taxes of                $3.6 million (2005 - $7.0 million; 2004 - $1.5 million)                (e) |   |       | **7.9**   |   |   | (14.0  | )      |   | (2.9 | ) |
| Reclassification                of effective portion of U.S. dollar hedges on de- designation,                net of future income taxes of $5.2 million (a)            |   |       | **(11.3** | **)**  |   | -      |   |   | - |   |
| Effective                portion of U.S. dollar revenue hedges, net of future                income taxes of $2.8 million (a) (2005 - $2.4 million)                     |   |       | **6.1**   |   |   | 4.5    |   |   | - |   |
| Comprehensive                income (loss) in accordance with U.S. GAAP                                                                                                      |   | **$**      | **(23.0** | **)**  | $      | (59.9  | )      | $ | (54.9 | ) |
| Basic                and diluted net earnings (loss) per share in accordance with                U.S. GAAP (in dollars)                                                      |   |       | **(0.12** | **)**  |   | (0.23  | )      |   | (0.24 | ) |
| Basic                and diluted weighted average number of shares in accordance                with U.S. GAAP (in millions)                                                 |   |       | **214.6** |   |   | 214.6  |   |   | 214.6 |   |

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

**Balance      sheet adjustments**

|                                                                         |   | ***2006*** |        | *2005* |   |
|------------------------------------------------------------------------------|--------|------------|-------------|--------|--------|
| **Prepaids                and other - Canadian GAAP**                        |   | **$**      | **15.4**    |   | $      | 24.1 |   |
| U.S.                dollar revenue hedges                                    |   |       | **(6.1**    | **)**  |   | 10.5 |   |
| Fixed-to-floating                interest swaps                              |   |       | **1.2**     |   |   | 0.4 |   |
| **Prepaids                and other - U.S. GAAP**                            |   | **$**      | **10.5**    |   | $      | 35.0 |   |
| **Other                assets - Canadian GAAP**                              |   | **$**      | **40.8**    |   | $      | 40.1 |   |
| Employee                future benefits                                      |   |       | **(1.5**    | **)**  |   | - |   |
| **Other                assets - U.S. GAAP**                                  |   | **$**      | **39.3**    |   | $      | 40.1 |   |
| **Accounts                payable and accrued liabilities - Canadian GAAP**  |   | **$**      | **293.3**   |   | $      | 279.4 |   |
| U.S.                dollar revenue hedges                                    |   |       | **0.7**     |   |   | - |   |
| Employee                future benefits                                      |   |       | **(0.1**    | **)**  |   | - |   |
| **Accounts                payable and accrued liabilities - U.S. GAAP**      |   | **$**      | **293.9**   |   | $      | 279.4 |   |
| **Long-term                debt - Canadian GAAP**                            |   | **$**      | **854.5**   |   | $      | 861.9 |   |
| Fixed-to-floating                interest swaps                              |   |       | **0.6**     |   |   | 0.1 |   |
| **Long-term                debt - U.S. GAAP**                                |   | **$**      | **855.1**   |   | $      | 862.0 |   |
| **Other                long-term obligations - Canadian GAAP**               |   | **$**      | **214.7**   |   | $      | 209.7 |   |
| Employee                future benefits                                      |   |       | **121.9**   |   |   | 63.8 |   |
| U.S.                dollar long-term debt hedges                             |   |       | **(0.2**    | **)**  |   | (0.9 | ) |
| Cancelled                interest rate swaps                                 |   |       | **-**       |   |   | (1.1 | ) |
| **Other                long-term obligations - U.S. GAAP**                   |   | **$**      | **336.4**   |   | $      | 271.5 |   |
| **Future                income taxes - Canadian GAAP**                       |   | **$**      | **243.9**   |   | $      | 300.9 |   |
| Tax                effect of employee future benefits adjustment             |   |       | **(40.6**   | **)**  |   | (22.5 | ) |
| Tax                effect of effective portion of U.S. dollar revenue hedges |   |       | **(2.1**    | **)**  |   | 2.4 |   |
| Tax                effect of other adjustments                               |   |       | **2.6**     |   |   | 2.2 |   |
| **Future                income taxes - U.S. GAAP**                           |   | **$**      | **203.8**   |   | $      | 283.0 |   |
| **Shareholders’                equity - Canadian GAAP**                |   | **$**      | **1,005.8** |   | $      | 1,019.7 |   |
| U.S.                dollar revenue hedges                                    |   |       | **(6.8**    | **)**  |   | 10.5 |   |
| U.S.                dollar long-term debt hedges                             |   |       | **0.2**     |   |   | 0.9 |   |
| Fixed-to-floating                interest swaps                              |   |       | **0.6**     |   |   | 1.4 |   |
| Employee                future benefits                                      |   |       | **(123.3**  | **)**  |   | (63.8 | ) |
| Tax                effect of employee future benefits adjustment             |   |       | **40.6**    |   |   | 22.5 |   |
| Tax                effect of effective portion of U.S. dollar revenue hedges |   |       | **2.1**     |   |   | (2.4 | ) |
| Tax                effect of other adjustments                               |   |       | **(2.6**    | **)**  |   | (2.2 | ) |
| **Shareholders’                equity - U.S. GAAP**                    |   | **$**      | **916.6**   |   | $      | 986.6 |   |
| **Accumulated                other comprehensive income - Canadian GAAP**    |   | **$**      | **-**       |   | $      | - |   |
| U.S.                dollar revenue hedges                                    |   |       | **(0.7**    | **)**  |   | 4.5 |   |
| Employee                future benefits - adoption of FAS158                 |   |       | **(49.0**   | **)**  |   | - |   |
| Employee                future benefits - minimum pension liability          |   |       | **(33.7**   | **)**  |   | (41.6 | ) |
| **Accumulated                other comprehensive income - U.S. GAAP**        |   | **$**      | **(83.4**   | **)**  | $      | (37.1 | ) |

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

|   | **(a)** | **U.S.                dollar revenue hedges** |
|--------|---------|-----------------------------------------------|

|   | Under                Canadian GAAP, translation gains and losses on foreign currency options                and forward contracts to sell foreign currencies that are designated                as                hedges are recognized concurrently with the hedged revenue in “Sales”.                Prior to April 1, 2005, the Company did not designate its revenue                contracts as hedges for U.S. GAAP purposes. Effective April 1, 2005,                the                Company designated certain of its existing revenue contracts as hedges                in                accordance with criteria under U.S. GAAP and has, prospectively,                accounted                for them as hedges under U.S. GAAP. For U.S. GAAP purchases, undesignated                contracts are recorded at fair value with changes recognized in income.                Designated contracts are recorded at fair value with changes in fair                value                during the period of designation recorded in other comprehensive                income,                net of tax, until the hedged item is                recognized. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(b)** | **U.S.                dollar long-term debt                hedges** |
|--------|---------|---------------------------------------------------------------------|

|   | Under                Canadian GAAP, prior to January 1, 2004, the Company designated foreign                currency contracts related to its U.S. dollar debt as hedges. The                forward                premium or discount on forward foreign currency contracts used to                hedge                the U.S. dollar long-term debt was amortized to interest expense                over the                term of the forward contract. Effective January 1, 2004, foreign                currency                contracts related to U.S. dollar debt are not designated as hedges.                Under                U.S. GAAP, the Company does not account for such contracts as hedges                of                long-term debt and recognizes the foreign currency contracts on a                fair                value basis at each reporting                period. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(c)** | **Fixed                to floating interest swaps** |
|--------|---------|-----------------------------------------------------|

|   | Under                Canadian GAAP, unrealized gains and losses on interest rate swap                contracts                designated as hedges are not recognized in the financial statements.                Under                U.S. GAAP, the ineffectiveness of the hedge is quantified, and the                ineffective portion of the changes in fair value is recorded in interest                expense. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During                2003, the Company terminated prior to their maturity, certain interest                rate swap contracts for cash proceeds of $15.9 million. Under Canadian                GAAP, the net gain is deferred and is being amortized as a reduction                of                interest expense based on the U.S. swap curve at the time of termination.                Under U.S. GAAP, there is no deferred amount as the fluctuations                in the                fair value and interest payments are recognized in earnings as they                arise. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(d)** | **Commodity                swaps** |
|--------|---------|------------------------------------|

|   | Under                Canadian GAAP, prior to January 1, 2004, the Company accounted for                commodity swaps as hedges. Effective January 1, 2004, commodity swaps                are                not designated as hedges and are recognized at their fair value at                each                reporting date with changes in fair value in the year included in                consolidated net income (loss). Under U.S. GAAP, the Company does                not                designate commodity swaps as                hedges. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(e)** | **Employee                future benefits** |
|--------|---------|---------------------------------------------|

|   | Under                U.S. GAAP, for years ended December 31, 2006 and prior, if the accumulated                benefit obligation exceeds the market value of plan assets, a minimum                pension liability for the excess is recognized to the extent that                the                liability recorded in the balance sheet is less than the minimum                liability. Any portion of this additional liability that relates                to                unrecognized prior service cost is recognized as an intangible asset                while                the remainder is charged to comprehensive income (loss). Canadian                GAAP has                no such requirement to record a minimum                liability. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                September 2006, the Financial Accounting Standards Board (“FASB”) issued                Statement of Financial Accounting Standards No. 158, “Employers’                Accounting for Defined Benefit Pension and Other Post-retirement                Plans”.                This statement requires the recognition of the overfunded or underfunded                status of a defined benefit post-retirement plan as an asset or liability                in the balance sheet and changes in that funded status in the year                in                which the changes occur through comprehensive income. Additional                disclosures are also required. These requirements are effective as                of the                end of the fiscal year ending after December 15, 2006. This statement                also                requires the measurement of the funded status of a plan as of the                balance                sheet date, effective for fiscal years ending after December 15,                2008. The                company adopted the standard on December 31, 2006 and this resulted                in a                decrease to other assets of $1.5 million and an increase to other                long-term obligations of $69.6                million. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts          expressed in millions of dollars, except where otherwise          stated)**

|   | **(f)** | **Comprehensive                income** |
|--------|---------|-----------------------------------------|

|   | Statement                of Financial Accounting Standards No. 130, “Reporting Comprehensive                Income”, requires that a company classify items of other comprehensive                income in a financial statement and display the accumulated balance                of                other comprehensive income separately from retained earnings and                additional paid-in capital in the equity section of the balance sheet.                The                concept of comprehensive income exists under Canadian GAAP, but applies                to                fiscal years beginning on or after October 1, 2006 and applies to                the                Company in its 2007 fiscal year. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(g)** | **Future                income taxes** |
|--------|---------|----------------------------------------|

|   | Income                taxes for the year ended December 31, 2006 include a release of future                income taxes related to the reduction in future federal corporate                income                tax rate. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(h)** | **Consolidated                cash flows** |
|--------|---------|--------------------------------------------|

|   | Under                U.S. GAAP, the consolidated cash flows would not be significantly                different from the presentation under Canadian GAAP, except that                the U.S.                GAAP does not allow sub-totals within cash flows provided by                operations. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Cash                flows associated with hedging instruments are classified in “Operations”                on the consolidated statement of cash flows consistent with the hedged                transaction. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(i)** | **Accounting                standard issued but not yet                implemented** |
|--------|---------|--------------------------------------------------------------------------------------|

|   | FASB                Interpretation (FIN) NO. 48, “Accounting for Uncertainty in Income Taxes”                is effective for fiscal years beginning after December 15, 2006.                FIN 48                uses a more-likely-than-not threshold to determine recognition in                the                financial statements of an uncertain tax position. The                more-likely-than-not threshold means that a benefit related to an                uncertain tax position is recognized only when it is more-likely-than-not                that the position will be sustained based on its technical merits                and                where there is a greater than 50 per cent likelihood that the position                would be sustained if challenged by a tax authority. The tax position                is                measured as the largest amount of benefit that is greater than 50                per cent                likely of being realized upon settlement. The unresolved uncertain                tax                positions must be reassessed at each balance sheet date based on these                thresholds. The Company is currently in the process of evaluating                the                impact of this new accounting standard on its financial position,                results                of operations and cash flows. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***24.*** | ***SUBSEQUENT                EVENT*** |
|-----------|---------------------------------------|

|   | On                January 15, 2007, the Company’s board of directors announced that it has                accepted the resignations of Russell J. Horner, President and Chief                Executive Officer, and Ralph Leverton, Vice-President, Finance and                Chief                Financial Officer, who have elected to exercise the Agreements. The                recent                acquisition by TAM of control or direction over an additional 39                million                common shares of the Company, exceeding a 25% threshold established                under                the Agreements with the Company, constituted a change of control                under the                Agreements. Under the terms of the Agreements, Mr. Horner and Mr.                Leverton                are entitled to receive change of control and pension benefits totalling                $4.8 million and $1.6 million, respectively, on the date their employment                ends. Mr. Horner’s employment is expected to end following completion by                the Company of its annual statutory filings (expected to be mid-February)                and Mr. Leverton’s employment is expected to end March 28, 2007.  The                Company will record these costs in the first quarter of                2007. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts            expressed in millions of dollars, except where otherwise            stated)**

**CONSOLIDATED      STATEMENTS OF EARNINGS **

*(Audited      and in millions of dollars)*

|                                                                                                  |   | ***Years                ended December 31,*** |        |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-------------|
|                                                                                                  |   | ***2006***                                    |        | *2005* |   | *2004* |   | *2003* |   | *2002* |   |
| **Sales****1**                                                                                        |   | **$**                                         | **1,882.5** |   | $ | 1,823.9 |   | $ | 1,878.2 |   | $ | 1,820.5 |   | $ | 1,704.0 |   |
| Operating                expenses                                                                     |   |                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost                of sales1                                                                         |   |                                          | **1,609.3** |   |   | 1,611.0 |   |   | 1,674.9 |   |   | 1,687.5 |   |   | 1,582.1 |   |
| Selling,                general and administrative                                                    |   |                                          | **62.2**    |   |   | 57.7 |   |   | 50.5 |   |   | 54.7 |   |   | 65.3 |   |
| Amortization                                                                                          |   |                                          | **207.1**   |   |   | 180.3 |   |   | 184.1 |   |   | 189.9 |   |   | 178.5 |   |
|                                                                                                  |   |                                          | **1,878.6** |   |   | 1,849.0 |   |   | 1,909.5 |   |   | 1,932.1 |   |   | 1,825.9 |   |
| **Operating                earnings (loss)**                                                          |   |                                          | **3.9**     |   |   | (25.1 | ) |   | (31.3 | ) |   | (111.6 | ) |   | (121.9 | ) |
| Foreign                exchange gain (loss) on translation                of long-term debt           |   |                                          | **(0.3**    | **)** |   | 24.7 |   |   | 53.5 |   |   | 58.2 |   |   | 12.3 |   |
| Write-down                of property, plant and  equipment                                      |   |                                          | **-**       |   |   | - |   |   | - |   |   | (14.2 | ) |   | - |   |
| Loss                on repayment of long-term debt                                                    |   |                                          | **-**       |   |   | - |   |   | (5.2 | ) |   |  |   |   |   |   |
| Other                income (expense), net                                                            |   |                                          | **1.8**     |   |   | 4.5 |   |   | 1.2 |   |   | (3.9 | ) |   | (13.3 | ) |
| Interest                income (expense), net                                                         |   |                                          | **(73.8**   | **)** |   | (75.7 | ) |   | (74.9 | ) |   | (75.0 | ) |   | (76.2 | ) |
| **Earnings                (loss) before income taxes****and                non-controlling interest** |   |                                          | **(68.4**   | **)** |   | (71.6 | ) |   | (56.7 | ) |   | (146.5 | ) |   | (199.1 | ) |
| Income                tax expense (recovery)                                                          |   |                                          | **(54.0**   | **)** |   | (46.6 | ) |   | (28.1 | ) |   | (62.0 | ) |   | (75.8 | ) |
| Net                earnings (loss) before non-controlling                interest                     |   |                                          | **(14.4**   | **)** |   | (25.0 | ) |   | (28.6 | ) |   | (84.5 | ) |   | (123.3 | ) |
| Non-controlling                interest                                                               |   |                                          | **(1.5**    | **)** |   | (0.6 | ) |   | - |   |   | - |   |   | - |   |
| **Net                earnings (loss)**                                                                |   | **$**                                         | **(15.9**   | **)** | $ | (25.6 | ) | $ | (28.6 | ) | $ | (84.5 | ) | $ | (123.3 | ) |

----

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

*(Audited      and in millions of dollars)*

|                                                                                        |   | ***Years                ended December 31,*** |      |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|
|                                                                                        |   | ***2006***                                    |      | *2005* |   | *2004* |   | *2003* |   | *2002* |   |
| **Cash                provided (used) by:**                                                 |   |                                          |      |   |   |   |   |   |   |   |   |
| **Operations**                                                                              |   |                                          |      |   |   |   |   |   |   |   |   |
| Net                earnings (loss)                                                          |   | **$**                                         | **(15.9** | **)** | $ | (25.6 | ) | $ | (28.6 | ) | $ | (84.5 | ) | $ | (123.3 | ) |
| Items                not requiring (providing) cash                                         |   |                                          |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization                                                                                |   |                                          | **183.7** |   |   | 180.3 |   |   | 184.1 |   |   | 189.9 |   |   | 178.5 |   |
| Impairment                loss on property, plant and                equipment         |   |                                          | **23.4**  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Future                income taxes                                                          |   |                                          | **(56.1** | **)** |   | (51.6 | ) |   | (31.3 | ) |   | (67.9 | ) |   | (91.5 | ) |
| Increase                in other long-term obligations                                      |   |                                          | **40.5**  |   |   | 24.7 |   |   | 23.5 |   |   | 17.5 |   |   | 19.8 |   |
| Foreign                exchange loss (gain) on translation                of long-term debt |   |                                          | **0.3**   |   |   | (24.7 | ) |   | (53.5 | ) |   | (58.2 | ) |   | (12.3 | ) |
| Non-controlling                interest                                                     |   |                                          | **1.5**   |   |   | 0.6 |   |   | - |   |   | - |   |   | - |   |
| Write-down                of property, plant and                equipment                   |   |                                          | -         |   |   | - |   |   | - |   |   | 14.2 |   |   | - |   |
| Loss                on sale of Mackenzie pulp operations                                    |   |                                          | -         |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Write-off                of deferred financing costs                                        |   |                                          | -         |   |   | - |   |   | - |   |   | - |   |   | 15.8 |   |
| Loss                on repayment of long-term debt                                          |   |                                          | -         |   |   | - |   |   | 5.2 |   |   | - |   |   | - |   |
| Other                                                                                       |   |                                          | **(7.4**  | **)** |   | 0.8 |   |   | (10.5 | ) |   | (10.9 | ) |   | (7.6 | ) |
|                                                                                        |   |                                          | **170.0** |   |   | 104.5 |   |   | 88.9 |   |   | 0.1 |   |   | (20.6 | ) |
| Changes                in non-cash working capital                                          |   |                                          | **(8.6**  | **)** |   | (11.5 | ) |   | (24.4 | ) |   | 22.4 |   |   | 25.8 |   |
| Cash                flows provided by operations                                            |   |                                          | **161.4** |   |   | 93.0 |   |   | 64.5 |   |   | 22.5 |   |   | 5.2 |   |
| **Investing**                                                                               |   |                                          |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition                of paper recycling business                                      |   |                                          | **-**     |   |   | - |   |   | - |   |   | (32.1 | ) |   | - |   |
| Additions                to property, plant and equipment                                   |   |                                          | **(93.2** | **)** |   | (95.2 | ) |   | (68.0 | ) |   | (81.4 | ) |   | (82.2 | ) |
| Proceeds                from sale of marketable securities                                  |   |                                          | -         |   |   | - |   |   | - |   |   | - |   |   | 39.2 |   |
| Proceeds                from sale of property, plant and                equipment           |   |                                          | **3.5**   |   |   | 3.5 |   |   | 0.5 |   |   | 0.4 |   |   | 1.5 |   |
| Proceeds                from termination of interest rate swaps                             |   |                                          | -         |   |   | - |   |   | - |   |   | 15.9 |   |   | 3.4 |   |
| Purchase                price adjustment                                                    |   |                                          | **4.3**   |   |   | - |   |   | 26.6 |   |   | - |   |   | - |   |
| Decrease                (increase) in other assets                                          |   |                                          | **(0.4**  | **)** |   | (1.3 | ) |   | (0.9 | ) |   | 1.1 |   |   | (4.4 | ) |
| Cash                flows used by investing activities                                      |   |                                          | **(85.8** | **)** |   | (93.0 | ) |   | (41.8 | ) |   | (96.1 | ) |   | (42.5 | ) |
| **Financing**                                                                               |   |                                          |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issue                of common shares, net of shareissue                costs               |   |                                          | -         |   |   | - |   |   | - |   |   | (0.1 | ) |   | 208.1 |   |
| Increase                (decrease) in revolving loan                                        |   |                                          | **(6.5**  | **)** |   | 6.4 |   |   | (12.5 | ) |   | (105.7 | ) |   | 119.1 |   |
| Issue                of long-term debt                                                      |   |                                          | -         |   |   | - |   |   | 333.1 |   |   | 212.7 |   |   | - |   |
| Repayment                of long-term debt                                                  |   |                                          | -         |   |   | - |   |   | (266.1 | ) |   | - |   |   | (386.7 | ) |
| Premium                and expenses on repayment of long-term                debt           |   |                                          | -         |   |   | - |   |   | (15.0 | ) |   | - |   |   | - |   |
| Decrease                in other long-term obligations                                      |   |                                          | **(33.6** | **)** |   | (32.5 | ) |   | (30.0 | ) |   | (27.7 | ) |   | (8.0 | ) |
| Deferred                financing costs                                                     |   |                                          | -         |   |   | 0.1 |   |   | (6.2 | ) |   | (5.6 | ) |   | - |   |
| Cash                flows provided (used) by financing                activities            |   |                                          | **(40.1** | **)** |   | (26.0 | ) |   | 3.3 |   |   | 73.6 |   |   | (67.5 | ) |
| Net                increase (decrease) in cash and cash equivalents                    |   |                                          | **35.5**  |   |   | (26.0 | ) |   | 26.0 |   |   | - |   |   | (104.8 | ) |
| Cash                and cash equivalents at beginning of year                               |   |                                          | **-**     |   |   | 26.0 |   |   | - |   |   | - |   |   | 104.8 |   |
| **Cash                and cash equivalents at end of year**                                 |   | **$**                                         | **35.5**  |   | $ | - |   | $ | 26.0 |   | $ | - |   | $ | - |   |

----

**CONSOLIDATED      BALANCE SHEETS**

*(Audited      and in millions of dollars)*

|                                                    |   | ***As                at December 31,*** |        |
|---------------------------------------------------------|--------|-----------------------------------------|-------------|
|                                                    |   | ***2006***                              |        | *2005* |   | *2004* |   | *2003* |   | *2002* |   |
| **Assets**Current                assets                 |   |                                    |        |   |   |   |   |   |   |   |   |
| Cash                and cash equivalents                |   | **$**                                   | **35.5**    |   | $ | - |   | $ | 26.0 |   | $ | - |   | $ | - |   |
| Accounts                receivable                      |   |                                    | **277.9**   |   |   | 246.7 |   |   | 236.8 |   |   | 238.2 |   |   | 279.1 |   |
| Inventories                                             |   |                                    | **245.0**   |   |   | 245.7 |   |   | 258.1 |   |   | 235.9 |   |   | 242.7 |   |
| Prepaids                and other                       |   |                                    | **15.4**    |   |   | 24.1 |   |   | 24.6 |   |   | 21.9 |   |   | 9.2 |   |
|                                                    |   |                                    | **573.8**   |   |   | 516.5 |   |   | 545.5 |   |   | 496.0 |   |   | 531.0 |   |
| Property,                plant and equipment            |   |                                    | **2,023.1** |   |   | 2,139.3 |   |   | 2,172.9 |   |   | 2,290.2 |   |   | 2,326.6 |   |
| Other                assets                             |   |                                    | **40.8**    |   |   | 40.1 |   |   | 27.5 |   |   | 30.2 |   |   | 39.5 |   |
|                                                    |   | **$**                                   | **2,637.7** |   | $ | 2,695.9 |   | $ | 2,745.9 |   | $ | 2,816.4 |   | $ | 2,897.1 |   |
| **Liabilities**Current                liabilities       |   |                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts                payable and accrued liabilities |   | **$**                                   | **293.3**   |   | $ | 279.4 |   | $ | 285.5 |   | $ | 267.3 |   | $ | 303.7 |   |
| Long-term                debt                           |   |                                    | **854.5**   |   |   | 861.9 |   |   | 823.6 |   |   | 845.8 |   |   | 886.2 |   |
| Other                long-term obligations              |   |                                    | **214.7**   |   |   | 209.7 |   |   | 233.6 |   |   | 249.8 |   |   | 177.0 |   |
| Future                income taxes/deferred credits     |   |                                    | **269.4**   |   |   | 325.2 |   |   | 360.4 |   |   | 384.3 |   |   | 405.5 |   |
|                                                    |   |                                    | **1,631.9** |   |   | 1,676.2 |   |   | 1,703.1 |   |   | 1,747.2 |   |   | 1,772.4 |   |
| **Shareholders’                equity**           |   |                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share                capital                            |   |                                    | **913.6**   |   |   | 913.6 |   |   | 913.6 |   |   | 913.6 |   |   | 884.6 |   |
| Contributed                surplus                      |   |                                    | **9.3**     |   |   | 7.3 |   |   | 4.8 |   |   | - |   |   | - |   |
| Retained                earnings                        |   |                                    | **82.9**    |   |   | 98.8 |   |   | 124.4 |   |   | 155.6 |   |   | 240.1 |   |
|                                                    |   |                                    | **1,005.8** |   |   | 1,019.7 |   |   | 1,042.8 |   |   | 1,069.2 |   |   | 1,124.7 |   |
|                                                    |   | **$**                                   | **2,637.7** |   | $ | 2,695.9 |   | $ | 2,745.9 |   | $ | 2,816.4 |   | $ | 2,897.1 |   |

----

**OTHER      FINANCIAL AND OPERATION INFORMATION**

*(In      millions of dollars, except where otherwise stated))*

|                                                                                                   |   | ***Years                ended December 31,*** |      |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|
|                                                                                                   |   | ***2006***                                    |      | *2005* |   | *2004* |   | *2003* |   | *2002* |   |
| Selected                financial information                                                          |   |                                          |      |   |   |   |   |   |   |   |   |
| EBITDA1                                                                                                |   | **$**                                         | **211.0** |   | $ | 155.2 |   | $ | 152.8 |   | $ | 78.3 |   | $ | 56.6 |   |
| EBITDA                margin2                                                                          |   |                                          | **11.2**  | **%** |   | 8.5 | % |   | 8.1 | % |   | 4.3 | % |   | 3.3 | % |
| Weighted                average common shares outstanding                (in millions)                 |   |                                          | **214.6** |   |   | 214.6 |   |   | 214.6 |   |   | 206.6 |   |   | 193.4 |   |
| Basic                and diluted earnings (loss) per share                (in dollars)            |   | **$**                                         | **(0.07** | **)** | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.41 | ) | $ | (0.64 | ) |
| Working                capital3                                                                        |   | **$**                                         | **280.3** |   | $ | 237.1 |   | $ | 260.0 |   | $ | 228.7 |   | $ | 227.3 |   |
| Current                assets to current liabilities3                                                  |   |                                          | **1.95**  |   |   | 1.85 |   |   | 1.91 |   |   | 1.75 |   |   | 1.75 |   |
| Total                debt to total capitalization4,                5                                   |   |                                          | **46**    | **%** |   | 46 | % |   | 44 | % |   | 44 | % |   | 44 | % |
| Net                debt to net capitalization6,                7                                       |   |                                          | **45**    | **%** |   | 46 | % |   | 43 | % |   | 44 | % |   | 44 | % |
| Common                shares outstanding at end of year                (in millions)                   |   |                                          | **214.6** |   |   | 214.6 |   |   | 214.6 |   |   | 214.6 |   |   | 205.9 |   |
| Book                value per share (in dollars)                                                       |   | **$**                                         | **4.69**  |   | $ | 4.75 |   | $ | 4.86 |   | $ | 4.98 |   | $ | 5.46 |   |
| Share                prices                                                                            |   |                                          |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High                                                                                                   |   | **$**                                         | **3.60**  |   | $ | 4.26 |   | $ | 4.95 |   | $ | 6.06 |   | $ | 7.70 |   |
| Low                                                                                                    |   |                                          | **2.40**  |   |   | 2.40 |   |   | 3.30 |   |   | 2.93 |   |   | 4.65 |   |
| Close                                                                                                  |   |                                          | **3.55**  |   |   | 3.07 |   |   | 3.77 |   |   | 4.17 |   |   | 5.45 |   |
| Benchmark                prices8                                                                       |   |                                          |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| SC-A                paper, 35 lb. (US$ per ton)                                                        |   | **$**                                         | **788**   |   | $ | 769 |   | $ | 713 |   | $ | 675 |   | $ | 669 |   |
| LWC                paper, No. 5, 40 lb. (US$ per ton)                                                  |   |                                          | **836**   |   |   | 847 |   |   | 726 |   |   | 688 |   |   | 678 |   |
| Telephone                directory paper, 22.1 lb. (US$                per ton)                        |   |                                          | **721**   |   |   | 675 |   |   | 650 |   |   | 654 |   |   | 695 |   |
| Newsprint                48.8 gsm, average West Coast delivery                (US$ per tonne).    |   |                                          | **649**   |   |   | 600 |   |   | 544 |   |   | 493 |   |   | 456 |   |
| NBSK                pulp, Northern Europe delivery (US$                per tonne)                 |   |                                          | **681**   |   |   | 611 |   |   | 618 |   |   | 525 |   |   | 458 |   |
| White-top                linerboard, 42 lb., Eastern U.S. delivery                (US$ per tonne) |   |                                          | **673**   |   |   | 608 |   |   | 591 |   |   | 547 |   |   | 570 |   |
| Sales                (000 tonnes)9                                                                     |   |                                          |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty                paper                                                                         |   |                                          | **990**   |   |   | 943 |   |   | 994 |   |   | 967 |   |   | 848 |   |
| Newsprint                                                                                              |   |                                          | **699**   |   |   | 707 |   |   | 755 |   |   | 769 |   |   | 750 |   |
| Pulp                                                                                                   |   |                                          | **626**   |   |   | 603 |   |   | 528 |   |   | 539 |   |   | 493 |   |

|   | 1 | EBITDA                is a non-GAAP measure. Refer to the “Non-GAAP Measures” section in                Management’s Discussion and                Analysis. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2 | EBITDA                margin is defined as EBITDA as a percentage of                sales. |
|--------|---|--------------------------------------------------------------------------------------------|

|   | 3 | Working                capital and current assets to current liabilities, for these purposes,                exclude current portion of long-term                debt. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4 | Total                debt comprises long-term debt, including current                portion. |
|--------|---|-----------------------------------------------------------------------------------------------|

|   | 5 | Total                capitalization comprises total debt and shareholders’                equity. |
|--------|---|---------------------------------------------------------------------------------------------------------|

|   | 6 | Net                debt comprises total debt less cash on                hand. |
|--------|---|--------------------------------------------------------------------------------|

|   | 7 | Net                capitalization comprises net debt and shareholders’                equity. |
|--------|---|-----------------------------------------------------------------------------------------------------|

|   | 8 | Benchmark                selling prices are sourced from                RISI. |
|--------|---|-------------------------------------------------------------------------------|

|   | 9 | Effective                January 1, 2006, the Company reclassified containerboard to its pulp                segment from its specialty paper segment . Prior period comparatives                have                been reclassified to reflect this                change. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----