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**CATALYST        PAPER CORPORATION**

**MANAGEMENT’S        DISCUSSION AND ANALYSIS**

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*Table            of Contents*

**MANAGEMENT’S        DISCUSSION AND ANALYSIS**

*The        following management discussion and analysis (“MD&A”) should be read in        conjunction with the consolidated financial statements for the years ended        December 31, 2006, 2005, and 2004, and the notes thereto.*

*Throughout        the discussion, reference is made to EBITDA, which represents earnings before        interest, taxes, depreciation and amortization, and before other non-operating        income and expenses. EBITDA, as defined, equates to operating earnings (loss)        plus amortization. Canadian Generally Accepted Accounting Principles (“GAAP”) do        not define a method of calculating EBITDA, therefore the measure as calculated        by Catalyst Paper Corporation (“the Company”) might not be comparable to        similarly titled measures reported by other entities. EBITDA is presented        because the Company believes it is a useful indicator of a company’s operational        performance, and subsequently, a company’s ability to meet debt service and        capital expenditure requirements. EBITDA should not be considered by an investor        as an alternative to net earnings, an indicator of the financial performance        of        the Company, or an alternative to cash flows as a measure of liquidity. Refer        to        the “Non-GAAP Measures” section for a reconciliation of this non-GAAP measure to        net earnings (loss).*

*In        accordance with industry practice, the term “ton” or the symbol “ST” in this        MD&A refers to a short ton, which is an imperial unit of measurement equal        to 0.9072 metric tonnes, and the term “tonne” or the symbol “MT” refers to a        metric tonne.*

*In        this MD&A, unless otherwise indicated, all dollar amounts are expressed in        Canadian dollars. The term “dollars” and the symbols “$” and “CDN$” refer to        Canadian dollars. The term “U.S. dollars” and the symbol “US$” refer to United        States dollars.*

*The        information in this report is as at February 13, 2007. Disclosure contained        in        this document is current to that date, unless otherwise        stated.*

***CAUTIONARY        STATEMENT REGARDING FORWARD-LOOKING STATEMENTS***

*This        MD&A contains forward-looking statements. Forward-looking statements are        statements, other than statements of historical fact, that address or discuss        activities, events or developments that the Company expects or anticipates        may        occur in the future. These forward-looking statements can be identified by        the        use of words such as “anticipate”, “could”, “expect”, “seek”, “may”, “likely”,“intend”, “will”, “believe” 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 the Company 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 general        economic conditions in the United States (“U.S.”), Canada and internationally,        market conditions and demand for the Company’s products, the outlook for        inventories, production and pricing, the Company’s ability to successfully        obtain performance improvements and cost savings, expected cash flows, capital        expenditures and completion of capital projects, shifts in industry capacity,        fluctuations in foreign exchange and interest rates, fluctuations in        availability and cost of raw materials or energy, the Company’s ability to        obtain financing and other factors beyond the Company’s control. Additional        information concerning these and other factors can be found in section 13        of        this MD&A under the heading "Risks and Uncertainties". The Company disclaims        any intention or obligation to update or revise any forward-looking statements,        whether as a result of new information, future events or        otherwise.*

*Investors        are cautioned not to place undue reliance on these forward-looking statements.        No forward-looking statement is a guarantee of future results.*

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*Table            of Contents*

**Table        of Contents**

|    |                                                                                                    | Page   |   |     |                                                                                           | Page   |
|---------|---------------------------------------------------------------------------------------------------------|--------|--------|----------|------------------------------------------------------------------------------------------------|--------|
| **1.0** | **Corporate                  overview and highlights**                                                  | 4      |   | **5.0**  | **Liquidity                  and capital resources**                                           | 36     |
|    | 1.1 Overview                  of the business                                                      | 4      |   |     | 5.1 Operating                  activities                                                 | 36     |
|    | 1.2 2006                  annual overview                                                          | 7      |   |     | 5.2 Investing                  activities                                                 | 37     |
|    | 1.3 2006                  highlights                                                               | 10     |   |     | 5.3 Financing                  activities                                                 | 37     |
|    | 1.4 Selected                  annual and quarterly financial  information                     | 11     |   |     | 5.3.1 Capital                  resources5.3.2 Financial                  instruments | 3739   |
|    | 1.5 Strategy                                                                                       | 13     |   |     |                                                                                           |   |
|    | 1.6 Consolidated                  results of operations                                            | 18     |   | **6.0**  | **Related                  party transactions**                                                | 40     |
|    |                                                                                                    |   |   |     |                                                                                           |   |
| **2.0** | **Annual                  segmented results of                  operations**                            | 21     |   | **7.0**  | **Off-balance                  sheet arrangements**                                            | 41     |
|    | 2.1 Speciality                  papers                                                             | 21     |   |     | 7.1 Financial                  instruments                                                | 41     |
|    | 2.1.1 Markets                                                                                      | 21     |   |     | 7.2 Guarantees                                                                            | 41     |
|    | 2.1.2 Segment                  overview                                                            | 22     |   |     |                                                                                           |   |
|    | 2.1.3 Operational                  performance                                                     | 23     |   | **8.0**  | **Summary                  of quarterly results**                                              | 42     |
|    | 2.1.4 Outlook                                                                                      | 23     |   |     |                                                                                           |   |
|    | 2.2 Newsprint                                                                                      | 24     |   | **9.0**  | **Non-GAAP                  measures**                                                         | 43     |
|    | 2.2.1 Markets                                                                                      | 24     |   |     |                                                                                           |   |
|    | 2.2.2 Segment                  overview                                                            | 25     |   | **10.0** | **Critical                  accounting policies and                  estimates**               | 43     |
|    | 2.2.3 Operational                  performance                                                     | 25     |   |     | 10.1 Environmental                  and legal liabilities                                 | 44     |
|    | 2.2.4 Outlook                                                                                      | 26     |   |     | 10.2 Impairment                  of long-lived assets                                     | 44     |
|    | 2.3 Pulp                                                                                           | 26     |   |     | 10.3 Pension                  and post-retirement benefits                                | 46     |
|    | 2.3.1 Markets                                                                                      | 27     |   |     | 10.4 Provision                  for bad debt and doubtful                                 |   |
|    | 2.3.2 Segment                  overview                                                            | 28     |   |     | accounts                                                                                       | 47     |
|    | 2.3.3 Operational                  performance                                                     | 28     |   |     | 10.5 Income                  taxes                                                        | 47     |
|    | 2.3.4 Outlook                                                                                      | 28     |   |     |                                                                                           |   |
|    |                                                                                                    |   |   | **11.0** | **Changes                  in accounting policies**                                            | 48     |
| **3.0** | **Quarterly                  segmented results of                  operations**                         | 30     |   |     |                                                                                           |   |
|    | 3.1 Three                  months ended December 31,                                               |   |   | **12.0** | **Impact                  of accounting                  pronouncements**                      |   |
|    | 2006                  compared to three months                                                          |   |   |     | **affecting                  future periods**                                                  | 48     |
|    | ended                  September 30, 2006                                                               | 31     |   |     |                                                                                           |   |
|    | 3.1.1 Consolidated                  result of    operations                         | 31     |   | **13.0** | **Risks                  and uncertainties**13.1 Product                  prices          | 4949   |
|    | 3.1.2 Operational                  performance                                                     |   |   |     | 13.2 Global                  competition                                                  | 50     |
|    | -                  specialty papers                                                                     | 31     |   |     | 13.3 International                  sales                                                 | 50     |
|    | 3.1.3 Operational                  performance                                                     |   |   |     | 13.4 Foreign                  exchange                                                    | 50     |
|    | -                  newsprint                                                                            | 32     |   |     | 13.5 Fibre                  supply                                                        | 51     |
|    | 3.1.4 Operational                  performance                                                     |   |   |     | 13.6 Aboriginal                  claims                                                   | 51     |
|    | -                  pulp                                                                                 | 32     |   |     | 13.7 Energy                  costs                                                        | 52     |
|    | 3.2 Three                  months ended December 31,2006                  compared to three months |   |   |     | 13.8 Legal                  proceedings13.9 Prior                  period losses     | 5354   |
|    | ended                  December 31, 2005                                                                | 33     |   |     | 13.10 Debt                                                                                | 54     |
|    | 3.2.1 Consolidated                  results of                                                     |   |   |     | 13.11 Environmental                  regulation                                           | 54     |
|    | operations3.2.2 Operational                  performance                                           | 33     |   |     | 13.12 Labour                  disruptions                                                 | 54     |
|    | -                  specialty papers                                                                     | 33     |   | **14.0** | **Sensitivity                  analysis**                                                      | 55     |
|    | 3.2.3 Operational                  performance                                                     |   |   |     |                                                                                           |   |
|    | -                  newsprint                                                                            | 34     |   | **15.0** | **Outlook**                                                                                    | 56     |
|    | 3.2.4 Operational                  performance                                                     |   |   |     |                                                                                           |   |
|    | -                  pulp                                                                                 | 34     |   | **16.0** | **Disclosure                  controls and internal control                  over**            |   |
|    |                                                                                                    |   |   |     | **financial                  reporting**                                                       | 57     |
| **4.0** | **Financial                  condition**                                                                | 35     |   |     |                                                                                           |   |
|    |                                                                                                    |   |   | **17.0** | **Outstanding                  share data**                                                    | 58     |

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*Table            of Contents*

| **1.0** | **CORPORATE                  OVERVIEW AND                  HIGHLIGHTS** |
|---------|-------------------------------------------------------------------------|

|   | 1.1 | Overview                  of the                  business |
|--------|-----|------------------------------------------------------------|

|   | The                  Company is the fourth largest North America-based producer of newsprint                  and uncoated mechanical groundwood specialty papers, measured by                  production capacity. It is also the largest producer of coated                  and                  uncoated specialty papers and newsprint and the only producer of                  lightweight coated paper on the West Coast of North America. The                  Company                  is the largest producer of directory paper in the world by capacity                  and                  operates the largest paper recycling operation in Western Canada.                  It also                  has a significant presence in most major international markets,                  serving                  customers around the world. The 2006 geographic sales distribution                  can be                  found at the end of this section. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Specialty                  papers* |
|--------|-------------------------------------|

|   | The                  specialty papers segment consists of soft-calendered (“SC”) and                  machine-finished (“MF”) hi-brite uncoated, lightweight coated (“LWC”) and                  directory paper grades. These groundwood specialty paper grades                  are                  manufactured on 101 paper                  machines in British Columbia at Crofton, Elk Falls, Port Alberni                  and                  Powell River. The specialty papers business segment has a total                  production                  capacity of 1,100,000 tonnes. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Specialty                  paper represents the Company’s largest business segment, generating                  approximately 49% of 2006 consolidated sales revenue. The Company’s                  customer base consists primarily of retailers, magazine and catalogue                  publishers, commercial printers and telephone directory publishers.                  Specialty paper products are sold primarily through the Company’s sales                  and marketing personnel in North America, and through distributors                  and                  agents in other geographic markets. In 2006, approximately 94%                  of                  specialty paper sales volumes were with customers in North America.                  Specialty papers are shipped by ship, barge, rail or truck or by                  a                  combination of some or all of these transportation                  modes. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Newsprint*

|   | Newsprint                  is currently produced on five1 paper machines at Crofton, Elk Falls                  and                  Powell River. The newsprint segment has a total annual production                  capacity                  of 617,000 tonnes. During the first quarter (“Q1”) of 2006, the Company                  permanently closed its Port Alberni No. 3 (“A3”) paper machine,                  representing 140,000 tonnes of equivalent newsprint production                  capacity. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 1   | The                Company has 11 paper machines. The number of machines noted in the                segments above reflects the ability of the Company’s machines to switch                between newsprint and specialty paper                grades. |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table            of Contents*

|   | Newsprint                  sales represented approximately 28% of 2006 consolidated sales                  revenue.                  The newsprint customer base consists primarily of newsprint publishers                  located in Western and Central North America and in Asia. In 2006,                  approximately 85% of newsprint sales volumes were with customers                  in North                  America and Asia. Newsprint is shipped overseas by deep-sea vessel                  and                  inland by ship, barge, rail or truck or a combination of some or                  all of                  these modes. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Pulp* |
|--------|--------|

|   | The                  pulp segment includes sawdust-based pulp and containerboard (formerly                  referred to as “kraft paper”) manufactured at the Elk Falls mill, and                  northern bleached softwood kraft (“NBSK”) pulp manufactured at the Crofton                  mill. The segment has a total market production capacity of 638,000                  tonnes. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Pulp                  and containerboard sales represented approximately 23% of 2006                  consolidated sales revenue. The pulp customer base is located primarily                  in                  Asia and Europe 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 in Canada, and through a network                  of agents                  in locations throughout the world. In 2006, approximately 77% of                  pulp and                  containerboard sales volumes were with customers in Europe, Asia                  and                  Australasia. The Crofton and Elk Falls pulp mills are located on                  tidewater                  and have deep-sea vessel loading facilities. Pulp and containerboard                  are                  shipped by both break-bulk and container deep-sea                  vessels. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  Company also has the largest paper recycling operation in Western                  Canada.                  Operated in support of its business segments, the recycling facility                  has a                  production capacity of 148,000 air-dried equivalent tonnes of pulp                  per                  year, the majority of which is consumed internally. After a project                  planned for mid-2007 is completed, this facility will increase                  production                  capacity to 160,000 air-dried equivalent tonnes of pulp per                  year. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table            of Contents*

| **PRODUCT                  PROFILE**             |
|--------------------------------------------------|
|                                             | **Specialty                  paper grades** | **Newsprint** | **Pulp** |
| **Category**                                     | **Uncoated                  papers** | **Coated****paper** | **Directory** | **Newsprint** | **Containerboard** | **Market                  pulp** |
| **Soft-calendered**                              | **Machine-finished** |   |   |   |   |   |
| **Brand                  names**                 | ElectrasoftElectracalElectraprime | ElectrabriteElectrastar | Electracote | Catalyst | Marathon | SilverlinerPlatinumlinerChromiumlinerBronzeliner | Elk                  PrimeCrofton                  Kraft |
| **Basis                  weight (g/m****2****)** | 36.6                  - 52 | 45                  - 66.5 | 44.4                  - 63.6 | 28                  - 40 | 43                  - 48.8 | 127                  - 270 | n/a |
| **Applications**                                 | Magazines,Supplements,Catalogues,Inserts,Flyers,Directories | Magazines,Supplements,Inserts,                  Flyers,Direct                  mail,PR                  and corporate communicationbooks/manuals | Magazines,Catalogues,Inserts,                  Flyers,Direct                  mail | Telephone                  books,Airline                  schedules,Catalogues | Newspapers,Inserts,                  Flyers,Supplements,Directories,Timetables | Packaging                  applications | Tissue,Freesheet,Specialty                  papers,White-top                  linerboard |
| **Capacity                  (tonnes)**           | 531,0001 | 231,000 | 338,0001 | 617,0001 | 127,000 | 511,0002 |
| **%                  of total capacity**         | 23% | 10% | 14% | 26% | 5% | 22% |

|   | 1 | Capacities                  expressed in the above table can vary as the Company is able to                  switch                  production between products, particularly newsprint, directory                  and                  machine-finished uncoated grades. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2 | Market                  tonnes. |
|--------|---|---------------------------------|

|   | The                  Company’s products are sold on five continents. The North American market,                  which accounts for 63% of sales, continues to be the Company’s principal                  market, followed by Asia and Australasia, Europe and Latin America.                  The                  consolidated sales volume distribution for 2006 was as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1.2 | 2006                  annual overview |
|--------|-----|---------------------------------------|

|   | The                  Company delivered improved operational performance in 2006, recording                  operating earnings of $3.9 million despite the strength of the                  Canadian                  dollar against the U.S. dollar. This compares to an operating loss                  of                  $25.1 million in 2005. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  Company improved operational performance in 2006 by focusing on                  machine                  efficiency, asset care, product quality and sharing cross-mill                  best                  practices. By making high-return investments through its Performance                  Improvement Program, the Company improved asset efficiency, which                  resulted                  in a significant increase in the Company’s production volume, and an                  overall improvement in machine efficiency of 3%, compared to 2005.                  Tight                  supply chain management and optimizing the mix of major inputs                  also helped                  control costs. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  steady U.S. economy, particularly retail sales, resulted in higher                  prices                  for most paper products. The Company’s improved operating results in 2006                  were also supported both by strong pulp prices, which hit their                  highest                  level since 1995, and reduced pulp costs. The Company’s performance                  improvement initiatives exceeded expectations, but rising fibre                  prices and                  the strong Canadian dollar kept the Company from delivering a better                  financial performance in 2006. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  2006, the Company and the industry in which it operates continued                  to                  experience an environment of rising input costs, most notably increasing                  energy and fibre costs. The Company benefits from relatively low                  fibre and                  electricity costs due to the location of its production facilities.                  In                  addition, the Company’s ability to use lower-priced energy alternatives                  helps mitigate rising prices. Nonetheless, the Company’s fibre costs                  increased late in the year due to regional supply limitations and                  their                  impact on market prices. Fibre supplies were constrained by curtailed                  sawmill activity and harsh West Coast weather conditions throughout                  the                  year. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  majority of the Company’s sales are denominated in U.S. dollars. As a                  result, the strengthening Canadian dollar had a significant negative                  impact on the Company’s earnings for the fourth consecutive year. The                  average spot rate for 2006 was CDN$1.134 compared to CDN$1.212                  for 2005                  and CDN$1.302 for 2004. The “Sensitivity Analysis” section provides                  further details on the Company’s sensitivity to fluctuations in foreign                  exchange. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  chart below illustrates the movement of the CDN$/US$ spot rate                  over the                  past five years. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  Company’s 2006 Performance Improvement Program exceeded its goal of $70                  million by 6% realizing $74 million in year-over-year EBITDA improvements.                  A discussion of the 2006 Performance Improvement Program’s results is                  provided under “Progress on 2006 Strategic Initiatives” in the “Strategy”                  section. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Market                  conditions for the Company’s products were mixed in 2006, despite the                  positive effect of the steady U.S. economy. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Coated                  mechanical demand was essentially flat for the year due to weak                  magazine                  and catalogue demand. Coated mechanical demand strengthened in                  the second                  half of the year, but only enough to offset the weakness in the                  first half                  of 2006. Flat demand and high mill inventories led to weak LWC                  prices for                  most of the year. The average LWC benchmark price decreased 1.3%                  in 2006,                  compared to 2005. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Uncoated                  mechanical demand remained stable for most grades in 2006. Demand                  for                  high-gloss grades was down due to grade switching resulting from                  supply                  disruptions. Pricing remained firm during the year, increasing                  at the                  beginning of the third quarter (“Q3”) of 2006 before falling slightly at                  the end of the year. Overall, the average soft-calendered A grade                  (“SC-A”)                  benchmark price increased 2.5% over the previous                  year. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Directory                  demand was strong in 2006 due to the increase in large publisher                  and                  independent books printed. The average benchmark price was up 6.8%                  over                  2005. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Newsprint                  demand and U.S. consumption were weak during 2006, but benchmark                  prices                  were up due to cost pressures and the strong Canadian dollar. The                  average                  newsprint benchmark price increased 8.2% over 2005, but decreased                  1.4% in                  the fourth quarter (“Q4”) of 2006 from the preceding                  quarter. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Pulp                  demand was strong and NBSK supply continued to decline because                  of the                  closure of several uncompetitive North American mills. The combination                  of                  strong demand and tight supply resulted in prices increasing to                  their                  highest level since 1995. The average Northern                  Europe benchmark price in 2006 increased 11.6% over 2005, and increased                  2.8% in Q4, 2006 over the preceding                  quarter. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Containerboard                  demand was steady in 2006 because of strong U.S. box shipments,                  which were                  driven by steady demand for non-durable goods and processed foods,                  and low                  mill and box inventories in the first half of 2006. The steady                  demand led                  to the average white-top linerboard benchmark price increasing                  10.7% in                  2006, compared to 2005. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Effective                  February 16, 2006, Norske Skogindustrier ASA (“Norske Skog”) sold its                  29.4% shareholding in the Company. Concurrently, the three directors                  from                  Norske Skog resigned from the Company’s board of directors. Norske Skog                  had not been involved in the management of the Company since 2001, and the                  shareholder transaction has not affected the Company’s operations or its                  current distribution agreement with Norske Skog in Asia. The Company                  did                  not receive any proceeds related to this                  transaction. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During                  Q1, 2006, the Company permanently closed its Port Alberni A3 paper                  machine, which had been indefinitely idled since February 2005.                  The                  permanent closure has been assumed to be effective January 1, 2006,                  and                  accordingly, 140,000 tonnes of previously idled equivalent newsprint                  capacity has been removed from the Company’s total capacity. The permanent                  closure resulted in a $19.1 million impairment loss in 2006, of                  which $1.5                  million was recorded in Q4 upon completion of a detailed review                  of the                  assets. The impairment losses were recorded in the newsprint segment                  in                  amortization expense. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During                  Q3, 2006, the Company announced the temporary idling of its Port                  Alberni                  groundwood pulp mill, effective September 30, 2006, and the replacement                  of                  high-cost groundwood pulp with recycled fibre. In Q4, 2006, the                  Company                  determined that this closure was permanent due to the successful                  transition to recycled fibre and wrote off approximately $0.8 million                  of                  ancillary assets to cost of sales in the specialty segment in                  Q4. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On                  October 23, 2006, Third Avenue Management, LLC (“TAM”) increased its                  holdings in the Company on behalf of certain client accounts to                  37.97%. On                  December 1, 2006, the Company appointed four new directors to its                  board of                  directors at TAM’s request and accepted the resignations of two                  directors. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On                  January 15, 2007, the Company’s board of directors accepted the                  resignations of President and Chief Executive Officer Russell J.                  Horner                  and Vice-President, Finance and Chief Financial Officer Ralph Leverton,                  both of whom elected to exercise their rights under change-of-control                  agreements. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table            of Contents*

|   | 1.3 | 2006highlights  |
|--------|-----|----------------------|

| Ø   | Realized                a $74 million improvement in year-over-year EBITDA as a result of                the                Company’s 2006 Performance Improvement                Program. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ø   | Achieved                significant improvements in production levels, compared to 2005,                by                increasing machine speed and efficiency, focusing on asset reliability                and                product quality and sharing best practices across                mills. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ø   | Set                sales volume records for pulp, containerboard, and total pulp and                paper                (500,900 tonnes, 125,300 tonnes and 2,315,500 tonnes,                respectively). |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ø   | Achieved                highest EBITDA since 2000. |
|--------------------|----------------------------------------------------|
| Ø   | Reduced                the use of high-cost kraft pulp in paper production to the lowest                level in                the Company’s history in 2005 and sustained low kraft levels in                2006. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ø   | Formed                a joint venture company with the Tla’Amin First Nation and the City of                Powell River to allow its partners to develop surplus mill land around                the                Company’s Powell River Division. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ø   | Registered                Crofton paper and pulp mill to the PricewaterhouseCoopers (“PwC”)                certified chain-of-custody standard, the last of the Company’s mills to be                registered, and achieved Forest Stewardship Council chain-of-custody                certification for the de-inked pulp produced by the Paper Recycling                Division. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ø   | Received                third-party recognition through the BC Export Award in the primary                products and resources category and selected as a finalist for the                2006                Metafore Innovation Award for developing the Electraprime and Electrastar                grades. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ø   | Received                social responsibility recognition as recipient of the Ethics in Action                Award for environmental excellence and as one of 25 companies for                greenhouse gas reductions in the Carbon Disclosure Project - Canada                280                Report. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ø   | Received                the Canadian Institute of Chartered Accountants Award of Excellence                for                Corporate Reporting in the forestry products category, and ranked                50th out                of more than 200 companies in the Globe and Mail newspaper’s Report on                Business corporate governance rankings, up from 89th in                2005. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table            of Contents*

|   | 1.4 | Selected                  annual financial                  information |
|--------|-----|-------------------------------------------------------------------------|

| *(In                  millions of dollars, except where otherwise stated)*      |   |
|---------------------------------------------------------------------------------|--------|
|                                                                            |   | **2006** |   | 2005 |   | 2004 |   |
| Sales                                                                           |   | **$** | **1,882.5** |   | $ | 1,823.9 |   | $ | 1,878.2 |   |
| Operating                  earnings (loss)                                      |   |   | **3.9** |   |   | (25.1 | ) |   | (31.3 | ) |
| EBITDA1                                                                         |   |   | **211.0** |   |   | 155.2 |   |   | 152.8 |   |
| Net                  earnings (loss)                                            |   |   | **(15.9** | **)** |   | (25.6 | ) |   | (28.6 | ) |
| EBITDA                  margin1,2                                               |   |   | **11.2** | **%** |   | 8.5 | % |   | 8.1 | % |
| Net                  earnings (loss) per share (in dollars) - basic and diluted |   | **$** | **(0.07** | **)** | $ | (0.12 | ) | $ | (0.13 | ) |
| Total                  assets                                                   |   |   | **2,637.7** |   |   | 2,695.9 |   |   | 2,745.9 |   |
| Total                  long-term liabilities                                    |   |   | **1,338.6** |   |   | 1,396.8 |   |   | 1,417.6 |   |
| Sales                  (000 tonnes)3                                            |   |   |   |   |   |   |   |   |   |   |
| Specialty                  papers                                               |   |   | **990.2** |   |   | 942.9 |   |   | 993.7 |   |
| Newsprint                                                                       |   |   | **699.1** |   |   | 707.1 |   |   | 754.7 |   |
| Total                  paper                                                    |   |   | **1,689.3** |   |   | 1,650.0 |   |   | 1,748.4 |   |
| Pulp                                                                            |   |   | **626.2** |   |   | 603.0 |   |   | 527.3 |   |
| Total                  sales                                                    |   |   | **2,315.5** |   |   | 2,253.0 |   |   | 2,275.7 |   |
| Production                  (000 tonnes) 3                                 |   |   |   |   |   |   |   |   |   |   |
| Specialty                  papers                                               |   |   | **983.7** |   |   | 949.3 |   |   | 1,000.0 |   |
| Newsprint                                                                       |   |   | **703.7** |   |   | 699.5 |   |   | 757.8 |   |
| Total                  paper                                                    |   |   | **1,687.4** |   |   | 1,648.8 |   |   | 1,757.8 |   |
| Pulp                                                                            |   |   | **624.3** |   |   | 590.9 |   |   | 544.0 |   |
| Total                  production                                               |   |   | **2,311.7** |   |   | 2,239.7 |   |   | 2,301.8 |   |
| Average                  spot foreign exchange rate C$/US$4                     |   |   | **1.134** |   |   | 1.212 |   |   | 1.302 |   |
| Period-end                  spot foreign exchange rate C$/US$5                  |   |   | **1.165** |   |   | 1.166 |   |   | 1.204 |   |
| Effective                  foreign exchange rate C$/US$6                        |   |   | **1.146** |   |   | 1.239 |   |   | 1.359 |   |
| Common                  shares (millions)                                       |   |   |   |   |   |   |   |   |   |   |
| At                  period end                                                  |   |   | **214.6** |   |   | 214.6 |   |   | 214.6 |   |
| Weighted                  average                                               |   |   | **214.6** |   |   | 214.6 |   |   | 214.6 |   |

| 1   | EBITDA                is a non-GAAP measure. Refer to “Non-GAAP Measures” for further                details. |
|---------------|---------------------------------------------------------------------------------------------------------------------------|
| 2   | EBITDA                margin is defined as EBITDA as a percentage of                sales. |
|---------------|--------------------------------------------------------------------------------------------|
| 3   | Effective                January 1, 2006, the Company reclassified containerboard out of its                specialty paper segment into its pulp segment. Prior period comparatives                have been reclassified to reflect this                change. |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4   | Average                spot foreign exchange rate is the average Bank of Canada noon spot                rate                over the reporting period. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 5   | Period-end                spot foreign exchange rate is the Bank of Canada noon spot                rate. |
|---------------|-----------------------------------------------------------------------------------------------------------|
| 6   | Effective                foreign exchange rate represents a blended rate which takes into                account                the applicable spot rates and the Company’s revenue hedging program in the                reporting period. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(In                  millions of dollars, except where otherwise stated)*                       |   |
|--------------------------------------------------------------------------------------------------|--------|
|                                                                                             |   | **2006** |   | 2005 |   |
|                                                                                             |   | Q1 |   | Q2 |   | Q3 |   | **Q4** |   | Q1 |   | Q2 |   | Q3 |   | Q4 |   |
| Sales                                                                                            |   | $ | 456.3 |   | $ | 469.6 |   | $ | 486.0 |   | **$** | **470.6** |   | $ | 462.7 |   | $ | 439.0 |   | $ | 450.3 |   | $ | 471.9 |   |
| Operating                  earnings (loss)                                                       |   |   | (15.9 | ) |   | 6.1 |   |   | 17.0 |   |   | **(3.3** | **)** |   | (10.7 | ) |   | (19.5 | ) |   | 2.8 |   |   | 2.3 |   |
| EBITDA1                                                                                          |   |   | 47.3 |   |   | 52.4 |   |   | 62.8 |   |   | **48.5** |   |   | 33.6 |   |   | 25.4 |   |   | 47.9 |   |   | 48.3 |   |
| Net                  earnings (loss)                                                             |   |   | (23.6 | ) |   | 42.4 |   |   | 2.5 |   |   | **(37.2** | **)** |   | (21.8 | ) |   | (30.0 | ) |   | 34.2 |   |   | (8.0 | ) |
| EBITDA                  margin1,2                                                                |   |   | 10.4 | % |   | 11.2 | % |   | 12.9 | % |   | **10.3** | **%** |   | 7.3 | % |   | 5.8 | % |   | 10.6 | % |   | 10.2 | % |
| Net                  earnings (loss) per share (in dollars) -                  basic and diluted |   | $ | (0.11 | ) | $ | 0.20 |   | $ | 0.01 |   | **$** | **(0.17** | **)** | $ | (0.10 | ) | $ | (0.14 | ) | $ | 0.16 |   | $ | (0.04 | ) |
| Sales                  (000 tonnes) 3                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty                  papers                                                                |   |   | 235.1 |   |   | 237.8 |   |   | 264.6 |   |   | **252.7** |   |   | 238.0 |   |   | 219.9 |   |   | 235.0 |   |   | 250.0 |   |
| Newsprint                                                                                        |   |   | 181.1 |   |   | 178.4 |   |   | 169.5 |   |   | **170.1** |   |   | 180.7 |   |   | 169.2 |   |   | 169.9 |   |   | 187.3 |   |
| Total                  paper                                                                     |   |   | 416.2 |   |   | 416.2 |   |   | 434.1 |   |   | **422.8** |   |   | 418.7 |   |   | 389.1 |   |   | 404.9 |   |   | 437.3 |   |
| Pulp                                                                                             |   |   | 153.4 |   |   | 171.4 |   |   | 155.9 |   |   | **145.5** |   |   | 150.6 |   |   | 150.3 |   |   | 157.7 |   |   | 144.4 |   |
| Total                  sales                                                                     |   |   | 569.6 |   |   | 587.6 |   |   | 590.0 |   |   | **568.3** |   |   | 569.3 |   |   | 539.4 |   |   | 562.6 |   |   | 581.7 |   |
| Production                  (000 tonnes) 3                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty                  papers                                                                |   |   | 235.7 |   |   | 244.2 |   |   | 254.8 |   |   | **249.0** |   |   | 237.5 |   |   | 228.6 |   |   | 242.3 |   |   | 240.9 |   |
| Newsprint                                                                                        |   |   | 183.9 |   |   | 179.6 |   |   | 170.0 |   |   | **170.2** |   |   | 176.7 |   |   | 167.4 |   |   | 167.9 |   |   | 187.5 |   |
| Total                  paper                                                                     |   |   | 419.6 |   |   | 423.8 |   |   | 424.8 |   |   | **419.2** |   |   | 414.2 |   |   | 396.0 |   |   | 410.2 |   |   | 428.4 |   |
| Pulp                                                                                             |   |   | 153.1 |   |   | 155.6 |   |   | 162.8 |   |   | **152.8** |   |   | 142.3 |   |   | 141.4 |   |   | 157.1 |   |   | 150.1 |   |
| Total                  production                                                                |   |   | 572.7 |   |   | 579.4 |   |   | 587.6 |   |   | **572.0** |   |   | 556.5 |   |   | 537.4 |   |   | 567.3 |   |   | 578.5 |   |
|                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                  spot foreign exchange rate                  C$/US$4                     |   |   | 1.155 |   |   | 1.121 |   |   | 1.121 |   |   | **1.139** |   |   | 1.227 |   |   | 1.244 |   |   | 1.201 |   |   | 1.173 |   |
| Period-end                  spot foreign exchange rate C$/US$5                                   |   |   | 1.167 |   |   | 1.115 |   |   | 1.115 |   |   | **1.165** |   |   | 1.210 |   |   | 1.226 |   |   | 1.161 |   |   | 1.166 |   |
| Effective                  foreign exchange rate C$/US$6                                         |   |   | 1.172 |   |   | 1.147 |   |   | 1.129 |   |   | **1.139** |   |   | 1.265 |   |   | 1.267 |   |   | 1.221 |   |   | 1.206 |   |
| Common                  shares (millions)                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At                  period end                                                                   |   |   | 214.6 |   |   | 214.6 |   |   | 214.6 |   |   | **214.6** |   |   | 214.6 |   |   | 214.6 |   |   | 214.6 |   |   | 214.6 |   |
| Weighted                  average                                                                |   |   | 214.6 |   |   | 214.6 |   |   | 214.6 |   |   | **214.6** |   |   | 214.6 |   |   | 214.6 |   |   | 214.6 |   |   | 214.6 |   |

| 1   | EBITDA                is a non-GAAP measure. Refer to the “Non-GAAP Measures” section for                further details. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | 1.5 | Strategy** ** |
|--------|-----|--------------------|

|   | The                  Company’s long-term objective is to achieve higher sustainable earnings                  and maximize cash flow by strengthening its position as a leading                  producer                  of value-added paper. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | Key                  performance drivers |
|--------|--------|------------------------------------------|

|   | The                  Company believes the following key performance drivers are critical                  to                  achieving its strategic goals and creating value for its                  investors. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Strong                  market position* |
|--------|-------------------------------------------|

|   | Market                  position is a significant driver of the Company’s success. As one of the                  largest North America-based producers of uncoated groundwood specialty                  papers and newsprint, market penetration is important. The Company’s brand                  names are well recognized in the marketplace and it has built a                  reputation                  for reliability, value and service. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Upgraded,                  cost-competitive manufacturing* |
|--------|-------------------------------------------------------------|

|   | In                  the past five years, capital expenditures of approximately $419                  million                  have been directed primarily towards the Company’s manufacturing                  facilities to shift production towards higher-margin papers, reduce                  unit                  production costs, increase machine productivity, improve product                  quality,                  increase capacity, and meet or exceed environmental                  regulations. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Diversified                  product mix* |
|--------|--------------------------------------------|

|   | In                  recent years, the Company has introduced or expanded a number of                  specialty                  paper and differentiated product lines, including lightweight newsprint                  grades, coated papers, MF hi-brites, super hi-brites, soft-calendered                  grades, directory, sawdust-based pulp, and white-top linerboard.                  These                  products offer improved margins over standard commodity newsprint                  grades.                  In addition, market pulp further diversifies the product                  mix. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Strong                  supply chain* |
|--------|----------------------------------------|

|   | The                  Company has a strong and flexible distribution network. The Company                  utilizes all transportation modes available to it, such as truck,                  rail,                  and container and break-bulk shipping. The Company’s supply chain systems                  have enabled better planning and scheduling, allowing the Company                  to use                  the most cost-efficient means of transportation to ship its                  products. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Production                  expertise* |
|--------|-----------------------------------------|

|   | Over                  the last several years, the Company has developed expertise in                  the                  production of lightweight papers. Lower basis weight papers reduce                  the                  Company’s costs by decreasing fibre, conversion, shipping, storage and                  handling expenses, and reducing warehouse space required for inventories,                  thus creating a competitive advantage. The use of lower basis weight                  paper                  by the Company’s customers also reduces their costs. The Company’s                  paper-making expertise enables it to produce high-quality, high-brightness                  uncoated groundwood grades. In addition, new product development                  continues                  to be an important focus. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  Company is also 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. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Skilled                  people* |
|--------|-----------------------------------|

|   | The                  Company’s employees act as strategic partners when tackling challenges                  and                  improving the Company’s performance. Recognizing this, the Company strives                  to be a top employer by providing a work environment that is safe,                  challenging, interesting and                  rewarding. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Sound                  corporate social                  responsibility* |
|--------|---------------------------------------------------------------------------|

|   | Corporate                  social responsibility is one of the Company’s core values. The Company                  judges success in this area through the health of citizens in its                  communities, the safety and well-being of its employees, the vibrancy                  of                  its communities, and the sustainability of the Company’s practices with                  respect to their impact on the environment. A complete description                  of the                  Company’s objectives and progress in corporate social responsibility will                  be provided in the Company’s 2006 Sustainability Report, which will be                  released in April 2007. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Key                  performance indicators |
|--------|---------------------------------------------|

|   | The                  Company believes the following key performance indicators are meaningful                  for measuring the Company’s progress in achieving its strategic goals and                  creating value for investors. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Safety* |
|--------|----------|

|   | The                  Company’s first priority is the well-being of its employees. Safety is                  measured in terms of the medical incident rate (“MIR”), which is the                  number of incidents requiring medical attention per 200,000 hours                  worked,                  and the lost-time injury frequency (“LTI”), which is the number of                  lost-time injuries per 200,000 hours worked. The Company achieved                  its                  safest year on record in 2005 and set even higher safety goals                  for 2006.                  However, 2006 was disappointing in that the Company’s safety record                  slipped, compared to 2005. Additional details on 2006 safety results                  will                  be provided in the Company’s 2006 Sustainability Report, which will be                  released in April 2007. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *EBITDA* |
|--------|----------|

|   | EBITDA                  is widely used in the financial community to compare the profitability                  of                  corporations, and is used by management as an indicator of relative                  operating performance. Further analysis and discussion of this                  indicator                  is provided in all discussions of operations and the “Non-GAAP Measures”                  section. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Performance                  Improvement Program* |
|--------|----------------------------------------------------|

|   | One                  of the characteristics of the Company’s culture is that of engaging its                  people in projects that challenge the status quo. The Company has                  for                  several years aggregated these initiatives on an annual basis into                  a                  Performance Improvement Program. Performance improvement initiatives                  challenge the Company to create innovative and cost-effective business                  solutions. In addition, the Company focuses on significant capital                  projects to improve the quality of products and improve machine                  efficiency. In 2006, the Company launched its fifth consecutive                  Performance Improvement Program. A detailed summary of the 2006                  Performance Improvement Program results is available in this section                  under                  “Progress on 2006 Strategic Initiatives”. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Average                  sales revenue per tonne* |
|--------|----------------------------------------------------|

|   | Average                  sales revenue per tonne for each core business provides key insights                  into                  how the Company maximizes its market position. The main factors                  in revenue                  growth are U.S. dollar transaction prices, and the relationship                  between                  the Canadian and U.S. dollar. Details on 2006 results are provided                  in the                  “Annual Segmented Results of Operations” and “Quarterly Segmented Results                  of Operations” sections. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Average                  cash costs* |
|--------|---------------------------------------|

|   | Reducing                  cash costs while maintaining product quality is essential to sustaining                  profitability in each of the Company’s core businesses. The Company                  continually examines all areas of its business for cost reduction                  opportunities. Details on 2006 results are provided in the “Annual                  Segmented Results of Operations” and “Quarterly Segmented Results of                  Operations” sections. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Debt                  to capitalization* |
|--------|-------------------------------------------|

|   | The                  Company’s success also depends on its liquidity and continued ability to                  finance its growth. The Company focuses on its total-debt to                  total-capitalization ratio and on its net-debt to net-capitalization                  ratio                  in order to assess its debt position. Further discussion is provided                  in                  the “Liquidity and Capital Resources”section. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Greenhouse                  gas emissions (“GHG”)* |
|--------|-----------------------------------------------------------------|

|   | The                  Company takes its environmental responsibility seriously and, as                  such, has                  invested heavily in environmental initiatives. The Company has                  had a 70%                  absolute reduction of GHGs and a 69% intensity reduction of GHGs                  since                  1990, and is well positioned to meet objectives established by                  the Kyoto                  Protocol. Emissions are measured in direct GHGs per tonne. In recognition                  of its progress in 2006, the Company was one of 25 companies recognized                  for reducing greenhouse gases in the Carbon Disclosure Project                  - Canada                  280 Report. Further details will be provided in the Company’s 2006                  Sustainability Report, which will be released in April                  2007. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | Strategic                  initiatives  |
|--------|----------------------------------------------|

| *(All                  amounts pre-tax and in millions of dollars)*   |   |
|-----------------------------------------------------------------------|--------|
| **Initiative**                                                        |   | **Performance                  goal** |   | **2006****Goal** |   | **2006                  Achievement** |   | **2005                  Achievement** |   |
| ***Components                  of Performance Improvement Programs*** |   |
| i) Grade                  development and product optimization   |   |   | Develop                  new, higher-value specialty products, reduce exposure to the commodity                  newsprint market, and optimize product, grade and customer                  mix |   | $ | 9 |   | **$** | **11** |   | $ | 19 |   |
| ii) Cost                  Reduction                              |   |   | Improve                  productivity |   |   | 24 |   |   | **20** |   |   | - |   |
|                                                                  |   |   | Optimize                  fibre |   |   | 8 |   |   | **12** |   |   | 12 |   |
|                                                                  |   |   | Improve                  energy efficiencies |   |   | 6 |   |   | **12** |   |   | 10 |   |
|                                                                  |   |   | Optimize                  freight |   |   | 4 |   |   | **5** |   |   | 7 |   |
|                                                                  |   |   | Optimize                  chemical usage |   |   | 6 |   |   | **5** |   |   | 4 |   |
|                                                                  |   |   | Reduce                  kraft usage |   |   | 2 |   |   | **(1** | **)** |   | 18 |   |
|                                                                  |   |   | Other |   |   | 11 |   |   | **10** |   |   | 14 |   |
|                                                                  |   |   |   |   |   | 61 |   |   | **63** |   |   | 65 |   |
|                                                                  |   |   |   |   | $ | 70 |   | **$** | **74** |   | $ | 84 |   |

|   | Progress                  on 2006 strategic initiatives |
|--------|---------------------------------------------------------|

|   | *(a)* | *Performance                  Improvement Program* |
|--------|-------|----------------------------------------------------|

|   | In                  January 2006, the Company commenced its fifth consecutive annual                  Performance Improvement Program. The 2006 Performance Improvement                  Program                  was aimed at generating $70 million in year-over-year EBITDA improvements                  across all areas of the Company. Improvements were targeted in                  the areas                  of grade development and product optimization and cost reduction.                  In 2006,                  the program delivered $74 million in realized                  improvements. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | *i)* | *Grade                  development and product optimization* |
|--------|--------|------|---------------------------------------------------------------|

|   | This                  strategic initiative included the marketing of new high-value specialty                  paper products, and the reduction of the Company’s exposure to standard                  newsprint. In 2006, the Company realized EBITDA improvements of                  $11                  million as a result of its various grade development and product                  optimization initiatives. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  pursuit of these performance initiatives, the Company accomplished                  the                  following in 2006: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | *Sales                  of Electraprime and Electrastar* |
|--------|----------------------------------------------------------|

*ii)*
*Cost        reduction *

|   | The                  Company’s cost-reduction initiatives produced the following key results                  in                  2006: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Improve                  productivity* |
|--------|-----------------------------------------|

|   | *Optimize                  fibre* |
|--------|-----------------------------------|

|   | The                  Company continued to optimize its furnish mix during the year by                  using                  lower-cost chips and optimizing the use of other lower-cost furnishes.                  These and other initiatives resulted in savings of $12 million                  in                  2006. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Improve                  energy efficiencies* |
|--------|------------------------------------------------|

|   | The                  Company is a significant consumer of steam and electrical energy.                  The                  overall reduction in steam usage and the continuing optimization                  of the                  fuel mix in the Company’s power boilers resulted in less reliance on                  fossil fuels in favour of wood waste hog fuel. In addition, the                  Company                  focused on a number of electrical energy initiatives that reduced                  overall                  electrical consumption. These and other energy reduction initiatives                  resulted in additional savings of $12 million in                  2006. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Optimize                  freight* |
|--------|-------------------------------------|

|   | *Optimize                  chemical usage* |
|--------|--------------------------------------------|

|   | The                  Company had a number of initiatives to reduce the usage and costs                  of                  bleaching and additive chemicals during the year. These and other                  initiatives resulted in additional savings of $5 million in                  2006. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | *Other* |
|--------|---------|

|   | The                  Company also completed a series of smaller initiatives, primarily                  with                  respect to manpower reductions, procurement improvements and its                  maintenance practices. Approximately $10 million in savings were                  realized                  as a result of these initiatives. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *(b)* | *Other                  strategic initiatives* |
|--------|-------|------------------------------------------------|

|   |   | *i)* | *Preferred                  supplier* |
|--------|--------|------|---------------------------------------|

|   | *Quality                  initiatives* |
|--------|----------------------------------------|

|   | *Chain-of-custody                  certification* |
|--------|---------------------------------------------------|

|   | The                  Company has implemented over the 2004-to-2006 period an “independent                  chain-of-custody” system to certify its wood fibre supply. The PwC                  standard is a third-party audited system that identifies the source                  of                  wood fibre and whether it is derived from a forest independently                  certified                  as being managed in accordance with a recognized sustainable forest                  certification system. By 2006, all the Company’s paper and pulp mills were                  certified under the PwC 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. It is expected to continue to result in additional                  sales opportunities. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Systems                  and processes |
|--------|----------------------------------------|

|   | As                  part of its ongoing initiatives to improve efficiency, the Company                  intends                  to further invest in improved systems and processes in 2007. In                  the second                  quarter (“Q2”) of 2006, the Company completed an upgrade in its enterprise                  business system with the primary focus on improving order visibility.                  In                  2007, the Company expects to undertake a project to expand the                  use of its                  enterprise business system to locations currently using a legacy                  system. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2007                  Performance Improvement Program |
|--------|-------------------------------------------------------|

|   | The                  2007 Performance Improvement Program is currently under review                  with the                  expectation that there will be identified improvements across all                  areas of                  the Company similar to those of previous                  years. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1.6 | Consolidated                  results of operations  |
|--------|-----|-----------------------------------------------------------|

|   | *Year                  ended December 31, 2006 compared to year ended December 31,                  2005* |
|--------|-----------------------------------------------------------------------------------------------------------|

|   | *Sales* |
|--------|---------|

|   | Sales                  were $1,882.5 million in 2006, an increase of $58.6 million, or                  3.2%,                  compared to $1,823.9 million in 2005. The positive impact on sales                  from                  improved prices across most paper and pulp grades together with                  higher                  sales volumes for most grades more than offset the negative impact                  from                  the stronger Canadian dollar. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following table highlights the factors that affected the Company’s sales                  by segment: |
|--------|----------------------------------------------------------------------------------------------------------------------------------|

| Sales                  ($ millions) |   |
|-------------------------------------|--------|
|                                |   | Year                  endedDecember                  31, |   |   |   | Increase                  (decrease) from 2005as                  a result of |   |
|                                |   | **2006** |   | 2005 |   | Total                  change |   | Volume |   | Mix |   | Price |   | F/X |   |
| Specialty                  papers   |   | **$** | **918.4** |   | $ | 900.5 |   | $ | 17.9 |   | $ | 45.1 |   | $ | 5.2 |   | $ | 34.1 |   | $ | (66.5 | ) |
| Newsprint                           |   |   | **529.8** |   |   | 529.1 |   |   | 0.7 |   |   | (5.9 | ) |   | 2.1 |   |   | 39.0 |   |   | (34.5 | ) |
| Total                  paper        |   | **$** | **1,448.2** |   | $ | 1,429.6 |   | $ | 18.6 |   | $ | 39.2 |   | $ | 7.3 |   | $ | 73.1 |   | $ | (101.0 | ) |
| Pulp                                |   |   | **434.3** |   |   | 394.3 |   |   | 40.0 |   |   | 15.2 |   |   | (1.0 | ) |   | 62.8 |   |   | (37.0 | ) |
| Total                               |   | **$** | **1,882.5** |   | $ | 1,823.9 |   | $ | 58.6 |   | $ | 54.4 |   | $ | 6.3 |   | $ | 135.9 |   | $ | (138.0 | ) |

|   | *EBITDA* |
|--------|----------|

|   | EBITDA                  was $211.0 million in 2006, an increase of $55.8 million, or 36.0%,                  compared to $155.2 million in the previous year. The positive impact                  of                  higher transaction prices, performance improvements, primarily                  reflecting                  productivity improvements, lower planned maintenance shutdown costs                  and                  lower restructuring costs more than offset the negative impact                  of the                  stronger Canadian dollar and inflationary impacts including chip                  prices. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following table summarizes the key changes in EBITDA from the year                  ended                  December 31, 2005, to the year ended December 31,                  2006: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Operating                  earnings (loss)* |
|--------|----------------------------------------------|

|   | The                  Company recorded operating earnings of $3.9 million in 2006, compared                  to                  an operating loss of $25.1 million for the previous year. The improvement                  was mainly related to the $55.8 million increase in EBITDA noted                  above,                  partially offset by $23.4 million of impairment losses related                  to the                  permanent closure of the A3 paper machine and other asset impairments.                  More details are provided in the “Critical Accounting Policies and                  Estimates” section. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | *Net                  earnings (loss)* |
|--------|----------------------------------------|

|   | Net                  loss in 2006 was $15.9 million ($0.07 per common share), compared                  to a net                  loss of $25.6 million ($0.12 per common share) in 2005. The 2006                  net loss                  included a $0.2 million (less than $0.01 per common share) after-tax                  foreign exchange loss on the translation of U.S.-dollar-denominated                  debt,                  compared to an after-tax gain of $20.7 million ($0.10 per common                  share) in                  the previous year. Net loss in 2006 also included an after-tax                  impairment                  loss of $15.4 million ($0.07 per common share), a $22.9 million                  ($0.11 per                  common share) release of future income taxes related to the reduction                  in                  the federal corporate income tax rate, a net $4.0 million ($0.02                  per                  common share) favourable future income tax provision adjustment,                  and $2.2                  million ($0.01 per common share) of after-tax advisory costs resulting                  from a tender offer initiated by TAM. Net loss in 2005 included                  net                  favourable future income tax adjustments totalling $18.3 million                  ($0.09                  per common share), which consisted primarily of a $14.2 million                  ($0.07 per                  common share) favourable future income tax adjustment related to                  a                  decrease in the British Columbia provincial income tax rate. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Net                  loss before the abovementioned items in 2006 was $25.0 million                  ($0.12 per                  common share), compared to a net loss of $64.6 million ($0.30 per                  common                  share) in the previous year. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following table reconciles 2006 earnings (loss) to                  2005: |
|--------|------------------------------------------------------------------------------------------------|

| *($millions)*                                                                     |   | **Pre-tax** |      | **After-tax** |   |
|-----------------------------------------------------------------------------------|--------|-------------|-----------|---------------|--------|
| **2005                  earnings (loss)**                                         |   | **$**       | **(72.2** | **)**         | **$**  | **(25.6** | **)** |
| Higher                  EBITDA                                                    |   |        | 55.8      |          |   | 36.8 |   |
| Higher                  amortization expense                                      |   |        | (3.4      | )             |   | (2.2 | ) |
| Impairment                  loss                                                  |   |        | (23.4     | )             |   | (15.4 | ) |
| Decreased                  foreign exchange gain on translation of long-term debt |   |        | (25.0     | )             |   | (20.9 | ) |
| Lower                  other income, net                                          |   |        | (2.7      | )             |   | (1.7 | ) |
| Lower                  interest expense                                           |   |        | 1.9       |          |   | 1.3 |   |
| Income                  tax adjustments, net                                      |   |        | -         |          |   | 12.7 |   |
| Non-controlling                  interest                                         |   |        | (0.9      | )             |   | (0.9 | ) |
| **2006                  earnings (loss)**                                         |   | **$**       | **(69.9** | **)**         | **$**  | **(15.9** | **)** |

----

*Table            of Contents*

| **2.0** | **ANNUALSEGMENTED                  RESULTS OF                  OPERATIONS** |
|---------|-----------------------------------------------------------------------------|

|   | 2.1 | Specialty                  papers |
|--------|-----|-----------------------------------|

| Summary                  of Selected Financial Information                 |   |
|----------------------------------------------------------------------------|--------|
| *(In                  millions of dollars, except where otherwise stated)* |   | **2006** |   | 20051 |   | 20041 |   |
| Sales                                                                      |   | **$** | **918.4** |   | $ | 900.5 |   | $ | 935.3 |   |
| EBITDA2                                                                    |   |   | **104.8** |   |   | 115.8 |   |   | 95.6 |   |
| Operating                  earnings (loss)                                 |   |   | **9.7** |   |   | 24.8 |   |   | 1.0 |   |
| EBITDA                  margin2,                  3                        |   |   | **11.4** | **%** |   | 12.9 | % |   | 10.2 | % |
| Sales                  (000 tonnes)                                        |   |   | **990.2** |   |   | 942.9 |   |   | 993.7 |   |
| Production                  (000 tonnes)                                   |   |   | **983.7** |   |   | 949.3 |   |   | 1,000.0 |   |
| Average                  sales revenue per tonne                           |   | **$** | **928** |   | $ | 955 |   | $ | 941 |   |
| Average                  delivered cash costs per tonne4                   |   |   | **822** |   |   | 832 |   |   | 846 |   |
| SC-A                  paper, 35lb. (US$/ton)5                              |   |   | **788** |   |   | 769 |   |   | 713 |   |
| LWC                  paper, No.5, 40lb (US$/ton)5                          |   |   | **836** |   |   | 847 |   |   | 726 |   |
| Telephone                  directory paper, 22.1 lb. (US$/ton)5            |   |   | **721** |   |   | 675 |   |   | 650 |   |

| 1   | Effective                January 1, 2006, the Company reclassified containerboard out of its                specialty paper segment into its pulp segment. Prior period comparatives                have been reclassified to reflect this                change. |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2   | EBITDA                is a non-GAAP measure. Refer to the “Non-GAAP Measures” section for                further details. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------|
| 3   | EBITDA                margin is defined as EBITDA as a percentage of                sales. |
|---------------|--------------------------------------------------------------------------------------------|
| 4   | Average                cash costs per tonne for these purposes consist of cost of sales                and                Sales, general and administrative (“SG&A”) costs, including delivery                costs. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 5   | Benchmark                selling prices are sourced from Resource Information Systems, Inc.                (“RISI”). |
|---------------|----------------------------------------------------------------------------------------------------------------------------------|

|   | 2.1.1 | Markets |
|--------|-------|---------|

|   | During                  2006, market conditions for specialty paper products were                  mixed. |
|--------|-----------------------------------------------------------------------------------------------------------|

|   | Coated                  mechanical markets were weak for most of the year due to flat demand,                  which was caused by high North American mill inventories and weak                  catalogue and magazine demand. Demand in 2006 was up 0.6% over                  2005, as                  demand in the second half of the year offset the weakness in the                  first six                  months. Nevertheless, prices continued to fall in 2006, and spot                  prices                  faced pressure due to strong competition and weak order books.                  The average                  LWC benchmark price in 2006 was down US$11 per ton, or 1.3%, compared                  to                  the previous year. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Demand                  for uncoated mechanical grades was down 0.3% in 2006. The demand                  for high                  gloss and MF grades decreased 2.3% and 2.0%, respectively, due                  to grade                  switching as a result of supply disruptions and slightly lower                  insert                  circulation. Pricing remained firm throughout 2006 due to strong                  operating                  rates on a supply adjusted basis, with a slight decline in prices                  near the                  end of the year. The average benchmark price for SC-A in 2006 increased                  US$19 per ton, or 2.5%, over 2005. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Directory                  demand was strong in 2006, up 10.3% year-over-year. The growth                  was driven                  by an increase in the number of large publisher and independent                  books, and                  increased circulation, which contributed to an 8.2% increase in                  large                  publisher yellow pages in North America. In addition, a shift to                  lighter                  basis weights also contributed to a higher demand for the Company's                  paper. The average benchmark price for 2006 was up US$46 per ton,                  or 6.8%,                  over the previous year. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  North American economy is a key driver for the Company’s specialty paper                  business with 94% of its product sold to this market. Among its                  initiatives to improve profitability, the Company continues to                  look for                  ways to optimize its customer mix. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2.1.2 | Segment                  overview** ** |
|--------|-------|---------------------------------------------|

|   | The                  Company focused on growing its specialty paper grades in addition                  to grade                  optimization, enhancing its customer and grade mix, and shipping                  to more                  low-cost freight locations. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volumes for coated mechanical grades in 2006 were up 5.8% from                  the                  previous year. The growth matched the increased production in 2006                  from                  the Company’s coated mechanical                  machine. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volumes for uncoated mechanical grades in 2006 increased 14.5%                  over 2005                  due to significant growth in the Company’s Electraprime, Electrastar and                  Electrabrite grades. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  a strategic move, the Company reduced directory sales volumes in                  2006 by                  9.1% to take advantage of relatively strong newsprint and uncoated                  mechanical prices in 2006. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2.1.3 | Operational                  performance |
|--------|-------|------------------------------------------|

|   | The                  specialty papers business recorded operating earnings of $9.7 million                  on                  sales of $918.4 million in 2006, compared to operating earnings                  of $24.8                  million on sales of $900.5 million in 2005. EBITDA of $104.8 million                  in                  2006 was $11.0 million lower than the $115.8 million recorded in                  the                  previous year. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volume of 990,200 tonnes in 2006 increased 47,300 tonnes, or 5.0%,                  compared to the previous year. The increase was largely due to                  the                  significant growth of the Company’s uncoated specialty                  grades. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  sales revenue of $928 per tonne in 2006 was down $27 per tonne                  compared to                  the previous year. The negative impact of the stronger Canadian                  dollar on                  revenues more than offset higher average transaction prices across                  most                  grades, improvements in customer and grade mix, and a favourable                  adjustment to allowance for doubtful                  accounts. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  cash costs in 2006 were $822 per tonne, an improvement of $10 per                  tonne,                  compared to $832 recorded in 2005. Savings from performance improvements                  more than offset higher chip costs, rising energy prices, increased                  labour                  expense and the impact of                  inflation. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2.1.4 | Outlook |
|--------|-------|---------|

|   | Market                  conditions are expected to remain mixed for specialty paper products                  in                  2007. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | Coated                  mechanical paper demand is expected to remain relatively flat,                  reflecting                  an anticipated slowing of magazine and catalogue demand and a switch                  to                  SC-A grade. Recent capacity closures in Western Europe as well                  as the                  rising Euro are expected to result in lower imports to North America,                  which should help stabilize the North American coated market. In                  addition,                  rising chip, pulp, and energy costs are expected to increase the                  cash-cost                  floor thereby preventing significant price erosion. Benchmark prices                  are                  expected to fall in Q1, 2007, matching the seasonally slower first                  quarter                  before stabilizing in the second half of the                  year. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Markets                  for uncoated mechanical grades are expected to remain relatively                  stable in                  2007. Demand for high-gloss paper is expected to grow due to grade                  switching from coated mechanical and lower-gloss grades, but excess                  capacity and European imports are expected to keep operating rates                  low.                  Demand for MF grades is expected to be stable in 2007. Benchmark                  prices                  for high-gloss grades are expected to weaken in the seasonally                  slower                  first quarter and remain flat for the remainder of the                  year. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Directory                  demand is expected to be solid through 2007 as large and independent                  publishers continue to print more books. In addition, benchmark                  prices are                  expected to increase in 2007, compared to                  2006. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | 2.2 | Newsprint |
|--------|-----|-----------|

| Summary                  of Selected Financial Information                 |   |
|----------------------------------------------------------------------------|--------|
| *(In                  millions of dollars, except where otherwise stated)* |   | **2006** |   | 2005 |   | 2004 |   |
| Sales                                                                      |   | **$** | **529.8** |   | $ | 529.1 |   | $ | 553.1 |   |
| EBITDA1                                                                    |   |   | **71.8** |   |   | 58.1 |   |   | 45.2 |   |
| Operating                  earnings (loss)                                 |   |   | **6.9** |   |   | 12.3 |   |   | (4.3 | ) |
| EBITDA                  margin1,                  2                        |   |   | **13.6** | **%** |   | 11.0 | % |   | 8.2 | % |
| Sales                  (000 tonnes)                                        |   |   | **699.1** |   |   | 707.1 |   |   | 754.7 |   |
| Production                  (000 tonnes)                                   |   |   | **703.7** |   |   | 699.5 |   |   | 757.8 |   |
| Average                  sales revenue per tonne                           |   | **$** | **758** |   | $ | 748 |   | $ | 733 |   |
| Average                  delivered cash costs per tonne3                   |   |   | **655** |   |   | 666 |   |   | 673 |   |
| Newsprint,                  48.8 gsm, West Coast delivery (US$/tonne)4     |   |   | **649** |   |   | 600 |   |   | 544 |   |

| 1   | EBITDA                is a non-GAAP measure. Refer to the “Non-GAAP Measures” section for                further details. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------|
| 2   | EBITDA                margin is defined as EBITDA as a percentage of                sales. |
|---------------|--------------------------------------------------------------------------------------------|
| 3   | Average                cash costs per tonne for these purposes consist of cost of sales                and                SG&A costs, including delivery costs. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4   | Benchmark                selling prices are sourced from RISI. |
|---------------|----------------------------------------------------------------|

|   | 2.2.1 | Markets |
|--------|-------|---------|

|   | Newsprint                  demand continued to decline in 2006 with total U.S. consumption                  down 6.3%                  year-over-year. The decline was due mainly to daily newspapers                  employing a                  number of conservation measures to reduce paper consumption. Despite                  falling demand, operating rates were strong for most of the year,                  resulting in higher benchmark prices. The average newsprint benchmark                  price in 2006 was up US$49 per tonne, or 8.2%, compared to 2005.                  Continued                  weakness in U.S. consumption and lower operating rates resulted                  in prices                  softening late in 2006. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Approximately                  85% of the Company’s newsprint sales volumes were to North America and                  Asia. The 2006 geographical sales distribution, based on sales                  volumes, is                  depicted in the chart below. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2.2.2 | Segment                  overview |
|--------|-------|-----------------------------------|

|   | The                  Company reduced newsprint sales volumes in 2006 by 1.1% in a strategic                  move to optimize swing machine capacity to meet the higher demand                  for its                  specialty grades and to improve productivity. The Company continued                  to                  shift to lighter basis weights and increased its volume of value-added                  newsprint during the year, while also continuing to focus on freight                  optimization and customer mix**.** |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  chart below illustrates the decline in the Company’s newsprint cash costs                  per tonne since 2002, which has been driven primarily by the Company’s                  Performance Improvement Programs. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2.2.3 | Operational                  performance** ** |
|--------|-------|----------------------------------------------------|

|   | The                  newsprint business recorded operating earnings of $6.9 million                  on sales of                  $529.8 million in 2006, compared to operating earnings of $12.3                  million on                  sales of $529.1 million in 2005. EBITDA of $71.8 million in 2006                  was $13.7                  million higher than the $58.1 million recorded in 2005. The decline                  in                  operating earnings was primarily due to $19.1 million of impairment                  losses                  recorded on the Company’s A3 paper machine. Further details are provided                  in the “Critical Accounting Policies and Estimates”                  section. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volumes were 699,100 tonnes in 2006, down 8,000 tonnes, or 1.1%,                  from the                  previous year, primarily due to the Company’s strategic decision to                  optimize its swing machine capacity to meet higher demand for its                  specialty grades. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  sales revenue was $758 per tonne in 2006, an increase of $10 per                  tonne                  compared to the previous year. Higher transaction prices outweighed                  the                  impact of the stronger Canadian dollar*.* |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  cash costs in 2006 were $655 per tonne, an improvement of $11 per                  tonne                  from the previous year. Savings from performance improvements and                  lower                  shutdown and restructuring costs more than offset higher maintenance                  spending and higher prices for fibre, energy and fuel, and the                  impact of                  inflation. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2.2.4 | Outlook |
|--------|-------|---------|

|   | The                  Company expects the newsprint market to continue to soften in 2007                  due to                  decreases in ad lineage, circulation, average basis weights, and                  increased                  publisher conservation. The downward trend in newsprint consumption                  and                  lower expected operating rates in 2007 are expected to negatively                  impact                  prices. West Coast benchmark newsprint prices, which have risen                  for the                  last four years, are expected to weaken in 2007. Despite the downward                  trend in newsprint consumption, the Company believes it is well                  positioned                  to address further demand reductions due to its ability to switch                  grades. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2.3 | Pulp |
|--------|-----|------|

| Summary                  of Selected Financial Information                        |   |
|-----------------------------------------------------------------------------------|--------|
| *(In                  millions of dollars, except where otherwise stated)*        |   | **2006** |   | 20051 |   | 20041 |   |
| Sales                                                                             |   | **$** | **434.3** |   | $ | 394.3 |   | $ | 389.8 |   |
| EBITDA2                                                                           |   |   | **34.4** |   |   | (18.7 | ) |   | 12.0 |   |
| Operating                  earnings (loss)                                        |   |   | **(12.7** | **)** |   | (62.2 | ) |   | (28.0 | ) |
| EBITDA                  margin2,                  3                               |   |   | **7.9** | **%** |   | (4.7 | %) |   | 3.1 | % |
| Sales                  (000 tonnes)                                               |   |   | **626.2** |   |   | 603.0 |   |   | 527.3 |   |
| Production                  (000 tonnes)                                          |   |   | **624.3** |   |   | 590.9 |   |   | 544.0 |   |
| Average                  sales revenue per tonne$                                 |   | **$** | **693** |   | $ | 654 |   | $ | 739 |   |
| Average                  delivered cash costs per tonne4                          |   |   | **638** |   |   | 684 |   |   | 716 |   |
| NBSK                  pulp, Northern Europe delivery (US$/tonne)5                 |   |   | **681** |   |   | 610 |   |   | 618 |   |
| White-top                  linerboard, 42 lb., Eastern U.S. delivery (US$/tonne)5 |   |   | **673** |   |   | 608 |   |   | 591 |   |

| 1   | Effective                January 1, 2006, the Company reclassified containerboard out of its                specialty paper segment into its pulp segment. Prior period comparatives                have been reclassified to reflect this                change. |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2   | EBITDA                is a non-GAAP measure. Refer to the “Non-GAAP Measures” section for                further details. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------|
| 3   | EBITDA                margin is defined as EBITDA as a percentage of                sales. |
|---------------|--------------------------------------------------------------------------------------------|
| 4   | Average                cash costs per tonne for these purposes consist of cost of sales                and                SG&A costs, including delivery costs. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 5   | Benchmark                selling prices are sourced from RISI. |
|---------------|----------------------------------------------------------------|

----

*Table            of Contents*

|   | 2.3.1 | Markets |
|--------|-------|---------|

|   | Pulp                  markets were strong throughout 2006 with global pulp shipments                  up 3.9%                  year-over-year. The closure of a number of uncompetitive North                  American                  mills in 2006, coupled with relatively strong global paper and                  tissue                  demand resulted in multiple pulp price increases during the year.                  This                  helped push the European benchmark pulp price to its highest level                  since                  1995. The average Northern Europe NBSK benchmark price for 2006                  was up                  US$71 per tonne, or 11.6%, compared to the previous year. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | U.S.                  containerboard consumption remained steady in 2006, up 1.8% from                  the                  previous year, as U.S. box shipments increased with the relatively                  steady                  demand for non-durable goods and processed foods, and mill and                  box                  inventories were low for most of the year. Benchmark white-top                  linerboard                  prices increased in 2006 by US$65 per tonne, or 10.7%, compared                  to 2005.                  Prices in the second half of 2006 were relatively                  stable. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  primary markets for the Company’s market pulp are Asia and Australasia and                  Europe. The 2006 geographical sales distribution, based on sales                  volumes,                  is depicted in the chart below. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2.3.2 | Segment                  overview |
|--------|-------|-----------------------------------|

|   | 2.3.3 | Operational                  performance |
|--------|-------|------------------------------------------|

|   | 2.3.4 | Outlook |
|--------|-------|---------|

|   | The                  Company is expecting that demand and prices for containerboard                  will remain                  flat in 2007 as a result of the weakening U.S. economy. A US$40                  per tonne                  increase for containerboard and white-top linerboard has been announced                  by                  a number of suppliers, effective January 1,                  2007. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

| **3.0** | **QUARTERLYSEGMENTED                  RESULTS OF                  OPERATIONS** |
|---------|--------------------------------------------------------------------------------|

| Summary                  of Selected Financial Information*(In                  millions of dollars, except where otherwise stated)* |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                 |   | **2006** |   | 2005 |   |
| Specialty                  Papers1                                                                                                   |   | Q1 |   | Q2 |   | Q3 |   | **Q4** |   | Q1 |   | Q2 |   | Q3 |   | Q4 |   |
| Sales                                                                                                                                |   | $ | 220.8 |   | $ | 218.6 |   | $ | 245.0 |   | **$** | **234.0** |   | $ | 226.1 |   | $ | 211.7 |   | $ | 223.9 |   | $ | 238.8 |   |
| EBITDA2                                                                                                                              |   |   | 29.1 |   |   | 25.7 |   |   | 31.6 |   |   | **18.4** |   |   | 25.5 |   |   | 24.5 |   |   | 33.7 |   |   | 32.1 |   |
| Operating                  earnings (loss)                                                                                           |   |   | 6.6 |   |   | 2.8 |   |   | 6.9 |   |   | **(6.6** | **)** |   | 2.5 |   |   | 2.1 |   |   | 10.9 |   |   | 9.3 |   |
| EBITDA                  margin2,                  3                                                                                  |   |   | 13.2 | % |   | 11.8 | % |   | 12.9 | % |   | **7.9** | **%** |   | 11.3 | % |   | 11.6 | % |   | 15.1 | % |   | 13.4 | % |
|                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                  (000 tonnes)                                                                                                  |   |   | 235.1 |   |   | 237.8 |   |   | 264.6 |   |   | **252.7** |   |   | 238.0 |   |   | 219.9 |   |   | 235.0 |   |   | 250.0 |   |
| Production                  (000 tonnes)                                                                                             |   |   | 235.7 |   |   | 244.2 |   |   | 254.8 |   |   | **249.0** |   |   | 237.5 |   |   | 228.6 |   |   | 242.3 |   |   | 240.9 |   |
|                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                  sales revenue per tonne                                                                                     |   | $ | 939 |   | $ | 920 |   | $ | 926 |   | **$** | **927** |   | $ | 950 |   | $ | 963 |   | $ | 953 |   | $ | 956 |   |
| Average                  delivered cash costs per tonne4                                                                             |   |   | 815 |   |   | 811 |   |   | 806 |   |   | **853** |   |   | 843 |   |   | 852 |   |   | 809 |   |   | 827 |   |
|                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| SC-A                  paper, 35 lb. (US$/ton)5                                                                                       |   |   | 780 |   |   | 785 |   |   | 800 |   |   | **787** |   |   | 745 |   |   | 770 |   |   | 780 |   |   | 780 |   |
| LWC                  paper, No. 5, 40 lb. (US$/ton)5                                                                                 |   |   | 875 |   |   | 852 |   |   | 820 |   |   | **798** |   |   | 790 |   |   | 837 |   |   | 880 |   |   | 880 |   |
| Telephone                  directory paper, 22.1 lb. (US$/ton)5                                                                      |   |   | 715 |   |   | 720 |   |   | 725 |   |   | **725** |   |   | 675 |   |   | 675 |   |   | 675 |   |   | 675 |   |
| Newsprint                                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                                                                                                |   | $ | 137.2 |   | $ | 135.4 |   | $ | 128.8 |   | **$** | **128.4** |   | $ | 133.0 |   | $ | 127.1 |   | $ | 127.1 |   | $ | 141.9 |   |
| EBITDA2                                                                                                                              |   |   | 19.8 |   |   | 19.3 |   |   | 18.2 |   |   | **14.5** |   |   | 9.9 |   |   | 12.7 |   |   | 14.7 |   |   | 20.8 |   |
| Operating                  earnings (loss)                                                                                      |   |   | (9.9 | ) |   | 7.4 |   |   | 7.5 |   |   | **1.9** |   |   | (0.9 | ) |   | 1.4 |   |   | 3.4 |   |   | 8.4 |   |
| EBITDA                  margin2,                  3                                                                                  |   |   | 14.4 | % |   | 14.3 | % |   | 14.1 | % |   | **11.3** | **%** |   | 7.4 | % |   | 10.0 | % |   | 11.6 | % |   | 14.7 | % |
|                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                  (000 tonnes)                                                                                                  |   |   | 181.1 |   |   | 178.4 |   |   | 169.5 |   |   | **170.1** |   |   | 180.7 |   |   | 169.2 |   |   | 169.9 |   |   | 187.3 |   |
| Production                  (000 tonnes)                                                                                             |   |   | 183.9 |   |   | 179.6 |   |   | 170.0 |   |   | **170.2** |   |   | 176.7 |   |   | 167.4 |   |   | 167.9 |   |   | 187.5 |   |
|                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                  sales revenue per tonne                                                                                     |   | $ | 758 |   | $ | 759 |   | $ | 761 |   | **$** | **754** |   | $ | 736 |   | $ | 752 |   | $ | 748 |   | $ | 758 |   |
| Average                  delivered cash costs per tonne4                                                                             |   |   | 647 |   |   | 651 |   |   | 653 |   |   | **669** |   |   | 682 |   |   | 677 |   |   | 662 |   |   | 647 |   |
|                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Newsprint                  48.8 gsm, West Coast delivery (US$/tonne)5                                                                |   |   | 640 |   |   | 651 |   |   | 658 |   |   | **649** |   |   | 571 |   |   | 589 |   |   | 612 |   |   | 627 |   |
| Pulp1                                                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                                                                                                |   | $ | 98.3 |   | $ | 115.6 |   | $ | 112.2 |   | **$** | **108.2** |   | $ | 103.6 |   | $ | 100.2 |   | $ | 99.3 |   | $ | 91.2 |   |
| EBITDA2                                                                                                                              |   |   | (1.6 | ) |   | 7.4 |   |   | 13.0 |   |   | **15.6** |   |   | (1.8 | ) |   | (11.8 | ) |   | (0.5 | ) |   | (4.6 | ) |
| Operating                  earnings (loss)                                                                                           |   |   | (12.6 | ) |   | (4.1 | ) |   | 2.6 |   |   | **1.4** |   |   | (12.3 | ) |   | (23.0 | ) |   | (11.5 | ) |   | (15.4 | ) |
| EBITDA                  margin2,                  3                                                                                  |   |   | (1.6 | %) |   | 6.4 | % |   | 11.6 | % |   | **14.4** | **%** |   | (1.7 | %) |   | (11.8 | %) |   | (0.5 | %) |   | (5.0 | %) |
|                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                  (000 tonnes)                                                                                                  |   |   | 153.4 |   |   | 171.4 |   |   | 155.9 |   |   | **145.5** |   |   | 150.6 |   |   | 150.3 |   |   | 157.7 |   |   | 144.4 |   |
| Production                  (000 tonnes)                                                                                             |   |   | 153.1 |   |   | 155.6 |   |   | 162.8 |   |   | **152.8** |   |   | 142.3 |   |   | 141.4 |   |   | 157.1 |   |   | 150.1 |   |
|                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                  sales revenue per tonne                                                                                     |   | $ | 641 |   | $ | 674 |   | $ | 720 |   | **$** | **744** |   | $ | 688 |   | $ | 666 |   | $ | 630 |   | $ | 632 |   |
| Average                  delivered cash costs per tonne4                                                                             |   |   | 652 |   |   | 630 |   |   | 637 |   |   | **636** |   |   | 699 |   |   | 745 |   |   | 633 |   |   | 664 |   |
| NBSK                  pulp, Northern Europe delivery (US$/tonne)5                                                                    |   |   | 618 |   |   | 665 |   |   | 710 |   |   | **730** |   |   | 640 |   |   | 613 |   |   | 587 |   |   | 600 |   |
| White-top                  linerboard, 42 lb., Eastern U.S. delivery (US$/tonne)5                                                    |   |   | 650 |   |   | 680 |   |   | 680 |   |   | **680** |   |   | 620 |   |   | 620 |   |   | 583 |   |   | 610 |   |

| 1   | Effective                January 1, 2006, the Company reclassified containerboard out of its                specialty paper segment into its pulp segment. Prior period comparatives                have been reclassified to reflect this                change. |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2   | EBITDA                is a non-GAAP measure. Refer to the “Non-GAAP Measures” section for                further details. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------|
| 3   | EBITDA                margin is defined as EBITDA as a percentage of                sales. |
|---------------|--------------------------------------------------------------------------------------------|
| 4   | Average                cash costs per tonne for these purposes consist of cost of sales                and                SG&A costs, including delivery costs. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 5   | Benchmark                selling prices are sourced from RISI. |
|---------------|----------------------------------------------------------------|

|   | 3.1 | Threemonths                  ended December 31, 2006 compared to three months                  ended |
|--------|-----|------------------------------------------------------------------------------------------------------|

|   |   | September                  30, 2006 |
|--------|--------|-------------------------------------|

|   | 3.1.1 | Consolidated                  results of                  operations |
|--------|-------|----------------------------------------------------------------------|

|   | *EBITDA* |
|--------|----------|

|   | EBITDA                  in Q4, 2006 was $48.5 million, a decrease of $14.3 million, or                  22.8%, from                  $62.8 million in Q3, 2006. The reduction was caused by the negative                  impact                  of higher fibre prices, higher maintenance costs and poor weather                  conditions, which more than offset the positive impact of the weaker                  Canadian dollar, the absence of the tender offer advisory costs                  recorded                  in the previous quarter, and higher pulp and paper prices. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following table summarizes the key changes in EBITDA from Q3, 2006                  to Q4,                  2006: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------|

| *($                  millions)*                                              |   |   |     |
|------------------------------------------------------------------------------|--------|--------|----------|
| **Q3,                  2006 EBITDA**                                         |   | **$**  | **62.8** |   |
| Pulp                  and paper prices                                       |   |   | 0.7      |   |
| Impact                  of weaker Canadian dollar, net of hedging program    |   |   | 4.2      |   |
| Fibre                  prices                                                |   |   | (5.2     | ) |
| Maintenance                  and other operating costs                       |   |   | (6.0     | ) |
| Energy                  costs                                                |   |   | (2.6     | ) |
| Impact                  of poor weather conditions                           |   |   | (4.6     | ) |
| Non-recurring                  tender offer advisory and other related costs |   |   | 3.4      |   |
| Other,                  net                                                  |   |   | (4.2     | ) |
| **Q4,                  2006 EBITDA**                                         |   | **$**  | **48.5** |   |

|   | *Net                  earnings (loss)* |
|--------|----------------------------------------|

|   | Net                  loss in Q4, 2006 was $37.2 million ($0.17 per common share), compared                  to                  net earnings of $2.5 million ($0.01 per common share) in the previous                  quarter. Net loss in Q4 included a $26.2 million ($0.12 per common                  share)                  after-tax foreign exchange loss on the translation of                  U.S.-dollar-denominated debt, compared to a $0.1 million (less                  than $0.01                  per common share) after-tax foreign exchange gain on the translation                  of                  U.S.-dollar-denominated debt in the previous quarter. Net loss                  in Q4 also                  included an after-tax impairment loss of $3.8 million ($0.02 per                  common                  share). Net earnings in the previous period also included a net                  $4.0                  million ($0.02 per common share) favourable future income tax provision                  adjustment and $2.2 million ($0.01 per common share) of after-tax                  costs                  resulting from a tender offer initiated by TAM. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Net                  loss before the abovementioned items in Q4 was $7.2 million ($0.03                  per                  common share), compared to net earnings before the abovementioned                  items of                  $0.6 million (less than $0.01 per common share) in the previous                  quarter. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3.1.2 | Operational                  performance - specialty                  papers |
|--------|-------|------------------------------------------------------------------------------|

|   | The                  specialty papers business recorded an operating loss of $6.6 million                  on                  sales of $234.0 million in Q4, 2006, compared to operating earnings                  of                  $6.9 million on sales of $245.0 million in Q3, 2006. EBITDA in                  Q4 was                  $18.4 million, a $13.2 million decrease from $31.6 million recorded                  in the                  previous quarter. The primary reasons for the decreases are discussed                  below. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volume of 252,700 tonnes in Q4 decreased 11,900 tonnes, or 4.5%,                  from the                  previous quarter when the Company shipped record-high coated and                  uncoated                  specialty sales volumes. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  sales revenue in Q4 of $927 per tonne remained consistent with                  the $926                  per tonne recorded in Q3. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  cash costs in Q4 were $853 per tonne, an increase of $47 per tonne                  compared to the previous quarter. Higher maintenance spending and                  fibre                  prices, increased usage of fossil fuel and one-time closure costs                  for the                  Port Alberni groundwood pulp mill more than offset savings from                  performance improvements. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Operational

|   | The                  newsprint business recorded operating earnings of $1.9 million                  on sales of                  $128.4 million in Q4, 2006, compared to operating earnings of $7.5                  million                  on sales of $128.8 million in Q3, 2006. EBITDA in Q4 was $14.5                  million, a                  $3.7 million decrease from $18.2 million recorded in the previous                  quarter.                  The primary reasons for the decreases are discussed below. The                  decline in                  operating earnings was also partially due to impairment losses                  of $1.5                  million recorded on the Company’s A3 paper machine in Q4. Further details                  are provided in the “Critical Accounting Policies and Estimates”                  section. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volume of 170,100 tonnes in Q4 was consistent with the previous                  quarter. |
|--------|------------------------------------------------------------------------------------------------------------------|

|   | Average                  sales revenue in Q4 of $754 per tonne decreased $7 per tonne compared                  to                  the previous quarter, with weaker transaction prices being the                  primary                  factor for the decrease. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  cash costs in Q4 were $669 per tonne, an increase of $16 per tonne                  from                  the previous quarter. Higher maintenance spending and fibre prices                  and                  increased usage of fossil fuel more than offset savings from performance                  improvements. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3.1.4 | Operational                  performance -                  pulp |
|--------|-------|------------------------------------------------------------------|

|   | The                  pulp business recorded operating earnings of $1.4 million on sales                  of                  $108.2 million in Q4, 2006, compared to operating earnings of $2.6                  million                  on sales of $112.2 million in Q3, 2006. EBITDA in Q4 was $15.6                  million, a                  $2.6 million increase from $13.0 million recorded in the previous                  quarter.                  The primary reasons for the movements are discussed below. The                  decline in                  operating earnings was also due in part to impairment losses of                  $3.8                  million recorded on the Company’s assets in Q4. Further details are                  provided in the “Critical Accounting Policies and Estimates”                  section. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volume of 145,500 tonnes in Q4 decreased by 10,400 tonnes, or 6.7%,                  from                  the previous quarter, reflecting primarily the timing of pulp shipments                  to                  Asia. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  sales revenue in Q4 was $744 per tonne, an increase of $24 per                  tonne from                  the previous quarter, primarily due to higher pricing for                  pulp. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3.2 | Three                  months ended December 31, 2006 compared to three months                  ended |
|--------|-----|-------------------------------------------------------------------------------------------------------|

|   | December                  31, 2005 |
|--------|------------------------------------|

Consolidat

|   | *EBITDA* |
|--------|----------|

|   | EBITDA                  in Q4, 2006 was $48.5 million, up $0.2 million, or 0.4%, from $48.3                  million in Q4, 2005. Higher product prices across most paper and                  pulp                  grades and further performance improvements were offset by the                  negative                  impacts of the stronger Canadian dollar and inflation, and by higher                  costs*.* |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following table summarizes the key changes in EBITDA from Q4, 2005                  to Q4,                  2006: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------|

| *($                  millions)*                                             |   |   |     |
|-----------------------------------------------------------------------------|--------|--------|----------|
| **Q4                  2005 EBITDA**                                         |   | **$**  | **48.3** |   |
| Improved                  pulp prices                                       |   |   | 22.9     |   |
| Improved                  paper prices                                      |   |   | 9.2      |   |
| Impact                  of stronger Canadian dollar, net of hedging program |   |   | (20.9    | ) |
| Inflation                                                                   |   |   | (15.4    | ) |
| Other,                  net                                                 |   |   | 4.4      |   |
| **Q4                  2006 EBITDA**                                         |   | **$**  | **48.5** |   |

|   | *Net                  earnings (loss)* |
|--------|----------------------------------------|

|   | Net                  loss in Q4, 2006 was $37.2 million ($0.17 per common share), compared                  to a                  net loss of $8.0 million ($0.04 per common share) in Q4, 2005.                  Net loss in                  Q4, 2006 included a $26.2 million ($0.12 per common share) after-tax                  foreign exchange loss on the translation of U.S.-dollar-denominated                  debt,                  compared to an after-tax foreign exchange loss of $2.2 million                  ($0.01 per                  common share) in Q4, 2005. Net loss in Q4, 2006 also included an                  after-tax                  impairment loss of $3.8 million ($0.02 per common share). Net loss                  in Q4,                  2005 also included favourable income tax adjustments of $5.0 million                  ($0.02 per common share). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Net                  loss before the abovementioned items in Q4, 2006 was $7.2 million                  ($0.03                  per common share), compared to a net loss before the abovementioned                  items                  of $10.8 million ($0.05 per common share) in the same period of                  2005. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3.2.2 | Operational                  -performance - specialty                  papers |
|--------|-------|-------------------------------------------------------------------------------|

|   | The                  specialty papers business recorded an operating loss of $6.6 million                  on                  sales of $234.0 million in Q4, 2006, compared to operating earnings                  of                  $9.3 million on sales of $238.8 million in the same quarter of                  2005.                  EBITDA in Q4, 2006 was $18.4 million, a $13.7 million decrease                  from $32.1                  million recorded in the same quarter last year. The primary reasons                  for                  the decreases are discussed below. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volume of 252,700 tonnes in Q4, 2006 was in line with the same                  quarter                  last year. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  sales revenue in Q4, 2006 was $927 per tonne, a decrease of $29                  per tonne                  from Q4, 2005. The decrease was due to the negative impact of the                  significantly stronger Canadian dollar and, to a lesser extent,                  weaker                  coated prices, which together more than offset stronger prices                  for                  uncoated and directory grades, and an improved customer and grade                  mix. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  cash costs in Q4, 2006 were $853 per tonne, an increase of $26                  per tonne                  from the same quarter of 2005. Higher maintenance spending and                  shutdowns                  in addition to increased fibre and energy prices more than offset                  savings                  from performance improvements. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3.2.3 | Operationalperformance                  -                  newsprint |
|--------|-------|----------------------------------------------------------------------|

|   | The                  newsprint business recorded operating earnings of $1.9 million                  on sales of                  $128.4 million in Q4, 2006, compared to operating earnings of $8.4                  million                  on sales of $141.9 million in the same quarter of 2005. EBITDA                  of $14.5                  million in Q4, 2006 was down $6.3 million from $20.8 million recorded                  in                  Q4, 2005. The primary reasons for the decreases are noted below.                  The                  decline in operating earnings was also partially due to impairment                  losses                  of $1.5 million recorded on the Company’s A3 paper machine in Q4, 2006.                  Further details are provided in the “Critical Accounting Policies and                  Estimates” section. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volume of 170,100 tonnes in Q4, 2006 was down 17,200 tonnes, or                  9.2%, from                  Q4, 2005, due primarily to the Company optimizing its swing machine                  capacity to meet the higher demand for other                  grades. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  sales revenue of $754 per tonne in Q4, 2006 decreased $4 per tonne                  from                  the same period of 2005, with the negative impact of the stronger                  Canadian                  dollar more than offsetting higher transaction prices and a favourable                  market, grade and customer mix. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  cash costs in Q4, 2006 were $669 per tonne, an increase of $22                  per tonne                  from the same quarter of 2005. Higher fibre costs and fossil fuel                  usage,                  increased maintenance spending and the impact of inflation more                  than                  offset the savings from performance                  improvements. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3.2.4 | Operational                  performance -                  pulp |
|--------|-------|------------------------------------------------------------------|

|   | The                  pulp business recorded operating earnings of $1.4 million on sales                  of                  $108.2 million in Q4, 2006, compared to an operating loss of $15.4                  million                  on sales of $91.2 million in Q4, 2005. EBITDA was $15.6 million                  in Q4,                  2006, an increase of $20.2 million from negative EBITDA of $4.6                  million                  recorded in the same quarter last year. The primary reasons for                  the                  movements are discussed below. The increase in operating earnings                  was                  offset by impairment losses of $3.8 million recorded on the Company’s                  assets in Q4, 2006. Further details are provided in the “Critical                  Accounting Policies and Estimates”section. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sales                  volume of 145,500 tonnes in Q4, 2006 was consistent with the same                  period                  of 2005. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  sales revenue in Q4, 2006 was $744 per tonne, up $112 per tonne                  from Q4,                  2005, due largely to stronger transaction prices, which more than                  offset                  the negative impact of the stronger Canadian dollar. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Average                  cash costs in Q4, 2006 were $636 per tonne, an improvement of $28                  per                  tonne from the same quarter of 2005, with savings from performance                  improvements more than offsetting higher fibre costs and the impact                  of                  inflation. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **4.0** | **FINANCIAL                  CONDITION** |
|---------|------------------------------------------|

|   | The                  following table highlights the significant changes between the                  consolidated balance sheets as at December 31, 2006, and December                  31,                  2005. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(In                  millions of dollars)*                     |   | **2006** |        | 2005   |   | **Variance** |   | **Comment** |   |
|-----------------------------------------------------------------|--------|----------|-------------|--------|--------|--------------|--------|-------------|--------|
| ***Working                  capital***                          |   | **$**    | **280.5**   |   | $      | 237.1        |   | $           | 43.4   |   |   | Increase                  primarily reflects higher cash and cash equivalents, receivable                  levels,                  and reclasses of short-term liabilities to long-term liabilities.                  The                  increase was partially offset by higher payables. |   |
| ***Capital                  assets***                           |   |     | **2,023.1** |   |   | 2,139.3      |   |        | (116.2 | ) |   | Amortization                  expense including impairment losses of $23.4 million exceeded capital                  asset additions. Refer to the “Investing Activities” section for                  additional details on capital asset additions. |   |
| ***Other                  assets***                             |   |     | **40.8**    |   |   | 40.1         |   |        | 0.7    |   |   | Increase                  mostly reflects the increase in long-term receivables partly offset                  by the                  amortization of deferred financing costs. |   |
| ***Long-term                  debt***                           |   |     | **854.5**   |   |   | 861.9        |   |        | (7.4   | ) |   | Decrease                  primarily reflects the $6.5 million repayment of revolving debt.                  Refer to                  the “Capital Resources” section for further details on the change in                  long-term debt. |   |
| ***Other                  long-term obligations***              |   |     | **214.7**   |   |   | 209.7        |   |        | 5.0    |   |   | Increase                  primarily relates to higher employee future benefits and reclasses                  of                  short-term liabilities to long-term liabilities. This was partly                  offset by                  the reduction in fair value of hedging instruments. |   |
| ***Future                  income taxes and deferred credits*** |   |     | **269.4**   |   |   | 325.2        |   |        | (55.8  | ) | $ | 22.9                  million of the decrease relates to the reduction in the federal                  corporate                  tax rate. The balance of the reduction primarily relates to the                  future                  income tax on the 2006 losses. |   |
| ***Contributed                  surplus***                      |   |     | **9.3**     |   |   | 7.3          |   |        | 2.0    |   |   | Increase                  relates to the recording of stock based compensation. |   |

----

*Table            of Contents*

| **5.0** | **LIQUIDITYAND                  CAPITAL                  RESOURCES** |
|---------|----------------------------------------------------------------------|

| Selected                  Annual Financial Information                                                         |   |
|----------------------------------------------------------------------------------------------------------------|--------|
| *(In                  millions of dollars, except where otherwise stated)*                                     |   | **2006** |   | 2005 |   | 2004 |   |
| Cash                  flows provided by operations before changes in non-cash working                  capital |   | **$** | **170.0** |   | $ | 104.5 |   | $ | 88.9 |   |
| Changes                  in non-cash working capital                                                           |   |   | **(8.6** | **)** |   | (11.5 | ) |   | (24.4 | ) |
| Cash                  flows provided by operations                                                             |   |   | **161.4** |   |   | 93.0 |   |   | 64.5 |   |
| Cash                  flows used by investing activities                                                       |   |   | **(85.8** | **)** |   | (93.0 | ) |   | (41.8 | ) |
| Cash                  flows provided (used) by financing activities                                            |   |   | **(40.1** | **)** |   | (26.0 | ) |   | 3.3 |   |
| Capital                  spending                                                                              |   |   | **93.2** |   |   | 95.2 |   |   | 68.0 |   |
| Amortization1                                                                                                  |   |   | **207.1** |   |   | 180.3 |   |   | 184.1 |   |
| Capital                  spending as % of amortization                                                         |   |   | **45** | **%** |   | 53 | % |   | 37 | % |
| Total                  debt to total capitalization2,3                                                    |   |   | **46** | **%** |   | 46 | % |   | 44 | % |
| Net                  debt to net capitalization4,5                                                             |   |   | **45** | **%** |   | 46 | % |   | 43 | % |

| 1   | 2006                amortization expense includes a $19.1 million impairment loss related                to                the permanent closure of the A3 paper machine, and $4.3 million in                other                asset impairments. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2   | Total                debt comprises long-term debt, including current                portion. |
|---------------|-----------------------------------------------------------------------------------------------|
| 3   | Total                capitalization comprises total debt and shareholders’                equity. |
|---------------|---------------------------------------------------------------------------------------------------------|
| 4   | Net                debt comprises total debt, less cash on                hand. |
|---------------|---------------------------------------------------------------------------------|
| 5   | Net                capitalization comprises net debt and shareholders’                equity. |
|---------------|-----------------------------------------------------------------------------------------------------|

| Selected                  Quarterly Financial Information                                                                                           |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| *(In                  millions of dollars)*                                                                                                         |   | **2006** |   | 2005 |   |
|                                                                                                                                                |   | Q1 |   | Q2 |   | Q3 |   | **Q4** |   | Q1 |   | Q2 |   | Q3 |   | Q4 |   |
| Cash                  provided (used) by operations                  (before changes                  in non-cash working                  capital) |   | $ | 43.3 |   | $ | 28.4 |   | $ | 48.6 |   | **$** | **49.7** |   | $ | 26.0 |   | $ | 15.4 |   | $ | 17.5 |   | $ | 45.6 |   |
| Changes                  in non-cash working                  capital                                                                               |   |   | (1.9 | ) |   | 18.2 |   |   | (27.4 | ) |   | **2.5** |   |   | 5.2 |   |   | 16.3 |   |   | (39.3 | ) |   | 6.3 |   |
| Cash                  provided (used) by operations                                                                                                 |   |   | 41.4 |   |   | 46.6 |   |   | 21.2 |   |   | **52.2** |   |   | 31.2 |   |   | 31.7 |   |   | (21.8 | ) |   | 51.9 |   |
| Capital                  spending                                                                                                                   |   |   | 11.8 |   |   | 17.5 |   |   | 22.9 |   |   | **41.0** |   |   | 11.4 |   |   | 34.5 |   |   | 23.8 |   |   | 25.5 |   |

|   | The                  Company’s principal cash requirements are for interest payments on its                  debt and for capital expenditures and working capital fluctuations.                  Cash                  flows are funded through operations and, where necessary, through                  the                  revolving operating facility (the “Facility”). If necessary, liquidity                  requirements may be funded through the issuance of debt, equity                  or both.                  Access to current and alternative sources of financing at competitive                  cost                  is dependent upon the Company’s credit ratings and capital market                  conditions. The Company believes that the cash flow from operations                  and                  the Facility will be sufficient to meet its anticipated capital                  expenditures and debt repayment obligations in the near and intermediate                  term. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Operat

|   | Cash                  flow provided by operating activities, after changes in non-cash                  working                  capital, was $161.4 million in 2006, compared to $93.0 million                  in the                  previous year. The increase of $68.4 million was primarily attributed                  to                  higher EBITDA and decreased non-cash working capital requirements                  in 2006.                  The Company’s operating cash flow requirements are primarily for labour,                  salaries and benefits, and the purchase of raw materials, energy                  and                  distribution services. Working capital requirements in 2007 are                  not                  expected to be materially different than those of                  2006. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Investing        activities

|   | Cash                  used for investing activities in 2006 totalled $85.8 million, compared                  to                  $93.0 million in the previous year. The Company’s capital spending in 2006                  totalled $93.2 million, compared to $95.2 million in 2005. Major                  capital                  investments in 2006 included a $5.6 million project to bypass a                  primary                  clarifier and a $3.1 million project on a paper machine ventilation                  improvement, both at the Powell River division. In addition, there                  were                  various small-investment, high-return capital projects, including                  a number                  of projects to increase product                  quality. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  Company anticipates that cash flows will be generated primarily                  from                  operations and the Facility. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

Financi

|   | Cash                  used by financing activities was $40.1 million in 2006, compared                  to $26.0                  million in the previous year. The increase of $14.1 million was                  primarily                  attributable to the absence of drawings on the Company’s revolving loan in                  2006 and the repayment of the $6.5 million owing at the end of                  2005. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Capi

|   | The                  Company’s capital resources at December 31, 2006 included cash and cash                  equivalents along with the amount available under the Facility.                  The                  Company’s $350.0 million Facility was undrawn. After outstanding letters                  of credit of $26.4 million, $323.6 million was available to be                  drawn at                  year-end 2006, compared to $316.0 million at year-end 2005. These                  resources, together with operating cash flows, are expected to                  enable the                  Company to meet its minimum                  payments. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following table presents the aggregate amount of future cash outflows                  for                  contractual obligations as of December 31, 2006, excluding amounts                  due for                  interest on outstanding                  indebtedness. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                        |   | **Payments                  Due by Period** |   |
|---------------------------------------------|--------|---------------------------------------------|--------|
| *(In                  millions of dollars)* |   | 2007                                        |   | 2008 |   | 2009 |   | 2010 |   | 2011 |   | Thereafter |   |
| Long-term                  debt             |   | $                                           | -      |   | $ | - |   | $ | 75.0 |   | $ | - |   | $ | 468.7 |   | $ | 310.8 |   |
| Capital                  lease obligations  |   |                                        | 0.7    |   |   | 0.7 |   |   | 0.7 |   |   | 0.7 |   |   | 0.7 |   |   | 1.9 |   |
| Operating                  leases           |   |                                        | 13.1   |   |   | 11.3 |   |   | 10.1 |   |   | 9.2 |   |   | 8.8 |   |   | 39.5 |   |
| Other                  commitments          |   |                                        | 1.6    |   |   | 1.6 |   |   | 1.6 |   |   | 1.6 |   |   | 1.6 |   |   | 0.5 |   |
| Total                                       |   | $                                           | 15.4   |   | $ | 13.6 |   | $ | 87.4 |   | $ | 11.5 |   | $ | 479.8 |   | $ | 352.7 |   |

|   | As                  at December 31, 2006, the total long-term debt outstanding was                  $854.5                  million. Principal repayments on this debt do not begin until July                  2009.                  The Company’s net-debt to net-capitalization ratio at December 31, 2006,                  was 45%, or 1% lower than December 31,                  2005. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following table illustrates the changes in the Company’s long-term debt                  during 2006: |
|--------|----------------------------------------------------------------------------------------------------------------------------------|

| **Issue**                                                                                                                                                                    |   | **Carrying                  value****December                  31, 2006** |   | **Net                  increase (decrease)** |   | **Foreign                  exchange** |   | **Carrying                  value****December                  31, 2005** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------|--------|---------------------------------------------------------------------------|--------|
| *(In                  millions of dollars)*                                                                                                                                  |   |                                                                      |   |                                         |   |                                  |   |                                                                      |   |
| ***Recourse*** Senior                  notes, 8.625% due June 2011 (US$400.0                  million)                                                                  |   | $                                                                         | 468.7  |                                         | $      | -                                     |   | $                                                                         | (0.7   | ) | $ | 469.4 |   |
| Senior                  notes, 7.375% due March 2014 (US$250.0 million)                                                                                                      |   |                                                                      | 291.3  |                                         |   | -                                     |   |                                                                      | (0.2   | ) |   | 291.5 |   |
| Revolving                  operating facility of up to $350.0 million due July 2009 with interest                  based on Canadian Prime/BA rates or U.S. Base/LIBOR rates |   |                                                                      | -      |                                         |   | (6.5                                  | )      |                                                                      | -      |   |   | 6.5 |   |
| ***Non-recourse                  (PREI)***                                                                                                                                   |   |                                                                      |   |                                         |   |                                  |   |                                                                      |   |   |   |   |   |
| First                  mortgage bonds, 6.387% due July 2009                                                                                                                  |   |                                                                      | 75.0   |                                         |   | -                                     |   |                                                                      | -      |   |   | 75.0 |   |
| Subordinated                  promissory notes                                                                                                                               |   |                                                                      | 19.5   |                                         |   | -                                     |   |                                                                      | -      |   |   | 19.5 |   |
| ***Total                  long-term debt***                                                                                                                                  |   | $                                                                         | 854.5  |                                         | $      | (6.5                                  | )      | $                                                                         | (0.9   | ) | $ | 861.9 |   |

|   | The                  Company is in compliance with the covenants under its Facility                  and senior                  notes indentures. The Company’s Consolidated Fixed Charge Coverage Ratio                  (“CFCC Ratio”) under the senior note indentures calculated on a 12-month                  trailing average, was 3.0:1 as at                  December 31, 2006 (2.0:1 as at December 31, 2005). In the event                  that the                  CFCC Ratio is below 2.0:1, the Company is limited in the amount                  of                  additional debt it may incur beyond drawings under the Facility                  or other                  debt as permitted under the senior notes. Also, the Company’s restricted                  payments basket under the 8.625% and 7.375% senior notes was negative                  $72.5 million and negative $47.5 million, respectively, as at December                  31,                  2006 (negative $69.1 million and negative $44.1 million, respectively,                  as                  at December 31, 2005), as a result of the accumulation of losses                  in recent                  years. Under the senior note covenants, the Company is restricted                  from                  making certain payments, including the payment of dividends, unless                  the                  balances in these baskets are                  positive. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Credit                  ratings* |
|--------|-----------------------------------|

|   | In                  August 2006, Moody’s Investors Services, Inc. (“Moody's”) changed its                  outlook on the Company’s 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 assessments" on its individual-rated                  debt                  issues. On the introduction of the enhanced rating methodology,                  Moody's                  raised its credit ratings on the Company’s secured revolving operating                  facility to Ba1 from Ba3 and lowered its credit ratings on the                  unsecured                  senior notes to B2 from B1. These changes are not expected to                  significantly affect the Company’s interest costs or its cost of                  capital. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | The                  following table highlights the Company’s credit ratings and outlook with                  Moody’s, Standard and Poor’s Corporation and Dominion Bond Rating Service                  as at December 31, 2006, 2005, and                  2004: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                | **December                    31,** |
|-----------------------------------------------------|-------------------------------------|
|                                                | **2006**                            | 2005 | 2004 |
| **Moody’s**                                   |                                |   |   |
| Outlook                                             | **Stable**                          | Negative | Negative |
| Corporate                    family rating          | **B1**                              | B1 | Ba3 |
| Senior                    unsecured debt            | **B2**                              | B1 | Ba3 |
| Senior                    secured credit facility   | **Ba1**                             | Ba3 | Ba2 |
|                                                |                                |   |   |
|                                                |                                |   |   |
| **Standard                    & Poor’s**  |                                |   |   |
| Outlook                                             | **Stable**                          | Stable | Negative |
| Long-term                    corporate credit       | **B+**                              | B+ | BB- |
| Senior                    unsecured debt            | **B+**                              | B+ | BB- |
| Senior                    secured debt              | **BB-**                             | BB- | BB |
|                                                |                                |   |   |
|                                                |                                |   |   |
| **Dominion                    Bond Rating Service** |                                |   |   |
| Outlook                                             | **Negative****1**                   | Negative | Stable |
| Senior                    unsecured debt            | **BB**                              | BB | BB |

| 1   | Effective                January 18, 2007, Dominion Bond Rating Service changed the Outlook                to                stable from negative. |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5.3.2 | Financial                  instruments |
|--------|-------|----------------------------------------|

|   | In                  the normal course of business, the Company is exposed to foreign                  currency                  and price risk associated with revenues, which are predominately                  in U.S.                  dollars, and to energy costs and long-term debt. In accordance                  with its                  foreign exchange risk management program, the Company manages its                  exposure                  to these risks through the use of financial instruments. The Company                  also                  uses interest rate swaps to reduce its exposure to long-term fixed                  interest rates associated with its senior notes. The Company does                  not                  enter into financial instruments for speculative                  purposes. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Revenue                  risk management                  instruments* |
|--------|-------------------------------------------------------------------------|

|   | In                  respect of revenues, the Company uses foreign currency options                  and forward                  contracts to sell U.S. dollars. At December 31, 2006, 61% of the                  options                  and contracts were designated as hedging instruments and the resulting                  foreign exchange translation gains and losses will be recognized                  concurrently with the hedged revenue in “Sales”. At period-end exchange                  rates, the net amount the Company would pay to settle the foreign                  currency                  options and forward contracts is $3.8 million, of which $6.0 million                  is                  included in “Prepaids and other”, $3.0 million is included in “Accounts                  payable and accrued liabilities”, and negative $6.8 million is not yet                  recorded in the financial statements. The hedging program improved                  the                  Company’s sales value by $14.3 million in                  2006. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

*Table            of Contents*

|   | *Long-term                  debt risk management                  instruments* |
|--------|--------------------------------------------------------------------------------|

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

|   | *Cost                  risk management                  instruments* |
|--------|----------------------------------------------------------------------|

|   | To                  hedge against the effect of energy cost fluctuations, the Company                  enters                  into contracts to fix the price of a portion of the Company’s oil and gas                  exposure. The contracts are not designated as hedging instruments                  for                  accounting purposes and are reported as “Accounts payable and accrued                  liabilities” on the balance sheet at their fair value. Settlements and                  changes in fair value are recognized in “Cost of sales”. At period-end                  contract rates, the net amount the Company would pay to settle                  these                  contracts is $0.6 million, all of which is included in “Accounts payable                  and accrued liabilities” and has been recognized in “Cost of                  sales”. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *Interest                  rate swaps* |
|--------|----------------------------------------|

|   | The                  Company occasionally uses interest rate swap contracts to manage                  its net                  exposure to interest rate changes. At December 31, 2006, the Company                  had                  pay-floating, receive-fixed interest rate swap contracts for notional                  US$100.0 million, and has designated them as hedging instruments.                  At                  period-end swap rates, the net amount the Company would receive                  to settle                  these contracts is $1.2 million. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **6.0** | **RELATED                  PARTY                  TRANSACTIONS** |
|---------|------------------------------------------------------------------|

|   | Effective                  February 16, 2006, Norske Skog sold its 29.4% shareholding in the                  Company.                  Concurrently, the three directors from Norske Skog resigned from                  the                  Company’s board of directors. Norske Skog had not been involved in the                  management of the Company since 2001, and the shareholder transaction                  has                  not impacted the Company’s operations or its current distribution                  agreement with Norske Skog in Asia. The Company did not receive                  any                  proceeds related to this                  transaction. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Effective                  October 23, 2006, TAM increased its shareholdings in the Company                  on behalf                  of certain client accounts to 37.97% and as a result, became a                  significant                  shareholder together with its subsidiaries and affiliates. The                  Company did                  not undertake any transactions with TAM during the year ended December                  31,                  2006. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Directors                  and employees |
|--------|------------------------------------------|

|   | The                  Company undertakes certain transactions with companies affiliated                  with a                  director of the Company. These transactions are in the normal course                  of                  business and are on the same terms as those accorded to third parties.                  During 2006, the Company paid aggregate fees of approximately $0.4                  million                  (2005 - nil) primarily for legal services to a firm affiliated                  with a                  director of the Company. The Company has charged the costs to SG&A                  expense. In 2006, the Company also paid $3.9 million (2005 - $1.8                  million)                  primarily for chemicals used in the manufacturing process to a                  company                  affiliated with an officer and director of the Company. The Company                  charged these costs to “Cost of                  sales”. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| **7.0** | **OFF-BALANCE                  SHEET                  ARRANGEMENTS** |
|---------|----------------------------------------------------------------------|

|   | 7.1 | Financial                  instruments |
|--------|-----|----------------------------------------|

|   | The                  Company has ongoing programs with respect to financial instruments,                  for                  which it has elected to designate some as hedging instruments.                  The fair                  value of the following designated hedging instruments is not recorded                  in                  the financial statements: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **§  ** | Sales                - Foreign currency options and forward contracts having a notional                principal of US$385 million with major financial                institutions. |
|------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **§  ** | Interest                Rates - Fixed to floating interest rate swaps having a principal                amount of                US$100 million with major financial institutions. The Company will                receive                a fixed rate of 7.375%, and pay a floating rate averaging U.S. six-month                LIBOR plus 2.0%. |
|------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Further                  discussion of financial instruments is provided under “Financial                  Instruments” in the “Liquidity and Capital Resources”                  section. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7.2 | Guarantees |
|--------|-----|------------|

|   | Business                  dispositions |
|--------|----------------------------------------|

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

----

*Table            of Contents*

|   | Loans |
|--------|-------|

|   | The                  Company has entered into a building lease agreement whereby it                  will                  continue to make the prescribed lease payments directly to the                  financial                  institution holding the mortgage on the building in the event the                  lessor                  is no longer able to meet its contractual obligations. At December                  31,                  2006, the value of the mortgage was $11.9 million.                  This agreement does not increase the Company’s liability beyond the                  obligations for the building lease. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Recycling                  plant acquisition |
|--------|----------------------------------------------|

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

| **8.0** | **SUMMARY                  OF QUARTERLY RESULTS** |
|---------|---------------------------------------------------|

|   | The                  following table highlights selected financial information for the                  eight                  consecutive quarters through to December 31, 2006. A more detailed                  analysis of Q4, 2006 results is provided in the “Quarterly Segmented                  Results of Operations” section. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(In                  millions of dollars, except per share amounts)*               |   | **2006** |      | 2005   |   |
|-------------------------------------------------------------------------------------|--------|----------|-----------|--------|--------|
|                                                                                |   | **Q1**   |      | **Q2** |   | **Q3** |   | **Q4** |   | Q1 |   | Q2 |   | Q3 |   | Q4 |   |
| Sales                                                                               |   | **$**    | **456.3** |   | **$**  | **469.6** |   | **$** | **486.0** |   | **$** | **470.6** |   | $ | 462.7 |   | $ | 439.0 |   | $ | 450.3 |   | $ | 471.9 |   |
| EBITDA1                                                                             |   |     | **47.3**  |   |   | **52.4** |   |   | **62.8** |   |   | **48.5** |   |   | 33.6 |   |   | 25.4 |   |   | 47.9 |   |   | 48.3 |   |
| Net                  earnings (loss)                                                |   |     | **(23.6** | **)**  |   | **42.4** |   |   | **2.5** |   |   | **(37.2** | **)** |   | (21.8 | ) |   | (30.0 | ) |   | 34.2 |   |   | (8.0 | ) |
| Net                  earnings (loss) per share -                  basic and diluted |   | **$**    | **(0.11** | **)**  | **$**  | **0.20** |   | **$** | **0.01** |   | **$** | **(0.17** | **)** | $ | (0.10 | ) | $ | (0.14 | ) | $ | 0.16 |   | $ | (0.04 | ) |

| 1   | EBITDA                is a non-GAAP measure. Refer to the “Non-GAAP Measures” section for                further details. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  Q1, 2006, the net loss increased by $15.6 million ($0.07 per common                  share), compared to Q4, 2005, due largely                  to an                  $11.6 million after-tax impairment loss, which was partially offset                  by a                  $1.9 million decrease in                  the after-tax foreign exchange loss arising from the translation                  of                  U.S.-dollar-denominated debt. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  Q2, 2006, the $66.0 million ($0.31 per common share) improvement                  in net                  earnings, compared to Q1, 2006, was related primarily to a $26.5                  million                  increase in foreign exchange gain on the translation of                  U.S.-dollar-denominated                  debt,                  a $22.9 million release of future income taxes related to the reduction                  in                  the federal corporate income tax rate, and the absence of the $11.6                  million after-tax impairment loss recorded in the previous                  quarter. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  Q3, 2006, the $39.9 million ($0.19 per common share) decrease in                  net                  earnings, compared to Q2, 2006, was due largely to a decrease in                  the                  after-tax foreign exchange gain arising from the translation of                  U.S.-dollar-denominated debt of $26.1 million, and the absence                  of the                  $22.9 million release of future income taxes recorded in the previous                  quarter. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  Q4, 2006, the $39.7 million ($0.18 per common share) increase in                  net loss,                  compared to Q3, 2006, was due largely to an increase in the after-tax                  foreign exchange loss arising from the translation of                  U.S.-dollar-denominated debt of $26.3 million and an after-tax                  impairment                  loss of $3.8 million. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **9.0** | **NON-GAAP                  MEASURES** |
|---------|----------------------------------------|

|   | The                  following measure, included in this report, does not have a standardized                  meaning under Canadian GAAP. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

|   | EBITDA                  (earnings before interest, income taxes, depreciation and amortization),                  as defined, equates to operating earnings (loss) plus amortization.                  The                  Company focuses on EBITDA as the Company believes this measure                  enables                  comparison of the Company’s results between periods without regard to debt                  service, income taxes and capital expenditure requirements. As                  such, the                  Company believes it would be useful for investors and other users                  to be                  aware of this measure so they can better assess the Company’s operating                  performance. This measure should not be considered by an investor                  as an                  alternative to net income, an indicator of the financial performance                  of                  the Company or an alternative to cash flows as a measure of                  liquidity. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As                  there is no generally accepted method of calculating EBITDA, the                  measure                  as calculated by the Company might not be comparable to similarly                  titled                  measures reported by other                  companies. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following table reconciles the Company’s net earnings (loss) to                  EBITDA: |
|--------|---------------------------------------------------------------------------------------------------------------------|

| *(In                  millions of dollars)*                                    |   | **2006** |      | 2005   |   | 2004  |   |
|--------------------------------------------------------------------------------|--------|----------|-----------|--------|--------|-------|--------|
| Net                  earnings (loss)                                           |   | **$**    | **(15.9** | **)**  | $      | (25.6 | )      | $ | (28.6 | ) |
| Amortization                                                                   |   |     | **183.7** |   |   | 180.3 |   |   | 184.1 |   |
| Impairment                  loss on property, plant and equipment              |   |     | **23.4**  |   |   | -     |   |   | - |   |
| Foreign                  exchange (gain) loss on translation of long-term debt |   |     | **0.3**   |   |   | (24.7 | )      |   | (53.5 | ) |
| Loss                  on repayment of long-term debt                           |   |     | **-**     |   |   | -     |   |   | 5.2 |   |
| Other                  (income) expense, net                                   |   |     | **(1.8**  | **)**  |   | (4.5  | )      |   | (1.2 | ) |
| Interest                  expense, net                                         |   |     | **73.8**  |   |   | 75.7  |   |   | 74.9 |   |
| Income                  tax recovery                                           |   |     | **(54.0** | **)**  |   | (46.6 | )      |   | (28.1 | ) |
| Non-controlling                  interest                                      |   |     | **1.5**   |   |   | 0.6   |   |   | - |   |
| EBITDA                                                                         |   | **$**    | **211.0** |   | $      | 155.2 |   | $ | 152.8 |   |

| **10.0** | **CRITICAL                  ACCOUNTING****POLICIES                  AND ESTIMATES** |
|----------|-------------------------------------------------------------------------------------|

|   | The                  preparation of financial statements in conformity with Canadian                  GAAP                  requires companies to establish accounting policies and to make                  estimates                  that affect both the amount and timing of recording of assets,                  liabilities, revenues and expenses. Some of these estimates require                  judgments about matters that are inherently                  uncertain. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Note                  2 to the December 31, 2006 consolidated financial statements includes                  a                  summary of the significant accounting policies used in their preparation.                  While all of the significant accounting policies are important                  to the                  consolidated financial statements, some of these policies may be                  viewed as                  involving a high degree of judgement. On an ongoing basis using                  currently                  available information, management reviews its estimates, including                  those                  related to environmental and legal liabilities, impairment of long-lived                  assets, pension and post-retirement benefits, provision for bad                  and                  doubtful accounts, and income taxes. Actual results could differ                  from                  these estimates. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following accounting policies require management’s most difficult,                  subjective and complex judgements, and are subject to a fair degree                  of                  measurement uncertainty. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10.1 | Environmental                  and legal                  liabilities |
|--------|------|-----------------------------------------------------------------------|

|   | Environmental                  and legal liabilities are recorded on an undiscounted basis when                  it is                  considered probable that a liability has been incurred and the                  amount of                  the loss can be reasonably estimated. Liabilities for environmental                  matters require evaluations of applicable environmental regulations                  and                  estimates of remediation alternatives and the costs thereof. Provisions                  for liabilities relating to legal actions and claims require judgments                  regarding projected outcomes and the range of loss, based on such                  factors                  as historical experience and recommendations of legal                  counsel. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As                  at December 31, 2006, the Company had a provision of approximately                  $23 million                  for environmental, remedial and other obligations. In addition,                  the                  Company capitalized approximately $7 million,                  related largely to the improvement of air emission. The Company                  expects                  capital expenditures relating to known environmental matters, including                  compliance issues and the assessment and remediation of the environmental                  condition of the Company’s properties, will total approximately                  $2 million                  in 2007. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10.2 | Impairmentof                  long-lived assets  |
|--------|------|-------------------------------------------------------|

|   | The                  Company reviews long-lived assets, which are primarily plant and                  equipment, for impairment                  when events or changes in circumstances indicate that the carrying                  value                  of these assets may not be recoverable. Canadian GAAP requires                  the Company                  to make certain judgments, assumptions and estimates in identifying                  such                  events and changes in circumstances, and in assessing their impact                  on the                  valuations and economic lives of the affected assets. A long-lived                  asset                  impairment is possible when an asset’s carrying value exceeds management’s                  estimate of its undiscounted future cash flows. Impaired assets                  are                  recorded at fair value, determined principally by using discounted                  future                  cash flows expected from their use and eventual disposition. Key                  assumptions used in estimating the future cash flow and fair value                  include, for example, future product pricing over the commodity                  cycle,                  foreign exchange rates, and future estimates of useful                  life. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  Q1, 2006, after undertaking an operational review of the A3 paper                  machine,                  the Company determined that the previously announced indefinite                  closure of                  this machine would be permanent. Accordingly, the Company tested                  the                  long-lived assets of the permanently closed paper machine for impairment.                  This impairment test required making estimates of the fair value                  of the                  long-lived assets that the Company expected                  would not continue to be used on other paper machines in its inventory.                  The fair value was based on management’s estimates of the value of used                  paper machine equipment. As a result of this test, the Company                  recorded a                  $17.6 million impairment loss in Q1,                  2006. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  Q4, 2006, the Company completed a thorough review of the A3 paper                  machine                  long-lived assets that were expected to be used on other paper                  machines in                  its inventory. This review was primarily done by the mill’s engineering                  group, and included a feasibility analysis, consideration of future                  capital spending plans, and determination of maintenance requirements.                  Through the review, the Company determined that it would not be                  desirable                  to use on other paper machines some of the long-lived assets it                  originally                  expected could be used. The Company then made estimates of the                  fair value                  of these long-lived assets. Similar to the impairment exercise                  in Q1,                  2006, the fair value of the long-lived assets that weren’t going to be                  used on other paper machines was based on management’s estimate of the                  value of used paper machine equipment. Accordingly, the Company                  increased                  its estimate of the A3 paper machine impairment loss by $1.5 million                  in                  Q4. In total, the A3 paper machine impairment loss was $19.1 million,                  which was booked in the newsprint                  segment. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  Q3, 2006, the Company announced it was indefinitely idling its                  Port                  Alberni groundwood pulp mill, effective September 30, 2006, and                  was                  planning to replace the high-cost groundwood pulp with recycled                  fibre from                  the Company’s recycling division. At that time, it was uncertain whether                  this strategy would negatively affect the Company’s ability to fibre its                  mills because the fourth and first quarters are traditionally high                  fibre-usage periods. It was determined late in Q4, 2006 that the                  recycled                  fibre strategy was effective and, as a result, the Company concluded                  that                  the groundwood mill closure was permanent. Accordingly, the Company                  determined which long-lived assets would be retained for alternate                  uses.                  The Company then made an estimate of the fair value of the long-lived                  assets that were not going to be retained. Fair value was based                  on                  management’s estimate of the value of the used pulp mill equipment. Due to                  the age of the long-lived assets that were not going to be retained,                  the                  carrying cost of these assets was low and, as a result, the impairment                  loss recorded in Q4, 2006 was less than $0.1 million. The impairment                  loss                  was recorded in the specialty papers segment in “Cost of sales”. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As                  part of its annual review of long-lived assets, the Company in                  Q4, 2006                  identified certain long-lived assets that had been previously idled                  and                  determined that these assets would not be brought back into service.                  Accordingly, the Company made an estimate of the fair value of                  these                  assets based on scrap metal prices, net of removal costs and recorded                  an                  impairment loss of $4.3 million in Q4, 2006. The impairment loss                  was                  recorded in the pulp and specialty papers segments, $3.8 million                  and $0.5                  million, respectively. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Long-lived                  assets represented approximately 77% of total assets as at December                  31,                  2006. If future developments were to differ adversely from management’s                  best estimate of key assumptions and associated cash flows, the                  Company                  could potentially experience future material impairment                  charges. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Due                  to the numerous variables associated with judgments and assumptions                  relating to the valuation of assets in such situations, the precision                  and                  accuracy of estimates of related impairment charges are subject                  to                  significant uncertainties and may change significantly as additional                  information becomes known. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10.3 | Pension                  and post-retirement                  benefits |
|--------|------|------------------------------------------------------------------------|

|   | The                  Company maintains various employee future benefit plans, which                  include                  defined benefit pension and post-retirement benefit plans. The                  Company                  retains independent actuarial firms to perform actuarial valuations                  of the                  fair value of the Company’s defined benefit pension and post-retirement                  benefit plan assets and benefit obligations, and advise on the                  amounts to                  be recorded in the Company’s financial statements. This information is                  determined using certain assumptions, based on historical and market                  data                  that directly impact the fair value of the assets and obligations                  as well                  as the charges disclosed in the Company’s financial statements. These                  assumptions include: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                discount rate which is used to estimate the actuarial present value                of the                various plan obligations. The Company, assisted by independent actuarial                advisors, sets the discount rate assumption annually to reflect the                rates                available on high-quality debt instruments, with cash flows that                are                expected to match the timing and amount of expected benefit payments.                The                discount rate, as at December 31, 2006, was estimated to be                5.0%. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | The                long-term return on assets used to estimate the growth in the value                of                invested assets available to satisfy certain obligations. The Company,                with the assistance of independent actuarial firms, annually sets                the                expected rate of return on plan assets to reflect the current view                of                long-term investment returns. As at December 31, 2006, a rate of                return of                7.0% was determined by management in consultation with its independent                actuarial advisors. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | Salary                increases used to estimate the impact that future compensation increases                will have on pension and other post-retirement obligations. As at                December                31, 2006, the rate of compensation increase of 3.0% was determined                by                management in consultation with its independent actuarial                advisors. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | Health                care trend rates and mortality rates used to estimate the impact                that                future health care costs will have on pension and post-retirement                obligations. As at December 31, 2006, an initial health care trend                rate of                9.0% was determined by management in consultation with its independent                actuarial advisors. The initial health care trend rate is expected                to                decline by 1.0% annually, and the ultimate health care trend rate                is                estimated to be 5.0%. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Actual                  experience can vary significantly from estimates and could materially                  impact the estimated cost of employee benefit plans and future                  cash                  requirements. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  following table provides a sensitivity analysis of the key weighted                  average economic assumptions used in measuring the accrued pension                  benefit                  obligation, and the accrued other employee future benefit and related                  net                  periodic benefit cost for 2006. This sensitivity analysis should                  be used                  with caution as it is hypothetical and changes in each key assumption                  may                  not be linear. The sensitivities in each key variable have been                  calculated                  independently of each other. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                    | Pension                  benefit plans      | Other                  benefit plans |
|---------------------------------------------------------|---------------------------------------------|--------------------------------------|
| *(In                  millions of dollars)*             | Accrued                  benefit obligation | Net                  2006 expense    | Accrued                  benefit obligation | Net                  2006 expense |
| Expected                  rate of return on assets      |                                        |                                 |   |   |
| Impact                  of:                             |                                        |                                 |   |   |
| 1%                  increase                            | N/A                                         | (2.4)                                | N/A | N/A |
| 1%                  decrease                            | N/A                                         | 2.4                                  | N/A | N/A |
| Discount                  rate                          |                                        |                                 |   |   |
| Impact                  of:                             |                                        |                                 |   |   |
| 1%                  increase                            | (34.8)                                      | (3.8)                                | (31.6) | (2.7) |
| 1%                  decrease                            | 38.4                                        | 3.7                                  | 36.9 | 2.9 |
| Assumed                  overall health care cost trend |                                        |                                 |   |   |
| Impact                  of:                             |                                        |                                 |   |   |
| 1%                  increase                            | N/A                                         | N/A                                  | 41.6 | 6.1 |
| 1%                  decrease                            | N/A                                         | N/A                                  | (33.0) | (4.8) |

|   | 10.4 | Provision                  for bad debt and doubtful accounts |
|--------|------|---------------------------------------------------------------|

|   | The                  Company uses generally accepted practices in estimating required                  provisions for doubtful accounts and bad-debt losses arising on                  trade and                  other receivable balances. The Company’s estimate of the required                  allowance is a matter of opinion and the actual loss eventually                  sustained                  may be more or less than estimated. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  Company regularly reviews the collectibility of its accounts receivable.                  The Company records its allowance for doubtful accounts based on                  its best                  estimate of any potentially uncollectible accounts by highlighting                  those                  that are specifically high risk and applying judgement to determine                  its                  estimate. Consideration is given to current economic conditions                  and                  specific customer circumstances to determine the amount of any                  bad-debt                  expense to be recorded. While the Company has not experienced any                  significant bad-debt expense in prior periods, declines in the                  economy                  could result in collectibility concerns. Accounts receivable balances                  for                  individual customers could potentially be material at any given                  time. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  September 2006, the Company strengthened its accounts receivable                  insurance                  coverage by purchasing account receivable put options on selected                  accounts                  receivable balances. As a result of adding this form of insurance                  coverage, the Company reassessed its allowance for doubtful accounts                  and                  reduced its allowance for doubtful accounts by $3.3 million. As                  at                  December 31, 2006, “Accounts receivable” comprised approximately 11% of                  total assets. Included in this balance was a provision of approximately                  $3.1 million for doubtful accounts, or approximately 1.1% of accounts                  receivable (as at December 31, 2005, approximately $7.0 million                  for                  doubtful accounts, or approximately 2.8% of accounts                  receivable). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10.5 | Income                  taxes |
|--------|------|-------------------------------|

|   | The                  amounts recorded for future income tax assets and liabilities are                  based on                  various judgments, assumptions and estimates. Future tax assets                  and                  liabilities are measured using enacted or substantively enacted                  tax rates                  for the years in which assets and liabilities are expected to be                  recovered                  or settled. For these years, a projection is made of taxable income                  and                  estimates made of the ultimate recovery or settlement of temporary                  differences. The projection of future taxable income is based on                  management’s best estimate and may vary from                  actual. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  Company’s future tax assets are mainly composed of temporary differences                  relating to employee future benefits and loss carryforwards. Future                  tax                  liabilities are mainly composed of temporary differences pertaining                  to                  property, plant and equipment. Estimating the ultimate settlement                  period                  for these temporary differences requires judgment. The reversal                  of these                  temporary differences is expected to be at future substantially                  enacted                  rates which could change due to changes in income tax laws. As                  a result, a                  change in the timing of reversal or in the income tax rate could                  materially affect the future tax expense recorded in the consolidated                  statement of earnings. A one-percentage-point change in the Company’s                  reported effective income tax rate would have the effect of changing                  the                  income tax expense by approximately $8.1                  million. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  addition, the Company records provisions for federal, provincial                  and                  foreign taxes based on the respective tax laws of the jurisdictions                  in                  which the Company operates and its judgment as to the appropriate                  allocation of income and deductions to those jurisdictions. Canadian,                  U.S.                  and international tax laws are subject to interpretation and the                  Company’s                  judgment may be challenged by taxation authorities. In such circumstances,                  the final resolution of these challenges can result in settlements                  that                  differ from the Company’s estimated                  amounts. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **11.0** | **CHANGES                  IN ACCOUNTING                  POLICIES** |
|----------|----------------------------------------------------------------------|

|   | The                  Company did not adopt any new accounting standards or change any                  accounting policies in 2006. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|

| **12.0** | **IMPACT                  OF ACCOUNTING PRONOUNCEMENTS AFFECTING FUTURE                  PERIODS** |
|----------|----------------------------------------------------------------------------------------------------|

|   | In                  April 2005, the Canadian Institute of Chartered Accountants issued                  the                  following new accounting standards, which impact the recognition,                  measurement and disclosure of financial instruments, hedges and                  comprehensive income: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | 5. | Section                  3865, “Hedges”, establishes the standards for when and how hedge                  accounting may be applied. |
|--------|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  new sections are all to be applied at the same time and are effective                  for                  interim and annual financial statements relating to fiscal years                  beginning                  on or after October 1, 2006. Early adoption is permitted, but only                  as of                  the beginning of a fiscal year ending on or after December 31,                  2004. The                  Company is currently in the process of evaluating the impact of                  the new                  accounting standards on its financial position, results of operations,                  and                  cash flows. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **13.0** | **RISKS                  AND                  UNCERTAINTIES** |
|----------|---------------------------------------------------------------|

|   | The                  Company produces and markets pulp and paper products that are sold                  globally. The Company seeks to differentiate its product lines                  from those                  of other producers by supplying specialty products that add value                  for                  customers. However, like most companies in the forest products                  industry in                  North America, the Company faces business risks and uncertainties.                  These                  fall into the general business areas of markets, international                  commodity                  prices, currency exchange rates, environmental issues, fibre supply,                  government regulation and policy, and for Canadian companies, trade                  barriers and potential impacts of Aboriginal rights, including                  unresolved                  Aboriginal land claims in British                  Columbia. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  order to address these risks and effectively manage them, the Company’s                  management has developed a process for managing risk and the                  interrelationships risks have with the Company’s strategic plan.                  Management provides regular updates to the Audit Committee, works                  with                  corporate and operational management to identify, measure and prioritize                  the critical risks facing the Company, and manages these risks                  by ensuring                  that they are adequately addressed through mitigating procedures                  where                  appropriate. The objectives of the risk management function include                  developing a common framework for understanding what constitutes                  principal                  business risks, ensuring that risk management activities are aligned                  with                  business strategies, and providing an effective mechanism for governance                  in the area of risk management. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A                  discussion of the principal uncertainties to which the Company                  is subject                  follows. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | 13.1 | Product                  prices |
|--------|------|---------------------------------|

|   | The                  Company’s markets are commodity-based and cyclical in nature. Markets for                  the principal products are affected by fluctuations in supply and                  demand                  within each cycle, which in turn affect product prices. Demand                  has                  historically been determined by the level of economic growth and                  has been                  very closely tied to overall business activity and personal income.                  The                  Company’s earnings are sensitive to price changes for its principal                  products, with the effect of price changes on specialty and newsprint                  grades being the greatest. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  newsprint market is mature, but the Company believes it remains                  well                  positioned to mitigate the impact of this decline through its ability                  to                  switch grades. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  “Sensitivity Analysis” section provides further details about the                  Company’s sensitivity to product price                  fluctuations. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | 13.2 | Global                  competition |
|--------|------|-------------------------------------|

|   | Pulp                  and paper markets are highly competitive global commodity markets                  in which                  producers compete primarily on the basis of price. A majority of                  the                  Company’s production is directed to markets outside Canada, where Canadian                  producers generally compete with American, European and Asian producers.                  Many of the Company’s competitors are larger and have greater financial                  resources than the Company and some of the mills operated by the                  Company’s                  competitors are lower cost producers than the mills the Company                  operates.                  ** **The                  Company is focused on improving productivity and reducing costs                  to stay                  competitive. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13.3 | International                  sales |
|--------|------|--------------------------------------|

|   | A                  significant portion of the Company’s sales are outside Canada and the                  United States. Therefore, the Company faces a number of risks including                  tariffs and other trade barriers, political and economic instability                  in                  foreign markets, and fluctuations in foreign                  currencies. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Under                  the terms of the Company’s distribution agreement with an affiliate of                  Norske Skogindustrier ASA, either party on six months notice may                  terminate                  the agreement. If the agreement is terminated, the Company will                  be                  required to replace the distributor within the six-month notice                  period in                  order to minimize disruption* *to                  sales activities in the relevant                  market. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13.4 | Foreign                  exchange |
|--------|------|-----------------------------------|

|   | The                  Company’s profitability is subject to fluctuations in foreign currencies,                  particularly the U.S. dollar, which is the currency in which most                  sales                  are denominated. Fluctuations in foreign currencies affect the                  Company’s                  competitive position in world markets. Apart from the value of                  the                  Canadian dollar relative to the U.S. dollar, the Company’s competitiveness                  in world markets is affected by the relative strength of the currencies                  of                  other producing countries. The Company is also exposed to currency                  exchange risk on debt denominated in U.S. dollars, including its                  7.375%                  and 8.625% senior notes. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Under                  a Board-approved foreign exchange risk management program, the                  Company                  manages a portion of its currency exposure through the use of currency                  options and forward contracts to hedge anticipated future sales                  denominated in foreign currencies and U.S.-dollar-denominated debt.                  The                  Company’s hedging policy for revenues includes 33% to 67% of 0- to                  12-month and 0% to 25% of 13 to 24-month U.S. dollar net exposure.                  The                  Company considers its U.S. dollar revenues to act largely as a                  hedge of                  its U.S.-dollar-denominated debt. The revenue hedge program mitigates                  the                  impact of any rapid movements in currency by 40% to 50% over the                  near                  term. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  “Sensitivity Analysis” section provides further details about the                  Company’s sensitivity to foreign exchange                  fluctuations. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | 13.5 | Fibre                  supply |
|--------|------|-------------------------------|

|   | Since                  the Company has no significant timber holdings, operations are                  dependent                  on the supply by third parties of wood fibre, over half of which                  is                  provided by three suppliers. The Company’s fibre supply could be reduced                  as a result of events beyond its control, such as industrial disputes,                  natural disasters, material curtailments, and shutdown of operations                  by                  suppliers or the Company for market or other reasons. Market-related                  curtailments or shutdowns can be influenced by both seasonal and                  cyclical                  factors such as raw material availability, finished goods inventory                  levels, or interest rates and underlying demand for lumber in key                  markets. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Long-term                  fibre contracts with third parties are conducted at market prices                  or at                  prices determined under market-based formulas and represent approximately                  70% of the Company’s pulp and paper mills’ wood fibre requirements. The                  solid wood segment of British Columbia’s forest industry has undergone                  significant consolidation and downsizing. As a result, there is                  no                  assurance that the Company will continue to be able to access wood                  fibre                  at the same levels achieved in the past; therefore, costs may be                  negatively impacted. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  Company is currently monitoring the impacts of the softwood lumber                  agreement and the weakening U.S. housing market to determine British                  Columbia’s lumber producers’ ability to maintain production levels. The                  Company’s cost of wood fibre could be negatively impacted if its wood                  fibre suppliers are forced to alter their operations such that                  they are                  not able to supply wood fibre to the Company at current levels                  or from                  cost-effective locations or due to increased market                  prices. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  addition, government regulations and aboriginal issues may also                  lower the                  supply of wood fibre. The Province of British Columbia owns approximately                  95% of all timberlands and could introduce legislation to reduce                  wood                  fibre supply. Aboriginal groups have claimed aboriginal title over                  substantial portions of British Columbia, including areas where                  the forest                  tenures held by the Company’s suppliers are located. Although the renewal                  of forest tenures held by the Company’s suppliers may be adversely                  impacted by claims of aboriginal title, the specific impact cannot                  be                  estimated at this time. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  Company is also a large consumer of old newspapers and magazines.                  Ownership of Western Canada’s largest paper recycling facility enables the                  Company to secure 100% of its recycled fibre needs from this                  facility.  While the supply remains reliable, the pricing is                  determined by the market and is subject to                  variability. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  “Sensitivity Analysis” section provides further details about the                  Company’s sensitivity to fibre cost                  movements. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13.6 | Aboriginal                  claims |
|--------|------|------------------------------------|

|   | The                  Company’s ability to operate its manufacturing facilities may also be                  affected by aboriginal groups’ claims of aboriginal title and rights. The                  governments of Canada and British Columbia have established a formal                  process to negotiate settlements with aboriginal groups throughout                  British                  Columbia in order to resolve these land claims. It is the policy                  of the                  governments that ownership of lands held in fee simple by third                  parties                  such as the Company will not be affected by treaty negotiations.                  In the                  case of the Powell River mill, the site has been included in areas                  to                  which an aboriginal group has asserted aboriginal title both through                  treaty negotiations with government and by commencing an action                  in the                  Supreme Court of British Columbia. While the Company and other                  industrial                  companies have been named as parties in the court proceeding along                  with                  the two governments of Canada and British Columbia, counsel for                  the                  aboriginal group has advised the Company that the plaintiffs are                  currently                  negotiating with two governments and have no intention of proceeding                  with                  the action at this time. Based on the history of similar proceedings,                  the                  Company expects that it would take many years before a final court                  decision could be rendered if the court proceeding were                  pursued. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Recent                  Supreme Court of Canada decisions have confirmed that the governments                  of                  Canada and British Columbia are obligated to consult with and,                  in certain                  circumstances, accommodate aboriginal groups whenever there is                  a                  reasonable prospect their decisions, such as the decision to issue                  or                  amend a regulatory permit, may affect aboriginal groups’ rights or title.                  This duty of consultation and accommodation may affect the Company’s                  ability to obtain or amend necessary regulatory permits on a timely                  basis                  and may influence the conditions set out in such permits. In mid-2005                  the                  Government of British Columbia initiated a “new relationship” policy                  related to Aboriginal interests that recognizes the need to find                  pre-treaty solutions to advance the consultation process and to                  reconcile                  governmental interests and Aboriginal interests.  This new                  relationship policy is directed, in part, at improving decision-making                  affecting land and resource use.  It is unclear what, if any, impact                  the new relationship policy will have on governmental decision                  making as                  it affects the Company. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13.7 | Energy                  costs |
|--------|------|-------------------------------|

|   | The                  Company is a significant consumer of electrical                  power. |
|--------|----------------------------------------------------------------------------------------------|

|   | The                  Company’s electricity supply contracts are provincially regulated, and                  historically pricing has been very stable.  In April 2004 there was a                  rate increase of approximately 5%, the first increase in 11 years.                   In early 2006, BC Hydro (the “Utility”) announced an interim rate increase                  of 4.65%, effective July 1, 2006, subject to regulatory approval                  in late                  2006. In November 2006, after a negotiated settlement process,                  the Utility                  regulatory commission approved a final rate increase of 1.54%,                  effective                  July 1, 2006 to January 31, 2007. The higher rate increase will                  remain in                  effect until the end of January 2007. In March 2007, the Utility                  plans to                  issue a refund to customers based on the difference between the                  interim                  4.65% increase and the final 1.54% rate increase for the period                  July 1,                  2006 to January 31, 2007. In addition, the Utility regulatory commission                  approved a further increase of 1.64% over the Utilities rate prior                  to July 2006, effective February 1, 2007 and will also charge an                  additional rate rider of 2% on all customer bills for the period                  February                  1, 2007 to March 31, 2008. The Company has recorded a $2.8 million                  receivable for the refund applicable for the period July 1, 2006                  to                  December 31, 2006. The Company believes that the Province’s electricity                  rates will continue to be low relative to other regions in North                  America,                  but going forward the Utility will be requesting rate increases                  on a more                  regular basis than in the past should the cost of electricity sources                  continue to rise. Consequently, future changes in electricity prices                  could                  have a significant impact on the Company’s                  earnings. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Effective                  April 1, 2006, the Utility implemented its redesigned rate structure                  for                  industrial customers.  The new rate structure has resulted in the                  Company acquiring 90% of the electricity purchased from the Utility                  at an                  annual rate that is lower than the previous regulated rate, and                  10% of the                  electricity at an annual rate that approximates the long-term acquisition                  costs paid by the Utility for incremental electricity.  The change in                  rate structure, by design, is not expected to materially impact                  the                  Company's total cost of electricity, assuming no change to the                  Company’s                  electricity consumption, but it has been designed to motivate industrial                  customers to reduce their electricity consumption. Consequently,                  the new                  rate structure has provided substantial, but yet to be quantified,                  opportunity for cost reductions. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  majority of the Company’s fossil fuels, particularly oil and natural gas,                  are purchased on the spot market, which can fluctuate significantly                  depending on various external                  factors. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A                  portion of the Company’s exposure to fluctuating fossil fuel prices is                  managed through the use of financial instruments and physical supply                  contracts, under a Board-approved energy program. The Company’s energy                  hedging policy is restricted to 20-70% of the net exposure for                  oil and                  gas. In addition, the Company reduces its exposure to fossil fuel                  prices                  through the use of lower priced                  alternatives. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Freight                  charges and chemical expenses also vary with oil and diesel fuel                  prices. |
|--------|--------------------------------------------------------------------------------------------------------------------|

|   | The                  “Sensitivity Analysis” section provides further details about the                  Company’s sensitivity to energy cost                  fluctuations. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13.8 | Legal                  proceedings |
|--------|------|------------------------------------|

|   | In                  the ordinary course of business, the Company occasionally will                  become                  party to legal proceedings, which are generally related to contract                  disputes and employment law. As at December 31, 2006, the final                  results of                  currently ongoing legal proceedings, while not immediately determinable,                  are not expected to have a material effect on financial                  results. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

*Table            of Contents*

|   | 13.9 | Priorperiod                  losses |
|--------|------|-------------------------------------|

|   | The                  Company has recorded a net loss in seven                  of                  the last 12 quarters. These losses have arisen primarily as a result                  of                  the strengthening Canadian dollar and, to a lesser extent, market                  conditions. Should market conditions deteriorate to a greater extent,                  the                  Company may, over time, need to rely to a greater extent on its                  Facility                  and, if necessary, additional sources of                  funding. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                  particular, the Company’s pulp operations, like those of other producers,                  have recently been under pressure as a result of the relatively                  strong                  Canadian dollar and market conditions that do not compensate producers                  for                  rising energy costs. While under current market projections the                  Company                  expects to operate its pulp facilities, deterioration in market                  conditions                  or unplanned capital expenditures may necessitate temporary or                  permanent                  curtailment. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13.10 | Debt |
|--------|-------|------|

|   | The                  Company has a significant amount of debt, and its debt agreements                  contain                  various restrictive and financial covenants. The Company’s ability to pay                  interest on and satisfy its debt obligations will depend on its                  future                  operating performance and ability to obtain additional debt or                  equity                  financing when necessary. Prevailing economic conditions and financial,                  business and other factors beyond the Company’s control may affect its                  ability to make these payments. In addition, the Company’s debt level may                  limit its ability to obtain additional financing and increase its                  vulnerability to interest rate fluctuations. Should the challenging                  market                  conditions continue, the Company may, over time, have to rely to                  a greater                  extent on its Facility and, if necessary, additional sources of                  funding. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13.11 | Environmental                  regulation |
|--------|-------|-------------------------------------------|

|   | The                  Company’s operations are subject to a wide range of general and                  industry-specific environmental laws and regulations related to                  waste                  management. The costs of compliance with such laws and regulations                  can be                  significant. The Company continually monitors its environmental                  performance and believes that its facilities are operating in substantial                  compliance with environmental laws and                  regulations. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13.12 | Labour                  disruptions |
|--------|-------|-------------------------------------|

|   | Many                  of the Company’s suppliers and service providers are unionized. Strikes or                  work stoppages by members of those unions could result in a significant                  disruption of operations or higher operating costs, which could                  have a                  material adverse effect on the                  business. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  majority of the Company’s wood fibre supplier employees are members of the                  United Steelworkers of Canada whose contract is set to expire on                  June 15,                  2007. The Company believes that the union and the employees will                  be able                  to come to terms without a work stoppage. However, should a work                  stoppage                  occur, the Company’s wood fibre supply could be negatively impacted both                  in terms of volume and cost. Contingency plans have been developed                  to                  mitigate against a supply disruption resulting from a potential                  labour                  impasse. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The                  majority of the Company’s pulp and paper mill employees are members of the                  Communications, Energy & Paperworkers Union of Canada (“CEP”), the                  Pulp, Paper and Woodworkers of Canada (“PPWC”) or the Canadian Office and                  Professional Employees Union (“COPE”) unions. Distribution centre                  employees are members of the Christian Labour Association of Canada                  (CLAC). Collective agreements with the CEP and PPWC unions expire                  in April                  2008. During Q1, 2006, the Company negotiated a new collective                  agreement                  with COPE, the smallest of the three unions, that expires on April                  30,                  2012. The collective agreement with CLAC expires April 2012. The                  Company                  believes its labour relations are strong and does not anticipate                  labour                  disruptions in its operations. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **14.0** | **SENSITIVITY                  ANALYSIS** |
|----------|-------------------------------------------|

|   | The                  Company’s earnings are sensitive to fluctuations                  in: |
|--------|--------------------------------------------------------------------------------------------------|

|   | Product                  price |
|--------|--------------------------------|

|   | The                  Company’s products are commodity-based and cyclical in nature. As a                  result, earnings are sensitive to price changes, with the effect                  of price                  changes on specialty paper grades and newsprint being the                  greatest. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Foreign                  exchange |
|--------|-----------------------------------|

|   | The                  Company’s products are primarily sold in Canada, the United States, Asia                  and Australasia, Latin America and Europe. The majority of sales                  are                  denominated in foreign currencies, principally the U.S. dollar.                  As a                  result, the Company is exposed to foreign currency market risk                  on accounts                  receivable and future sales. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Energy                  costs |
|--------|-------------------------------|

|   | The                  Company’s earnings could be significantly impacted by changes in prices                  and terms of energy supply contracts, as the Company is a significant                  consumer of electrical power, fossil fuels, and inputs whose pricing                  is                  highly correlated to energy. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Fibre                  costs |
|--------|------------------------------|

|   | The                  Company’s supply of fibre is reliable, although it is subject to market                  influences and has some degree of variability. Fibre supply includes                  wood                  chips, logs and old newspapers                  (“ONP”). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

|   | The                  Company’s annual EBITDA, net earnings and earnings per share are estimated                  to be impacted by changes in product prices, foreign exchange and                  input                  costs as follows: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(In                  millions of dollars, except per-share amounts)*                                       |   | **EBITDA****5** |   | **Net                  earnings****1** |   | **Earnings****per                  share** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|----------------------------------------|--------|--------------------------------------------|--------|
| **Product                  prices****2**                                                                    |   |            |   |                                   |   |                                       |   |
| A                  US$10 per tonne change in the sales price of:                                            |   |            |   |                                   |   |                                       |   |
| Specialty                  papers                                                                           |   | $               | 12.8   |                                   | $      | 8.5                                        |   | $ | 0.04 |   |
| Newsprint                                                                                                   |   |            | 7.2    |                                   |   | 4.7                                        |   |   | 0.02 |   |
| Pulp                                                                                                        |   |            | 5.8    |                                   |   | 3.9                                        |   |   | 0.02 |   |
| **Foreign                  exchange****3**                                                                  |   |            |   |                                   |   |                                       |   |   |   |   |
| A                  US$0.01 change in the U.S. dollar relative value of the Canadian                  dollar |   | $               | 14.0   |                                   | $      | 9.2                                        |   | $ | 0.04 |   |
| **Energy                  cost sensitivity****4**                                                           |   |            |   |                                   |   |                                       |   |   |   |   |
| A                  5% change in the price of:                                                               |   |            |   |                                   |   |                                       |   |   |   |   |
| Natural                  gas and oil - direct purchases                                                     |   | $               | 3.6    |                                   | $      | 2.3                                        |   | $ | 0.01 |   |
| Electricity                  - direct purchases                                                             |   |            | 8.6    |                                   |   | 5.7                                        |   |   | 0.03 |   |
| **Fibre                  sensitivity****4**                                                                 |   |            |   |                                   |   |                                       |   |   |   |   |
| A                  5% change in the price of:                                                               |   |            |   |                                   |   |                                       |   |   |   |   |
| Wood                  chips and sawdust                                                                     |   | $               | 13.9   |                                   | $      | 9.2                                        |   | $ | 0.04 |   |
| ONP                                                                                                         |   |            | 1.3    |                                   |   | 0.8                                        |   |   | Less                  than $0.01 |   |

| 1   | Based                on an expected tax rate of 34%. |
|---------------|------------------------------------------------------|
| 2   | Based                on full 2007 capacities. |
|---------------|-----------------------------------------------|
| 3   | Based                on a movement from US$0.86 to US$0.87, and excludes the Company’s hedging                program and the impact of the Company’s translation of                U.S.-dollar-denominated debt. |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4   | Based                on 2006 consumption levels. |
|---------------|--------------------------------------------------|
| 5   | EBITDA                is a non-GAAP measure. Refer to the “Non-GAAP Measures” section for                further details. |
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| **15.0** | **OUTLOOK** |
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*Table            of Contents*

| **16.0** | **DISCLOSURE                  CONTROLS AND INTERNAL CONTROL OVER** |
|----------|--------------------------------------------------------------------|

**FINANCIAL        REPORTING **

|   | The                  Company conducted an evaluation under the supervision and with                  the                  participation of the Company’s management, including the chief executive                  officer and chief financial officer, as of December 31, 2006, of                  the                  effectiveness of the design and operation of the Company’s disclosure                  controls and procedures.  Based on this evaluation, the Company’s                  chief executive officer and chief financial officer concluded that                  such                  disclosure controls and procedures are effective to ensure that                  information required to be disclosed by the Company in reports                  it files or                  submits under applicable Canadian securities laws is (a) recorded,                  processed, summarized and reported within the time periods specified                  in                  the rules and forms of the Canadian securities regulatory authorities                  and                  (b) accumulated and communicated to the Company’s management including the                  Company’s chief executive officer and chief financial officer, or persons                  performing similar functions, as appropriate, to allow timely decisions                  regarding required disclosure.  It should be noted that while the                  Company’s chief executive officer and chief financial officer believe that                  the Company’s disclosure controls and procedures provide a reasonable                  level of assurance that they are effective, they do not expect                  that the                  Company’s disclosure controls and procedures or internal control over                  financial reporting will prevent all errors and fraud. A control                  system,                  no matter how well conceived or operated, can provide only reasonable,                  not                  absolute, assurance that the objectives of the control system are                  met. |
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|   | There                  have been no changes in the Company’s internal control over financial                  reporting that occurred during the most recent interim period ended                  December 31, 2006, that have materially affected, or are reasonably                  likely                  to materially affect, the Company’s internal control over financial                  reporting. |
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|   | The                  Company’s Audit Committee, as part of its oversight role, has reviewed                  and                  recommended the approval of this MD&A to the board of directors. The                  board of directors has read and approved this MD&A. Through                  discussions with management, the board of directors and the Audit                  Committee have satisfied themselves that management has implemented                  the                  necessary disclosure controls. |
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|   | Internal                  controls |
|--------|------------------------------------|

|   | On                  March 10, 2006, the Canadian Securities Administrators issued Notice                  52-313, “Status of Proposed MI 52-111 Reporting on Internal Control over                  Financial Reporting and Proposed Amended and Restated MI 52-109                  Certification of Disclosure in Issuers’ Annual and Interim Findings,”                  (“Notice 52-313”). Notice 52-313 advised market participants that proposed                  Multilateral Instrument 52-111, “Reporting on Internal Control over                  Financial Reporting”, will be dropped, and that Multilateral Instrument                  52-109, “Certification of Disclosure in Issuers’ Annual and Interim                  Findings”, will be modified to                  require: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Annual                Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)                certifications stating that they have evaluated the effectiveness                of the                issuer’s internal control over financial reporting as of the end of the                financial year, and caused the issuer to disclose in its annual                management’s discussion and analysis their conclusions about the                effectiveness of internal control over financial reporting as at                the end                of the financial year based on their                evaluations. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | The                issuer will not be required to obtain from its independent auditors                an                internal control audit opinion concerning management’s assessment of the                effectiveness of internal control over financial                reporting. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | These                requirements will apply to all reporting issuers, other than investment                funds, in all Canadian jurisdictions. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | The                earliest these requirements will apply is in respect of financial                years                ending on or after December 31, 2007. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As                  a result of the changes highlighted in Notice 52-313, the Company’s CEO                  and CFO are required to certify as to the design of the Company’s internal                  control over financial reporting for the fiscal year ended December                  31,                  2006, and the certification as to the effectiveness of internal                  control                  over financial reporting will be added for the fiscal year ended                  December                  31, 2007. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Section                  404 of the United States *Sarbanes-Oxley                  Act*,                  “Management Assessment of Internal Controls” (“Section 404”), continues to                  require that management assess and report on the effectiveness                  of internal                  control over financial reporting annually. The Company was required                  to                  comply with Section 404 by the end of its fiscal year ended December                  31,                  2006. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On                  August 9, 2006, the Securities and Exchange Commission (“SEC”) proposed                  that certain foreign private issuers would continue to be required                  to                  include management’s report on internal control over financial reporting,                  but would be granted relief from the independent auditors’ attestation                  requirements until fiscal years ending on or after July 15, 2007.                  On                  December 15, 2006, the SEC adopted this extension substantially                  as                  proposed. The SEC added a requirement for a company’s management to                  disclose that its assessment of internal control over financial                  reporting                  has not been attested to by the independent auditor, if the company                  is                  only providing management’s report during its first year of compliance.                  While not required, the Company has included the attestation of                  internal                  control over financial reporting within the scope of the independent                  auditors’ December 31, 2006, year-end audit. As a result, the independent                  auditors have expressed an opinion on management’s assessment of internal                  control over financial reporting as at December 31,                  2006. |
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| **17.0** | **OUTSTANDING                  SHARE                  DATA** |
|----------|--------------------------------------------------------------|

|   | At                  February 13, 2007, the Company had 214,604,120 common shares issued                  and                  outstanding. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | Additional                  information about the Company including the 2006 Annual Information                  Form                  is available on the Company’s website at www.catalystpaper.com,                  or the Canadian Securities Administrator’s electronic filing website at                  www.sedar.com. |
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