MANAGEMENT’S
RESPONSIBILITY




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




Catalyst
Paper Corporation’s management is responsible for the preparation, integrity and
fair presentation of the accompanying consolidated financial statements and
other information contained in this Annual Report.  The consolidated
financial statements and related notes were prepared in accordance with
generally accepted accounting principles (“GAAP”) in Canada, except note 28
which sets out the significant measurement differences had these statements been
prepared in accordance with U.S. GAAP, and reflect management’s best judgments
and estimates.  Financial information provided elsewhere in this
Annual Report is consistent with that in the consolidated financial
statements.




Management
is responsible for designing and maintaining adequate internal control over
financial reporting.  The Company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for reporting purposes.  Internal control over financial reporting
include those processes and procedures that:




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


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


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


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




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in condition, or that the degree of compliance
with policies or procedures may deteriorate.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007. Management based this assessment on the
criteria for internal control over financial reporting described in the
“Internal Control – Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission.  Management’s assessment
included an evaluation of the design of the Company’s internal control over
financial reporting and testing of the operational effectiveness of its internal
control over financial reporting.  Management reviewed the results of
its assessment with the Audit Committee of our Board of Directors.




Based on
this assessment, management determined that, as of December 31, 2007, the
Company’s internal control over financial reporting was effective.




The
Company’s independent auditor which audited and reported on the Company’s
consolidated financial statements has  also issued an auditors’ report
on the Company’s internal control over financial reporting.




The Board
of Directors is responsible for satisfying itself that management fulfills its
responsibilities for financial reporting and internal control.  The
Audit Committee, which is comprised of three non-management members of the Board
of Directors, provides oversight to the financial reporting
process.  The Audit Committee meets periodically with management, the
internal auditors and the external auditors to review the consolidated financial
statements, the adequacy of financial reporting, accounting systems and controls
and internal and external auditing functions.




The
consolidated financial statements have been reviewed by the Audit Committee,
which has recommended their approval by the Board of Directors.  These
consolidated financial statements have been audited by KPMG LLP, the independent
auditors, whose report follows.













Richard
      Garneau
            David
      SmalesPresident
      and
            Vice-President,
      FinanceChief
      Executive Officer
            and
      Chief Financial Officer








Vancouver,
Canada


February
5, 2008





AUDITORS’
REPORT ON FINANCIAL STATEMENTS




To the
Shareholders of Catalyst Paper Corporation




We have
audited the consolidated balance sheets of Catalyst Paper Corporation ("the
Company") as at December 31, 2007 and 2006 and the consolidated statements of
earnings and comprehensive income, shareholders’ equity and cash flows for each
of the years in the three-year period ended December 31, 2007. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.




We
conducted our audits in accordance with Canadian generally accepted auditing
standards. With respect to the consolidated financial statements for the years
ended December 31, 2007 and 2006, we also conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.




In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2007 and 2006
and the results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 2007 in accordance with Canadian
generally accepted accounting principles.








“KPMG
LLP”


Chartered
Accountants


Vancouver,
Canada





February
5, 2008, except as to note 29


which is
as of February 11, 2008










REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




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




To the
Shareholders and Board of Directors of Catalyst Paper Corporation




We have
audited Catalyst Paper Corporation ("the Company")’s internal control over
financial reporting as of December 31, 2007, based on the criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Financial
Statements and Assessment of Internal Control Over Financial Reporting. Our
responsibility is to express an opinion the Company's internal control over
financial reporting based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.




A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).




We also
have conducted our audits on the consolidated financial statements in accordance
with Canadian generally accepted auditing standards. With respect to the years
ended December 31, 2007 and 2006, we also have conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our report dated February 5, 2008, except as to note 29 which
is as of February 11, 2008, expressed an unqualified opinion on those
consolidated financial statements.








“KPMG
LLP”


Chartered
Accountants


Vancouver,
Canada





February
5, 2008







CONSOLIDATED
STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME







(In
millions of dollars, except where otherwise stated)




Years
      ended December 31,2007
            
            
            2006
            
            
            2005Sales
            
            $
            1,714.6
            
            
            $
            1,882.5
            
            
            $
            1,823.9Operating
      expensesCost of sales
            
            
            1,574.6
            
            
            
            1,609.3
            
            
            
            1,604.3Selling, general and
      administrative
            
            
            48.3
            
            
            
            62.2
            
            
            
            57.7Restructuring and
      change-of-control (note 5)
            
            
            64.7
            
            
            
            –
            
            
            
            6.7Amortization (note
      13)
            
            
            176.4
            
            
            
            207.1
            
            
            
            180.31,864.0
            
            
            
            1,878.6
            
            
            
            1,849.0Operating
      earnings (loss)
            
            
            (149.4
            )
            
            
            3.9
            
            
            
            (25.1
            )Interest
      expense, net (note 6)
            
            
            (70.7
            )
            
            
            (73.8
            )
            
            
            (75.7
            )Foreign
      exchange gain (loss) on long-term debt
            
            
            103.9
            
            
            
            (0.3
            )
            
            
            24.7Other
      income (expense), net (note 7)
            
            
            (15.3
            )
            
            
            1.8
            
            
            
            4.5Earnings
      (loss) before income taxes andnon-controlling
      interest
            
            
            (131.5
            )
            
            
            (68.4
            )
            
            
            (71.6
            )Income
      tax recovery (note 8)
            
            
            (100.0
            )
            
            
            (54.0
            )
            
            
            (46.6
            )Net
      earnings (loss) before non-controlling interest
            
            
            (31.5
            )
            
            
            (14.4
            )
            
            
            (25.0
            )Non-controlling
      interest (note 4)
            
            
            (0.1
            )
            
            
            (1.5
            )
            
            
            (0.6
            )Net
      earnings (loss)
            
            $
            (31.6
            )
            
            $
            (15.9
            )
            
            $
            (25.6
            )Other
      comprehensive income (note 2 (c))
            
            
            14.3
            
            
            
            –
            
            
            
            –Comprehensive
      income (loss)
            
            $
            (17.3
            )
            
            $
            (15.9
            )
            
            $
            (25.6
            )Basic
      and diluted earnings (loss) per share(note
      9) (in dollars)
            
            $
            (0.15
            )
            
            $
            (0.07
            )
            
            $
            (0.12
            )Weighted
      average common shares outstanding (in millions)
            
            
            214.7
            
            
            
            214.6
            
            
            
            214.6




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




















CONSOLIDATED
BALANCE SHEETS




(In
millions of dollars)




As
      at December 31,2007
            
            
            2006Assets
              Current
      assetsCash and cash
      equivalents
            
            $
            –
            
            
            $
            35.5Accounts receivable (note
      10)
            
            
            213.1
            
            
            
            277.9Inventories (note
      11)
            
            
            235.7
            
            
            
            245.0Prepaids and other (note
      12)
            
            
            40.7
            
            
            
            15.4489.5
            
            
            
            573.8Property,
      plant and equipment (note 13)
            
            
            1,912.8
            
            
            
            2,023.1Other
      assets (note 14)
            
            
            51.1
            
            
            
            40.8$
            2,453.4
            
            
            $
            2,637.7Liabilities
              Current
      liabilitiesAccounts payable and accrued
      liabilities (note 15)
            
            $
            268.2
            
            
            $
            291.5Current portion of long-term
      debt
            
            
            1.2
            
            
            
            1.8269.4
            
            
            
            293.3Long-term
      debt (note 16)
            
            
            784.6
            
            
            
            858.7Employee
      future benefits (note 17)
            
            
            211.7
            
            
            
            187.2Other
      long-term obligations (note 18)
            
            
            26.9
            
            
            
            23.3Future
      income taxes (note 8)
            
            
            150.5
            
            
            
            243.9Deferred
      credits (note 19)
            
            
            21.7
            
            
            
            25.51,464.8
            
            
            
            1,631.9Shareholders’
      equityShare
      capital (note 20)
            
            
            913.9
            
            
            
            913.6Contributed
      surplus
            
            
            12.1
            
            
            
            9.3Retained
      earnings
            
            
            49.0
            
            
            
            82.9Accumulated
      other comprehensive income (note 2 (c))
            
            
            13.6
            
            
            
            –988.6
            
            
            
            1,005.8$
            2,453.4
            
            
            $
            2,637.7




Commitments,
guarantees and indemnities and contingent liabilities (notes 24, 25 and
26)





Subsequent
event (note 29)





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











ON
      BEHALF OF THE BOARD:Richard
      Garneau
            Thomas
      S. ChambersDirector
            Director








CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY


(In
millions of dollars, except where otherwise stated)




Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Share
      capital (note 20)
            
            
            #
            
            
            
            #
            
            
            
            #Shares outstanding, beginning of
      year
            
            
            214,604,120
            
            
            
            214,604,120
            
            
            
            214,604,120Issued under stock option
      plan
            
            
            80,009
            
            
            
            –
            
            
            
            –Shares outstanding, end of
      year
            
            
            214,684,129
            
            
            
            214,604,120
            
            
            
            214,604,120Balance, beginning of
      year
            
            $
            913.6
            
            
            $
            913.6
            
            
            $
            913.6Stock options
      exercised
            
            
            0.3
            
            
            
            –
            
            
            
            –Balance, end of
    year
            
            
            913.9
            
            
            
            913.6
            
            
            
            913.6Contributed
      surplusBalance, beginning of
      year
            
            
            9.3
            
            
            
            7.3
            
            
            
            4.8Stock option compensation
      expense
            
            
            3.2
            
            
            
            2.0
            
            
            
            2.5Stock options
      exercised
            
            
            (0.4
            )
            
            
            –
            
            
            
            –Balance, end of
    year
            
            
            12.1
            
            
            
            9.3
            
            
            
            7.3Retained
      earningsBalance, beginning of
      year
            
            
            82.9
            
            
            
            98.8
            
            
            
            124.4Adoption of new accounting
      standards for financialinstruments
      (note 2 (c))
            
            
            (2.3
            )
            
            
            –
            
            
            
            –Net earnings
(loss)
            
            
            (31.6
            )
            
            
            (15.9
            )
            
            
            (25.6
            )Balance, end of
    year
            
            
            49.0
            
            
            
            82.9
            
            
            
            98.8Accumulated
      other comprehensive income (loss) (note 2 (c))Balance, beginning of
      year
            
            
            –
            
            
            
            –
            
            
            
            –Adoption of new accounting
      standards for financialinstruments
            
            
            (0.7
            )
            
            
            –
            
            
            
            –Unrealized net gain on cash flow
      hedges on revenue, netof
      tax of $13.8 million
            
            
            28.4
            
            
            
            –
            
            
            
            –Reclassification of net gain on
      cash flow hedges on revenue included in net loss, net of tax of $7.3
      million
            
            
            (14.1
            )
            
            
            –
            
            
            
            –Balance, end of
    year
            
            
            13.6
            
            
            
            –
            
            
            
            –Total
      shareholders’ equity
            
            $
            988.6
            
            
            $
            1,005.8
            
            
            $
            1,019.7




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





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
millions of dollars)




Years
      ended December 31,2007
            
            
            2006
            
            
            2005Cash
      flows provided (used) by:OperationsNet earnings
(loss)
            
            $
            (31.6
            )
            
            $
            (15.9
            )
            
            $
            (25.6
            )Items not requiring (providing)
      cashAmortization
            
            
            176.4
            
            
            
            183.7
            
            
            
            180.3Impairment loss on property,
      plant and equipment (note 3)
            
            
            –
            
            
            
            23.4
            
            
            
            –Loss (gain) on disposal of
      property, plant and equipment (note 7)
            
            
            13.6
            
            
            
            (1.1
            )
            
            
            1.6Future income taxes (note
      8)
            
            
            (100.7
            )
            
            
            (56.1
            )
            
            
            (51.6
            )Foreign exchange loss (gain) on
      long-term debt
            
            
            (103.9
            )
            
            
            0.3
            
            
            
            (24.7
            )Employee future benefits, excess
      of expense over funding
            
            
            6.7
            
            
            
            6.4
            
            
            
            (0.2
            )Increase (decrease) in other
      long-term obligations
            
            
            7.5
            
            
            
            0.9
            
            
            
            (7.4
            )Non-controlling
      interest
            
            
            0.1
            
            
            
            1.5
            
            
            
            0.6Other
            
            
            (20.9
            )
            
            
            (6.3
            )
            
            
            (0.8
            )(52.8
            )
            
            
            136.8
            
            
            
            72.2Changes in non-cash working
      capitalAccounts
    receivable
            
            
            64.2
            
            
            
            (35.5
            )
            
            
            (9.1
            )Inventories
            
            
            9.2
            
            
            
            0.7
            
            
            
            12.4Prepaids and
other
            
            
            (5.0
            )
            
            
            (0.9
            )
            
            
            (6.7
            )Accounts payable and accrued
      liabilities
            
            
            (18.3
            )
            
            
            26.1
            
            
            
            (8.1
            )50.1
            
            
            
            (9.6
            )
            
            
            (11.5
            )Cash
      flows provided (used) by operations
            
            
            (2.7
            )
            
            
            127.2
            
            
            
            60.7InvestingAdditions to property, plant and
      equipment
            
            
            (85.8
            )
            
            
            (93.2
            )
            
            
            (95.2
            )Proceeds from sale of property,
      plant and equipment
            
            
            6.5
            
            
            
            3.5
            
            
            
            3.5Purchase price adjustment (note
      23)
            
            
            –
            
            
            
            4.3
            
            
            
            –Increase in other
      assets
            
            
            (4.4
            )
            
            
            (0.4
            )
            
            
            (1.3
            )Cash flows used by investing
      activities
            
            
            (83.7
            )
            
            
            (85.8
            )
            
            
            (93.0
            )FinancingIncrease (decrease) in revolving
      loan and loan payable
            
            
            47.0
            
            
            
            (5.5
            )
            
            
            6.4Deferred financing
      costs
            
            
            –
            
            
            
            –
            
            
            
            0.1Increase (decrease) in other
      long-term debt
            
            
            3.6
            
            
            
            (0.4
            )
            
            
            (0.2
            )Issue of shares from exercise of
      stock options
            
            
            0.3
            
            
            
            –
            
            
            
            –Cash flows provided (used) by
      financing activities
            
            
            50.9
            
            
            
            (5.9
            )
            
            
            6.3Cash
      and cash equivalents, increase (decrease) in the year
            
            
            (35.5
            )
            
            
            35.5
            
            
            
            (26.0
            )Cash
      and cash equivalents, beginning of year
            
            
            35.5
            
            
            
            –
            
            
            
            26.0Cash
      and cash equivalents, end of year
            
            $
            –
            
            
            $
            35.5
            
            
            $
            –Supplemental
      disclosures:Income taxes paid
            
            $
            0.5
            
            
            $
            2.7
            
            
            $
            3.9Net interest paid
            
            
            67.8
            
            
            
            71.5
            
            
            
            75.3





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





CONSOLIDATED
BUSINESS SEGMENTS


(In
millions of dollars)




Year
      ended December 31, 2007Specialty
              paper
            
            
            Newsprint
            
            
            Pulp
            
            
            Corporate
              adjustments
            
            
            ConsolidatedSales
      to external customers
            
            $
            919.6
            
            
            $
            338.0
            
            
            $
            457.0
            
            
            $
            –
            
            
            $
            1,714.6Inter-segment
      sales
            
            
            –
            
            
            
            –
            
            
            
            45.3
            
            
            
            (45.3
            )
            
            
            –Restructuring
      andchange-of-control
      (note 5)
            
            
            42.2
            
            
            
            12.9
            
            
            
            9.6
            
            
            
            –
            
            
            
            64.7Amortization
            
            
            101.3
            
            
            
            33.2
            
            
            
            41.9
            
            
            
            –
            
            
            
            176.4Operating
      earnings (loss)
            
            
            (75.1
            )
            
            
            (56.9
            )
            
            
            (17.4
            )
            
            
            –
            
            
            
            (149.4
            )Total
      assets
            
            
            1,306.6
            
            
            
            662.0
            
            
            
            468.2
            
            
            
            16.6
            
            
            
            2,453.4Additions
      to property, plant and equipment
            
            
            42.8
            
            
            
            32.4
            
            
            
            10.6
            
            
            
            –
            
            
            
            85.8














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














Year
      ended December 31, 2005Specialty
              paper
            
            
            Newsprint
            
            
            Pulp
            
            
            Corporate
              adjustments
            
            
            ConsolidatedSales
      to external customers
            
            $
            900.5
            
            
            $
            529.1
            
            
            $
            394.3
            
            
            $
            –
            
            
            $
            1,823.9Inter-segment
      sales
            
            
            –
            
            
            
            –
            
            
            
            46.6
            
            
            
            (46.6
            )
            
            
            –Restructuring
      andchange-of-control
            
            
            0.5
            
            
            
            6.2
            
            
            
            –
            
            
            
            –
            
            
            
            6.7Amortization
            
            
            91.0
            
            
            
            45.8
            
            
            
            43.5
            
            
            
            –
            
            
            
            180.3Operating
      earnings (loss)
            
            
            24.8
            
            
            
            12.3
            
            
            
            (62.2
            )
            
            
            –
            
            
            
            (25.1
            )Total
      assets
            
            
            1,379.1
            
            
            
            738.1
            
            
            
            560.2
            
            
            
            18.5
            
            
            
            2,695.9Additions
      to property, plant and equipment
            
            
            49.3
            
            
            
            23.6
            
            
            
            22.3
            
            
            
            –
            
            
            
            95.2




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





CONSOLIDATED
GEOGRAPHIC BUSINESS SEGMENTS


(In
millions of dollars)




2007Sales
      by shipment destination:
            
            Specialty
              paper
            
            
            Newsprint
            
            
            Pulp
            
            
            TotalCanada
            
            $
            121.0
            
            
            $
            60.7
            
            
            $
            14.5
            
            
            $
            196.2United
      States
            
            
            712.2
            
            
            
            145.7
            
            
            
            47.0
            
            
            
            904.9Asia
      and Australasia
            
            
            22.7
            
            
            
            67.8
            
            
            
            242.2
            
            
            
            332.7Latin
      America
            
            
            59.9
            
            
            
            61.6
            
            
            
            36.7
            
            
            
            158.2Europe
      and Other
            
            
            3.8
            
            
            
            2.2
            
            
            
            116.6
            
            
            
            122.6$
            919.6
            
            
            $
            338.0
            
            
            $
            457.0
            
            
            $
            1,714.6














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














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







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





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


1.
            NATURE
      OF OPERATIONS




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




Specialty
      Paper–Manufacture and sale of groundwood specialty printing
      paper.Newsprint–Manufacture
      and sale of newsprint.Pulp–Manufacture
      and sale of long and short fibre pulp and
  containerboard.




The
Company manages its business based on the products that it manufactures and
sells to customers.  All manufacturing facilities are located in
British Columbia.  Inter-segment sales consist of pulp transfers at
cost.




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




2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




The
consolidated financial statements of the Company are expressed in millions of
Canadian dollars and are prepared in accordance with Canadian generally accepted
accounting principles (“Canadian GAAP”).  These financial statements
differ in certain respects from those prepared in accordance with United States
generally accepted accounting principles (“U.S. GAAP”).  These
measurement differences are described in note 28 “Reconciliation of Canadian and
United States generally accepted accounting principles”.




(a)
            Basis
      of consolidation




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




(b)
            Variable
      interest entities




Variable
interest entities (“VIE”) are entities in which equity investors do not have a
controlling financial interest or the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
subordinated financial support provided by other parties.  The Company
consolidates the accounts of VIEs where it has been determined that the Company
is the primary beneficiary, defined as the party that receives the majority of
the expected residual returns and/or absorbs the majority of the entity’s
expected losses.




(c)
            Changes
      in accounting policies




Effective
January 1, 2007, the Company adopted the new recommendations of the Canadian
Institute of Chartered Accountants (“CICA”) Section 3855, “Financial Instruments
– Recognition and Measurement”, Section 1530, “Comprehensive Income”, Section
3865, “Hedges”, Section 3861, “Financial Instruments – Disclosure and
Presentation”, and Section 3251, “Equity”.  These new standards, which
apply to fiscal years beginning on or after October 1, 2006, introduce new
requirements for recognition, measurement and disclosure of financial
instruments, when and how hedge accounting may be applied, establishes the
concept of comprehensive income and rules for reporting it, and establishes
rules for the presentation of equity and changes in equity.  Prior
period financial statements are not revised for the adoption of these new
standards.




The new
pronouncements require an entity to account for its derivatives at fair value at
each balance sheet date.  The effective portion of changes in the
derivative fair values that qualify and are designated as cash flow hedges is
deferred and recorded as a component of “Accumulated Other Comprehensive Income
(Loss)” (“AOCI”), a component of shareholders’ equity, until the underlying
transaction is recorded in earnings while the ineffective portion flows through
net earnings.  Changes in the derivative fair values that qualify and
are designated as fair value hedges flow through net earnings at the same time
as the hedged item.  In addition, the new pronouncements also require
entities to either expense deferred financing costs immediately or to net them
against the carrying value of debt.  The Company opted to net its
deferred financing costs against debt.




The
adoption of these standards resulted in the Company recording on its balance
sheet, at fair value, certain revenue and interest rate derivative financial
instruments that were previously off balance sheet and the reclassification of
its deferred financing costs against long-term debt.  This resulted in
the following adjustments at January 1, 2007:




AssetsPrepaids
      and other
            
            $
            (7.8
            )Other
      assets
            
            
            (12.0
            )$
            (19.8
            )Liabilities
      and shareholders’ equityAccounts
      payable and accrued liabilities
            
            $
            (0.2
            )Long-term
      debt
            
            
            (14.7
            )Other
      long-term obligations
            
            
            (0.2
            )Future
      income taxes
            
            
            (1.7
            )Retained
      earnings
            
            
            (2.3
            )Accumulated
      other comprehensive income
            
            
            (0.7
            )$
            (19.8
            )




(d)
            Use
      of estimates




The
consolidated financial statements have been prepared in conformity with Canadian
GAAP, which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the year.  On an ongoing
basis, management reviews its estimates, including those related to inventory
obsolescence, estimated useful lives of assets, environmental and legal
liabilities, impairment of long-lived assets, pension and post-retirement
benefits, bad debt and doubtful accounts and income taxes, based on currently
available information.  Actual amounts could differ from
estimates.




(e)
            Revenue
      recognition




The
Company recognizes revenues upon shipment when the significant risks and rewards
of ownership are transferred to the customer.  Title to products is
typically transferred to the customers at the time of shipment, and payment is
based on agreed prices and credit terms contained in sales
invoices.  Customers have no contractual right of return.




(f)
            Translation
      of foreign currencies




The
majority of the Company’s sales are denominated in foreign currencies,
principally U.S. dollars. Revenue and expense items denominated in foreign
currencies are translated at exchange rates prevailing during the period.
Monetary assets and liabilities denominated in foreign currencies are translated
at the period-end exchange rates.  Non-monetary assets and liabilities
are translated at exchange rates in effect when the assets are acquired or the
obligations are incurred.  Foreign exchange gains and losses are
reflected in net earnings (loss) for the period.




(g)
            Derivative
      financial instruments




The
Company uses derivative financial instruments in the management of foreign
currency, and price risk associated with its revenues, energy costs and
long-term debt.  The Company also uses interest rate swaps to manage
its net exposure to interest rate changes.  The Company’s policy is to
use derivatives for managing existing financial exposures and not for trading or
speculative purposes.  The Company accounts for its derivatives at
fair value at each balance sheet date (note 2 (c)).  Prior to January
1, 2007, the Company used hedge accounting to account for the derivative
financial instruments designated as hedging instruments, and the fair value
method to account for derivative financial instruments not designated as hedging
instruments.




The
Company designates the hedge relationship and formally documents at its
inception, the particular risk management objective and strategy, the specific
asset, liability or cash flow being hedged, as well as how effectiveness is
assessed.  Risk management strategies and relationships are assessed
on an on-going basis to ensure each derivative instrument is effective in
accomplishing the objective of offsetting either changes in the fair value or
cash flow attributable to the exposure being hedged both at inception and over
the term of the hedging relationship.




Realized
and unrealized gains or losses associated with hedging instruments are
recognized in earnings in the same period the hedge item is
recognized.  Realized and unrealized gains or losses when hedging
instruments have ended or ceased to be effective prior to their maturity are
deferred and recognized in earnings concurrently with the recognition of the
item being hedged.




Foreign
exchange exposure to foreign currency revenue and related receivables, primarily
in U.S. currency, is managed through the use of foreign exchange forward
contracts and options to sell foreign currencies.  Realized foreign
exchange translation gains and losses from transactions formally designated as
hedges are recognized concurrently with the hedged revenue in
“Sales”.  The effective portion of changes in the fair value of
derivatives that qualify and are designated as cash flow hedges are deferred and
recorded as a component of AOCI until the underlying transaction is recorded in
earnings.  When the hedged item affects earnings, the gain or loss is
reclassified from AOCI to “Sales”.  Any ineffective portion of a
hedging derivative’s change in fair value and the portion that is excluded from
the assessment of hedge effectiveness is recognized immediately in
“Sales”.




Price
risk associated with the sale of products, primarily Northern Bleached Softwood
Kraft (“NBSK”) pulp and containerboard, is managed from time to time through the
use of commodity swap agreements.  These contracts are not designated
as hedging instruments for accounting purposes, and are reported at fair value
in “Prepaids and other” or “Accounts payable and accrued liabilities” on the
consolidated balance sheet.  Changes in fair value are recognized in
“Sales”.




Price
risk associated with the purchase of certain inputs, primarily oil and gas, is
managed from time to time through the use of commodity swaps.  These
instruments are not designated as hedges for accounting purposes and are
reported at their fair value in “Prepaids and other” or “Accounts payable and
accrued liabilities” on the consolidated balance sheet.  Changes in
fair value are recognized in “Cost of sales”.




Foreign
currency exposure on long-term debt denominated in U.S. currency is managed
through the use of forward contracts and options to purchase U.S.
dollars.  These instruments are not designated as hedging instruments
for accounting purposes and are reported under “Other assets” or “Other
long-term obligations” on the consolidated balance sheet at their fair value
with changes in fair value recognized in “Foreign exchange gain (loss) on
long-term debt”, offsetting the respective translation gains and losses on the
underlying foreign currency long-term debt.




Exposure
to interest rates on long-term debt is managed through the use of interest
swaps.  These swap agreements require the periodic exchange of
payments without the exchange of the notional principal amount on which the
payments are based.  These instruments are designated as fair value
hedging instruments.  The effective portion of changes in the fair
value of the derivatives are netted in “long-term debt” and the ineffective
portion is recognized in “Interest expense, net”.




Cash
flows from derivative financial instruments that are designated as hedges and
for which hedge accounting does not apply are classified in “Operations” on the
consolidated statement of cash flows consistent with the hedged
transaction.




(h)
            Cash
      and cash equivalents




Cash and
cash equivalents include cash and short-term investments with original
maturities of less than three months and are presented at cost.




(i)
            Inventories




Inventories
other than supplies and work-in-progress which are valued at cost, are valued at
the lower of average cost and net realizable value.




(j)
            Property,
      plant and equipment




Property,
plant and equipment are stated at cost, less accumulated amortization, including
asset impairment charges.  Interest costs are capitalized for capital
projects in excess of $10 million and having a minimum duration of six
months.  Buildings, machinery and equipment are generally amortized on
a straight-line basis at rates that reflect estimates of the economic lives of
the assets. The rates for major classes of assets based on the estimated
remaining economic lives are:




Buildings
            2.5%
      − 5.0%Paper
      machinery and equipment
            5.0%
      – 10.0%Pulp
      machinery and equipment
            10.0%
      – 20.0%




During
periods of major production interruption, an obsolescence amount of 10% of
normal amortization is charged on manufacturing machinery and
equipment.




No
amortization is charged on capital projects during the period of
construction.  Start-up costs incurred in achieving normal operating
capacity on major capital projects are deferred and amortized over a five-year
period.




Leasehold
improvements are normally amortized over the lesser of their expected average
service life or the term of the lease.




When
property, plant and equipment are sold by the Company, the historical cost less
accumulated amortization is netted against the sale proceeds and the difference
is included in “Other income (expense), net”.




(k)
            Impairment
      of long-lived assets




Long-lived
assets are tested for recoverability when events or changes in circumstances
indicate their carrying value may not be recoverable. A long-lived asset is
potentially not recoverable when its carrying value is greater than the sum of
its undiscounted cash flows expected to result from its use and eventual
disposition.  The impairment loss, if any, is measured as the amount
by which the long-lived asset’s carrying amount exceeds its fair
value.




(l)
            Environmental
      costs




Environmental
expenditures are expensed or capitalized depending upon their future economic
benefit.  Expenditures that prevent future environmental contamination
are capitalized as part of “Property, plant and equipment”, and amortization is
subsequently charged to earnings over the estimated future benefit period of the
assets.  Expenditures that relate to an existing condition caused by
past operations are expensed.  Liabilities are recorded on an
undiscounted basis when rehabilitation efforts are likely to occur and the costs
can be reasonably estimated.




(m)
            Asset
      retirement obligations




Asset
retirement obligations are recognized at fair value in the period in which the
Company incurs a legal obligation associated with the retirement of an
asset.  The associated costs are capitalized as part of the carrying
value of the related asset and amortized over its remaining useful
life.  The liability is accreted using a credit-adjusted risk-free
interest rate.




The
Company’s obligations for the proper removal and disposal of asbestos products
in the Company’s mills meet the definition of a conditional asset retirement
obligation.  That is, the Company is subject to regulations that are
in place to ensure that asbestos fibres do not become friable, or
loose.  The regulations require that friable asbestos be repaired or
removed in accordance with the regulations.




The
Company’s asbestos can generally be found on steam and condensate piping systems
throughout its facilities, as well as in transite cladding on buildings and in
building insulation.  As a result of the longevity of the Company’s
mills, due in part to the Company’s maintenance procedures, and the fact that
the Company does not have plans for major changes that would require the removal
of asbestos, the timing of the removal of asbestos in the Company’s mills is
indeterminate.  As a result, the Company is currently unable to
estimate the fair value of its asbestos removal and disposal
obligation.




(n)
            Research
      and development




Research
and development costs are expensed except in cases where development costs meet
certain identifiable criteria for deferral.  Deferred development
costs are amortized over the life of the commercial production.




(o)
            Deferred
      financing costs




Deferred
financing costs represent the issuance costs of the Company’s long-term
debt.  These are netted against the carrying value of long-term debt
(note 2 (c)) on the consolidated balance sheet and amortized using the effective
interest rate method over the expected life of the related
liability.  Prior to January 1, 2007, deferred financing costs were
included in “Other assets” on the consolidated balance sheet and related
amortization was included in “Interest expense, net” on a straight-line basis
over the term of the debt.




(p)
            Share
      issue costs




Direct
costs of issuing shares, net of income tax recoveries thereon, are applied to
reduce the value of consideration assigned to such shares.




(q)
            Stock-based
      compensation and other stock-based
payments




Stock
options and restricted share units granted to the Company’s key officers,
directors and employees are accounted for using the fair value-based
method.  Under this method, compensation cost is measured at fair
value at the date of grant, and is expensed over the award’s vesting
period.  Any consideration paid by plan participants on the exercise
of share options or the purchase of shares is credited to “Share capital”
together with any related stock-based compensation
expense.  Performance and time based share-based payments are
amortized over their vesting periods based on management’s best
estimate.




Deferred
share units are accounted for using the quoted market value at each reporting
period until settlement, and are amortized over their vesting
periods.




(r)
            Income
      taxes




Income
taxes are accounted for using the asset and liability method. Future income tax
assets and liabilities are based on temporary differences (differences between
the accounting basis and the tax basis of the assets and liabilities) and
non-capital loss carry-forwards and are measured using the enacted or
substantively enacted tax rates and laws expected to apply when these
differences reverse.  Future tax benefits, including non-capital loss
carry-forwards, are recognized to the extent that realization of such benefits
is considered more likely than not. The effect on future tax assets and
liabilities of a change in tax rates is recognized in earnings in the period
that substantive enactment occurs.




(s)
            Deferred
      credits




Deferred
credits represent the excess of amounts assigned to future income tax assets for
tax losses acquired in other than business combinations over the consideration
paid.  Deferred credits are amortized to “Income tax recovery” in the
consolidated statement of earnings during the period that the acquired tax asset
is utilized.




(t)
            Employee
      future benefits




Pensions
and other employee future benefits




The
estimated cost for pensions and other employee future benefits provided to
employees by the Company is accrued using actuarial techniques and assumptions
during the employees’ active years of service.  These plans include
funded and unfunded defined benefit plans and defined contribution
plans.  The net periodic benefit cost includes:




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


-
            the
      interest cost of benefit
obligations;


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


-
            gains
      or losses on settlements or
curtailments;


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


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




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




(u)
            Earnings
      per share




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




(v)
            Comparative
      figures




Certain
comparative figures disclosed in the consolidated financial statements have been
reclassified to conform with the presentation adopted for the current
year.




3.
            MEASUREMENT
      UNCERTAINTY – IMPAIRMENT OF LONG-LIVED
ASSETS




The
Company reviews long-lived assets, primarily plant and equipment, for impairment
when events or changes in circumstances indicate that the carrying value of
these assets may not be recoverable.  The Company tests for impairment
using a two-step methodology:




(i)
            Testing
      for impairment is accomplished by determining whether the projected
      undiscounted future cash flows from operations exceed the net carrying
      amount of the assets as of the assessment date,
  and




(ii)
            If
      assets are determined to be impaired in step (i), then such impaired
      assets are written down to their fair value, determined principally by
      using discounted future cash flows expected from their use and eventual
      disposition.




Estimates
of future cash flows and fair value require judgments, assumptions and estimates
and may change over time.  Due to the variables associated with
judgments and assumptions used in these tests, the precision and accuracy of
estimates of impairment charges are subject to significant uncertainties and may
change significantly as additional information becomes
known.  Long-lived assets represented approximately 78% of total
assets as at December 31, 2007.  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.




In the
fourth quarter of 2007, as a result of rapid strengthening of the Canadian
dollar and the decline in North American consumption of newsprint, the Company
conducted step (i) impairment tests on its paper and pulp assets. Estimates of
future cash flows used to test the recoverability of long-lived assets included
key assumptions related to foreign exchange rates, forecast prices, estimated
useful life of the long-lived assets, production levels, production costs,
market supply and demand, inflation, weighted average cost of capital, and
capital spending.  The assumptions are derived from information
generated internally, independent industry research firms, and other external
published reports and forecasts.  The useful life of the Company’s
assets was estimated at 20 years for paper assets and 5 to 10 years for pulp
assets. Product sales prices and foreign exchange
assumptions  for years 2008 to 2012 were based on forecasts
prepared by Resource Information Systems Inc. (“RISI”), an independent external
firm.  The foreign exchange assumption was CDN$1.00 = US$1.015 in 2008
declining to CDN$1.00=US$0.8512 by 2012.  Product sales
prices and foreign exchange rate assumptions for 2013 and subsequent years
were estimated by management based on long-term trend pricing for product sales
prices and a long term expected foreign exchange rate of
 CDN$1.00=US$0.8800.  The Company concluded that an impairment
charge for the pulp and paper assets was not required in 2007 as the estimated
undiscounted future cash flows exceeded the carrying values.




As at
December 31, 2007, the net book value of the indefinitely curtailed No. 4 paper
machine in Port Alberni was $63 million.  The Company has not recorded an
impairment for the indefinite curtailment.  The Company will monitor
market and other conditions and assess whether they improve sufficiently to
allow this machine to be placed back into production.  To the extent that
conditions do not improve in a reasonable period of time and to the levels
necessary to restart the machine, a write-down may have to be recorded in the
future.




In 2006,
the Company recorded an impairment loss of $23.4 million, of which $19.1 million
related to the permanent closure of its Port Alberni No. 3 paper machine and
ancillary assets, and $4.3 million related to assets that were previously idled
and where the Company determined the assets would not be used again in the
future. The estimated fair value of these assets was based on the present value
of the estimated asset proceeds net of dismantling and selling costs.  The
impairment loss was recorded in the Company’s amortization
expense.




4.
            VARIABLE
      INTEREST ENTITIES




The
Company has a 50.0% interest in Powell River Energy Inc.
(“PREI”).  The Company consolidates 100% of PREI in accordance with
Accounting Guideline 15, “Consolidation of Variable Interest Entities”.
 PREI consists of an integrated hydroelectric power generating,
transmission and distribution system which includes two hydroelectric stations
in British Columbia with installed capacity of 82 Megawatts.  The Company
purchases 100% of the power generated by PREI.  Prior to January 1, 2005,
PREI was accounted for using the proportionate consolidation
method.




The
Company has limited access to PREI’s assets, which generally takes the form of
interest on loans, management fees and earnings distributions based on the
Company’s interest in PREI.  In addition, creditors of PREI have
recourse limited to the assets in PREI.  Condensed financial
information with respect to PREI is as follows:




Years
      ended December 31,
            
            2007
            
            
            2006
            
            
            2005Condensed
      statement of earningsSales – affiliate 1
            
            $
            19.2
            
            
            $
            19.6
            
            
            $
            19.9Cost of sales
            
            
            5.1
            
            
            
            5.3
            
            
            
            5.9Amortization
            
            
            3.3
            
            
            
            2.9
            
            
            
            2.88.4
            
            
            
            8.2
            
            
            
            8.7Operating
    earnings
            
            
            10.8
            
            
            
            11.4
            
            
            
            11.2Interest
expense
            
            
            (8.2
            )
            
            
            (8.1
            )
            
            
            (8.4
            )Interest expense – affiliate
      1
            
            
            (3.1
            )
            
            
            (3.1
            )
            
            
            (3.5
            )Other expense,
    net
            
            
            (4.2
            )
            
            
            (0.3
            )
            
            
            –Income tax
    recovery
            
            
            4.9
            
            
            
            3.0
            
            
            
            1.9Net earnings 2
            
            $
            0.2
            
            
            $
            2.9
            
            
            $
            1.2







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)







At
      December 31,
            
            2007
            
            
            2006Condensed
      balance sheetsCurrent assets
            
            $
            3.8
            
            
            $
            2.7Property, plant and
      equipment
            
            
            118.2
            
            
            
            118.7Other assets
            
            
            –
            
            
            
            0.6$
            122.0
            
            
            $
            122.0Current
    liabilities
            
            
            17.9
            
            
            
            11.9Long-term debt
            
            
            94.1
            
            
            
            94.5Long-term debt – affiliate
      1
            
            
            21.5
            
            
            
            21.5Future income
    taxes
            
            
            20.7
            
            
            
            25.3Shareholders’ deficit 2
            
            
            (32.2
            )
            
            
            (31.2
            )$
            122.0
            
            
            $
            122.0




1
            Balances
      with Catalyst Paper Corporation.


2
            50%
      is included in the Company’s non-controlling
  interest.




During
2007, the Company took over the management of the warehouse facility that houses
a large portion of the Company’s paper products from a previously designated
potential VIE.  As a result, this entity is no longer a potential
VIE.  The Company has identified one other potential VIE, but has not
been able to obtain the financial information necessary to evaluate whether the
entity is a VIE, or if the entity is a VIE, whether the Company is the primary
beneficiary.  The potential VIE is a private entity and, as such, is
unwilling to share financial information with the Company.  The
Company has entered into a building lease agreement with this potential VIE
whereby it has agreed to continue making the prescribed lease payments directly
to the financial institution holding the mortgage on the building in the event
the lessor is no longer able to meet its contractual obligations.  As
at December 31, 2007, the principal amount of the mortgage was $10.6 million
(2006 – $11.9 million).  This agreement does not increase the
Company’s liability beyond the obligation under the building lease.




5.
            RESTRUCTURING
      AND CHANGE-OF-CONTROL COSTS




In 2007,
the Company announced and implemented, in various phases during the year, a
restructuring program which included reductions of approximately 565 positions
across the Company, the relocation of the Corporate office, and the
centralization of certain mill administrative functions.  This plan
was substantially completed during the year and the Company incurred $58.3
million of restructuring costs, of which $3.0 million was capital
related.  Restructuring expenses and provisions are primarily
severance related and  have been recorded in accordance with the
Emerging Issues Committee Abstract No. 134, “Accounting for Severance and
Termination Benefits”.




For the
year ended December 31, 2007, the Company also expensed $8.3 million for
change-of-control payments, pension benefits and stock compensation to the now
former President and Chief Executive Officer, and the now former Vice-President,
Finance and Chief Financial Officer, who exercised their rights under Amended
and Restated Change of Control Agreements and resigned their
positions.  These rights were triggered upon the acquisition by Third
Avenue Management LLC of control or direction over 37.8% of the Company’s common
shares in October, 2006.  In addition, the Company expensed $1.1
million in change-of-control costs related to employee retention agreements that
required certain key employees to remain actively employed by the Company for
one year following a change-of-control.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


The
Company’s restructuring and change-of-control expenses and related provisions at
December 31, 2007 are as provided in the following table.




Balance,
      beginning of year
            
            $
            –Expensed
      in year
            
            
            64.7Disbursements
            
            
            (23.6
            )Other
      non-cash items
            
            
            (0.4
            )Balance,
      end of year
            
            $
            40.7Classification:Accounts payable and accrued
      liabilities (note 15)-  Restructuring
      and change-of-control
            
            $
            20.0-  Accrued
      benefit obligation – pension plan (note 17)
            
            
            1.2Employee
      future benefits (note 17)
            
            
            11.4Other
      long-term obligations (note 18)
            
            
            8.1$
            40.7




At
December 31, 2007, no significant expenses remain to be accrued or recorded
under the initiatives noted above.  Any variances from current
estimates will be recorded in subsequent periods.




6.
            INTEREST
      EXPENSE, NET




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




2007
            
            
            2006
            
            
            2005Interest
      on long-term debt
            
            $
            71.7
            
            
            $
            72.5
            
            
            $
            76.8Fixed-to-floating
      interest rate swaps
            
            
            –
            
            
            
            (1.2
            )
            
            
            (3.9
            )Amortization
      of deferred financing costs
            
            
            –
            
            
            
            2.9
            
            
            
            3.0Other
            
            
            0.1
            
            
            
            0.9
            
            
            
            0.771.8
            
            
            
            75.1
            
            
            
            76.6Capitalized
      interest
            
            
            (0.2
            )
            
            
            –
            
            
            
            –Interest
      income
            
            
            (0.9
            )
            
            
            (1.3
            )
            
            
            (0.9
            )$
            70.7
            
            
            $
            73.8
            
            
            $
            75.7




7.
            OTHER
      INCOME (EXPENSE), NET




The
components of other income (expense), net, for the years ended December 31 were
as follows:




2007
            
            
            2006
            
            
            2005Gain
      (loss) on disposal of property, plantand
      equipment
            
            $
            (13.6
            )
            
            $
            1.1
            
            
            $
            (1.6
            )Financing
      expenses
            
            
            (1.2
            )
            
            
            –
            
            
            
            –Other
            
            
            (0.5
            )
            
            
            0.7
            
            
            
            6.1$
            (15.3
            )
            
            $
            1.8
            
            
            $
            4.5




During
the year ended December 31, 2007, the Company recognized $7.5 million loss on
sale of the Company’s previously permanently closed Port Alberni No. 3 paper
machine and ancillary assets.  This is included in “Gain (loss) on
disposal of property, plant and equipment”.




Financing
expenses for the year ended December 31, 2007 were in respect of the proposed
$200 million private debt placement which the Company decided to withdraw due to
adverse market conditions.




8.
            INCOME
      TAXES




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




2007
            
            
            2006
            
            
            2005Current
            
            $
            0.7
            
            
            $
            2.1
            
            
            $
            5.0Future
            
            
            (78.3
            )
            
            
            (33.2
            )
            
            
            (37.4
            )Release
      of future taxes related to reductionin
      corporate income tax rates
            
            
            (22.4
            )
            
            
            (22.9
            )
            
            
            (14.2
            )$
            (100.0
            )
            
            $
            (54.0
            )
            
            $
            (46.6
            )







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




2007
            
            
            2006
            
            
            2005Income
      tax recovery at Canadian statutory income tax rates
            
            $
            (44.7
            )
            
            
            34.0
            %
            
            $
            (23.3
            )
            
            
            34.1
            %
            
            $
            (24.9
            )
            
            
            34.8
            %Increase
      (decrease) in income taxes for:Non-taxable income and
      expenses
            
            
            (14.9
            )
            
            
            11.3
            
            
            
            0.8
            
            
            
            (1.2
            )
            
            
            (2.5
            )
            
            
            3.5Difference in foreign tax
      rate
            
            
            (1.7
            )
            
            
            1.3
            
            
            
            (1.8
            )
            
            
            2.6
            
            
            
            (2.0
            )
            
            
            2.8Release of future income taxes
      related to reduction in corporate income tax rates
            
            
            (22.4
            )
            
            
            17.0
            
            
            
            (22.9
            )
            
            
            33.5
            
            
            
            (14.2
            )
            
            
            19.8Change in the future income tax
      estimate
            
            
            (14.4
            )
            
            
            11.0
            
            
            
            (4.5
            )
            
            
            6.6
            
            
            
            –
            
            
            
            –Adjustment to deferred
      credits
            
            
            (2.3
            )
            
            
            1.7
            
            
            
            1.0
            
            
            
            (1.4
            )
            
            
            (5.0
            )
            
            
            7.0Large corporations
      tax
            
            
            –
            
            
            
            –
            
            
            
            (0.3
            )
            
            
            0.4
            
            
            
            3.5
            
            
            
            (4.9
            )Other
            
            
            0.4
            
            
            
            (0.3
            )
            
            
            (3.0
            )
            
            
            4.4
            
            
            
            (1.5
            )
            
            
            2.1Income
      tax recovery
            
            $
            (100.0
            )
            
            
            76.0
            %
            
            $
            (54.0
            )
            
            
            79.0
            %
            
            $
            (46.6
            )
            
            
            65.1
            %




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




2007
            
            
            2006Future
      income tax liabilitiesProperty, plant and
      equipment
            
            $
            229.2
            
            
            $
            396.1Other
            
            
            61.7
            
            
            
            92.6290.9
            
            
            
            488.7Future
      income tax assetsNon-capital loss
      carry-forwards
            
            
            (77.9
            )
            
            
            (179.4
            )Employee future
      benefits
            
            
            (54.8
            )
            
            
            (60.7
            )Other
            
            
            (11.8
            )
            
            
            (10.5
            )(144.5
            )
            
            
            (250.6
            )Valuation
      allowance
            
            
            4.1
            
            
            
            5.8(140.4
            )
            
            
            (244.8
            )Net
      future income tax liability
            
            $
            150.5
            
            
            $
            243.9


















9.
            EARNINGS
      PER SHARE




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




2007
            
            
            2006
            
            
            2005Net
      earnings (loss) reported
            
            $
            (31.6
            )
            
            $
            (15.9
            )
            
            $
            (25.6
            )Weighted
      average shares used in computation of basicearnings
      per share (in millions)
            
            
            214.7
            
            
            
            214.6
            
            
            
            214.6Weighted
      average shares from assumed conversion ofdilutive
      options (in millions)
            
            
            –
            
            
            
            –
            
            
            
            –Weighted
      average shares used in computation of dilutedearnings
      per share (in millions)
            
            
            214.7
            
            
            
            214.6
            
            
            
            214.6Basic
      and diluted earnings (loss) per share (in dollars)
            
            $
            (0.15
            )
            
            $
            (0.07
            )
            
            $
            (0.12
            )




10.
            ACCOUNTS
      RECEIVABLE




The
components of accounts receivable at December 31 were as follows:




2007
            
            
            2006Trade
      receivables
            
            $
            197.0
            
            
            $
            267.0Less:  Allowance
      for doubtful accounts
            
            
            (2.8
            )
            
            
            (3.1
            )194.2
            
            
            
            263.9Sales
      taxes receivable
            
            
            8.3
            
            
            
            4.4Other
            
            
            10.6
            
            
            
            9.6$
            213.1
            
            
            $
            277.9




11.
            INVENTORIES




The
components of inventories at December 31 were as follows:




2007
            
            
            2006Finished
      goodsSpecialty paper
            
            $
            40.6
            
            
            $
            44.1Newsprint
            
            
            10.3
            
            
            
            26.8Pulp
            
            
            24.3
            
            
            
            25.3Total
      finished goods
            
            
            75.2
            
            
            
            96.2Work-in-progress
            
            
            1.5
            
            
            
            1.4Raw
      materials – wood chips, pulp logs and other
            
            
            41.0
            
            
            
            33.0Operating
      and maintenance supplies and parts
            
            
            118.0
            
            
            
            114.4$
            235.7
            
            
            $
            245.0









NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


12.
            PREPAIDS
      AND OTHER




The
components of prepaids and other at December 31 were as follows:




2007
            
            
            2006Derivative
      financial instruments
            
            $
            32.0
            
            
            $
            6.1Property
      taxes, insurance and licences
            
            
            3.7
            
            
            
            4.7Other
            
            
            5.0
            
            
            
            4.6$
            40.7
            
            
            $
            15.4




13.
            PROPERTY,
      PLANT AND EQUIPMENT




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




2007Cost
            
            
            Accumulated
              amortization
            
            
            Net
      book
              valueBuildings
      and landSpecialty paper and
      newsprint
            
            $
            472.2
            
            
            $
            172.2
            
            
            $
            300.0Pulp
            
            
            117.1
            
            
            
            59.7
            
            
            
            57.4Machinery
      and equipmentSpecialty paper and
      newsprint
            
            
            2,562.9
            
            
            
            1,281.2
            
            
            
            1,281.7Pulp
            
            
            883.5
            
            
            
            609.8
            
            
            
            273.7$
            4,035.7
            
            
            $
            2,122.9
            
            
            $
            1,912.8







2006Cost
            
            
            Accumulated
              amortization
            
            
            Net
      book
              valueBuildings
      and landSpecialty paper and
      newsprint
            
            $
            471.4
            
            
            $
            158.4
            
            
            $
            313.0Pulp
            
            
            116.4
            
            
            
            54.0
            
            
            
            62.4Machinery
      and equipmentSpecialty paper and
      newsprint
            
            
            2,518.9
            
            
            
            1,181.4
            
            
            
            1,337.5Pulp
            
            
            881.1
            
            
            
            570.9
            
            
            
            310.2$
            3,987.8
            
            
            $
            1,964.7
            
            
            $
            2,023.1




During
2007, interest of $0.2 million (2006 - $nil) was capitalized in connection with
capital projects.




At
December 31, 2007, a net carrying amount of $8.3 million (2006 – $4.6 million)
included in machinery and equipment is held under capital leases, $10.4 million
for cost (2006 – $6.3 million) and $2.1 million for accumulated amortization
(2006 – $1.7 million).




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


14.
            OTHER
      ASSETS




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




2007
            
            
            2006Accrued
      benefit asset – pension plan (note 17)
            
            $
            16.6
            
            
            $
            1.8Deferred
      financing costs (note 2 (c))
            
            
            –
            
            
            
            14.9Non-controlling
      interest (note 4)
            
            
            16.1
            
            
            
            15.6Deferred
      charges and other
            
            
            13.4
            
            
            
            8.5Derivative
      financial instruments
            
            
            5.0
            
            
            
            –$
            51.1
            
            
            $
            40.8




15.
            ACCOUNTS
      PAYABLE AND ACCRUED LIABILITIES




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




2007
            
            
            2006Trade
      payables
            
            $
            135.7
            
            
            $
            150.8Accrued
      payroll and related liabilities
            
            
            74.9
            
            
            
            85.1Restructuring
      and change-of-control (note 5)
            
            
            20.0
            
            
            
            –Accrued
      benefit obligation – pension plan (note 17)
            
            
            5.5
            
            
            
            4.5Accrued
      benefit obligation – other employee futurebenefit
      plans (note 17)
            
            
            6.7
            
            
            
            6.3Accrued
      interest
            
            
            9.2
            
            
            
            10.6Other
            
            
            16.2
            
            
            
            34.2$
            268.2
            
            
            $
            291.5




16.
            LONG-TERM
      DEBT




The
Company’s long-term debt at December 31 was as follows (note 2
(c)):




2007
            
            
            2006RecourseSenior
      notes, 8.625% due June 2011 (US$400.0 million)
            
            $
            388.9
            
            
            $
            468.7Senior
      notes, 7.375% due March 2014 (US$250.0 million)
            
            
            246.6
            
            
            
            291.3635.5
            
            
            
            760.0Revolving
      operating facility of up to $350.0 million due July 2009
            
            
            47.1
            
            
            
            -Capital
      lease obligations
            
            
            8.6
            
            
            
            5.0691.2
            
            
            
            765.0Non-recourse
      (PREI)First
      mortgage bonds, 6.387% due July 2009
            
            
            74.6
            
            
            
            75.0Subordinated
      promissory notes
            
            
            19.5
            
            
            
            19.5Short-term
      loan payable
            
            
            0.5
            
            
            
            1.094.6
            
            
            
            95.5Total
      debt
            
            
            785.8
            
            
            
            860.5Less:  Current
      portion
            
            
            (1.2
            )
            
            
            (1.8
            )$
            784.6
            
            
            $
            858.7




Borrowings
under the revolving operating facility (the “Facility”) bear interest at a rate
based on Canadian dollar banker’s acceptance/prime or U.S. dollar LIBOR/base
rates, plus a margin that varies with the Company’s credit
rating.  The interest rates on borrowings under the Facility averaged
7.3% in 2007 (2006 – 7.3%).  A commitment fee at a percentage of the
margin applies to the undrawn portion of the Facility.  Substantially
all of the assets of the Company are pledged as security under the $350.0
million Facility.  Its availability is determined by a borrowing base
which is calculated based on accounts receivable and inventory balances, and
includes covenants to maintain the funded debt/capitalization ratio below 60%,
secured debt/capitalization ratio below 30% and shareholders’ equity above
$779.3 million as at December 31, 2007.  At December 31, 2007, as
calculated under the Facility, the Company’s funded debt/capitalization ratio
was 42% (December 31, 2006 – 44%), secured debt/capitalization ratio was 4%
(December 31, 2006 – 2%) and shareholders’ equity was $988.6 million (December
31, 2006 – $1,005.8 million).  The borrowing base at December 31, 2007
was $309.0 million and after drawings of $47.5 million and outstanding letters
of credit of $20.7 million, $240.8 million was available to the
Company.  A springing interest coverage covenant is applicable in
certain circumstances if the Company incurs secured debt other than under the
Facility.  At December 31, 2007, no such debt has been
incurred.




The
indentures and agreements governing the Company’s senior notes and the Facility
contain customary restrictive covenants, including restrictions on incurring
additional indebtedness, certain payments including dividends and investments in
other persons, the creation of liens, sale and leaseback transactions, certain
amalgamations, mergers, consolidations and the use of proceeds arising from
certain sales of assets and certain transactions with affiliates.  At
December 31, 2007, the Company was in compliance with the covenants under both
its Facility and senior notes.  The Company’s Fixed Charge Coverage
Ratio (“FCC Ratio”) under the senior note indentures, calculated on a 12-month
trailing average, was 0.8:1 at December 31, 2007 (December 31, 2006 –
3.0:1).  While the FCC Ratio is below 2.0:1, the Company is limited in
the amount of additional debt it may incur to “permitted debt” under the senior
notes.  Under the indenture for the 8.625% senior notes, “permitted
debt” includes a) the Company’s existing 8.625% notes and 7.375% notes, b) a
credit facility basket in an amount equal to the greater of (i) $725 million and
(ii) the sum of 75% of the book value of the Company’s accounts receivable, 50%
of the book value of the Company’s inventory and $290 million, against which in
either case utilization under the Company’s $350 million Facility is applied, c)
purchase money debt and capital lease obligations in an amount equal to 5.0% of
the Company’s consolidated tangible assets, d) a $40 million general basket, and
e) a $5 million basket for accommodation guarantees, trade or standby letters of
credit, performance bonds, bankers’ acceptances and surety bonds.  The
indenture for the 7.375% notes contains larger debt baskets, but while the
8.625% notes remain outstanding, the Company is bound by their more restrictive
provisions.  Also, the Company’s restricted payments baskets under the
8.625% and 7.375% senior notes were negative $189.0 million and negative $164.0
million, respectively as at December 31, 2007, as a result of accumulated losses
in recent years (December 31, 2006 – negative $72.5 million and negative $47.5
million, respectively).  Under the senior note covenants, the Company
cannot pay dividends unless the balance in these baskets is
positive.




Non-recourse
debt is debt owed by PREI.  The Company has a 50% interest in PREI,
and consolidates 100% of it as PREI is a VIE in which the Company is the primary
beneficiary.




Scheduled
total debt repayments




Recourse
              debt
            
            
            Non-recourse
              debt
      (PREI)2008
            
            $
            0.7
            
            
            $
            0.52009
            
            
            47.9
            
            
            
            74.62010
            
            
            0.7
            
            
            
            –2011
            
            
            389.7
            
            
            
            –2012
            
            
            0.8
            
            
            
            –Thereafter
            
            
            251.4
            
            
            
            19.5$
            691.2
            
            
            $
            94.6











Fair
value of total debt




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




2007
            
            
            2006Recourse
            
            $
            573.9
            
            
            $
            750.1Non-recourse
      (PREI)
            
            
            96.5
            
            
            
            96.5$
            670.4
            
            
            $
            846.6




17.
            EMPLOYEE
      FUTURE BENEFITS




Description
of benefit plans




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




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




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




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




Total
cash payments




Total
cash payments for employee future benefits for the year ending December 31,
2007, consisting of cash contributed by the Company to its funded pension plans,
cash payments directly to beneficiaries for its unfunded benefit plans and cash
contributed to its defined contribution plans, was $36.2 million (2006 – $33.9
million).




Unionized
employees of the Company are members of multi-employer industry-wide pension
plans to which the Company contributes a predetermined amount per hour worked by
an employee.  The pension expense for these plans is equal to the
Company’s contribution of $17.2 million in 2007 (2006 – $18.0 million; 2005 –
$18.3 million).




Defined
benefit plan




The
Company measures the fair value of plan assets and the accrued benefit
obligations for accounting purposes as at December 31 of each
year.  The most recent actuarial valuation of the majority of pension
plans for funding purposes was as of December 31, 2006, and the next required
valuation will be as of December 31, 2009.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


Change
in accrued defined benefit plan obligation




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




Pension
      benefit plans
            
            
            Other
      benefit plans2007
            
            
            2006
            
            
            2007
            
            
            2006Accrued
      benefit obligations at beginning of year
            
            $
            376.5
            
            
            $
            364.9
            
            
            $
            227.6
            
            
            $
            216.8Service
      cost for the year
            
            
            5.3
            
            
            
            6.9
            
            
            
            5.1
            
            
            
            5.6Interest
      cost
            
            
            18.2
            
            
            
            17.8
            
            
            
            11.4
            
            
            
            10.9Employee
      contributions
            
            
            0.4
            
            
            
            0.4
            
            
            
            –
            
            
            
            –Benefit
      payments
            
            
            (29.8
            )
            
            
            (27.7
            )
            
            
            (6.4
            )
            
            
            (6.1
            )Recognition
      of restructuring program (note 5)
            
            
            12.6
            
            
            
            –
            
            
            
            –
            
            
            
            –Actuarial
      loss (gain) and other adjustments
            
            
            (7.4
            )
            
            
            14.2
            
            
            
            (18.3
            )
            
            
            0.4Accrued
      benefit obligations balance at end of year
            
            $
            375.8
            
            
            $
            376.5
            
            
            $
            219.4
            
            
            $
            227.6




Change
in fair value of defined benefit plan assets




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




Pension
      benefit plans
            
            
            Other
      benefit plans2007
            
            
            2006
            
            
            2007
            
            
            2006Fair
      value of defined benefit plan assets at beginning of year
            
            $
            283.5
            
            
            $
            250.8
            
            
            $
            –
            
            
            $
            0.2Actual
      return on plan assets
            
            
            (1.1
            )
            
            
            37.7
            
            
            
            –
            
            
            
            –Employee
      contributions
            
            
            0.4
            
            
            
            0.4
            
            
            
            –
            
            
            
            –Company
      contributions
            
            
            24.4
            
            
            
            22.3
            
            
            
            6.4
            
            
            
            6.1Other
            
            
            (1.0
            )
            
            
            –
            
            
            
            –
            
            
            
            –Benefit
      payments
            
            
            (29.8
            )
            
            
            (27.7
            )
            
            
            (6.4
            )
            
            
            (6.3
            )Fair
      value of defined benefit plan assets at end of year
            
            $
            276.4
            
            
            $
            283.5
            
            
            $
            –
            
            
            $
            –




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




Plan
      assets at December 31,
            
            2007
            
            
            2006Equity
      securities
            
            
            60.5
            %
            
            
            59.4
            %Fixed
      income securities
            
            
            39.5
            %
            
            
            40.6
            %Total
            
            
            100.0
            %
            
            
            100.0
            %




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




The
following table presents the difference between the fair value of the defined
benefit pension assets and the actuarially determined accrued benefit
obligations as at December 31, 2007 and 2006.  This difference is also
referred to as either the deficit or surplus, as the case may be, or the funded
status of the plans.




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




As at
December 31, 2007, there was a total funding deficit of $99.4 million (2006 –
$93.0 million) in the Company’s various defined benefit pension
plans.  Of this amount, $38.3 million (2006 – $39.9 million) related
to funded defined benefit pension plans and $61.1 million (2006 – $53.1 million)
to “pay-as-you-go” unfunded defined benefit pension plans.  In
addition, the Company has other “pay-as-you-go” post-retirement benefit plans,
consisting of group health care and life insurance, which had a deficit of
$219.4 million at December 31, 2007 (2006 – $227.6 million).




Pension
      benefit plans
            
            
            Other
      benefit plans2007
            
            
            2006
            
            
            2007
            
            
            2006Accrued
      benefit obligation at end of year
            
            $
            375.8
            
            
            $
            376.5
            
            
            $
            219.4
            
            
            $
            227.6Fair
      value of plan assets at end of year
            
            
            276.4
            
            
            
            283.5
            
            
            
            –
            
            
            
            –Funded
      status-deficit
            
            
            (99.4
            )
            
            
            (93.0
            )
            
            
            (219.4
            )
            
            
            (227.6
            )Unrecognized
      past service costs
            
            
            –
            
            
            
            0.1
            
            
            
            (1.7
            )
            
            
            (1.9
            )Unrecognized
      actuarial losses
            
            
            68.2
            
            
            
            59.8
            
            
            
            45.0
            
            
            
            66.4Accrued
      benefit obligation recognized in theconsolidated balance
      sheets
            
            $
            (31.2
            )
            
            $
            (33.1
            )
            
            $
            (176.1
            )
            
            $
            (163.1
            )




Classification
of accrued obligations




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




Pension
      benefit plans
            
            
            Other
      benefit plans2007
            
            
            2006
            
            
            2007
            
            
            2006Other
      assets
            
            $
            16.6
            
            
            $
            1.8
            
            
            $
            –
            
            
            $
            –Accounts
      payable and accrued liabilities
            
            
            (5.5
            )
            
            
            (4.5
            )
            
            
            (6.7
            )
            
            
            (6.3
            )Employee
      future benefits
            
            
            (42.3
            )
            
            
            (30.4
            )
            
            
            (169.4
            )
            
            
            (156.8
            )$
            (31.2
            )
            
            $
            (33.1
            )
            
            $
            (176.1
            )
            
            $
            (163.1
            )




Components
of net periodic benefit cost recognized in the year




Pension
      benefit plans
            
            2007
            
            
            2006
            
            
            2005Defined
      benefit costsService cost for the
      year
            
            $
            5.3
            
            
            $
            6.9
            
            
            $
            5.4Interest cost
            
            
            18.2
            
            
            
            17.8
            
            
            
            19.4Actual return on
      assets
            
            
            1.1
            
            
            
            (37.7
            )
            
            
            (21.4
            )Actuarial
      (gain)/loss
            
            
            (9.0
            )
            
            
            14.2
            
            
            
            31.2Settlement loss
            
            
            0.5
            
            
            
            –
            
            
            
            –Recognition of restructuring
      program (note 5)
            
            
            12.6
            
            
            
            –
            
            
            
            –Difference between actual and
      expected return
            
            
            (20.7
            )
            
            
            20.3
            
            
            
            4.6Difference between actual and
      recognized actuarial(gain)/loss
      and other
            
            
            11.6
            
            
            
            (7.7
            )
            
            
            (28.5
            )Difference between actual and
      recognized prior service costs
            
            
            –
            
            
            
            –
            
            
            
            0.1Amortization of transitional
      balance
            
            
            –
            
            
            
            –
            
            
            
            0.119.6
            
            
            
            13.8
            
            
            
            10.9Defined
      contribution costService cost for the
      year
            
            
            5.3
            
            
            
            5.5
            
            
            
            5.1Net
      periodic benefit cost for pension benefit plans
            
            $
            24.9
            
            
            $
            19.3
            
            
            $
            16.0





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)








Other
      benefit plans
            
            2007
            
            
            2006
            
            
            2005Defined
      benefit costsService cost for the
      year
            
            $
            5.1
            
            
            $
            5.6
            
            
            $
            4.2Interest cost
            
            
            11.4
            
            
            
            10.9
            
            
            
            10.7Actuarial
      (gain)/loss
            
            
            (18.3
            )
            
            
            0.4
            
            
            
            28.9Difference between actual and
      recognized actuarial (gain)/lossand
      other
            
            
            21.5
            
            
            
            3.0
            
            
            
            (27.1
            )Difference between actual and
      recognized prior service costs
            
            
            (0.2
            )
            
            
            (0.2
            )
            
            
            (0.2
            )Net
      periodic benefit cost for other benefit plans
            
            $
            19.5
            
            
            $
            19.7
            
            
            $
            16.5




Significant
assumptions




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




2007
            
            
            2006Benefit
      obligations at December 31,Discount rate
            
            
            5.25
            %
            
            
            5.00
            %Rate of compensation
      increase
            
            
            2.50
            %
            
            
            3.00
            %Net
      benefit cost for year ended December 31,Discount rate
            
            
            5.00
            %
            
            
            5.00
            %Rate of compensation
      increase
            
            
            3.00
            %
            
            
            3.00
            %Expected rate of return on plan
      assets
            
            
            7.00
            %
            
            
            7.00
            %Assumed
      health care cost trend rate at December 31,Extended health
      benefitsInitial health care cost trend
      rate
            
            
            8.00
            %
            
            
            9.00
            %Annual rate of decline in
      trend rate
            
            
            0.50
            %
            
            
            1.00
            %Ultimate health care cost
      trend rate
            
            
            4.50
            %
            
            
            5.00
            %Dental benefitsDental care cost trend
      rate
            
            
            4.00
            %
            
            
            4.50
            %Medical services plan
      benefitsPremium trend
    rate
            
            
            2.00
            %
            
            
            2.00
            %




Sensitivity
analysis




Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans.  A 1% change in assumed health care cost
rates would have the following effects for 2007:




Other
      benefit plansIncrease
            
            
            DecreaseTotal
      of service and interest cost
            
            $
            3.5
            
            
            $
            (2.8
            )Accrued
      benefit obligation at December 31
            
            $
            39.7
            
            
            $
            (31.0
            )


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


18.
            OTHER
      LONG-TERM OBLIGATIONS




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




2007
            
            
            2006Restructuring
      and change-of-control liabilities (note 5)
            
            $
            8.1
            
            
            $
            –Forward
      foreign currency contracts hedging long-term debt
            
            
            5.4
            
            
            
            4.2Environmental
      and remedial
            
            
            9.2
            
            
            
            10.0Other
            
            
            4.2
            
            
            
            9.1$
            26.9
            
            
            $
            23.3




19.
            DEFERRED
      CREDITS




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




2007
            
            
            2006Beginning
      of year
            
            $
            25.5
            
            
            $
            24.3Net
      price adjustment related to acquired tax losses
            
            
            –
            
            
            
            1.4Adjustment
      related to utilization of acquired tax losses
            
            
            (2.3
            )
            
            
            1.0Adjustment
      resulting from reduction in corporate income tax rates
            
            
            (1.5
            )
            
            
            (1.2
            )End
      of year
            
            $
            21.7
            
            
            $
            25.5




In prior
years, the Company acquired from wholly owned subsidiaries of Fletcher Challenge
Limited, a major shareholder up to July 28, 2000, companies with available tax
losses.  The purchase price of these companies is subject to
adjustment under certain conditions.  In 2007, there were no
adjustments to the purchase price (2006 – net $1.4 million
reduction).




20.
            SHARE
      CAPITAL




(a)
            Authorized




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




(b)
            Issued
      and outstanding




2007
            
            2006Shares
            $
            
            Shares
            $Issued
      and outstanding:Common shares
            214,684,129
            913.9
            
            214,604,120
            913.6


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


21.
            STOCK-BASED
      COMPENSATION PLANS




(a)
            Details
      of stock-based compensation
expense:




2007
            
            
            2006
            
            
            2005Stock
      option awards
            
            $
            2.4
            
            
            $
            2.0
            
            
            $
            2.5Restricted
      share units
            
            
            0.8
            
            
            
            –
            
            
            
            –Deferred
      share units
            
            
            0.2
            
            
            
            0.9
            
            
            
            0.6$
            3.4
            
            
            $
            2.9
            
            
            $
            3.1




(b)
            Stock
      option plans




The
Company has an employee share option plan (the “Plan”) for its key officers,
directors and employees. The Plan provides for the issuance of up to a maximum
of 12.0 million common shares.




Options
granted prior to July 31, 2007  have a term of ten
years.  These options are exercisable as to one-third on and after the
first anniversary date, as to two-thirds on and after the second anniversary
date and as to all on and after the third anniversary date, unless, for all
options other than those granted on March 28, 2007, the market price of the
common shares exceeds a specified acceleration price, in which case all of the
options are exercisable at that date.  Market price is determined by
the weighted average price per share for all sales of the shares on the Toronto
Stock Exchange (“TSX”) during the five consecutive trading days preceding the
date on which a determination of Market Price is required under the
Plan.




During
the third quarter of 2007, the Company granted 1,804,624 stock options to its
key executives that are time and performance based.  These options
vest on December 31, 2009 subject to certain conditions being
met.  50% of the total number of stock options will vest if the
executive remains employed with the Company for a three year period, subject to
a minimum return on capital employed benchmark.  The remaining 50% of
the options will vest subject to the achievement of a relative return on capital
employed compared to that of an industry peer group.  These options
have a term of seven years.




The
Company applies the fair value-based method for recording share options granted
to directors, officers and employees.  Under the fair value method,
compensation cost is measured at fair value at the date of grant, and is
expensed over the award’s vesting period.  Compensation expense
related to these noted options has been based on management’s best estimate of
the outcome of the performance conditions in accordance with CICA Handbook
Section 3870, “Stock-based Compensation and Other Stock-based
payments.”




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




2007
            
            
            2006
            
            
            2005Risk-free
      interest rate
            
            
            4.5
            %
            
            
            4.0
            %
            
            
            3.7
            %Annual
      dividends per share
            
            Nil
            
            
            Nil
            
            
            NilExpected
      stock price volatility
            
            
            30.5
            %
            
            
            30.6
            %
            
            
            30.3
            %Expected
      option life (in years)
            
            
            7.0
            
            
            
            4.0
            
            
            
            4.0Average
      fair value of options granted (in dollars)
            
            $
            1.25
            
            
            $
            1.02
            
            
            $
            1.11




The
risk-free interest rate was based on a zero-coupon Government of Canada bond
with a remaining term approximately equivalent to the expected life of the stock
option.  The Company estimated the annual dividends per share,
expected stock price volatility and expected option life based upon historical
experience.  Forfeitures were recognized as they
occurred.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


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




2007
            
            
            2006
            
            
            2005Number
      of options
            
            
            Weighted
      average
              exerciseprice
              (in
      dollars)
            
            
            Number
      of options
            
            
            Weightedaverage
              exerciseprice
              (in
      dollars)
            
            
            Number
      of options
            
            
            Weightedaverage
              exerciseprice
              (in
      dollars)Beginning
      of year
            
            
            8,171,000
            
            
            $
            4.35
            
            
            
            8,409,500
            
            
            $
            5.00
            
            
            
            5,951,333
            
            
            $
            5.62Granted
            
            
            1,984,624
            
            
            
            3.20
            
            
            
            1,836,000
            
            
            
            3.37
            
            
            
            2,886,000
            
            
            
            3.58Exercised
            
            
            (80,009
            )
            
            
            3.31
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Expired
      or cancelled
            
            
            (6,111,591
            )
            
            
            4.58
            
            
            
            (2,074,500
            )
            
            
            6.08
            
            
            
            (427,833
            )
            
            
            4.14End
      of year
            
            
            3,964,024
            
            
            
            3.43
            
            
            
            8,171,000
            
            
            
            4.35
            
            
            
            8,409,500
            
            
            
            5.00




The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2007:




Options
      Outstanding
            
            
            Options
      ExercisableRange
      of
              exercise
      prices
            
            
            Number
      of options
            
            
            Weighted
      average remaining option life (years)
            
            
            Weighted
      average range of exercise price (in dollars)
            
            
            Number
      of options
            
            
            Weighted
      average range of exercise price (in dollars)
            
            
            Accelerated
      price
              (in
      dollars)$
            3.06
      - $3.29
            
            
            
            2,115,524
            
            
            
            6.8
            
            
            $
            3.09
            
            
            
            155,566
            
            
            $
            3.22
            
            
            $
            4.62$
            3.31
      - $3.62
            
            
            
            1,212,250
            
            
            
            7.6
            
            
            
            3.49
            
            
            
            600,833
            
            
            
            3.52
            
            
            
            5.06$
            4.39
      - $4.57
            
            
            
            636,250
            
            
            
            7.0
            
            
            
            4.44
            
            
            
            456,250
            
            
            
            4.39
            
            
            
            6.303,964,024
            
            
            
            7.1
            
            
            $
            3.43
            
            
            
            1,212,649
            
            
            $
            3.81
            
            
            $
            5.47




(c)
            Restricted
      share units




During
2007, the Company established a Restricted Share Unit Plan for its directors and
key executives.  Under the terms of this plan, senior executives are
eligible to incentive remuneration paid to them in the form of restricted share
units (“RSUs”).  Each RSU, once vested, entitles the holder to receive
one  common share of the Company.  The fair value of RSUs is
based on the market value of the Company’s shares on the day of the
grant.




During
2007, the Company granted 485,000 RSUs to its directors and 1,201,307 RSUs to
its key executives.  RSUs granted to directors vest three years
following the grant date.  RSUs granted to key executives are time and
performance based and vest on December 31, 2009 subject to certain conditions
being met.  50% of the total number of RSUs will vest if the executive
remains employed with the Company until December 31, 2009, subject to a minimum
return on capital employed benchmark.  The remaining 50% will vest
subject to the achievement of a relative return of capital employed compared to
that of an industry peer group.  Compensation expense related to these
RSUs is based on management’s best estimate of the outcome of the performance
conditions in accordance with CICA Handbook Section 3870, “Stock-based
Compensation and Other Stock-based Payments.”




Changes
in the number of outstanding RSUs during the year ended December 31, 2007 were
as follows:




Number
              of
      shares
            
            
            Weighted
      average
              fair
      value
              at
      grant date
              (in
      dollars)Beginning
      of year
            
            
            –
            
            
            $
            –Granted
            
            
            1,686,307
            
            
            
            3.20Expired
      or cancelled
            
            
            –
            
            
            
            –End
      of year
            
            
            1,686,307
            
            
            $
            3.20




(d)
            Deferred
      share unit plan




The
Company has established a deferred share unit (“DSU”) plan for its
directors.  Under the terms of this plan, directors may elect to
receive their annual cash remuneration in DSUs, cash or a combination
thereof.  Each DSU initially has a value equivalent to the Company’s
weighted average share price on the TSX, during the ten consecutive trading days
prior to the issuance date of the DSU.  A director’s DSU account is
credited with dividend equivalents in the form of additional DSUs when dividends
are paid on common shares.  A director may elect the date of
redemption by filing an irrevocable written election with the Company no later
than December 15 of the calendar year commencing immediately after the
director’s termination date.  The value shall be paid by the Company
as a lump sum in cash, equal to the fair value of the notional underlying common
shares plus accrued dividend equivalents at that date, after deduction of
applicable taxes and other source deductions required to be
withheld.  Liabilities related to this plan are recorded in “Accounts
payable and accrued liabilities”.  As at December 31, 2007, 365,188
DSUs were outstanding under this plan (2006 – 448,533 DSUs) and approximately
$0.6 million was payable (2006 – $1.5 million).




22.
            FINANCIAL
      INSTRUMENTS




Derivative
financial instruments




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




Derivative
financial instruments are accounted for in accordance with CICA Handbook Section
3855, “Financial Instruments – Recognition and Measurement”, and where
applicable, Section 3865, “Hedges.”  Under these standards, all
derivatives are recorded on the balance sheet at fair value (see note 2
(c)).




(a)
            Revenue
      risk management instruments




Foreign
exchange exposure to foreign currency revenue and related receivables, primarily
in U.S. currency, is managed through the use of foreign exchange forward
contracts and options to sell foreign currencies.




The
effective portion of changes in the fair value of derivatives that qualify and
are designated as cash flow hedges are deferred and recorded as a component of
AOCI until the underlying transaction is recorded in earnings.  When
the hedged item affects earnings, the gain or loss is reclassified from AOCI to
“Sales”.  Any ineffective portion of a hedging derivative’s change in
fair value and the portion that is excluded from the assessment of hedge
effectiveness is recognized immediately in “Sales”.  At December 31,
2007, instruments having a notional principal of US$404 million are designated
as hedging instruments.  At period-end exchange rates, the net amount
the Company would receive to settle the above contracts and options is $32.9
million (December 31, 2006 – negative $3.8 million).




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




OptionsPurchased
      US$ put
              
              
              Sold
      US$ call
              
              
              Forward
      ContractsTerm
              
              US$Millions
              
              
              Average
      Rate
                  US$
      / C$
              
              
              US$Millions
              
              
              Average
      Rate
                  US$
      / C$
              
              
              US$Millions
              
              
              Average
      Rate
                US$
      / C$As at December 31,
      20070
      to 12 months
              
              $
              496
              
              
              0.9688
              
              
              $
              106
              
              
              0.9190
              
              
              $
              47
              
              
              1.000113
      to 24 months
              
              
              38
              
              
              1.0355
              
              
              
              –
              
              
              –
              
              
              
              –
              
              
              –$
              534
              
              
              0.9733
              
              
              $
              106
              
              
              0.9190
              
              
              $
              47
              
              
              1.0001As at December 31,
      20060
      to 12 months
              
              $
              485
              
              
              
              0.9031
              
              
              $
              205
              
              
              
              0.8606
              
              
              $
              109
              
              
              
              0.872713
      to 24 months
              
              
              34
              
              
              
              0.8982
              
              
              
              32
              
              
              
              0.8898
              
              
              
              –
              
              
              
              –$
              519
              
              
              
              0.9028
              
              
              $
              237
              
              
              
              0.8644
              
              
              $
              109
              
              
              
              0.8727
  At
December 31, 2007, commodity swap agreements to fix the sales price of NBSK pulp
and containerboard within the next 12 months are outstanding for 23,500 metric
tonnes and 1,750 short tons, respectively.  These contracts are not
designated as hedging instruments for accounting purposes and are reported at
their fair value, which was negative $1.0 million (December 31, 2006 – negative
$0.3 million) at the end of the current year.




(b)
            Cost
      risk management instruments




Natural
gas contracts and options outstanding were as follows:




AECO or
      SumasSold
      options
            
            
            Purchased
      options
            
            
            Fixed
      swap contractsTerm
            
            Gigajoules
              (“GJ”)
              (millions)
            
            
            Average
      rate
              C$/GJ
            
            
            GJ
              (millions)
            
            
            Average
      rate
              C$/GJ
            
            
            GJ
              (millions)
            
            
            Average
      rate
              C$/GJAs
      at December 31, 2007
            
            
            0.6
            
            
            $
            6.07
            
            
            
            1.0
            
            
            $
            7.98
            
            
            
            –
            
            
            $
            –As
      at December 31, 2006
            
            
            –
            
            
            $
            –
            
            
            
            0.4
            
            
            $
            7.91
            
            
            
            1.0
            
            
            $
            8.33




Oil
contracts and options outstanding were as follows:




WTI
      NYMEXSold
      options
            
            
            Purchased
      options
            
            
            Fixed
      swap contractsTerm
            
            Barrels
              (“bbls”
              -
      000s)
            
            
            Average
      rate
              US$/bbl
            
            
            bbls
              (
      000s)
            
            
            Average
      rate
              US$/bbl
            
            
            bbls
              (000s)
            
            
            Average
      rate
              US$/bblAs
      at December 31, 2007
            
            
            –
            
            
            $
            –
            
            
            
            –
            
            
            $
            –
            
            
            
            –
            
            
            $
            –As
      at December 31, 2006
            
            
            –
            
            
            $
            –
            
            
            
            –
            
            
            $
            –
            
            
            
            30
            
            
            $
            31.55




The above
instruments are not designated as hedging instruments for accounting
purposes.  At period-end contract rates, the net amount the Company
would pay to settle these commodity contracts is $0.2 million (December 31, 2006
– $0.6 million).




(c)
            Long-term
      debt risk management instruments




The
Company is party to forward foreign currency contracts or options to acquire
U.S. dollars totalling US$228 million (December 31, 2006 – US$23 million) over a
seven-year period at rates averaging US$/C$0.9359.  These instruments
are not designated as hedging instruments for accounting purposes, and are
included in “Other long-term obligations” on the balance sheet at their fair
value.  Settlements and changes in fair value are recognized in
“Foreign exchange gain (loss) on long-term debt”.  At period-end
exchange rates, the net amount the Company would pay to settle these contracts
is $5.4 million (December 31, 2006 – $4.0 million).




(d)
            Interest
      rate swaps




The
Company has entered into fixed-to-floating interest rate swaps on US$80 million,
under which it will receive a fixed rate of 7.375%, and pay a floating rate of
U.S. six-month LIBOR plus 2.0%.  The swaps mature March 1, 2014,
although US$10 million are cancellable at the counterparties’ option between
March 1, 2009 and March 1, 2014 for premiums which mirror the call premiums on
the 7.375% senior notes.  These instruments are designated as fair
value hedging instruments.  The effective portion of changes in the
fair value of the derivatives are netted in “Long-term debt” and the ineffective
portion is recognized in “Interest expense, net”.  At period-end swap
rates, the net amount the Company would receive to settle these contracts is
$4.1 million (December 31, 2006 – $1.2 million).




(e)
            Credit
      risk




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




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




(f)
            Fair
      value of financial instruments




The
carrying values of the Company’s other financial instruments, namely cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair values because of the short-term maturity of these
instruments.




23.
            RELATED
      PARTY TRANSACTIONS




Related
parties include Third Avenue Management LLC, which has control or direction over
a significant number of the Company’s common shares.  The Company has
not undertaken any transactions with TAM during the year ended December 31,
2007.




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




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




2007
            
            
            2006
            
            
            2005Norske
      SkogSelling, general and
      administrative
            
            $
            –
            
            
            $
            0.2
            
            
            $
            0.1Accounts
      receivable
            
            
            –
            
            
            
            –
            
            
            
            2.7Norske
      Skog North America LLCCommission
      expenses
            
            
            –
            
            
            
            –
            
            
            
            4.4Net
      loss
            
            
            –
            
            
            
            –
            
            
            
            0.1Investment (US$0.5
      million)
            
            
            –
            
            
            
            –
            
            
            
            0.8




The
Company previously entered into agency and distribution agreements with
affiliates of Norske Skog to effect all sales of the Company’s newsprint and
specialty papers in certain international markets.  The agency
agreement was terminated in April, 2006.  Product sales to these
affiliates were $13.6 million for 2006 and $118.1 million for
2005.  Neither of these entities were affiliates in
2007.  Transactions that took place under the distribution agreement
were in accordance with normal third-party trade practices.




In prior
years, the Company acquired from wholly-owned subsidiaries of Fletcher Challenge
Limited, now subsidiaries of Norske Skog, companies with tax
losses.  The purchase price of these companies is subject to
adjustment under certain conditions.  At December 31, 2007, there was
no outstanding balance with respect to such adjustments (2006 – $nil; 2005 –
$2.7 million).  During 2006, the Company collected $4.3 million in
respect of the adjustments.  The $4.3 million was comprised of the
$2.7 million accounts receivable at December 31, 2005 and a further adjustment
and interest totalling $1.6 million.




The
Company undertakes certain transactions with companies affiliated with its
directors.  These transactions are in the normal course of business
and are on the same terms as those accorded to third parties.  During
2007, the Company paid aggregate fees of approximately $8.7 million
(2006  – $0.4 million; 2005 – $nil) primarily for obligations under a
building lease, for services related to trucking chips and sawdust, and for
other consulting services to companies affiliated with directors of the
Company.  In addition, the Company paid $0.7 million (2006 – $3.9
million; 2005 – $1.8 million) primarily for chemicals used in the manufacturing
process to a company affiliated with a former officer and director of the
Company.




The
Company has advanced interest-free loans to its officers.  As at
December 31, 2007, the balance outstanding was $0.1 million (2006 – $0.1
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.




24.
            COMMITMENTS




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




2008
            
            $
            10.12009
            
            
            9.02010
            
            
            8.02011
            
            
            7.52012
            
            
            5.6Subsequent
      years
            
            
            32.0$
            72.2




The total
lease expense amounted to $12.3 million in 2007 (2006 – $13.0 million; 2005 –
$13.8 million).




(b)
            The
      Company has entered into a six-year take-or-pay contract for the purchase
      of recycled paper used in the production of its paper
      products.  The agreement, effective May 1, 2006, provides for
      minimum purchase quantities of recycled paper and prices are based on
      market rates at the beginning of each month.  Total purchases in
      2007 amounted to $2.1 million (2006 – $0.9 million).  At current
      market rates, the Company is expected to pay approximately $2.2 million
      per year for the duration of the
contract.




25.
            GUARANTEES
      AND INDEMNITIES




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




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




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




(c)
            The
      Company has entered a building lease agreement whereby it has agreed to
      continue making the prescribed lease payments directly to the financial
      institution holding the mortgage on the building in the event the lessor
      is no longer able to meet its contractual obligations.  As at
      December 31, 2007, the value of the mortgage was $10.6 million (2006 –
      $11.9 million).  This agreement does not increase the Company’s
      liability beyond the obligation under the building
  lease.




26.
            CONTINGENT
      LIABILITIES




In the
normal course of its business activities, the Company is subject to a number of
claims and legal actions that may be made by customers, suppliers and
others.  While the final outcome with respect to actions outstanding
or pending as at December 31, 2007, cannot be predicted with certainty, the
Company believes an adequate provision has been made, or the resolution will not
have a material effect on the Company’s consolidated financial position,
earnings or cash flows.




27.
            ACCOUNTING
      POLICY DEVELOPMENTS




The new
recommendations of the CICA Handbook Section 3031, “Inventories” provides
significantly more guidance on the measurement of inventory and requires
enhanced disclosures.  This standard is effective for interim and
annual financial statements for fiscal years beginning on or after January 1,
2008.  The transitional rules for this standard require retrospective
application at the beginning of the fiscal year.  While the Company is
currently assessing the impact of these new recommendations on its consolidated
financial statements, it does not expect the recommendations to have material
impact on its earnings or cash flows.




The new
recommendations of the CICA Handbook Section 1535, “Capital Disclosures”
establishes guidelines for the disclosure of information related to an entity’s
objectives, policies and processes for managing capital, quantitative data on
what the entity regards as capital and whether the entity has complied with any
capital requirements and, if it has not complied, the consequences of such
non-compliance.  This standard is effective for interim and annual
financial statements for fiscal years beginning on or after October 1,
2007.  The Company does not expect the adoption of this standard to
have a material impact on its consolidated financial position, earnings or cash
flows.




The CICA
has released two new Handbook sections related to financial instruments: Section
3862, “Financial Instruments – Disclosures” and Section 3863, “Financial
Instruments – Presentation”.  These standards enhance existing
disclosures in previously issued Section 3861, “Financial Instruments –
Disclosures and Presentation”.  The new recommendations under Section
3862, “Financial Instruments – Disclosures” require additional disclosures,
relative to those currently, with an emphasis on risks associated with both
recognized and unrecognized financial instruments to which an entity is exposed
during the period and at the balance sheet date, and how the entity manages
those risks. This standard is effective for interim and annual financial
statements for fiscal years beginning on or after October 1,
2007.  The Company does not expect the adoption of this standard to
have a material impact on its consolidated financial position, earnings or cash
flows.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


28.
            RECONCILIATION
      OF CANADIAN AND UNITED STATES GENERALLY
ACCEPTED


ACCOUNTING
PRINCIPLES




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




Net earnings
adjustments




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




2007
            
            
            2006
            
            
            2005Net
      earnings (loss) as reported under Canadian GAAP
            
            $
            (31.6
            )
            
            $
            (15.9
            )
            
            $
            (25.6
            )U.S.
      dollar revenue hedges (a)
            
            
            –
            
            
            
            (9.4
            )
            
            
            (32.4
            )U.S.
      dollar long-term debt hedges (b)
            
            
            –
            
            
            
            (0.7
            )
            
            
            (1.5
            )Fixed
      to floating interest swaps (c)
            
            
            –
            
            
            
            (0.8
            )
            
            
            (3.4
            )Commodity
      swaps (d)
            
            
            –
            
            
            
            –
            
            
            
            (0.3
            )Income
      tax impact of above items and effect of rate change
            
            
            (4.9
            )
            
            
            1.1
            
            
            
            12.8Net
      earnings (loss) in accordance with U.S. GAAP
            
            
            (36.5
            )
            
            
            (25.7
            )
            
            
            (50.4
            )Other
      comprehensive income:Other comprehensive income in
      accordance with Canadian GAAP (e)
            
            
            14.3
            
            
            
            –
            
            
            
            –Reclass of amortization of
      employee future benefits included in pension cost, net of future income
      taxes of $5.1 million
            
            
            13.9
            
            
            
            –
            
            
            
            –Employee future benefits liability
      adjustment, net of future income taxes of $2.2 million
            
            
            (5.8
            )
            
            
            –
            
            
            
            –Minimum pension liability
      adjustment, net of future income taxesof
      $nil (2006 – $3.6 million; 2005 – $7.0 million) (e)
            
            
            –
            
            
            
            7.9
            
            
            
            (14.0
            )Reclassification of
      effective portion of U.S. dollar hedges onde-designation,
      net of future income taxes of $nil(2006
      – $5.2 million) (a)
            
            
            –
            
            
            
            (11.3
            )
            
            
            –Effective portion of U.S.
      dollar revenue hedges, net offuture
      income taxes of $nil (2006 – $2.8 million;2005
      – $2.4 million) (a)
            
            
            –
            
            
            
            6.1
            
            
            
            4.5Comprehensive
      income (loss) in accordance with U.S. GAAP
            
            $
            (14.1
            )
            
            $
            (23.0
            )
            
            $
            (59.9
            )Basic
      and diluted net earnings (loss) per share in accordancewith
      U.S. GAAP (in dollars)
            
            
            (0.17
            )
            
            
            (0.12
            )
            
            
            (0.23
            )Basic
      and diluted weighted average number of shares inaccordance
      with U.S. GAAP (in millions)
            
            
            214.7
            
            
            
            214.6
            
            
            
            214.6


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


The
following table presents the consolidated statements of earnings under Canadian
and U.S. GAAP:




Years
      ended December 31,2007
            
            
            2006
            
            
            2005Canadian
              GAAP
            
            
            U.S.
              GAAP
            
            
            Canadian
              GAAP
            
            
            U.S.
              GAAP
            
            
            Canadian
              GAAP
            
            
            U.S.
              GAAPSales
            
            $
            1,714.6
            
            
            $
            1,714.6
            
            
            $
            1,882.5
            
            
            $
            1,873.2
            
            
            $
            1,823.9
            
            
            $
            1,791.5Operating
      expensesCost of sales
            
            
            1,574.6
            
            
            
            1,574.6
            
            
            
            1,609.3
            
            
            
            1,609.3
            
            
            
            1,604.3
            
            
            
            1,604.6Selling, general and
      administrative
            
            
            48.3
            
            
            
            48.3
            
            
            
            62.2
            
            
            
            62.2
            
            
            
            57.7
            
            
            
            57.7Restructuring and
      change-of-control
            
            
            64.7
            
            
            
            64.7
            
            
            
            –
            
            
            
            –
            
            
            
            6.7
            
            
            
            6.7Amortization
            
            
            176.4
            
            
            
            176.4
            
            
            
            207.1
            
            
            
            207.1
            
            
            
            180.3
            
            
            
            180.31,864.0
            
            
            
            1,864.0
            
            
            
            1,878.6
            
            
            
            1,878.6
            
            
            
            1,849.0
            
            
            
            1,849.3Operating
      earnings (loss)
            
            
            (149.4
            )
            
            
            (149.4
            )
            
            
            3.9
            
            
            
            (5.4
            )
            
            
            (25.1
            )
            
            
            (57.8
            )Interest
      expense, net
            
            
            (70.7
            )
            
            
            (70.7
            )
            
            
            (73.8
            )
            
            
            (74.6
            )
            
            
            (75.7
            )
            
            
            (76.0
            )Foreign
      exchange gain (loss) on long-term debt
            
            
            103.9
            
            
            
            103.9
            
            
            
            (0.3
            )
            
            
            (1.0
            )
            
            
            24.7
            
            
            
            20.1Other
      income (expense), net
            
            
            (15.3
            )
            
            
            (15.3
            )
            
            
            1.8
            
            
            
            1.8
            
            
            
            4.5
            
            
            
            4.5Earnings
      (loss) before income taxesand
      non-controlling interest
            
            
            (131.5
            )
            
            
            (131.5
            )
            
            
            (68.4
            )
            
            
            (79.2
            )
            
            
            (71.6
            )
            
            
            (109.2
            )Income
      tax recovery
            
            
            (100.0
            )
            
            
            (95.1
            )
            
            
            (54.0
            )
            
            
            (55.0
            )
            
            
            (46.6
            )
            
            
            (59.4
            )Net
      earnings (loss) before non-controlling interest
            
            
            (31.5
            )
            
            
            (36.4
            )
            
            
            (14.4
            )
            
            
            (24.2
            )
            
            
            (25.0
            )
            
            
            (49.8
            )Non-controlling
      interest
            
            
            (0.1
            )
            
            
            (0.1
            )
            
            
            (1.5
            )
            
            
            (1.5
            )
            
            
            (0.6
            )
            
            
            (0.6
            )Net
      earnings (loss)
            
            $
            (31.6
            )
            
            $
            (36.5
            )
            
            $
            (15.9
            )
            
            $
            (25.7
            )
            
            $
            (25.6
            )
            
            $
            (50.4
            )Other
      comprehensive income
            
            
            14.3
            
            
            
            22.4
            
            
            
            –
            
            
            
            2.7
            
            
            
            –
            
            
            
            (9.5
            )Comprehensive
      income (loss)
            
            $
            (17.3
            )
            
            $
            (14.1
            )
            
            $
            (15.9
            )
            
            $
            (23.0
            )
            
            $
            (25.6
            )
            
            $
            (59.9
            )Basic
      and diluted earnings (loss) per share(in
      dollars)
            
            $
            (0.15
            )
            
            $
            (0.17
            )
            
            $
            (0.07
            )
            
            $
            (0.12
            )
            
            $
            (0.12
            )
            
            $
            (0.23
            )Weighted
      average common sharesoutstanding
      (in millions)
            
            
            214.7
            
            
            
            214.7
            
            
            
            214.6
            
            
            
            214.6
            
            
            
            214.6
            
            
            
            214.6


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


Balance sheet
adjustments




The
following table provides a reconciliation of the consolidated balance sheet
components at December 31 from Canadian GAAP to U.S. GAAP:




2007
            
            
            2006Prepaids
      and other – Canadian GAAP
            
            $
            40.7
            
            
            $
            15.4U.S. dollar revenue
      hedges
            
            
            –
            
            
            
            (6.1
            )Fixed-to-floating interest
      swaps
            
            
            –
            
            
            
            1.2Prepaids
      and other – U.S. GAAP
            
            $
            40.7
            
            
            $
            10.5Other
      assets – Canadian GAAP
            
            $
            51.1
            
            
            $
            40.8Employee future
      benefits
            
            
            (17.1
            )
            
            
            (1.5
            )Deferred financing
      costs
            
            
            14.4
            
            
            
            –Other
      assets – U.S. GAAP
            
            $
            48.4
            
            
            $
            39.3Accounts
      payable and accrued liabilities – Canadian GAAP
            
            $
            268.2
            
            
            $
            291.5U.S. dollar revenue
      hedges
            
            
            –
            
            
            
            0.7Employee future
      benefits
            
            
            –
            
            
            
            (0.1
            )Accounts
      payable and accrued liabilities – U.S. GAAP
            
            $
            268.2
            
            
            $
            292.1Long-term
      debt – Canadian GAAP
            
            $
            784.6
            
            
            $
            858.7Fixed-to-floating interest
      swaps
            
            
            –
            
            
            
            0.6Interest on long-term
      debt
            
            
            1.6
            
            
            
            –Deferred financing costs
      (g)
            
            
            14.4
            
            
            
            –Long-term
      debt – U.S. GAAP
            
            $
            800.6
            
            
            $
            859.3Employee
      future benefits – Canadian GAAP
            
            $
            211.7
            
            
            $
            187.2Employee future
      benefits
            
            
            95.1
            
            
            
            121.9Employee
      future benefits – U.S. GAAP
            
            $
            306.8
            
            
            $
            309.1Other
      long-term obligations – Canadian GAAP
            
            $
            26.9
            
            
            $
            23.3U.S. dollar long-term debt
      hedges
            
            
            –
            
            
            
            (0.2
            )Other
      long-term obligations – U.S. GAAP
            
            $
            26.9
            
            
            $
            23.1Future
      income taxes – Canadian GAAP
            
            $
            150.5
            
            
            $
            243.9Interest on long-term
      debt
            
            
            (0.5
            )
            
            
            –Tax effect of employee future
      benefits adjustment
            
            
            (37.6
            )
            
            
            (40.6
            )Tax effect of effective portion
      of U.S. dollar revenue hedges
            
            
            –
            
            
            
            (2.1
            )Tax effect of other
      adjustments
            
            
            7.3
            
            
            
            2.6Future
      income taxes – U.S. GAAP
            
            $
            119.7
            
            
            $
            203.8Shareholders’
      equity – Canadian GAAP
            
            $
            988.6
            
            
            $
            1,005.8U.S. dollar revenue
      hedges
            
            
            –
            
            
            
            (6.8
            )U.S. dollar long-term debt
      hedges
            
            
            –
            
            
            
            0.2Fixed-to-floating interest
      swaps
            
            
            –
            
            
            
            0.6Interest on long-term
      debt
            
            
            (1.6
            )
            
            
            –Employee future
      benefits
            
            
            (112.2
            )
            
            
            (123.3
            )Tax effect of employee future
      benefits adjustment
            
            
            37.6
            
            
            
            40.6Tax effect of effective portion
      of U.S. dollar revenue hedges
            
            
            –
            
            
            
            2.1Tax effect on interest on
      long-term debt
            
            
            0.5
            
            
            
            –Tax effect of other
      adjustments
            
            
            (7.3
            )
            
            
            (2.6
            )Shareholders’
      equity – U.S. GAAP
            
            $
            905.6
            
            
            $
            916.6




The
following table provides a reconciliation of accumulated other comprehensive
income at December 31 from Canadian GAAP to U.S. GAAP:




2007
            
            
            2006Accumulated
      other comprehensive income – Canadian GAAP
            
            $
            13.6
            
            
            $
            –U.S. dollar revenue
      hedges
            
            
            –
            
            
            
            (0.7
            )Employee future benefits –
      adoption of FAS 158
            
            
            (74.6
            )
            
            
            (49.0
            )Employee future benefits –
      minimum pension liability
            
            
            –
            
            
            
            (33.7
            )Accumulated
      other comprehensive income (loss) – U.S. GAAP
            
            $
            (61.0
            )
            
            $
            (83.4
            )


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


The
following table presents the consolidated balance sheets under Canadian and U.S.
GAAP:




As
      at December 31,2007
            
            
            2006Canadian
              GAAP
            
            
            U.S.
              GAAP
            
            
            Canadian
              GAAP
            
            
            U.S.
              GAAPAssetsCurrent
      assetsCash and cash
      equivalents
            
            $
            –
            
            
            $
            –
            
            
            $
            35.5
            
            
            $
            35.5Accounts
    receivable
            
            
            213.1
            
            
            
            213.1
            
            
            
            277.9
            
            
            
            277.9Inventories
            
            
            235.7
            
            
            
            235.7
            
            
            
            245.0
            
            
            
            245.0Prepaids and
    other
            
            
            40.7
            
            
            
            40.7
            
            
            
            15.4
            
            
            
            10.5489.5
            
            
            
            489.5
            
            
            
            573.8
            
            
            
            568.9Property,
      plant and equipment
            
            
            1,912.8
            
            
            
            1,912.8
            
            
            
            2,023.1
            
            
            
            2,023.1Other
      assets
            
            
            51.1
            
            
            
            48.4
            
            
            
            40.8
            
            
            
            39.3$
            2,453.4
            
            
            $
            2,450.7
            
            
            $
            2,637.7
            
            
            $
            2,631.3LiabilitiesCurrent
      liabilitiesAccounts payable and accrued
      liabilities
            
            $
            268.2
            
            
            $
            268.2
            
            
            $
            291.5
            
            
            $
            292.1Current portion of long-term
      debt
            
            
            1.2
            
            
            
            1.2
            
            
            
            1.8
            
            
            
            1.8269.4
            
            
            
            269.4
            
            
            
            293.3
            
            
            
            293.9Long-term
      debt
            
            
            784.6
            
            
            
            800.6
            
            
            
            858.7
            
            
            
            859.3Employee
      future benefits
            
            
            211.7
            
            
            
            306.8
            
            
            
            187.2
            
            
            
            309.1Other
      long-term obligations
            
            
            26.9
            
            
            
            26.9
            
            
            
            23.3
            
            
            
            23.1Future
      income taxes
            
            
            150.5
            
            
            
            119.7
            
            
            
            243.9
            
            
            
            203.8Deferred
      credits
            
            
            21.7
            
            
            
            21.7
            
            
            
            25.5
            
            
            
            25.51,464.8
            
            
            
            1,545.1
            
            
            
            1,631.9
            
            
            
            1,714.7Shareholders’
      equityShare
      capital
            
            
            913.9
            
            
            
            913.9
            
            
            
            913.6
            
            
            
            913.6Contributed
      surplus
            
            
            12.1
            
            
            
            12.1
            
            
            
            9.3
            
            
            
            9.3Retained
      earnings
            
            
            49.0
            
            
            
            40.6
            
            
            
            82.9
            
            
            
            77.1Accumulated
      other comprehensive income (loss)
            
            
            13.6
            
            
            
            (61.0
            )
            
            
            –
            
            
            
            (83.4
            )988.6
            
            
            
            905.6
            
            
            
            1,005.8
            
            
            
            916.6$
            2,453.4
            
            
            $
            2,450.7
            
            
            $
            2,637.7
            
            
            $
            2,631.3




(a)
            U.S.
      dollar revenue hedges




Effective
January 1, 2007, the Company adopted the new Canadian accounting standards that
require entities to record its derivatives at fair value. Changes in the fair
value of designated contracts, during the period of designation, are recorded in
other comprehensive income, net of tax, until the hedged item is
recognized.  Changes in the fair value of undesignated contracts are
recognized in income.  Prior to January 1, 2007, under Canadian GAAP,
translation gains and losses on foreign currency options and forward contracts
to sell foreign currencies that were designated as hedges were recognized
concurrently with the hedged revenue in “Sales”. The new Canadian standards have
eliminated this difference.




Prior to
April 1, 2005, the Company did not designate its revenue contracts as hedges for
U.S. GAAP purposes.  Effective April 1, 2005, the Company designated
certain of its existing revenue contracts as hedges in accordance with criteria
under U.S. GAAP and has, prospectively, accounted for them as hedges under U.S.
GAAP.




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




Under
Canadian GAAP, prior to January 1, 2004, the Company designated foreign currency
contracts related to its U.S. dollar debt as hedges.  The forward
premium or discount on forward foreign currency contracts used to hedge the U.S.
dollar long-term debt was amortized to interest expense over the term of the
forward contract.  Effective January 1, 2004, foreign currency
contracts related to U.S. dollar debt are not designated as
hedges.  Under U.S. GAAP, the Company does not account for such
contracts as hedges of long-term debt and recognizes the foreign currency
contracts on a fair value basis at each reporting period.  The
adoption of new Canadian standards on January 1, 2007 eliminated this
difference.




(c)
            Fixed
      to floating interest swaps




Effective
January 1, 2007, the Company adopted the new Canadian accounting standards that
recognize the unrealized gains and losses on interest rate swap contracts in the
financial statements.  The ineffectiveness of the hedge is quantified,
and the ineffective portion of the changes in fair value is recorded in interest
expense. Prior to January 1, 2007, unrealized gains and losses on interest rate
swap contracts designated as hedges were not recognized in the financial
statements under Canadian GAAP.  The adoption of new Canadian
standards eliminated this difference.  During 2003, the Company
terminated prior to their maturity, certain interest rate swap contracts for
cash proceeds of $15.9 million.  Under Canadian GAAP, the net gain is
deferred and is being amortized as a reduction of interest expense based on the
U.S. swap curve at the time of termination.  Under U.S. GAAP, there is
no deferred amount as the fluctuations in the fair value and interest payments
are recognized in earnings as they arise.




(d)
            Commodity
      swaps




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




(e)
            Employee
      future benefits




Effective
December 31, 2006, the Company adopted Financial Accounting Standards No. 158
(“FAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other
Post-retirement Plans”.  This statement requires the recognition of
the overfunded or underfunded status of a defined benefit post-retirement plan
as an asset or liability in the balance sheet and changes in that funded status
in the year in which the changes occur through comprehensive income. This new
standard replaced the U.S. GAAP requirement to recognize an additional minimum
pension liability in cases where the accumulated benefit obligation exceeded the
market value of plan assets. The portion of this additional liability that
related to unrecognized prior service cost was recognized as an intangible asset
while the remainder was charged to comprehensive income (loss).  There
is no change in the calculation of the pension and other employee future
benefits expense.  Canadian GAAP has no such requirement.




(f)
            Comprehensive
      income




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




(g)
            Debt
      issue costs




Effective
January 1, 2007, on adoption of the new Canadian accounting standards, the
Company netted its debt issue costs against the carrying value of
debt.  Under U.S. GAAP, debt issue costs are reported in the balance
sheet as deferred charges.




(h)
            Future
      income taxes




Income
taxes for the year ended December 31, 2007 include a release of future income
taxes of $22.4 million related to the reduction in future federal corporate
income tax rates and a release of $14.0 million related to tax uncertainties
resolved with the conclusion of an examination by the Canada Revenue
Agency.




On
January 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes”.  FIN 48 clarifies the
accounting for uncertainty in income taxes and uses a more-likely-than-not
threshold to determine recognition in the financial statements of an uncertain
tax position.  The more-likely-than-not threshold means that a benefit
related to an uncertain tax position is recognized only when it is
more-likely-than-not that the position will be sustained based on its technical
merits and where there is a greater than 50 per cent likelihood that the
position would be sustained if challenged by a tax authority.  The tax
position is measured as the largest amount of benefit that is greater than 50
per cent likely of being realized upon settlement.  The unresolved
uncertain tax positions must be reassessed at each balance sheet date based on
these thresholds.  FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods and
disclosure.  FIN 48 is effective for fiscal years beginning after
December 31, 2006.




The
Company did not record any unrecognized tax benefits as a result of applying
this interpretation.




A tabular
reconciliation of the total amounts of unrecognized tax benefits at the
beginning and end of 2007 is as follows:




Unrecognized
      tax benefits, beginning of year
            
            $
            36.7Increases
      – tax positions taken in prior periods
            
            
            –Decreases
      – tax positions taken in prior periods
            
            
            (2.5
            )Current
      period tax positions
            
            
            –Settlements
            
            
            (14.0
            )Lapse
      of statute of limitations
            
            
            –Decrease
      resulting from tax rate reduction
            
            
            (3.3
            )Unrecognized
      tax benefits, end of year
            
            $
            16.9




The above
balance, if recognized, would affect the Company’s effective tax
rate.  Total amount of interests and penalties related to the above
amount is $nil.




In the
normal course of business, the Company and its subsidiaries are subject to
audits by the Canadian federal and provincial taxing authorities, by the U.S.
federal and various state taxing authorities and by the taxing authorities in
various foreign jurisdictions.  All tax years up to and including
August 31, 2001 have been audited by the Canadian federal taxing
authorities.  The Canadian federal  taxing authorities are
presently auditing the December 31, 2001 and the December 31, 2002 taxation
years of the Canadian entities.  The Company is not currently under
audit by the U.S. Internal Revenue Service, by any U.S. state taxing authority
or by any foreign taxing authority.  The U.S. federal statute of
limitations for pre-2003 tax years expired on September 15, 2006.




(i)
            Shareholders’
      equity




Accumulated
other comprehensive income is recorded as a separate component of shareholders’
equity under U.S. GAAP.  The concept of accumulated other
comprehensive income exists under Canadian GAAP, but applies to fiscal years
beginning on or after October 1, 2006 and applies to the Company in its 2007
fiscal year.




(j)
            Consolidated
      cash flows




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




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




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
expressed in millions of dollars, except where otherwise
stated)


(k)
            Future
      changes in accounting policy




Fair
value measurement




FASB has
issued a new standard which clarifies the definition of “fair value” applicable
under all United States accounting standards, with some limited
exceptions.  The standard establishes a single definition of fair
value, sets out a framework for measuring fair value and requires additional
disclosures about fair value measurements.  The objective of the
standard is to increase consistency, reliability and comparability in fair value
measurements, and to enhance disclosures to help users of financial statements
assess the effects of the fair value measurements used in financial
reporting.  The framework provides a hierarchy for reliably
determining fair value based on the definition in the standard.  This
standard is effective November 1, 2008.




Business
combinations




FASB has
issued new guidance on accounting for business combinations on how entities
should approach financial planning and reporting around business
combinations.  This will require entities to be more transparent in
demonstrating the values of assets and liabilities.  This standard is
effective for fiscal years beginning after December 15, 2008.




29.
            SUBSEQUENT
      EVENT




On
February 11, 2008, the Company announced that it has entered into a definitive
agreement with a subsidiary of AbitibiBowater to acquire its Snowflake Arizona
recycled newsprint mill for cash consideration of US$161 million.  The
purchase price excludes trade receivables of approximately US$19 million that
are being retained by AbitibiBowater.  The acquisition will be
financed through a combination of the Company’s revolving credit facilities and
a proposed $125 million rights offering.










CONSOLIDATED
STATEMENTS OF EARNINGS




(Audited
and in millions of dollars)




Years
      ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002
            
            
            2001Sales
            
            $
            1,714.6
            
            
            $
            1,882.5
            
            
            $
            1,823.9
            
            
            $
            1,878.2
            
            
            $
            1,820.5
            
            
            $
            1,704.0
            
            
            $
            1,561.1Operating
      expensesCost of sales
            
            
            1,574.6
            
            
            
            1,609.3
            
            
            
            1,604.3
            
            
            
            1,674.9
            
            
            
            1,687.5
            
            
            
            1,582.1
            
            
            
            1,286.6Selling, general and
      administrative
            
            
            48.3
            
            
            
            62.2
            
            
            
            57.7
            
            
            
            50.5
            
            
            
            54.7
            
            
            
            65.3
            
            
            
            63.6Restructuring and
      change-of-control
            
            
            64.7
            
            
            
            –
            
            
            
            6.7
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Amortization
            
            
            176.4
            
            
            
            207.1
            
            
            
            180.3
            
            
            
            184.1
            
            
            
            189.9
            
            
            
            178.5
            
            
            
            131.21,864.0
            
            
            
            1,878.6
            
            
            
            1,849.0
            
            
            
            1,909.5
            
            
            
            1,932.1
            
            
            
            1,825.9
            
            
            
            1,481.4Operating
      earnings (loss)
            
            
            (149.4
            )
            
            
            3.9
            
            
            
            (25.1
            )
            
            
            (31.3
            )
            
            
            (111.6
            )
            
            
            (121.9
            )
            
            
            79.7Interest
      expense, net
            
            
            (70.7
            )
            
            
            (73.8
            )
            
            
            (75.7
            )
            
            
            (74.9
            )
            
            
            (75.0
            )
            
            
            (76.2
            )
            
            
            0.9Foreign
      exchange gain (loss) onlong-term
      debt
            
            
            103.9
            
            
            
            (0.3
            )
            
            
            24.7
            
            
            
            53.5
            
            
            
            58.2
            
            
            
            12.3
            
            
            
            (17.1
            )Write-down
      of property, plant andequipment
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (14.2
            )
            
            
            –
            
            
            
            –Loss
      on repayment of long-term debt
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (5.2
            )
            
            
            
            
            
            
            –
            
            
            
            –Other
      income (expense), net
            
            
            (15.3
            )
            
            
            1.8
            
            
            
            4.5
            
            
            
            1.2
            
            
            
            (3.9
            )
            
            
            (13.3
            )
            
            
            (40.2
            )Earnings
      (loss) before income taxesand
      non-controlling interest
            
            
            (131.5
            )
            
            
            (68.4
            )
            
            
            (71.6
            )
            
            
            (56.7
            )
            
            
            (146.5
            )
            
            
            (199.1
            )
            
            
            23.3Income
      tax recovery
            
            
            (100.0
            )
            
            
            (54.0
            )
            
            
            (46.6
            )
            
            
            (28.1
            )
            
            
            (62.0
            )
            
            
            (75.8
            )
            
            
            (21.2
            )Net
      earnings (loss) beforenon-controlling
      interest
            
            
            (31.5
            )
            
            
            (14.4
            )
            
            
            (25.0
            )
            
            
            (28.6
            )
            
            
            (84.5
            )
            
            
            (123.3
            )
            
            
            44.5Non-controlling
      interest
            
            
            (0.1
            )
            
            
            (1.5
            )
            
            
            (0.6
            )
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Net
      earnings (loss)
            
            $
            (31.6
            )
            
            $
            (15.9
            )
            
            $
            (25.6
            )
            
            $
            (28.6
            )
            
            $
            (84.5
            )
            
            $
            (123.3
            )
            
            $
            44.5Other
      comprehensive income1
            
            
            14.3
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Comprehensive
      income (loss)1
            
            $
            (17.3
            )
            
            $
            (15.9
            )
            
            $
            (25.6
            )
            
            $
            (28.6
            )
            
            $
            (84.5
            )
            
            $
            (123.3
            )
            
            $
            44.5




1
            Effective
      January 1, 2007, the Company adopted the new CICA Section 3855, “Financial
      Instruments – Recognition and Measurement”, Section 1530, “Comprehensive
      Income”, Section 3865, “Hedges”, Section 3861, “Financial Instruments –
      Disclosure and Presentations” and Section 3251, “Equity”.  These
      standards introduce new requirements for recognition, measurement and
      disclosure of financial instruments, when and how hedge accounting may be
      applied, establishes the concept of comprehensive income and rules for
      operating it, and establishes rules for the presentation of equity and
      changes in equity.  Prior period financial statements are not
      revised for the adoption of these new
standards.





CONSOLIDATED
BALANCE SHEETS




(Audited
and in millions of dollars)




As
      at December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002
            
            
            2001Assets
              Current
      assetsCash and cash
      equivalents
            
            $
            –
            
            
            $
            35.5
            
            
            $
            –
            
            
            $
            26.0
            
            
            $
            –
            
            
            $
            –
            
            
            $
            104.8Marketable
      securities
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            34.4Accounts
    receivable
            
            
            213.1
            
            
            
            277.9
            
            
            
            246.7
            
            
            
            236.8
            
            
            
            238.2
            
            
            
            279.1
            
            
            
            309.2Inventories
            
            
            235.7
            
            
            
            245.0
            
            
            
            245.7
            
            
            
            258.1
            
            
            
            235.9
            
            
            
            242.7
            
            
            
            230.5Prepaids and
    other
            
            
            40.7
            
            
            
            15.4
            
            
            
            24.1
            
            
            
            24.6
            
            
            
            21.9
            
            
            
            9.2
            
            
            
            4.1489.5
            
            
            
            573.8
            
            
            
            516.5
            
            
            
            545.5
            
            
            
            496.0
            
            
            
            531.0
            
            
            
            683.0Property,
      plant and equipment
            
            
            1,912.8
            
            
            
            2,023.1
            
            
            
            2,139.3
            
            
            
            2,172.9
            
            
            
            2,290.2
            
            
            
            2,326.6
            
            
            
            2,416.4Other
      assets
            
            
            51.1
            
            
            
            40.8
            
            
            
            40.1
            
            
            
            27.5
            
            
            
            30.2
            
            
            
            39.5
            
            
            
            60.4$
            2,453.4
            
            
            $
            2,637.7
            
            
            $
            2,695.9
            
            
            $
            2,745.9
            
            
            $
            2,816.4
            
            
            $
            2,897.1
            
            
            $
            3,159.8Liabilities
              Current
      liabilitiesAccounts payable and accrued
      liabilities
            
            $
            268.2
            
            
            $
            291.5
            
            
            $
            278.6
            
            
            $
            284.8
            
            
            $
            266.6
            
            
            $
            303.0
            
            
            $
            303.5Current portion of long-term
      debt
            
            
            1.2
            
            
            
            1.8
            
            
            
            0.8
            
            
            
            0.7
            
            
            
            0.7
            
            
            
            0.7
            
            
            
            10.7269.4
            
            
            
            293.3
            
            
            
            279.4
            
            
            
            285.5
            
            
            
            267.3
            
            
            
            303.7
            
            
            
            314.2Long-term
      debt
            
            
            784.6
            
            
            
            858.7
            
            
            
            866.5
            
            
            
            828.4
            
            
            
            850.9
            
            
            
            891.6
            
            
            
            1,163.9Employee
      future benefits
            
            
            211.7
            
            
            
            187.2
            
            
            
            171.6
            
            
            
            165.2
            
            
            
            183.5
            
            
            
            163.7
            
            
            
            133.6Other
      long-term obligations
            
            
            26.9
            
            
            
            23.3
            
            
            
            33.5
            
            
            
            63.6
            
            
            
            61.2
            
            
            
            7.9
            
            
            
            11.1Future
      income taxes/deferred credits
            
            
            172.2
            
            
            
            269.4
            
            
            
            325.2
            
            
            
            360.4
            
            
            
            384.3
            
            
            
            405.5
            
            
            
            500.51,464.8
            
            
            
            1,631.9
            
            
            
            1,676.2
            
            
            
            1,703.1
            
            
            
            1,747.2
            
            
            
            1,772.4
            
            
            
            2,123.3Shareholders’
      equityShare
      capital
            
            
            913.9
            
            
            
            913.6
            
            
            
            913.6
            
            
            
            913.6
            
            
            
            913.6
            
            
            
            884.6
            
            
            
            673.1Contributed
      surplus
            
            
            12.1
            
            
            
            9.3
            
            
            
            7.3
            
            
            
            4.8
            
            
            
            –
            
            
            
            –
            
            
            
            –Retained
      earnings
            
            
            49.0
            
            
            
            82.9
            
            
            
            98.8
            
            
            
            124.4
            
            
            
            155.6
            
            
            
            240.1
            
            
            
            363.4Accumulated
      other comprehensive income1
            
            
            13.6
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –988.6
            
            
            
            1,005.8
            
            
            
            1,019.7
            
            
            
            1,042.8
            
            
            
            1,069.2
            
            
            
            1,124.7
            
            
            
            1,036.5$
            2,453.4
            
            
            $
            2,637.7
            
            
            $
            2,695.9
            
            
            $
            2,745.9
            
            
            $
            2,816.4
            
            
            $
            2,897.1
            
            
            $
            3,159.8





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Audited
and in millions of dollars)




Years
      ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002
            
            
            2001Cash
      provided (used) by:OperationsNet earnings
(loss)
            
            $
            (31.6
            )
            
            $
            (15.9
            )
            
            $
            (25.6
            )
            
            $
            (28.6
            )
            
            $
            (84.5
            )
            
            $
            (123.3
            )
            
            $
            44.5Items not requiring (providing)
      cashAmortization
            
            
            176.4
            
            
            
            183.7
            
            
            
            180.3
            
            
            
            184.1
            
            
            
            189.9
            
            
            
            178.5
            
            
            
            131.2Impairment or write-down on
      property, plantand
      equipment
            
            
            –
            
            
            
            23.4
            
            
            
            –
            
            
            
            –
            
            
            
            14.2
            
            
            
            –
            
            
            
            –Loss (gain) on disposal of
      property, plantand
      equipment
            
            
            13.6
            
            
            
            (1.1
            )
            
            
            1.6
            
            
            
            1.1
            
            
            
            0.7
            
            
            
            (0.3
            )
            
            
            30.2Future income
    taxes
            
            
            (100.7
            )
            
            
            (56.1
            )
            
            
            (51.6
            )
            
            
            (31.3
            )
            
            
            (67.9
            )
            
            
            (91.5
            )
            
            
            (7.7
            )Foreign exchange loss (gain) onlong-term
      debt
            
            
            (103.9
            )
            
            
            0.3
            
            
            
            (24.7
            )
            
            
            (53.5
            )
            
            
            (58.2
            )
            
            
            (12.3
            )
            
            
            17.1Employee future benefits, excess
      ofexpense
      over funding
            
            
            6.7
            
            
            
            6.4
            
            
            
            (0.2
            )
            
            
            5.2
            
            
            
            19.8
            
            
            
            13.9
            
            
            
            4.9Increase (decrease) in other
      long-term obligations
            
            
            7.5
            
            
            
            0.9
            
            
            
            (7.4
            )
            
            
            (11.4
            )
            
            
            (14.0
            )
            
            
            (11.6
            )
            
            
            –Non-controlling
      interest
            
            
            0.1
            
            
            
            1.5
            
            
            
            0.6
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Other
            
            
            (20.9
            )
            
            
            (6.3
            )
            
            
            (0.8
            )
            
            
            (6.4
            )
            
            
            (11.6
            )
            
            
            8.5
            
            
            
            14.8(52.8
            )
            
            
            136.8
            
            
            
            72.2
            
            
            
            59.2
            
            
            
            (11.6
            )
            
            
            (38.1
            )
            
            
            235.0Changes in non-cash working
      capital
            
            
            50.1
            
            
            
            (9.6
            )
            
            
            (11.5
            )
            
            
            (24.4
            )
            
            
            22.4
            
            
            
            25.8
            
            
            
            31.2Cash
      flows provided (used) by operations
            
            
            (2.7
            )
            
            
            127.2
            
            
            
            60.7
            
            
            
            34.8
            
            
            
            10.8
            
            
            
            (12.3
            )
            
            
            266.2InvestingAcquisition of paper recycling
      business
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (32.1
            )
            
            
            –
            
            
            
            –Acquisition of Pacifica Papers
      Inc.
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (74.1
            )Additions to property, plant and
      equipment
            
            
            (85.8
            )
            
            
            (93.2
            )
            
            
            (95.2
            )
            
            
            (68.0
            )
            
            
            (81.4
            )
            
            
            (82.2
            )
            
            
            (92.7
            )Proceeds from sale of marketable
      securities
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            39.2
            
            
            
            –Proceeds from sale of property,
      plantand
      equipment
            
            
            6.5
            
            
            
            3.5
            
            
            
            3.5
            
            
            
            0.5
            
            
            
            0.4
            
            
            
            1.5
            
            
            
            0.7Proceeds from sale of Mackenzie
      pulp operation
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            103.8Proceeds from termination of
      interest rate swaps
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            15.9
            
            
            
            3.4
            
            
            
            –Purchase price
      adjustment
            
            
            –
            
            
            
            4.3
            
            
            
            –
            
            
            
            26.6
            
            
            
            –
            
            
            
            –
            
            
            
            –Decrease (increase) in other
      assets
            
            
            (4.4
            )
            
            
            (0.4
            )
            
            
            (1.3
            )
            
            
            (0.9
            )
            
            
            1.1
            
            
            
            (4.4
            )
            
            
            1.6Cash flows used by investing
      activities
            
            
            (83.7
            )
            
            
            (85.8
            )
            
            
            (93.0
            )
            
            
            (41.8
            )
            
            
            (96.1
            )
            
            
            (42.5
            )
            
            
            (60.7
            )FinancingSpecial
    distribution
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (1,490.3
            )Dividends paid
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (37.2
            )Increase (decrease) in revolving
      loan andloan
      payable
            
            
            47.0
            
            
            
            (5.5
            )
            
            
            6.4
            
            
            
            (12.5
            )
            
            
            (105.7
            )
            
            
            119.1
            
            
            
            –Issue of long-term
      debt
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            333.1
            
            
            
            212.7
            
            
            
            –
            
            
            
            768.7Repayment of long-term
      debt
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (266.1
            )
            
            
            –
            
            
            
            (386.7
            )
            
            
            (240.9
            )Premium and expenses on repayment
      oflong-term
      debt
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (15.0
            )
            
            
            –
            
            
            
            –
            
            
            
            –Increase (decrease) in other
      long-term debt
            
            
            3.6
            
            
            
            (0.4
            )
            
            
            (0.2
            )
            
            
            (0.3
            )
            
            
            (0.3
            )
            
            
            6.1
            
            
            
            –Issue of common shares, net of
      share issue costs
            
            
            0.3
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (0.1
            )
            
            
            208.1
            
            
            
            –Increase (decrease) in other
      long-term obligations
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (15.7
            )
            
            
            3.4
            
            
            
            –Deferred financing
      costs
            
            
            –
            
            
            
            –
            
            
            
            0.1
            
            
            
            (6.2
            )
            
            
            (5.6
            )
            
            
            –
            
            
            
            (30.7
            )Cash flows provided (used) by
      financing activities
            
            
            50.9
            
            
            
            (5.9
            )
            
            
            6.3
            
            
            
            33.0
            
            
            
            85.3
            
            
            
            (50.0
            )
            
            
            (1,030.4
            )Cash
      and cash equivalents, increase (decrease)in
      the year
            
            
            (35.5
            )
            
            
            35.5
            
            
            
            (26.0
            )
            
            
            26.0
            
            
            
            –
            
            
            
            (104.8
            )
            
            
            (824.9
            )Cash
      and cash equivalents, beginning of year
            
            
            35.5
            
            
            
            –
            
            
            
            26.0
            
            
            
            –
            
            
            
            –
            
            
            
            104.8
            
            
            
            929.7Cash
      and cash equivalents, end of year
            
            $
            –
            
            
            $
            35.5
            
            
            $
            –
            
            
            $
            26.0
            
            
            $
            –
            
            
            $
            –
            
            
            $
            104.8





OTHER
FINANCIAL AND OPERATIONAL INFORMATION


(In
millions of dollars, except where otherwise stated)




Years
      ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002
            
            
            2001Selected
      financial informationEBITDA1,
      10
            
            $
            27.0
            
            
            $
            211.0
            
            
            $
            155.2
            
            
            $
            152.8
            
            
            $
            78.3
            
            
            $
            56.6
            
            
            $
            210.9EBITDA margin2
            
            
            1.6
            %
            
            
            11.2
            %
            
            
            8.5
            %
            
            
            8.1
            %
            
            
            4.3
            %
            
            
            3.3
            %
            
            
            13.5
            %Weighted average common shares
      outstanding(in
      millions)
            
            
            214.7
            
            
            
            214.6
            
            
            
            214.6
            
            
            
            214.6
            
            
            
            206.6
            
            
            
            193.4
            
            
            
            141.1Basic and diluted earnings
      (loss) per share (in dollars)
            
            $
            (0.15
            )
            
            $
            (0.07
            )
            
            $
            (0.12
            )
            
            $
            (0.13
            )
            
            $
            (0.41
            )
            
            $
            (0.64
            )
            
            $
            0.32Working capital3
            
            $
            221.3
            
            
            $
            282.3
            
            
            $
            237.9
            
            
            $
            260.7
            
            
            $
            229.4
            
            
            $
            228.0
            
            
            $
            379.5Current assets to current
      liabilities3
            
            
            1.83
            
            
            
            1.97
            
            
            
            1.85
            
            
            
            1.92
            
            
            
            1.86
            
            
            
            1.75
            
            
            
            2.25Total debt to total
      capitalization4,
      5
            
            
            44
            %
            
            
            46
            %
            
            
            46
            %
            
            
            44
            %
            
            
            44
            %
            
            
            44
            %
            
            
            53
            %Net debt to net
      capitalization6,
      7
            
            
            44
            %
            
            
            45
            %
            
            
            46
            %
            
            
            43
            %
            
            
            44
            %
            
            
            44
            %
            
            
            51
            %Common shares outstanding at end
      of year (in millions)
            
            
            214.7
            
            
            
            214.6
            
            
            
            214.6
            
            
            
            214.6
            
            
            
            214.6
            
            
            
            205.9
            
            
            
            174.8Book value per share (in
      dollars)
            
            $
            4.60
            
            
            $
            4.69
            
            
            $
            4.75
            
            
            $
            4.86
            
            
            $
            4.98
            
            
            $
            5.46
            
            
            $
            5.93Average spot rate
      (US$/CDN$)8
            
            
            0.930
            
            
            
            0.882
            
            
            
            0.825
            
            
            
            0.768
            
            
            
            0.714
            
            
            
            0.637
            
            
            
            0.646Share
      pricesHigh
            
            $
            4.31
            
            
            $
            3.60
            
            
            $
            4.26
            
            
            $
            4.95
            
            
            $
            6.06
            
            
            $
            7.70
            
            
            $
            11.89Low
            
            
            1.19
            
            
            
            2.40
            
            
            
            2.40
            
            
            
            3.30
            
            
            
            2.93
            
            
            
            4.65
            
            
            
            5.30Close
            
            
            1.57
            
            
            
            3.55
            
            
            
            3.07
            
            
            
            3.77
            
            
            
            4.17
            
            
            
            5.45
            
            
            
            6.80Benchmark
      prices9SC-A paper, 35 lb. (US$ per
      ton)
            
            $
            753
            
            
            $
            788
            
            
            $
            769
            
            
            $
            713
            
            
            $
            675
            
            
            $
            669
            
            
            $
            807LWC paper, No. 5, 40 lb. (US$
      per ton)
            
            
            786
            
            
            
            836
            
            
            
            847
            
            
            
            726
            
            
            
            688
            
            
            
            678
            
            
            
            803Telephone directory paper, 22.1
      lb. (US$ per ton)
            
            
            740
            
            
            
            721
            
            
            
            675
            
            
            
            650
            
            
            
            654
            
            
            
            695
            
            
            
            730Newsprint 48.8 gsm, average West
      Coast delivery(US$
      per tonne)
            
            
            579
            
            
            
            649
            
            
            
            600
            
            
            
            544
            
            
            
            493
            
            
            
            456
            
            
            
            578NBSK pulp, Northern Europe
      delivery (US$ per tonne)
            
            
            800
            
            
            
            681
            
            
            
            611
            
            
            
            618
            
            
            
            525
            
            
            
            458
            
            
            
            531White-top linerboard, 42 lb.,
      Eastern U.S.delivery(US$
      per ton)
            
            
            697
            
            
            
            673
            
            
            
            608
            
            
            
            591
            
            
            
            547
            
            
            
            570
            
            
            
            594Sales
      (000 tonnes)Specialty paper
            
            
            1,055
            
            
            
            990
            
            
            
            943
            
            
            
            994
            
            
            
            967
            
            
            
            848
            
            
            
            472Newsprint
            
            
            496
            
            
            
            699
            
            
            
            707
            
            
            
            755
            
            
            
            769
            
            
            
            750
            
            
            
            604Pulp
            
            
            603
            
            
            
            626
            
            
            
            603
            
            
            
            528
            
            
            
            539
            
            
            
            493
            
            
            
            669




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


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


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


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


5
            Total
      capitalization comprises total debt and shareholders’
    equity.


6
            Net
      debt comprises total debt less cash on
hand.


7
            Net
      capitalization comprises net debt and shareholders’
  equity.


8
            Average
      spot rate is the average Bank of Canada noon spot rate over the reporting
      period.


9
            Benchmark
      selling prices are sourced from
RISI.


10
            For
      EBITDA before specific items, refer to the “Non-GAAP Measures” section in
      Management’s Discussion and
Analysis.