CATALYST
PAPER CORPORATION




ANNUAL
INFORMATION FORM




March 24,
2008














TABLE
OF CONTENTS








Documents
      Incorporated by Reference
            1Glossary
      of Terms
            1Forward
      Looking Statements
            1Incorporation
            2Corporate
      Profile
            3Three
      Year History
            5Competitive
      Strengths
            7Business
      Strategy
            9Lines
      of Business
            10Competition
            16Fibre
      Supply
            17Properties
            18Human
      Resources
            18Environment
            18Social
      Responsibility
            20Research
      and Development
            22Capital
      Expenditures
            22Capital
      Structure
            22Foreign
      Operations
            22Risk
      Factors
            22Legal
      Proceedings
            23Dividends
            23Ratings
            23Market
      for Securities
            25Material
      Contracts
            25Transfer
      Agent and Registrar
            27Audit
      Committee Information
            27Corporate
      Governance
            29Directors
      and Officers
            29Experts
            31Additional
      Information
            31Glossary
            32













CATALYST
      PAPER CORPORATION




ANNUAL
      INFORMATION FORM




(with
      respect to the year ended December 31,
2007)




DOCUMENTS
INCORPORATED BY REFERENCE




Certain
specifically identified sections of the audited consolidated financial
statements of Catalyst Paper Corporation for the fiscal year ended December 31,
2007 (the “2007 Financial Statements”), the report of the auditors thereon dated
February 5, 2008, except as to note 29 which is as of February 11, 2008, and
management’s discussion and analysis thereof (the “2007 Annual Report”) filed
with the securities commission or similar authority in each of the provinces of
Canada, are incorporated by reference into and form an integral part of this
Annual Information Form.  The Annual Report is available on SEDAR at
www.sedar.com.




GLOSSARY
OF TERMS




In this
Annual Information Form, unless otherwise specified, “Catalyst”, the
“Corporation”, “we”, “us”, and “our” refer to Catalyst Paper Corporation and its
subsidiaries and affiliates.  Unless otherwise indicated, all dollar
amounts are expressed in Canadian dollars.




A
Glossary of Terms is included on page 32.




FORWARD
LOOKING STATEMENTS




Certain
statements contained in this Annual Information Form are
forward-looking.  Forward-looking statements are statements, other
than statements of historical fact, that address or discuss activities, events
or developments that we expect or anticipate may occur in the
future.  These forward-looking statements can be identified by use of
words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”,
“likely”, “may”, “project”, “seek”, “will”, and similar expressions or the
negative thereof.




These
forward-looking statements reflect management’s current views and are based on
certain assumptions including assumptions as to future economic conditions and
courses of action, as well as other factors management believes are appropriate
in the circumstances.  Such forward-looking statements are subject to
risks and uncertainties and no assurance can be given that any of the events
anticipated by such statements will occur or, if they do occur, what benefit we
will derive from them.  A number of factors could cause actual
results, performance or developments to differ materially from those expressed
or implied by such forward-looking statements, including:




·
            the
      impact of general economic conditions in the United States and Canada and
      in other countries in which we do
business;




·
            market
      conditions and demand for our products and the outlook for inventories,
      production and pricing;




·
            expected
      cash flows, capital expenditures and completion of capital
      projects;




·
            business
      strategies and measures to implement
strategies;




·
            competitive
      strengths, goals, expansion and growth of our business and
      operations;




·
            fluctuations
      in foreign exchange or interest
rates;




·
            our
      ability to successfully obtain performance improvements and cost savings
      from our cost reduction
initiatives;




·
            labour
      unrest;




·
            fluctuations
      in the availability and cost of raw materials, including fibre and
      energy;




·
            implementation
      of environmental legislation requiring capital for operational
      changes;




·
            the
      availability of qualified personnel or
  management;




·
            the
      outcome of certain litigation or
disputes;




·
            conditions
      in the capital markets and our ability to obtain financing;
      and




other
factors, many of which are beyond our control, including those factors
identified under the heading “Risk Factors” in the management’s discussion and
analysis section of the 2007 Annual Report, which is incorporated herein by
reference.




Our
actual results, performance or achievements could differ materially from those
expressed in, or implied by, these forward-looking statements and, accordingly,
no assurance can be given that any of the events anticipated by the
forward-looking statements will occur, or if any of them do so, what benefits,
including the amount of proceeds, we will derive therefrom.  Catalyst
disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law.




INCORPORATION




We were
formed on September 1, 2001 by the amalgamation under the Canada Business Corporations
Act of Norske Skog Canada Limited and Pacifica Papers Inc.  On
October 3, 2005 we changed our name to Catalyst Paper Corporation.




Catalyst’s
principal predecessor was British Columbia Forest Products Limited, which was a
company formed by the amalgamation under the laws of the Province of British
Columbia on December 30, 1971 of its predecessor company, incorporated
by certificate of incorporation, with memorandum and articles, under the laws of
the Province of British Columbia on January 31, 1946, and 24 of its
wholly owned subsidiaries.   On September 2, 1988,
British Columbia Forest Products Limited changed its name to Fletcher Challenge
Canada Limited.   Prior to July 2000, 50.76% of Fletcher
Challenge Canada Limited was owned by Fletcher Challenge Limited of New Zealand
(“Fletcher Challenge New Zealand”).  In July 2000, Norske
Skogindustrier ASA completed a transaction with Fletcher Challenge New Zealand
whereby all of the business and assets of Fletcher Challenge New Zealand’s paper
division worldwide were acquired by Norske Skogindustrier ASA.  As
part of this transaction, Norske Skogindustrier ASA acquired Fletcher Challenge
New Zealand’s 50.76% interest in Fletcher Challenge Canada
Limited.  On December 15, 2000, Fletcher Challenge Canada Limited
changed its name to Norske Skog Canada Limited.




As a
result of the amalgamation with Pacifica Papers Inc. and subsequent equity
issues, Norske Skogindustrier ASA’s interest in Catalyst decreased to
29.4%.  On February 16, 2006 Norske Skogindustrier ASA sold its
remaining 29.4% interest in Catalyst by way of a secondary
offering.




Pacifica
Papers Inc.’s predecessor was Pacifica Papers Limited Partnership.  On
June 8, 1998 Pacifica Papers Limited Partnership, through its indirect wholly
owned subsidiary, Pacifica Papers Acquisition Company Ltd., acquired all the
shares of MB Paper Limited from MacMillan Bloedel Limited.  On March
12, 1999 the unitholders of Pacifica Papers Limited Partnership approved a
reorganization pursuant to which Pacifica Papers Limited Partnership changed its
corporate form from a partnership to a corporation.  As part of this
reorganization, 28,750,000 common shares of Pacifica Papers Inc. were
distributed to all the unitholders of Pacifica Paper Limited Partnership in
exchange for their partnership units on a one for one basis.




Our head
and registered office is located at 2nd Floor,
3600 Lysander Lane, Richmond, British Columbia,  V7B 1C3.




We own
all the issued and outstanding shares of the following principal
subsidiaries:




Corporation
            JurisdictionElk
      Falls Pulp and Paper Limited
            British
      ColumbiaCatalyst
      Paper Finance Limited
            British
      ColumbiaCatalyst
      Pulp Operations Limited
            British
      ColumbiaCatalyst
      Pulp Sales Inc.
            British
      ColumbiaCatalyst
      Pulp and Paper Sales Inc.
            British
      ColumbiaCatalyst
      Paper (USA) Inc.
            CaliforniaCatalyst
      Paper Holdings Inc.
            DelawarePacifica
      Papers Sales Inc.
            DelawarePacifica
      Poplars Ltd.
            British
      ColumbiaPacifica
      Poplars Inc.
            DelawarePacifica
      Papers U.S. Inc.
            Delaware




We are,
along with our subsidiary Catalyst Pulp Operations Limited, a partner of the
British Columbia general partnership Catalyst Paper.  We also own 50%
of Powell River Energy Inc., which owns hydroelectric assets that provide power
to our Powell River mill.




CORPORATE
PROFILE




We are a
leading North American producer of specialty mechanical printing papers and
newsprint.  Our specialty printing papers include lightweight coated
and uncoated mechanical grades such as soft-calendered, machine-finished
hi-brites and super-brites and telephone directory papers.  We are the
largest producer of specialty printing papers and newsprint, and the only
producer of lightweight coated paper, on the west coast of North America. We are
one of the largest producers of telephone directory paper in the
world.  We also produce market pulp and white top linerboard
(previously referred to as “kraft paper”) and we operate the largest paper
recycling operation in Western Canada.




Our four
pulp and paper operations are located in British Columbia, at Crofton and
Campbell River (Elk Falls) on the east coast of Vancouver Island, Port Alberni
on central Vancouver Island, and Powell River on the west coast of the British
Columbia mainland.  Our paper recycling operation is located in
Coquitlam, British Columbia.




The chart
below represents our expectation as to the division of total mill capacity in
2008, in thousands of tonnes, among the different product lines that can be
produced at each mill.  Some of our paper machines are capable of
producing more than one product line.





Mill
            
            Newsprint
            
            
            Directory
      Paper
            
            
            Other
      Uncoated Groundwood Specialties
            
            
            LWC
      Paper
            
            
            Paper
      Sub-total
            
            
            Market
      Pulp(1)
            
            
            White
      Top Liner Board
            
            
            Pulp
              Sub-total
            
            
            TotalCrofton
            
            
            150,000
            
            
            
            246,000
            
            
            
            -
            
            
            
            -
            
            
            
            396,000
            
            
            
            343,000
            
            
            
            -
            
            
            
            343,000
            
            
            
            739,000Elk
      Falls
            
            
            373,000
            
            
            
            -
            
            
            
            153,000
            
            
            
            -
            
            
            
            526,000
            
            
            
            200,000
            
            
            
            131,000
            
            
            
            331,000
            
            
            
            857,000Port
      Alberni
            
            
            -
            
            
            
            106,000
            
            
            
            -
            
            
            
            231,000
            
            
            
            337,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            337,000Powell
      River
            
            
            83,000
            
            
            
            -
            
            
            
            387,000
            
            
            
            -
            
            
            
            470,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            470,000Total
            
            
            606,000
            
            
            
            352,000
            
            
            
            540,000
            
            
            
            231,000
            
            
            
            1,729,000
            
            
            
            543,000
            
            
            
            131,000
            
            
            
            674,000
            
            
            
            2,403,000





(1)
            Our
      total pulp capacity is 698,000 tonnes, of which 155,000 tonnes is used
      internally, leaving 543,000 tonnes available to sell to third
      parties.




Our paper
recycling facility has a production capacity of 175,000 tonnes, the majority of
which is consumed internally.




Specialty
Papers




Our
specialty printing papers are manufactured on ten paper machines in British
Columbia at Crofton, Elk Falls, Port Alberni and Powell River.  The
specialty paper business segment has a total annual production capacity of
1,123,000 tonnes.




Specialty
printing paper products represent our largest business segment, generating 54%
of our 2007 consolidated sales revenue.  Our customer base consists
primarily of retailers, magazine and catalogue publishers, commercial printers
and telephone directory publishers.  Specialty printing paper products
are sold primarily through our sales and marketing personnel in North America,
and through distributors and agents in other geographic markets.  In
2007, 90% of specialty paper sales volumes were with customers in North
America.




Newsprint




Newsprint
is currently manufactured on five paper machines in British Columbia at Crofton,
Elk Falls and Powell River.  The newsprint business segment has a
current total annual production capacity of 606,000 tonnes.




Newsprint
sales generated 20% of our 2007 consolidated sales revenue.  The
newsprint customer base consists primarily of newspaper publishers located in
western and central North America and in Asia.  In 2007, 82% of our
newsprint sales volumes were with customers in North America, Asia and
Australasia.




Pulp




Our pulp
segment consists of northern bleached softwood kraft (“NBSK”) pulp manufactured
at the Crofton mill and sawdust-based pulp and containerboard manufactured at
the Elk Falls mill.   The pulp business segment has a total
annual market production capacity of 674,000 tonnes.




Pulp and
containerboard sales generated 26% of our 2007 consolidated sales
revenue.  The pulp customer base is located primarily in Europe and
Asia and includes producers of tissue, magazine papers, woodfree printing and
writing papers and certain specialty paper products.  The
containerboard customer base consists primarily of corrugated box
manufacturers.  Pulp and containerboard products are sold primarily
through sales and marketing personnel based in Canada, and through a network of
agents in locations throughout the world.  In 2007, 79% of our pulp
and containerboard sales volumes were with customers in Europe, Asia and
Australasia.




THREE
YEAR HISTORY




Announced
Snowflake Transaction and Related Rights Offering




On
February 11, 2008, we announced that we had entered into a definitive agreement
with a subsidiary of AbitibiBowater Inc. to acquire its Snowflake Arizona
recycled newsprint mill for cash consideration of US$161 million.  The
purchase price excludes trade receivables of approximately US$19 million that
are being retained by AbitibiBowater.  The acquisition will be
financed through a combination of our revolving credit facilities and a $125
million rights offering.  On February 29, 2008 we announced that we
had filed a final short form prospectus in each of the provinces of Canada in
connection with the rights offering.  Under the rights offering each
holder of record of our common shares as of the close of business on March 11,
2008 received one right for each common share held.  Each 1.285 rights
entitles the holder to purchase a subscription receipt of Catalyst for an
exercise price of $0.75 per subscription receipt.  Each subscription
receipt will be converted into a common share of Catalyst concurrent with the
closing of the Snowflake acquisition.  The rights offering and the
Snowflake transaction are expected to close in mid-April 2008.




British
Columbia Carbon Tax




On
February 20, 2008 the British Columbia government announced a broad-based carbon
tax on fossil fuels, commencing July 1, 2008.  The initial tax rate
will be $10 per tonne of carbon-dioxide equivalent emissions, increasing in $5
per tonne increments each year to reach $30 per tonne by 2012. The tax will
apply to gasoline, diesel fuel, natural gas and other fossil
fuels.  We are a significant consumer of fossil fuels, both directly
in our operations and through our reliance on fossil fuel powered transportation
for the delivery of products and supplies.  Although the government
has stated its intention that the carbon tax be, in the aggregate, revenue
neutral, it is unlikely that we will be able, in the short term, to take
advantage in a material way of other tax initiatives designed to offset the
carbon tax.  We expect that the tax will increase our operating costs
in the second half of 2008 by approximately $3 million, increasing in future
years, depending on our ability to decrease our use of fossil fuel.




Manning
and Cost Reductions




During
2007 we implemented a corporate restructuring which resulted in the reduction of
approximately 565 positions across the company, centralization of certain
functions to Nanaimo, British Columbia and the relocation of our head office to
Richmond, British Columbia.  This program was substantially completed
during the year and is expected to deliver total annualized cost savings of
approximately $67 million.  In 2007, total restructuring costs for
this program were $58.3 million, including $3.6 million of capital
expenditures.




We are
exploring options to monetize certain non-core assets, including surplus real
estate and our 50.00% interest in Powell River Energy Inc.




Production
Curtailment due to Fibre Supply Limitations




Due to
fibre supply limitations caused by a United Steelworkers strike affecting
certain coastal logging and sawmilling operations, we partially curtailed pulp
and paper production at our Elk Falls mill and pulp production at our Crofton
mill effective August 31, 2007.  From September 1, 2007 to December
31, 2007 these curtailments resulted in an aggregate reduction of 106,100 tonnes
of paper production and 44,200 tonnes of pulp and containerboard production at
the Elk Falls mill and 10,500 tonnes of pulp at the Crofton
mill.  Although the strike ended on October 21, 2007 fibre related
shortages continued to affect production and on November 26, 2007 we announced
that Elk Falls paper machine No. 1 would remain down for the first quarter of
2008.  This is expected to reduce our newsprint production by a
further 38,200 tonnes to the end of March 2008.  Curtailment of Elk
Falls paper machine No. 1 will continue into the second quarter of
2008.




Poor
lumber market conditions in 2007 resulted in the curtailment or permanent
shutdown of a number of sawmills, tightening our fibre supplies and increasing
our fibre costs.  Lumber markets continued to deteriorate in early
2008 and the amount of sawmill curtailment in British Columbia and across North
America is expected to increase.  On February 7, 2008, TimberWest
Forest Corp., one of our suppliers, announced the permanent closure of its
Campbell River sawmill, effective May 9, 2008.  Our Elk Falls mill is
adjacent to this sawmill and receives all the chips, sawdust and hog fuel that
it produces.  TimberWest has agreed to supply logs to us to replace a
portion of the lost chip supply that will occur once the sawmill is shut,
however, these logs are unlikely to be converted into chips until lumber market
conditions and sawmill activity increases.  We expect to lose the
equivalent of approximately 60,000 tonnes of paper production or 35,000 tonnes
of pulp production (depending on the allocation of remaining fibre supplies) in
the second half of 2008 as a result of this closure.  As a result of
all of these factors, a tight fibre supply situation is expected to continue
into 2008 and this will likely require additional production
curtailment.




Port
Alberni Production Restructuring




In
September 2007 we indefinitely shut down paper machine No. 4 at Port Alberni
(“PM4”).  This displaced 134,000 tonnes per year (45.0 gsm equivalent)
of our least profitable newsprint business and reduced our highest cost fibre
and power requirements.




On
February 13, 2008 we announced a $12 million investment in the thermo-mechanical
pulp facility at our Port Alberni mill and the restart, by mid-year 2008, of
PM4.  The PM4 restart will be accompanied by a new labour agreement
with the union locals at the Port Alberni mill, resulting in $14 million of
early retirement and severance payments.  We expect the capital
upgrade and new labour agreement will result in lower operating costs at the
mill.




In March,
2006 we permanently closed paper machine No. 3 at our Port Alberni mill, which
had been indefinitely idled since February 2006.  This closure
displaced 140,000 tonnes per year of 45.0 gsm equivalent paper production as we
shifted the directory production from this machine to other paper machines that
we own.  In September 2007 we sold paper machine No. 3 and ancillary
assets for $1.3 million and recorded a loss on disposal of $7.4
million.




Executive
Changes




In the
first quarter of 2007 the then President and Chief Executive Officer and
Vice-President, Finance and Chief Financial Officer elected to exercise their
rights under change of control agreements, which were triggered by the
acquisition referred to below under “Acquisition of Common Shares by Third
Avenue Management LLC” and resigned from the Company.  Mr. Richard
Garneau was appointed President and Chief Executive Officer effective March 26,
2007 and Mr. David Smales was appointed Acting Vice-President, Finance and Chief
Financial Officer effective March 28, 2007 and Vice-President, Finance and Chief
Financial Officer effective April 24, 2007.  Mr. James Armitage,
Senior Vice President, Sales and Marketing, left the company in May, 2007 and
effective September 6, 2007 Mr. Tom Crowley was appointed Senior Vice President,
Sales and Marketing.  Effective January 8, 2008 Mr. Stephen Boniferro
was appointed Senior Vice President, Human Resources, replacing Mr. Ferio
Pugliese who resigned in February, 2007.




Acquisition
of Common Shares by Third Avenue Management LLC




In
October, 2006 Third Avenue Management LLC (“TAM”) acquired an additional
39,000,000 common shares of Catalyst pursuant to an unsolicited take-over
bid.  On October 23, 2006 TAM announced that, as a result of such
acquisition, client accounts managed by TAM beneficially owned 81,503,313 common
shares of Catalyst, representing 37.97% of the outstanding common shares, and
that TAM exercised control or discretion over such shares as portfolio
manager.  TAM also announced that it had authority to vote
approximately 95% of such shares.  As at March 7, 2008 client accounts
managed by TAM own in the aggregate 75,973,059 Common Shares representing
approximately 35.39% of the issued and outstanding Common Shares, and TAM has
voting control over 70,797,911 Common Shares, representing 32.98% of the issued
and outstanding Common Shares.




Curtailment
of Port Alberni Groundwood Mill




Effective
September 30, 2006 we temporarily idled our Port Alberni groundwood pulp mill,
replacing higher-cost groundwood pulp with recycled fibre.  In the
fourth quarter, we determined that this closure was permanent due to the
successful transition to recycled fibre and we wrote off approximately $0.8
million of ancillary assets to cost of sales in the specialty paper
segment.




Disposition
of Shares by Norske Skogindustrier ASA




Effective
February 16, 2006, Norske Skogindustrier ASA (“Norske Skog”) sold its 29.4%
shareholding in Catalyst.  Concurrently, the three directors from
Norske Skog resigned from our Board of Directors.  Norske Skog had not
been involved in the management of Catalyst since 2001, and the shareholder
transaction did not impact our operations, or our current distribution agreement
with Norske Skog PanAsia.  We did not receive any proceeds related to
this transaction.




Extension
of Operating Facility




During
the second quarter of 2006, the maturity of our revolving operating facility was
extended by one year to July 2009.




Change
of Corporate Name




On
October 3, 2005 we changed our name from Norske Skog Canada Limited to Catalyst
Paper Corporation.




Dissolution
of Joint Venture




Effective
October 1, 2005 we dissolved a joint venture arrangement with Norske Skog, which
was formed in 2001 to collectively market our specialty paper products in North
America.  As a result of this dissolution, we began marketing our
specialty papers directly to North American customers.




COMPETITIVE
STRENGTHS




We
believe that we have the following competitive strengths:




•
            Strong Market
      Position.  We are the largest producer of mechanical
      printing papers (newsprint and specialty printing papers) on the west
      coast of North America.  We are the only producer of lightweight
      coated paper on the west coast.  We are the one of the largest
      producers of directory paper in the world.  We have annual
      production capacity of approximately 2.4 million tonnes of specialty
      paper, newsprint, market pulp and containerboard.  In addition,
      we operate the largest paper recycling operation in Western
      Canada.




•
            Diversified Product
      Mix and Product Development.  In recent years, we have
      expanded the number of grades we manufacture and market.  We
      have introduced product lines which include ElectraprimeTM (an “SCA”
      alternative), ElectrastarTM (a super-brite) and Electrabrite Lite (a
      lightweight hi-brite).  Our ElectraprimeTM grade is a
      soft-calendered, high-brightness paper designed to compete as an
      alternative to traditional supercalendered grades.  It is used
      primarily for advertising inserts and flyers.  Our ElectrastarTM
      product is a super high-brightness grade designed for applications in
      which brightness is a desirable characteristic such as inserts and
      specialty newspapers.  Electrabrite Lite is a lighter basis
      weight, high brightness product that is used by newspapers and
      retailers.  All three product lines have been well received in
      the market.  These newer and more specialized products generally
      provide higher margins than standard commodity grades.  We
      manage fluctuations in demand for our products through our ability to
      switch production between products, particularly newsprint, directory, and
      machine-finished uncoated mechanical
grades.




•
            Upgraded,
      Cost-Competitive Manufacturing Facilities.Our financial results are driven
      by our manufacturing costs, particularly with respect to fibre prices and
      mix, energy prices and usage and labour costs.  We are focused
      on reducing these costs, while maintaining or improving the quality of our
      products.  Over the past five years, capital expenditures of
      approximately $423 million have been directed primarily towards shifting
      production towards higher-margin papers, reducing unit production costs,
      increasing machine productivity, improving product quality, increasing
      capacity, and meeting or exceeding environmental
      regulations.  In addition, over the last several years, we have
      developed expertise in the production of lightweight
      papers.  Lower basis weight papers reduce our costs by
      decreasing fibre, shipping, and storage and handling
      expenses.




•
            Strong Supply Chain
      Management Practices.  Distribution costs have a
      significant impact on net sales realizations. Our strong and flexible
      distribution network optimizes all transportation modes available to it,
      such as truck, rail, and container and break-bulk shipping.  We
      control key elements of the supply chain.  Our mill sites
      directly ship break bulk paper and pulp to offshore customers via
      regularly scheduled vessels.  We operate a central distribution
      centre in Surrey, BC which continuously receives volumes from its four
      manufacturing sites and then ships via rail, truck and container to its
      customers.  This allows us to choose the most cost effective
      transportation mode in conjunction with customer
      requirements.  We lease 980 rail cars and we lease five paper
      barges which we use in conjunction with third party providers to transport
      our products to the Surrey distribution centre.  Controlling key
      elements of our supply chain have allowed us to achieve a high on time
      performance and low damage level.




•
            Production
      Expertise.  Over the last several years, we have
      developed expertise in the production of lightweight papers.  As
      part of this process we have converted all our paper mills to alkaline
      papermaking, which uses lower-cost precipitated calcium carbonate, or PCC,
      fillers in the production process.  In addition to being a
      lower-cost input, the PCC filler leads to improved brightness and opacity,
      which facilitates the production of papers with a lower basis
      weight.  We believe that lower basis weight papers provide us
      with an important competitive advantage because a higher volume of lower
      basis weight paper can be stored on each paper roll, thereby reducing
      shipping, storage and handling costs and warehouse space required for
      inventories.  The use of lower basis weight paper by our
      customers reduces their postage costs. Lower basis weight papers also
      provide a positive environmental impact as they use less
      fibre.




•
            Sawdust Pulp
      Expertise. We are one of the few manufacturers of sawdust-based
      pulp in the world.  This product is valued by producers of
      tissue and wood-free printing papers as a substitute for more costly NBSK
      pulp.  High initial tensile strength and ease of refining are
      other attributes of this type of
pulp.




BUSINESS
STRATEGY




We intend
to achieve greater earnings stability and to maximize cash flow by strengthening
our position as a leading producer of value-added mechanical paper and related
forest products within western North America.  Key principles of our
strategy include:




•
            Performance
      Improvement Program.  One of the characteristics of our
      culture is that of engaging our people in projects that challenge the
      status quo.  We have for several years aggregated these
      initiatives on an annual basis into a performance improvement
      program.  Performance improvement initiatives challenge our
      employees to create innovative and cost-effective business
      solutions.  Early in 2007, we commenced our sixth consecutive
      annual performance improvement program.  Improvements were
      targeted in the areas of workforce reductions, grade development and
      product optimization, and other cost reduction initiatives.  In
      2007, the program delivered $81 million in realized
      improvements.




•
            Optimizing Fibre Mix
      to Reduce Costs.  We intend to continue to use low cost
      PCC filler and sustain low kraft input while maintaining the quality of
      our products and improving printability.  In 2005, we reduced
      the amount of kraft used in our specialty and newsprint products by 40%
      compared to 2004 and sustained these low kraft levels in 2006 and
      2007.  In December 2003, we acquired Western Canada’s largest
      paper recycling facility.  This acquisition allowed us to exit a
      higher-cost, long term de-inked pulp contract with the facility’s previous
      owner.  Subsequently, we have improved the value of this
      acquisition by utilizing an additional 25,000 air-dried metric tonnes of
      production capability and by realizing synergies related to chemical
      purchases and freight optimization




•
            Become the Preferred
      Supplier for our Customers.  In 2007, we focused further
      on advancing our preferred supplier status with key customers by
      continuing to improve the consistency, runnability and reliability of our
      products, and our on-time delivery service. As a result, we were able to
      maintain low quality claims in 2007.  We have continued using an
      “independent chain-of-custody” system to certify our wood fibre
      supply.  The PricewaterhouseCoopers standard that we use is a
      third-party audited system that verifies fibre is derived from a forest
      managed in accordance with the requirements of a major sustainability
      certification program. The independent chain-of-custody system tracks the
      fibre from source to finished product and provides a valuable tool to
      assure customers that paper contains fibre originated from well-managed
      forests.  It is expected to continue to result in additional
      sales opportunities.  In 2007, we launched “Catalyst Cooled”, a
      product line whose manufacture results in no net carbon
      emissions.  This product is designed for customers who do not
      want their paper to contribute to carbon
  emissions.





LINES
      OF BUSINESS




We have
three business segments:  specialty paper, newsprint and
pulp.  The segmented results for these businesses are shown in our
2007 Management’s Discussion and Analysis, which is incorporated by reference
herein.




Paper




Paper
Operations




Our
specialty paper and newsprint can be manufactured on 11 paper machines at four
mill locations.  Our paper machines consist of the
following:




Crofton
            ProductPaper
      Machine No. 1 (“PM1”)
            Specialty/NewsprintPaper
      Machine No. 2 (“PM2”)
            SpecialtyPaper
      Machine No. 3 (“PM3”)
            Specialty/NewsprintElk Falls
            ProductPaper
      Machine No. 1 (“PM1”)
            Specialty/NewsprintPaper
      Machine No. 2 (“PM2”)
            SpecialtyPaper
      Machine No. 5 (“PM5”)
            NewsprintPort Alberni
            ProductPaper
      Machine No. 4 (“PM4”)
            SpecialtyPaper
      Machine No. 5 (“PM5”)
            Specialty
      (Coated)Powell River
            ProductPaper
      Machine No. 9 (“PM9”)
            SpecialtyPaper
      Machine No. 10 (“PM10”)
            SpecialtyPaper
      Machine No. 11 (“PM11”)
            Specialty/Newsprint




Our
capacity to produce specialty papers and newsprint, in thousands of tonnes,
as compared to our production for each of the last two years is as
follows:





Net
      ProductionYear
      ended December 31Mill
            
            Annual
      Capacity
            
            
            2007
            
            
            2006Crofton
            
            
            396
            
            
            
            379
            
            
            
            403Elk
      Falls
            
            
            526
            
            
            
            410
            
            
            
            523Port
      Alberni
            
            
            337
            
            
            
            284
            
            
            
            324Powell
      River
            
            
            470
            
            
            
            455
            
            
            
            4381,729
            
            
            
            1,528
            
            
            
            1,688







Crofton




Crofton's
capacity is 396,000 tonnes of newsprint and directory paper.  On a
48.8 gsm equivalent basis the annual capacity of the Crofton paper operations is
approximately 531,000 tonnes.




The
Crofton paper mill’s three paper machines were put in operation in 1964, 1968
and 1982.  PM1 and PM3 are capable of producing either newsprint or
directory paper as market conditions warrant and PM2 is only capable of
efficiently producing directory paper.  All machines were installed
with, or have been converted to, twin-wire sheet formation, which provides a
more uniform quality of sheet for both printing surfaces.




To
further our objective to produce highly runnable directory paper, we completed
$16 million in modifications to PM2 in May 1999. These modifications
enable the Crofton mill to produce an innovative directory paper at the lowest
industry basis weight.  This directory paper has improved consistency,
runnability and printability.  Crofton also makes directory paper on
PM3 and has the capability to make it on PM1.




Pulp
furnish for the paper mill is supplied by a three-line thermomechanical pulp
(“TMP”) mill, consisting of Andritz twin mainline refiners, and de-inked pulp
from our paper recycling division.  In August 2003, we completed an
$11 million upgrade to increase the capacity of the TMP facility and improve the
quality of the pulp in order to lower production costs for lightweight paper
manufactured at the Crofton mill.  In 2004 we began work on a $10
million investment in the thermomechanical pulp facility.  This work
was completed in 2005 and has resulted in improvements in capacity, quality, and
the elimination of kraft pulp from Crofton’s papermaking
operations.




Of the
$16 million spent in 2006 to support Crofton’s paper operations, the largest
project was an initiative to change the way de-inked pulp was shipped to and
handled at the mill.  The project allows operations to handle de-inked
pulp in crumb form, resulting in less intensive handling of de-inked pulp and a
reduction in operating labour.  An additional $6 million was spent in
2007 to complete this project.




Also in
2007, approximately $4.5 million was spent on PM1 to upgrade the dryer system
which has resulted in increased productivity due to higher machine speeds and a
reduction in drying steam.  This upgrade has also enabled the machine
to make lighter basis weight paper.




Elk
Falls




Elk
Falls' annual capacity is 526,000 tonnes of newsprint and uncoated specialty
printing papers.  On a 48.8 gsm equivalent basis, the annual capacity
of the Elk Falls paper operations is approximately 552,000 tonnes.




The three
paper machines were put into operation in 1952, 1957 and 1982 and produce
newsprint, soft calendered and machine finished high brightness specialties
papers.  All machines were installed with, or converted to, twin-wire
sheet formation.




Elk Falls
has broadened its range of uncoated mechanical specialty printing papers to meet
the needs of commercial printers.  The mill has met the demand for
better quality through equipment upgrades to produce a cleaner, more refined
pulp furnish.  The soft-nip calendering system on PM2 provides for
improvements to the sheet’s smoothness and printability.  Glossy high
bright specialty papers marketed under the ElectraSoftTM
and ElectraCalTM
labels produced from this machine are used mainly by the commercial print
market for advertising flyers and newspaper supplements.  We are the
largest supplier of soft-calendered papers on the west coast of North
America.




Pulp
furnish for the paper mill is supplied primarily from the mill's seven-line
thermomechanical pulp mill and a minimal amount from its semi-bleached kraft
pulping facilities.




Port
Alberni




Port
Alberni's annual capacity is 337,000 tonnes of directory paper and
lightweight coated paper.  Port Alberni's annual paper capacity on a
48.8 gsm equivalent basis is approximately 349,000 tonnes.




The Port
Alberni paper mill has two paper machines.  One of the paper machines
was put into operation in 1957, and the other paper machine was put into
operation in 1968.  In September 2007 we indefinitely curtailed PM4,
displacing 134,000 tonnes of 45.0 gsm equivalent paper production.  In
February, 2008 we announced the re-start of PM4, effective mid-year
2008.  At the same time, we announced our intention to invest $12
million in an upgrade to the mill’s thermomechanical pulp facility.




PM5 is
the only lightweight coated paper machine in western North
America.  Its on-line technology allows for the coating of paper on
both sides simultaneously, reduces the amount of kraft pulp required to produce
conventional lightweight coated paper and produces the desired product quality
in terms of runnability, printability and bulk.




Pulp
furnish for the paper mill is supplied primarily from the mill's
thermomechanical pulp plant, from our paper recycling operation and from kraft
pulp supplied from the Crofton mill.  In 2006, we announced the
permanent closure of the groundwood pulp mill. The groundwood pulp was replaced
with recycled fibre from our paper recycling operation in order to provide fibre
to PM4. We have installed equipment at the Port Alberni mill to allow us to use
crumb recycled fibre from our Paper Recycle Division in telephone directory
paper and crumb kraft pulp from the Crofton millin our
lightweight coated paper.




Powell
River




Powell
River's annual capacity is 470,000 tonnes of newsprint and uncoated specialty
papers. On a 48.8 gsm equivalent basis, the annual capacity of Powell River’s
paper operations is approximately 464,000 tonnes.




The
Powell River mill has three paper machines, which were put into operation in
1957, 1967 and 1981.  These machines produce machine finished
super-brites and hi-brites, soft calendered hi-brite papers and
newsprint.  In 2004, we completed a $7.5 million upgrade of PM10 and
the peroxide bleach plant to support the production of higher value specialty
printing papers, including ElectracalTM
and ElectraprimeTM
grades.  We have dedicated PM9 to produce ElectrastarTM
and ElectrabriteTM
grades, our super-brite and hi-brite grades, respectively.  We
continue our effort to push towards the development of highbrightness products
at our Powell River mill, and in 2005 we completed a further upgrade of the
peroxide bleach plant at a cost of approximately $5 million to expand the mill’s
production capacity for higher brightness uncoated specialty
grades.




In 2006,
Powell River completed a $5.6 million project to by-pass the existing primary
effluent clarifier which, because of reductions in mill effluent flows over the
years, was too large to efficiently process that effluent. This
environmentally-driven project was based on reducing the foul odours which
emanated from the over-sized clarifier.




Pulp
furnish for the paper mill comes primarily from a thermomechanical pulp
plant.  In November, 2001, we permanently closed Powell River’s kraft
pulp mill, which consumed a high-cost fibre diet resulting in higher unit costs
compared to our other two pulp mills at Elk Falls and Crofton.  In
addition, the pulp mills at Elk Falls and Crofton have roughly twice the
capacity of the Powell River pulp mill.  We now supply the kraft pulp
requirements of the paper machines at Powell River from our Crofton
facilities.




The
Powell River mill has the capability to use recycled de-inked pulp on a limited
scale.  Recycled de-inked pulp is supplied from our paper recycling
operation.




We own
50% of Powell River Energy Inc., or Powell River Energy, which owns two
hydroelectric dams near the Powell River mill with a combined generating
capacity of 82 megawatts.  Pursuant to a power purchase agreement
between us and Powell River Energy, Powell River Energy will provide the power
generated by its facilities to us at a fixed rate approximating current British
Columbia Hydro and Power Authority rates until 2011.  Powell River
Energy's hydroelectric facilities supply approximately 40%of the annual power
needs of the Powell River mill, although this amount varies depending on
hydrological conditions.




Paper
Marketing




The
principal customers for our specialty printing papers and newsprint are
retailers, magazine and catalogue publishers, commercial printers, telephone
directory publishers, newspaper publishers and corrugated box manufacturers, and
are located primarily in western and central North America, Asia and Latin
America.  Specialty and newsprint customers are served primarily by
our sales and marketing personnel in North America and distributors and agents
in other geographic markets.  Historically, approximately two-thirds
of our paper sales revenue has been generated from sales to customers in the
United States.  The United States is the world's largest consumer of
newsprint, with consumption of approximately 7.844 million tonnes in 2007,
representing about 21% of total world consumption.




For the
years ended December 31, 2007 and 2006, specialty paper and newsprint
accounted for 73% and 77% of our consolidated net sales revenue,
respectively.  No single customer accounts for more than 10% of our
specialty and newsprint consolidated net sales revenue nor is a material part of
our revenuesdependent on a small
group of customers.  Specialty paper and newsprint markets are not
subject to significant seasonal fluctuations.




The
Crofton and Elk Falls mills are located on tidewater and have deep-sea vessel
loading facilities.  Specialty paper and newsprint is shipped
primarily by deep-sea vessel, and by a combination of ship, barge, rail and
truck for inland destinations.  We use the services of independent
warehouses for distribution to our customers in other parts of the
world.




We have
built effective long-term relationships with our customers for our specialty
papers and newsprint, based on a partnership approach to produce the best
product for their particular needs.  As a result, we expect to remain
a preferred supplier to many of those customers.




Pulp




Pulp
Operations




We
manufacture market pulp at our Crofton pulp and paper mill and both market pulp
and containerboard at our Elk Falls pulp and paper mill, located in British
Columbia on the east coast of Vancouver Island.




Our
market pulp and containerboard capacity, in thousands of tonnes, as
compared to our production for each of the last two years is
as follows:




Year
      ended December 31Mill
              Annual Capacity
              
              2007 Production
              2006 ProductionMarket
      pulp (1)
              
              Crofton
              343
              
              326
              321Elk
      Falls
              200
              
              164
              178543
              
              490
              499Containerboard
              
              Elk
      Falls
              131
              
              113
              125Total
              
              
              674
              
              603
              624




(1)
            Our
      total pulp capacity is 698,000 tonnes, of which 155,000 tonnes is used
      internally, leaving 543,000 tonnes available for sale to third
      parties.





Crofton




The
Crofton kraft pulp mill is a two-line mill.  The first line began
operating in 1957 and the second in 1965.  At December 31, 2007 total
annual pulp production capacity was 392,000 tonnes, of which 343,000 tonnes was
market pulp capacity.  This mill is equipped with one continuous
digester and eight batch digesters, which provide the flexibility to cook
different species of chips independently. Crofton's batch digesters utilize a
rapid displacement heating cooking system.  This system allows for
quick turnaround in the batch cooking process, because it rapidly extracts and
replaces the cooking liquor in the cooking vessel for each batch without a
significant loss in temperature.  This technology improves the overall
quality of Crofton pulps and provides a stronger and more uniform pulp than
conventional cooking.




The
Crofton kraft pulp mill produces Northern bleached softwood kraft, or NBSK pulp
grades.   One grade is a low coarseness fine fibre
pulp.  This pulp is consumed internally at our Port Alberni and Powell
River operations and sold to market customers.  This pulp is a high
tensile grade which is ideally suited for the manufacture of lightweight
papers.  The other pulp grades produced are made from spruce, pine and
fir (SPF), coastal hemlock and Douglas fir species.  These grades have
high intrinsic strength and bulk, and is used in a variety of printing and
writing papers and a range of specialty papers.




In 2005
we spent $3 million at our Crofton kraft pulp mill to install a crumb pulp
handling process, reducing energy use on the kraft pulp used
internally.  This installation has allowed us to free up drying
capacity for our market pulp business and, as a result, we are able to produce
an additional 25,000 tonnes of market pulp a year.




Elk
Falls




The Elk
Falls kraft pulp mill was initially commissioned in 1956, and its sawdust based
pulp production began in 1964. The mill has been modernized to meet or exceed
current environmental standards and to improve operating efficiency and
costs.




The Elk Falls kraft pulp mill is
equipped with five batch digesters and two continuous digesters and has a total
annual market pulp capacity of 200,000 tonnes.  The mill manufactures
a sawdust-based pulp branded Elk PrimeTM.  Elk PrimeTMis a fully bleached pulp that is
manufactured from a combination of sawdust, wood shavings and chip
screenings.  Blending of these residuals produces a pulp with an
average fibre length between that of conventional softwood and hardwood
pulps.  Elk PrimeTMis easy to refine, delivers high
initial tensile strength and, when added to a paper makers’ furnish, enhances
dimensional stability in woodfree printing papers.  Manufacturers of
products such as specialty papers, tissue, paper toweling, printing and writing
and other paper products can substitute Elk PrimeTMfor portions of their conventional
NBSK pulp feedstock, realizing cost savings without compromising
quality.  Elk Falls uses some sawdust-based pulp in producing its
specialty brands of white-top linerboard, which are sold to customers who
manufacture corrugated containers that require high quality
graphics.




All of
the kraft pulp operations are equipped with chlorine dioxide bleaching systems
and secondary effluent treatment facilities.




The Elk
Falls mill has annual containerboard production capacity of approximately
131,000 tonnes. The containerboard machine was put into operation in 1966.
Whitetop linerboard, which is produced by the containerboard specialties machine
(PM4), is a premium product that combines a layer of unbleached kraft pulp with
a layer of bleached kraft pulp.  The two layers are formed on the
paper machine by uniting the bleached and unbleached stock into what is known as
a duplex stock.  This specialty product is white on the top and brown
on the reverse side and is used in packaging where bright, high quality graphics
are important.  Elk Falls’ competitive advantage in producing this
product stems from its ability to produce a lightweight, high-performance
sheet.  The inclusion of sawdust-based pulp in the furnish also
results in a smoother, more consistent surface which performs better in
customers’ conversion facilities.




Production
of whitetop linerboard grades totaled approximately 109,000tonnes, or 96%, of
production from the Elk Falls containerboard machine for the year ended December
31, 2007.  The majority of this product is marketed under the brand
name SilverLinerTM.




The
furnish for the containerboard specialties produced at Elk Falls is comprised of
long-fibre pulp, alternative fibre sources such as sawdust-based pulp and
rejects from the Elk Falls kraft pulp mill, as well as clippings received from
converting plants and post-consumer waste.  Elk Falls also purchases a
limited quantity of high quality hardwood kraft pulp in order to enhance the top
sheet quality of our containerboard product line.




In 2004,
we completed a $45 million upgrade of the Elk Falls No. 2 recovery boiler to
increase capacity and maintain reliability.  This upgrade allowed the
permanent shut down of the smaller recovery boiler, a lime kiln and a bleach
plant.  As a result, market pulp production at Elk Falls was reduced
by approximately 90,000 tonnes per year.  This decrease in market pulp
production has been largely offset by reduced internal consumption of kraft pulp
and by kraft mill optimization improvements made since the
upgrade.  In 2005, an improved sawdust screening process was installed
at a cost of $8 million.  This improved screening ability provided an
incremental sawdust and shavings cooking capacity and displaced 26,000 tonnes of
chip-based pulp (on an annual basis).




Pulp
Marketing




Our two
pulp mills are well situated for export shipments to Asia and Western
Europe.  Our strategy is to maintain a diversified range of
freight-logical customers, including producers of tissue, magazine papers,
woodfree printing and writing papers and certain specialty paper
products.  Our sawdust-based pulp produced at Elk Falls is
particularly versatile and is often used as a lower cost substitute for more
expensive pulps.




In recent
years, our marketing strategy for containerboard has been, first, to shift the
sales mix to 100% white-top production and eliminate lower value unbleached
grades and second, to improve surface properties in order to expand freight
logical North American sales with high graphic accounts that prefer our
lightweight grades.




Pulp
customers are served by sales and marketing staff in Canada and a network of
agents in locations throughout the world.




The
Crofton and Elk Falls pulp mills are located on tidewater and have deep-sea
vessel loading facilities.  Pulp is shipped to offshore locations by
both break bulk on deep-sea vessels and container shipment.  For the
year ended December 31, 2007, pulp and containerboard accounted for 27% of
our consolidated sales revenue as compared to 23% for the year ended
December 31, 2006.  There is no single customer that accounts for
more than 10% of our consolidated net sales revenue for pulp and
containerboard.




Paper Recycling
Division




On
December 1, 2003 we acquired Western Canada’s largest paper recycling operation,
located in Coquitlam, B.C.  The purchase price was $61.1 million
(including a $2.5 million working capital adjustment) and was comprised of $31.5
million of cash, approximately 8.7 million of our common shares having a value
of $29 million, and $0.6 million of transaction costs.  As part of the
acquisition, we entered into a lease of the land and buildings where the paper
recycling plant operates for an initial term of 20 years, with one 10 year
renewal option.  The annual rent under the lease is $2.1 million,subject to adjustment
for changes in the Consumer Price Index.  The lease includes options
to purchase the land and buildings, and a right of first offer in the event the
landlord wishes to sell the land to a third party.




In June
2007 our paper recycling division completed a crumb deinked pulp project which
enables the delivery of deinked pulp in crumb form to our mill
operations.  This project increases the capacity of the paper
recycling plant, generally eliminates all packing material and warehouse
handling and lowers the mills’ labour cost structure.




Our paper
recycling operation recycles old newspapers, magazines and other waste paper
into pulp suitable for the manufacture of newsprint, telephone directory paper
and similar grades of paper.  The plant was constructed in
1990.  Its current production capacity is 175,000 air-dried metric
tonnes of pulp per year.  Average annual production in the last three
fiscal years was approximately 141,000 air-dried metric tonnes per
year.  We were the principal customer of the paper recycling operation
and prior to our acquisition we purchased approximately 95% of the de-inked pulp
it produced.  The operation supplies 100% of our de-inked pulp
requirements.




The paper
recycling operation utilizes flotation, cleaning and screening technologies to
remove ink and impurities from the waste paper input.  This produces
high-quality pulp that can be blended with traditional virgin-fibre pulp to
produce paper in accordance with customers’ (mills)
specifications.  The pulp is mechanically pressed to a dryness of
about 50% moisture content for shipment to its customers.




The waste
paper furnish for our paper recycling operation is purchased in Western Canada
and the Western United States.  In the most recent fiscal year,
approximately 52% of the furnish was sourced in British Columbia, 27% in the
balance of Western Canada and 21% in the United States.




The plant
receives waste paper primarily by rail and truck into warehouse facilities
located adjacent to the production facility.  Bales of waste paper are
loaded onto a conveyor for transport into the production facility.




Within
the production facility the waste paper is initially mixed with water and
de-inking and bleaching chemicals in a batch pulper.  The paper slurry
produced by the pulper is then processed through a succession of cleaners and
screens to remove contaminants.  It then passes through a flotation
unit, where tiny air bubbles float ink particles out of the
slurry.  The pulp slurry is then further processed through additional
cleaners and a final flotation process before being formed into a crumb pulp for
shipment.  The recycled pulp is shipped to our other operations by
truck, rail and barge.




COMPETITION




The
markets for our products are highly competitive on a global
basis.  The pulp and paper industry is essentially a commodity market
in which producers compete primarily on the basis of price.  In
addition, since an important percentage of our production is directed to export
markets, we compete on a worldwide basis against many producers of approximately
the same or larger capacity.  In export markets, Canadian producers
generally compete with American, European and
Asian producers.





FIBRE
SUPPLY




Our pulp
and paper operations consume wood fibre which is purchased from more than 50
independent mills.  Our fibre supply comes primarily from residual
wood chips and sawdust from lumber operations located on the coast or in the
southern interior of British Columbia and secondarily from the chipping of pulp
logs originating from locations throughout the region.




Sawmill
wood chips presently comprise 59% of the fibre supply for our pulp and paper
operations.  The remainder is comprised of pulp logs (22.1%), sawdust
(14.1%) and recycled de-inked pulp (5%).  Currently, five
wood chip, log and sawdust suppliers provide 48.1% of our fibre supply. The
supply contracts with these companies were negotiated for indefinite
("evergreen") terms when certain of our timber and processing assets
were sold.




In
addition, through an evergreen contract with a coastal log producer, additional
wood chips can be obtained from regional sawmills.  These suppliers
provide an additional 9.1% of our fibre supply.




Together,
all of these long-term, secure supply agreements provide approximately 57% of
the fibre supply for our pulp and paper operations.




The
remainder of the fibre requirements for the four pulp and paper operations is
sourced from independent suppliers, many under long-term
contracts.  Fibre is purchased from these suppliers at market prices
or at prices determined under market-based formulas.




As a
result of the current tight fibre situation we rarely sell fibre to outside
customers.  We continue to engage in fibre trading activities to
ensure optimum allocation of different fibre grades to the appropriate
product.




In 2007
we experienced fibre shortages and related production curtailments as a result
of a strike by United Steelworkers affecting coastal logging
operations.  See “Three year History – Production
Curtailment due to Fibre Supply Limitations”.




During
the past four years, we have implemented an “independent chain of custody”
system to certify our wood fibre supply.  We use the
PricewaterhouseCoopers standard, which is a third party audited system that
identifies the source of wood fibre, and whether or not it is derived from a
forest independently certified as being managed in accordance with a recognized
sustainable forest certification system.  By 2006, all of our paper
and pulp mills were certified under the PricewaterhouseCoopers
standard.  The independent chain of custody system tracks the fibre
from source to finished product and provides a valuable tool to assure customers
that paper contains wood fibre derived from well-managed forests, and is
expected to continue to result in additional sales opportunities.




Our
operations are subject to a wide range of issues that can impact the
availability and price of fibre supply, including suppliers’ lumber market
demand, sawlog supply, coastal solid wood industry restructuring and regional
market prices.  The diversity of supply from over 50 mills located in
three geographical regions helps to mitigate the risk of interruptions to fibre
deliveries to our operations.





PROPERTIES




Our head
office is located in leased premises in Richmond, British
Columbia.  The lease covers an aggregate of 31,790 square feet and
expires March 31, 2018.




We lease
the land and buildings where our paper recycling operation is
located.  The lease expires November 30, 2023, subject to one 10 year
renewal option.  We also sub-lease the land and buildings for our
distribution warehouse and facility in Surrey, British Columbia, which lease
terminates in June 2014, subject to further options to renew.  We
lease the premises for our Nanaimo office pursuant to two leases, one of which
expires in September, 2010 and the other expires in August 2012.  Both
of these leases are subject to one option to renew for three years
each.  We also lease a port and warehouse facility in Long Beach,
California, which we use for delivering product to customers located in the
western United States.  That lease terminates in August,
2008.




Each of
our Crofton, Elk Falls, Powell River and Port Alberni pulp and paper
manufacturing facilities are situated on land we own.  The Crofton
mill is located on a 107 hectare site, the Elk Falls mill is located near
the town of Campbell River, British Columbia on a 78 hectare site, the
Powell River mill is located on a 94 hectare site and the Port Alberni mill
is located on a 44 hectare site.  Each of our properties is
subject to a mortgage in favor of our lenders to secure our
credit facilities.




HUMAN
RESOURCES




We have
approximately 3,000 employees.




Approximately
2,260 hourly employees at our pulp and paper mills (with the exception of the
Paper Recycling Division and the Surrey Distribution Centre) are members of
either the Communications, Energy & Paperworkers Union of Canada (CEP), or
the Pulp, Paper and Woodworkers of Canada (PPWC).  The hourly
employees at the Surrey Distribution Centre are represented by the Christian
Labour Association of Canada (CLAC).




The
current collective agreements with each of the CEP and PPWC locals expire on
April 30, 2008. Negotiations in preparation for the renewal of these agreements
are expected to begin in April, 2008.  The collective agreement with
the CLAC local expires in 2012.




ENVIRONMENT




Our
operations are subject to a wide range of general and industry-specific
environmental laws and regulations including those related to waste management,
air emissions, water discharges and remediation of environmental
contamination.  There has been significant upgrading of our facilities
during the last few years to comply with solid and special waste, effluent and
air regulations.  Environmental performance is monitored regularly by
us, third party consultants and government regulatory bodies.  We
believe that our facilities are operating in substantial compliance with
applicable environmental laws and regulations.




In
addition to regular monitoring of emission points and reporting to regulatory
authorities, we manage our environmental performance through an environmental
management system.  This system is registered to the ISO 14001
standard at all five of our facilities. The environmental management system
utilizes annual internal surveillance audits and bi-annual external compliance
audits of our manufacturing facilities. The audit findings are communicated to
management and a committee of the board of directors, so that appropriate action
plans can be developed to address any deficiencies.  Compliance audits
were completed during late 2006 and no material issues were uncovered during
those audits.  The next round of compliance audits are scheduled for
the fall of 2008.




Numerous
federal and provincial environmental initiatives are underway which could
translate into more vigorous regulatory standards and permits in the next
decade, especially with respect to air emissions.  Substances that may
be targeted include chlorine dioxide, odorous compounds, fine particulate,
sulphur dioxide and greenhouse gases.  Because of recent upgrades we
have made to our air emissions controls, we believe we are well positioned to
meet many of these new challenges.  In cases where equipment
improvements may be required, we expect that policy lead time and flexibility in
the permitting process will mitigate any required capital spending.




Recycled
      Content in Mechanical Paper




We are a
major supplier of newsprint, directory and other mechanical printing papers to
western North America.  The most significant of these markets is the
western United States, where in three states - California, Arizona and Oregon -
newspaper publishers and commercial printers are required by law to use a
certain proportion of recycled containing paper. While the other western United
States and Canada do not have legislated requirements for recycled containing
paper, many printers and publishers are demanding some recycled containing paper
as part of their supply mix.




We meet
this market demand through the use of de-inked pulp from our paper recycling
operation located in Coquitlam, British Columbia. This de-inked post-consumer
recycled pulp is mixed with virgin pulp furnish to produce newsprint and
directory paper that meets the legislated requirements and customer
needs.




Solid
      Waste




An
ongoing environmental issue faced by our operations is the disposal of solid
waste.  Most non-recyclable waste is disposed of at on-site
landfills.  Based on current practice we have at least three years’
capacity in the landfills at Port Alberni and Crofton, two years at Elk Falls
and approximately one year at Powell River.  We continue to work to
reduce volumes sent to landfill by increasing recycling efforts and
investigating alternative uses for all waste.  In 2004, we constructed
a new landfill at Crofton with a 30 year capacity and we are planning to expand
existing landfill sites at our Elk Falls and Powell River mills to establish
more capacity.




Effluent




In 2003
we began an initiative to reduce water use at all facilities.  These
reductions resulted in lower waste water volumes being discharged and greater
opportunities to improve the performance of the systems.  We delivered
total reductions in water use of 7% between 2003 and 2005.  In 2006,
we reduced our water use by 5% and in 2007 water use was reduced by another 2%
which should help reduce our energy costs.




Air
      Emissions




Over the
past ten years, substantial environmental capital has been spent at all
facilities upgrading air emissions controls and infrastructure.  This
includes odour collection and treatment systems and new precipitators at Crofton
and Elk Falls, a fluidized bed boiler conversion at Port Alberni and a fluidized
bed boiler at Powell River.  Our facilities are well positioned to be
compliant with future air emissions standards, which will likely focus on odour,
fine particulates and other criteria air contaminants.




Canada’s
commitment to the Kyoto Protocol is to obtain a 6% absolute reduction of
greenhouse gas emissions below 1990 levels by 2010.  Our 2007
greenhouse gas emissions were 69% below 1990 levels and, therefore, we easily
surpass the federal commitment.  While specific federal and provincial
policy regarding large final emitters such as pulp and paper facilities is still
under development, we believe we are well positioned to take advantage of
opportunities as they arise in a carbon trading economy.




In 2007,
we spent approximately $1.3 million on environmental capital
projects.




We
estimate that capital expenditures relating to known environmental matters,
including compliance issues and the assessment and remediation of the
environmental condition of our properties, will total approximately $1.0 million
in 2008.  While we believe that our estimate for environmental
projects for 2008 is reasonable, there can be no assurance that actual
expenditures will not exceed the estimated amounts.




In
February, 2008 the British Columbia government announced the implementation, in
July 2008, of a carbon tax on fossil fuels.  See “Recent Developments
– B.C. Carbon Tax”.




Contaminated
      Sites




We are
not aware of any sites or land parcels which are considered contaminated under
the Province’s contaminated sites legislation.




Provincial
legislation governing contaminated sites came into effect in British Columbia on
April 1, 1997.  If a particular site exceeds prescribed levels of
certain classes of substances, the site is determined to be a “contaminated
site” under the legislation.  The legislation specifies the
circumstances in which a “site profile” must be prepared in respect of any
property that has been used for certain industrial or commercial
purposes.  If a site is determined to be contaminated, remediation
will normally be required under government supervision.  As current
and past owners of mill sites, all forest products companies in British Columbia
may face remediation costs particularly as a result of historical operations and
disposal practices. Compliance with this legislation has not resulted in any
material cost to us but there can be no guarantee that such costs will not be
incurred in the future as a consequence, for example, of the discovery of
unknown conditions or changes in enforcement policies.




SOCIAL
RESPONSIBILITY




Fibre
Certification Chain of Custody




We have
implemented an independent chain of custody system to verify that select paper
products made at our Crofton, Elk Falls, Port Alberni and Powell River mills
contain 100% certified wood fibre.  This allows customers to track,
measure and report the extent and type of environmentally-preferable fibre used
in their product.  The independent chain of custody system tracks
fibre from forests certified under three recognized sustainable forest
management certification systems – Canadian Standards Association (CSA), Forest
Stewardship Council (FSC), and Sustainable Forestry Initiative
(SFI).  The system is audited to the PricewaterhouseCoopers
standard.




We
implemented a similar chain of custody system at our paper recycling division
under the Forest Stewardship Council (FSC) standard in 2006.  Under
this certification, a percentage of our recycled fibre is certified as post
consumer waste and represents an FSC stream into our manufacturing sites. We
continue to work with the forest industry and local special interest groups
around development of additional FSC certified fibre sources in British Columbia
for use in our fibre stream.




Aboriginal
Relations and Business Development




We
continue to develop aboriginal business initiatives and relationships with First
Nations bands in proximity of our mills.  With the Tla’Amin (Sliammon)
Nation and the City of Powell River, we established a limited partnership in
2006 which acquired 805 acres (325 hectares) of our surplus land not required
for local mill operations.  The limited partnership assumed a secured
five-year mortgage of $4.5 million and intends to subdivide and sell parts of
the property and redevelop other parcels, with any profits distributed equally
among the partners.  This initiative builds on two cooperation
protocols that Tla’Amin Nation reached in 2004 with Catalyst and the City of
Powell River.




In Port
Alberni, Tseshaht Nation purchased 120 hectares (297 acres) of surplus company
property.  A
majority of the land is part of the Somass River delta and was previously used
to grow poplar.  We retained a right-of-way for a water pipeline to
our Port Alberni paper mill.  The $2 million sale is part of an
ongoing rationalization of property holdings that are surplus to business
operations.  The Tseshaht are one of 14 nations that make up the Nuu
chah nulth Tribal Council.




With the
Wewaikai Nation near Elk Falls mill in Campbell River, we formed a joint
environment committee in 2006 to develop a process for integrating the
Wewaikai’s aboriginal interests into the mill’s continuous environmental
improvement and to explore and develop, on a mutually reasonable basis,
individual and business opportunities available to Wewaikai members with
Catalyst.  Committee advice and recommendations including studies or
data gathering and appropriate mitigation measures to address environmental
impacts are provided for Catalyst consideration, decision-making and
implementation.




Carbon
Emission Reduction Reporting




Aligned
with our focus on continuous environmental performance improvements, we
participated in the Carbon Disclosure Project, a study backed by 225 investors
worldwide who represent $31 trillion in assets.  We consider this an
important global reporting initiative that will encourage more fulsome
risk-return analysis by companies and their investors of the potential impact of
environmental factors such as climate change on business and industry
operations.




This
follows an initiative with World Wildlife Fund Inc. and the Center for Energy
and Climate Solutions, a division of Global Environment & Technology
Foundation (GETF) that saw Catalyst sign a voluntary memorandum of understanding
in December 2005 committing the parties to work together in the Climate Savers
Program. The program is administered by World Wildlife Fund in Washington, DC
and involves 12 corporate leaders in greenhouse gas reductions.  In
joining the program, we set a voluntary target to reduce CO2 emissions
to 70% below its 1990 emissions by the year 2010 through energy conservation,
increased use of biomass fuel to replace fossil fuels, and other cost-effective
strategies.  Our 2007 greenhouse gas emissions were 69% below 1990
levels and we continue to focus on reducing our carbon footprint.




Environmental
Paper Assessment Tool




We
participated in the pilot and introduction of the Environmental Paper Assessment
Tool (EPAT) developed by Metafore, a Portland-based organization.  The
web-based tool is designed to assist paper buyers to evaluate the environmental
performance of paper products against objective and consistent
criteria.  The tool allows for consideration of major environmental
impacts over the life cycle of paper products.  We continue to take an
active role in the initiative as one of the first paper manufacturers to seed
the system with performance data and by providing input on the design of the
system to paper buyers.





RESEARCH
AND DEVELOPMENT




We
continue to contribute to industry supported research organizations such as the
Pulp and Paper Research Institute of Canada.  In addition, research
required to meet our specific needs is conducted at private laboratories under
the direction of our technical experts and at the
mill laboratories.




Business
unit technical staff provide scientific and technological expertise in support
of operations and product development efforts.




Our
research and development expenditures totaled approximately $3 million for the
year ended December 31, 2007, and approximately $3 million for the
year ended December 31, 2006.




CAPITAL
EXPENDITURES




Over the
past five years our capital expenditures on continuing operations have totalled
approximately $423 million.  In the year ended December 31, 2007,
approximately $86 million was spent on various environmental, maintenance of
business and discretionary projects.  The following table summarizes
capital expenditures on continuing operations by business segment over the past
five years:




$
      Millions
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            TotalPaper
      (1)
            
            
            75
            
            
            
            83
            
            
            
            73
            
            
            
            38
            
            
            
            54
            
            
            
            320Pulp
            
            
            11
            
            
            
            10
            
            
            
            22
            
            
            
            30
            
            
            
            27
            
            
            
            103Continuing
      Operations
            
            
            86
            
            
            
            93
            
            
            
            95
            
            
            
            68
            
            
            
            81
            
            
            
            423




(1)
            The
      paper segment includes capital expenditures related to Powell River Energy
      Inc. (“PREI”).  We consolidate 100% of PREI effective January 1,
      2005.  Our 50% interest in PREI, prior to January 1, 2005 was
      accounted for using the proportionate consolidation
  method.




CAPITAL
      STRUCTURE




We are
authorized to issue an unlimited number of common shares and 100,000,000
preferred shares.  As of December 31, 2007, there were 214,684,129
common shares issued and outstanding and no preferred shares issued and
outstanding.  All of the issued and outstanding common shares are
fully paid.  Holders of common shares are entitled to receive
dividends as and when declared by our Board of Directors and, unless otherwise
provided by legislation, are entitled to one vote per share on all matters to be
voted on at all meetings of shareholders.  Upon the voluntary or
involuntary liquidation, dissolution or winding-up of the company, the holders
of common shares are entitled to share rateably in the remaining assets
available for distribution after payment of liabilities.  The common
shares are not subject to any future call or assessment and there are no
pre-emptive, conversion or redemption rights attached to the common
shares.




FOREIGN
      OPERATIONS




We have
no foreign manufacturing operations.




RISK
      FACTORS




Our
business and operations are subject to a number of risk factors which are set
out under the heading “Risk Factors” in the management’s discussion and analysis
contained in the 2007 Annual Report, which is incorporated herein by
reference.  The 2007 Annual Report for our most recently completed
financial year is available on SEDAR at www.sedar.com.





LEGAL
PROCEEDINGS




We
occasionally become party to legal proceedings, generally related to contract
disputes and employment law in the ordinary course of business.  The
final results of currently ongoing legal proceedings, while not immediately
determinable, are not expected to have a material effect on our financial
results.




DIVIDENDS




We are
currently restricted from paying dividends under the terms of our bond
indentures because our cumulative losses (adjusted to exclude foreign exchange
gains/losses on debt) since the initial bond issue exceed cash proceeds from
equity issues for the same period.  No dividends were paid in the
years ended December 31, 2007, 2006 or 2005.




RATINGS




In
January 2008, Dominion Bond Rating Service (“DBRS”) confirmed its senior
unsecured debt rating as BB and the outlook as negative.




In June
2007, Standard & Poor’s Rating Services (“S&P”) lowered its outlook to
negative from stable and in October 2007 its long-term corporate credit and
senior unsecured ratings to B from B+. The strong Canadian currency and weak
newsprint prices were the primary factors cited in the downgrade.




In June
2007, Moody’s Investor Services, Inc. (“Moody’s”) revised the outlook on our
debt ratings to negative from stable due to an expectation that with weak
industry conditions and currency related pressures, the Company’s profitability
and cash flow would decline during the year.




In August
2006, Moody’s changed its outlook on our debt ratings to stable from
negative.  In September 2006, Moody’s supplemented its rating
methodology to incorporate “probability of default ratings” for its speculative
grade corporate families and “loss given default assessment” on its individual
rated debt issues.  On the introduction of the enhanced rating
methodology, Moody’s raised its credit ratings on our secured revolving
operating facility to Ba1 from Ba3 and lowered its credit ratings on the
unsecured senior notes to B2 from B1.




In
December 2005, Moody’s lowered its credit ratings on our senior unsecured debt
to B1 from Ba3, on our secured credit facilities to B1 from Ba2, and confirmed
its outlook on our debt ratings as negative.  The downgrade was cited
as due to the prolonged downturn in the market for newsprint and other products
we manufacture.




In
December 2005, S&P lowered its corporate credit and senior unsecured ratings
to B+ from BB- and its senior secured rating to BB- from BB, and upgraded the
outlook to stable.  The rapid appreciation of the Canadian dollar as
well as continued energy pressures were attributed to the
downgrade.




The
interest rate we pay on borrowings under our revolving credit facility includes
a margin that varies with our credit rating.  The margin increased
with the Moody’s downgrade in December 2005.  Downgrades could
negatively impact our cost of additional borrowing and potentially our cost of
capital, but otherwise have no direct impact on our business.




The
following table highlights our credit ratings and assigned outlooks with
Moody’s, S&P and DBRS as of December 31, 2007, 2006 and 2005.




December
      31,Moody’s
              Outlook
              Corporate
      Family rating
              Senior
      unsecured debt
              Bank
      loan debt
              
              Standard
      & Poor’s
              Outlook
              Long-term
      credit
              Senior
      unsecured debt
              Senior
      secured debt
              
              Dominion
      Bond Rating Service
              Outlook
              Senior
      debt
            2007
              
              Negative
              B1
              B2
              Ba1
              
              
              Negative
              B
              B
              BB-
              
              
              Negative
              BB
            2006
              
              Stable
              B1
              B2
              Ba1
              
              
              Stable
              B+
              B+
              BB-
              
              
              Negative
              BB
            2005
              
              Negative
              B1
              B1
              Ba3
              
              
              Stable
              B+
              B+
              BB-
              
              
              Negative
              BB




Moody’s
credit ratings are on a long-term debt rating scale that ranges from AAA to C,
which represents the range from highest to lowest quality of such securities
rated.  According to the Moody’s rating system, an obligation rated B
is judged to be a speculative investment with a high credit
risk.  Assurance of interest and principal payments or of maintenance
of other terms of the contract over any large period of time may be
small.  Moody applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from AA through CAA in its corporate bond rating
system.  The modifier 1 indicates that the issue ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.




S&P’s
credit ratings are on a long-term debt rating scale that ranges from AAA to D,
which represents the range from highest to lowest quality of such securities
rated.  According to the S&P’s rating system, an obligation rated
B is vulnerable to non-payment, but the obligor currently has the capacity to
meet its financial commitment on the obligation.  Adverse business,
financial, or economic conditions will likely impair the obligator’s capacity or
willingness to meet its financial commitment on the obligation.  The
rates from AA to CCC may be modified by the addition of a + or – sign to show
relative standing with the major rating categories.




DBRS
credit ratings are on a long-term debt rating scale that ranges from AAA to D,
which represents the range from highest to lowest quality of such securities
rated.  According to the DBRS rating system, an obligation rated BB is
defined as speculative and non-investment grade, where the degree of protection
afforded interest and principal is uncertain, particularly during periods of
economic recession.  In many cases, deficiencies in critical mass,
diversification, and competitive strength are additional negative
considerations.  The ratings from AA to CCC may be modified by the
addition of a high or low modifier to show relative standing within the major
rating categories.  The lack of one of these designations indicates a
rating which is essentially in the middle of the category.




The above
ratings are not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the above rating
agencies.  A reduction in our credit ratings would impact our access
to and cost of capital and financial flexibility in the future.




MARKET
      FOR SECURITIES




Our
common shares are listed for trading on the Toronto Stock Exchange (the “TSX”)
under the symbol CTL.  During 2007, the common shares traded at a high
of $4.31, a low of $1.19 and an average daily volume of 479,735.  The
price range and average daily volume of trading of the common shares on the TSX
during each month of 2007 was as follows:







Month
            Price
      Range
              Low-High ($)
            VolumeJanuary
            3.50
      – 4.31
            389,575February
            3.26
      – 4.06
            559,156March
            3.35
      – 3.98
            589,863April
            3.38
      – 3.77
            688,075May
            3.27
      – 3.68
            148,473June
            3.21
      – 3.80
            136,739July
            2.90
      – 3.44
            216,032August
            2.20
      – 3.21
            185,793September
            1.38
      – 2.60
            512,047October
            1.40
      – 1.97
            334,729November
            1.19
      – 1.69
            518,213December
            1.44
      – 1.79
            1,639,228




MATERIAL
      CONTRACTS




Since
January 1, 2002, we have entered into the following material
contracts:




1.
            Credit
      Agreement, dated as of July 19, 2002, among Catalyst, the subsidiary
      restricted parties named therein, TD Securities and RBC Capital Markets as
      arrangers, the Toronto-Dominion Bank, as administration agent, Royal Bank
      of Canada as syndication agent, and the lender parties named therein (the
      “Credit Agreement”).




2.
            Omnibus
      Pledge Agreement, dated as of July 19, 2002, entered into by certain
      wholly owned subsidiaries of the Corporation and The Toronto-Dominion Bank
      pursuant to the Credit Agreement.




3.
            First
      Amending Agreement to Credit Agreement, dated as of May 8, 2003, among
      Catalyst, the subsidiary restricted parties named therein, The
      Toronto-Dominion Bank, as administration agent, and the lender parties
      named therein.




4.
            Aggregate
      Repricing Agreement, dated as of May 14, 2003, among Norske Skog Canada
      Finance Limited, certain lenders or affiliates of lenders named in the
      Credit Agreement and Royal Bank of Canada as group valuation agent, with
      respect to the repricing from time to time of certain secured derivative
      contracts entered into by Norske Skog Canada Finance
    Limited.




5.
            Indenture,
      dated as of May 15, 2003, governing the Corporation’s 8 5/8% Senior Notes
      due 2011, among the Corporation, the subsidiary guarantors and Wells Fargo
      Bank Minnesota, National Association, as trustee (the “2003 Notes
      Indenture”)




6.
            Second
      Amending Agreement to Credit Agreement, dated August 6, 2003 among
      Catalyst, its subsidiary restricted parties named therein, the
      Toronto-Dominion Bank, as administrative agent, and the lender parties
      thereto.




7.
            First
      Supplemental Indenture amending the 2003 Notes Indenture, dated as of
      December 1, 2003, among the Corporation, the subsidiary guarantors named
      therein and Wells Fargo Bank Minnesota, National Association, as
      trustee.




8.
            Indenture,
      dated as of March 23, 2004, governing Catalyst’s 7 3/8% Senior Notes due
      2014, among Catalyst, the subsidiary guarantors and Wells Fargo Bank,
      National Association, as trustee.




9.
            Third
      Amending Agreement to Credit Agreement, dated May 28, 2004, among
      Catalyst, its subsidiary restricted parties named therein, the
      Toronto-Dominion Bank, as administrative agent, and the lender parties
      thereto.




10.
            Fourth
      Amending Agreement to Credit Agreement, dated July 12, 2005, among
      Catalyst, its subsidiary restricted parties named therein, the
      Toronto-Dominion Bank, as administrative agent, and the lender parties
      thereto.




11.
            Fifth
      Amending Agreement to Credit Agreement, dated June 5, 2006 among Catalyst,
      its subsidiary restricted parties named therein, the Toronto-Dominion
      Bank, as administrative agent, and the lender parties
    thereto.




12.
            Sixth
      Amending Agreement to Credit Agreement, dated February 15, 2007 among
      Catalyst, its subsidiary restricted parties named therein, the Toronto
      Dominion Bank, as administrative agent, and the lender parties
      thereto.




13.
            Standby
      Purchase Agreement dated February 10, 2008 between the Corporation, BMO
      Nesbitt Burns Inc. and Genuity Capital
Markets.




14.
            Oversubscription
      Agreement dated February 10, 2008 between the Corporation and Third Avenue
      International Value Fund.




15.
            Asset
      and Stock Purchase Agreement dated February 10, 2008 between the
      Corporation and Abitibi Consolidated Sales
  Corporation.




16.
            Dealer
      Manager Agreement dated February 29, 2008 between the
      Corporation,  BMO Nesbitt Burns Inc. and Genuity Capital
      Markets.




17.
            Subscription
      Receipt Agreement dated February 29, 2008 between the Corporation, BMO
      Nesbitt Burns Inc. on its own behalf and on behalf of Genuity Capital
      Markets, Third Avenue Trust on behalf of Third Avenue International Value
      Fund and CIBC Mellon Trust Company.






TRANSFER
      AGENT AND REGISTRAR




CIBC
Mellon Trust Company; Vancouver and Toronto.




AUDIT
      COMMITTEE INFORMATION




The Audit
Committee consists of Thomas S. Chambers, Neal P. Goldman and Jeffrey
Marshall.  Each of these directors are independent for the purposes of
sitting on the Audit Committee, as defined under applicable legislation, and are
financially literate.  The Board has determined that Mr. Chambers
qualifies as an “audit committee financial expert” for the purposes of
applicable legislation.  The relevant education and experience of each
Audit Committee member is as follows:







Name
            Relevant
      Education and ExperienceT.S.
      Chambers
            Mr.
      Chambers has been a chartered accountant since 1969.  He was an
      audit partner at PricewaterhouseCoopers LLP from 1976 to 2002 and was the
      managing partner of PricewaterhouseCoopers LLP’s and its predecessor’s
      Canadian audit practice from 1996 to 2001.  Mr. Chambers is a
      member of the Institute of Corporate Directors and was the chair of the
      British Columbia chapter of that organization from 2002 to
      2004.  Mr. Chambers is the chair of three other audit
      committees.N.
      P. Goldman
            Mr.
      Goldman is a Partner at Brigade Capital Management LLC, an investment
      company, which he joined in January 2007.  Previously, he was a
      Managing Director at MacKay Shields LLC, an investment advisor with over
      $30 billion under management, specializing in high yield and distressed
      investing.  Prior to joining MacKay Shields, Mr. Goldman was a
      Principal in the Special Situations Group at Banc of America Securities,
      where he specialized in distressed debt investing.  Before Mr.
      Goldman was at Banc of America Securities, he worked at Salomon Brothers
      in the Merger and Acquisitions Group and as a Vice President in the High
      Yield Bond Department.  Mr. Goldman also sits on the Board of
      Directors of NII Holdings, Inc. (NIHD), a leading mobile services provider
      in Latin America.  Mr. Goldman earned a Masters of Business
      Administration from the University of Illinois and a Bachelors of Arts
      degree from the University of Michigan.J.G.
      Marshall
            Mr.
      Marshall is chairman of Smith Marshall, a strategic partnership which
      provides business consulting services to industry.  He has
      been  President and Chief Executive Officer of Aluma Enterprises
      Inc., a construction technology company, and Marshall Drummond McCall
      Inc., and in those capacities he actively supervised financial
      officers.  He is a member of two other audit
      committees.  He holds an MBA (Finance) from McGill
      University.




The
principal functions of the Audit Committee are:




(i)
            to
      review all financial information and statutory disclosure documents prior
      to their approval by the Board and their distribution to shareholders and
      other interested persons;




(ii)
            to
      evaluate systems of internal control and procedures for financial
      reporting;




(iii)
            to
      review and recommend for approval by the Board the terms of engagement and
      remuneration of the external
auditor;




(iv)
            to
      monitor the performance of the external and internal auditors and assess
      the independence thereof; and




(v)
            to
      recommend to the Board the appointment of investment managers for the
      Corporation’s salaried pension plans and to monitor the performance of
      these managers.




The roles
and responsibilities of the Audit Committee are contained in its terms of
reference, which are reviewed annually.




The
Board, through the Audit Committee, identifies and reviews with management the
principal risks facing the Corporation and ensures that appropriate risk
management systems and internal control systems are implemented.  The
Audit Committee is also responsible for the Corporation’s financial reporting
processes and the quality of its financial reporting.  The Audit
Committee is free to communicate with the Corporation’s external and internal
auditors at any time, and the committee meets with the Corporation’s internal
and external auditors, without management present, on a regular
basis.




Through
the Audit Committee the Board has approved policies relating to the treatment
and disclosure of corporate information. Public disclosure about the Corporation
is reviewed by a group that includes the Chief Executive Officer, Chief
Financial Officer, and the legal, investor relations and corporate controller’s
departments, and others as required, to ensure timely and accurate
disclosure.




All
quarterly and annual financial statements, material press releases, investor
presentations and other corporate materials are posted immediately on the
Corporation’s website (www.catalystpaper.com). The Corporation provides live
internet and conference call access to interested parties in connection with the
release of its quarterly financial information.




The Audit
Committee is responsible for pre-approving all non-audit services to be
performed by the external auditors.  The Chair of the Audit Committee
is authorized to pre-approve non-audit services that have a value equal to up to
$100,000.  All non-audit services pre-approved by the Chair are
presented to the Committee at its first scheduled meeting following the Chair’s
pre-approval.  In February, 2008 the Audit Committee approved the
engagement of the external auditors for the period ending February 12, 2009 for
the provision of certain tax related services and miscellaneous accounting
advice having an aggregate cost of $700,000.




During
the last two years, we paid the following fees to our external
auditors:


Period
      ending December 312007
            
            
            2006Audit
      Fees
            
            $
            1,011,442
            
            
            $
            1,094,000Audit
      Related Fees
            
            
            178,000
            
            
            
            111,600Tax
      Fees
            
            
            95,195
            
            
            
            81,000Total
            
            $
            1,284,637
            
            
            $
            1,286,600




The
services rendered in connection with “Audit Related Fees” consisted primarily of
the audit of a wholly owned subsidiary, the audit of our pension plan and other
accounting advice.  The services rendered in connection with “Tax
Fees” consisted primarily of tax compliance services.





CORPORATE
      GOVERNANCE




Additional
information regarding our corporate governance practices, including the terms of
reference for our Board of Directors and our Audit Committee, is contained in
our management proxy circular for our most recent annual
meeting.  This document can be found at www.sedar.com.




DIRECTORS
      AND OFFICERS




As of
February 1, 2008, the name and municipality of residence of each of the
directors and officers of the Corporation, the office held by each and the
principal occupation of each during the past five years are as
follows:





DIRECTORS




Name and Municipality of
      Residence
            Principal Occupation
            Director SinceThomas
      S. Chambers
              Vancouver,
      British Columbia
            President,
      Senior Partner Services Ltd.  Previously, Partner,
      PricewaterhouseCoopers.
            October
      30, 2003Gary
      Collins
              Vancouver,
      British Columbia
            Senior
      Vice President, Belkorp Industries Inc.  Previously, President
      and Chief Executive Officer, HMY Airways Inc., member of the British
      Columbia Legislative Assembly and Minister of Finance, British
      Columbia.
            April
      27, 2005Michel
      Desbiens
              Beaconsfield,
      Quebec
            Corporate
      director and retired forest products company
      executive.  Previously, consultant to the forestry
      industry.
            May
      24, 2006Benjamin
      C. Duster, IV
              New
      York, NY
            Senior
      Advisor, Watermark Advisors (financial advisory
      services).  Previously, Partner, Masson & Company LLC
      (financial restructuring firm).
            December
      1, 2006Richard
      Garneau
              Vancouver,
      British Columbia
            President
      and Chief Executive Officer.  Previously, Executive Vice
      President, Operations and Senior Vice President, Forest Products, Domtar
      Inc.
            March
      28, 2007Neal
      P. Goldman
              Bedford,
      NY
            Partner,
      Brigade Capital Management LLC (investment
      company).  Previously, Managing Director, MacKay Shields
      LLC.
            December
      1, 2006Denis
      Jean
              Lac
      Megantic, Quebec
            Corporate
      Director and Consultant
            March
      28, 2007Jeffrey
      G. Marshall
              Niagara-on-the-Lake,
      Ontario
            Chairman,
      Smith Marshall (business consulting services).  Previously,
      President and Chief Executive Officer, Aluma Enterprises
    Inc.
            December
      1, 2006Amit
      B. Wadhwaney
              New
      York, NY
            Portfolio
      Manager and Senior Research Analyst, Third Avenue Management
      LLC.
            December
      1, 2006





Messrs.
Chambers, Desbiens, Jean and Marshall are members of the Corporation’s
Environmental, Health and Safety Committee.




Messrs.
Collins, Goldman and Wadhwaney are members of the Corporation’s Governance
Committee.




Messrs.
Collins, Duster and Wadhwaney are members of the Corporation’s Human Resources
and Compensation Committee.




Messrs.
Chambers, Goldman and Marshall are members of the Corporation’s Audit
Committee.





OFFICERS




Name and Municipality of
      Residence
            Principal OccupationLyn
      Brown
              Vancouver,
      British Columbia
            Vice-President,
      Corporate Relations and Social Responsibility.  Previously,
      Director, Corporate Affairs and Social Responsibility; Vice President,
      Customer Relations and Vice President, Communications and Government
      Affairs, Aquila Networks Canada.Stephen
      Boniferro
              Delta,
      British Columbia
            Senior
      Vice-President, Human Resources.  Previously, Vice President
      Algoma Steel.W.R.
      (Ron) Buchhorn
              Vancouver,
      British Columbia
            Senior
      Vice-President, Operations.  Previously, Vice-President,
      Corporate Services, Vice-President, Human Resources.L.
      Thomas Crowley
              Bainbridge
      Island, Washington
            Senior
      Vice President, Sales and Marketing.  Previously Vice President
      and General Manager, Specialty Papers.Richard
      Garneau
              Vancouver,
      British Columbia
            President
      and Chief Executive Officer.  Previously, Executive Vice
      President, Operations and Senior Vice President, Forest Products, Domtar
      Inc.Robert
      H. Lindstrom
              Burnaby,
      British Columbia
            Vice-President,
      Supply Chain.  Previously, Vice-President, Strategy,
      Vice-President, Supply and Utilities, Pulp Operations.Valerie
      B. Seager
              Vancouver,
      British Columbia
            Vice-President
      and General Counsel.  Previously, Corporate Secretary and Legal
      Counsel.David
      Smales
              Port
      Moody, British Columbia
            Vice
      President Finance and Chief Financial Officer.  Previously
      Vice-President, Strategy & Analysis.Peter
      M. Staiger
              Vancouver,
      British Columbia
            Corporate
      Controller & Treasurer.  Previously,
    Treasurer.









Our
directors and officers as a group beneficially own, directly or indirectly, or
exercise control or direction over less than 1% of our issued and outstanding
Common Shares.






EXPERTS




KPMG LLP
is our auditor and has prepared an audit report on our financial
statements.  To our knowledge, the partners of KPMG LLP do not own,
directly or indirectly, any of our common shares.




Towers
Perrin provides certain pension consulting and actuarial services to the
Company. Also, Mercers provides certain U.S. pension consulting services to the
Company.




ADDITIONAL
      INFORMATION




Additional
financial information is provided in the Corporation’s Management’s Discussion
and Analysis of Financial Condition and Results of Operation and Consolidated
Financial Statements for the year ended December 31, 2007.




Further
information relating to the Corporation may be found on SEDAR at www.sedar.com,
including the management proxy circular for the Corporation’s most recent annual
meeting, which contains additional information regarding directors’ and
officers’ remuneration, principal holders of our securities, and securities
authorized for issuance under equity compensation plans.




In
addition, we will provide to any person, upon request to the Corporate
Secretary:




(a)
            when
      our securities are in the course of a distribution pursuant to a short
      form prospectus or a preliminary short form prospectus which has been
      filed in respect of a distribution of our
  securities:




(i)
            one
      copy of our Annual Information Form, together with one copy of any
      document, or the pertinent pages of any document, incorporated by
      reference in the Annual Information
Form;




(ii)
            one
      copy of our comparative financial statements for our most recently
      completed fiscal year together with the accompanying report of the auditor
      and one copy of any of our interim financial statements subsequent to the
      financial statements for our most recently completed fiscal
      year;




(iii)
            one
      copy of our Information Circular in respect of our most recent annual
      meeting of shareholders that involved the election of directors;
      and




(iv)
            one
      copy of any other documents that are incorporated by reference into the
      preliminary short form prospectus or the short form prospectus and are not
      required to be provided under (i) to (iii) above;
  or




(b)
            at
      any other time, one copy of any other documents referred to in (a) (i),
      (ii) and (iii) above, provided we may require the payment of a reasonable
      charge if the request is made by a person who is not a holder of our
      securities.







GLOSSARY
      OF TERMS









AOXorabsorbable organic halides –
the measurement of total chlorinated organic compounds in pulp mill
effluents.




Basis weight – the weight of
paper per specified area, such as gsm.




Capacity – the number of units
which can be produced in a year based on operating with the normal number of
shifts and maintenance interruptions.




Coated paper–paper which is coated
with clay and treated to impart a smooth glossy surface.




Dioxins – chlorinated chemical
compounds, of which certain members have been identified as
carcinogens.




Directory paper – lightweight
uncoated groundwood paper suitable for printing telephone and commercial
directory books.




Effluent–outflowing waste
discharge from a pulp and paper mill.




Furans–toxic contaminants
associated with the formation of dioxins in the bleaching of pulps with chlorine
compounds.




Furnish–a blend of different
types of pulps and additives which are provided to the paper machine for making
paper.




Groundwood specialty paper–coated and
uncoated printing papers, with mechanical pulp as their major component, which
differ from newsprint in brightness, surface characteristics and end
uses.




Hi-brite or highbrightness paper – a group
of uncoated groundwood papers with brightness levels greater than standard
newsprint.




Hog fuel – wood waste, a
by-product from sawmilling and log sorting activities, used in boilers as an
energy source.




Containerboard-
any type of single and multi-ply liner used to make boxes and other containers
for shipping materials, and the type of paperboard used to make them
up.




Lightweight coated paper or
LWC paper – coated paper
having a basis weight generally below 72 gsm and used principally for magazine
and mail order catalogues, inserts, flyers, coupons and direct
mail.  The term is often used interchangeably with coated groundwood
paper.




Linerboard–a type of kraft
paperboard, generally unbleached, used to line or face corrugated core board (on
both sides) to form shipping boxes and various types of containers.




Newsprint–a printing paper whose
major use is in newspapers.  It is made largely from groundwood or
mechanical pulp reinforced to varying degrees with chemical pulp.




Particulate emissions – the
discharge of all airborne solid or liquid materials other than uncombined
water.




Printability–the ease with which
paper can be printed to high quality standards with the least amount of
spoilage.




Printing papers–a general term used to
describe those grades of paper used by the printing trades, including job, book,
magazine, and newspaper printers.




Pulp–the generic term
describing the fibres derived from wood.  Pulp can result from a
variety of pulping processes including cooking, refining, grinding or the
processing and cleaning of waste paper.  Pulp can be either in a wet
or dry state.  Types of pulp include:




Bleached pulp–pulp that has been
purified or whitened by chemical treatment to alter colouring matter and has
taken on a higher brightness characteristic.




Chemical pulp–obtained by cooking wood
in solutions of various chemicals.  The principal chemical processes
are sulphite and sulphate (kraft).




De-inked pulp–obtained by removing
inks, clays and coatings, bindings and other additives from waste papers
(primarily old newspapers and office waste) so that it can be reused as a source
of papermaking furnish.




Kraft pulp–chemical pulp produced
by an alkaline cooking process using sodium sulphate.




Market pulp –pulp sold on the
open market.




Northern bleached softwood kraft
(NBSK) pulp–kraft pulp produced from
slow-growing coniferous trees indigenous to the forests of Canada, the northern
United States and Scandinavian countries.  NBSK pulp is noted for its
strength and length of fibre.




Thermomechanical pulp–pulp produced from wood
chips using heated mechanical processes to break the bonds between the wood
fibres.




Pulpwood–logs which are used for
making pulp as opposed to those used for making lumber and panel
products.




Runnability – the ease with
which paper can be run through presses with the least amount of
breakages.




Soft-calender – a machine
which improves the smoothness and gloss of paper by running it through a
combination of steel rolls and proprietary synthetic rolls.




Total reduced sulphur or TRS–the
four reduced sulphur compounds that contribute to the typical odour emitted by
kraft pulp mills.




Twin-wire– refers to a paper
machine with forming wires on both sides of the paper surface which provide a
more uniform quality of sheet for both printing surfaces.  Older
machines typically only have a forming wire on the lower surface.




Uncoated specialty paper –
uncoated printing papers, with mechanical pulp as their major component, which
differ from newsprint in brightness and surface characteristics and are used for
magazines, catalogues, supplements, inserts and flyers.




Woodfree – paper grades
manufactured almost entirely with kraft pulp, and containing less than 10 per
cent groundwood or mechanical pulp.




Measurements




gsm – grams per square
metre.




kg/ADBt – kilograms per
air-dried bleached tonne of production.




tonne–metric ton – 1,000
kilograms or 2,204 pounds (1.1023 tons).