**CATALYST
        PAPER CORPORATION**
 
 
 
 ANNUAL
        INFORMATION FORM
 
 
 FEBRUARY 9, 2007
 
 
 
 
 
  *Table
            of Contents*
   
 
 
 **TABLE
        OF CONTENTS**
 
 
 Documents
                  Incorporated by Reference
              1Glossary
                  of Terms
              1Forward
                  Looking Statements
              1Incorporation
              2Corporate
                  Profile
              3Three
                  Year History
              4Competitive
                  Strengths
              6Business
                  Strategy
              7Lines
                  of Business
              8Competition
              15Fibre
                  Supply
              15Properties
              16Human
                  Resources
              17Environment
              17Social
                  Responsibility
              19Research
                  and Development
              21Capital
                  Expenditures
              21Capital
                  Structure
              22Foreign
                  Operations
              22Risk
                  Factors
              22Legal
                  Proceedings
              22Dividends
              22Ratings
              22Market
                  for Securities
              24Material
                  Contracts
              24Transfer
                  Agent and Registrar
              25Audit
                  Committee Information
              25Corporate
                  Governance
              29Directors
                  and Officers
              29Experts
              31Additional
                  Information
              31Glossary
              32
 
  *Table
            of Contents*
   
  **CATALYST
        PAPER CORPORATION**
  **ANNUAL
        INFORMATION FORM**
  **(with
        respect to the year ended December 31, 2006)**
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
  Certain
        specifically identified sections of the audited consolidated financial
        statements of Catalyst Paper Corporation for the fiscal year ended December
        31,
        2006 (the “2006 Financial Statements”), the report of the auditors thereon dated
        February 9, 2007 and management’s discussion and analysis thereof (the “2006
        Annual Report”) filed with the securities commission or similar authority in
        each of the provinces of Canada, are incorporated by reference into and form
        an
        integral part of this Annual Information Form. The Annual Report is available
        on
        SEDAR at www.sedar.com.
  **GLOSSARY
        OF TERMS**
  In
        this
        Annual Information Form, unless otherwise specified, “Catalyst”, the
“Corporation”, “we”, “us”, and “our” refer to Catalyst Paper Corporation and its
        subsidiaries and affiliates. Unless otherwise indicated, all dollar amounts
        are
        expressed in Canadian dollars.
  A
        Glossary of Terms is included on page 31.
  **FORWARD
        LOOKING STATEMENTS**
  Certain
        statements contained in this Annual Information Form are forward-looking.
        Forward-looking statements are statements, other than statements of historical
        fact, that address or discuss activities, events or developments that we
        expect
        or anticipate may occur in the future. These forward-looking statements can
        be
        identified by use of words such as “anticipate”, “could”, “expect”, “seek”,
“may”, “likely”, “intend”, “will”, “believe” and similar expressions or the
        negative thereof.
  These
        forward-looking statements reflect management’s current views and are based on
        certain assumptions including assumptions as to future economic conditions
        and
        courses of action, as well as other factors management believes are appropriate
        in the circumstances. Such forward-looking statements are subject to risks
        and
        uncertainties and no assurance can be given that any of the events anticipated
        by such statements will occur or, if they do occur, what benefit we will
        derive
        from them. A number of factors could cause actual results, performance or
        developments to differ materially from those expressed or implied by such
        forward-looking statements, including:
  ·
            the
                prices, consumption of, and demand for, our
                products;  ·
            future
                capital expenditures (including the amount and nature of the expenditures)
                and the results of the expenditures;  ·
            business
                strategies and measures to implement
                strategies;  ·
            competitive
                strengths, goals, expansion and growth of our business and
                operations;  ·
            fluctuations
                in foreign exchange or interest rates; ·
            labour
                unrest;  ·
            fluctuations
                in the availability or costs of raw materials, including fibre and
                energy;  ·
            the
                impact of general economic conditions in the United States and Canada
                and
                in other countries in which we do
                business;  ·
            industry
                conditions, including the adoption of new environmental laws and
                regulations and changes in how they are interpreted and
                enforced;  ·
            the
                availability of qualified personnel or
                management;  ·
            the
                outcome of certain litigation or
                disputes;  ·
            conditions
                in the capital markets; and  other
        factors, many of which are beyond our control, including those factors
        identified under the heading “Risk Factors” in the management’s discussion and
        analysis section of the 2006 Annual Report, which is incorporated herein
        by
        reference.
  Our
        actual results, performance or achievements could differ materially from
        those
        expressed in, or implied by, these forward-looking statements and, accordingly,
        no assurance can be given that any of the events anticipated by the
        forward-looking statements will occur, or if any of them do so, what benefits,
        including the amount of proceeds, we will derive therefrom. Catalyst disclaims
        any intention or obligation to update or revise any forward-looking statements,
        whether as a result of new information, future events or otherwise.
  **INCORPORATION**
  We
        were
        formed on September 1, 2001 by the amalgamation under the *Canada
        Business Corporations Act* of
        Norske Skog Canada Limited and Pacifica Papers Inc. On October 3, 2005 we
        changed our name to Catalyst Paper Corporation.
  Catalyst’s
        principal predecessor was British Columbia Forest Products Limited, which
        was a
        company formed by the amalgamation under the laws of the Province of British
        Columbia on December 30, 1971 of its predecessor company, incorporated
        by certificate of incorporation, with memorandum and articles, under the
        laws of
        the Province of British Columbia on January 31 , 19 46, and
        24 of
        its wholly owned subsidiaries. On September 2, 1988, British Columbia
        Forest Products Limited changed its name to Fletcher Challenge Canada Limited.
        Prior to July 2000, 50.76% of Fletcher Challenge Canada Limited was owned
        by
        Fletcher Challenge Limited of New Zealand (“Fletcher Challenge New Zealand”). In
        July 2000, Norske Skogindustrier ASA completed a transaction with Fletcher
        Challenge New Zealand whereby all of the business and assets of Fletcher
        Challenge New Zealand’s paper division worldwide were acquired by Norske
        Skogindustrier ASA. As part of this transaction, Norske Skogindustrier ASA
        acquired Fletcher Challenge New Zealand’s 50.76% interest in Fletcher Challenge
        Canada Limited. On December 15, 2000, Fletcher Challenge Canada Limited changed
        its name to Norske Skog Canada Limited.
  As
        a
        result of the amalgamation with Pacifica Papers Inc. and subsequent equity
        issues, Norske Skogindustrier ASA’s interest in Catalyst decreased to 29.4%. On
        February 16, 2006 Norske Skogindustrier ASA sold its remaining 29.4% interest
        in
        Catalyst by way of a secondary offering.
  *Table
            of Contents*
  Pacifica
        Papers Inc.’s predecessor was Pacifica Papers Limited Partnership. On June 8,
        1998 Pacifica Papers Limited Partnership, through its indirect wholly owned
        subsidiary, Pacifica Papers Acquisition Company Ltd., acquired all the shares
        of
        MB Paper Limited from MacMillan Bloedel Limited. On March 12, 1999 the
        unitholders of Pacifica Papers Limited Partnership approved a reorganization
        pursuant to which Pacifica Papers Limited Partnership changed its corporate
        form
        from a partnership to a corporation. As part of this reorganization, 28,750,000
        common shares of Pacifica Papers Inc. were distributed to all the unitholders
        of
        Pacifica Paper Limited Partnership in exchange for their partnership units
        on a
        one for one basis.
  Our
        head
        and registered office is located at 250 Howe Street, 16 th Floor,
        Vancouver, British Columbia, V6C 3R8.
  We
        own
        all the issued and outstanding shares of the following principal
        subsidiaries:
  **Corporation**
              **Jurisdiction**Elk
                  Falls Pulp and Paper Limited
              British
                  ColumbiaCatalyst
                  Paper Finance Limited
              British
                  ColumbiaCatalyst
                  Paper Japan Ltd.
              JapanCatalyst
                  Pulp Operations Limited
              British
                  ColumbiaCatalyst
                  Pulp Sales Inc.
              British
                  ColumbiaCatalyst
                  Pulp and Paper Sales Inc.
              British
                  ColumbiaCatalyst
                  Paper (USA) Inc.
              CaliforniaCatalyst
                  Paper Holdings Inc.
              DelawarePacifica
                  Papers Sales Ltd.
              British
                  ColumbiaPacifica
                  Papers Sales Inc.
              DelawarePacifica
                  Poplars Ltd.
              British
                  ColumbiaPacifica
                  Poplars Inc.
              DelawarePacifica
                  Papers U.S. Inc.
              Delaware
  We
        are,
        along with our subsidiary Catalyst Pulp Operations Limited, a partner of
        the
        British Columbia general partnership Catalyst Paper. We also own 50% of Powell
        River Energy Inc., which owns hydroelectric assets that provide power to
        our
        Powell River mill.
  **CORPORATE
        PROFILE**
  We
        are
        the fourth largest North American based producer of newsprint and uncoated
        mechanical groundwood specialty papers measured by production capacity. We
        are
        the largest producer of mechanical coated and uncoated specialty papers and
        newsprint, measured by production capacity, and the only producer of lightweight
        coated paper, on the west coast of North America. We are the largest producer
        of
        lightweight uncoated groundwood (directory) paper in the world. We also produce
        market pulp and containerboard (previously referred to as “kraft paper”) and we
        operate the largest paper recycling operation in Western Canada.
  Our
        four
        pulp and paper operations are located in British Columbia, at Crofton and
        Campbell River (Elk Falls) on the east coast of Vancouver Island, Port Alberni
        on central Vancouver Island, and Powell River on the west coast of the British
        Columbia mainland. Our paper recycling operation is located in Coquitlam,
        British Columbia.
  *Table
            of Contents*
  The
        chart
        below represents our expectation as to the division of total mill capacity
        in
        2007, in thousands of tonnes, among the different product lines that can
        be
        produced at each mill. Some of our paper machines are capable of producing
        more
        than one paper product.
  **Mill**
              
              **Newsprint**
              
              **Directory
                  Paper**
              
              **Other
                  Uncoated Groundwood Specialties**
              
              **LWC
                  Paper**
              
              **Paper
                  Sub-total**
              
              **Market
                  Pulp(1)**
              
              **Container-board****(2)**
              
              **Pulp
                  Sub-total**
              
              **Total**Crofton
              
              
              156
              
              
              232
              
              
              -
              
              
              -
              
              
              388
              
              
              324
              
              
              -
              
              
              324
              
              
              712Elk
                  Falls
              
              
              354
              
              
              -
              
              
              178
              
              
              -
              
              
              532
              
              
              187
              
              
              127
              
              
              314
              
              
              846Port
                  Alberni
              
              
              -
              
              
              106
              
              
              -
              
              
              231
              
              
              337
              
              
              -
              
              
              -
              
              
              -
              
              
              337Powell
                  River
              
              
              107
              
              
              -
              
              
              353
              
              
              -
              
              
              460
              
              
              -
              
              
              -
              
              
              -
              
              
              460Total
              
              
              617
              
              
              338
              
              
              531
              
              
              231
              
              
              1,717
              
              
              511
              
              
              127
              
              
              638
              
              
              2,355
 
 (1)
            Our
                total pulp capacity is674,000tonnes, of which163,000tonnes is used internally, leaving 511,000 tonnes available to sell
                to
                third parties. (2)
            Effective
                January 1, 2006, we reclassified containerboard out of our specialty
                paper
                segment into our pulp segment.  In
        addition, our paper recycling operation has a production capacity of 148,000
        air-dried equivalent tonnes of pulp per year, the vast majority of which
        is
        consumed internally. After a project planned for mid-2007 is completed, this
        facility will have a new production capacity of 160,000 tonnes.
  Our
        principal business is the manufacture and sale of printing papers, consisting
        of
        groundwood coated, uncoated and specialty papers, and newsprint. For the
        year
        ended December 31, 2006, printing papers comprised approximately 73 %
        of our
        total manufacturing capacity and contributed approximately 77 %
        of our
        total sales revenues. For the same period, market pulp and containerboard
        comprised approximately 27%
        of
        our total manufacturing capacity and contributed approximately 23% of our
        total
        sales revenue.
  The
        principal markets for our paper products are located in North America, Asia
        and
        Latin America. The major markets for our market pulp are Western Europe and
        Asia.
  **THREE
        YEAR HISTORY**
  ***Resignations
        of Executive***
  On
        January 15, 2007, Catalyst’s board of directors accepted the resignations of
        President and Chief Executive Officer Russell J. Horner and Vice-President,
        Finance and Chief Financial Officer Ralph Leverton, both of whom elected
        to
        exercise their rights under change of control agreements, which were triggered
        by the acquisition referred to below under “Acquisition of Common Shares by
        Third Avenue Management LLC”. Mr. Horner’s resignation is effective following
        the completion of the filing of the Corporation’s annual statutory disclosure
        documents (expected to be mid-February 2007) and Mr. Leverton’s resignation is
        effective March 28, 2007.
  ***Acquisition
        of Common Shares by Third Avenue Management LLC***
  In
        October, 2006 Third Avenue Management LLC (“TAM”) acquired an additional
        39,000,000 common shares of Catalyst pursuant to an unsolicited take-over
        bid.
        On October 23, 2006 TAM announced that, as a result of such acquisition,
        client
        accounts managed by TAM beneficially own 81,503,313 common shares of Catalyst,
        representing 37.97% of the outstanding common shares, and that TAM exercises
        control or discretion over such shares as portfolio manager. TAM also announced
        that it has authority to vote approximately 95% of such shares.
  *Table
            of Contents*
  ***Curtailment
        of Port Alberni Groundwood Mill***
  Effective
        September 30, 2006 we temporarily idled our Port Alberni groundwood pulp
        mill,
        replacing higher-cost groundwood pulp with recycled fibre. In the fourth
        quarter, we determined that this closure was permanent due to the successful
        transition to recycled fibre and we wrote off approximately $0.8 million
        of
        ancillary assets to cost of sales in the specialty paper segment.
  ***Extension
        of Operating Facility***
  During
        the second quarter of 2006, the maturity of our revolving operating facility
        was
        extended by one year to July 2009.
  ***Disposition
        of Shares by Norske Skogindustrier ASA***
  Effective
        February 16, 2006, Norske Skogindustrier ASA (“Norske Skog”) sold its 29.4%
        shareholding in Catalyst. Concurrently, the three directors from Norske Skog
        resigned from our Board of Directors. Norske Skog had not been involved in
        the
        management of Catalyst since 2001, and the shareholder transaction did not
        impact our operations, or our current distribution agreement with Norske
        Skog
        PanAsia. We did not receive any proceeds related to this transaction.
  ***Reclassification
        of Containerboard***
  Effective
        January 1, 2006, we reclassified our containerboard product from our specialty
        paper segment to our pulp segment. The change was required as we reviewed
        our
        pulp operations and concluded that the containerboard business is inextricably
        linked to the pulp business. Segmented information for prior periods has
        been
        reclassified to reflect this change. Effective December 31, 2006, we have
        stopped using the term kraft paper and instead refer to this product as
        containerboard.
  ***Change
        of Corporate Name***
  On
        October 3, 2005 we changed our name from Norske Skog Canada Limited to Catalyst
        Paper Corporation.
  ***Dissolution
        of Joint Venture***
  Effective
        October 1, 2005 we dissolved a joint venture arrangement with Norske Skog,
        which
        was formed in 2001 to collectively market our specialty paper products in
        North
        America. As a result of this dissolution, we began marketing our specialty
        papers directly to North American customers.
  ***Paper
        Capacity Reduction***
  In
        February, 2005 we indefinitely shut down paper machine No. 3 at our Port
        Alberni
        mill. This effectively displaced 140,000 tonnes per year of 45.0 gsm equivalent
        paper production as we shifted the directory production from this machine
        to
        other paper machines that we own. In March 2006, we undertook an operational
        review of this paper machine and its ancillary assets and decided to permanently
        close the machine. The closure, impacting the equivalent of 140,000 tonnes
        of
        previously idled newsprint capacity, resulted in a $19.1 million impairment
        loss
        that was recorded in newsprint amortization expense in the year.
  *Table
            of Contents*
  ***Recovery
        Boiler Upgrade***
  In
        April,
        2004 we completed a $45 million upgrade of our Elk Falls No. 2 recovery
        boiler.
  ***Financing***
  In
        March,
        2004 we issued US$250,000,000 aggregate principal amount of 7 3/8% Senior
        Notes
        due 2014. The proceeds of these Notes were used to retire our outstanding
        US$200,000,000 principal amount of 10% Senior Notes due 2009.
  **COMPETITIVE
        STRENGTHS**
  We
        believe that we have the following competitive strengths:
  •
              Strong
                  Market Position.
                  We are the fourth largest producer of newsprint and uncoated groundwood
                  specialty papers based in North America measured by production
                  capacity.
                  We are also the largest producer of mechanical coated and uncoated
                  specialty papers and newsprint, measured by production capacity,
                  and the
                  only producer of lightweight coated paper, on the west coast of
                  North
                  America. We are the largest producer of directory paper in the
                  world. We
                  have annual production capacity of approximately2.4million tonnes
                  of specialty paper, newsprint, market pulp and containerboard.
                  In
                  addition, we operate the largest paper recycling operation in Western
                  Canada.
  •
              Diversified
                  Product Mix.
                  In recent years, we have introduced or expanded a number of specialty
                  and
                  differentiated product lines, including lightweight newsprint grades,
                  coated papers, machine finished hi-brites, super hi-brites,
                  soft-calendered grades, directory, sawdust-based pulp and whitetop
                  linerboard. These specialized products generally provide improved
                  margins
                  over standard commodity grades. Additionally, market pulp accounts
                  for
                  only22%
                  of our manufacturing capacity, significantly reducing our exposure
                  to
                  volatile pulp markets.
  •
              Upgraded,
                  Cost-Competitive Manufacturing Facilities.
                  Over the last five years, we have invested approximately $419million
                  in our manufacturing facilities to shift production towards higher
                  margin
                  papers, reduce unit production costs, increase operating efficiency,
                  improve product quality, increase capacity and meet environmental
                  regulations.
  •
              Strong
                  Supply Chain Management Practices.
                  We introduced new supply chain systems in 2000 to improve our supply
                  chain
                  and order fulfillment processes. These processes range from the
                  purchase
                  of raw materials to the delivery of finished paper products to
                  our
                  customers. These new systems have allowed us to increase inventory
                  turnover and provide faster delivery to customers. We also make
                  better use
                  of the barges, rail cars, trucks and containers that we use to
                  ship our
                  products. With better planning and scheduling, we are now able
                  to ship our
                  products to customers using the most cost-efficient mode of transportation
                  on virtually every shipment. Following the acquisition of Pacifica
                  Papers
                  Inc. in 2001, we harmonized our order fulfillment systems to better
                  service our customers' requirements. We have applied our order
                  fulfillment, distribution and procurement expertise to further
                  lower the
                  supply chain costs at our Powell River and Port Alberni facilities.
                  In
                  2006, we completed an upgrade of our enterprise business system
                  with the
                  primary focus on improving order
                  visibility.
  *Table
            of Contents*
  •
              Production
                  Expertise.
                  Over the last several years, we have developed expertise in the
                  production
                  of lightweight papers. As part of this process we have converted
                  all our
                  paper mills to alkaline papermaking, which uses lower-cost precipitated
                  calcium carbonate, or PCC, fillers in the production process. In
                  addition
                  to being a lower-cost input, the PCC filler leads to improved brightness
                  and opacity, which facilitates the production of papers with a
                  lower basis
                  weight. We believe that lower basis weight papers provide us with
                  an
                  important competitive advantage because a higher volume of lower
                  basis
                  weight paper can be stored on each paper roll, thereby reducing
                  shipping,
                  storage and handling costs and warehouse space required for inventories.
                  The use of lower basis weight paper by our customers reduces their
                  postage
                  costs. Lower basis weight papers also provide a positive environmental
                  impact as they use less fibre.
  •
              Sawdust
                  Pulp Expertise.
                  We are one of the few manufacturers of sawdust-based pulp in the
                  world.
                  This product is valued by producers of tissue and wood-free printing
                  papers as a substitute for more costly NBSK pulp. High initial
                  tensile
                  strength and ease of refining are other attributes of this type
                  of pulp.
  **BUSINESS
        STRATEGY**
  We
        intend
        to achieve greater earnings stability and to maximize cash flow by strengthening
        our position as a leading producer of value-added paper and related forest
        products within Western North America. Key principles of our strategy include:
  •
              Performance
                  Improvement Program.
                  We will continue to seek to implement performance improvement initiatives
                  through our efforts to develop innovative and cost effective business
                  solutions. In 2006, we commenced our fifth consecutive annual performance
                  improvement initiative. This initiative generated $74million in earnings improvements across all areas, year over year.
                  We
                  realized improvements in the areas of grade development and product
                  optimization, as well as cost reductions.For
                  example, we have improved our production planning and focused on
                  lower
                  cost forms of transportation to ship our products. To deal with
                  rising
                  energy costs, we worked on optimizing the fuel mix in our power
                  boilers,
                  resulting in less reliance on fossil fuels in favour of lower cost
                  wood
                  waste hog fuel. We also took advantage of our ability to alternate
                  between
                  oil and natural gas at several mill sites, allowing us to consume
                  lower
                  cost fuels.
  •
              Product
                  Development.
                  We plan to increase profitability within our paper operations by
                  continuing to improve our recently developed high-value specialty
                  paper
                  products. In 2005, we completed the development of two new grades,
                  ElectraprimeTMand ElectrastarTM.
                  Our ElectraprimeTMgrade is a soft-calendered high-brightness paper designed to compete
                  as an
                  alternative to supercalendered grades used primarily for advertising
                  flyers and inserts. Our ElectrastarTMproduct is a super high-brightness grade designed for applications
                  in
                  which brightness is a desirable characteristic such as inserts
                  and
                  specialty newspapers. Both products have been well received in
                  the market.
                  We intend to continue to aggressively promote them while exploring
                  other
                  product development opportunities using the knowledge gained in
                  developing
                  these specialty grades. We have also made minor capital investments
                  that
                  have facilitated our growth into the roto-news grade family to
                  command a
                  margin improvement over standard
                  newsprint.
  *Table
            of Contents*
  •
              Optimizing
                  Fibre Mix to Reduce Costs.
                  We intend to continue to use low cost PCC filler and to sustain
                  low kraft
                  input while maintaining the quality of our products and improving
                  printability. In 2005, we reduced the amount of kraft used in our
                  specialty and newsprint products by 40% compared to 2004 and sustained
                  these low kraft levels in 2006. In December 2003, we acquired Western
                  Canada’s largest paper recycling facility. This acquisition allowed us
                  to
                  exit a higher-cost, long term de-inked pulp contract with the facility’s
                  previous owner. Subsequently, we have improved the value of this
                  acquisition by utilizing an additional 25,000 air-dried metric
                  tonnes of
                  production capability and by realizing synergies related to chemical
                  purchases and freight optimization.
  •
              Become
                  the Preferred Supplier for our Customers.
                  We are working on initiatives to continue to improve product quality,
                  service levels, distribution and customer relationships. Our plan
                  is to
                  seek to differentiate ourselves from our competitors by becoming
                  a trusted
                  supplier that consistently produces reliable products. In 2006,
                  all of our
                  paper and pulp mills were certified under the PricewaterhouseCoopers
                  standard, which identifies the source of our wood fibre and certifies
                  whether or not it is derived from a forest managed in accordance
                  with a
                  recognized sustainable forest certification
                  system.
  **LINES
        OF BUSINESS**
  We
        have
        three business segments: specialty paper, newsprint and pulp. The segmented
        results for these businesses are shown in our 2006 Management’s Discussion and
        Analysis, which is incorporated by reference herein.
  ***Paper***
  Paper
                  Operations
  Our
        specialties paper and newsprint can be manufactured on 11 paper machines
        at four
        mill locations. Our paper machines consist of the following:
  Crofton
              ProductPaper
                  Machine No. 1 (“PM1”)
              Specialty/NewsprintPaper
                  Machine No. 2 (“PM2”)
              SpecialtyPaper
                  Machine No. 3 (“PM3”)
              Specialty/NewsprintElk
                  Falls
              ProductPaper
                  Machine No. 1 (“PM1”)
              Specialty/NewsprintPaper
                  Machine No. 2 (“PM2”)
              SpecialtyPaper
                  Machine No. 5 (“PM5”)
              NewsprintPort
                  Alberni
              ProductPaper
                  Machine No. 4 (“PM4”)
              SpecialtyPaper
                  Machine No. 5 (“PM5”)
              Specialty
                  (Coated)Powell
                  River
              ProductPaper
                  Machine No. 9 (“PM9”)
              SpecialtyPaper
                  Machine No. 10 (“PM10”)
              SpecialtyPaper
                  Machine No. 11 (“PM11”)
              Specialty/Newsprint
  *Table
            of Contents*
  Our
        capacity to produce specialty papers and newsprint, in thousands of tonnes,
        as compared to our production for each of the last two years is as
        follows:
 
 **Annual
                  Capacity**
              
              **Production(1)**
                **Year
                  ended December 31****Mill**
              
              
              
              **2006**
              
              **2005**Crofton
              
              
              388
              
              
              403
              
              
              391Elk
                  Falls
              
              
              532
              
              
              523
              
              
              513Port
                  Alberni
              
              
              337
              
              
              324
              
              
              332Powell
                  River
              
              
              460
              
              
              438
              
              
              4121,717
              
              
              1,688
              
              
              1,648
 
 (1)
            Effective
                January 1, 2006, we reclassified containerboard out of our specialty
                paper
                segment into our pulp segment. Prior period comparatives have been
                reclassified to reflect this change.  *Crofton*
  Crofton's
        capacity is 388,000 tonnes of newsprint and directory paper. On a
        48.8 gsm equivalent basis the annual capacity of the Crofton paper
        operations is approximately 516,000 tonnes.
  The
        Crofton paper mill’s three paper machines were put in operation in 1964, 1968
        and 1982. Each of the paper machines is capable of producing either newsprint
        or
        directory paper, as market conditions warrant. All machines were installed
        with,
        or have been converted to, twin-wire sheet formation, which provides a more
        uniform quality of sheet for both printing surfaces.
  To
        further our objective to produce highly runnable directory paper, we completed
        $16 million in modifications to PM2 in May 1999. These modifications
        enable the Crofton mill to produce an innovative directory paper at the lowest
        industry basis weight. This directory paper has improved consistency,
        runnability and printability. Crofton also makes directory paper on PM3 and
        has
        the capability to make it on PM1 if required.
  Pulp
        furnish for the paper mill is supplied by a three-line thermomechanical pulp
        (“TMP”) mill, consisting of Andritz twin mainline refiners, and de-inked pulp
        from our paper recycling division. In August 2003, we completed an $11 million
        upgrade to increase the capacity of the TMP facility and improve the quality
        of
        the pulp in order to lower production costs for lightweight paper manufactured
        at the Crofton mill. In 2004 we began work on a $10 million investment in
        the
        thermomechanical pulp facility. This work was completed in 2005 and has resulted
        in improvements in capacity, quality, and the elimination of kraft pulp from
        Crofton’s papermaking operations.
  Of
        the
        $16 million spent in 2006 to support Crofton’s paper operations, the largest
        project was an initiative to change the way de-inked pulp was shipped to
        and
        handled at the mill. This project will be completed in mid-2007 ($2.7 million
        was spent on the project in 2006). The project will allow operations to switch
        from handling baled de-inked pulp to handling de-inked pulp in crumb form,
        resulting in less intensive handling of de-inked pulp and a reduction in
        operating labor.
  *Elk
                  Falls*
  Elk
        Falls' annual capacity is 532,000 tonnes of newsprint and high brightness
        uncoated specialties. On a 48.8 gsm equivalent basis, the annual capacity
        of the Elk Falls paper operations is approximately
        556,000 tonnes.
  *Table
            of Contents*
  The
        three
        paper machines were put into operation in 1952, 1957 and 1982 and produce
        newsprint, soft calendered and machine finished high brightness specialties
        papers. All machines were installed with, or converted to, twin-wire sheet
        formation.
  Elk
        Falls
        has broadened its range of uncoated groundwood specialty papers to meet the
        needs of commercial printers. The mill has met the demand for better quality
        through equipment upgrades to produce a cleaner, more refined pulp furnish.
        The
        soft-nip calendering system on PM2 provides for improvements to the sheet’s
        smoothness and printability. High bright specialty papers marketed under
        the
        ElectraSoft TM and
        ElectraCal TM
        l abels
        produced from this machine are used mainly by the commercial print market
        for
        advertising flyers and newspaper supplements. We are the largest supplier
        of
        soft-calendered papers on the west coast of North America.
  Pulp
        furnish for the paper mill is supplied primarily from the mill's seven-line
        thermomechanical pulp mill and a minimal amount from its semi-bleached kraft
        pulping facilities.
  *Port
                  Alberni*
  Port
        Alberni's annual capacity is 337,000 tonnes of directory paper and
        lightweight coated paper. Port Alberni's annual paper capacity on a
        48.8 gsm equivalent basis is approximately 352,000 tonnes.
  The
        Port
        Alberni paper mill has three paper machines. Two of the paper machines were
        put
        into operation in 1957, with the third paper machine put into operation in
        1968.
        In March, 2006 we permanently shut down PM3. Curtailment of this machine
        effectively displaced 140,000 tonnes per year of 45.0 gsm equivalent paper
        production.
  PM5
        is
        the only lightweight coated paper machine in western North America. Its on-line
        technology allows for the coating of paper on both sides simultaneously,
        reduces
        the amount of kraft pulp required to produce conventional lightweight coated
        paper and produces the desired product quality in terms of runnability,
        printability and bulk.
  Pulp
        furnish for the paper mill is supplied primarily from the mill's
        thermomechanical pulp plant, from our paper recycling operation and from
        kraft
        pulp supplied from the Crofton mill. In 2006, we announced the permanent
        closure
        of the groundwood pulp mill. The groundwood pulp was replaced with recycled
        fibre from our paper recycling operation. We have installed equipment at
        the
        Port Alberni mill to allow us to use recycled fibre in telephone directory
        paper
        and crumb kraft pulp from the Crofton mill .
  *Powell
                  River*
  Powell
        River's annual capacity is 460,000 tonnes of newsprint and uncoated
        groundwood specialty paper. On a 48.8 gsm equivalent basis, the annual capacity
        of Powell River’s paper operations is approximately 457,000 tonnes.
  The
        Powell River mill has three paper machines, which were put into operation
        in
        1957, 1967 and 1981. These machines produce hi-brite, uncoated groundwood
        specialty papers and newsprint. In 2004, we completed a $7.5 million upgrade
        of
        PM10 and the peroxide bleach plant to support the production of higher value
        groundwood specialty paper, including Electracal TM and our
        newest Electraprime TM grade.
        We have dedicated PM9
        to
        produce highbrightness Electrastar TM and
        Electrabrite TM grades .
        We
        continue our effort to push towards the development of highbrightness products
        at our Powell River mill, and in 2005 we completed a further upgrade of the
        peroxide bleach plant at a cost of approximately $5 million to expand the
        mill’s
        production capacity for higher brightness uncoated specialty
        grades.
  *Table
            of Contents*
  In
        2006,
        Powell River completed a $5.6 million project to by-pass the existing primary
        effluent clarifier which, because of reductions in mill effluent flows over
        the
        years, was too large to efficiently process that effluent. This
        environmentally-driven project was based on reducing the foul odors which
        emanated from the over-sized clarifier.
  Pulp
        furnish for the paper mill comes primarily from a thermomechanical pulp plant.
        In November, 2001, we permanently closed Powell River’s kraft pulp mill, which
        consumed a high-cost fibre diet resulting in higher unit costs compared to
        our
        other two pulp mills at Elk Falls and Crofton. In addition, the pulp mills
        at
        Elk Falls and Crofton have roughly twice the capacity of the Powell River
        pulp
        mill. We now supply the kraft pulp requirements of the paper machines at
        Powell
        River from our Crofton facilities.
  The
        Powell River mill has the capability to use recycled de-inked pulp on a limited
        scale. Recycled de-inked pulp is supplied from our paper recycling operation.
  We
        own
        50% of Powell River Energy Inc., or Powell River Energy, which owns two
        hydroelectric dams near the Powell River mill with a combined generating
        capacity of 82 megawatts. Pursuant to a power purchase agreement between us
        and Powell River Energy, Powell River Energy will provide the power generated
        by
        its facilities to us at a fixed rate approximating current British Columbia
        Hydro and Power Authority rates until 2011. Powell River Energy's hydroelectric
        facilities supply approximately 40% **** of
        the
        annual power needs of the Powell River mill, although this amount varies
        depending on hydrological conditions.
  Paper
                  Marketing
  The
        principal customers for our specialty papers and newsprint are retailers,
        magazine and catalogue publishers, commercial printers, telephone directory
        publishers, corrugated box manufacturers and newspaper publishers, and are
        located primarily in western and central North America, Asia and Latin America.
        Specialty and newsprint
        customers are
        served primarily by our sales and marketing personnel in North America and
        Japan
        and distributors and agents in other geographic markets. Historically,
        approximately two-thirds of our paper sales revenue has been generated from
        sales to customers in the United States. The United States is the world's
        largest consumer of newsprint, with consumption of approximately
        8.8 million tonnes in 2006, representing about 23.6% of total world
        consumption.
  For
        the
        years ended December 31, 2006 and 2005, specialty paper and newsprint
        accounted for 77 %
        and 85%
        of our consolidated net sales revenue, respectively. No single customer accounts
        for more than 10% of our specialty and newsprint consolidated net sales revenue
        nor is a material part of our revenues **** dependent
        on a small group of customers. Specialty paper and newsprint
        markets are not
        subject to significant seasonal fluctuations.
  The
        Crofton and Elk Falls mills are located on tidewater and have deep-sea vessel
        loading facilities. Specialty paper and newsprint is shipped primarily by
        deep-sea vessel, and by a combination of ship, barge, rail and truck for
        inland
        destinations. We use the services of independent warehouses for distribution
        to
        our customers in other parts of the world.
  We
        have
        built effective long-term relationships with our customers for our specialty
        papers and newsprint, based on a partnership approach to produce the best
        product for their particular needs. As a result, we expect to remain a preferred
        supplier to many of those customers.
  *Table
            of Contents*
  ***Pulp***
  Pulp
                  Operations
  We
        manufacture market pulp at our Crofton pulp and paper mill and both market
        pulp
        and containerboard at our Elk Falls pulp and paper mill, located in British
        Columbia on the east coast of Vancouver Island.
  Our
        market pulp and containerboard capacity, in thousands of tonnes, as
        compared to our production for each of the last two years is as follows:
  **Year
                  ended December 31****Mill**
              **Annual
                  Capacity**
              
              **2006
                  Production****(2)**
              **2005
                  Production****(2)**Market
                  pulp(1)
              
              Crofton
              324
              
              321
              301Elk
                  Falls
              187
              
              178
              173511
              
              499
              474Containerboard(2)
              
              Elk
                  Falls
              127
              
              125
              117Total
              
              
              638
              
              624
              591
 
 (1)
            Our
                total pulp capacity is 674,000 tonnes, of which 163,000 tonnes is
                used
                internally, leaving 511,000 tonnes available for sale to third
                parties. (2)
            Effective
                January 1, 2006, we reclassified containerboard out of our specialty
                paper
                segment into our pulp segment. Prior period comparatives have been
                reclassified to reflect this change.  *Crofton*
  The
        Crofton kraft pulp mill is a two-line mill. The first line began operating
        in
        1957 and the second in 1965. At December 31, 2006 total annual pulp production
        capacity was 392,000 tonnes, of which 324,000 tonnes was market pulp capacity.
        This mill is equipped with one continuous digester and eight batch digesters,
        which provide the flexibility to cook different species of chips independently.
        Crofton's batch digesters utilize a rapid displacement heating cooking system.
        This system allows for quick turnaround in the batch cooking process, because
        it
        rapidly extracts and replaces the cooking liquor in the cooking vessel for
        each
        batch without a significant loss in temperature. This technology improves
        the
        overall quality of Crofton pulps and provides a stronger and more uniform
        pulp
        than conventional cooking.
  The
        Crofton kraft pulp mill produces Northern bleached softwood kraft, or NBSK
        pulp
        grades. One grade is a low coarseness fine fibre pulp. This pulp is consumed
        internally at our Port Alberni and Powell River operations and sold to market
        customers. This pulp is a high tensile grade which is ideally suited for
        the
        manufacture of lightweight papers. The other pulp grades produced are made
        from
        spruce, pine and fir (SPF), coastal hemlock and Douglas fir fibre species.
        This
        pulp has high intrinsic strength and bulk, and is used in a variety of printing
        and writing papers and a range of specialty papers.
  In
        2005
        we spent $3 million at our Crofton kraft pulp mill to install a crumb pulp
        handling process, reducing energy use on the kraft pulp used internally.
        This
        installation has allowed us to free up drying capacity for our market pulp
        business and, as a result, we are able to produce an additional 25,000 tonnes
        of
        market pulp a year.
  *Table
            of Contents*
  *Elk
                  Falls*
  The
        Elk
        Falls kraft pulp mill was initially commissioned in 1956, and its sawdust-based
        pulp production began in 1964. The mill has been extensively modernized over
        recent years to meet or exceed current environmental standards and to improve
        operating efficiency and costs.
  The
        Elk
        Falls kraft pulp mill is equipped with five batch digesters and two continuous
        digesters and has a total annual market pulp capacity of 187,000 tonnes.
        The mill manufactures a sawdust-based pulp branded Elk Prime TM .
        Elk
        Prime TM is a
        fully bleached pulp that is manufactured from a combination of sawdust, wood
        shavings and chip screenings. Blending of these residuals produces a pulp
        with
        an average fibre length between that of conventional softwood and hardwood
        pulps. Elk Prime TM is easy
        to refine, delivers high initial tensile strength and, when added to a paper
        makers’ furnish, enhances dimensional stability in woodfree printing papers.
        Manufacturers of products such as specialty papers, tissue, paper toweling,
        printing and writing and other paper products can substitute Elk
        Prime TM for
        portions of their conventional NBSK pulp feedstock, realizing cost savings
        and,
        in many cases, improved quality. Sawdust-based pulps have an added environmental
        advantage in that they are made from fibre that would otherwise have been
        a
        waste product. Elk Falls uses some sawdust-based pulp in producing its specialty
        brands of white-top linerboard, which are sold to customers who manufacture
        corrugated containers that require high quality graphics.
  All
        of
        the kraft pulp operations are equipped with chlorine dioxide bleaching systems
        and secondary effluent treatment facilities and are presently operating in
        substantial compliance with applicable environmental laws and regulations.
  The
        Elk
        Falls mill has annual containerboard production capacity of approximately
        127,000 tonnes. The containerboard machine was put into operation in 1966.
        Whitetop linerboard, which is produced by the containerboard specialties
        machine
        (PM4), is a premium product that combines a layer of unbleached kraft pulp
        with
        a layer of bleached kraft pulp. The two layers are formed on the paper machine
        by uniting the bleached and unbleached stock into what is known as a duplex
        stock. This specialty product is white on the top and brown on the reverse
        side
        and is used in packaging where bright, high quality graphics are important.
        Elk
        Falls’ competitive advantage in producing this product stems from its ability to
        produce a lightweight, high-performance sheet. The inclusion of sawdust-based
        pulp in the furnish also results in a smoother, more consistent surface which
        performs better in customers’ conversion facilities.
  Production
        of whitetop linerboard grades totaled approximately 119,000 **** tonnes,
        or 94%, of production from the Elk Falls containerboard machine for the year
        ended December 31, 2006. The majority of this product is marketed under the
        brand name SilverLiner TM .
  The
        furnish for the containerboard specialties produced at Elk Falls is comprised
        of
        long-fibre pulp, alternative fibre sources such as sawdust-based pulp and
        rejects from the Elk Falls kraft pulp mill, as well as clippings received
        from
        converting plants and post-consumer waste. Elk Falls also purchases a limited
        quantity of high quality hardwood kraft pulp in order to enhance the top
        sheet
        quality of our containerboard product line.
  *Table
            of Contents*
  In
        2004,
        we completed a $45 million upgrade of the Elk Falls No. 2 recovery boiler
        to
        increase capacity and maintain reliability. This upgrade allowed the permanent
        shut down of the smaller recovery boiler, a lime kiln and a bleach plant.
        As a
        result, market pulp production at Elk Falls was reduced by approximately
        90,000
        tonnes per year. This decrease in market pulp production has been largely
        offset
        by reduced internal consumption of kraft pulp and by kraft mill optimization
        improvements made since the upgrade. In 2005, an improved sawdust screening
        process was installed at a cost of $8 million. This improved screening ability
        provided an incremental sawdust and shavings cooking capacity and displaced
        26,000 tonnes of chip-based pulp (on an annual basis).
  Pulp
                  Marketing
  Our
        two
        pulp mills are well situated for export shipments to Asia and Western Europe.
        Our strategy is to maintain a diversified range of freight-logical customers,
        including producers of tissue, magazine papers, woodfree printing and writing
        papers and certain specialty paper products. Our sawdust-based pulp produced
        at
        Elk Falls is particularly versatile and is often used as a lower cost substitute
        for more expensive pulps.
  In
        recent
        years, our marketing strategy for containerboard has been, first, to shift
        the
        sales mix to 100% white-top production and eliminate lower value unbleached
        grades and second, to improve surface properties in order to expand freight
        logical North American sales with high graphic accounts that prefer our
        lightweight grades.
  Pulp
        customers are served by sales and marketing staff in Canada and a network
        of
        agents in locations throughout the world.
  The
        Crofton and Elk Falls pulp mills are located on tidewater and have deep-sea
        vessel loading facilities. Pulp is shipped to offshore locations by both
        break
        bulk on deep-sea vessels and container shipment.
  For
        the
        year ended December 31, 2006, pulp and containerboard accounted for 23 %
        of our
        consolidated sales revenue as compared to 22% for the year ended
        December 31, 2005. There is no single customer that accounts for more than
        10% of our consolidated net sales revenue for pulp and containerboard, nor
        is a
        material part of our pulp and containerboard revenues dependent upon a small
        group of customers.
  Paper
                  Recycling Division
  On
        December 1, 2003 we acquired Western Canada’s largest paper
        recycling operation, located in Coquitlam, B.C. The purchase price was $61.1
        million (including a $2.5 million working capital adjustment) and was comprised
        of $31.5 million of cash, approximately 8.7 million of our common shares
        having
        a value of $29 million, and $0.6 million of transaction costs. As part of
        the
        acquisition, we entered into a lease of the land and buildings where the
        paper
        recycling plant operates for an initial term of 20 years, with one 10 year
        renewal option. The annual rent under the lease is $2.1 million, **** subject
        to adjustment for changes in the Consumer Price Index. The lease includes
        options to purchase the land and buildings, and a right of first offer in
        the
        event the landlord wishes to sell the land to a third party.
  *Table
            of Contents*
  Our
        paper
        recycling operation recycles old newspapers, magazines and other waste paper
        into pulp suitable for the manufacture of newsprint, telephone directory
        paper
        and similar grades of paper. The plant was constructed in 1990. Its current
        production capacity is 148,000 air-dried metric tonnes of pulp per year but
        will
        increase to 160,000 air-dried metric tonnes per year in mid-2007 when a project
        to increase capacity is completed. Average annual production in the last
        three
        fiscal years was approximately 143,000 air-dried metric tonnes per year.
        We were
        the principal customer of the paper recycling operation and prior to our
        acquisition we purchased approximately 95% of the de-inked pulp it produced.
        The
        operation now supplies 100% of our de-inked pulp requirements.
  The
        paper
        recycling operation utilizes flotation, cleaning and screening technologies
        to
        remove ink and impurities from the waste paper input. This produces high-quality
        pulp that can be blended with traditional virgin-fibre pulp to produce paper
        in
        accordance with customers’ (mills) specifications. The pulp is mechanically
        pressed to a dryness of about 50% moisture content for shipment to its
        customers.
  The
        waste
        paper furnish for our paper recycling operation is purchased in Western Canada
        and the Western United States. In the most recent fiscal year, approximately
        46.4% of the furnish was sourced in British Columbia, 23.3% in the balance
        of
        Western Canada and 30.3% in the United States.
  The
        plant
        receives waste paper primarily by rail and truck into warehouse facilities
        located adjacent to the production facility. An independent contractor is
        responsible for operations in the raw materials warehouse. Batches of waste
        paper are loaded onto a conveyor for transport into the production
        facility.
  Within
        the production facility the waste paper is initially mixed with water and
        de-inking and bleaching chemicals in a batch pulper. The paper slurry produced
        by the pulper is then processed through a succession of cleaners and screens
        to
        remove contaminants. It then passes through a flotation unit, where tiny
        air
        bubbles float ink particles out of the slurry. The pulp slurry is then further
        processed through additional cleaners and a final flotation process before
        being
        formed into mechanically-dried sheets which are baled for shipment. The recycled
        pulp is shipped to our other operations by truck, rail and barge.
  **COMPETITION**
  The
        markets for our products are highly competitive on a global basis. The pulp
        and
        paper industry is essentially a commodity market in which producers compete
        primarily on the basis of price. In addition, since a majority of our production
        is directed to export markets, we compete on a worldwide basis against many
        producers of approximately the same or larger capacity. In export markets,
        Canadian producers generally compete with American, European and
        Asian producers.
  **FIBRE
        SUPPLY**
  Our
        pulp
        and paper operations consume wood fibre which is purchased from more than
        70
        independent mills. Our fibre supply comes primarily from residual wood chips
        and
        sawdust from lumber operations located on the coast or in the southern interior
        of British Columbia and secondarily from the chipping of pulp logs originating
        from locations throughout the region.
  *Table
            of Contents*
  Sawmill
        wood chips presently comprise 59 %
        of the
        fibre supply for our pulp and paper operations. The remainder is comprised
        of
        pulp logs ( 18 %),
        sawdust ( 18 %)
        and
        recycled de-inked pulp ( 5 %).
        Currently, five wood chip, log and sawdust suppliers provide 46 %
        of our
        fibre supply. The supply contracts with these companies were negotiated for
        indefinite ("evergreen") terms when certain of our timber and processing
        assets
        were sold.
  In
        addition, through an evergreen contract with a coastal log producer, additional
        wood chips can be obtained from regional sawmills. These suppliers provide
        an
        additional 8 %
        of our
        fibre supply.
  Together,
        all of these long-term, secure supply agreements provide approximately 54 %
        of the
        fibre supply for our pulp and paper operations.
  The
        remainder of the fibre requirements for the four pulp and paper operations
        is
        sourced from independent suppliers, many under long-term contracts. Fibre
        is
        purchased from these suppliers at market prices or at prices determined under
        market-based formulas.
  To
        enhance our fibre security, when possible we maintain a surplus fibre position.
        As a result of our fibre position, we made annual sales of approximately 150,000 cubic
        meters of surplus fibre to regional customers in 2006. As a result of
        anticipated supply limitations, we do not expect to have surplus fibre in
        2007.
        We also engage in fibre trading activities to ensure optimum allocation of
        different fibre grades to the appropriate product.
  During
        the past three years, we have implemented an “independent chain of custody”
system to certify our wood fibre supply. We use the PricewaterhouseCoopers
        standard, which is a third party audited system that identifies the source
        of
        wood fibre, and whether or not it is derived from a forest independently
        certified as being managed in accordance with a recognized sustainable forest
        certification system. By 2006, all of our paper and pulp mills were certified
        under the PricewaterhouseCoopers standard. The independent chain of custody
        system tracks the fibre from source to finished product and provides a valuable
        tool to assure customers that paper contains wood fibre derived from
        well-managed forests, and is expected to continue to result in additional
        sales
        opportunities.
  Our
        operations are subject to a wide range of issues that can impact the
        availability and price of fibre supply, including suppliers’ lumber market
        demand, sawlog supply, coastal solid wood industry restructuring and regional
        market prices. The diversity of supply from over 70 mills located in three
        geographical regions combined with our surplus fibre position helps to mitigate
        the risk of interruptions to fibre deliveries to our operations.
  **PROPERTIES**
  Our
        head
        office is located in leased premises in Vancouver, British Columbia. The
        lease
        covers an aggregate of 40,842 square feet and expires February 15,
        2016.
  We
        lease
        the land and buildings where our paper recycling operation is located. The
        lease
        expires November 30, 2023, subject to one 10 year renewal option. We also
        lease
        a port and warehouse facility in Long Beach, California, which we use for
        delivering product to customers located in the Western United States. That
        lease
        terminates in August, 2008.
  *Table
            of Contents*
  Each
        of
        our Crofton, Elk Falls, Powell River and Port Alberni pulp and paper
        manufacturing facilities are situated on land we own. The Crofton mill is
        located on a 107 hectare site, the Elk Falls mill is located near the town
        of Campbell River, British Columbia on a 78 hectare site, the Powell River
        mill is located on a 94 hectare site and the Port Alberni mill is located
        on a 44 hectare site. Each of our properties is the subject of a mortgage
        in favor of our lenders to secure our credit facilities.
  **HUMAN
        RESOURCES**
  We
        have
        approximately 3,600 employees.
  All
        of
        the approximately 2,700 hourly employees at our pulp and paper mills (with
        the exception of the paper recycling operation) are members of either the
        Communications, Energy & Paperworkers Union of Canada, or CEP, or the
        Pulp, Paper and Woodworkers of Canada, or PPWC. Eighteen employees in the
        Port
        Alberni mill are represented by the Canadian Office and Professional Employees
        Union, or COPE.
  The
        current collective agreements with each of CEP and PPWC expire on April 30,
        2008. The collective agreement with COPE expires on April 30, 2012.
  **ENVIRONMENT**
  Our
        operations are subject to a wide range of general and industry-specific
        environmental laws and regulations including those related to waste management,
        air emissions, water discharges and remediation of environmental contamination.
        There has been significant upgrading of our facilities during the last few
        years
        to comply with solid and special waste, effluent and air regulations.
        Environmental performance is monitored regularly by us. We believe that our
        facilities are operating in substantial compliance with applicable environmental
        laws and regulations.
  In
        addition to regular monitoring of emission points and reporting to regulatory
        authorities, we manage our environmental performance through an environmental
        management system. This system is registered to the ISO 14001 standard at
        all
        five of our facilities. The environmental management system utilizes annual
        internal surveillance audits and bi-annual external compliance audits of
        our
        manufacturing facilities. The audit findings are communicated to management
        and
        a committee of the board of directors, so that appropriate action plans can
        be
        developed to address any deficiencies. Compliance audits were completed during
        late 2006 and no material issues were uncovered during those
        audits.
  Numerous
        federal environmental initiatives are underway which could translate into
        more
        vigourous regulatory standards and permits in the next decade, especially
        with
        respect to air emissions. Substances that may be targeted include chlorine
        dioxide, odorous compounds, fine particulate, sulphur dioxide and greenhouse
        gases. Because of recent upgrades we have made to our air emissions controls,
        we
        believe we are well positioned to meet many of these new challenges. In cases
        where equipment improvements may be required, we expect that policy lead
        time
        and flexibility in the permitting process will mitigate any required capital
        spending.
  *Table
            of Contents*
  ***Recycled
        Content in Groundwood Paper***
  We
        are a
        major supplier of newsprint, directory and other groundwood printing papers
        to
        western North America. The most significant of these markets is the western
        United States, where in three states - California, Arizona and Oregon -
        newspaper publishers and commercial printers are required by law to use a
        certain proportion of recycled containing paper. While the other western
        U.S. states and Canada do not have legislated requirements for recycled
        containing paper, many printers and publishers are demanding some recycled
        containing paper as part of their supply mix.
  We
        meet
        this market demand through the use of de-inked pulp from our paper recycling
        operation located in Coquitlam, British Columbia. This de-inked post-consumer
        recycled pulp is mixed with virgin pulp furnish to produce newsprint and
        directory paper that meets the legislated requirements and the customer
        needs.
  ***Solid
        Waste***
  An
        ongoing environmental issue faced by our operations is the disposal of solid
        waste. Most non-recyclable waste is disposed of at on-site landfills and
        based
        on current practice we have at least three years’ capacity in the landfills at
        each of our facilities. We continue to work to reduce volumes sent to landfill
        by increasing recycling efforts and investigating alternative uses for all
        waste. In 2004, we constructed a new landfill at Crofton with a 30 year capacity
        and we are planning to expand existing landfill sites at our Elk Falls and
        Powell River mills to establish more capacity.
  ***Effluent***
  In
        the
        early 1990s, the British Columbia provincial government mandated the elimination
        of AOX in mill effluent by December 31, 2002. In July 2002, this regulation
        was amended to 0.6 kilograms per tonne of pulp produced effective December
        31,
        2002. All of our facilities are operating below this new limit which is similar
        to legislation recently enacted in the United States .
  In
        2003
        we began an initiative to reduce water use at all facilities. These reductions
        resulted in lower waste water volumes being discharged and greater opportunities
        to improve the performance of the systems. We delivered total reductions
        in
        water use of 7% between 2003 and 2005. In 2006, we reduced our water use
        by 5%.
        We are establishing targets for water reduction in 2007 which should help
        reduce
        our energy costs.
  ***Air
        Emissions***
  Over
        the
        past ten years, substantial environmental capital has been spent at all
        facilities upgrading air emissions controls and infrastructure. This includes
        odour collection and treatment systems at Crofton and Campbell River, new
        precipitators at Crofton and Elk Falls, a fluidized bed boiler conversion
        at
        Port Alberni and a new fluidized bed boiler at Powell River. Our facilities
        are
        well positioned to be compliant with future air emissions standards, which
        will
        likely focus on odour, fine particulates and other criteria air
        contaminants.
  Canada’s
        commitment to the Kyoto Protocol is to obtain a 6% absolute reduction of
        greenhouse gas emissions below 1990 levels by 2010. Our 2006 greenhouse gas
        emissions were 70% below 1990 levels and, therefore, we easily surpass the
        federal commitment. While specific Canadian policy regarding large final
        emitters such as pulp and paper facilities is still under development, we
        believe we are well positioned to take advantage of opportunities as they
        arise
        in a carbon trading economy.
  *Table
            of Contents*
  In
        2006,
        we spent approximately $7 million on environmental capital projects. Key
        2006
        environmental projects included a knot washing system at Crofton that provides
        an additional stream of biomass fuel to the power boiler. At Elk Falls we
        have
        begun engineering work on a planned future expansion of the landfill. At
        Port
        Alberni we upgraded our stormwater collection system and protection of a
        local
        stream. At Powell River, the key source of fugitive odour was eliminated
        with
        the retirement of the old primary clarify in favour of a new smaller unit.
        Our
        paper recycling division invested in a sweeper to improve site cleanliness
        that
        helps keep fibre out of the nearby Fraser River.
  We
        estimate that capital expenditures relating to known environmental matters,
        including compliance issues and the assessment and remediation of the
        environmental condition of our properties, will total approximately
        $ 2 million
        in 2007. While we believe that our estimate for environmental projects for
        2007
        is reasonable, there can be no assurance that actual expenditures will not
        exceed the estimated amounts.
  ***Contaminated
        Sites***
  We
        are
        not aware of any sites or land parcels which are considered contaminated
        under
        the Province’s contaminated sites legislation.
  Provincial
        legislation governing contaminated sites came into effect in British Columbia
        on
        April 1, 1997. If a particular site exceeds prescribed levels of certain
        classes of substances, the site is determined to be a “contaminated site” under
        the legislation. The legislation specifies the circumstances in which a “site
        profile” must be prepared in respect of any property that has been used for
        certain industrial or commercial purposes. If a site is determined to be
        contaminated, remediation will normally be required under government
        supervision. As current and past owners of mill sites, all forest products
        companies in British Columbia may face remediation costs particularly as
        a
        result of historical operations and disposal practices. Compliance with this
        legislation has not resulted in any material cost to us but there can be
        no
        guarantee that such costs will not be incurred in the future as a consequence,
        for example, of the discovery of unknown conditions or changes in enforcement
        policies.
  **SOCIAL
        RESPONSIBILITY**
  ***Fibre
        Certification Chain of Custody***
  We
        have
        implemented an independent chain of custody system to verify that select
        paper
        products made at our Crofton, Elk Falls, Port Alberni and Powell River mills
        contain 100% certified wood fibre. This allows customers to track, measure
        and
        report the extent and type of environmentally-preferable fibre used in their
        product. The independent chain of custody system tracks fibre from forests
        certified under three recognized sustainable forest management certification
        systems - Canadian Standards Association (CSA), Forest Stewardship Council
        (FSC), and Sustainable Forestry Initiative (SFI). The system is audited to
        the
        PricewaterhouseCoopers standard.
  We
        implemented a similar chain of custody system at our paper recycling division
        under the Forest Stewardship Council (FSC) standard in 2006. Under this
        certification, a percentage of our recycled fibre is certified as post consumer
        waste and represents an FSC stream into our manufacturing sites. We continue
        to
        work with the forest industry and local special interest groups around
        development of additional FSC certified fibre sources in British Columbia
        for
        use in our fibre stream.
  *Table
            of Contents*
  ***Aboriginal
        Relations and Business Development***
  We
        continue to develop aboriginal business initiatives and relationships with
        First
        Nations bands in proximity of our mills. With the Tla’Amin (Sliammon) Nation and
        the City of Powell River, we established a limited partnership which acquired
        805 acres (325 hectares) of our surplus land not required for local mill
        operations. The limited partnership assumed a secured five-year mortgage
        of $4.5
        million and intends to subdivide and sell parts of the property and redevelop
        other parcels, with any profits distributed equally among the partners. This
        initiative builds on two cooperation protocols that Tla’Amin Nation reached in
        2004 with Catalyst and the City of Powell River.
  In
        Port
        Alberni, Tseshaht Nation purchased 120 hectares (297 acres) of surplus company
        property located next to its reserve. A majority of the land is part of the
        Somass River delta and was previously used to grow poplar. We retained a
        right-of-way for a water pipeline to our Port Alberni paper mill. The $2
        million
        sale is part of an ongoing rationalization of property holdings that are
        surplus
        to business operations. The Tseshaht are one of 14 nations that make up the
        Nuu
        chah nulth Tribal Council.
  With
        the
        Wewaikai Nation near Elk Falls mill in Campbell River, we formed a joint
        environment committee in 2006 to develop a process for integrating the
        Wewaikai’s aboriginal interests into the mill’s continuous environmental
        improvement and to explore and develop, on a mutually reasonable basis,
        individual and business opportunities available to Wewaikai members with
        Catalyst. Committee advice and recommendations including studies or data
        gathering and appropriate mitigation measures to address environmental impacts
        are provided for Catalyst consideration, decision-making and
        implementation.
  ***Carbon
        Emission Reduction Reporting***
  Aligned
        with its focus on continuous environmental performance improvements, we
        participated in the Carbon Disclosure Project, a study backed by 225 investors
        worldwide who represent $31 trillion in assets. We consider this an important
        global reporting initiative that will encourage more fulsome risk-return
        analysis by companies and their investors of the potential impact of
        environmental factors such as climate change on business and industry
        operations.
  This
        follows an initiative with World Wildlife Fund Inc. and the Center for Energy
        and Climate Solutions, a division of Global Environment & Technology
        Foundation (GETF) that saw Catalyst sign a voluntary memorandum of understanding
        in December 2005 committing the parties to work together in the Climate Savers
        Program. The program is administered by World Wildlife Fund in Washington,
        DC
        and involves 12 corporate leaders in greenhouse gas reductions. In joining
        the
        program, we set a voluntary target to reduce CO 2 emissions to 70% below its 1990 emissions by the year 2010 through energy
        conservation, increased use of biomass fuel to replace fossil fuels, and
        other
        cost-effective strategies. We met the reduction target in 2006 and continue
        to
        focus on reducing our carbon footprint.
  *Table
            of Contents*
  ***Environmental
        Paper Assessment Tool***
  We
        participated in the pilot and introduction of the Environmental Paper Assessment
        Tool (EPAT) developed by Metafore, a Portland-based organization. The web-based
        tool is designed to assist paper buyers to evaluate the environmental
        performance of paper products against objective and consistent criteria.
        The
        tool allows for consideration of major environmental impacts over the life
        cycle
        of paper products. We continue to take an active role in the initiative as
        one
        of the first paper manufacturers to seed the system with performance data
        and by
        providing input on the design of the system to paper buyers.
  **RESEARCH
        AND DEVELOPMENT**
  We
        continue to contribute to industry supported research organizations such
        as the
        Pulp and Paper Research Institute of Canada. In addition, research required
        to
        meet our specific needs is conducted at private laboratories under the direction
        of our technical experts and at the mill laboratories.
  Business
        unit technical staff provide scientific and technological expertise in support
        of operations and product development efforts.
  Our
        research and development expenditures totaled approximately $3 million for
        the
        year ended December 31, 2006, and approximately $ 3 million
        for the year ended December 31, 2005.
  **CAPITAL
        EXPENDITURES**
  Over
        the
        past five years our capital expenditures on continuing operations have totalled
        approximately $419 million. In the year ended December 31, 2006, approximately
        $93  million
        was spent on various environmental, maintenance of business and discretionary
        projects. The following table summarizes capital expenditures on continuing
        operations by business segment over the past five years:
  $
                  Millions
              **2006**
              **2005**
              **2004**
              **2003**
              **2002**
              
              **Total**Paper(1)
              83
              74
              39
              54
              63
              
              313Pulp
              10
              21
              29
              27
              19
              
              106Continuing
                  Operations
              93
              95
              68
              81
              82
              
              419
  (1)
              The
                  paper segment includes capital expenditures related to Powell River
                  Energy
                  Inc. (“PREI”). We consolidate 100% of PREI effective January 1, 2005. The
                  Company’s 50% interest in PREI, prior to January 1, 2005 was accounted
                  for
                  using the proportionate consolidation method.
  **CAPITAL
        STRUCTURE**
  We
        are
        authorized to issue an unlimited number of common shares and 100,000,000
        preferred shares. As of December 31, 2006, there were 214,604,120 common
        shares
        issued and outstanding and no preferred shares issued and outstanding. All
        of
        the issued and outstanding common shares are fully paid. Holders of common
        shares are entitled to receive dividends as and when declared by our Board
        of
        Directors and, unless otherwise provided by legislation, are entitled to
        one
        vote per share on all matters to be voted on at all meetings of shareholders.
        Upon the voluntary or involuntary liquidation, dissolution or winding-up
        of the
        company, the holders of common shares are entitled to share rateably in the
        remaining assets available for distribution after payment of liabilities.
        The
        common shares are not subject to any future call or assessment and there
        are no
        pre-emptive, conversion or redemption rights attached to the common
        shares.
  *Table
            of Contents*
  **FOREIGN
        OPERATIONS**
  We
        have
        no foreign manufacturing operations.
  **RISK
        FACTORS**
  Our
        business and operations are subject to a number of risk factors which are
        set
        out under the heading “Risk Factors” in the management’s discussion and analysis
        contained in the 2006 Annual Report, which is incorporated herein by reference.
        The 2006 Annual Report for our most recently completed financial year is
        available on SEDAR at www.sedar.com.
  **LEGAL
        PROCEEDINGS**
  We
        occasionally become party to legal proceedings, generally related to contract
        disputes and employment law in the ordinary course of business. The final
        results of currently ongoing legal proceedings, while not immediately
        determinable, are not expected to have a material effect on our financial
        results.
  In
        early
        2004, the European Commission began an investigation into possible
        anti-competitive practices by certain European paper producers. Shortly after
        the investigation was announced, Catalyst and certain of its affiliates were
        named, together with a number of other paper producers, in several United
        States
        class action lawsuits brought by direct and indirect purchasers alleging
        an
        ongoing conspiracy to fix prices of magazines and other publication papers.
        In
        late 2006, the European Commission reportedly completed its investigation;
        Catalyst was also conditionally dismissed from the class action brought by
        direct purchasers. Catalyst remains a defendant in class actions brought
        by
        indirect purchasers. We believe there is no merit to the lawsuits with respect
        to Catalyst, but we will nonetheless continue to incur related costs to defend
        ourselves.
  **DIVIDENDS**
  We
        are
        currently restricted from paying dividends under the terms of our bond
        indentures because our cumulative losses (adjusted to exclude foreign exchange
        gains/losses on debt) since the initial bond issue exceed cash proceeds from
        equity issues for the same period. No dividends were paid in the years ended
        December 31, 2006, 2005 or 2004.
  **RATINGS**
  In
        August
        2006, Moody’s changed its outlook on our debt ratings to stable from negative.
        In September 2006, Moody’s supplemented its rating methodology to incorporate
“probability of default ratings” for its speculative grade corporate families
        and “loss given default assessment” on its individual rated debt issues. On the
        introduction of the enhanced rating methodology, Moody’s raised its credit
        ratings on our secured revolving operating facility to Ba1 from Ba3 and lowered
        its credit ratings on the unsecured senior notes to B2 from B1.
  In
        December 2005, Moody’s lowered its credit ratings on our senior unsecured debt
        to B1 from Ba3, on our secured credit facilities to B1 from Ba2, and confirmed
        its outlook on our debt ratings as negative. The downgrade was cited as due
        to
        the prolonged downturn in the market for newsprint and other products we
        manufacture.
  *Table
            of Contents*
  In
        December 2005, Standard and Poor’s (S&P) lowered its corporate credit and
        senior unsecured ratings to B+ from BB- and its senior secured rating to
        BB-
        from BB, and upgraded the outlook to stable. The rapid appreciation of the
        Canadian dollar as well as continued energy pressures were attributed to
        the
        downgrade.
  The
        interest rate we pay on borrowings under our revolving credit facility includes
        a margin that varies with our credit rating. The margin increased with the
        Moody’s downgrade in December 2005. Downgrades could negatively impact our cost
        of additional borrowing and potentially our cost of capital, but otherwise
        have
        no direct impact on our business.
  The
        following table highlights our credit ratings and assigned outlooks with
        Moody’s, S&P and Dominion Bond Rating Service (“DBRS”) as of December 31,
        2006, 2005 and 2004.
  **December
                  31,****Moody’s**
                Outlook
                Corporate
                  Family rating
                Senior
                  unsecured debt
                Bank
                  loan debt
                
                **Standard
                  & Poor’s**
                Outlook
                Corporate
                  Credit rating
                Senior
                  unsecured debt
                Senior
                  secured debt
                
                **Dominion
                  Bond Rating Service**
                Outlook
                Senior
                  debt
              **2006**
                
                Stable
                B1
                B1
                Ba1
                
                
                Stable
                B+
                B+
                BB-
                
                
                Negative
                BB
              **2005**
                
                Negative
                B1
                B1
                Ba3
                
                
                Stable
                B+
                B+
                BB-
                
                
                Negative
                BB
              **2004**
                
                Negative
                Ba3
                Ba3
                Ba2
                
                
                Negative
                BB-
                BB-
                BB
                
                
                Stable
                BB
  Moody’s
        credit ratings are on a long-term debt rating scale that ranges from AAA
        to C,
        which represents the range from highest to lower quality of such securities
        rated. According to the Moody’s rating system, an obligation rated B is judged
        to be a speculative investment with a high credit risk. Assurance of interest
        and principal payments or of maintenance of other terms of the contract over
        any
        large period of time may be small. Moody applies numerical modifiers, 1,
        2 and 3
        in each generic rating classification from AA through CAA in its corporate
        bond
        rating system. The modifier 1 indicates that the issue ranks in the higher
        end
        of its generic rating category, the modifier 2 indicates a mid-range ranking
        and
        the modifier 3 indicates that the issue ranks in the lower end of its generic
        rating category.
  Standard
        & Poor’s credit ratings are on a long-term debt rating scale that ranges
        from AAA to D, which represents the range from highest to lowest qualities
        of
        such securities rated. According to the Standard & Poor’s rating system, an
        obligation rated B is vulnerable to non-payment, but the obligor currently
        has
        the capacity to meet its financial commitment on the obligation. Adverse
        business, financial, or economic conditions will likely impair the obligator’s
        capacity or willingness to meet its financial commitment on the obligation.
        The
        rates from AA to CCC may be modified by the addition of a + or - sign to
        show
        relative standing with the major rating categories.
  *Table
            of Contents*
  DBRS
        credit ratings are on a long-term debt rating scale that ranges from AAA
        to D,
        which represents the range from highest to lowest quality of such securities
        rated. According to the DBRS rating system, an obligation rated BB is defined
        as
        speculative and non-investment grade, where the degree of protection afforded
        interest and principal is uncertain, particularly during periods of economic
        recession. In many cases, deficiencies in critical mass, diversification,
        and
        competitive strength are additional negative considerations. The ratings
        from AA
        to CCC may be modified by the addition of a high or low modifier to show
        relative standing within the major rating categories. The lack of one of
        these
        designations indicates a rating which is essentially in the middle of the
        category.
  The
        above
        ratings are not a recommendation to buy, sell or hold securities and may
        be
        subject to revision or withdrawal at any time by the above rating agencies.
        A
        reduction in our credit ratings would impact our access to and cost of capital
        and financial flexibility in the future.
  **MARKET
        FOR SECURITIES**
  Our
        common shares are listed for trading on the Toronto Stock Exchange (the “TSX”)
        under the symbol CTL. During 2006, the common shares traded at a high of
        $3.60,
        a low of $2.40 and an average daily volume of 452,898. The price range and
        average daily volume of trading of the common shares on the TSX during each
        month of 2006 was as follows:
  
 **Month**
              **Price
                  Range**
                **Low-High
                  ($)**
              **Volume**January
              3.04
                  - 3.48
              482,847February
              3.15
                  - 3.40
              935,753March
              3.04
                  - 3.42
              603,686April
              3.04
                  - 3.34
              384,420May
              2.40
                  - 3.25
              553,881June
              2.47
                  - 3.00
              343,120July
              2.55
                  - 3.25
              592,682August
              3.01
                  - 3.27
              177,811September
              3.01
                  - 3.27
              159,455October
              3.07
                  - 3.34
              313,096November
              2.95
                  - 3.30
              633,269December
              3.01
                  - 3.60
              223,636
  **MATERIALCONTRACTS**
  Since
        January 1, 2002, we have entered into the following material
        contracts:
  1.
              Indenture,
                  dated as of March 23, 2004, governing Catalyst’s 7 3/8% Senior Notes due
                  2014, among Catalyst, the subsidiary guarantors and Wells Fargo
                  Bank,
                  National Association, as trustee.
  2.
              Credit
                  Agreement, dated as of July 19, 2002, among Catalyst, the subsidiary
                  restricted parties named therein, TD Securities and RBC Capital
                  Markets as
                  arrangers, the Toronto-Dominion Bank, as administration agent,
                  Royal Bank
                  of Canada as syndication agent, and the lender parties named therein
                  (the
                  “Credit Agreement”).
   *Table
            of Contents*
  3.
              First
                  Amending Agreement to Credit Agreement, dated as of May 8, 2003,
                  among
                  Catalyst, the subsidiary restricted parties named therein, The
                  Toronto-Dominion Bank, as administration agent, and the lender
                  parties
                  named therein.
  4.
              Second
                  Amending Agreement to Credit Agreement, dated August 6, 2003 among
                  Catalyst, its subsidiary restricted parties named therein, the
                  Toronto-Dominion Bank, as administrative agent, and the lender
                  parties
                  thereto.
  5.
              Third
                  Amending Agreement to Credit Agreement, dated May 28, 2004, among
                  Catalyst, its subsidiary restricted parties named therein, the
                  Toronto-Dominion Bank, as administrative agent, and the lender
                  parties
                  thereto.
  6.
              Fourth
                  Amending Agreement to Credit Agreement, dated July 12, 2005, among
                  Catalyst, its subsidiary restricted parties named therein, the
                  Toronto-Dominion Bank, as administrative agent, and the lender
                  parties
                  thereto.
  7.
              Fifth
                  Amending Agreement to Credit Agreement, dated June 5, 2006 among
                  Catalyst,
                  its subsidiary restricted parties named therein, the Toronto-Dominion
                  Bank, as administrative agent, and the lender parties
                  thereto.
  8.
              Omnibus
                  Pledge Agreement, dated as of July 19, 2002, entered into by certain
                  wholly owned subsidiaries of the Corporation and The Toronto-Dominion
                  Bank
                  pursuant to the Credit Agreement.
  9.
              Aggregate
                  Repricing Agreement, dated as of May 14, 2003, among Norske Skog
                  Canada
                  Finance Limited, certain lenders or affiliates of lenders named
                  in the
                  Credit Agreement and Royal Bank of Canada as group valuation agent,
                  with
                  respect to the repricing from time to time of certain secured derivative
                  contracts entered into by Norske Skog Canada Finance
                  Limited.
  10.
              Indenture,
                  dated as of May 15, 2003, governing the Corporation’s 8 5/8% Senior Notes
                  due 2011, among the Corporation, the subsidiary guarantors and
                  Wells Fargo
                  Bank Minnesota, National Association, as trustee (the “2003 Notes
                  Indenture”).
  11.  First
        Supplemental Indenture amending the 2003 Notes Indenture, dated as of December
        1, 2003, among the Corporation, the subsidiary guarantors named therein and
        Wells Fargo Bank Minnesota, National Association, as trustee.
  **TRANSFER
        AGENT AND REGISTRAR**
  CIBC
        Mellon Trust Company; Vancouver and Toronto.
  **AUDIT
        COMMITTEEINFORMATION**
  The
        Audit
        Committee consists of Thomas S. Chambers, Gary Collins, Benjamin C. Duster,
        Michel Desbiens, Brian Kenning, Jeffrey Marshall, R. Keith Purchase and
        David Unruh. Each of these directors are independent for the purposes of
        sitting
        on the Audit Committee, as defined under applicable legislation, and are
        financially literate. The Board has determined that Mr. Chambers qualifies
        as an
“audit committee financial expert” for the purposes of applicable legislation.
        The relevant education and experience of each Audit Committee member is as
        follows:
  *Table
            of Contents*
   
 **Name**
              **Relevant
                  Education and Experience**T.S.
                  Chambers
              Mr.
                  Chambers has been a chartered accountant since 1969. He was an
                  audit
                  partner at PricewaterhouseCoopers LLP from 1976 to 2002 and was
                  the
                  managing partner of PricewaterhouseCoopers LLP’s and its predecessor’s
                  Canadian audit practice from 1996 to 2001. Mr. Chambers is a member
                  of the
                  Institute of Corporate Directors and was the chair of the British
                  Columbia
                  chapter of that organization from 2002 to 2004. Mr. Chambers is
                  the chair
                  of four other audit committees.G.
                  Collins
              Mr.
                  Collins is the former Chief Executive Officer of HMY Airways Inc.
                  and in
                  that capacity supervised the preparation of that company’s financial
                  statements. Prior to joining HMY Airways Inc., Mr. Collins was
                  the
                  Minister of Finance for the Province of British
                  Columbia.B.C.
                  Duster
              Mr.
                  Duster is a senior advisor with the financial advisory firm Watermark
                  Advisors. He has also held financial advisory positions with Masson
&
                  Company, LLC, Wachovia Securities and Salomon Brothers. In that
                  capacity
                  he has been responsible for reviewing and interpreting financial
                  statements for the purpose of advising clients on valuing, structuring
                  and
                  financing merger and acquisition transactions and executing financing
                  transactions. He has an MBA, with a concentration in Finance, from
                  Harvard
                  and an undergraduate degree in economics from Yale. Mr. Duster
                  is the
                  Chairman of the Board of Algoma Steel, a TSX listed public company,
                  and
                  the Chair of the Audit Committee of RCN Corp., a NASDAQ listed
                  public
                  company.M.
                  Desbiens
              Mr.
                  Desbiens has held a number of senior positions with public companies,
                  including president and chief executive officer of Donohue Inc.,
                  chairman
                  of the board of Abitibi-Consolidated Inc. and president and chief
                  executive officer of Quebecor World Inc. In those capacities he
                  actively
                  supervised financial officers of the respective companies. He was
                  a
                  consultant to the forestry industry for a number of year, where
                  he
                  evaluated the financial performance of a number of industry
                  participants.B.
                  Kenning
              Mr.
                  Kenning is a member of the Brookfield Asset Management Advisory
                  Board.
                  Prior to his retirement in 2005, Mr. Kenning was a Managing Partner
                  at
                  Brookfield Asset Management Inc.(formerly Brascan Inc.), a position
                  he
                  held for a number of years. He was also the chair and managing
                  partner of
                  BC Pacific Capital, a public merchant banking and investment company.
                  Mr.
                  Kenning is the Chair of the Audit Committee of British Columbia
                  Railway
                  Corporation and the past chair of the Audit Committee of two other
                  public
                  companies. Mr. Kenning holds an MBA (Finance).J.G.
                  Marshall
              Mr.
                  Marshall is chairman of Smith Marshall, a strategic partnership
                  which
                  provides business consulting services to industry. He has been
                  President
                  and Chief Executive Officer of Aluma Enterprises Inc., a construction
                  technology company, and Marshall Drummond McCall Inc., and in those
                  capacities he actively supervised financial officers. He has been
                  a member
                  of two other audit committees. He holds an MBA (Finance) from McGill
                  University.R.K.
                  Purchase
              Mr.
                  Purchase holds a Bachelor of Commerce (Administration) from Victoria
                  University of Wellington (New Zealand) and an MBA from Simon Fraser
                  University. He has been the Chief Executive Officer of Timberwest,
                  the
                  managing director of Tasman Pulp & Paper and the Executive Vice
                  President of MacMillan Bloedel Ltd. In those capacities he actively
                  supervised financial officers of the respective
                  companies.D.
                  Unruh
              Mr.
                  Unruh is the retired Vice Chair of Westcoast Energy Inc. and Union
                  Gas
                  Limited. For ten years he was a senior officer with a large Canadian
                  public company and in that capacity oversaw the performance of
                  external
                  accountants with respect to the preparation, auditing and evaluation
                  of
                  financial statements. Mr. Unruh sits on four other audit committees
                  of
                  public companies.
  The
        principal functions of the Audit Committee are:
  (i)
              to
                  review all financial information and statutory disclosure documents
                  prior
                  to their approval by the Board and their distribution to shareholders
                  and
                  other interested persons;
  (ii)
              to
                  evaluate systems of internal control and procedures for financial
                  reporting;
  (iii)
              to
                  review and recommend for approval by the Board the terms of engagement
                  and
                  remuneration of the external
                  auditor;
  (iv)
              to
                  monitor the performance of the external and internal auditors and
                  assess
                  the independence thereof; and
  (v)
              to
                  recommend to the Board the appointment of investment managers for
                  the
                  Corporation’s salaried pension plans and to monitor the performance of
                  these managers.
  The
        roles
        and responsibilities of the Audit Committee are contained in its terms of
        reference, which are reviewed annually.
  *Table
            of Contents*
  The
        Board, through the Audit Committee, identifies and reviews with management
        the
        principal risks facing the Corporation and ensures that appropriate risk
        management systems and internal control systems are implemented. The Audit
        Committee is also responsible for the Corporation’s financial reporting
        processes and the quality of its financial reporting. The Audit Committee
        is
        free to communicate with the Corporation’s external and internal auditors at any
        time, and the committee meets with the Corporation’s internal and external
        auditors, without management present, on a regular basis.
  Through
        the Audit Committee the Board has approved policies relating to the treatment
        and disclosure of corporate information. Public disclosure about the Corporation
        is reviewed by a group that includes the Chief Executive Officer, Chief
        Financial Officer, and the legal, investor relations and corporate controller’s
        departments, and others as required, to ensure timely and accurate
        disclosure.
  All
        quarterly and annual financial statements, material press releases, investor
        presentations and other corporate materials are posted immediately on the
        Corporation’s website (www.catalystpaper.com). The Corporation provides live
        internet and conference call access to interested parties in connection with
        the
        release of its quarterly financial information.
  The
        Audit
        Committee is responsible for pre-approving all non-audit services to be
        performed by the external auditors. The Chair of the Audit Committee is
        authorized to pre-approve non-audit services that have a value equal to up
        to
        $100,000. All non-audit services pre-approved by the Chair are presented
        to the
        Committee at its first scheduled meeting following the Chair’s pre-approval. In
        February, 2007 the Audit Committee approved the engagement of the external
        auditors for the period ending January 29, 2008 for the provision of certain
        tax
        related services and miscellaneous accounting advice having an aggregate
        cost of
        $400,000.
  During
        the last two years, we paid the following fees to our external
        auditors:
  **Period
                  ending December 31****2006**
              
              **2005**Audit
                  Fees
              
              $
              1,094,000
              
              $
              594,200Audit
                  Related Fees
              
              
              111,600
              
              
              188,200Tax
                  Fees
              
              
              81,000
              
              
              139,900All
                  Other Fees
              
              
              -
              
              
              -Total
              
              $
              1,286,600
              
              $
              922,700
  The
        services rendered in connection with “Audit Related Fees” consisted primarily of
        the audit of a wholly owned subsidiary, the audit of our pension plan and
        other
        accounting advice. The services rendered in connection with “Tax Fees” consisted
        primarily of tax compliance services.
  *Table
            of Contents*
  **CORPORATE
        GOVERNANCE**
  Additional
        information regarding our corporate governance practices, including the terms
        of
        reference for our Board of Directors and our Audit Committee, is contained
        in
        our management proxy circular for our most recent annual meeting. This document
        can be found at www.sedar.com.
  **DIRECTORS
        AND OFFICERS**
  As
        of
        February 1, 2007, the name and municipality of residence of each of the
        directors and officers of the Corporation, the office held by each and the
        principal occupation of each during the past five years are as
        follows:
  **DIRECTORS**
 
 *Name
                  and Municipality of Residence*
              *Principal
                  Occupation*
              *Director
                  Since***Thomas
                  S. Chambers**
                Vancouver,
                  British Columbia
              President,
                  Senior Partner Services Ltd. Previously, Partner,
                  PricewaterhouseCoopers.
              October
                  30, 2003**Gary
                  Collins**
                Vancouver,
                  British Columbia
              Corporate
                  director. Previously, President and Chief Executive Officer, HMY
                  Airways
                  Inc., member of the British Columbia Legislative Assembly and Minister
                  of
                  Finance, British Columbia.
              April
                  27, 2005**Michel
                  Desbiens**
                Beaconsfield,
                  Quebec
              Corporate
                  director and retired forest products company executive. Previously,
                  consultant to the forestry industry.
              May
                  24, 2006**Benjamin
                  C. Duster, IV**
                New
                  York, NY
              Senior
                  Advisor, Watermark Advisors (financial advisory services). Previously,
                  Partner, Masson & Company LLC (financial restructuring
                  firm).
              December
                  1, 2006**Neal
                  P****.
                  Goldman**
                Bedford,
                  NY
              Partner,
                  Brigade Capital Management LLC (investment company). Previously,
                  Managing
                  Director, MacKay Shields LLC.
              December
                  1, 2006**Russell
                  J. Horner**
                Vancouver,
                  British Columbia
              President
                  and Chief Executive Officer.
              November
                  3, 1999**Brian
                  Kenning**
                Vancouver,
                  British Columbia
              Corporate
                  director. Previously, Managing Director, Brookfield Asset Management
                  Inc.
              March
                  6, 2006**Jeffrey
                  G. Marshall**
                Toronto,
                  Ontario
              Chairman,
                  Smith Marshall (business consulting services). Previously, President
                  and
                  Chief Executive Officer, Aluma Enterprises Inc.
              December
                  1, 2006**R.
                  Keith Purchase**
                West
                  Vancouver, British Columbia
              Corporate
                  director and advisor. Previously, Executive Vice President and
                  Chief
                  Operating Officer, MacMillan Bloedel Limited, an integrated forest
                  products company.
              August
                  27, 2001**William
                  P. Rosenfeld**
                Toronto,
                  Ontario
              Counsel,
                  Goodmans LLP. Previously, Partner, Goodmans LLP.
              October
                  27, 1993**David
                  Unruh**
                West
                  Vancouver, British Columbia
              Corporate
                  director. Previously, Vice-Chair, Westcoast Energy Inc. and Union
                  Gas
                  Limited and Senior Vice President and General Counsel, Duke Energy
                  Gas
                  Transmission.
              February
                  22, 2006**Amit
                  B. Wadhwaney**
                New
                  York, NY
              Portfolio
                  Manager and Senior Research Analyst, Third Avenue Management
                  LLC.
              December
                  1, 2006
 
 Messrs.
        Desbiens, Duster, Horner, Marshall, Purchase and Rosenfeld are members of
        the
        Corporation’s Environmental, Health and Safety Committee.
 
 Messrs.
        Chambers, Collins, Goldman, Kenning, Rosenfeld, Unruh and Wadhwaney are members
        of the Corporation’s Governance and Human Resources Committee.
 
 Messrs.
        Chambers, Collins, Duster, Desbiens, Kenning, Marshall, Purchase and Unruh
        are
        members of the Corporation’s Audit Committee.
 
 **OFFICERS**
 
 *Name
                  and Municipality of Residence*
              *Principal
                  Occupation***R.
                  Keith Purchase**
                West
                  Vancouver, British Columbia
              Chairman
                  of the Board. Corporate director and advisor. Previously, Executive
                  Vice
                  President and Chief Operating Officer, MacMillan Bloedel Limited,
                  an
                  integrated forest products company.**William
                  P. Rosenfeld**
                Toronto,
                  Ontario
              Deputy
                  Chairman.Counsel,
                  Goodmans LLP. Previously, Partner, Goodmans LLP.**Russell
                  J. Horner**
                Vancouver,
                  British Columbia
              President
                  and Chief Executive Officer.**James
                  E. Armitage**
                Vancouver,
                  British Columbia
              Senior
                  Vice-President, Sales and Marketing. Previously, Senior Vice-President,
                  Newsprint; Vice-President, Worldwide Newsprint Sales.**Lyn
                  Brown**
                Vancouver,
                  British Columbia
              Vice-President,
                  Corporate Affairs and Social Responsibility. Previously,Director,
                  Corporate Affairs and Social Responsibility; Vice President, Customer
                  Relations and Vice President, Communications and Government Affairs,
                  Aquila Networks Canada.**W.R.
                  (Ron) Buchhorn**
                West
                  Vancouver, British Columbia
              Senior
                  Vice-President, Operations. Previously, Vice-President, Corporate
                  Services, Vice-President, Human Resources.**Ralph
                  Leverton**
                Surrey,
                  British Columbia
              Vice-President,
                  Finance and Chief Financial Officer. Previously, Chief Financial
                  Officer,
                  Secretary and Treasurer.**Robert
                  H. Lindstrom**
                Burnaby,
                  British Columbia
              Vice-President,
                  Supply Chain. Previously, Vice-President, Strategy, Vice-President,
                  Supply
                  and Utilities, Pulp Operations.**Ferio
                  Pugliese**
                Surrey,
                  British Columbia
              Vice-President,
                  Human Resources. Previously,Director,
                  Operational Excellence. Previously, Director, Human Resources Development,
                  Windsor Casino Limited.**Valerie
                  B. Seager**
                Vancouver,
                  British Columbia
              Vice-President
                  and General Counsel. Previously, Corporate Secretary and Legal
                  Counsel.**Peter
                  M. Staiger**
                Vancouver,
                  British Columbia
              Treasurer
  Our
        directors and officers as a group beneficially own, directly or indirectly,
        or
        exercise control or direction over less than 1%of our issued and outstanding
        Common Shares.
   *Table
            of Contents*
  **EXPERTS**
  KPMG
        LLP
        is our auditor and has prepared an audit report on our financial statements.
        To
        our knowledge, the partners of KPMG LLP do not own, directly or indirectly,
        any
        of our common shares.
  Towers
        Perrin provides certain pension consulting and actuarial services to the
        Company. Also, Mercers provides certain U.S. pension consulting services
        to the
        Company.
  **ADDITIONAL
        INFORMATION**
  Additional
        financial information is provided in the Corporation’s Management’s Discussion
        and Analysis of Financial Condition and Results of Operation and Consolidated
        Financial Statements for the year ended December 31, 2006.
  Further
        information relating to the Corporation may be found on SEDAR at www.sedar.com,
        including the management proxy circular for the Corporation’s most recent annual
        meeting, which contains additional information regarding directors’ and
        officers’ remuneration, principal holders of our securities, and securities
        authorized for issuance under equity compensation plans.
  In
        addition, we will provide to any person, upon request to the Corporate
        Secretary:
  (a)
              when
                  our securities are in the course of a distribution pursuant to
                  a short
                  form prospectus or a preliminary short form prospectus which has
                  been
                  filed in respect of a distribution of our
                  securities:
  (i)
              one
                  copy of our Annual Information Form, together with one copy of
                  any
                  document, or the pertinent pages of any document, incorporated
                  by
                  reference in the Annual Information
                  Form;
  (ii)
              one
                  copy of our comparative financial statements for our most recently
                  completed fiscal year together with the accompanying report of
                  the auditor
                  and one copy of any of our interim financial statementssubsequent
                  to the financial statements for our most recentlycompleted
                  fiscal year;
  (iii)
              one
                  copy of our Information Circular in respect of our most recent
                  annual
                  meeting of shareholders that involved the election of directors;
                  and
  (iv)
              one
                  copy of any other documents that are incorporated by reference
                  into the
                  preliminary short form prospectus or the short form prospectus
                  and are not
                  required to be provided under (i) to (iii) above;
                  or
  (b)
              at
                  any other time, one copy of any other documents referred to in
                  (a) (i),
                  (ii) and (iii) above, provided we may require the payment of a
                  reasonable
                  charge if the request is made by a person who is not a holder of
                  our
                  securities.
 
   *Table
            of Contents*
  **GLOSSARY
        OF TERMS**
  **AOX** or **absorbable organic halides** - the
        measurement of total chlorinated organic compounds in pulp mill
        effluents.
  **Basis
        weight** - the
        weight of paper per specified area, such as gsm. ******
  **Capacity** - the
        number of units which can be produced in a year based on operating with the
        normal number of shifts and maintenance interruptions.
  **Coated
        paper** - **** paper
        which is coated with clay and treated to impart a smooth glossy
        surface.
  **Dioxins** -
        chlorinated chemical compounds, of which certain members have been identified
        as
        carcinogens.
  **Directory
        paper** -
        lightweight uncoated groundwood paper suitable for printing telephone and
        commercial directory books.
  **Effluent** - **** outflowing
        waste discharge from a pulp and paper mill.
  **Furans** - **** toxic
        contaminants associated with the formation of dioxins in the bleaching of
        pulps
        with chlorine compounds.
  **Furnish** - **** a
        blend
        of different types of pulps and additives which are provided to the paper
        machine for making paper.
  **Groundwood
        specialty paper** - **** coated
        and uncoated printing papers, with mechanical pulp as their major component,
        which differ from newsprint in brightness, surface characteristics and end
        uses.
  **Hi-brite** or **highbrightness
        paper** - a
        group of uncoated groundwood papers with brightness levels greater than standard
        newsprint.
  **Hog
        fuel** - wood
        waste, a by-product from sawmilling and log sorting activities, used in boilers
        as an energy source.
  **Containerboard** ****** -
        any
        type of single and multi-ply liner used to make boxes and other containers
        for
        shipping materials, and the type of paperboard used to make them
        up.
  **Lightweight
        coated paper** or **LWC
        paper** - coated
        paper having a basis weight generally below 72 gsm and used principally for
        magazine and mail order catalogues, inserts, flyers, coupons and direct mail.
        The term is often used interchangeably with coated groundwood
        paper.
  **Linerboard** - **** a
        type of
        kraft paperboard, generally unbleached, used to line or face corrugated core
        board (on both sides) to form shipping boxes and various types of
        containers.
  **Newsprint** - **** a
        printing paper whose major use is in newspapers. It is made largely from
        groundwood or mechanical pulp reinforced to varying degrees with chemical
        pulp.
  **Particulate
        emissions** - the
        discharge of all airborne solid or liquid materials other than uncombined
        water.
  **Printability** - **** the
        ease
        with which paper can be printed to high quality standards with the least
        amount
        of spoilage.
  **Printing
        papers** - **** a
        general
        term used to describe those grades of paper used by the printing trades,
        including job, book, magazine, and newspaper printers.
  **Pulp** - **** the
        generic term describing the fibres derived from wood. Pulp can result from
        a
        variety of pulping processes including cooking, refining, grinding or the
        processing and cleaning of waste paper. Pulp can be either in a wet or dry
        state. Types of pulp include:
  *Table
            of Contents*
   **Bleached
                  pulp**-****pulp
                  that has been purified or whitened by chemical treatment to alter
                  colouring matter and has taken on a higher brightness
                  characteristic.
  **Chemical
                  pulp**-****obtained
                  by cooking wood in solutions of various chemicals. The principal
                  chemical
                  processes are sulphite and sulphate
                  (kraft).
  **De-inked
                  pulp**-****obtained
                  by removing inks, clays and coatings, bindings and other additives
                  from
                  waste papers (primarily old newspapers and office waste) so that
                  it can be
                  reused as a source of papermaking
                  furnish.
  **Kraft
                  pulp**-****chemical
                  pulp produced by an alkaline cooking process using sodium
                  sulphate.
  **Market
                  pulp -**pulp
                  sold on the open market.
  **Northern
                  bleached softwood kraft (NBSK) pulp********-****kraft
                  pulp produced from slow-growing coniferous trees indigenous to
                  the forests
                  of Canada, the northern United States and Scandinavian countries.
                  NBSK
                  pulp is noted for its strength and length of
                  fibre.
  **Thermomechanical
                  pulp**-****pulp
                  produced from wood chips using heated mechanical processes to break
                  the
                  bonds between the wood fibres.
  **Pulpwood** - **** logs
        which are used for making pulp as opposed to those used for making lumber
        and
        panel products.
  **Runnability** - the
        ease with which paper can be run through presses with the least amount of
        breakages.
  **Soft-calender** - a
        machine which improves the smoothness and gloss of paper by running it through
        a
        combination of steel rolls and proprietary synthetic rolls.
  **Total
        reduced sulphur** or **TRS** ****** - ****** the
        four
        reduced sulphur compounds that contribute to the typical odour emitted by
        kraft
        pulp mills.
  **Twin-wire** -
        refers
        to a paper machine with forming wires on both sides of the paper surface
        which
        provide a more uniform quality of sheet for both printing surfaces. Older
        machines typically only have a forming wire on the lower surface.
  **Uncoated
        specialty paper** - uncoated
        printing papers, with mechanical pulp as their major component, which differ
        from newsprint in brightness and surface characteristics and are used for
        magazines, catalogues, supplements, inserts and flyers.
  **Woodfree** - paper
        grades manufactured almost entirely with kraft pulp, and containing less
        than 10
        per cent groundwood or mechanical pulp.
  **Measurements**
  **gsm**  - grams
        per square metre.
  **kg/ADBt**  - kilograms per air-dried bleached tonne of production.
  **tonne** - **** metric
        ton - 1,000 kilograms or 2,204 pounds (1.1023 tons).