---

|MANAGEMENTS RESPONSIBILITY
|---------------------------

The management of Catalyst Paper Corporation is responsible for
the preparation, integrity and fair presentation of the accompanying
consolidated financial statements and other information contained in this Annual
Report. The consolidated financial statements and related notes were prepared in
accordance with accounting principles generally accepted in Canada and reflect
managements best judgments and estimates. Financial information provided
elsewhere in this Annual Report is consistent with that in the consolidated
financial statements.

Management maintains a system of internal controls over
financial reporting which encompasses policies, procedures and controls to
provide reasonable assurance that assets are safeguarded against loss or
unauthorized use, transactions are executed and recorded in accordance with
managements authorization, and financial records are accurate and reliable.

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

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

|Russell J. Horner       | Ralph Leverton             
|----------------------- | ---------------------------
|President and           | Vice-President, Finance    
|Chief Executive Officer | and Chief Financial Officer
|                        |                            
|                        |                            
|Vancouver, Canada       |                            
|January 24, 2006        |                            

AUDITORS REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of Catalyst
Paper Corporation as at December 31, 2005 and 2004 and the consolidated
statements of earnings, retained earnings and cash flows for each of the years
in the three-year period ended December 31, 2005. These financial statements are
the responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Company as at
December 31, 2005 and 2004 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2005 in
accordance with Canadian generally accepted accounting principles.

Chartered AccountantsVancouver, Canada

January 24, 2006

2

---

CONSOLIDATED STATEMENTS OF
EARNINGS(In millions of dollars, except where otherwise
stated)

|                                                               |   | Years ended December 31, |  
|-------------------------------------------------------------- | - | ------------------------ | -
|                                                               |   | 2005                     |  
|Sales                                                          | $ | 1,823.9                  |  
|Operating expenses                                             |   |                          |  
|Cost of sales                                                  |   | 1,611.0                  |  
|Selling, general and administrative                            |   | 57.7                     |  
|Amortization                                                   |   | 180.3                    |  
|                                                               |   | 1,849.0                  |  
|                                                               |   |                          |  
|Operating earnings (loss)                                      |   | (25.1                    | )
|                                                               |   |                          |  
|Foreign exchange gain on translation of long-term debt         |   | 24.7                     |  
|Loss on repayment of long-term debt
      (note 12)            |   |                         |  
|Write-down of property, plant and equipment (note 9)           |   |                         |  
|Other income (expense), net                                    |   | 4.5                      |  
|Interest expense, net (note 5)                                 |   | (75.7                    | )
|Earnings (loss) before income taxes
      and                  |   |                          |  
|non-controlling interest                                       |   | (71.6                    | )
|Income tax recovery (note 6)                                   |   | (46.6                    | )
|Net earnings (loss) before non-controlling interest            |   | (25.0                    | )
|Non-controlling interest (note 3(a))                           |   | (0.6                     | )
|Net earnings (loss)                                            | $ | (25.6                    | )
|                                                               |   |                          |  
|Basic and diluted earnings (loss) per share (note 7)
      (in |   |                          |  
|dollars)                                                       | $ | (0.12                    | )
|                                                               |   |                          |  
|Weighted average common shares outstanding
      (in           |   |                          |  
|millions)                                                      |   | 214.6                    |  



CONSOLIDATED STATEMENTS OF RETAINED
EARNINGS(In millions of dollars)

|                                                  |   | Years ended December 31, |  
|------------------------------------------------- | - | ------------------------ | -
|                                                  |   | 2005                     |  
|Retained earnings, beginning of year              |   |                          |  
| as previously reported                          | $ | 124.4                    |  
|Effect of change in accounting policy (note 3(c)) |   |                         |  
|Retained earnings, beginning of year, restated    |   | 124.4                    |  
|Net earnings (loss)                               |   | (25.6                    | )
|Retained earnings, end of year                    | $ | 98.8                     |  

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

3

---

CONSOLIDATED BALANCE SHEETS(In
millions of dollars)

|                                                                   |   | As at December 31, | 
|------------------------------------------------------------------ | - | ------------------ | 
|                                                                   |   | 2005               | 
|ASSETS                                                             |   |                    | 
|Current assets                                                     |   |                    | 
|Cash and cash equivalents                                          | $ |                   | 
|Accounts receivable                                                |   | 246.7              | 
|Inventories (note 8)                                               |   | 245.7              | 
|Prepaids
      and other                                           |   | 24.1               | 
|                                                                   |   |                    | 
|                                                                   |   | 516.5              | 
|Property, plant and equipment (note 9)                             |   | 2,139.3            | 
|Other assets (note
      10)                                       |   | 40.1               | 
|                                                                   |   |                    | 
|                                                                   | $ | 2,695.9            | 
|LIABILITIES                                                        |   |                    | 
|Current liabilities                                                |   |                    | 
|Accounts payable and accrued
      liabilities (note 11)           | $ | 279.4              | 
|Long-term debt (note 12)                                           |   | 861.9              | 
|Other long-term obligations (note 13)                              |   | 209.7              | 
|Future income taxes (note 6)                                       |   | 300.9              | 
|Deferred credits
      (note 14)                                   |   | 24.3               | 
|                                                                   |   | 1,676.2            | 
|                                                                   |   |                    | 
|SHAREHOLDERS EQUITY                                               |   |                    | 
|Share capital (note 15)                                            |   | 913.6              | 
|Contributed surplus (note 3(c))                                    |   | 7.3                | 
|Retained earnings                                                  |   | 98.8               | 
|                                                                   |   | 1,019.7            | 
|                                                                   |   |                    | 
|                                                                   | $ | 2,695.9            | 
|Commitments and Guarantees and Indemnities
      (notes 21 and 22) |   |                    | 
|Contingent liabilities (note 23)                                   |   |                    | 

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



ON BEHALF OF THE BOARD:

|                   | 
|------------------ | 
|Russell J. Horner  | 
|Director           | 
|                   | 
|                   | 
|                   | 
|                   | 
|Thomas S. Chambers | 
|Director           | 

4

---

CONSOLIDATED STATEMENTS OF CASH
FLOWS(In millions of dollars)

|                                                                 |   | Years ended December 31, |  
|---------------------------------------------------------------- | - | ------------------------ | -
|                                                                 |   | 2005                     |  
|                                                                 |   |                          |  
|Cash flows provided (used) by:                                   |   |                          |  
|Operations                                                       |   |                          |  
|Net earnings (loss)                                              | $ | (25.6                    | )
|Items not requiring (providing) cash                             |   |                          |  
|Amortization                                                     |   | 180.3                    |  
|Future income taxes                                              |   | (51.6                    | )
|Increase
      in other long-term obligations                    |   | 24.7                     |  
|Foreign exchange gain
      on translation of long-term debt     |   | (24.7                    | )
|Non-controlling
      interest (note 3(a))                       |   | 0.6                      |  
|Loss on repayment
      of long-term debt (note 12)              |   |                         |  
|Write-down
      of property, plant and equipment (note 9)       |   |                         |  
|Other                                                            |   | 0.8                      |  
|                                                                 |   | 104.5                    |  
|Changes in non-cash working capital                              |   |                          |  
|Accounts
      receivable                                        |   | (9.1                     | )
|Inventories                                                      |   | 12.4                     |  
|Prepaids
      and other                                         |   | (6.7                     | )
|Accounts payable and accrued liabilities                         |   | (8.1                     | )
|                                                                 |   | (11.5                    | )
|Cash flows
      provided by operations                          |   | 93.0                     |  
|Investing                                                        |   |                          |  
|Acquisition of paper recycling business
      (note 4)           |   |                         |  
|Additions to property,
      plant and equipment                 |   | (95.2                    | )
|Proceeds from sale of property, plant and
      equipment        |   | 3.5                      |  
|Proceeds from termination
      of interest rate swaps           |   |                         |  
|Purchase price adjustment (note 19)                              |   |                         |  
|Decrease (increase) in other assets                              |   | (1.3                     | )
|Cash
      flows used by investing activities                    |   | (93.0                    | )
|Financing                                                        |   |                          |  
|Share issue costs                                                |   |                         |  
|Increase (decrease) in
      revolving loan (note 12)            |   | 6.4                      |  
|Issue of long-term debt (note 12)                                |   |                         |  
|Repayment of long-term
      debt (note 12)                      |   |                         |  
|Premium and expenses on repayment of long-term
      debt        |   |                         |  
|Deferred financing costs                                         |   | 0.1                      |  
|Decrease
      in other long-term obligations                    |   | (32.5                    | )
|Cash flows provided (used) by financing
      activities         |   | (26.0                    | )
|                                                                 |   |                          |  
|Cash and cash equivalents, increase
      (decrease) during year |   | (26.0                    | )
|Cash and
      cash equivalents, beginning of year               |   | 26.0                     |  
|Cash and cash equivalents, end of year                           | $ |                         |  
|Supplemental information:                                        |   |                          |  
|Income taxes paid                                                | $ | 3.9                      |  
|Net interest paid                                                |   | 75.3                     |  
|Common shares issued for
      acquisition of paper recycling    |   |                          |  
|business (note 4)                                                |   |                         |  

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

5

---

CONSOLIDATED BUSINESS
SEGMENTS(In millions of dollars)

Year ended December 31, 2005Specialty
    
    
    
    
    
    
    
    
    CorporatePapers
    
    
    Newsprint
    
    
    Pulp
    
    
    Adjustments
    
    
    ConsolidatedSales to external customers
      $
      994.7
      
      $
      529.1
      
      $
      300.1
      
      $
      
      
      $
      1,823.9Inter-segment sales
    
    
    
    
    
    
    
    83.3
    
    
    (83.3
    )
    
    Amortization
      
      97.8
      
      
      45.8
      
      
      36.7
      
      
      
      
      
      180.3Operating earnings (loss)
    
    21.4
    
    
    12.3
    
    
    (58.8
    )
    
    
    
    
    (25.1
    )Total assets
      
      1,416.8
      
      
      736.4
      
      
      524.2
      
      
      18.5
      
      
      2,695.9Additions to property, plant andequipment
      
      50.1
      
      
      23.6
      
      
      21.5
      
      
      
      
      
      95.2Year ended December 31, 2004Specialty
    
    
    
    
    
    
    
    
    CorporatePapers
    
    
    Newsprint
    
    
    Pulp
    
    
    Adjustments
    
    
    ConsolidatedSales to external customers
      $
      1,037.2
      
      $
      553.1
      
      $
      287.9
      
      $
      
      
      $
      1,878.2Inter-segment sales
    
    
    
    
    
    
    
    127.2
    
    
    (127.2
    )
    
    Amortization
      
      101.5
      
      
      49.5
      
      
      33.1
      
      
      
      
      
      184.1Operating earnings (loss)
    
    1.9
    
    
    (4.3
    )
    
    (28.9
    )
    
    
    
    
    (31.3
    )Total assets
      
      1,406.0
      
      
      741.3
      
      
      576.9
      
      
      21.7
      
      
      2,745.9Additions to property, plant andequipment
      
      28.5
      
      
      10.1
      
      
      29.4
      
      
      
      
      
      68.0Year ended December 31, 2003Specialty
    
    
    
    
    
    
    
    
    CorporatePapers
    
    
    Newsprint
    
    
    Pulp
    
    
    Adjustments
    
    
    ConsolidatedSales to external customers
      $
      1,002.7
      
      $
      539.2
      
      $
      278.6
      
      $
      
      
      $
      1,820.5Inter-segment sales
    
      
    
    
      
    
    
    171.5
    
    
    (171.5
    )
    
      Amortization
      
      98.5
      
      
      61.7
      
      
      29.7
      
      
      
      
      
      189.9Operating earnings (loss)
    
    (32.5
    )
    
    (56.6
    )
    
    (22.5
    )
    
    
    
    
    (111.6
    )Total assets
      
      1,441.8
      
      
      773.4
      
      
      575.8
      
      
      25.4
      
      
      2,816.4Additions to property, plant andequipment
      
      28.1
      
      
      25.6
      
      
      27.7
      
      
      
      
      
      81.4


See accompanying note 20 to the consolidated financial
statements.

6

---

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

|1. | NATURE OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | On October 3, 2005, the shareholders authorized
        Norske Skog Canada Limited to change its name to Catalyst Paper Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Catalyst Paper Corporation, together with
        its subsidiaries (collectively, the Company) is a significant
        newsprint and specialty groundwood paper producer in North America. The
        Company operates four manufacturing divisions, and one paper recycling
        division in British Columbia, Canada. The Company operates in three business
        segments.                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The primary markets for the Companys
        paper products are North America, Latin America and the Pacific Rim. The
        primary markets for the Companys pulp products are Europe and the
        Pacific Rim.                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The consolidated financial statements of the
        Company are expressed in millions of Canadian dollars and are prepared
        in accordance with Canadian generally accepted accounting principles (Canadian
        GAAP). These financial statements differ in certain respects from
        those prepared in accordance with United States generally accepted accounting
        principles (U.S. GAAP). These measurement differences are
        described in note 24 Differences between United States and Canadian
        generally accepted accounting principles.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

7

---

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

| | (e) | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The Company uses derivative financial instruments in the
      management of foreign currency, interest rate and commodity price
      exposures. The Companys policy is to use derivatives for managing
      existing financial exposures and not for trading or speculative purposes.
      The Company uses hedge accounting to account for the derivative financial
      instruments designated as hedging instruments, and the fair value method
      to account for derivative financial instruments not designated as hedging
      instruments. In order for a derivative to qualify for hedge accounting,
      the Company designates the hedge relationship and formally documents at
      its inception, the particular risk management objective and strategy, the
      specific asset, liability or cash flow being hedged, as well as how
      effectiveness is assessed. Risk management strategies and relationships
      are assessed on an on-going basis to ensure each derivative instrument is
      effective in accomplishing the objective of offsetting either changes in
      the fair value or cash flow attributable to the exposure being hedged both
      at inception and over the term of the hedging relationship.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Realized and unrealized gains or losses associated with
      hedging instruments are recognized in earnings in the same period the
      hedged item is recognized. Realized and unrealized gains or losses when
      hedging instruments have ended or ceased to be effective prior to their
      maturity are deferred and recognized in earnings concurrently with the
      recognition of the item being hedged.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Foreign exchange exposure to foreign currency revenue and
      related receivables, primarily in U.S. currency, is managed through the
      use of foreign exchange forward contracts and options to sell foreign
      currencies. Realized foreign exchange translation gains and losses from
      transactions formally designated as hedges are recognized concurrently
      with the hedged revenue in Sales. Instruments that are not designated as
      hedges are included in Prepaids and other or Accounts payable and
      accrued liabilities on the consolidated balance sheet at their fair
      value. Gains and losses, both realized and unrealized, from such
      instruments that are not designated as hedges are also recorded in
      Sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Price risk associated with the sale of products or
      purchase of certain inputs, primarily oil and gas, is managed from time to
      time through the use of commodity swaps. Realized gains and losses from
      transactions formally designated as hedges are recognized concurrently
      with the hedged item in Cost of sales. Instruments that are not
      designated as hedges are included in Prepaids and other or Accounts
      payable and accrued liabilities on the consolidated balance sheet at
      their fair value. Changes in fair value are recognized in Cost of sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Foreign currency exposure on long-term debt denominated
      in U.S. currency is managed through the use of forward contracts and
      options to purchase U.S. dollars. These instruments are reported under
      Other assets or Other long-term obligations on the consolidated
      balance sheet at their fair value with changes in fair value recognized in
      Foreign exchange gain on translation of long-term debt, offsetting the
      respective translation gains and losses on the underlying foreign currency
      long-term debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Exposure to interest rates on long-term debt is managed
      through the use of interest swaps. These swap agreements require the
      periodic exchange of payments without the exchange of the notional
      principal amount on which the payments are based. Settlement amounts under
      interest swap agreements formally designated as hedges are recognized in
      Interest expense, net, offsetting the interest expense otherwise
      incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Cash flows from derivative financial instruments that are
      designated as hedges are classified in Operations on the consolidated
      statement of cash flows consistent with the hedged transaction.
      Derivatives not designated as hedges are also classified in Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (f) | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Cash and cash equivalents include cash and short-term
      investments with original maturities of less than three months and are
      presented at cost, which approximates market value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (g) | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Inventories, other than supplies which are valued at
      cost, are valued at the lower of average cost and net realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

8

---

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

| | (h) | Property, plant and equipment                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                      
| |     | Property, plant and equipment are stated at cost, which
      includes capitalized interest during construction, less accumulated
      amortization, including asset impairment charges.            
| |     |                                                                                                                                                                                                      
| |     | Buildings, machinery and equipment are amortized on a
      straight-line basis at rates that reflect estimates of the economic lives
      of the assets. The rates for major classes of assets are:

Buildings
    2.5  5.0%Pulp and paper machinery and equipment
    5.0%


| |     | During periods of major production interruption, an
      obsolescence amount of 10% of normal amortization is charged on
      manufacturing equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | No amortization is charged on capital projects during the
      period of construction. Start-up costs incurred in achieving normal
      operating capacity on major capital projects are deferred and amortized
      over a five-year period.                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (i) | Impairment of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | Long-lived assets are tested for recoverability when
      events or changes in circumstances indicate their carrying value may not
      be recoverable. A long-lived asset is potentially not recoverable when its
      carrying value is greater than the sum of its undiscounted cash flows
      expected to result from its use and eventual disposition. The impairment
      loss, if any, is measured as the amount by which the long-lived assets
      carrying amount exceeds its fair value.                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (j) | Environmental costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | Environmental expenditures are expensed or capitalized
      depending upon their future economic benefit. Expenditures that prevent
      future environmental contamination are capitalized as part of Property,
      plant and equipment, and amortization is subsequently charged to income
      over the estimated future benefit period of the assets. Expenditures that
      relate to an existing condition caused by past operations are expensed.
      Liabilities are recorded on an undiscounted basis when rehabilitation
      efforts are likely to occur and the costs can be reasonably estimated.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (k) | Asset retirement obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | Asset retirement obligations are recognized, at fair
      value, in the period in which the Company incurs a legal obligation
      associated with the retirement of an asset. The associated costs are
      capitalized as part of the carrying value of the related asset and
      depreciated over its remaining useful life. The liability is accreted
      using a credit adjusted risk-free interest rate.                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (l) | Deferred financing costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | Deferred financing costs are included in Other assets
      on the consolidated balance sheet and represent the issuance costs of the
      Companys long-term debt. Related amortization is included in Interest
      expense, net on a straight-line basis over the term of the debt.                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (m) | Share issue costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | Direct costs of issuing shares, net of income tax
      recoveries thereon, are applied to reduce the value of consideration
      assigned to such shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                              

9

---

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

| | (n) | Stock-based compensation and other stock-based payments after
      January 1, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | The Company uses the fair-value based method of
      accounting for stock-based payments to key officers, directors and for
      stock options granted to its employees. Under the fair-value based method,
      compensation cost is measured at fair value at the date of grant, and is
      expensed over the awards vesting period. Any consideration paid by plan
      participants on the exercise of share options or the purchase of shares is
      credited to Share capital together with any related stock-based
      compensation expense.                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Deferred share units (DSU) settleable in cash are
      amortized over their vesting periods and remeasured at each reporting
      period, until settlement, using the quoted market value. DSUs are
      accounted for as compensation expense and recorded in Accounts payable
      and accrued liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (o) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Income taxes are accounted for using the liability
      method. Future income tax assets and liabilities are based on temporary
      differences (differences between the accounting basis and the tax basis of
      the assets and liabilities) and non-capital loss carry-forwards and are
      measured using the enacted or substantively enacted tax rates and laws
      expected to apply when these differences reverse. Future tax benefits,
      including non-capital loss carry- forwards, are recognized to the extent
      that realization of such benefits is considered more likely than not. The
      effect on future tax assets and liabilities of a change in tax rates is
      recognized in earnings in the period that substantive enactment occurs.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (p) | Deferred credits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Deferred credits represent the excess of amounts assigned
      to future income tax assets for tax losses acquired in other than business
      combinations over the consideration paid. Deferred credits are amortized
      to Income tax recovery in the consolidated statement of earnings over
      the period that the acquired tax asset is utilized.                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (q) | Employee future benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Pensions and other employee future benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | The estimated cost for pensions and other employee future
      benefits provided to employees by the Company is accrued using actuarial
      techniques and assumptions during the employees active years of service.
      These plans include funded and unfunded defined benefit plans and defined
      contribution plans. The net periodic benefit cost includes:                                                                                                                                                                                                                                                                                                                                                                                                          

| |  | - | the cost of benefits provided in exchange for employees
      services rendered during the year,                                                                                                                                                                                                                                                                                                                                    
| |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | - | the interest cost of benefit obligations,                                                                                                                                                                                                                                                                                                                                                                                            
| |  | - | the expected long-term return on pension fund assets
      based on the fair value for all asset classes,                                                                                                                                                                                                                                                                                                                            
| |  | - | gains or losses on settlements or curtailments,                                                                                                                                                                                                                                                                                                                                                                                      
| |  | - | the straight-line amortization of past service costs and
      plan amendments over the average remaining service period of the active
      employee group covered by the plans, unless the period is less than five
      years, in which case such costs are amortized over five years, and                                                                                                                                       
|
|
| |  | - | the amortization of cumulative unrecognized net actuarial
      gains and losses in excess of 10% of the greater of the accrued benefit
      obligation and the fair value of plan assets at the beginning of year over
      the average remaining service period of the active employee group covered
      by the plans, unless the period is less than five years, in which case
      such costs are amortized over five years.
|
|
|

| |     | The plan obligations are determined in accordance with
      the projected benefit method prorated on services.                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (r) | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Basic earnings (loss) per share are computed by dividing
      net earnings (loss) for the period by the weighted average shares
      outstanding during the reporting period. Diluted earnings (loss) per share
      are computed using the treasury stock method. When the effect of options
      and other securities convertible into common shares is anti-dilutive,
      including when the Company has incurred a loss for the period, basic and
      diluted loss per share are the same.

10

---

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

|   | (s)                           | Comparative figures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ----------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                               | Certain comparative figures disclosed in the consolidated
      financial statements have been reclassified to conform with the
      presentation adopted for the current year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|3. | CHANGE IN ACCOUNTING POLICIES
|   |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | (a)                           | Variable interest entities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                               | Effective January 1, 2005, the Company adopted the
      Canadian Institute of Chartered Accountants (CICA) Accounting Guideline
      15, Consolidation of Variable Interest Entities (AcG-15) on a
      prospective basis. AcG-15 prescribes the application of consolidation
      principles for entities that meet the definition of a variable interest
      entity (VIE). AcG-15 requires that an enterprise holding other than a
      voting interest in a VIE could, subject to certain conditions, be required
      to consolidate the VIE if the enterprise is considered its primary
      beneficiary whereby it would absorb the majority of the VIEs expected
      losses, receive the majority of its expected residual returns, or both.
|   |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                               | The adoption of AcG-15 resulted in the consolidation of
      100% of Powell River Energy Inc. (PREI). PREI commenced operations
      February 2001, 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 Company has limited access to PREIs assets, which
      generally takes the form of interest on loans, management fees and
      earnings distributions based on the Companys interest in PREI. In
      addition, creditors of PREI have recourse limited to the assets in PREI.
      The change in consolidation method does not change the Companys
      obligations with regard to PREI.                                                                                                                                                                                                                                                                                                                                                                  
|   |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                               | Upon adoption of AcG-15, the Company measured the assets,
      liabilities, and non-controlling interest of PREI at their carrying
      amounts and the consolidation of the additional 50.0% of PREI resulted in
      the following adjustments at January 1, 2005:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Current assets
    $
    2.5Property, plant and equipment
    
    56.9Other assets1
    
    15.7Current liabilities
    
    (3.3
    )Long-term debt
    
    (56.9
    )Future income taxes
    
    (14.9
    )


1Other assets includes
$16.3 million of non-controlling interest, representing PREIs deficit.

The adoption of AcG-15 is not expected
to have a material impact on consolidated net earnings (loss) going forward. The
following summarizes the impact the adoption of AcG-15 had on the Companys
consolidated statement of earnings in the year ended December 31, 2005:

| |                               |   | Year ended,       |  
| | ----------------------------- | - | ----------------- | -
| |                               |   | December 31, 2005 |  
| |                               |   |                   |  
| | Cost of sales recovery        | $ | 7.0               |  
| | Amortization expense          |   | (1.4              | )
| | Interest expense              |   | (5.9              | )
| | Income tax recovery  current |   | 0.1               |  
| | Income tax recovery  future  |   | 0.8               |  
| | Non-controlling interest      |   | (0.6              | )
| |                               |   |                   |  
| | Net earnings (loss)           | $ |                  |  

The Company has identified two other
potential VIEs, but has not been able to obtain the financial information
necessary to evaluate whether the entities are VIEs, or if the entities are
VIEs, whether the Company is the

11

---

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

primary beneficiary. The two potential
VIEs are private entities and, as such, are unwilling to share financial
information with the Company. The potential VIEs are related to each other, and
together they provide the Company with warehousing services for a large portion
of the Companys paper products. The Company first contracted with these
entities in 1999. The amounts paid to these entities are not significant
relative to the Companys total distribution costs.

The Company has entered into a
building lease agreement with one of the potential VIEs whereby it has agreed to
continue making the prescribed lease payments directly to the financial
institution holding the mortgage on the building in the event the lessor is no
longer able to meet its contractual obligations. As at December 31, 2005, the
principal amount of the mortgage was approximately $13.0 million. This agreement
does not increase the Companys liability beyond the obligation under the
building lease.

| | (b) | Asset retirement obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | On December 6, 2005, the CICAs Emerging Issues Committee
      issued Abstract Number 159, Conditional Asset Retirement Obligations,
      (EIC-159) effective for interim and annual reporting periods ending
      after 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 (the 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 the obligations for the proper removal and disposal of
      asbestos products in the Companys mills meet the definition of a
      conditional asset retirement obligation. That is, the Company is subject
      to regulations that are in place to ensure that asbestos fibres do not
      become friable, or loose. The regulations require that friable asbestos be
      repaired or removed in accordance with the regulations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | The Companys asbestos can generally be found on steam
      and condensate piping systems throughout its facilities, as well as in
      transite cladding on buildings and in building insulation. As a result of
      the longevity of the Companys mills, due in part to the Companys
      maintenance procedures, and the fact that the Company does not have plans
      for major changes that would require the removal of asbestos, the timing
      of the removal of asbestos in the Companys mills is indeterminate as 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (c) | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Effective January 1, 2004, the Company adopted the CICA
      amended recommendation of Handbook Section 3870, Stock-based Compensation
      and Other Stock-based Payments. These recommendations require the use of
      a fair-value based approach for the accounting of stock-based compensation
      awards granted to employees. Under the fair-value based method,
      compensation cost is measured at fair value at the date of grant, and is
      expensed over the awards vesting period. The standard was applied
      retroactively without restatement of prior periods, and resulted in an
      adjustment of $2.6 million to the contributed surplus and the opening
      balance of retained earnings of the year ended December 31, 2004, to
      reflect the cumulative effect of applying the fair- value based method to
      all employee stock options granted on or after January 1, 2002. For the
      years ended December 31, 2004 and 2005, the Company recorded $2.2 million
      and $2.5 million, respectively, as an expense for the stock-based
      compensation plans. During fiscal 2003, the Company accounted for
      stock-based payments to non-employees, and employee awards of stock, that
      call for settlement in cash or other assets, or stock appreciation rights
      that call for net settlement by the issuance of equity instruments,
      granted on or after January 1, 2002, using the fair value method. No
      compensation cost was recorded for all other stock-based employee

12

---

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

compensation awards. The pro forma
disclosures with respect to the years ended December 31, 2003 are provided in
note 16 of the consolidated financial statements.

|4. | BUSINESS ACQUISITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On December 1, 2003, the Company completed the
      acquisition of a paper recycling business from Newstech Recycling
      Partnership (the Acquisition) for a total purchase price of $61.1
      million, including working capital. The Companys consideration was
      comprised of $31.5 million in cash, $29.0 million in equity and $0.6
      million in transaction costs. The value of the 8,693,988 common shares
      issued was determined by the weighted average trading price of the
      Companys common shares over the two-day period before December 1, 2003,
      which was the date the terms of the Acquisition were agreed to and
      announced.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Acquisition has been accounted for using the purchase
      method of accounting and the results of the operations of the business
      have been consolidated from the date of acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|5. | INTEREST EXPENSE, NET                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The components of interest expense, net, for the years
      ended December 31 were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                |   | 2005 |   |   | 2004 |   |   | 2003 |  
| | ---------------------------------------------- | - | ---- | - | - | ---- | - | - | ---- | -
| |                                                |   |      |   |   |      |   |   |      |  
| | Interest on long-term debt                     | $ | 77.7 |   | $ | 79.0 |   | $ | 80.7 |  
| | Fixed-to-floating interest rate swaps          |   | (3.9 | ) |   | (6.8 | ) |   | (8.5 | )
| | Amortization of deferred
      financing costs |   | 3.0  |   |   | 3.7  |   |   | 4.3  |  
| | Capitalized interest                           |   |     |   |   | (0.3 | ) |   | (0.9 | )
| | Interest income                                |   | (0.9 | ) |   | (0.4 | ) |   | (0.5 | )
| | Other                                          |   | (0.2 | ) |   | (0.3 | ) |   | (0.1 | )
| |                                                | $ | 75.7 |   | $ | 74.9 |   | $ | 75.0 |  

|6. | INCOME TAXES                                                                                
|-- | --------------------------------------------------------------------------------------------
|   |                                                                                             
|   | The components of income tax recovery for the years ended
      December 31 were as follows:

| |                                                    |   | 2005  |   |   | 2004  |   |   | 2003  |  
| | -------------------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | -
| |                                                    |   |       |   |   |       |   |   |       |  
| | Current                                            | $ | 5.0   |   | $ | 3.2   |   | $ | 5.9   |  
| | Future                                             |   | (37.4 | ) |   | (31.3 | ) |   | (67.9 | )
| | Release of future taxes
      related to reduction |   |       |   |   |       |   |   |       |  
| | in provincial corporate income tax
      rate      |   | (14.2 | ) |   |      |   |   |      |  
| |                                                    | $ | (46.6 | ) | $ | (28.1 | ) | $ | (62.0 | )

13

---

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

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

| |                                                |   | 2005  |   |  | *2004* |    |   | *2003* |  
| | ---------------------------------------------- | - | ----- | - |  | ------ | -- | - | ------ | -
| |                                                |   |       |   |  |        |    |   |        |  
| | Income tax recovery at Canadian statutory      |   |       |   |  |        |    |   |        |  
| | income tax rates                               | $ | (24.9 | ) |  | 34.8%  |    | $ | (20.1  | )
| | Increase (decrease) in income taxes
      for: |   |       |   |  |        |    |   |        |  
| | Non-taxable income and expenses                |   | (2.5  | ) |  | 3.5%   |    |   | (8.1   | )
| | Difference
      in foreign tax rate           |   | (2.0  | ) |  | 2.8%   |    |   | (2.3   | )
| | Release of future income taxes related         |   |       |   |  |        |    |   |        |  
| | to
      reduction in provincial corporate     |   |       |   |  |        |    |   |        |  
| | income tax
      rate                          |   | (14.2 | ) |  | 19.8%  |    |   |       |  
| | Release of deferred
      credits              |   | (5.0  | ) |  | 7.0%   |    |   |       |  
| | Large corporations tax                         |   | 3.5   |   |  | (4.9   | )% |   | 4.3    |  
| | Other                                          |   | (1.5  | ) |  | 2.1%   |    |   | (1.9   | )
| | Income tax
      recovery                      | $ | (46.6 | ) |  | 65.1%  |    | $ | (28.1  | )

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

| |                                 |   | 2005   |   |   | 2004   |  
| | ------------------------------- | - | ------ | - | - | ------ | -
| | Future income tax liabilities   |   |        |   |   |        |  
| | Property, plant and equipment   | $ | 486.0  |   | $ | 535.9  |  
| | Other                           |   | 90.4   |   |   | 86.8   |  
| |                                 |   | 576.4  |   |   | 622.7  |  
| | Future income tax assets        |   |        |   |   |        |  
| | Non-capital loss carry-forwards |   | (203.2 | ) |   | (206.5 | )
| | Employee future
      benefits  |   | (64.3  | ) |   | (67.3  | )
| | Other                           |   | (13.9  | ) |   | (22.3  | )
| |                                 |   | (281.4 | ) |   | (296.1 | )
| | Valuation allowance             |   | 5.9    |   |   | 6.3    |  
| |                                 |   | (275.5 | ) |   | (289.8 | )
| |                                 |   |        |   |   |        |  
| | Net future income tax liability | $ | 300.9  |   | $ | 332.9  |  

|7. | EARNINGS PER SHARE                                                                                        
|-- | ----------------------------------------------------------------------------------------------------------
|   |                                                                                                           
|   | The following table provides the reconciliation between
      basic and diluted earnings (loss) per share:

| |                                                                         |   | 2005  |   |   | 2004  |   |   | 2003  |  
| | ----------------------------------------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | -
| |                                                                         |   |       |   |   |       |   |   |       |  
| | Net earnings (loss) reported                                            | $ | (25.6 | ) | $ | (28.6 | ) | $ | (84.5 | )
| | Weighted average shares used in computation of basic
      earnings per |   |       |   |   |       |   |   |       |  
| | share (in millions)                                                     |   | 214.6 |   |   | 214.6 |   |   | 206.6 |  
| | Weighted average shares from assumed conversion of
      dilutive       |   |       |   |   |       |   |   |       |  
| | options (in millions)                                                   |   |      |   |   |      |   |   |      |  
| | Weighted average shares used in computation of diluted
      earnings   |   |       |   |   |       |   |   |       |  
| | per share (in millions)                                                 |   | 214.6 |   |   | 214.6 |   |   | 206.6 |  
| | Basic and diluted earnings (loss) per share (in dollars)                | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.41 | )

14

---

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

|8. | INVENTORIES                                                        
|-- | -------------------------------------------------------------------
|   |                                                                    
|   | The components of inventories at December 31 were as
      follows:

| |                                                     |   | 2005  |  |   | 2004  | 
| | --------------------------------------------------- | - | ----- |  | - | ----- | 
| |                                                     |   |       |  |   |       | 
| | Specialty papers                                    | $ | 54.4  |  | $ | 53.7  | 
| | Newsprint                                           |   | 23.5  |  |   | 28.5  | 
| | Pulp                                                |   | 19.5  |  |   | 25.3  | 
| | Total finished goods and work in progress           |   | 97.4  |  |   | 107.5 | 
| | Wood chips, pulp logs and other raw
      materials |   | 36.1  |  |   | 56.1  | 
| | Operating and
      maintenance supplies            |   | 112.2 |  |   | 94.5  | 
| |                                                     |   |       |  |   |       | 
| |                                                     | $ | 245.7 |  | $ | 258.1 | 

|9. | PROPERTY, PLANT AND EQUIPMENT                                                        
|-- | -------------------------------------------------------------------------------------
|   |                                                                                      
|   | The components of property, plant and equipment at
      December 31 were as follows:

| |                                      |   |         |  |   | 2005         |  |   |          | 
| | ------------------------------------ | - | ------- |  | - | ------------ |  | - | -------- | 
| |                                      |   |         |  |   | Accumulated  |  |   | Net Book | 
| |                                      |   | Cost    |  |   | Amortization |  |   | Value    | 
| |                                      |   |         |  |   |              |  |   |          | 
| | Buildings and land                   |   |         |  |   |              |  |   |          | 
| | Specialty papers
      and newsprint | $ | 482.3   |  | $ | 156.1        |  | $ | 326.2    | 
| | Pulp                                 |   | 107.8   |  |   | 44.0         |  |   | 63.8     | 
| |                                      |   |         |  |   |              |  |   |          | 
| | Machinery and equipment              |   |         |  |   |              |  |   |          | 
| | Specialty papers
      and newsprint | $ | 2,475.6 |  | $ | 1,067.4      |  | $ | 1,408.2  | 
| | Pulp                                 |   | 844.3   |  |   | 503.2        |  |   | 341.1    | 
| |                                      |   |         |  |   |              |  |   |          | 
| |                                      | $ | 3,910.0 |  | $ | 1,770.7      |  | $ | 2,139.3  | 

| |                                      |   |         |  |   | 2004         |  |   |          | 
| | ------------------------------------ | - | ------- |  | - | ------------ |  | - | -------- | 
| |                                      |   |         |  |   | Accumulated  |  |   | Net Book | 
| |                                      |   | Cost    |  |   | Amortization |  |   | Value    | 
| |                                      |   |         |  |   |              |  |   |          | 
| | Buildings and land                   |   |         |  |   |              |  |   |          | 
| | Specialty papers
      and newsprint | $ | 406.6   |  | $ | 135.3        |  | $ | 271.3    | 
| | Pulp                                 |   | 105.0   |  |   | 42.0         |  |   | 63.0     | 
| |                                      |   |         |  |   |              |  |   |          | 
| | Machinery and equipment              |   |         |  |   |              |  |   |          | 
| | Specialty papers
      and newsprint | $ | 2,432.7 |  | $ | 966.5        |  | $ | 1,466.2  | 
| | Pulp                                 |   | 850.4   |  |   | 478.0        |  |   | 372.4    | 
| |                                      |   |         |  |   |              |  |   |          | 
| |                                      | $ | 3,794.7 |  | $ | 1,621.8      |  | $ | 2,172.9  | 

In December 2003, the Company recorded
a property, plant and equipment write-down of $14.2 million relating to the
permanent closure of a portion of its pulp producing capacity at its Elk Falls
mill in early 2004.

15

---

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

|10. | OTHER ASSETS                                                        
|--- | --------------------------------------------------------------------
|    |                                                                     
|    | The components of other assets at December 31 were as
      follows:

| |                                      |   | 2005 |  |   | 2004 | 
| | ------------------------------------ | - | ---- |  | - | ---- | 
| |                                      |   |      |  |   |      | 
| | Deferred financing costs             | $ | 18.3 |  | $ | 21.5 | 
| | Non-controlling interest (note 3(a)) |   | 16.4 |  |   |     | 
| | Deferred charges and other           |   | 5.4  |  |   | 6.0  | 
| |                                      |   |      |  |   |      | 
| |                                      | $ | 40.1 |  | $ | 27.5 | 

|11. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES                                                        
|--- | ------------------------------------------------------------------------------------------------
|    |                                                                                                 
|    | The components of accounts payable and accrued
      liabilities at December 31 were as follows:

| |                                         |   | 2005  |  |   | 2004  | 
| | --------------------------------------- | - | ----- |  | - | ----- | 
| |                                         |   |       |  |   |       | 
| | Trade accounts payable                  | $ | 142.9 |  | $ | 141.8 | 
| | Accrued payroll and related liabilities |   | 82.5  |  |   | 86.4  | 
| | Pension plans (note 17)                 |   | 11.6  |  |   | 18.1  | 
| | Post-retirement benefit plans (note 17) |   | 5.5   |  |   | 5.6   | 
| | Accrued interest                        |   | 10.8  |  |   | 10.6  | 
| | Other                                   |   | 26.1  |  |   | 23.0  | 
| |                                         |   |       |  |   |       | 
| |                                         | $ | 279.4 |  | $ | 285.5 | 

|12. | LONG-TERM DEBT                                                                                          
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | The Companys long-term debt, all of which matures beyond
      one year, at December 31 was as follows:

| |                                                                          |   | 2005  |  |   | 2004  | 
| | ------------------------------------------------------------------------ | - | ----- |  | - | ----- | 
| | Recourse                                                                 |   |       |  |   |       | 
| | Senior notes, 8.625% due June 2011 (US$400.0 million)                    | $ | 469.4 |  | $ | 485.1 | 
| | Senior notes, 7.375% due March 2014 (US$250.0 million)                   |   | 291.5 |  |   | 300.9 | 
| |                                                                          |   | 760.9 |  |   | 786.0 | 
| | Revolving operating facility of up to $350.0 million
      due July 2008 |   | 6.5   |  |   |      | 
| |                                                                          |   | 767.4 |  |   | 786.0 | 
| | Non-recourse (PREI) (note 3(a))                                          |   |       |  |   |       | 
| | First Mortgage Bonds, 6.387% due July 2009                               |   | 75.0  |  |   | 37.6  | 
| | Subordinated promissory notes                                            |   | 19.5  |  |   |      | 
| |                                                                          |   | 94.5  |  |   | 37.6  | 
| |                                                                          | $ | 861.9 |  | $ | 823.6 | 

During the year ended December 31,
2005, the maturity of the $350.0 million revolving operating facility (the
Facility) was extended by one year, to July 2008. Borrowings under the
Facility bear interest at a rate based on Canadian dollar bankers
acceptance/prime or U.S. dollar LIBOR/base rates, plus a margin that varies with
the Companys credit rating. The interest rates on borrowings under the Facility
averaged 5.1% in 2005 (2004  5.3%) . A commitment fee at a percentage of the
margin applies to the undrawn portion of the Facility. Substantially all of the
assets of the Company are pledged as security under the Facility. Its
availability is determined by a borrowing base, calculated based on accounts
receivable and inventory balances, and includes covenants to maintain the funded

16

---

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

debt/capitalization ratio below 60%,
secured debt/capitalization ratio below 30% and shareholders equity above
$779.3 million as at December 31, 2005. At December 31, 2005, the Facility had
$6.5 million drawn against it and after outstanding letters of credit of $22.3
million, $316.0 million was available to the Company. An interest coverage
covenant is applicable in certain circumstances if the Company incurs secured
debt other than under the Facility. As of December 31, 2005, no such debt has
been incurred.

On March 23, 2004, the Company issued,
at par, US$250.0 million 7.375% senior notes due March 1, 2014 for cash proceeds
of $333.1 million. The net proceeds were used to redeem the 10% senior notes and
for general corporate purposes. The Company recorded a loss of $5.2 million on
repayment of the 10% senior notes.

The indentures and agreements governing
the Companys senior notes and the Facility contain customary restrictive
covenants, including restrictions on the incurrence of additional indebtedness,
certain payments including dividends and investments in other persons, the
creation of liens, sale and leaseback transactions, certain amalgamations,
mergers, consolidations and the use of proceeds arising from certain sales of
assets and certain transactions with affiliates. At December 31, 2005 and 2004,
the Company was in compliance with the covenants under both its Facility and
senior notes. The Companys consolidated fixed charge coverage ratio (CFCC
Ratio) as calculated under the senior note indentures was at 2.0:1 for the last
twelve months ended December 31, 2005 (2004  2.0:1) . 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 (2004  negative $26
million), as a result of accumulated losses in recent years. Under the 8.625%
senior notes, the Company cannot pay dividends unless the balance in this basket
is positive.

Scheduled long-term debt
repayments

| |            |   | Recourse |  |   | Non-recourse | 
| | ---------- | - | -------- |  | - | ------------ | 
| |            |   | Debt     |  |   | Debt         | 
| |            |   |          |  |   |              | 
| | 2006       | $ |         |  | $ |             | 
| | 2007       |   |         |  |   |             | 
| | 2008       |   | 6.5      |  |   |             | 
| | 2009       |   |         |  |   | 75.0         | 
| | 2010       |   |         |  |   |             | 
| | Thereafter |   | 760.9    |  |   | 19.5         | 
| |            | $ | 767.4    |  | $ | 94.5         | 

Fair value of long-term debt

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

| |              |   | 2005  |  |   | 2004  | 
| | ------------ | - | ----- |  | - | ----- | 
| |              |   |       |  |   |       | 
| | Recourse     | $ | 706.1 |  | $ | 830.0 | 
| | Non-recourse |   | 97.3  |  |   | 39.8  | 
| |              | $ | 803.4 |  | $ | 869.8 | 

17

---

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

|13. | OTHER LONG-TERM OBLIGATIONS                                                        
|--- | -----------------------------------------------------------------------------------
|    |                                                                                    
|    | The components of other long-term obligations at December
      31 were as follows:

| |                                                                 |   | 2005  |  |   | 2004  | 
| | --------------------------------------------------------------- | - | ----- |  | - | ----- | 
| |                                                                 |   |       |  |   |       | 
| | Pension plans (note 17)                                         | $ | 27.8  |  | $ | 33.2  | 
| | Other post-retirement benefit plans (note 17)                   |   | 143.8 |  |   | 132.1 | 
| | Forward foreign currency contracts hedging
      long-term debt |   | 25.2  |  |   | 44.1  | 
| | Deferred gain on termination of interest rate swaps             |   | 1.1   |  |   | 4.2   | 
| | Environmental, remedial and other                               |   | 11.8  |  |   | 20.0  | 
| |                                                                 | $ | 209.7 |  | $ | 233.6 | 

|14. | DEFERRED CREDITS                                                                    
|--- | ------------------------------------------------------------------------------------
|    |                                                                                     
|    | Continuity of deferred credits for the years ended
      December 31 was as follows:

| |                                                                            |   | 2005 |   |   | 2004 | 
| | -------------------------------------------------------------------------- | - | ---- | - | - | ---- | 
| |                                                                            |   |      |   |   |      | 
| | Beginning of year                                                          | $ | 27.5 |   | $ | 21.0 | 
| | Net price adjustment related to acquired tax losses                        |   | 2.4  |   |   | 6.5  | 
| | Adjustment related to utilization of
      acquired tax losses (note 2(p)) |   | (5.0 | ) |   |     | 
| | Adjustment resulting from reduction in provincial corporate
      income   |   |      |   |   |      | 
| | tax rate                                                                   |   | (0.6 | ) |   |     | 
| |                                                                            |   |      |   |   |      | 
| | End of year                                                                | $ | 24.3 |   | $ | 27.5 | 

|    | In prior years, the Company acquired from wholly owned
      subsidiaries of Fletcher Challenge Limited (FCL), a major shareholder up
      to July 28, 2000, companies with available tax losses. The purchase price
      of these companies is subject to adjustment under certain conditions.
      During the year, the Company recorded a downward adjustment of $2.4
      million (net of taxes of $0.3 million on the interest component),
      reflecting a reduction to the purchase price (2004  $6.5 million).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|15. | SHARE CAPITAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                         |  | 2005        |  |  | 2004  | 
| | ----------------------- |  | ----------- |  |  | ----- | 
| |                         |  | Shares      |  |  | $     | 
| |                         |  |             |  |  |       | 
| | Issued and outstanding: |  |             |  |  |       | 
| | Common shares           |  | 214,604,120 |  |  | 913.6 | 

|16. | STOCK-BASED COMPENSATION PLANS
|--- | ------------------------------
|    |                               
|    | (a)                           
|    |                               
|    |                               

18

---

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

after the second anniversary date and
as to all on and after the third anniversary date, unless the market price of
the common shares exceeds a specified acceleration price, in which case all of
the options are exercisable at that date. Market price is determined by the
weighted average price per share for all sales of the shares on the Toronto
Stock Exchange (TSX) during the ten consecutive trading days preceding the
date on which a determination of Market Price is required under the Plan. The
Plan provides for the issuance of up to a maximum of 10.0 million common
shares.

Effective January 1, 2004, the Company
applies the fair value method for recording share options granted to directors,
officers and employees. The pro forma effect on net earnings (loss) and net
earnings (loss) per common share if the fair value method had been used in the
year ended December 31, 2003 to determine compensation cost for share options is
as follows:

| |                                        |   | 2003  |  
| | -------------------------------------- | - | ----- | -
| |                                        |   |       |  
| | Net loss                               |   |       |  
| | As reported                            | $ | (84.5 | )
| | Pro forma                              |   | (86.5 | )
| | Net loss per common share (in dollars) |   |       |  
| | As reported                            | $ | (0.41 | )
| | Pro forma                              |   | (0.42 | )

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

| |                                                    |  | 2005  |  |  | 2004  |  |  | 2003  | 
| | -------------------------------------------------- |  | ----- |  |  | ----- |  |  | ----- | 
| |                                                    |  |       |  |  |       |  |  |       | 
| | Risk-free interest rate                            |  | 3.7%  |  |  | 4.5%  |  |  | 4.9%  | 
| | Annual dividends per share                         |  | Nil   |  |  | Nil   |  |  | Nil   | 
| | Expected stock price volatility                    |  | 30.3% |  |  | 28.3% |  |  | 27.3% | 
| | Expected option life (in years)                    |  | 4.0   |  |  | 4.0   |  |  | 4.0   | 
| | Average fair value of options granted (in dollars) |  | $1.11 |  |  | $1.50 |  |  | $1.73 | 

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

| |                      |  | 2005      |   |   | 2004         |  |  | 2003      |  
| | -------------------- |  | --------- | - | - | ------------ |  |  | --------- | -
| |                      |  |           |   |   | Weighted     |  |  |           |  
| |                      |  |           |   |   | Average      |  |  |           |  
| |                      |  |           |   |   | Exercise     |  |  |           |  
| |                      |  | Number of |   |   | Price        |  |  | Number of |  
| |                      |  | Options   |   |   | (in dollars) |  |  | Options   |  
| |                      |  |           |   |   |              |  |  |           |  
| | Beginning of year    |  | 5,951,333 |   | $ | 5.62         |  |  | 4,495,500 |  
| | Granted              |  | 2,886,000 |   |   | 3.58         |  |  | 1,637,500 |  
| | Exercised            |  |          |   |   |             |  |  |          |  
| | Expired or cancelled |  | (427,833  | ) |   | 4.14         |  |  | (181,667  | )
| |                      |  |           |   |   |              |  |  |           |  
| | End of year          |  | 8,409,500 |   | $ | 5.00         |  |  | 5,951,333 |  

19

---

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

The following table summarizes
information about stock options outstanding and exercisable at December 31,
2005:

Options Outstanding
      
      
      Options ExercisableWeightedAverage
      
      
      Weighted
      
      
      
      
      
      WeightedRemaining
      
      
      Average
      
      
      
      
      
      Average
      
      
      AcceleratedExercise
      
      Number of
      
      
      Option Life
      
      
      Exercise Price
      
      
      Number of
      
      
      Exercise Price
      
      
      PricePrices
      
      Options
      
      
      (years)
      
      
      (in dollars)
      
      
      Options
      
      
      (in dollars)
      
      
      (in dollars)$
      6.60
      
      1,221,500
      
      
      0.7
      
      $
      6.60
      
      
      1,221,500
      
      $
      6.60
      
      $
      9.477.13
      
      1,011,000
      
      
      1.1
      
      
      7.13
      
      
      1,011,000
      
      
      7.13
      
      
      10.005.25
      
      1,916,000
      
      
      1.8
      
      
      5.25
      
      
      1,916,000
      
      
      5.25
      
      
      7.545.81
      
      50,000
      
      
      2.1
      
      
      5.81
      
      
      33,333
      
      
      5.81
      
      
      8.354.39
      
      1,533,333
      
      
      8.1
      
      
      4.39
      
      
      545,833
      
      
      4.39
      
      
      6.303.62
      
      2,397,667
      
      
      9.1
      
      
      3.62
      
      
      
      
      
      3.62
      
      
      5.203.18
      
      220,000
      
      
      9.5
      
      
      3.18
      
      
      
      
      
      3.18
      
      
      4.573.31
      
      60,000
      
      
      9.6
      
      
      3.31
      
      
      
      
      
      3.31
      
      
      4.758,409,500
      
      
      5.0
      
      $
      5.00
      
      
      4,727,666
      
      $
      5.91
      
      $
      8.43


| | (b) | Deferred share unit plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | The Company has established a DSU plan for its directors.
      Under the terms of this plan, directors may elect to receive their annual
      remuneration in DSUs, cash or a combination thereof. Each DSU initially
      has a value equivalent to the Companys weighted average share price on
      the TSX, during the ten consecutive trading days prior to the issuance
      date of the DSU. A directors DSU account is credited with dividend
      equivalents in the form of additional DSUs when dividends are paid on
      common shares. A director may elect the date of redemption by filing an
      irrevocable written election with the Company no later than November 15 of
      the calendar year commencing immediately after the directors termination
      date. The value shall be paid by the Company as a lump sum in cash, equal
      to the fair value of the notional underlying common shares plus accrued
      dividend equivalents at that date, after deduction of applicable taxes and
      other source deductions required to be withheld. During the year ended
      December 31, 2005, the Company recognized $0.6 million in expense (2004 
      $0.5 million) related to DSUs. As at December 31, 2005, 320,982 DSUs are
      outstanding under this plan (2004  225,336 DSUs) and there is
      approximately $1.0 million payable (2004  $0.8 million).

|17. | EMPLOYEE FUTURE BENEFITS                                                                                                                                                                                                                                                                                                                                                 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                          
|    | Description of benefit plans                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company maintains pension benefit plans, which
      include defined benefit and defined contribution segments. Employees hired
      subsequent to January 1, 1994, enroll in the defined contribution segment.                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                          
|    | The defined benefit segment provides a pension based on
      years of service and earnings. For the defined contribution segment, the
      Companys contributions are based on a percentage of an employees
      earnings with the Companys funding obligations being satisfied upon
      crediting contributions to an employees account.                       
|    |                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company provides other benefit plans consisting of
      provincial medical plan premiums, extended health care and dental benefits
      to eligible retired employees and their dependents. Assumed health care
      trend rates have a significant effect on the amounts reported for the
      post-retirement medical plans.                                   
|    |                                                                                                                                                                                                                                                                                                                                                                          
|    | Total cash payments                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                          
|    | Total cash payments for employee future benefits for the
      year ending December 31, 2005, consisting of cash contributed by the
      Company to its funded pension plans, cash payments directly to
      beneficiaries for its unfunded other benefit plans and cash contributed to
      its defined contribution plans, was $32.3 million (2004  $29.4 million).

20

---

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

Defined benefit plan

The Company measures the fair value of
plan assets and the accrued benefit obligations for accounting purposes as at
December 31 of each year. The most recent actuarial valuation of the majority of
pension plans for funding purposes was as of December 31, 2003, and the next
required valuation will be as of December 31, 2006.

Change in accrued defined benefit
plan obligation

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

| |                                                        |   | Pension Benefit Plans |   |   | Other Benefit Plans |  
| | ------------------------------------------------------ | - | --------------------- | - | - | ------------------- | -
| |                                                        |   | 2005                  |   |   | 2004                |  
| |                                                        |   |                       |   |   |                     |  
| | Accrued benefit obligations at beginning
      of year | $ | 335.4                 |   | $ | 327.2               |  
| | Service cost for the year                              |   | 5.4                   |   |   | 4.5                 |  
| | Interest cost                                          |   | 19.4                  |   |   | 19.8                |  
| | Employee contributions                                 |   | 0.4                   |   |   | 0.5                 |  
| | Benefit payments                                       |   | (26.9                 | ) |   | (26.0               | )
| | Actuarial loss
      (gain) and other adjustments      |   | 31.2                  |   |   | 9.4                 |  
| | Accrued benefit obligations balance at end of year     | $ | 364.9                 |   | $ | 335.4               |  

Change in fair value of defined
benefit plan assets

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

| |                                                              |   | Pension Benefit Plans |   |   | Other Benefit Plans |  
| | ------------------------------------------------------------ | - | --------------------- | - | - | ------------------- | -
| |                                                              |   | 2005                  |   |   | 2004                |  
| |                                                              |   |                       |   |   |                     |  
| | Fair value of defined benefit plan assets,
      beginning   |   |                       |   |   |                     |  
| | of year                                                      | $ | 233.3                 |   | $ | 214.7               |  
| | Actual return on plan assets                                 |   | 21.4                  |   |   | 24.0                |  
| | Employee contributions                                       |   | 0.4                   |   |   | 0.5                 |  
| | Company contributions                                        |   | 22.3                  |   |   | 19.1                |  
| | Other                                                        |   | 0.3                   |   |   | 1.0                 |  
| | Benefit payments                                             |   | (26.9                 | ) |   | (26.0               | )
| | Fair value
      of defined benefit plan assets, end of year | $ | 250.8                 |   | $ | 233.3               |  

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

| | Plan assets at
      December 31, |  | 2005   |  |  | 2004   | 
| | --------------------------------- |  | ------ |  |  | ------ | 
| |                                   |  |        |  |  |        | 
| | Equity securities                 |  | 59.3%  |  |  | 57.4%  | 
| | Fixed income
      securities     |  | 40.7%  |  |  | 42.6%  | 
| |                                   |  |        |  |  |        | 
| | Total                             |  | 100.0% |  |  | 100.0% | 

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

The following table presents the
difference between the fair value of the defined benefit pension assets and the
actuarially determined accrued benefit obligations as at December 31, 2005 and
2004. This difference is also referred to as either the deficit or surplus, as
the case may be, or the funded status of the plans.

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

21

---

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

As at December 31, 2005, there was a
total funding deficit of $114.1 million (2004  $102.1 million) in the Companys
various pension plans. Of this amount, $69.7 million (2004  $60.4 million)
related to funded defined benefit pension plans and $44.4 million (2004  $41.7
million) to pay-as-you-go unfunded defined benefit pension plans. In addition,
the Company has other pay-as-you-go post-retirement benefit plans, consisting
of group health care and life insurance, which had a deficit of $216.6 million
at December 31, 2005 (2004  $178.2 million).

| |                                                    |   | Pension Benefit Plans |   |   | Other Benefit Plans |  
| | -------------------------------------------------- | - | --------------------- | - | - | ------------------- | -
| |                                                    |   | 2005                  |   |   | 2004                |  
| |                                                    |   |                       |   |   |                     |  
| | Accrued benefit obligation, end of
      year      | $ | 364.9                 |   | $ | 335.4               |  
| | Fair value of plan assets, end of year             |   | 250.8                 |   |   | 233.3               |  
| |                                                    |   |                       |   |   |                     |  
| | Funded status deficit                              |   | (114.1                | ) |   | (102.1              | )
| | Unrecognized past service costs                    |   | 0.2                   |   |   | 0.3                 |  
| | Unrecognized actuarial losses                      |   | 74.7                  |   |   | 50.7                |  
| | Accrued benefit obligation recognized
      in the |   |                       |   |   |                     |  
| | consolidated balance sheets                        | $ | (39.2                 | ) | $ | (51.1               | )

Classification of accrued
obligations

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

| |                                          |   | Pension Benefit Plans |   |   | Other Benefit Plans |  
| | ---------------------------------------- | - | --------------------- | - | - | ------------------- | -
| |                                          |   | 2005                  |   |   | 2004                |  
| | Other assets                             | $ | 0.2                   |   | $ | 0.2                 |  
| | Accounts payable and accrued liabilities |   | (11.6                 | ) |   | (18.1               | )
| | Other long-term obligations              |   | (27.8                 | ) |   | (33.2               | )
| |                                          | $ | (39.2                 | ) | $ | (51.1               | )

Components of net periodic benefit
cost recognized in the year

| | Pension Benefit Plans                                                |   | 2005  |   |   | 2004  |   |   | 2003  |  
| | -------------------------------------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | -
| |                                                                      |   |       |   |   |       |   |   |       |  
| | Defined benefit costs                                                |   |       |   |   |       |   |   |       |  
| | Service cost for the year                                            | $ | 5.4   |   | $ | 4.5   |   | $ | 4.0   |  
| | Interest
      cost                                                  |   | 19.4  |   |   | 19.8  |   |   | 20.4  |  
| | Actual return on assets                                              |   | (21.4 | ) |   | (23.9 | ) |   | 11.7  |  
| | Actuarial
      (gain)/loss                                          |   | 31.2  |   |   | 9.0   |   |   | 7.5   |  
| | Prior service costs                                                  |   |      |   |   |      |   |   |      |  
| | Difference
      between actual and expected return                  |   | 4.6   |   |   | 7.8   |   |   | (28.3 | )
| | Difference between actual
      and recognized actuarial (gain)/loss |   | (28.5 | ) |   | (5.7  | ) |   | (4.9  | )
| | Difference
      between actual and recognized prior service costs   |   | 0.1   |   |   | 0.2   |   |   | 0.3   |  
| | Amortization of transitional balance                                 |   | 0.1   |   |   | (0.3  | ) |   | (0.7  | )
| |                                                                      |   |       |   |   |       |   |   |       |  
| |                                                                      |   | 10.9  |   |   | 11.4  |   |   | 10.0  |  
| | Defined contribution cost                                            |   |       |   |   |       |   |   |       |  
| | Service cost for the year                                            |   | 5.1   |   |   | 5.2   |   |   | 4.7   |  
| |                                                                      |   |       |   |   |       |   |   |       |  
| | Net periodic
      benefit cost for pension benefit plans            | $ | 16.0  |   | $ | 16.6  |   | $ | 14.7  |  

22

---

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

| | Other
      Benefit Plans                                            |   | 2005  |   |   | 2004  |   |   | 2003  |  
| | -------------------------------------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | -
| |                                                                      |   |       |   |   |       |   |   |       |  
| | Defined benefit costs                                                |   |       |   |   |       |   |   |       |  
| | Service cost for the year                                            | $ | 4.2   |   | $ | 4.3   |   | $ | 4.3   |  
| | Interest cost                                                        |   | 10.7  |   |   | 11.2  |   |   | 11.2  |  
| | Actuarial (gain)/loss                                                |   | 28.9  |   |   | (15.2 | ) |   | 13.0  |  
| | Prior service
      costs                                            |   |      |   |   |      |   |   |      |  
| | Difference between actual and
      recognized actuarial gain/(loss) |   | (27.1 | ) |   | 17.8  |   |   | (10.1 | )
| | Difference between actual and
      recognized prior service costs   |   | (0.2  | ) |   | (0.2  | ) |   | (0.2  | )
| |                                                                      |   |       |   |   |       |   |   |       |  
| | Net periodic benefit cost for other benefit plans                    | $ | 16.5  |   | $ | 17.9  |   | $ | 18.2  |  

Multi-employer pension plans

Unionized employees of the Company are
members of industry-wide benefit plans to which the Company contributes a
predetermined amount per hour worked by an employee. The pension expense for
these plans is equal to the Companys contribution of $18.3 million for the year
end December 31, 2005 (2004  $18.4 million; 2003  $18.4 million).

Significant assumptions

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

| |                                                     | 2005   |  | 2004               
| | --------------------------------------------------- | ------ |  | -------------------
| |                                                     |        |  |                    
| | Benefit obligations at December 31,                 |        |  |                    
| | Discount rate                                       | 5.00%  |  | 6.00%              
| | Rate of
      compensation increase                 | 3.00%  |  | 3.00%              
| |                                                     |        |  |                    
| | Net expense for year ended December
      31,       |        |  |                    
| | Discount rate                                       | 6.00%  |  | 6.25%              
| | Rate of
      compensation increase                 | 3.00%  |  | 3.00%              
| | Expected rate of return on plan
      assets        | 7.25%  |  | 7.50%              
| |                                                     |        |  |                    
| | Assumed health care cost trend rate at December 31, |        |  |                    
| | Extended
      health benefits                      |        |  |                    
| | Initial health
      care cost trend rate           | 10.00% |  | 11.00%             
| | Annual rate of decline in trend rate                | 1.00%  |  | 1.00%              
| | Ultimate health
      care cost trend rate          | 5.00%  |  | 5.00%              
| | Dental
      benefits                               |        |  |                    
| | Dental care cost
      trend rate                   | 5.00%  |  | 5.00%              
| |                                                     |        |  |                    
| | Medical services plan
      benefits                |        |  |                    
| | Premium trend rate                                  | 2.00%  |  | 5% until June 30,  
| |                                                     |        |  | 2004, 2% thereafter

23

---

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

Sensitivity analysis

Assumed health care cost trend rates
have a significant effect on the amounts reported for the health care plans. A
1% change in assumed health care cost rates would have the following effects for
2005.

| |                                    |   | Other Benefit Plans | 
| | ---------------------------------- | - | ------------------- | 
| |                                    |   | Increase            | 
| | Total of service and interest cost | $ | 3.2                 | 
| | Accrued benefit
      obligation   | $ | 39.7                | 

|18. | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                            
|    | Derivative financial instruments                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                            
|    | The Company uses derivative financial instruments to
      reduce its exposure to foreign currency and price risk associated with its
      revenues, energy costs and long-term debt. The Company also uses interest
      rate swaps to manage its net exposure to interest rate changes.
|    |                                                                                                                                                                                                                                                                                            
|    | (a)                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                            

| |                               |   | Options           |  |  |              |  |   |                   | 
| | ----------------------------- | - | ----------------- |  |  | ------------ |  | - | ----------------- | 
| |                               |   | Purchased Options |  |  | Sold Options |  |   | Forward Contracts | 
| |                               |   |                   |  |  | Average      |  |   |                   | 
| |                               |   |                   |  |  | Rate         |  |   |                   | 
| | Term                          |   | US$Millions       |  |  | C$ / US$     |  |   | US$Millions       | 
| | As
      at December 31, 2005 |   |                   |  |  |              |  |   |                   | 
| | 0 to 12 months                | $ | 450               |  |  | 1.1930       |  | $ | 232               | 
| | 13
      to 24 months         |   | 50                |  |  | 1.1447       |  |   |                  | 
| |                               | $ | 500               |  |  | 1.1881       |  | $ | 232               | 
| | As
      at December 31, 2004 |   |                   |  |  |              |  |   |                   | 
| | 0 to 12 months                | $ | 422               |  |  | 1.2902       |  | $ | 362               | 
| | 13
      to 24 months         |   | 56                |  |  | 1.2882       |  |   | 56                | 
| |                               | $ | 478               |  |  | 1.2900       |  | $ | 418               | 

Foreign exchange translation gains and
losses on the above instruments designated as hedges are recognized concurrently
with the hedged revenue in Sales. At December 31, 2005, all of the above
contracts are designated as hedging instruments, except for US$182 million where
the associated revenue has been recognized. At period-end exchange rates, the
net amount the Company would receive to settle the above contracts and options
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.

At December 31, 2005, no price hedging
instruments were outstanding in respect of pulp and paper products sold.

24

---

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

| | (b) | Cost risk management instruments                  
| | --- | --------------------------------------------------
| |     |                                                   
| |     | Oil and gas contracts outstanding were as follows:

| |                               |  | Oil Contracts |   |   | Gas Contracts | 
| | ----------------------------- |  | ------------- | - | - | ------------- | 
| |                               |  | Barrels       |   |   | Average       | 
| |                               |  | (bbls)      |   |   | Rate          | 
| | Term                          |  | (000s        | ) |   | US$/bbl       | 
| | As
      at December 31, 2005 |  |               |   |   |               | 
| | 0 to 12
      months          |  | 20            |   | $ | 23.30         | 
| | 13
      to 36 months         |  | 30            |   |   | 31.55         | 
| |                               |  | 50            |   | $ | 28.25         | 
| | As
      at December 31, 2004 |  |               |   |   |               | 
| | 0 to 12 months                |  | 125           |   | $ | 20.85         | 
| | 13
      to 36 months         |  | 80            |   |   | 32.34         | 
| |                               |  | 205           |   | $ | 25.33         | 

| |     | The above instruments are not designated as hedging
      instruments for accounting purposes and are reported under 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 swap rates,
      the net amount the Company would receive to settle these commodity swaps
      is $2.7 million, all of which has been recognized and is included in Cost
      of sales and Prepaids and other.                                                                                                                                                                                                                                                                                              
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (c) | Long-term debt risk management instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | The Company has forward foreign currency contracts to
      acquire U.S. dollars totalling US$59 million over a two- year period at
      rates averaging C$1.5802/US$. These instruments are not designated as
      hedging instruments for accounting purposes, and are included in Other
      long-term obligations on the balance sheet at their fair value.
      Settlements and changes in fair value are recognized in Foreign exchange
      gain 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.                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (d) | Interest rate swaps                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | The Company has entered into fixed-to-floating interest
      rate swaps on US$40 million, under which it will receive a fixed rate
      receipt of 7.375%, and pay a floating rate averaging U.S. six month LIBOR
      plus an average of 2.0%. The swaps mature March 1, 2014, although US$30
      million are cancellable at the counterparties option between March 1,
      2009 and March 1, 2014, for premiums which mirror the call premiums on the
      7.375% senior notes. These instruments are designated as fair value
      hedging instruments, with settlement amounts recognized in interest
      expense offsetting the interest expense otherwise incurred. At period-end
      rates, the net amount the Company would receive to settle these contracts
      is $0.4 million.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (e) | Credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | The Company is exposed to credit risk on accounts
      receivable from its customers who are mainly in the newspaper publishing,
      commercial printing and paper manufacturing businesses. The Company
      manages its credit risk, principally through credit policies, which
      include the analysis of the financial position of its customers and the
      regular review of their credit limits. The Company also subscribes to
      credit insurance for a majority of its receivables, and obtains bank
      letters of credit for some export markets or customers.                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | The Company is exposed to credit risk with counterparties
      to the Companys derivative financial instruments. The credit risk arises
      from the potential for a counterparty to default on its contractual
      obligations, and is limited to those contracts where the Company would
      incur a loss in replacing the defaulted transaction. The Company manages
      this risk by diversifying through counterparties that are of strong credit
      quality, normally major financial institutions.                                                                                                                                                                                                                                                                                    

25

---

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

| | (f) | Fair value                                                                                                              
| | --- | ------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                         
| |     | Estimated fair-values of financial instruments, which
      differ from carrying values at December 31, were as follows:

| |                                                    |   | 2005     |   |   | 2004  |  
| | -------------------------------------------------- | - | -------- | - | - | ----- | -
| |                                                    |   | Carrying |   |   | Fair  |  
| |                                                    |   | Value    |   |   | Value |  
| | Forward contracts and options hedging
      future |   |          |   |   |       |  
| | U.S. dollar receipts                               | $ | 13.1     |   | $ | 23.6  |  
| | Commodity swaps hedging future oil and
      gas   |   |          |   |   |       |  
| | purchases                                          |   | 2.7      |   |   | 2.7   |  
| | Instruments related to long-term debt
      risk   |   |          |   |   |       |  
| | management                                         |   |          |   |   |       |  
| | Forward
      contracts to buy U.S. dollars        |   | (25.2    | ) |   | (24.3 | )
| | Fixed to floating interest swaps                   |   |         |   |   | 0.4   |  

The fair value of options and forward
foreign currency contracts is based on mid-market rates from financial
institutions.

|19. | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Related parties include Norske Skogindustrier ASA
      (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.                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | 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. Transactions or balances with these related parties, not
      otherwise disclosed in these financial statements, were as follows:

| |                                           |   | 2005 |  |   | 2004 |  |   | 2003 | 
| | ----------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
| | Norske Skog                               |   |      |  |   |      |  |   |      | 
| | Selling, general
      and administrative | $ | 0.1  |  | $ | 0.1  |  | $ | 0.1  | 
| | Accounts receivable                       |   | 2.4  |  |   |     |  |   | 19.3 | 
| | Norske Skog North America LLC             |   |      |  |   |      |  |   |      | 
| | Commission expenses                       |   | 4.4  |  |   | 4.8  |  |   | 4.2  | 
| | Net loss                                  |   | 0.1  |  |   | 0.1  |  |   | 0.1  | 
| | Investment (US$0.5 million)               |   | 0.8  |  |   | 0.8  |  |   | 0.8  | 
| | Accounts payable                          |   |     |  |   | 0.4  |  |   | 0.2  | 

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; 2003 $115.0
million). These transactions are in accordance with normal third party trade
practices.

In prior years, the Company acquired,
from wholly-owned subsidiaries of FCL (now subsidiaries of Norske Skog),
companies with tax losses. The purchase price of these companies is subject to
adjustment under certain conditions and $2.4 million was included in accounts
receivable as at December 31, 2005 with respect to such adjustments (2004  nil;
2003  $19.3 million). During 2004, the Company collected $26.6 million in
respect of the adjustment comprised of the $19.3 million accounts receivable at
December 31, 2003 along with a further adjustment and interest totalling $7.3
million.

26

---

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

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; 2003  $0.1 million) primarily for
legal services to companies affiliated with a director of the Company. The
Company charged the costs to selling, general and administrative expenses.

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 (December 31, 2004  $0.5 million). These loans
were issued prior to the enactment of the United StatesSarbanes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.

|20. | SEGMENTED INFORMATION                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                   
|    | The Company operates in three business segments:                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                   
|    | Specialty papers                                                                                                                                                                                                                                                                  
|    | Newsprint                                                                                                                                                                                                                                                                         
|    | Pulp                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                   
|    | The accounting policies of the segments
        are the same as described in the Summary of Significant Accounting Policies
        in note 2. Segment performance is evaluated based on operating earnings
        (loss). Inter-segment sales consist of pulp transfers at cost.

| |                               |   | 2005      | 
| | ----------------------------- | - | --------- | 
| |                               |   | Specialty | 
| | Sales by Shipment Destination |   | Papers    | 
| | Canada                        | $ | 108.7     | 
| | United States                 |   | 780.9     | 
| | Asia and Australasia          |   | 27.0      | 
| | Latin America                 |   | 77.2      | 
| | Europe and Other              |   | 0.9       | 
| |                               | $ | 994.7     | 
| |                               |   |           | 
| |                               |   | 2004      | 
| |                               |   | Specialty | 
| | Sales by Shipment Destination |   | Papers    | 
| | Canada                        | $ | 114.0     | 
| | United States                 |   | 750.6     | 
| | Asia and Australasia          |   | 66.3      | 
| | Latin America                 |   | 91.5      | 
| | Europe and Other              |   | 14.8      | 
| |                               | $ | 1,037.2   | 
| |                               |   |           | 
| |                               |   | 2003      | 
| |                               |   | Specialty | 
| | Sales by Shipment Destination |   | Papers    | 
| | Canada                        | $ | 101.1     | 
| | United States                 |   | 729.8     | 
| | Asia and Australasia          |   | 95.0      | 
| | Latin America                 |   | 71.0      | 
| | Europe and Other              |   | 5.8       | 
| |                               | $ | 1,002.7   | 

27

---

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

|21. | COMMITMENTS                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                               
|    | The Company has entered into operating leases for property, plant and
      equipment. The minimum future payments under various operating leases in
      each of the years ended December 31 are as follows:

| | 2006             | $ | 12.8
| | ---------------- | - | ----
| | 2007             |   | 10.2
| | 2008             |   | 9.2 
| | 2009             |   | 7.7 
| | 2010             |   | 7.2 
| | Subsequent years |   | 46.3
| |                  | $ | 93.4

|    | The total lease expense amounted to $13.8 million for the
      year ended December 31, 2005 (2004  $14.5 million; 2003  $8.5 million).                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                            
|22. | GUARANTEES AND INDEMNITIES                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | The Company has, over time, provided various indemnities
      with respect to tax, environment, and employment liabilities, as well as
      general representations and warranties on sales of portions of its
      business, acquisitions, and commodity contracts. Significant existing
      indemnities are as follows:                                             
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | (a)                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | (b)                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | (c)                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                            
|23. | CONTINGENT LIABILITIES                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | In the normal course of its business activities, the
      Company is subject to a number of claims and legal actions that may be
      made by customers, suppliers and others. While the final outcome with
      respect to actions outstanding or pending as at December 31, 2005, cannot
      be predicted with certainty, the Company believes an adequate provision

28

---

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

has been made, or the resolution will
not have a material effect on the Companys consolidated financial position,
earnings or cash flows.

Class Action Lawsuits

In early 2004, the European Commission
began an investigation into possible anti-competitive practices by certain
European paper producers. Shortly after the investigation was announced, the
Company and certain of its affiliates were named, together with a number of
other paper producers in several United States class action lawsuits alleging an
ongoing conspiracy to fix prices of magazine and other publication papers. The
Company believes there is no merit to the lawsuits, but will nevertheless
continue to incur related costs to defend itself.

|24. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                     
|    | The Companys consolidated financial statements have been
      prepared in accordance with Canadian GAAP. Significant differences to
      accounting principles generally accepted in the United States are set
      forth below:
|    |                                                                                                                                                                                                                                     
|    | Earnings adjustments                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                     
|    | The following table provides a reconciliation of the net
      earnings (loss) for the years ended December 31 under Canadian GAAP to
      U.S. GAAP:                                                                              

| |                                                                     |   | 2005  |   |   | 2004  |   |   | 2003  |  
| | ------------------------------------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | -
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Net earnings (loss) in accordance with
      Canadian GAAP          | $ | (25.6 | ) | $ | (28.6 | ) | $ | (84.5 | )
| | U.S. dollar revenue hedges (a)                                      |   | (32.4 | ) |   | (22.8 | ) |   | 67.5  |  
| | U.S. dollar long-term debt hedges (b)                               |   | (1.5  | ) |   | (3.0  | ) |   | (0.6  | )
| | Fixed to floating interest swaps (c)                                |   | (3.4  | ) |   | (5.4  | ) |   | (6.7  | )
| | Commodity swaps (d)                                                 |   | (0.3  | ) |   | (3.3  | ) |   | 3.6   |  
| | Stock based compensation expense                                    |   |      |   |   | (0.6  | ) |   |      |  
| | Income tax impact of above items                                    |   | 12.8  |   |   | 11.7  |   |   | (22.8 | )
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Net earnings (loss) in accordance with
      U.S. GAAP              |   | (50.4 | ) |   | (52.0 | ) |   | (43.5 | )
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Other comprehensive income:                                         |   |       |   |   |       |   |   |       |  
| | Minimum pension liability adjustment,
      net of deferred         |   |       |   |   |       |   |   |       |  
| | income taxes of $7.0 million (2004
       $1.5 million;            |   |       |   |   |       |   |   |       |  
| | 2003  $1.7 million)
      (e)                                      |   | (14.0 | ) |   | (2.9  | ) |   | (3.1  | )
| | Effective portion of U.S.
      dollar revenue hedges, net of       |   |       |   |   |       |   |   |       |  
| | deferred income taxes of $2.4 million (a)                           |   | 4.5   |   |   |      |   |   |      |  
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Comprehensive income (loss) in accordance with U.S. GAAP            | $ | (59.9 | ) | $ | (54.9 | ) | $ | (46.6 | )
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Basic and diluted net earnings (loss) per share in
      accordance |   |       |   |   |       |   |   |       |  
| | with U.S. GAAP (in dollars)                                         | $ | (0.23 | ) | $ | (0.24 | ) | $ | (0.21 | )
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Basic and diluted weighted average
      number of shares in        |   |       |   |   |       |   |   |       |  
| | accordance with U.S. GAAP (in millions)                             |   | 214.6 |   |   | 214.6 |   |   | 206.6 |  

29

---

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

Balance sheet adjustments

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

| |                                                                         |   | 2005    |   |   | 2004    |  
| | ----------------------------------------------------------------------- | - | ------- | - | - | ------- | -
| |                                                                         |   |         |   |   |         |  
| | Prepaids and other  Canadian
      GAAP                                | $ | 24.1    |   | $ | 24.6    |  
| | U.S. dollar revenue hedges                                              |   | 10.5    |   |   | 36.0    |  
| | Fixed to floating interest
      swaps                                  |   | 0.4     |   |   | 1.4     |  
| | Commodity
      swaps                                                   |   |        |   |   | 0.3     |  
| | Prepaid and other  U.S. GAAP                                           | $ | 35.0    |   | $ | 62.3    |  
| |                                                                         |   |         |   |   |         |  
| |                                                                         |   |         |   |   |         |  
| | Other assets  Canadian GAAP                                            | $ | 40.1    |   | $ | 27.5    |  
| | Intangible assets related to additional
      minimum pension liability |   |        |   |   | 0.1     |  
| | Other assets
       U.S. GAAP                                          | $ | 40.1    |   | $ | 27.6    |  
| |                                                                         |   |         |   |   |         |  
| |                                                                         |   |         |   |   |         |  
| | Long-term debt  Canadian GAAP                                          | $ | 861.9   |   | $ | 823.6   |  
| | Adjustment
      related to fixed to floating interest swaps            |   | 0.1     |   |   | 0.8     |  
| | Long-term debt  U.S. GAAP                                              | $ | 862.0   |   | $ | 824.4   |  
| |                                                                         |   |         |   |   |         |  
| |                                                                         |   |         |   |   |         |  
| | Other long-term obligations  Canadian GAAP                             | $ | 209.7   |   | $ | 233.6   |  
| | Additional minimum pension
      liability adjustment                   |   | 63.8    |   |   | 42.4    |  
| | U.S. dollar long-term debt hedges                                       |   | (0.9    | ) |   | (2.4    | )
| | Cancelled interest rate swaps                                           |   | (1.1    | ) |   | (4.2    | )
| | Other long-term
      obligations  U.S. GAAP                           | $ | 271.5   |   | $ | 269.4   |  
| |                                                                         |   |         |   |   |         |  
| |                                                                         |   |         |   |   |         |  
| | Future income taxes  Canadian
      GAAP                               | $ | 300.9   |   | $ | 332.9   |  
| | Tax effect of pension adjustment                                        |   | (22.5   | ) |   | (15.0   | )
| | Tax effect of effective
      portion of U.S. dollar revenue hedges     |   | 2.4     |   |   |        |  
| | Tax
      effect of other adjustments                                   |   | 2.2     |   |   | 15.0    |  
| |                                                                         |   |         |   |   |         |  
| | Future income
      taxes  U.S. GAAP                                   | $ | 283.0   |   | $ | 332.9   |  
| |                                                                         |   |         |   |   |         |  
| |                                                                         |   |         |   |   |         |  
| | Shareholders equity 
      Canadian GAAP                              | $ | 1,019.7 |   | $ | 1,042.8 |  
| | U.S. dollar revenue hedges                                              |   | 10.5    |   |   | 36.0    |  
| | U.S. dollar long-term debt
      hedges                                 |   | 0.9     |   |   | 2.4     |  
| | Fixed to floating interest swaps                                        |   | 1.4     |   |   | 4.8     |  
| | Commodity swaps                                                         |   |        |   |   | 0.3     |  
| | Additional minimum pension liability adjustment                         |   | (63.8   | ) |   | (42.3   | )
| | Tax effect of pension adjustment                                        |   | 22.5    |   |   | 15.0    |  
| | Tax effect of effective portion of U.S.
      dollar revenue hedges     |   | (2.4    | ) |   |        |  
| | Tax effect of other adjustments                                         |   | (2.2    | ) |   | (15.0   | )
| | Shareholders
      equity  U.S. GAAP                                  | $ | 986.6   |   | $ | 1,044.0 |  

30

---

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

| | (a) | U.S. dollar revenue hedges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Under Canadian GAAP, translation gains and losses on
      foreign currency options and forward contracts to sell foreign currencies
      that are designated as hedges are recognized concurrently with the hedged
      revenue in Sales. Prior to April 1, 2005, the Company did not designate
      its revenue contracts as hedges for U.S. GAAP purposes. Effective April 1,
      2005, the Company designated certain of its existing revenue contracts as
      hedges in accordance with criteria under U.S. GAAP and has, prospectively,
      accounted for them as hedges under U.S. GAAP. For U.S. GAAP purchases,
      undesignated contracts are recorded at fair value with changes recognized
      in income. Designated contracts are recorded at fair value with changes in
      fair value during the period of designation recorded in other
      comprehensive income, net of tax, until the hedged item is recognized.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (b) | U.S. dollar long-term debt hedges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Under Canadian GAAP, prior to January 1, 2004, the
      Company designated foreign currency contracts related to its U.S. dollar
      debt as hedges. The forward premium or discount on forward foreign
      currency contracts used to hedge the U.S. dollar long-term debt was
      amortized to interest expense over the term of the forward contract.
      Effective January 1, 2004, foreign currency contracts related to U.S.
      dollar debt are not designated as hedges. Under U.S. GAAP, the Company
      does not account for such contracts as hedges of long-term debt and
      recognizes the foreign currency contracts on a fair value basis at each
      reporting period.                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (c) | Fixed to floating interest swaps                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Under Canadian GAAP, unrealized gains and losses on
      interest rate swap contracts designated as hedges are not recognized in
      the financial statements. Under U.S. GAAP, the ineffectiveness of the
      hedge is quantified, and the ineffective portion of the changes in fair
      value is recorded in interest expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | During 2003, the Company terminated prior to maturity,
      interest rate swap contracts for cash proceeds of $15.9 million. Under
      Canadian GAAP, the net gain is deferred and is being amortized as a
      reduction of interest expense based on the U.S. swap curve at the time of
      termination. Under U.S. GAAP, there is no deferred amount as the
      fluctuations in the fair value and interest payments are recognized in
      earnings as they arise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (d) | Commodity swaps                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Under Canadian GAAP, prior to January 1, 2004, the
      Company accounted for commodity swaps as hedges. Effective January 1,
      2004, commodity swaps are not designated as hedges and are recognized at
      their fair value at each reporting date with changes in fair value in the
      year included in consolidated net income (loss). Under U.S. GAAP, the
      Company does not designate commodity swaps as hedges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (e) | Minimum pension liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Under U.S. GAAP, if the accumulated benefit obligation
      exceeds the market value of plan assets, a minimum pension liability for
      the excess is recognized to the extent that the liability recorded in the
      balance sheet is less than the minimum liability. Any portion of this
      additional liability that relates to unrecognized prior service cost is
      recognized as an intangible asset while the remainder is charged to
      comprehensive income (loss). Canadian GAAP has no such requirement to
      record a minimum liability.                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (f) | Comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Statement of Financial Accounting Standards No. 130,
      Reporting Comprehensive Income, requires that a company classify items
      of other comprehensive income in a financial statement and display the
      accumulated balance of other comprehensive income separately from retained
      earnings and additional paid-in capital in the equity section of the
      balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (g) | Accounting standard issued but not yet implemented                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | There are no U.S. GAAP standards issued but not yet
      implemented that are expected to materially impact the Companys financial
      position, results of operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

31

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