---





CATALYST PAPER CORPORATION

MANAGEMENTS DISCUSSION AND
ANALYSIS



| | 1 | 
| | - | 

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MANAGEMENTS DISCUSSION AND ANALYSIS

The following management discussion and analysis
(MD&A) should be read in conjunction with the consolidated financial
statements for the years ended December 31, 2005, 2004, and 2003 and the notes
thereto.

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

Except for the historical information contained herein, the
matters set forth in this report are forward-looking. These include, for
example, statements with respect to general economic conditions in the U.S.,
Canada, and internationally, assessment of market conditions and demand for the
Companys products, the outlook for inventories, production and pricing,
performance improvements and cost savings, expected cash flows, capital
expenditures and completion of capital projects, shifts in industry capacity,
fluctuations in foreign exchange and interest rates, business strategies,
fluctuations in availability and cost of raw materials or energy, ability to
obtain financing and other factors beyond the Companys control. These
statements reflect managements current views and are based on certain
assumptions. Such statements are subject to risks and uncertainties that may
cause actual results, performance or developments to differ materially from
those contained in the statements. No assurance can be given that any of the
events anticipated by the forward-looking statements will occur or, if they do
occur, what benefits the Company will obtain from them. The Company disclaims
any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

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

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

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

The information in this report is as at January 25, 2006.
  Disclosure contained in this document is current to that date, unless otherwise
  stated.

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Table of Contents

Page1.0
      **Corporate
        Overview and Highlights**
      41.1
      Overview of the Business
      41.2
      2005 Overview
      71.3
      2005 Highlights
      91.4
      Selected Financial Information
      101.5
      Strategy
      101.6
      Consolidated Results of
        Operations
      172.0
      **Segmented Results
        of Operations**
      192.1
      Specialty Papers
      192.1.1
      Markets
      192.1.2
      Segment Overview
      212.1.3
      Operational Performance
      222.1.4
      Outlook
      222.2
      Newsprint
      232.2.1
      Markets
      232.2.2
      Segment Overview
      242.2.3
      Operational Performance
      252.2.4
      Outlook
      262.3
      Pulp
      262.3.1
      Markets
      262.3.2
      Segment Overview
      272.3.3
      Operational Performance
      282.3.4
      Outlook
      283.0
      **Financial Condition**
      294.0
      **Liquidity and Capital
        Resources**
      304.1
      Operating Activities
      304.2
      Investing Activities
      314.3
      Financing Activities
      314.3.1
      Capital Resources
      314.3.2
      Financial Instruments
      345.0
      **Related Party Transactions**
      356.0
      **Off-Balance Sheet
        Arrangements**
      366.1
      Financial Instruments
      366.2
      Guarantees
      377.0
      **Summary of Quarterly
        Results**
      38


|8.0  | Non-GAAP Measures                                                           | 38                                                                                                         
|---- | --------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------
|     |                                                                             |                                                                                                            
|9.0  | Critical Accounting Policies
      and Estimates                            | 39                                                                                                         
|     |                                                                             |                                                                                                            
|     | 9.1                                                                         | Environmental and Legal Liabilities                                                                        
|     | 9.2                                                                         | Impairment of Long-Lived Assets                                                                            
|     | 9.3                                                                         | Pension and Post-Retirement Benefits                                                                       
|     | 9.4                                                                         | Provision for Bad Debt and Doubtful Accounts                                                               
|     | 9.5                                                                         | Income Taxes                                                                                               
|     |                                                                             |                                                                                                            
|10.0 | Changes in Accounting Policies                                              | 44                                                                                                         
|     |                                                                             |                                                                                                            
|     | 10.1                                                                        | Accounting Guideline 15, Consolidation
      of Variable Interest Entities (AcG-15)                     
|     | 10.2                                                                        | Emerging Issues Committee Abstract Number
      159 Conditional Asset  Retirement Obligations (EIC-159)
|     |                                                                             |                                                                                                            
|11.0 | Impact of Accounting Pronouncements
      **Affecting Future Periods**      | 46                                                                                                         
|     |                                                                             |                                                                                                            
|12.0 | Risks and Uncertainties                                                     | 46                                                                                                         
|     |                                                                             |                                                                                                            
|     | 12.1                                                                        | Product Prices                                                                                             
|     | 12.2                                                                        | Global Competition                                                                                         
|     | 12.3                                                                        | International Sales                                                                                        
|     | 12.4                                                                        | Foreign Exchange                                                                                           
|     | 12.5                                                                        | Fibre Supply                                                                                               
|     | 12.6                                                                        | Aboriginal Claims                                                                                          
|     | 12.7                                                                        | Energy Costs                                                                                               
|     | 12.8                                                                        | Legal Proceedings                                                                                          
|     | 12.9                                                                        | Prior Period Losses                                                                                        
|     | 12.10                                                                       | Debt                                                                                                       
|     | 12.11                                                                       | Environmental Regulation                                                                                   
|     | 12.12                                                                       | Labour Disruptions                                                                                         
|     |                                                                             |                                                                                                            
|13.0 | Sensitivity Analysis                                                        | 52                                                                                                         
|     |                                                                             |                                                                                                            
|14.0 | Outlook                                                                     | 53                                                                                                         
|     |                                                                             |                                                                                                            
|15.0 | Disclosure Controls and
      Internal Control Over **Financial Reporting** | 54                                                                                                         
|     |                                                                             |                                                                                                            
|16.0 | Outstanding Share Data                                                      | 55                                                                                                         

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|1.0 | CORPORATE OVERVIEW AND HIGHLIGHTS
|--- | ---------------------------------
|    |                                  
|    | 1.1                              
|    |                                  
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|    |                                  
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|    |                                  
|    |                                  
|    |                                  
|    |                                  
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|1 | The Company has 13 paper machines. The
        number of machines noted in the segments above reflects the ability of
        the Companys machines to switch between newsprint and specialty
        paper grades.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | - | 

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Newsprint sales represented
approximately 29% of 2005 consolidated sales revenue. The newsprint customer
base consists primarily of newsprint publishers located in Western and Central
North America and Asia. In 2005, approximately 88% of newsprint sales volumes
were to customers in North America and Asia. Newsprint is shipped primarily by
deep-sea vessel, and by a combination of ship, barge, rail, and truck for inland
destinations.

PulpThe pulp segment
is comprised of sawdust-based pulp, manufactured at the Elk Falls mill, and
Northern Bleached Softwood Kraft (NBSK) pulp, manufactured at the Crofton
mill. The segment has a total production capacity of 509,000 tonnes.

Pulp sales represented approximately
16% of 2005 consolidated sales revenue. The pulp customer base includes
producers of tissue, magazine papers, woodfree printing and writing papers, and
certain specialty paper products located primarily in Asia and Europe. Pulp
products are sold primarily through sales and marketing personnel in Canada and
Japan, and through a network of agents in locations throughout the world. In
2005, approximately 97% of pulp sales volumes were made to customers in Europe
and Asia and Australasia. The Crofton and Elk Falls pulp mills are located on
tidewater and have deep-sea vessel loading facilities. Pulp is shipped by both
break-bulk on deep-sea vessels and container shipment.

The Company also operates the largest
  paper recycling operation in Western Canada, in support of its business segments.
  This facility has a production capacity of 148,000 air-dried equivalent tonnes
  of pulp per year, the majority of which is consumed internally.

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The chart below illustrates the
Companys principal paper and pulp products, applications, and annual 2006
capacity.

PRODUCT PROFILESpecialty Paper Grades
    Newsprint
    PulpCategory
    Uncoated
      Papers
      CoatedPaper
    Directory
    Kraft
      Paper
    Newsprint
    Market
      PulpSoft-
      Calendered
    Machine-
      FinishedBrand Name
      Electrasoft
        Electracal
        Electraprime
      Electrabrite
        Electrastar
      Electracote
      Catalyst
      Silverliner
        Platinumliner
        Chromiumliner
        Bronzeliner
    Marathon
      Elk Prime
        Crofton
        KraftBasis Weight   (g/m2)
      36.6  52
      45  66.5
      44.4 
        63.6
      28  40
      127  250
      43 - 48.8
      n/aApplications
      Magazines,
        Supplements,
        Catalogues,
        Inserts, Flyers,
        Directories  Magazines,
        Supplements, Inserts,
        Flyers, Direct
        mail, PR and
        corporate
        communication
        books/manuals
      Magazines,
        Catalogues,
        Inserts, Flyers,
        Direct mail
      Telephone books,
        Airline schedules,
        Catalogues
      Packaging
        applications
      Newspapers,
        Inserts, Flyers,
        Supplements,
        Directories,
        Timetables
      Tissue,
        Freesheet,
        Specialty paper,
        Whitetop
        linerboardCapacity (tonnes)
      466,000 2
      223,000
      315,000 1, 2
      137,000
      841,000 1, 2
      509,000% of Total Capacity
      19%
      9%
      13%
      5%
      34%
      20%


| | 1 | Effective February, 2005, the Company indefinitely idled
      its Port Alberni paper machine No 3. This curtailment reduced the
      Companys capacity of its newsprint business a further 140,000 tonnes from
      the amounts expressed in this table.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2 | Capacities expressed in the above table can vary as the
      Company is able to switch production between products, particularly
      newsprint, directory, and machine-finished uncoated grades.                                                         

The Companys diverse range of
products are sold on five continents. The North American market accounts for 63%
of the Companys sales and continues to be the principal market for the Company
followed by Asia and Australasia, Latin America, and Europe. The consolidated
sales volume distribution for 2005 was as follows:



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| | 1.2 | 2005 Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Difficult business conditions for pulp and paper
      producers persisted throughout 2005, the strength of the Canadian dollar
      being a key factor in the Companys unsatisfactory financial performance.
      The 2005 net loss was comparable with the prior year, as gains from the
      2005 performance improvement program and higher average transaction prices
      for paper products were eroded by the negative impact of the strengthening
      Canadian dollar, lower pulp prices, and rising input costs.                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | For the third consecutive year, the strengthening
      Canadian dollar had a significant adverse impact on the Companys
      earnings, as the majority of sales are denominated in U.S. dollars. During
      the year, the Canadian dollar strengthened 6.9% compared to the U.S.
      dollar, with an average spot exchange rate of CDN$1.212 compared to
      CDN$1.302 for 2004 and 1.402 for 2003. The strengthening Canadian dollar
      negatively impacted operating earnings by approximately $140 million in
      the current year. For further details about the Companys sensitivity to
      fluctuations in foreign exchange refer to the Sensitivity Analysis
      section.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | The negative impact of the dollars strengthening on
      operating earnings was somewhat offset by a positive impact of the
      translation of the Companys U.S.-dollar-denominated debt into Canadian
      dollars which totalled $24.7 million pre-tax for the year ended December
      31, 2005.                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | The chart below illustrates the movement of the CDN$/US$
      spot rate over the past five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



Globally, the industry also continued
  to struggle with rising input costs, particularly with respect to increased
  energy and fibre prices. Due to its location in British Columbia, the Company
  was, to a certain extent, insulated from these effects because it benefits from
  lower fibre and electricity costs compared to other regions.

| | 7 | 
| | - | 

---

In addition, the Companys relatively
  low use of fossil fuels, due to its ability to use lower priced alternatives,
  lessens its exposure to rising fuel prices. However, like other producers, the
  Company is exposed to rising energy prices as they significantly impact transportation
  and chemical costs. In addition, it is one of the few companies fully exposed
  to Canadian dollar fluctuations. As a result of these challenging conditions,
  several producers indefinitely idled or permanently closed down a number of
  their mill operations during the year.

Despite the various challenges facing
the Company, its 2005 performance improvement program exceeded expectations,
surpassing its goal by 5%. With the conclusion of the 2005 program, the Company
realized $84 million in year-over-year EBITDA improvements, exceeding its $80
million target by $4 million. The Progress on 2005 Strategic Initiatives
section includes a detailed discussion on the current year results.

The U.S. economy continued its strong
performance in 2005, driven by consumer spending, industrial production, job
growth, and homebuilding which offset high energy costs during the year. Despite
the strong U.S. economy, market conditions for the Companys suite of products
were mixed during 2005.

Coated mechanical markets were tight
for much of the year despite weaker demand. As a result of tight market
conditions, lightweight coated (LWC) prices in 2005 increased by approximately
17% over 2004.

Uncoated mechanical markets were
strong, with job growth and consumer confidence leading to strong retail sales.
Prices for super-calendered A grades (SC-A), a common benchmark for a number
of uncoated mechanical paper grades, increased by approximately 8% in 2005.
Prices for MF hi-brite and super-brite grades increased between 7% and 9% over
the previous year, depending on the grade.

Directory markets were stable in 2005.
  Competition between traditional telephone directory publishers and independents
  in the yellow pages book market resulted in new publications and additional
  page counts in the year. Contract pricing in 2005 was up by approximately 4%
  from 2004.

Kraft paper markets were sluggish for
  much of the year, largely due to weak corrugated box shipments. A combination
  of falling inventories and cost pressures resulted in some improvement in market
  conditions late in the year. Compared to 2004, 2005 average prices for white
  top linerboard showed a marginal improvement.

Newsprint markets in the U.S. continued
  to experience declining demand and consumption due to decreases in ad lineage,
  circulation, and average basis weights. However, cost pressures and the strong
  Canadian dollar drove transaction prices higher compared to the previous year.

| | 8 | 
| | - | 

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As a result, prices moved up slowly
  but steadily over the year. Average prices for 2005 were up by an average of
  10% compared to 2004.

Pulp markets weakened in 2005. Despite
a slight increase in global shipments compared to 2004, new capacity in Asia and
South America during the year resulted in softer than anticipated pricing in
Asia and Europe. In Europe NBSK pulp benchmark prices declined by approximately
1% compared to 2004; however transaction prices fared worse due to competitive
pressures and generally weaker non-contract markets.

In early February 2005, the Company
indefinitely idled its Port Alberni No.3 paper machine displacing 140,000 tonnes
per year of the Companys newsprint capacity. Related restructuring costs for
the year were approximately $6 million.

On October 3, 2005, the Companys
shareholders voted 99.9% in favour of changing the Companys name from Norske
Skog Canada Limited to Catalyst Paper Corporation. In addition, effective
October 1, 2005, the Company dissolved its U.S. marketing joint venture with
Norske Skogindustrier ASA (Norske Skog).

| | 1.3 | 2005 Highlights
| | --- | ---------------

| |  | Ø | Changed the Companys name, reflecting its unique
      identity as an independent producer of paper and pulp products that are
      sold globally.                                               
| |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
| |  |   |                                                                                                                                                                                                    
| |  | Ø | Dissolved the Companys U.S. marketing joint venture with
      Norske Skog, after which the Company returned to marketing its specialty
      paper products directly to North American customers.
|
|
| |  |   |                                                                                                                                                                                                    
| |  | Ø | Recorded the safest year in the Companys history with
      the lowest medical incident rate and lost-time injury frequency.                                                                      
|
| |  |   |                                                                                                                                                                                                    
| |  | Ø | Realized an $84 million improvement in EBITDA as a result
      of the Companys 2005 performance improvement program.                                                                             
|
| |  |   |                                                                                                                                                                                                    
| |  | Ø | Increased sales of Electraprime, the Companys SC-A
      alternative product, by 56,000 tonnes to 89,000 tonnes during 2005.                                                                      
|
| |  |   |                                                                                                                                                                                                    
| |  | Ø | Reduced the use of high-cost kraft in paper production to
      the lowest level in the Companys history, resulting in savings of $18
      million.                                              
|
| |  |   |                                                                                                                                                                                                    
| |  | Ø | Optimized the Companys fibre mix, including the
      realization of the lowest delivered chip cost since 2002.                                                                                   
|
| |  |   |                                                                                                                                                                                                    
| |  | Ø | Reduced the Companys reliance on fossil fuels to record
      lows through the use of lower priced alternatives and conservation
      initiatives.                                               
|
| |  |   |                                                                                                                                                                                                    
| |  | Ø | Received recognition for product quality, including
      supplier of the year from Verizon Information Services and Vertis Inc.                                                                   
|



| | 9 | 
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| |  | Ø | Recognized as one of the top ten companies of the decade
      for the Companys amount of greenhouse gas reduction over the past ten
      years. By the end of 2005, the Company has reduced greenhouse gas
      emissions by 71% below 1990 levels.
| |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|

| | 1.4 | Selected Financial Information
| | --- | ------------------------------

(In
        millions of dollars, except where otherwise stated)2005
      
      
      2004
      
      
      2003Sales
      $
      1,823.9
      
      $
      1,878.2
      
      $
      1,820.5Operating earnings (loss)
      
      (25.1
      )
      
      (31.3
      )
      
      (111.6
      )EBITDA1
      
      155.2
      
      
      152.8
      
      
      78.3Net earnings (loss)
      
      (25.6
      )
      
      (28.6
      )
      
      (84.5
      )EBITDA margin 2
      
      8.5%
      
      
      8.1%
      
      
      4.3%Net earnings (loss) per share (in dollars) 
        basicand diluted
      
      (0.12
      )
      
      (0.13
      )
      
      (0.41
      )Total assets
      
      2,695.9
      
      
      2,745.9
      
      
      2,816.4Total
        long-term liabilities
      $
      1,396.8
      
      $
      1,417.6
      
      $
      1,479.9Sales (000 tonnes)Specialty papers
      
      1,063.2
      
      
      1,115.5
      
      
      1,084.7Newsprint
      
      707.1
      
      
      754.7
      
      
      768.7Total paper
      
      1,770.3
      
      
      1,870.2
      
      
      1,853.4Pulp
      
      482.7
      
      
      405.5
      
      
      421.3Total
        sales
      
      2,253.0
      
      
      2,275.7
      
      
      2,274.7Production (000 tonnes)Specialty papers
      
      1,066.0
      
      
      1,123.1
      
      
      1,075.3Newsprint
      
      699.5
      
      
      757.8
      
      
      774.8Total paper
      
      1,765.5
      
      
      1,880.9
      
      
      1,850.1Pulp
      
      474.2
      
      
      420.9
      
      
      418.8Total
        production
      
      2,239.7
      
      
      2,301.8
      
      
      2,268.9Average spot foreign exchange rate C$/US$3
      
      1.212
      
      
      1.302
      
      
      1.402Period-end spot foreign exchange rate C$/US$4
      
      1.166
      
      
      1.204
      
      
      1.292Effective
        foreign exchange rate C$/US$5
      
      1.239
      
      
      1.359
      
      
      1.454Common shares (millions):At period end
      
      214.6
      
      
      214.6
      
      
      214.6Weighted average
      
      214.6
      
      
      214.6
      
      
      206.6


1.
    EBITDA is a non-GAAP measure. Refer to Non-GAAP
      Measures for further details.2.
    EBITDA margin is defined as EBITDA as a percentage of
      sales.3.
    Average spot foreign exchange rate is the average Bank of
      Canada noon spot rate over the reporting period.4.
    Period-end spot foreign exchange rate is the Bank of
      Canada noon spot rate.5.
    Effective foreign exchange rate represents a blended rate
      which takes into account the applicable spot rates and the Companys
      revenue hedging program in the reporting period.


| | 1.5 | Strategy                                                                                                                                                                                                                                                
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                         
| |     | The Companys long-term objective is to achieve higher,
      sustainable earnings and maximize cash flow by strengthening its position
      as a leading producer of value-added paper and related forest products
      within Western North America.
| |     |                                                                                                                                                                                                                                                         
| |     | Key Performance Drivers                                                                                                                                                                                                                                 
| |     | The Company believes the following key performance
      drivers are critical in achieving its strategic goals and creating value
      for its investors.                                                                                              

| | 10 | 
| | -- | 

---

Strong Market
PositionMarket positioning is a significant driver of the Companys
success. As one of the largest North American based producers of newsprint and
uncoated groundwood specialty papers, market penetration is important. The
Companys brand names are well recognized in the marketplace and it has worked
hard to build a reputation for reliability, value and service.

Upgraded, Cost-Competitive
ManufacturingIn the past five years, capital expenditures of
approximately $463 million have been directed primarily towards the Companys
manufacturing facilities to shift production towards higher margin papers,
reduce unit production costs, increase operating efficiency, improve product
quality, increase capacity, and meet or exceed environmental regulations.

Diversified Product MixIn
recent years, the Company has introduced or expanded a number of specialty paper
and differentiated product lines, including lightweight newsprint grades, coated
papers, MF hi-brites, super hi-brites, soft-calendered grades, directory,
sawdust-based pulp, and whitetop linerboard. These products offer improved
margins over standard commodity newsprint grades. Additionally, market pulp
accounts for only 20% of the Companys manufacturing capacity, significantly
limiting the Companys relative exposure to volatile pulp markets.

Strong Supply ChainThe
Company has a strong and flexible distribution network. The Company utilizes all
transportation modes available to it such as truck, rail, container, and
break-bulk shipping. The Companys supply chain systems have enabled better
planning and scheduling, allowing the Company to use the most cost-efficient
mode of transportation on its shipments.

Production ExpertiseOver
the last several years, the Company has developed expertise in the production of
lightweight papers. Lower basis weight papers improve the Companys costs by
reducing fibre, conversion, shipping, storage and handling costs and warehouse
space required for inventories. The use of lower basis weight paper by the
Companys customers also reduces their costs. The Companys papermaking
expertise enables it to produce high quality, higher brightness uncoated
groundwood grades. In addition, new product development continues to be an
important focus.

The Company is also one of the few manufacturers
  of sawdust-based pulp in the world. This product is valued by producers of tissue
  and wood-free printing papers as a substitute for more costly NBSK pulp.

| | 11 | 
| | -- | 

---

Skilled People

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

The Companys management team is
  comprised of seasoned industry professionals with experience operating through
  multiple business cycles in the paper and forest products industry. The Companys
  executives have an average of over 16 years of industry experience and 11 years
  with the Company.

Sound Corporate Social
ResponsibilityCorporate social responsibility is one of the Companys
core values. The Company views success in this area as the health of citizens in
its communities, safety and well-being of its employees, vibrancy of its
communities, and sustainability of the Companys practices with respect to their
impact on the environment. For a complete description of the Companys
objectives and progress please see the Companys 2005 Accountability Report.

Key Performance
IndicatorsThe Company believes the following key performance indicators
are meaningful indicators for measuring the Companys progress in achieving its
strategic goals and creating value for investors.

SafetyThe well being of its
employees is the Companys first priority. Safety is measured in terms of the
medical incident rate (MIR), which is the number of incidents requiring
medical attention per 200,000 hours worked, and the lost-time injury frequency
(LTI), which is the number of lost-time injuries per 200,000 hours worked.
2005 was the safest year on record for the Company, and for additional details
on current year results see the Companys 2005 Accountability Report.

EBITDAEBITDA is widely used in the financial community to compare the profitability
  of corporations, and is used by management as an indicator of relative operating
  performance. See the Consolidated Results of Operations, Segmented
  Results of Operations, and the Non-GAAP Measures sections
  for further analysis and discussion of this indicator.

Performance Improvement ProgramOne of the characteristics of the Companys culture is that of engaging
  its people in projects that challenge the status quo. The Company, for several
  years, has aggregated these initiatives on an annual basis into Performance
  Improvement Programs. Performance improvement initiatives challenge the
  Company to create innovative and cost effective business solutions.

| | 12 | 
| | -- | 

---

In 2005, the Company launched its fourth
  consecutive performance improvement program. See Progress on 2005 Strategic
  Initiatives for a detailed summary of the 2005 Performance Improvement
  Program.

Average Sales Revenue per
TonneAverage sale revenue per tonne for each core business provides key
insights on how the Company maximizes its market position. The main factors in
revenue growth are U.S. dollar transaction prices, and the relationship between
the Canadian and U.S. dollar. For details on 2005 results see Segmented Results
of Operations.

Average Cash CostsReducing
cash costs, while maintaining product quality is essential to sustaining
profitability in each of the Companys core businesses. The Company continually
examines all areas of its business for cost reduction opportunities. For details
on 2005 results see Segmented Results of Operations.

Debt to CapitalizationThe
Companys success also depends on its liquidity and continued ability to finance
its growth. The Company focuses on its total debt to total capitalization ratio,
and net debt to net capitalization ratio, in order to assess its debt position.
See Liquidity and Capital Resources for further discussion.

Greenhouse Gas Emissions (GHG)The Company takes its environmental responsibility seriously and as such
  has invested heavily in environmental initiatives. The Company has reduced GHGs
  by 71% since 1990, and is well positioned to meet objectives established by
  the Kyoto Protocol. Emissions are measured in direct GHGs per tonne. In recognition
  of its progress, in 2005 the Company was named one of the top ten companies
  of the decade in terms of reducing greenhouse gases. For further details on
  current year results see the Companys 2005 Accountability Report.

| | 13 | 
| | -- | 

---

Strategic InitiativesThe
Companys strategic initiatives in 2005 and 2004 were as follows:

(All amounts pre-tax and in millions of
      dollars)Initiative
    Performance Goal
      2005Goal
    2005
      Achievement
    2004
      **Achievement**Components of Performance Improvement
      Programsi)
      Grade Development       and
      Product       Optimization
      Develop new, higher-value specialty
        products, reduce exposure to the commodity newsprint market, and optimize
        product, grade and customer mix.
      $16
      $19
      $ 18ii) Cost Reduction
    Reduce kraft usage
      Fibre optimization Improve energy efficiencies Freight
      optimization Optimize chemical usage Productivity improvements
      Deinked pulp cost reduction Other
      13 
          9 
          7 
          6 
          4 
          9 
          - 
        16
      18 
        12 10 
          7 
          4 
          - 
          - 
        14
      21 
        15 
          3 
          4 
          - 
          - 
        19 2364
      65
      85$80
      $84
      $103


Progress on 2005 Strategic
Initiatives

| |  | (a) | Performance Improvement Program                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     | In January 2005, the Company commenced its fourth
      consecutive annual performance improvement program. The 2005 performance
      improvement program was aimed at generating $80 million in year-over-year
      EBITDA improvements across all areas of the Company. The Company
      identified improvements in the areas of grade development and product
      optimization, and cost reduction. In 2005, $84 million in realized savings
      was delivered from the Performance Improvement Program.
|
|
|
|
|
|
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | i)  | Grade Development and Product Optimization                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |     | This strategic initiative included the marketing of new
      high-value specialty paper products, and the reduction of the Companys
      exposure to standard newsprint. In 2005, the Company realized EBITDA
      improvements of $19 million as a result of its various grade development
      and product optimization initiatives.                                                                                                                                                                       
|
|
|
|



| | 14 | 
| | -- | 

---

| |  |     | In pursuit of these performance initiatives, the Company
      accomplished the following in 2005:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |     | Sales of Electraprime and Electrastar                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |     | In 2003, the Company introduced Electraprime to the
      market. The Electraprime grade is a soft-calendered, high-brightness paper
      designed to compete as an alternative to SC-A grades used primarily for
      advertising flyers and inserts. Electraprime was well received in the
      market with sales of approximately 89,000 tonnes in 2005, an improvement
      of approximately 56,000 tonnes from the previous year. This was in excess
      of its goal to sell an additional 40,000 tonnes in 2005. The Company
      intends to continue growing its Electraprime business through 2006.
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |     | The Electrastar grade was also introduced to the market
      in 2003 and is a super high-brightness grade designed for applications in
      which brightness is a desirable characteristic, such as inserts and
      specialty newspapers. Electrastar sales volumes were up 10% to 60,000
      tonnes from the previous year, which was in line with the Companys
      expectations. Potential opportunities to grow the Electrastar grade will
      depend, amongst other things, on its profitability relative to other MF
      hi-brite grades, machine capacity constraints, and competitive factors.
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ii) | Cost Reduction                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |     | On the Companys initiative to reduce costs, the
      following was accomplished in 2005:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |     | Reduce Kraft Usage                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |     | The Company continued to use low-cost fillers and reduced
      kraft input while maintaining quality and improving printability. In 2005,
      kraft usage was the lowest in Company history. The amount of kraft used in
      specialty and newsprint paper products was reduced by 2.6%, from 6.5% in
      2004 to 3.9% in the current year. Approximately $18 million in savings
      were realized as a result of this initiative.                                                                                                                                                                       
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |     | Fibre Optimization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |     | The Company further optimized its fibre mix during the
      year. Specifically, the Company improved utilization of lower cost chips,
      recording the lowest delivered chip cost since 2002. In addition, the
      start-up of the reconfigured thermo-mechanical pulp (TMP) mill at
      Crofton resulted in higher use of lower cost TMP. This and other smaller
      initiatives yielded an additional $12 million in savings.                                                                                                                                                                       



| | 15 | 
| | -- | 

---

| |  |     | Improve Energy Efficiencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     | The Company is a significant consumer of energy. The
      continuing optimization of the fuel mix in the Companys power boilers has
      resulted in less reliance on fossil fuels in favour of wood waste hog
      fuel. In addition the Company has increased the amount of steam generated
      from its recovery boilers, and renegotiated delivery costs associated with
      a natural gas contract. These and other energy reduction initiatives
      resulted in additional savings of $10 million in 2005.
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |     | Freight Optimization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |     | The Companys key freight initiatives included improving
      the destination mix to reduce volumes to high-cost markets, rationalizing
      routes and mode mix, and reducing container shipment costs. These and
      other initiatives resulted in additional savings of $7 million in the
      current year.                                                                                                                                                                                                      
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |     | Optimize Chemical Usage                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |     | The Company optimized its chemical mix to include more
      low-cost chemicals, resulting in additional savings of $4 million during
      the current year.                                                                                                                                                                                                                                                                                                                                                             
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |     | Productivity Improvements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |     | The Company had a number of productivity initiatives
      during 2005 that were focused on improved efficiency and speed. While many
      of the initiatives were completed, several unforeseen events such as
      delays with the mills returning to production after their annual shutdowns
      mitigated the positive impact of these improvements. Consequently, the
      Company did not report any net savings from these initiatives.                                                                       
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |     | Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |     | The Company also completed a series of smaller
      initiatives, primarily with respect to procurement improvements and its
      maintenance practices. Approximately $14 million in savings were realized
      as a result of these initiatives.                                                                                                                                                                                                                                                                      
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | (b) | Other Strategic Initiatives                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |     | i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



| | 16 | 
| | -- | 

---

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Chain of Custody Certification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  | During the previous year, the Company implemented the
      independent chain of custody system to certify its wood fibre supply.
      This 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. The independent chain of custody provides a valuable
      tool to assure customers that paper contains wood fibre derived from
      well-managed forests, and has resulted in additional sales opportunities.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Systems and Processes                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | As part of its ongoing initiatives to improve efficiency,
      the Company will further invest in improved systems and processes in 2006.
      The Company anticipates that an upgrade in its enterprise reporting system
      will be completed by the third quarter of 2006, and will cost
      approximately $2.5 million for capitalizable software, hardware, and
      consulting.                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | 2006 Performance Improvement Program                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | In January 2006, the Company announced its fifth
      consecutive annual performance improvement program. The Company identified
      further improvements in the areas of grade development and product
      optimization, and cost reduction. The 2006 Performance Improvement Program
      is aimed at generating $70 million in EBITDA improvements across all areas
      of the Company, year over year.                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 1.6 | Consolidated Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | Sales for the current year of $1,823.9 million were down
      2.9%, compared to $1,878.2 million in the previous year. Higher average
      paper prices and an improved customer, grade, and market mix were more
      than offset by the negative impact of the stronger Canadian dollar, and
      lower sales volumes resulting from the indefinite idling of the Companys
      Port Alberni No. 3 paper machine in early February 2005.

Sales ($ millions)Year ended
       December 31
    
    Total Change
    Increase (decrease) from 2004as a result of:2005
    2004
    Volume
    Mix
    Price
    F/XSpecialties Newsprint
      $ 994.7
        529.1
      $1,037.2
        553.1
      $(42.5)
        (24.0)
      $(48.6)
        (34.9)
      $12.0
        5.5
      $ 81.6 
        49.9
      $ (87.5)
        (44.5)Total Paper Pulp
      $1,523.8
        300.1
      $1,590.3
        287.9
      $(66.5)
        12.2
      $(83.5)
        54.8
      $17.5
        2.4
      $131.5 
        (18.1)
      $(132.0)
        (26.9)Total
      $1,823.9
      $1,878.2
      $(54.3)
      $(28.7)  $19.9
      $113.4
      $(158.9)


| | 17 | 
| | -- | 

---

EBITDAEBITDA for the
current year of $155.2 million was up 1.6% compared to $152.8 million in the
previous year. The positive impact of higher paper prices, performance
improvement benefits, and the absence of costs associated with the Elk Falls
kraft mill rationalization, which occurred in the first quarter of 2004, was
largely offset by the stronger Canadian dollar, and to a lesser extent, lower
pulp prices. Other influences on costs included inflation on energy, inputs and
services, higher levels of biannual planned maintenance and curtailment, and
higher selling, general and administration (SG&A) costs which included
costs associated with the dissolution of the Companys U.S. marketing joint
venture and the Companys name change, along with higher audit and regulatory
costs. The following table summarizes the key changes in EBITDA from the year
ended December 31, 2004 to the year ended December 31, 2005:

($millions)2004 EBITDA  
       Improved paper prices    Lower pulp prices  
       Impact of stronger Canadian dollar, net of hedging program
      (1)   Performance improvements  
       Absence of 2004 Elk Falls rationalization project  
       Inflation    Maintenance shutdowns and curtailment
         SG&A    Other, net
      $ 152.8  
           130.0 
             (15.7)  
          (139.9) 
           84.0
           24.0
           (36.7)
         (17.9)      (7.2)
         (18.2)2005 EBITDA
      $ 155.2


| |  | 1. | Includes foreign exchange impact on costs.
| |  | -- | ------------------------------------------

Operating earnings
(loss)The Company recorded an operating loss of $25.1 million for
the current year, compared to an operating loss of $31.3 million for the
previous year. The decrease in operating loss was related to the $2.4 million
increase in EBITDA (see EBITDA section above) and a $3.8 million reduction in
amortization expense.

Net earnings (loss)Net loss for the current year was $25.6 million ($0.12 per common share)
  compared to net loss of $28.6 million ($0.13 per common share) for the same
  period last year. The net loss for the current year included a $20.7 million
  ($0.10 per common share) after-tax foreign exchange gain on the translation
  of U.S.-dollar-denominated debt, compared to an after-tax gain of $44.0 million
  ($0.21 per common share) for the previous year. The decrease in net loss was
  largely attributable to the decrease in foreign exchange gain, which was partially
  offset by net favourable future income tax adjustments totalling $18.3 million
  ($0.09 per common share), consisting primarily of a $14.2 million positive future
  income tax adjustment from a decrease in the British Columbia provincial income
  tax rate, effective July 1, 2005.

| | 18 | 
| | -- | 

---

The following table reconciles 2005
earnings (loss) to 2004:

($millions)
    Pre-tax
    After-tax2004 earnings (loss)
    $      (56.7)
    $      (28.6)Higher EBITDA
    2.4
    1.6Lower amortization
    3.8
    2.5Decreased foreign exchange gain on translation
      of long-term debt
    (28.8)
    (23.8)Absence of 2004 loss on repayment of long-term
      debt
    5.2
    3.4Interest
    (0.8)
    (0.5)Income tax adjustments, net
    -
    18.3Non-controlling interest
    (0.6)
    (0.6)Other, net
    3.3
    2.12005 earnings (loss)
    $      (72.2)
    $      (25.6)


|2.0 | SEGMENTED RESULTS OF
      OPERATIONS
|--- | -------------------------------------
|    |                                      
|    | 2.1                                  

Summary of Selected Financial Information*(In millions of dollars, except where
      otherwise* *stated)*
    2005
    2004
    2003Sales
      EBITDA1Operating earnings (loss) EBITDA margin
    $   
      994.7    119.2    21.4  
       12.0%
    $ 1,037.2  
       103.4    1.9    10.0%
    $ 1,002.7  
       66.0    (32.5)   6.6%Sales (000 tonnes)
      Production (000 tonnes)
    1,063.2  
       1,066.0
    1,115.5  
       1,123.1
    1,084.7  
       1,075.3Average sales revenue
      per tonne Average cash costs per tonne2
    $       936  
       824
    $    
        930    837
    $       924  
       864SC-A paper, 35lb. (US$
      per ton)3LWC paper, No.5, 40lb (US$ per ton) 3Telephone directory paper, 22.1 lb. (US$ per ton) 3
    769  
       846      675
    713  
       726      650
    675  
       688      654


| |  | 1. | EBITDA is a non-GAAP measure. Refer to the Non-GAAP
      Measures section for further details.
| |  | -- | -------------------------------------------------------------------------------------------------
| |  | 2. | Average cash costs per tonne for these purposes consist
      of cost of sales and SG&A costs.   
| |  | 3. | Benchmark prices are sourced from Resource Information
      Systems, Inc. (RISI).             

| | 2.1.1 | Markets                                                                                                                                                                                                                               
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                       
| |       | Coated mechanical paper markets were tight during the
      first half of the year before levelling off in the fall of 2005. On a
      year-over-year basis, demand for North American LWC paper was down 3.1% in
      2005, largely

| | 19 | 
| | -- | 

---

as a result of weaker magazine
circulation, flat ad pages, and some grade substitution, namely to SC-A. Despite
weak demand, markets were tight for the majority of the year as a result of
supply disruptions in Canada and Finland, which more than offset demand
declines. As a result, average LWC benchmark prices increased by US$120 per ton
compared to 2004.

North American uncoated mechanical
paper markets remained strong as job growth and consumer confidence drove retail
sales. As a result, demand for uncoated mechanical grades, which service the
retail insert and flyer market, were up 2.3% in 2005 over the previous year.
Average SC-A benchmark prices increased approximately US$56 per ton from the
previous year. Average MF hi-brite and super-brite prices increased between
US$50 and US$60 per tonne, depending on the grade, from the previous year.

Demand for directory grades remained
steady as competition between traditional telephone directory publishers and
independents in the yellow pages phone book markets resulted in new publications
and additional page counts. Demand increased 1.5% year over year in 2005, and
contract prices were up by 3.8%, or US$25 per ton, versus 2004. Kraft paper
markets were sluggish for much of the year as weak corrugated box shipments led
to a 3.1% decrease in demand in 2005. A combination of falling inventories, cost
pressures, and improving corrugated box shipments resulted in some improvement
in market conditions late in the year. As previously mentioned, average whitetop
linerboard prices in 2005 were up slightly over 2004.



| | 20 | 
| | -- | 

---

The North American economy continues
to be a key driver for the Companys specialty paper business with 88% of its
product sold to this market. The Company continues to look for ways to optimize
its customer mix as part of its initiatives to improve profitability.

The 2005 geographical sales
distribution, based on sales volumes, is depicted in the chart below.



| | 2.1.2 | Segment Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |       | In addition to growing its sales of its Electraprime
      grade, the Companys key areas of focus for specialty papers in 2005 were
      grade optimization, reducing grade switches resulting in longer production
      runs, enhancing its customer and grade mix, and shipping to more freight
      logical locations.                                                                                                                                            
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |       | Sales volumes for coated grades were consistent with the
      previous year.                                                                                                                                                                                                                                                                                                                                                                                            
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |       | Sales volumes for uncoated mechanical grades, excluding
      directory, were up, in large measure due to the previously mentioned
      additional sales of Electraprime. The Companys uncoated mechanical grades
      benefited from the strong market conditions during the year.                                                                                                                                                                                   
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |       | Sales volumes for directory papers were lower than the
      previous year, due to the grade and customer rationalization. The
      Companys focus continues to be the growth of its more profitable lighter
      basis weight directory business, and the enhancement of its customer and
      grade mix. The Company capitalized on stronger spot pricing in the second
      half of the year.                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |       | The kraft paper business experienced sluggish market
      conditions for much of 2005, causing the Company to curtail its Elk Falls
      No.4 paper for 31 days during the year. As a result, kraft paper volumes
      were lower than the previous year, and prices were weaker for much of the
      year. The Companys focus continued to be on optimizing business with
      customers producing high graphic products and more freight logical
      customers.

| | 21 | 
| | -- | 

---

| | 2.1.3 | Operational Performance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |       | The specialty papers business recorded operating earnings
      of $21.4 million on sales of $994.7 million in the current year, compared
      to operating earnings of $1.9 million on sales of $1,037.2 million for the
      same period last year. EBITDA of $119.2 million for the current year was
      $15.8 million higher than the $103.4 million recorded in the same period
      last year.                                                                                                                  
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |       | Sales volume of 1,063,200 tonnes in the current period
      decreased 52,300 tonnes, or 4.7%. The decline from the previous year was
      largely due to lower directory shipments, primarily resulting from the
      Companys grade and customer rationalization, which was partially offset
      by growth in the Companys uncoated specialty paper business.                                                                                                                                                      
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |       | Average sales revenue in the current period of $936 per
      tonne increased $6 per tonne compared to the previous year. Higher
      transaction prices across most grades, particularly for coated and
      uncoated mechanical grades, and an enhanced grade and customer mix driven
      by various performance improvement initiatives more than offset the
      adverse impact of the significantly stronger Canadian dollar.                                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |       | Average cash costs in the current period were $824 per
      tonne, an improvement of $13 per tonne compared to the previous year.
      Savings from performance improvements and lower fibre prices were the
      primary drivers of the improvement.                                                                                                                                                                                                                                                                   
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 2.1.4 | Outlook                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |       | Specialty paper markets are expected to be generally
      stable, with some unique differences by product.                                                                                                                                                                                                                                                                                                                                                                                                                
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |       | For coated mechanical papers, demand is expected to be
      relatively flat due to weak magazine circulation and ad page growth. In
      addition, the U.S. postal rate increase of 5.4% effective January 8, 2006,
      is expected to have some negative impact on catalogue demand in the first
      half of the year. Despite flat demand, cost pressures are likely to keep
      prices relatively stable early in the year before gradually declining in
      the second half of the year as the economy slows.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |       | Uncoated mechanical paper demand is forecast to grow
      slightly as consumer spending, while weaker than 2005, is expected to
      remain relatively strong. Prices for MF hi-brite grades are expected to
      trend upwards in the first half of the year, and possibly beyond this,
      depending on newsprint price levels.                                                                                                                                                                                     
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |       | Directory demand is expected to be up slightly in 2006 as
      a result of new independent publications and increased page counts from
      traditional telephone directory companies. On the supply side, directory
      mills are                                                                                                                                                                                                                                                                                     

| | 22 | 
| | -- | 

---

| |     | expected to continue running at high operating rates. For
      directory, 2006 contract prices are expected to show a modest improvement
      over 2005.                                                                                                                                                                                                     
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                
| |     | Kraft paper demand is expected to increase in 2006 due to
      strengthening demand for durable and non-durable goods, and inventory
      restocking. The improving market fundamentals should lead to increasing
      prices in 2006. An announced price increase of $40 per ton effective
      January 1, 2006, reflects the improving market conditions.
| |     |                                                                                                                                                                                                                                                                                                                                                                
| |     | The Company intends to continue focusing on product,
      customer, and geographical optimization for its specialty paper grades in
      2006.                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                
| | 2.2 | Newsprint                                                                                                                                                                                                                                                                                                                                                      

Summary of Selected Financial Information(In millions of dollars, except where
      otherwise stated)
    2005
    2004
    2003Sales
      EBITDA1Operating earnings (loss) EBITDA margin
    $ 529.1  
       58.1    12.3    11.0%
    $ 553.1  
       45.2    (4.3)   8.2%
    $ 539.2  
       5.1    (56.6)   0.9%Sales (000 tonnes)
      Production (000 tonnes)
    707.1  
       699.5
    754.7  
       757.8
    768.7  
       774.8Average sales revenue
      per tonne Average cash costs per tonne2
    $ 748  
       666
    $ 733  
       673
    $
      701    695Newsprint 48.8 gsm, West Coast Delivery (US$
      per tonne)3
    600
    544
    493


| |  | 1. | EBITDA is a non-GAAP measure. Refer to the Non-GAAP
      Measures section for further details.
| |  | -- | -------------------------------------------------------------------------------------------------
| |  | 2. | Average cash costs per tonne for these purposes consist
      of cost of sales and SG&A costs.   
| |  | 3. | Benchmark prices are sourced from RISI.                                                          

| | 2.2.1 | Markets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |       | The trend in newsprint consumption decline continued
      throughout 2005 with U.S. consumption and demand down 5.1% and 6.3%,
      respectively in 2005 compared to 2004. The consumption declines are due in
      large part to decreases in ad lineage, circulation, and lower average
      basis weights. The shift to lower average basis weights accounts for 1.7%
      of the decline; a shift that the Company views as favourable. Cost
      pressures and the stronger Canadian dollar drove transaction prices higher
      and average benchmark prices increased US$56 per tonne compared to the
      previous year, ending the year at US$635 per tonne.

| | 23 | 
| | -- | 

---



Approximately 67% of the Companys
newsprint sales were to the U.S. and Canada. The 2005 geographical sales
distribution, based on sales volumes, is depicted in the chart below.



| | 2.2.2 | Segment Overview                                                                                                                                                                                                                                                                                                                            
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                             
| |       | The primary focus areas for newsprint in 2005 were
      enhancing customer mix, developing specialty lighter and smoother
      newsprint grades, and optimizing the Companys significant newsprint swing
      capacity.                                                                                                                 
| |       |                                                                                                                                                                                                                                                                                                                                             
| |       | The Company continued to make progress on its drive
      towards lowering basis weights in 2005. In addition, successful cost
      reduction initiatives included freight optimization, particularly with
      respect to international sales, and a further reduction of kraft in its
      newsprint from 3.7% in 2004 to 1.3% in 2005.

| | 24 | 
| | -- | 

---

Effective early February 2005, the
Company indefinitely idled its Port Alberni No.3 paper machine displacing
140,000 tonnes per year of newsprint capacity, in response to the prolonged
strength of the Canadian dollar and related cost pressures.

The chart below illustrates the
decline in the Companys newsprint cash costs per tonne since 2002.



| | 2.2.3 | Operational Performance                                                                                                                                                                                                                                                                                                                                   
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                           
| |       | The newsprint business recorded operating earnings of
      $12.3 million on sales of $529.1 million in the current year, compared to
      an operating loss of $4.3 million on sales of $553.1 million for the
      previous year. EBITDA of $58.1 million for the current year was $12.9
      million higher than the $45.2 million recorded in 2004.
| |       |                                                                                                                                                                                                                                                                                                                                                           
| |       | Sales volume of 707,100 tonnes in the current period was
      down 47,600 tonnes, or 6.3%, from the same period last year, primarily due
      to the indefinite idling of the Port Alberni No.3 paper machine in early
      February 2005.                                                                                                             
| |       |                                                                                                                                                                                                                                                                                                                                                           
| |       | Average sales revenue in the current period of $748 per
      tonne increased $15 per tonne compared to the previous year. Higher prices
      and, to a lesser extent, a higher-value market, grade, and customer mix
      were the major factors that more than offset the adverse impact of the
      stronger Canadian dollar.                       
| |       |                                                                                                                                                                                                                                                                                                                                                           
| |       | Average cash costs in the current period were $666 per
      tonne, an improvement of $7 per tonne from the previous year. Savings from
      performance improvements and lower fibre prices more than offset increased
      SG&A costs and higher restructuring costs related to the indefinite
      idling of the Port Alberni No.3 paper machine.   

| | 25 | 
| | -- | 

---

| | 2.2.4 | Outlook                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |       | For newsprint, the downward consumption trend is expected
      to continue in 2006 due to lower circulation, ad lineage and basis
      weights, albeit at a lower rate of decline than 2005. The high Canadian
      dollar and cost pressures have prompted a US$40 per tonne price increase
      announcement, for effect February 1, 2006.The Company believes the
      decline in newsprint consumption is in part due to a shift by advertisers
      to uncoated specialty grades as growth in these grades has partially
      offset the decline in newsprint consumption. As a result, the Company
      believes that it is well positioned to address either further demand
      reductions, or a recovery in the newsprint market due to its ability to
      switch grades.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |       | Optimization of newsprint swing capacity will continue to
      be a priority for 2006. In addition, the Company intends to continue its
      drive to more profitable lighter basis weight grades, where it is widely
      recognized as a market leader.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 2.3   | Pulp                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Summary of Selected Financial Information(In millions of dollars, except where
      otherwise stated)
    2005
    2004
    2003Sales
        EBITDA1Operating earnings (loss) EBITDA margin
      $300.1    
        (22.1) 
       (58.8)   (7.4%)
      $287.9   
        4.2   
        (28.9)  
        1.5%
      $278.6   
        7.2   
        (22.5)  
        2.6%Sales (000 tonnes)
      Production (000 tonnes)
    482.7  
       474.2
    405.5  
       420.9
    421.3  
       418.8Average sales revenue
      per tonne Average cash costs per tonne2
    $ 622  
       667
    $ 710  
       699
    $ 661  
       644NBSK pulp, Northern Europe Delivery
      (US$ per    tonne)3
    611
    618
    525


| |  | 1. | EBITDA is a non-GAAP measure. Refer to the Non-GAAP
      Measures section for further details.
| |  | -- | -------------------------------------------------------------------------------------------------
| |  | 2. | Average cash costs per tonne for these purposes consist
      of cost of sales and SG&A costs.   
| |  | 3. | Benchmark prices are sourced from RISI.                                                          

| | 2.3.1 | Markets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |       | Pulp markets remained sluggish throughout most of the
      year. Global pulp shipments increased slightly by 0.5% in 2005 compared to
      2004, however the benefit was muted as new capacity came on line in 2005,
      which led to lower operating rates and weaker prices. Conditions improved
      somewhat towards the end of the year resulting in modest price
      improvements in most key markets. Overall, year-over-year average NBSK
      pulp benchmark prices decreased slightly by US$7 per tonne or 1%, to
      US$611 per tonne, compared to the previous year. Transaction prices fared
      worse

| | 26 | 
| | -- | 

---

due to competitive pressures and weak
non-contract market conditions for most of the year.



The primary markets for the Companys
market pulp are Asia and Australasia and Europe. The 2005 geographical sales
distribution, based on sales volumes, is depicted in the chart below.



| | 2.3.2 | Segment Overview                                                                                                                                                                                                                                                                                                     
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                      
| |       | In 2005, market pulp sales capacity increased
      signficantly through the considerable reduction of kraft pulp used in
      paper operations, as well as the absence of the Elk Falls kraft mill
      rationalization completed in early 2004.                                                                  
| |       |                                                                                                                                                                                                                                                                                                                      
| |       | Cost reduction remained a key priority in 2005. In
      particular the segment significantly reduced its delivered chip costs, due
      in part to taking advantage of the abundant supply of low cost spruce,
      pine, and fir (SPF) fibre in British Columbia. This, and other
      performance improvement

| | 27 | 
| | -- | 

---

| |       | initiatives, reduced the Companys manufacturing costs by
      $25 per tonne compared to 2004.                                                                                                                                                                                                                                                                                                           
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                           
| | 2.3.3 | Operational Performance                                                                                                                                                                                                                                                                                                                                                                                   
| |       |                                                                                                                                                                                                                                                                                                                                                                                                           
| |       | The pulp business recorded an operating loss of $58.8
      million on sales of $300.1 million in the current year, compared to an
      operating loss of $28.9 million on sales of $287.9 million for the
      previous year. Negative EBITDA of $22.1 million for the current year
      decreased $26.3 million from EBITDA of $4.2 million in 2004.                                                 
| |       |                                                                                                                                                                                                                                                                                                                                                                                                           
| |       | Sales volume of 482,700 tonnes in the current period
      increased 77,200 tonnes, or 19.0%, from the same period last year due to
      the factors highlighted in the segment overview section.                                                                                                                                                                                                        
| |       |                                                                                                                                                                                                                                                                                                                                                                                                           
| |       | Average sales revenue in the current period of $622 per
      tonne was down $88 per tonne compared to the previous year, due primarily
      to the stronger Canadian dollar and lower year-over-year NBSK pulp prices.                                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                                                                                                                                                                                           
| |       | Average cash costs in the current year were $667 per
      tonne, an improvement of $32 per tonne compared to the same period last
      year. Savings from performance improvement initiatives,the absence
      of the Elk Falls rationalization noted above, and lower fibre prices
      offset higher SG&A costs.                                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                           
| | 2.3.4 | Outlook                                                                                                                                                                                                                                                                                                                                                                                                   
| |       |                                                                                                                                                                                                                                                                                                                                                                                                           
| |       | For NBSK pulp markets, demand is expected to show modest
      improvement in 2006 due to anticipated increased printing and writing
      demand in China and Western Europe as well as inventory restocking. The
      Company expects prices on average to remain relatively flat in 2006, with
      an improvement in the first half of the year, partly offset by a decline
      later in the year.

| | 28 | 
| | -- | 

---

|3.0 | FINANCIAL CONDITION                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                        
|    | The following table highlights the significant changes in
      the consolidated balance sheets between December 31, 2005, and December
      31, 2004.

(In millions of dollars)
    2005
    2004
    Variance
    ExplanationWorking
      Capital
    $
      237.1
    $
      260.0
    $
      (22.9)
    Decrease
      primarily reflects lower cash and cash equivalents and inventory levels,
      partially offset by lower payables.Capital assets,
      net
    2,139.3
    2,172.9
    (33.6)
    Amortization expense exceeded capital asset additions and
      the impact of consolidating 100% of a variable interest entity in 2005
      (see the Changes in Accounting Policies section for further details).
      Refer to the Investing Activities section for additional details on
      capital asset additions.Other assets,
      net
    40.1
    27.5
    12.6
    Increase
      largely due to recording non- controlling interest as part of
      consolidating 100% of a variable interest entity in 2005 (see the Changes
      in Accounting Policies section for further details), partly offset by
      amortization of deferred financing costs.Long-term
      debt
    861.9
    823.6
    38.3
    Increase
      primarily reflects approximately $57 million of new debt related to
      consolidating 100% of a variable interest entity in 2005 (see the Changes
      in Accounting Policies section for further details). Refer to the
      Capital Resources section for further details on the change in long-term
      debt.Other long-term
      obligations
    209.7
    233.6
    (23.9)
    Decrease
      primarily relates to a reduction in the fair value of hedging instruments.Future income
      taxes and deferred credits
    300.9
    332.9
    (32.0)
    Decrease
      primarily relates to the reduction in the provincial corporate tax rate
      and increased tax losses.Contributed
      surplus
    7.3
    4.8
    2.5
    Increase
      relates to the recording of stock based compensation.


| | 29 | 
| | -- | 

---

|4.0 | LIQUIDITY AND CAPITAL RESOURCES
|--- | -------------------------------

Selected
        Financial Information(In
        millions of dollars, except where otherwise stated)
      
      2005
      
      
      2004
      
      
      2003Cash flows provided by operations before changes
        innon-cash working capital
      $
      104.5
      
      $
      88.9
      
      $
      0.1Changes
        in non-cash working capital
      
      (11.5
      )
      
      (24.4
      )
      
      22.4Cash flows provided by operations
      
      93.0
      
      
      64.5
      
      
      22.5Cash flows used by investing activities
      
      (93.0
      )
      
      (41.8
      )
      
      (96.1
      )Cash flows provided (used) by financing activities
      
      (26.0
      )
      
      3.3
      
      
      73.6Capital spending
      
      95.2
      
      
      68.0
      
      
      81.4Amortization
      
      180.3
      
      
      184.1
      
      
      189.9Capital spending as % of amortization
      
      53
      %
      
      37
      %
      
      43
      %Total debt to total capitalization1,2
      
      46
      %
      
      44
      %
      
      44
      %Net debt to net capitalization3,4
      
      46
      %
      
      43
      %
      
      44
      %


| |  | 1. | Total debt comprises long-term debt, including current
      portion.    
| |  | -- | -------------------------------------------------------------------------
| |  | 2. | Total capitalization comprises total debt and
      shareholders equity.
| |  | 3. | Net debt comprises total debt, less cash on hand.                        
| |  | 4. | Net capitalization comprises net debt and shareholders
      equity.    

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

| | 4.1 | Operating Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Cash flow provided from operating activities, after
      changes in non-cash working capital, in the current year was $93.0 million
      compared to cash provided from operating activities of $64.5 million in
      the previous year. The increase of $28.5 million was primarily attributed
      to decreased non- cash working capital requirements in the current year.
      The Companys operating cash flow requirements are primarily for labour,
      salaries and benefits, the purchase of raw materials, energy, and
      distribution services. Working capital requirements in 2006 are not
      expected to be materially different than 2005 requirements.

| | 30 | 
| | -- | 

---

| | 4.2   | Investing Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |       | Cash flow used for investing activities in the current
      year totalled $93.0 million, compared to $41.8 million in the previous
      year. The absence of a $26.6 million purchase price adjustment, which was
      received in 2004, and increased capital spending in the current year were
      the primary drivers of the increase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |       | The Companys capital spending totalled $95.2 million,
      compared to $68.0 million in the previous year. Major capital investments
      during the year included an $8.3 million installation of sawdust screening
      equipment at the Elk Falls division, which is expected to increase the
      production of Elk Prime market pulp by approximately 17,000 tonnes
      annually, a $6.9 million upgrade to the Crofton divisions TMP facilities,
      which is expected to increase TMP production by approximately 21,000
      tonnes annually, and a $5.1 million expansion of the bleaching capacity at
      the Powell River division. The bleaching capacity expansion will allow the
      Company to replace 36,000 tonnes of newsprint with higher-value uncoated
      specialty products.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |       | Capital spending levels are expected to be similar in
      2006. Cash flows are expected to be generated primarily from operations
      and the Facility, if necessary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 4.3   | Financing Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |       | Cash flow drawn by financing activities was $26.0 million
      in the current year compared to cash flow generated of $3.3 million in the
      previous year. The increase in cash flow drawn by financing activities of
      $29.3 million was primarily attributable to the absence of net proceeds on
      the senior note refinancing in March 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 4.3.1 | Capital Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |       | The Companys capital resources at December 31, 2005,
      included cash and cash equivalents along with the amount available under
      the Facility. The borrowing base on the Companys $350.0 million Facility
      was $344.8 million. After outstanding letters of credit of $22.3 million,
      and a $6.5 million draw on the Facility, $316.0 million was available at
      year-end, compared to $318.5 million in the previous year. These
      resources, together with operating cash flows, are expected to enable the
      Company to meet the minimum payments, described in the table below.                                                                                                                                                                                                

| | 31 | 
| | -- | 

---

The following table presents the
aggregate amount of future cash outflows for contractual obligations as of
December 31, 2005, excluding amounts due for interest on outstanding
indebtedness.

| |                           |   | Payments due by Period | 
| | ------------------------- | - | ---------------------- | 
| | (In millions of dollars)  |   | 2006                   | 
| |                           |   |                        | 
| | Long-term debt            | $ | -                      | 
| |                           |   |                        | 
| | Capital lease obligations |   | 0.7                    | 
| |                           |   |                        | 
| | Operating leases          |   | 12.8                   | 
| |                           |   |                        | 
| | Total                     | $ | 13.5                   | 

As at December 31, 2005, the total
long-term debt outstanding was $861.9 million. Principal repayments on this debt
do not begin until June 2009. The Companys net debt to net capitalization ratio
as of December 31, 2005, was 46%, or 3% higher than December 31, 2004.

The following table illustrates the
changes in the Companys long-term debt during 2005.

Issue
    Carrying Value
      December 31, 2004
    Net Increase
      (Decrease)
    Foreign Exchange
      Impact
    Carrying Value
      December 31, 2005(In millions of dollars)Recourse  
       Senior notes, 8.625% due June 2011        
       (US$400.0 million)
    $      485.1
    $        -
    $      (15.7)
    $      469.4Senior notes, 7.375%
      due March 2014          (US$250.0
      million)1
    300.9
    -
    (9.4)
    291.5Revolving operating
      facility of up to $350.0          million due
      July 2008 with interest based          on
      Canadian Prime/BA rates or U.S.        
       Base/LIBOR rates
    -
    6.5
    -
    6.5Non-recourse (PREI)First mortgage bonds,
      6.387% due July          2009
    37.6
    37.42
    -
    75.0Subordinated promissory notes
    -
    19.52
    -
    19.5Total long-term debt
    $      823.6
    $      63.4
    $      (25.1)
    $      861.9


| | 1. | US$250.0 million senior notes issued March 23, 2004.                                                                                                                                                               
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Net increase reflects approximately $57 million of new
      debt in 2005 due to the 100% consolidation of a variable interest entity
      (see the Changes in Accounting Policies section for further details).

The Company is in compliance with the
  covenants under its Facility and senior notes indentures. The Companys
  consolidated fixed charge coverage ratio (CFCC Ratio), as calculated
  under its senior notes, was at 2.0:1 for the last twelve months ended December
  31, 2005 (also at 2.0:1, for the twelve months ended December 31, 2004). If
  this CFCC Ratio goes below 2.0:1, the Company is limited in the amount of additional
  debt it may incur beyond drawings under the Facility or other debt as permitted
  under the senior notes. Also the Companys restricted payments basket under
  the senior notes was negative $69 million as at December 31, 2005 (negative
  $26 million as at December 31, 2004), as a result of accumulated losses in recent
  years.

| | 32 | 
| | -- | 

---

Under the 8.625% senior notes, the
  Company cannot pay dividends unless the balance in this basket is positive.

Credit Ratings

Like many others in the industry, the
Companys credit ratings were downgraded during the fourth quarter.

In December 2005, Moodys lowered its
credit ratings on the Companys corporate family rating and senior unsecured
debt to B1 from Ba3, and the Companys bank loan debt to Ba3 from Ba2, and
confirmed its outlook on the Companys debt ratings as negative. The downgrade
was cited because in Moodys view, current newsprint and related paper grade
fundamentals are not likely to facilitate a significant, sustainable margin
improvement.

In December 2005, Standard and Poors
(S&P) lowered its long-term corporate credit and senior unsecured ratings to
B+ from BB- and its senior secured rating to BB- from BB, and revised the
outlook from negative to stable. The Companys lower than expected profitability
and cash flow generation due to the stronger Canadian dollar and higher energy
costs were factors cited in the downgrade.

In October, Dominion Bond Rating
Service (DBRS) confirmed its senior debt rating of BB and changed the outlook
to negative. Growing signs that the Canadian dollar and energy costs will remain
high were cited in the revision.

The following table highlights the
Companys credit ratings and outlook with Moodys, S&P, and DBRS as of
December 31, 2005, 2004, and 2003:

December 31,2005
    2004
    2003Moodys Outlook
      Corporate family rating Senior unsecured debt Bank loan debt
          Standard & Poors Outlook
      Long term corporate credit Senior unsecured debt Senior
      secured debt     Dominion Bond Rating Service
      Outlook Senior debt
    Negative  
       B1    B1      Ba3  
          Stable    B+    B+
          BB-       Negative
        BB
    Negative Ba3
      Ba3 Ba2       Negative BB-
      BB- BB       Stable BB
    Negative Ba2
      Ba2 Ba1       Negative BB
      BB    BB+       Stable
      BBH


| | 33 | 
| | -- | 

---

| |       | As a result of these downgrades, any future borrowings
      under the Facility will be at a slightly higher rate because the interest
      rate includes a margin that varies with the Companys credit rating. Under
      current levels of borrowing, the credit rating downgrades are expected to
      increase the Companys cost of borrowing under its Facility by an
      estimated $0.8 million per annum. These downgrades do not have any other
      direct impacts. However, they could negatively impact the Companys cost
      of additional borrowing, and potentially its cost of capital.                                                                                                                                                                 
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 4.3.2 | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       | In the normal course of business, the Company is exposed
      to foreign currency and price risk associated with revenues and long-term
      debt, which are predominately in U.S. dollars, and energy costs. In
      accordance with its foreign exchange risk management program, the Company
      manages its exposure to these risks through the use of financial
      instruments. The Company also uses interest rate swaps to reduce its
      exposure to long-term fixed interest rates associated with its senior
      notes. The Company does not enter into financial instruments for
      speculative purposes.                                                                                                                                               
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       | Revenue Risk Management Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       | In respect of revenues, the Company uses foreign currency
      options and forward contracts outstanding to sell U.S. dollars. At
      December 31, 2005, 67% of the options and contracts are designated as
      hedging instruments and the resulting foreign exchange translation gains
      and losses will be recognized concurrently with the hedged revenue in
      Sales. At period- end exchange rates, the net amount the Company would
      receive to settle the foreign currency options and forward contracts is
      $23.6 million, of which $13.1 million is included in Prepaids and other,
      and $7.7 million has been recognized and included in Sales. The hedging
      program improved the Companys sales value by $32.3 million in 2005.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       | At December 31, 2005 and 2004, no price hedging
      instruments were outstanding in respect of products sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       | Long-term Debt Risk Management Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       | In respect of long-term debt, the Company has US$59.0
      million in forward foreign exchange contracts to acquire U.S. dollars.
      These instruments are not designated as hedging instruments for accounting
      purposes, and are included in Other long-term obligations on the balance
      sheet at their fair value. Settlements and changes in fair value are
      recognized in earnings as Foreign exchange gain on translation of
      long-term debt. At period-end exchange rates, the net amount the Company
      would pay to settle these contracts is $24.3 million.                                                                                                                                                                              

| | 34 | 
| | -- | 

---

Cost Risk Management
Instruments

To hedge against the effect of energy
cost fluctuations, the Company enters into contracts to fix the price of a
portion of the Companys oil and gas exposure. The contracts are not designated
as hedging instruments for accounting purposes and are reported as Prepaids and
other on the balance sheet at their fair value. Settlements and changes in fair
value are recognized in Cost of sales. At period-end contract rates, the net
amount the Company would receive to settle these contracts is $2.7 million, all
of which is included in Cost of sales and Prepaids and other.

Interest Rate Swaps

The Company occasionally uses interest
rate swap contracts to manage its net exposure to interest rate changes. At
December 31, 2005, the Company has pay-floating, receive-fixed interest rate
swap contracts for notional US$40 million, and has designated them as hedging
instruments. At period-end rates, the net amount the Company would receive to
settle these contracts is $0.4 million.

|5.0 | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Companys related parties include Norske Skog, a
      significant shareholder, together with its subsidiaries and affiliates,
      and Norske Skog North America LLC (NSNALLC), which was a joint venture
      between Norske Skog and the Company.                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | NSNALLC                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company had an agency agreement with NSNALLC, which
      provided for sales of certain specialty products in the U.S. During the
      year the Company paid $4.4 million in commission expenses. These
      transactions were in accordance with normal third party trade practices.                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | In the second quarter of 2005, the shareholders of
      NSNALLC announced the dissolution of its U.S. marketing joint venture. The
      dissolution was effective October 1, 2005, after which the Company
      returned to marketing its specialty papers directly to North American
      customers. The change did not materially impact net earnings for the year
      ended December 31, 2005.           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Norske Skog                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | In prior years, the Company acquired from wholly owned
      subsidiaries of Fletcher Challenge Limited (now subsidiaries of Norske
      Skog) companies with tax losses. The purchase price for these companies is
      subject to adjustment under certain conditions. The Company recorded a
      $2.4 million adjustment in the fourth quarter of 2005, reflecting a
      reduction to the purchase price.



| | 35 | 
| | -- | 

---

Subsidiaries and Affiliates of
Norske Skog

The Company has entered into agency and
distribution agreements with affiliates of Norske Skog whereby all sales of the
Companys newsprint and specialty papers in certain international markets are
affected through affiliates of Norske Skog. During the year, product sales to
these affiliates were $118.1 million (2004 - $121.7 million). These transactions
were in accordance with normal third party trade practices.

Directors and Employees

The Company undertakes certain
transactions with companies affiliated with a director of the Company. These
transactions are in the normal course of business, and are on the same terms as
those accorded to third parties. During 2005, the Company paid aggregate fees of
approximately $nil (2004 - $0.4 million) primarily for legal services from a
firm affiliated with a director of the Company. The Company has charged the
costs to SG&A expense.

The Company has advanced interest-free
loans to three officers of the Company. As at December 31, 2005, the balance
outstanding was $0.4 million (2004 -$0.5 million). These loans were issued prior
to the enactment of the United States Sarbanes-Oxley Act of 2002, which
prohibits such loans effective July 30, 2002. The Company has made no loans to
any of its directors or officers since that date.

|6.0 | OFF-BALANCE SHEET ARRANGEMENTS
|--- | ------------------------------
|    |                               
|    | 6.1                           
|    |                               
|    |                               

| |  |  | Revenues  Foreign currency options and forward contracts
      to sell US$378 million to major financial institutions.                                                                                                                  
| |  | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |   |                                                                                                                                                                                                                                          
| |  |  | Interest Rates  Fixed to floating interest rate swaps
      with a major financial institution on notional US$40 million. The Company
      will receive a fixed rate of 7.375% and pay a floating rate averaging
      LIBOR plus 2.0%.
|
|
|

Refer to financial instruments discussion
  within the Liquidity and Capital Resources section for further discussion
  of financial instruments.

| | 36 | 
| | -- | 

---

| | 6.2 | Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | Business Dispositions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | The Company sold a portion of its operations in June
      2001. In this regard, the Company provided a 10-year environmental
      indemnity with a maximum liability to the Company of $12.5 million. This
      liability has subsequently been reduced by expenditures related to certain
      decommissioning projects. The Company provided a tax indemnity, which
      continues while the relevant tax years of the indemnified parties remain
      open to audit. The Company also provided a general indemnity, capped at $5
      million, which expired in 2004. The purchaser of the operations has
      advised the Company that, based on the terms of the purchase and sale
      agreement, it believes it may be entitled to indemnification under the
      general indemnity in connection with certain labour matters. The Company
      is unable to estimate any potential liability under these indemnities as
      the amounts are dependent upon the outcome of future contingent events,
      the nature and likelihood of which cannot be determined at this time. As
      such, no liability has been recorded for these potential obligations.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | The Company has entered a building lease agreement
      whereby it has agreed to continue making the prescribed lease payments
      directly to the financial institution holding the mortgage on the building
      in the event the lessor is no longer able to meet its contractual
      obligations. At December 31, 2005, the value of the mortgage was
      approximately $13.0 million. This agreement does not increase the
      Companys liability beyond the obligations for the building lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | Recycling Plant Acquisition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | In connection with the acquisition of the paper recycling
      business in December 2003, the Company has provided indemnities with
      respect to representations and warranties related to general corporate
      matters and to the shares that were issued to the vendors. Liability under
      these indemnities expires in November 2008, except that the indemnity
      related to title to the shares does not expire. The Company does not
      expect any significant claims with respect to these indemnities. The
      Company has also provided indemnities with respect to general
      environmental matters under its lease of the land and buildings. The
      Company has agreed to indemnify the landlord for all costs, claims and
      damages related to any release by the Company of any hazardous substances
      on the property or the breach by the Company of its environmental
      covenants under the lease or any environmental laws. This indemnity is
      indefinite and survives after the lease is terminated. The Company is not
      liable for pre-existing environmental conditions.                                      

| | 37 | 
| | -- | 

---

|7.0 | SUMMARY OF QUARTERLY RESULTS                                                                                                                                                                                                           
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                        
|    | The following table highlights selected financial
      information for the eight consecutive quarters ending December 31, 2005.
      For a more detailed analysis on Q4, 2005 results, see the Companys Fourth
      Quarter Report.

(In millions of dollars)
    2004
    2005Q1
    Q2
    Q3
    Q4
    Q1
    Q2
    Q3
    Q4Sales
    $ 454.5
    $ 479.6
    $ 466.8
    $ 477.3
    $ 462.7
    $ 439.0
    $ 450.3
    $ 471.9EBITDA1
    7.4
    43.8
    56.3
    45.3
    33.6
    25.4
    47.9
    48.3Net earnings (loss)
    (46.3)
    (24.0)
    28.0
    13.7
    (21.8)
    (30.0)
    34.2
    (8.0)Net earnings (loss) per share basic and diluted
    $
      (0.22)
    $
      (0.11)
    $ 0.13
    $ 0.06
    $ (0.10)
    $
      (0.14)
    $ 0.16
    $ (0.04)


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

|    | In Q1, 2005, the net loss increased by $35.5 million
      ($0.16 per common share) compared to Q4, 2004 largely due to an increase
      in the after-tax foreign exchange loss arising from the translation of
      U.S.-dollar-denominated debt of $28.3 million, the Crofton pulp annual
      maintenance shut down, and restructuring charges related to the
      curtailment of the Port Alberni No.3 paper machine.                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In Q2, 2005, the $8.2 million ($0.04 per common share)
      increase in net loss compared to Q1, 2005 was primarily related to
      increased maintenance spending, which was partially offset by performance
      improvements and lower restructuring costs, and a $3.8 million increase in
      foreign exchange loss on the translation of U.S.-dollar-denominated debt.                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In Q3, 2005, the $64.2 million ($0.30 per common share)
      improvement in net earnings compared to Q2, 2005 was largely due to an
      increase in the after-tax foreign exchange gain arising from the
      translation of U.S.-dollar-denominated debt of $38.3 million, a $14.2
      million positive future tax adjustment, related to a decrease in the
      British Columbia provincial tax rate, which was effective July 1, 2005,
      and lower maintenance spending.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In Q4, 2005, the $42.2 million ($0.20 per common share)
      decrease in net earnings compared to Q3, 2005 was largely due to a
      decrease in the after-tax foreign exchange gain arising from the
      translation of U.S.-dollar-denominated debt of $34.1 million.                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|8.0 | NON-GAAP MEASURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The following measure, included in this report, does not
      have a standardized meaning under Canadian GAAP.                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | EBITDA (earnings before interest, income taxes, depreciation,
        and amortization), as defined, equates to operating earnings (loss) plus
        amortization.                                                                                                                                                                                                                                                                                                                  

| | 38 | 
| | -- | 

---

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

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

The following table reconciles the Companys net earnings
  (loss) to EBITDA:

(In millions of dollars)
    2005
    2004
    2003Net earnings (loss)
      Amortization Foreign exchange gain on translation of long-term
      debt Write-down of property, plant and equipment Loss on repayment
      of long-term debt Other (income) expense, net Interest expense,
      net Income tax recovery Non-controlling interest
    $ (25.6) 180.3  (24.7)
        (4.5) 75.7  (46.6) 0.6
    $ (28.6) 184.1  (53.5)
        5.2  (1.2) 74.9  (28.1) 
    $ (84.5) 189.9  (58.2)
      14.2    3.9  75.0  (62.0) EBITDA
    $ 155.2
    $ 152.8
    $ 78.3


|9.0 | CRITICAL ACCOUNTING POLICIES AND ESTIMATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The preparation of financial statements in conformity
      with generally accepted accounting principles in Canada requires companies
      to establish accounting policies, and to make estimates that affect both
      the amount and timing of the recording of assets, liabilities, revenues
      and expenses. Some of these estimates require judgments about matters that
      are inherently uncertain.                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Note 2 to the December 31, 2005 consolidated financial
      statements includes a summary of the significant accounting policies used
      in the preparation of those consolidated financial statements. While all
      of the significant accounting policies are important to the consolidated
      financial statements, some of these policies may be viewed as involving a
      high degree of judgement. On an ongoing basis, management reviews its
      estimates, including those related to environmental and legal liabilities,
      impairment of long-lived assets, pension and post-retirement benefits,
      provision for bad/doubtful accounts, and income taxes based upon currently
      available information. Actual results could differ from those estimates.

| | 39 | 
| | -- | 

---

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

| | 9.1 | Environmental and Legal Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | Environmental and legal liabilities are recorded on an
      undiscounted basis when it is considered probable that a liability has
      been incurred and the amount of the loss can be reasonably estimated.
      Liabilities for environmental matters require evaluations of applicable
      environmental regulations and estimates of remediation alternatives and
      the costs thereof. Provisions for liabilities relating to legal actions
      and claims require judgments regarding projected outcomes and the range of
      loss, based on such factors as historical experience and recommendations
      of legal counsel.                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | As at December 31, 2005, the Company had a provision of
      $11.8 million for environmental, remedial and other obligations. In
      addition, the Company capitalized approximately $2.0 million, largely
      related to the improvement of air emissions and, to a lesser extent, other
      environmental compliance matters. In 2006, the Company expects capital
      expenditures relating to known environmental matters, including compliance
      issues and the assessment and remediation of the environmental condition
      of the Companys properties, will total approximately $5 million in 2006.                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 9.2 | Impairment of Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | The Company reviews long-lived assets, primarily plant
      and equipment, for impairment when events or changes in circumstances
      indicate that the carrying value of assets may not be recoverable.
      Canadian GAAP requires the Company to make certain judgments, assumptions
      and estimates in identifying such events and changes in circumstances, and
      in assessing their impact on the valuations and economic lives of the
      affected assets. A long-lived asset impairment is possible when an assets
      carrying value exceeds managements estimate of its undiscounted future
      cash flows. Impaired assets are recorded at fair value, determined
      principally by using discounted future cash flows expected from their use
      and eventual disposition. Key assumptions in estimating the future cash
      flows and fair values include, for example, future product pricing over
      the commodity cycle, and future estimates of useful lives.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | During the fourth quarter of 2005, the Company tested the
      long-lived assets of both the pulp segment and the indefinitely idled Port
      Alberni No. 3 paper machine for recoverability. The pulp segment was
      reviewed due to operating losses, recent pulp prices, and foreign currency
      movement, while the Port Alberni No. 3 paper machine was reviewed due to
      its idled status.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| | 40 | 
| | -- | 

---

| |     | To test the pulp assets, the Company used industry
      analysts estimates of future pulp prices and foreign exchange rate
      expectations, estimates of the remaining useful lives of the assets,
      estimates of the capital requirements as well as managements judgment to
      calculate the undiscounted cash flows. Based on its test, management
      determined that the pulp assets expected undiscounted cash flows exceed
      the pulp assets carrying value. Accordingly, an impairment provision was
      not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | To test the indefinitely idled Port Alberni No. 3 paper
      machine (A3), the Company used industry analysts estimates of future
      pricing and foreign exchange rate expectations, estimates of the remaining
      useful lives of the assets, estimates of the capital requirements,
      estimates of probabilities for potential A3 operating scenarios as well as
      managements judgment to calculate the weighted expected undiscounted cash
      flows. The estimate for potential A3 operating scenarios was based on
      managements current estimate of profitability for various products that
      could be produced, and the feasibility of the Company being able to modify
      equipment, including cost considerations, as well as market acceptance for
      the products. Based on its test, management determined that A3s weighted
      expected undiscounted cash flows exceed its carrying value. Accordingly,
      an impairment provision was not required.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | Long-lived assets represent approximately 79% of total
      assets, as at December 31, 2005. If the future were to adversely differ
      from managements best estimate of key assumptions and associated cash
      flows, the Company could potentially experience future material impairment
      charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | Due to the numerous variables associated with judgments
      and assumptions relating to the valuation of assets in such situations,
      the precision and accuracy of estimates of related impairment charges are
      subject to significant uncertainties, and may change significantly as
      additional information becomes known.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 9.3 | Pension and Post-Retirement Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | The Company maintains various employee future benefit
      plans, which include defined benefit pension and post-retirement benefit
      plans. The Company retains independent actuarial firms to perform
      actuarial valuations of the fair values of the Companys defined benefit
      pension and post-retirement benefit plan assets and benefit obligations,
      and advise on the amounts to be recorded in the Companys financial
      statements. This information is determined using certain assumptions,
      based on historical and market data that directly impact the fair value of
      the assets and obligations and charges disclosed in the Companys
      financial statements. These assumptions include:                                                                                                                                                                                                                                                             

| | 41 | 
| | -- | 

---

| |  |  | The discount rate which is used to estimate the actuarial
      present value of the various plan obligations. The Company, with the
      assistance of independent actuarial advisors, sets the discount rate
      assumption annually to reflect the rates available on high-quality debt
      instruments, with cash flows that are expected to match the timing and
      amount of expected benefit payments. The discount rate, as at December 31,
      2005, was estimated to be 5.0%.        
| |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
|
|
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | The long-term return on assets used to estimate the
      growth in the value of invested assets available to satisfy certain
      obligations. The Company, with the assistance of independent actuarial
      firms, annually sets the expected rate of return on plan assets to reflect
      the current view of long-term investment returns. In consultation with its
      independent actuarial advisors, as at December 31, 2005, a rate of return
      of 7.25% was determined by management.
|
|
|
|
|
|
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | Salary increases used to estimate the impact that future
      compensation increases will have on pension and other post-retirement
      obligations. In consultation with its independent actuarial advisors, as
      at December 31, 2005, the rate of compensation increase of 3.0% was
      determined by management.                                                                                                                                                                            
|
|
|
|
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | Health care trend rates and mortality rates used to
      estimate the impact that future health care costs will have on pension and
      post- retirement obligations. In consultation with its independent
      actuarial advisors, as at December 31, 2005, the initial health care trend
      rate of 10.0% was determined by management. The initial health care trend
      rate is expected to decline by 1.0% annually, and the ultimate health care
      trend rate is estimated to be 5.0%.
|
|
|
|
|
|

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

The following table provides a sensitivity
  analysis of the key weighted average economic assumptions used in measuring
  the accrued pension benefit obligation, the accrued other employee future benefit
  and related net periodic benefit cost for 2005. The sensitivity analysis should
  be used with caution as it is hypothetical and changes in each key assumption
  may not be linear. The sensitivities in each key variable have been calculated
  independently of each other.

| | 42 | 
| | -- | 

---

Pension Benefit Plans
    Other Benefit Plans(In millions of
      dollars)
    Accrued Benefit Obligation
    Net 2005 Expense
    Accrued Benefit Obligation
    Net 2005 ExpenseExpected rate of return
      on assets Impact of:    1% increase    1%
      decrease
    N/A N/A
    (2.3) 2.3
    N/A N/A
    N/A N/ADiscount rate Impact
      of:    1% increase    1% decrease
    (30.1) 32.7
    (2.0) 3.7
    (29.9) 39.7
    (2.2) 2.7Assumed overall health
      care cost trend Impact of:    1% increase  
       1% decrease
    N/A N/A
    N/A N/A
    39.7 (31.4)
    3.2 (2.4)


| | 9.4 | Provision for Bad Debt and Doubtful Accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | The Company uses generally accepted practices in
      estimating required provisions for doubtful accounts and bad debt losses
      arising on trade and other receivable balances. The Companys estimate of
      the required allowance is a matter of opinion and the actual loss
      eventually sustained may be more or less than that estimated.                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | The Company regularly reviews the collectibility of its
      accounts receivable. The Company records its allowance for doubtful
      accounts based on its best estimate of any potentially uncollectible
      accounts by highlighting specific high risk accounts and then applying
      judgment to determine its estimate. Consideration is given to current
      economic conditions and specific customer circumstances to determine the
      amount of any bad debt expense to be recorded. While the Company has not
      experienced any significant bad debt expense in prior periods, declines in
      the economy could result in collectibility concerns. Accounts receivable
      balances for individual customers could potentially be material at any
      given time.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | As at December 31, 2005, Accounts receivable comprised
      approximately 9% of total assets. Included in this balance, the Company
      had a provision of approximately $7.0 million for doubtful accounts, or
      approximately 3.0% of accounts receivable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 9.5 | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | The amounts recorded for future income tax assets and
      liabilities are based on various judgments, assumptions and estimates.
      Future tax assets and liabilities are measured using enacted or
      substantively enacted tax rates in which assets and liabilities are
      expected to be recovered or settled. For these years, a projection of
      taxable income and an assumption of the                                                                                                                                                                                                                                                                                                                                                                                      

| | 43 | 
| | -- | 

---

ultimate recovery or settlement period
for temporary differences are required. The projection of future taxable income
is based on managements best estimate and may vary from actual to taxable
income. The Companys future tax assets are mainly composed of temporary
differences in employee future benefits and loss carryforwards. Future tax
liabilities are mainly composed of temporary differences pertaining to property,
plant and equipment. Estimating the ultimate settlement period requires judgment
and estimates. The reversal of timing differences is expected at future
substantially enacted rates which could change due to changes in income tax laws
or the introduction of tax changes. As a result, a change in the timing and the
income tax rate at which the components will reverse could materially affect
future tax expense as recorded in the consolidate statement of earnings. A one
percentage point change in the Companys reported effective income tax rate
would have the effect of changing the income tax expense by approximately $8.9
million.

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

|10.0 | CHANGES IN ACCOUNTING POLICIES                                                                                                                             
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                            
|     | Effective fiscal 2005, the Company adopted the following
      new pronouncements issued by the Canadian Institute of Chartered
      Accountants (CICA):
|     |                                                                                                                                                            
|     | 10.1                                                                                                                                                       
|     |                                                                                                                                                            
|     |                                                                                                                                                            
|     |                                                                                                                                                            
|     |                                                                                                                                                            

| | 44 | 
| | -- | 

---

| |      | and consists of an integrated hydroelectric power
      generating, transmission and distribution system which includes two
      hydroelectric generating stations, that provide power to the Company. The
      Company purchases 100% of the power generated by PREI. The Companys 50.0%
      interest in PREI was previously accounted for using the proportionate
      consolidation method. The adoption of this new standard increased the
      Companys EBITDA by $7.0 million for the year ended December 31, 2005, and
      had no impact on net earnings. In addition, long-term debt increased by
      approximately $57 million as a result of the consolidation of 100% of
      PREI.                                                                                                                                                                                        
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 10.2 | Emerging Issues Committee Abstract Number 159,
      Conditional Asset Retirement Obligations (EIC-159)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |      | On December 6, 2005, the CICAs Emerging Issues Committee
      issued EIC-159. EIC-159 is similar to the Financial Accounting Standards
      Boards Interpretation No. 47, Accounting for Conditional Asset
      Retirement Obligations which was issued in March 2005 and highlighted in
      the Companys interim reports. EIC-159 is effective for interim and annual
      reporting periods ending March 31, 2006. Effective, December 31, 2005, the
      Company early adopted EIC-159.                                                                                                                                                                                                                                                                                                                                                                                             
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |      | EIC-159 clarifies that the term, conditional asset
      retirement obligation, as used in CICA Handbook Section 3110, Asset
      Retirement Obligations, refers to a legal obligation to perform an asset
      retirement activity in which the timing and (or) method of settlement are
      conditional on a future event that may or may not be within the control of
      the entity. EIC-159 also clarifies what constitutes sufficient information
      to reasonably estimate the fair value of a conditional asset retirement
      obligation, and that if sufficient information is not available to
      reasonably estimate a conditional asset retirement obligation at the time
      the liability is incurred that the obligation should be recognized
      initially in the period in which sufficient information becomes available
      to estimate its fair value.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |      | As a result of the adoption of EIC-159, the Company
      concluded that obligations for the proper removal and disposal of asbestos
      products in the Companys mills meet the definition of a conditional asset
      retirement obligation. That is, the Company is subject to regulations that
      are in place to ensure that asbestos fibres do not become friable, or
      loose. The regulations require that friable asbestos be repaired, or
      removed in accordance with the regulations.                                                                                                                                                                                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |      | The Companys asbestos can generally be found on steam
      and condensate piping systems throughout its facilities, as well as in
      transite cladding on buildings and in building insulation. As a result of
      the longevity of the Companys mills, due in part to the Companys
      maintenance procedures, and the fact that the Company does not have plans
      for major changes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| | 45 | 
| | -- | 

---

that would require the removal of
asbestos, the timing of the removal of asbestos in the Companys mills is
indeterminate as at December 31, 2005. As a result, the Company is currently
unable to estimate the fair value of its asbestos removal and disposal
obligation. Consequently, the adoption of EIC-159 did not have an impact on the
consolidated financial statements for the year ended December 31, 2005.

|11.0 | IMPACT OF ACCOUNTING PRONOUNCEMENTS
        AFFECTING FUTURE PERIODS                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | In April 2005, the CICA issued
        the following new accounting standards that impact the recognition, measurement
        and disclosure of financial instruments, hedges and comprehensive income.                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | The new sections are all to
        be applied at the same time and are effective for interim and annual financial
        statements relating to fiscal years beginning on or after October 1, 2006.
        Early adoption is permitted, but only as of the beginning of a fiscal
        year ending on or after December 31, 2004. The Company is currently in
        the process of evaluating the impact of the new accounting standards on
        the Companys financial position, results of operations, and cash
        flows.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|12.0 | RISKS AND UNCERTAINTIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | The Company produces and markets
        pulp and paper products that are sold globally. The Company seeks to differentiate
        its product lines from those of other producers by supplying specialty
        products that add value for customers. However, like most companies in
        the forest products industry in North America, the Company faces business
        risks and uncertainties. These fall into the general                                                                                                   

| | 46 | 
| | -- | 

---

business areas of markets, international
  commodity prices, foreign currency exchange rates, environmental issues, fibre
  supply, government regulation and policy, and for Canadian companies, trade
  barriers and Aboriginal land claims.

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

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

| | 12.1 | Product Prices                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      | The Companys markets are commodity-based and cyclical in
      nature. Markets for the principal products are affected by fluctuations in
      supply and demand within each cycle, which in turn affects product prices.
      Demand has historically been determined by the level of economic growth
      and has been very closely tied to overall business activity and personal
      income. The Companys earnings are sensitive to price changes for its
      principal products, with the effect of price changes on newsprint and
      specialty grades being the greatest.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      | In addition, there is evidence to suggest the newsprint
      market is mature as declines in U.S. consumption have occurred in each of
      the last eleven quarters on a year-over-year basis. The Company believes
      it remains well positioned to mitigate the impact of this decline, through
      its ability to switch grades.                                                                                                                                                                                                                                                
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      | See Sensitivity Analysis section for further details
      about the Companys sensitivity to product price fluctuations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 12.2 | Global Competition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      | Pulp and paper markets are highly competitive global
      commodity markets in which producers compete primarily on the basis of
      price. A majority of the Companys production is directed to markets
      outside Canada, where Canadian producers generally compete with American,
      European, and Asian producers. Many of the Companys competitors are
      larger and have greater financial resources than the Company and some of
      the mills                                                                                                                     

| | 47 | 
| | -- | 

---

| |      | operated by the Companys competitors are lower cost
      producers than the mills the Company operates. To stay competitive the
      Company is focused on improving productivity and reducing costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 12.3 | International Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |      | A significant portion of the Companys sales are outside
      Canada and the United States, and therefore the Company faces a number of
      risks including tariffs and other trade barriers, political and economic
      instability in foreign markets, and fluctuations in foreign currencies.                                                                                                                                                                                                                                                                                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |      | Under the terms of agency and distribution agreements
      with affiliates of Norske Skog, a significant shareholder, either party on
      six months notice may terminate each of these contracts. If any of these
      contracts are terminated, the Company will be required to replace the
      sales agent or distributor within the six-month notice period in order to
      minimize disruption to sales activities in the relevant market.                                                                                                                                                                                                                                                             
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 12.4 | Foreign Exchange                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |      | The Companys profitability is subject to fluctuations
        in foreign currencies, particularly the U.S. dollar, which is the currency
        in which most sales are denominated. Fluctuations in foreign currencies
        affect the Companys competitive position in world markets. Apart
        from the value of the Canadian dollar relative to the U.S. dollar, the
        Companys competitiveness in world markets is also affected by the
        relative strength of the currencies of other producing countries. The
        Company is also exposed to currency exchange risk on debt denominated
        in U.S. dollars, including its 7.375% and 8.625% senior notes.                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |      | Under a Board-approved foreign exchange risk management
      program, the Company manages a portion of its currency exposure through
      the use of currency options and forward contracts to hedge anticipated
      future sales denominated in foreign currencies and U.S.-dollar-denominated
      debt. The Companys hedging policy for revenues includes 33% to 67% of 12
      month and 0% to 25% of 13 to 24-month U.S. dollar net exposure. The
      Company considers its U.S. dollar revenues to act largely as a hedge of
      its U.S.-dollar-denominated debt. The revenue hedge program mitigates the
      impact of any rapid movements in currency by 40% to 50% over the near
      term.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |      | See the Sensitivity Analysis section for further
      details about the Companys sensitivity to foreign exchange fluctuations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 12.5 | Fibre Supply                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |      | Since the Company has no significant timber holdings,
        operations are dependent on the supply of wood fibre from third parties,
        over half of which is provided by five suppliers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | 48 | 
| | -- | 

---

| |      | The Companys fibre supply could be reduced as a
        result of events beyond its control, such as industrial disputes, natural
        disasters, material curtailments, or shutdown of operations by suppliers
        or the Company for market or other reasons.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | Long-term contracts with third parties are conducted at
        market prices or at prices determined under market-based formulas and
        represent approximately 70% of the Companys pulp and paper mills
        fibre requirements. The solid wood segment of the B.C. coastal forest
        industry has undergone significant restructuring and downsizing. As a
        result, there is no assurance that the Company will continue to be able
        to access coastal fibre at the same levels achieved in the past.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | In addition, government regulations and aboriginal issues
      may also lower the supply of wood fibre. The Province of British Columbia
      owns approximately 95% of all timberlands and could introduce legislation
      to reduce wood fibre supply. Aboriginal groups have claimed aboriginal
      title over substantial portions of British Columbia, including areas where
      the forest tenures held by the Companys suppliers are situated. Although
      the renewal of forest tenures held by the Companys suppliers may be
      adversely impacted by claims of aboriginal title, the specific impact
      cannot be estimated at this time.                                                                                                                                                                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | The Company is also a large consumer of old newspapers
      and magazines. Ownership of Western Canadas largest paper recycling
      facility enables the Company to secure 100% of its recycled fibre needs
      from the internal recovery network. While the supply remains reliable, the
      pricing is determined by the market and is subject to variability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | See the Sensitivity Analysis section for further
      details about the Companys sensitivity to fibre cost movements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 12.6 | Aboriginal Claims                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | The Companys ability to operate its manufacturing
      facilities will also be affected by aboriginal groups claims of
      aboriginal title and rights. The governments of Canada and British
      Columbia have established a formal process to negotiate settlements with
      aboriginal groups throughout British Columbia in order to resolve these
      land claims. It is the policy of the governments that ownership of lands
      held in fee simple by third parties such as the Company will not be
      affected by treaty negotiations. In the case of the Powell River mill, the
      site has been included in areas to which an aboriginal group has asserted
      aboriginal title both through treaty negotiations with government and by
      commencing an action in the Supreme Court of British Columbia. While the
      Company and other industrial companies have been named as parties in the
      court proceeding along with the governments of Canada and British
      Columbia, counsel for

| | 49 | 
| | -- | 

---

| |      | the aboriginal group has advised the Company that the
      plaintiffs are currently negotiating with two governments and have no
      intention of proceeding with the action at this time. Based on the history
      of similar proceedings, the Company expects that it would take many years
      before a final court decision could be rendered if pursued.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      | Recent Supreme Court of Canada decisions have confirmed
        that the governments of Canada and British Columbia are obligated to consult
        with and, in certain circumstances, accommodate aboriginal groups whenever
        there is a reasonable prospect their decisions may affect aboriginal groups
        rights or title. This duty of consultation and accommodation may affect
        the Companys ability to obtain or amend necessary regulatory permits
        on a timely basis.                                                                                                                                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 12.7 | Energy Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      | The Company is a significant consumer of electrical power
        and fossil fuels.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      | The Government of British Columbia regulates the Companys
        electricity supply contracts and there have been few fluctuations in the
        terms of the contracts, as the November 2004 increase of approximately
        5% was the only increase in the last 11 years. However, future changes
        in electricity prices could have a significant impact on the Companys
        earnings.                                                                                                                                                                                                                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      | The provincial electricity regulator recently approved
        a redesigned rate structure for industrial customers that will result
        in the Company acquiring 90% of the electricity purchased from BC Hydro
        (the Utility) at a fixed rate that is lower than the current
        regulated rate, and 10% of the electricity at a rate that will approximate
        the price currently paid by the Utility for incremental electricity supplied
        by independent producers. The change in rate structure is expected to
        be implemented in 2006, and by design, is not expected to materially impact
        the Company's total cost of electricity. However, the rate structure has
        been designed to motivate industrial customers to reduce their electricity
        consumption.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      | The majority of the Companys fossil fuels, particularly
        oil and natural gas, are purchased on the spot market, which can fluctuate
        significantly depending on various external factors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      | A portion of the Companys exposure to fluctuating
        fossil fuel prices is managed through the use of financial instruments
        and contracts, under a Board-approved energy program. The Companys
        energy hedging policy is restricted to 20-70% of the net exposure for
        oil and gas. In addition, the Company reduces its exposure to fossil fuel
        prices through the use of lower priced alternatives.                                                                                                                                                                                                                                                                                                                                                                                    

| | 50 | 
| | -- | 

---

| |       | Freight charges comprise a significant portion of the
      Companys cash costs, and are also dependent on oil and diesel fuel
      prices.                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |       | See the Sensitivity Analysis section for further
      details about the Companys sensitivity to energy cost fluctuations.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 12.8  | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |       | In the ordinary course of business, the Company occasionally
        will become party to legal proceedings, generally related to contract
        disputes and employment law. As at December 31, 2005, the final results
        of ongoing legal proceedings, while not immediately determinable, are
        not expected to have a material effect on financial results.                                                                                                                                                                                                        
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |       | The Company and certain of its affiliates have been named
        together with, a number of other paper producers, in United States class
        action lawsuits alleging an ongoing conspiracy to fix prices of magazine
        and other publication papers. These suits have been triggered by a European
        Commission investigation into possible anti-competitive practices by certain
        European paper producers. The Company believes there is no merit to the
        lawsuits but will nevertheless continue to incur related costs to defend
        itself.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 12.9  | Prior Period Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |       | The Company has recorded a net loss in 9 of the last 12
      quarters. These losses have arisen primarily as a result of adverse market
      conditions. Should market conditions deteriorate to a greater extent, the
      Company may, over time, need to rely to a greater extent on its Facility
      and, if necessary, additional sources of funding.                                                                                                                                                                                                                      
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |       | In particular, the Companys pulp operations, like those
      of other producers, have come under increasing pressure as a result of a
      relatively strong Canadian dollar and market conditions that do not
      compensate producers for rising energy costs. While under current market
      projections the Company expects to operate its pulp facilities, further
      deterioration in market conditions or unplanned capital expenditures may
      necessitate temporary or permanent curtailment.                                                                  
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 12.10 | Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |       | The Company has a significant amount of debt, and debt
        agreements contain various restrictive and financial covenants. The Companys
        ability to pay interest on, and to satisfy, its debt obligations will
        depend upon the Companys future operating performance and its ability
        to obtain additional debt or equity financing, when necessary. Prevailing
        economic conditions and financial, business, and other factors beyond
        the Companys control may affect its ability to make these payments.                               

| | 51 | 
| | -- | 

---

| |       | In addition, the Companys debt level may limit
        its ability to obtain additional financing and increase its vulnerability
        to interest rate fluctuations. Should the challenging market conditions
        continue, the Company may, over time, have to rely to a greater extent
        on its Facility and, if necessary, additional sources of funding.                                                                      
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 12.11 | Environmental Regulation                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |       | The Companys operations are subject to a wide range of
      general and industry specific environmental laws and regulations related
      to waste management. The costs of compliance with such laws and
      regulations can be significant. The Company continually monitors its
      environmental performance, and believes that its facilities are operating
      in substantial compliance with environmental laws and regulations.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 12.12 | Labour Disruptions                                                                                                                                                                                                                                                                                                                                                                                                                              
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |       | Many of the Companys suppliers and service providers are
      unionized. Strikes or work stoppages by members of those unions could
      result in a significant disruption of operations or higher operating
      costs, which could have a material adverse effect on the business.                                                                                                                                                       
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |       | The majority of the Companys pulp and paper mill
      employees are members of the Communications, Energy & Paperworkers
      Union of Canada, or the Pulp, Paper and Woodworkers of Canada unions.
      Collective agreements with these unions expire in April 2008. The Company
      believes its labour relations are good and does not anticipate labour
      disruptions in its operations.                                         

|13.0 | SENSITIVITY ANALYSIS                                                                                                                                                                                                                                                                                                                                   
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                        
|     | The Companys earnings are sensitive to fluctuations in:                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                        
|     | Product Price                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                        
|     | The Companys products are commodity-based and cyclical
      in nature. As a result, earnings are sensitive to price changes, with the
      effect of price changes on specialty grades and newsprint being the
      greatest.                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                        
|     | Foreign Exchange                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                        
|     | The Companys products are primarily sold in Canada, the
      United States, Asia and Australasia, Latin America, and Europe. The
      majority of sales are denominated in foreign currencies, principally the
      U.S. dollar. As a result, the Company is exposed to foreign currency
      market risk on accounts receivable and future sales.
|     |                                                                                                                                                                                                                                                                                                                                                        
|     | Energy Costs                                                                                                                                                                                                                                                                                                                                           

| | 52 | 
| | -- | 

---

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

Fibre Costs

The Companys supply of fibre is
reliable although it is subject to market influences and has some degree of
variability. Fibre includes supply of wood chips, logs and old newspapers
(ONP).

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

(In millions of
      dollars, except per share amounts)
    EBITDA5
    Net
      earnings1
    Earnings per
      shareProduct prices2A US$10 per tonne change in the sales price
      of:Specialties
    $       13.3
    $         8.7
    $       0.04Newsprint
    9.8
    6.4
    0.03Pulp
    4.3
    2.8
    0.01Foreign exchange3A US$0.01 change in the U.S. dollar relative
      value of theCanadian dollar
    $       15.8
    $         9.8
    $       0.05Energy cost
      sensitivity4A 5% change in the price of:Natural gas
      and oil  direct purchases
    $         2.4
    $         1.8
    $       0.01Electricity
       direct purchases
    8.8
    6.5
    0.03Fibre sensitivity4A 5% change in the price of:Wood chips
      and sawdust
    $       13.5
    $       10.0
    $       0.05ONP
    1.3
    1.0
    0.01


| | 1. | Based on an expected tax rate of 35%.                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Based of full 2006 capacities.                                                                                                                                                  
| | 3. | Based on a movement from US$0.81 to US$0.82, and excludes
      the Companys hedging program and the impact of the Companys translation
      of U.S.-dollar-denominated debt.
| | 4. | Based on 2005 consumption levels.                                                                                                                                               
| | 5. | EBITDA is a non-GAAP measure. Refer to the Non-GAAP
      Measures section for further details.                                                                               

|14.0 | OUTLOOK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | U.S. economic conditions are expected to remain stable at
      least through the first half of 2006. The effects of rising energy and
      fibre costs continue to present challenges for the industry, and the
      strength of the Canadian dollar remains a major concern. These challenges
      are expected to continue to result in upward pressure on paper pricing. In
      contrast to other regions, the favourable economic environment in British
      Columbia, particularly with respect to stable electricity prices, along
      with the Companys limited reliance on fossil fuels in its
|
|
|
|
|
|

| | 53 | 
| | -- | 

---

|     | manufacturing processes, are expected to help create a
      competitive advantage for the Company. However, a continued strengthening
      of the Canadian dollar could offset the Companys progress on earnings
      improvement initiatives. The Company estimates that approximately one
      quarter of its cash costs are based on U.S.-dollar-denominated inputs, and
      approximately 90% of its revenues are denominated in U.S. dollars.                                                                                                                                                                                                                                                                                                                                                                                                  
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | In 2006, the Company expects to spend approximately $100
      million on capital projects, including approximately $7 million related to
      PREI, much of which will be directed toward rapid return projects in
      support of the Companys performance improvement program. With respect to
      its annual planned maintenance, the Company expects spending to be more
      evenly distributed throughout each quarter of the year.                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|15.0 | DISCLOSURE CONTROLS AND INTERNAL CONTROL OVER FINANCIAL
      REPORTING                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | The Companys Audit Committee, as part of its oversight
      role, has reviewed and recommended the approval of this MD&A to the
      Board of Directors. The Board of Directors have read and approved this
      MD&A. The Board of Directors and the Audit Committee have satisfied
      themselves that management has implemented the necessary disclosure
      controls through discussions with management.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | Certification of Disclosure Controls                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | In 2004, the Canadian Securities Administrators (CSA)
      issued Multilateral Instrument 52-109, Certification of Disclosure in
      Issuers Annual and Interim Filings. Effective for fiscal years ending on
      or after March 31, 2005, CEOs and CFOs (certifying officers) are
      required to certify that they are responsible for establishing and
      maintaining disclosure controls, ensuring the disclosure controls are
      designed to provide reasonable assurance that material information is made
      known to them, they have evaluated the effectiveness of the issuers
      disclosure controls, and have disclosed their conclusions about their
      effectiveness at the end of the period covered by the annual filings.                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | The Companys certifying officers have evaluated the
      effectiveness of the Companys disclosure controls, as of the Companys
      year ended December 31, 2005, and as a result of that evaluation have
      concluded that the Companys disclosure controls are effective for the
      year ended December 31, 2005. While the Companys certifying officers
      believe that the Companys disclosure controls and procedures provide a
      reasonable level of assurance that they are effective, they do not expect
      that the disclosure controls and procedures or internal controls over
      financial reporting will prevent all errors and fraud. A control system,
      no matter how well designed and operated, can provide only a reasonable,
      not absolute, level of assurance that the control objectives are met.

| | 54 | 
| | -- | 

---

Internal Controls

In February 2005, the CSA issued
proposed Multilateral Instrument 52-111, Reporting on Internal Control Over
Financial Reporting (MI 52-111). MI 52-111 is very similar in its
requirements to those found in Section 404 of the United States Sarbanes-Oxley
Act, Management Assessment of Internal Controls, (Section 404). Both MI
52-111 and Section 404 require that companies maintain an effective system of
internal controls, report on the effectiveness of those internal controls
annually and have the independent auditor report on managements assessment of
internal controls over financial reporting.

It is expected that the Company will
have to comply with MI 52-111 by the end of its fiscal year ended December 31,
2007.

During the first quarter of 2005, the
United States Securities and Exchange Commission extended the Section 404
compliance dates for foreign private issuers. The Company is now expected to
comply with Section 404 by the end of its fiscal year ended December 31,
2006.

In order to comply with Section 404,
the Company has undertaken a project to update and formalize its internal
controls, and to test and document the effectiveness of the internal controls
upon which management is relying. To this end, the Company has engaged a third
party advisor to assist in the project (the Internal Control Project).

The Internal Control Project has been
ongoing and as of the end of the Companys fiscal year ended December 31, 2005,
the Company has completed the documentation of its internal controls, and has
tested the majority of controls upon which management is relying. For the most
part the Company is beginning to move away from a project approach towards
sustainability of the internal control reporting process. However, remediation
work is ongoing with respect to some of the Companys systems, and the Company
continues to refine its internal control documentation. Based on the work done
to date, the Company expects that it will be able to comply with Section 404 and
with MI 52-111 when it is finalized.

|16.0 | OUTSTANDING SHARE DATA                                                                                                                                                                                                                                      
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                             
|     | At January 25, 2006, the Company had 214,604,120 common
      shares issued and outstanding.                                                                                                                                                                
|
|     |                                                                                                                                                                                                                                                             
|     | Additional information about the Company including the
        2005 Annual Information Form is available on the Companys website
        www.catalystpaper.com, or the
        Canadian Securities Administrators electronic filing website www.sedar.com.
|
|
|

| | 55 | 
| | -- | 

---