##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
|- | ----------------------------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 0-20646



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Caraustar Industries, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|North Carolina                                                 |  | 58-1388387                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|5000 Austell Powder Springs Road, Suite 300, Austell, Georgia  |  | 30106                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

(770) 948-3101

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act.



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act.):    Yes ̈No  x

Indicate the number of shares outstanding of each of issuers classes of common stock, as of the latest practicable date, October 31, 2006.



|                             |  |              
|---------------------------- |  | -------------
|Common Stock, $.10 par value |  | 29,081,969   
|(Class)                      |  | (Outstanding)



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##### Table of Contents

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2006

CARAUSTAR INDUSTRIES, INC.

TABLE OF CONTENTS



|              |  |                                                                                                                              |  |     
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                              |  | Page
|PART I       |  | FINANCIAL INFORMATION                                                                                                        |  |     
|              |  |                                                                                                                             
|Item 1.       |  | Condensed Consolidated Financial Statements (unaudited):                                                                     |  |     
|              |  |                                                                                                                             
|              |  | Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005                                         |  | 3   
|              |  |                                                                                                                             
|              |  | Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2006 and 2005 |  | 4   
|              |  |                                                                                                                             
|              |  | Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2006 and 2005                 |  | 5   
|              |  |                                                                                                                             
|              |  | Notes to Condensed Consolidated Financial Statements                                                                         |  | 6   
|              |  |                                                                                                                             
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                        |  | 28  
|              |  |                                                                                                                             
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                   |  | 39  
|              |  |                                                                                                                             
|Item 4.       |  | Controls and Procedures                                                                                                      |  | 39  
|              |  |                                                                                                                             
|PART II      |  | OTHER INFORMATION                                                                                                            |  |     
|              |  |                                                                                                                             
|Item 1A.      |  | Risk Factors                                                                                                                 |  | 39  
|              |  |                                                                                                                             
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                  |  | 39  
|              |  |                                                                                                                             
|Item 6.       |  | Exhibits                                                                                                                     |  | 39  
|              | 
|Signatures    |  | 40                                                                                                                          
|              | 
|Exhibit Index |  | 41                                                                                                                          



2



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##### Table of Contents

ITEM 1. Condensed Consolidated Financial Statements

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)



|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                              |  | September 30,2006 |          |   | December 31,2005 |  
|Assets                                                                                                                                                                        |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                               |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                     |  | $                 | 3,975    |   |                  | $ | 95,152   |  
|Receivables, net of allowances for doubtful accounts, returns, and discounts of $2,781 and $2,613 as of September 30, 2006 and
December 31, 2005, respectively                |  |                   | 98,043   |   |                  |   | 91,061   |  
|Inventories                                                                                                                                                                   |  |                   | 74,533   |   |                  |   | 70,959   |  
|Refundable income taxes                                                                                                                                                       |  |                   |         |   |                  |   | 56       |  
|Current deferred tax asset                                                                                                                                                    |  |                   | 10,952   |   |                  |   | 40,259   |  
|Other current assets                                                                                                                                                          |  |                   | 10,792   |   |                  |   | 21,613   |  
|Investment in unconsolidated affiliate                                                                                                                                        |  |                   |         |   |                  |   | 13,212   |  
|Assets of discontinued operations held for sale                                                                                                                               |  |                   | 23,692   |   |                  |   | 76,665   |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                          |  |                   | 221,987  |   |                  |   | 408,977  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Property, plant and equipment:                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Land                                                                                                                                                                          |  |                   | 9,777    |   |                  |   | 7,931    |  
|Buildings and improvements                                                                                                                                                    |  |                   | 93,415   |   |                  |   | 97,536   |  
|Machinery and equipment                                                                                                                                                       |  |                   | 436,949  |   |                  |   | 424,503  |  
|Furniture and fixtures                                                                                                                                                        |  |                   | 14,862   |   |                  |   | 15,071   |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                              |  |                   | 555,003  |   |                  |   | 545,041  |  
|Less accumulated depreciation                                                                                                                                                 |  |                   | (295,407 | ) |                  |   | (290,004 | )
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Property, plant and equipment, net                                                                                                                                            |  |                   | 259,596  |   |                  |   | 255,037  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Goodwill                                                                                                                                                                      |  |                   | 127,574  |   |                  |   | 129,275  |  
|Investment in unconsolidated affiliates                                                                                                                                       |  |                   | 41,143   |   |                  |   | 44,037   |  
|Other assets                                                                                                                                                                  |  |                   | 18,741   |   |                  |   | 21,806   |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                              |  | $                 | 669,041  |   |                  | $ | 859,132  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Liabilities and Shareholders Equity                                                                                                                                          |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                          |  |                   |          |   |                  |   |          |  
|Current maturities of debt                                                                                                                                                    |  | $                 | 7,285    |   |                  | $ | 85       |  
|Accounts payable                                                                                                                                                              |  |                   | 77,130   |   |                  |   | 78,015   |  
|Accrued interest                                                                                                                                                              |  |                   | 5,753    |   |                  |   | 7,976    |  
|Accrued compensation                                                                                                                                                          |  |                   | 12,326   |   |                  |   | 9,146    |  
|Accrued pension                                                                                                                                                               |  |                   | 7,828    |   |                  |   |         |  
|Capital lease obligations                                                                                                                                                     |  |                   | 529      |   |                  |   | 542      |  
|Income taxes payable                                                                                                                                                          |  |                   | 2,390    |   |                  |   |         |  
|Other accrued liabilities                                                                                                                                                     |  |                   | 22,962   |   |                  |   | 34,711   |  
|Liabilities of discontinued operations                                                                                                                                        |  |                   | 10,203   |   |                  |   | 31,373   |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                     |  |                   | 146,406  |   |                  |   | 161,848  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Long-term debt, less current maturities                                                                                                                                       |  |                   | 257,691  |   |                  |   | 492,305  |  
|Long-term capital lease obligations                                                                                                                                           |  |                   | 237      |   |                  |   | 561      |  
|Deferred income taxes                                                                                                                                                         |  |                   | 48,648   |   |                  |   | 48,699   |  
|Pension liability                                                                                                                                                             |  |                   | 40,051   |   |                  |   | 41,877   |  
|Other liabilities                                                                                                                                                             |  |                   | 5,791    |   |                  |   | 5,446    |  
|Commitments and contingencies (Note 14)                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                         |  |                   |          |   |                  |   |          |  
|Preferred stock, $.10 par value; 5,000,000 shares authorized, no shares issued                                                                                                |  |                   |         |   |                  |   |         |  
|Common stock, $.10 par value; 60,000,000 shares authorized, 29,072,362 and 28,785,519 shares issued and outstanding at September 30, 2006
and December 31, 2005, respectively |  |                   | 2,907    |   |                  |   | 2,879    |  
|Additional paid-in capital                                                                                                                                                    |  |                   | 190,409  |   |                  |   | 192,673  |  
|Unearned compensation                                                                                                                                                         |  |                   |         |   |                  |   | (3,442   | )
|Retained earnings (deficit)                                                                                                                                                   |  |                   | 4,990    |   |                  |   | (54,834  | )
|Accumulated other comprehensive (loss) income:                                                                                                                                |  |                   |          |   |                  |   |          |  
|Minimum pension liability adjustment                                                                                                                                          |  |                   | (29,796  | ) |                  |   | (29,796  | )
|Foreign currency translation                                                                                                                                                  |  |                   | 1,707    |   |                  |   | 916      |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total accumulated other comprehensive loss                                                                                                                                    |  |                   | (28,089  | ) |                  |   | (28,880  | )
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total Shareholders Equity                                                                                                                                                    |  |                   | 170,217  |   |                  |   | 108,396  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                              |  | $                 | 669,041  |   |                  | $ | 859,132  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  

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



3



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)



|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                   |  | For the Three Months Ended
September 30, |         |   | For the Nine Months Ended
September 30, |  
|                                                                                   |  | 2006                                     |         |   | 2005                                    |   |         | 2006 |  |   | 2005    |  
|Sales                                                                              |  | $                                        | 233,283 |   |                                         | $ | 213,991 |      |  | $ | 701,423 |   |  | $ | 651,436 |  
|Cost of sales                                                                      |  |                                          | 202,132 |   |                                         |   | 182,854 |      |  |   | 597,445 |   |  |   | 546,746 |  
|Selling, general and administrative expenses                                       |  |                                          | 30,142  |   |                                         |   | 29,876  |      |  |   | 94,836  |   |  |   | 92,431  |  
|Restructuring and impairment costs                                                 |  |                                          | 2,798   |   |                                         |   | (578    | )    |  |   | 6,433   |   |  |   | 242     |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from operations                                                      |  |                                          | (1,789  | ) |                                         |   | 1,839   |      |  |   | 2,709   |   |  |   | 12,017  |  
|Other income (loss):                                                               |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Interest expense                                                                   |  |                                          | (4,397  | ) |                                         |   | (10,399 | )    |  |   | (21,522 | ) |  |   | (31,367 | )
|Interest income                                                                    |  |                                          | 109     |   |                                         |   | 748     |      |  |   | 3,734   |   |  |   | 1,811   |  
|Equity in income of unconsolidated affiliates                                      |  |                                          | 1,455   |   |                                         |   | 9,615   |      |  |   | 5,106   |   |  |   | 27,531  |  
|Gain on sale of interest in Standard Gypsum, L.P.                                  |  |                                          |        |   |                                         |   |        |      |  |   | 135,247 |   |  |   |        |  
|Loss on redemption of senior subordinated notes                                    |  |                                          |        |   |                                         |   |        |      |  |   | (10,272 | ) |  |   |        |  
|Other, net                                                                         |  |                                          | (15     | ) |                                         |   | 44      |      |  |   | 93      |   |  |   | 331     |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|                                                                                   |  |                                          | (2,848  | ) |                                         |   | 8       |      |  |   | 112,386 |   |  |   | (1,694  | )
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes and minority interest |  |                                          | (4,637  | ) |                                         |   | 1,847   |      |  |   | 115,095 |   |  |   | 10,323  |  
|Benefit (provision) for income taxes                                               |  |                                          | 949     |   |                                         |   | (664    | )    |  |   | (41,185 | ) |  |   | (5,886  | )
|Minority interest in income                                                        |  |                                          | (19     | ) |                                         |   | (32     | )    |  |   | (102    | ) |  |   | (138    | )
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations                                           |  |                                          | (3,707  | ) |                                         |   | 1,151   |      |  |   | 73,808  |   |  |   | 4,299   |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Discontinued operations:                                                           |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations before income taxes                              |  |                                          | (2,025  | ) |                                         |   | (1,652  | )    |  |   | (21,413 | ) |  |   | (5,522  | )
|Benefit for income taxes of discontinued operations                                |  |                                          | 660     |   |                                         |   | 546     |      |  |   | 7,429   |   |  |   | 1,836   |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations                                                  |  |                                          | (1,365  | ) |                                         |   | (1,106  | )    |  |   | (13,984 | ) |  |   | (3,686  | )
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Net income (loss)                                                                  |  |                                          | (5,072  | ) |                                         |   | 45      |      |  |   | 59,824  |   |  |   | 613     |  
|Other comprehensive income (loss):                                                 |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Foreign currency translation adjustment                                            |  |                                          | 666     |   |                                         |   | 236     |      |  |   | 791     |   |  |   | 23      |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive income (loss)                                                        |  | $                                        | (4,406  | ) |                                         | $ | 281     |      |  | $ | 60,615  |   |  | $ | 636     |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Basic income (loss) per common share:                                              |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Continuing operations                                                              |  | $                                        | (0.13   | ) |                                         | $ | 0.04    |      |  | $ | 2.58    |   |  | $ | 0.15    |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Discontinued operations                                                            |  | $                                        | (0.05   | ) |                                         | $ | (0.04   | )    |  | $ | (0.49   | ) |  | $ | (0.13   | )
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Net                                                                                |  | $                                        | (0.18   | ) |                                         | $ | 0.00    |      |  | $ | 2.09    |   |  | $ | 0.02    |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Weighted average number of shares outstanding                                      |  |                                          | 28,584  |   |                                         |   | 28,780  |      |  |   | 28,568  |   |  |   | 28,769  |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Diluted income (loss) per common share:                                            |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Continuing operations                                                              |  | $                                        | (0.13   | ) |                                         | $ | 0.04    |      |  | $ | 2.58    |   |  | $ | 0.15    |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Discontinued operations                                                            |  | $                                        | (0.05   | ) |                                         | $ | (0.04   | )    |  | $ | (0.49   | ) |  | $ | (0.13   | )
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Net                                                                                |  | $                                        | (0.18   | ) |                                         | $ | 0.00    |      |  | $ | 2.09    |   |  | $ | 0.02    |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|Diluted weighted average number of shares outstanding                              |  |                                          | 28,584  |   |                                         |   | 28,878  |      |  |   | 28,606  |   |  |   | 28,887  |  
|                                                                                   |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  

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



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



|                                                        |  |                                         |          |   |      |   |         |  
|------------------------------------------------------- |  | --------------------------------------- | -------- | - | ---- | - | ------- | -
|                                                        |  | For the Nine Months Ended
September 30, |         
|                                                        |  | 2006                                    |          |   | 2005 |  
|Operating activities:                                   |  |                                         |          |   |      |   |         |  
|Net income                                              |  | $                                       | 59,824   |   |      | $ | 613     |  
|Depreciation and amortization                           |  |                                         | 16,884   |   |      |   | 21,305  |  
|Write-off of deferred debt costs                        |  |                                         | 155      |   |      |   |        |  
|Equity-based compensation expense                       |  |                                         | 867      |   |      |   | 640     |  
|Loss (gain) on redemption of senior subordinated notes  |  |                                         | 10,272   |   |      |   | (121    | )
|Restructuring and impairment costs                      |  |                                         | 20,723   |   |      |   | (171    | )
|Deferred income taxes                                   |  |                                         | 29,260   |   |      |   | 3,936   |  
|Gain on sale of interest in Standard Gypsum, L.P.       |  |                                         | (135,247 | ) |      |   |        |  
|Loss on sale of assets held for sale                    |  |                                         | 2,073    |   |      |   |        |  
|Equity in income of unconsolidated affiliates           |  |                                         | (5,106   | ) |      |   | (27,531 | )
|Distributions from unconsolidated affiliates            |  |                                         | 5,080    |   |      |   | 24,328  |  
|Changes in operating assets and liabilities             |  |                                         | (936     | ) |      |   | (9,810  | )
|                                                        |  |                                         |          |   |      |   |         |  
|Net cash provided by operating activities               |  |                                         | 3,849    |   |      |   | 13,189  |  
|                                                        |  |                                         |          |   |      |   |         |  
|Investing activities:                                   |  |                                         |          |   |      |   |         |  
|Purchases of property, plant and equipment              |  |                                         | (27,881  | ) |      |   | (17,982 | )
|Proceeds from disposal of property, plant and equipment |  |                                         | 712      |   |      |   | 2,811   |  
|Proceeds from sale of assets held for sale              |  |                                         | 22,390   |   |      |   |        |  
|Acquisition of businesses, net of cash acquired         |  |                                         | (11,059  | ) |      |   |        |  
|Changes in restricted cash                              |  |                                         | 10,610   |   |      |   |        |  
|Proceeds from sale of interest in Standard Gypsum, L.P. |  |                                         | 148,460  |   |      |   |        |  
|Return of investment in unconsolidated affiliates       |  |                                         | 2,920    |   |      |   | 4,672   |  
|Investment in unconsolidated affiliates                 |  |                                         |         |   |      |   | (40     | )
|                                                        |  |                                         |          |   |      |   |         |  
|Net cash provided by (used in) investing activities     |  |                                         | 146,152  |   |      |   | (10,539 | )
|                                                        |  |                                         |          |   |      |   |         |  
|Financing activities:                                   |  |                                         |          |   |      |   |         |  
|Proceeds from senior credit facility-revolver           |  |                                         | 35,332   |   |      |   |        |  
|Repayments of senior credit facility-revolver           |  |                                         | (34,520  | ) |      |   |        |  
|Proceeds from senior credit facility-term loan          |  |                                         | 35,000   |   |      |   |        |  
|Repayments of short and long-term debt                  |  |                                         | (275,570 | ) |      |   | (2,413  | )
|Deferred debt costs                                     |  |                                         | (1,139   | ) |      |   |        |  
|Swap agreement unwind proceeds                          |  |                                         |         |   |      |   | 826     |  
|Payments for capital lease obligations                  |  |                                         | (373     | ) |      |   | (380    | )
|Issuances of stock, net of forfeitures                  |  |                                         | 92       |   |      |   | 231     |  
|                                                        |  |                                         |          |   |      |   |         |  
|Net cash used in financing activities                   |  |                                         | (241,178 | ) |      |   | (1,736  | )
|                                                        |  |                                         |          |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents    |  |                                         | (91,177  | ) |      |   | 914     |  
|Cash and cash equivalents at beginning of period        |  |                                         | 95,152   |   |      |   | 89,756  |  
|                                                        |  |                                         |          |   |      |   |         |  
|Cash and cash equivalents at end of period              |  | $                                       | 3,975    |   |      | $ | 90,670  |  
|                                                        |  |                                         |          |   |      |   |         |  
|Supplemental disclosures:                               |  |                                         |          |   |      |   |         |  
|Cash payments for interest                              |  | $                                       | 23,122   |   |      | $ | 23,268  |  
|                                                        |  |                                         |          |   |      |   |         |  
|Income tax payments, net                                |  | $                                       | 2,453    |   |      | $ | 370     |  
|                                                        |  |                                         |          |   |      |   |         |  
|Property acquired under capital leases                  |  | $                                       | 36       |   |      | $ | 1,532   |  
|                                                        |  |                                         |          |   |      |   |         |  

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



5



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(UNAUDITED)

Note 1.Basis of
Presentation

The financial information included herein is unaudited; however, such information reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary to present fairly, in all material respects, the financial position of the Company as of September 30, 2006, and the results of operations for the three months and nine
months ended September 30, 2006 and 2005 and the cash flows for the nine months ended September 30, 2006 and 2005, respectively. The results of operations for the three months and nine months ended September 30, 2006 and 2005 and the
cash flows for the nine months ended September 30, 2006 and 2005 are not, and should not be, construed as necessarily indicative of the results of the operations or cash flows which may be reported for the remainder of 2006.

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for
reporting on Form 10-Q. Pursuant to such rules and regulations, certain footnote disclosures and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The accounting policies
followed for interim financial reporting are the same as those disclosed in note 1 of the notes to the financial statements included in the Companys Form 10-K.

Note 2.New Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation
No. 48 Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109) which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. This interpretation
was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Company is currently evaluating the potential impact of this interpretation.

In September 2006, the SEC
issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on how prior year
misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current years financial statements are materially misstated. SAB 108 permits
registrants to record the cumulative effect of initial adoption by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded
to the opening balance of retained earnings only if material under the dual method. SAB 108 is effective for fiscal years ending on or after November 15, 2006. We are currently evaluating the impact of adopting this pronouncement.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies
under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any
transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for the fiscal years beginning after November 15, 2007; therefore, we anticipate
adopting this standard as of January 1, 2008. We have not determined the effect, if any, the adoption of this statement will have on our financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of
FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires employers to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the
funded status of defined benefit pension and other post-retirement benefit plans. SFAS No. 158 requires prospective application; thus, the recognition and disclosure requirements are effective for our fiscal year ending December 31, 2006.
Additionally, SFAS No. 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. This requirement is effective for our fiscal year ending December 31, 2008. We do not expect the adoption of SFAS
No. 158 to have a material impact on our financial condition and results of operations.



6



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##### Table of Contents

Note 3.Accounting for Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R), Share-Based Payment (SFAS 123R) which is a revision
of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123R supersedes APB 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.
SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statements of operations based on their fair values.

The Company adopted SFAS 123R as of January 1, 2006 using the modified prospective method. Under this transition method, compensation cost is recognized beginning with the effective date (a) based on the
requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the
effective date. As permitted by SFAS 123, through December 31, 2005, the Company accounted for share-based payments to employees using APB 25s intrinsic value method and, as such, had not recognized compensation costs for employee stock
options.

SFAS 123R requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than
an operating cash flow as required under APB No. 25. This requirement reduces reported operating cash flows and increases reported financing cash flows in periods after adoption. The Company elected to utilize the straight-line attribution
method for recognizing stock-based compensation expense under SFAS 123R.

In May 2003, the Companys board of directors and shareholders approved a
long-term equity incentive plan, which became effective May 7, 2003. Under the provisions of the plan, participating key employees are rewarded, in the form of common share purchase options, performance accelerated restricted shares
(PARS), or a combination of both, for improving the Companys financial performance in a manner that is consistent with the creation of increased shareholder value. All options awarded under the plan will have an exercise price not
less than 100% of the fair market value of a share of common stock on the date of grant. Options will have a vesting schedule of up to five years and expire after ten years. The PARS issued by the Company will vest seven years from the date of grant
unless vesting is accelerated when the price of Caraustar stock meets a specific target price and trades at this price or higher for twenty consecutive trading days. The Companys board of directors authorized and shareholders approved an
aggregate of 4.0 million common shares for issuance under this plan. The Companys policy for issuing shares upon an exercise of options is to issue new shares.

In May 2005, the shareholders approved an amendment to allow the Companys directors to participate in the long-term equity incentive plan. Under this plan, each non-employee director of the Company is granted
3,000 options annually.

During the nine months ended September 30, 2006, the Company granted 226 thousand options with a weighted average
grant-date fair value of $5.96 per share. There were no options granted during the nine months ended September 30, 2005. The Company recorded approximately $246 thousand of compensation expense for the nine months ended September 30, 2006.
The total intrinsic value of the 11,662 options exercised during the nine months ended September 30, 2006 was insignificant.

During the nine months
ended September 30, 2006, the Company granted 277 thousand PARS at the weighted average grant-date fair value price of $10.14 per share. There were no PARS granted during the nine months ended September 30, 2005. The Company recorded
approximately $621 thousand and $640 thousand of compensation expense in the nine months ended September 30, 2006 and September 30, 2005, respectively.

Total compensation expense for PARS and stock options for the nine months ended September 30, 2006 and 2005 was $867 thousand and $640 thousand, respectively. The Company recognized no windfall tax benefit for the nine months ended
September 30, 2006.

The following table summarizes the stock option activity during the nine months ended September 30, 2006:



|                                                     |  |           |   |  |                                |       |                                           |     |                                              |   |   
|---------------------------------------------------- |  | --------- | - |  | ------------------------------ | ----- | ----------------------------------------- | --- | -------------------------------------------- | - | --
|                                                     |  | Shares    |   |  | Weighted AverageExercise Price |       | Weighted Average RemainingLife (In Years) |     | Aggregate Intrinsic Value (1) (in
thousands)
|Outstanding at December 31, 2005                     |  | 1,618,959 |   |  | $                              | 17.51 |                                           |     |                                              |   |   
|Granted                                              |  | 225,550   |   |  |                                | 10.59 |                                           |     |                                              |   |   
|Forfeited                                            |  | (124,729  | ) |  |                                | 20.64 |                                           |     |                                              |   |   
|Exercised                                            |  | (11,662   | ) |  |                                | 7.83  |                                           |     |                                              |   |   
|                                                     |  |           |   |  |                                |       |                                           |     |                                              |   |   
|Outstanding at September 30, 2006                    |  | 1,708,118 |   |  | $                              | 16.45 |                                           | 5.4 |                                              | $ | 82
|                                                     |  |           |   |  |                                |       |                                           |     |                                              |   |   
|Vested and expected to vest as of September 30, 2006 |  | 1,675,949 |   |  | $                              | 16.56 |                                           | 5.3 |                                              | $ | 82
|                                                     |  |           |   |  |                                |       |                                           |     |                                              |   |   
|Options exercisable as of September 30, 2006         |  | 1,416,207 |   |  | $                              | 17.76 |                                           | 4.7 |                                              | $ | 82
|                                                     |  |           |   |  |                                |       |                                           |     |                                              |   |   

---

|(1) | These amounts represent the difference between the exercise price and $7.93, the closing price of Caraustar stock on September 29, 2006 (the closing price closest to the last
day of the quarter) as reported on the NASDAQ Stock Market, for all the in-the-money options outstanding.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

A summary of the status of Caraustars nonvested PARS as of September 30, 2006 and changes during the nine
months ended September 30, 2006, is presented below:



|                                |  |         |   |  |                                      |      
|------------------------------- |  | ------- | - |  | ------------------------------------ | -----
|                                |  | Shares  |   |  | Weighted-AverageGrant-DateFair Value
|Nonvested at December 31, 2005  |  | 238,294 |   |  | $                                    | 16.95
|Granted                         |  | 276,550 |   |  |                                      | 10.14
|Vested                          |  | (500    | ) |  |                                      | 17.05
|Forfeited                       |  | (20,825 | ) |  |                                      | 13.11
|                                |  |         |   |  |                                      |      
|Nonvested at September 30, 2006 |  | 493,519 |   |  | $                                    | 13.30
|                                |  |         |   |  |                                      |      

As of September 30, 2006, there was $5.2 million of total unrecognized compensation cost related to PARS. The
unrecognized cost is expected to be expensed over a weighted-average period of 5.8 years unless specific stock price targets are achieved, then the PARS will vest and be expensed during the period the targets are achieved. The total value of PARS
vested during the nine months ended September 30, 2006 was $9 thousand.

Results for the nine months ended September 30, 2005 have not been
restated to reflect compensation expense for employee stock options. Had compensation expense for employee stock options been determined based on the fair value at the grant date consistent with SFAS 123, the Companys net income and earnings
per share amounts for the three and nine months ended September 30, 2005 would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):



|                                                                                                         |  |                                      |       |   |                                     |   |       |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----- | - | ----------------------------------- | - | ----- | -
|                                                                                                         |  | Three Months EndedSeptember 30, 2005 |       |   | Nine Months EndedSeptember 30, 2005 |  
|Net income (loss):                                                                                       |  |                                      |       |   |                                     |   |       |  
|As reported                                                                                              |  | $                                    | 45    |   |                                     | $ | 613   |  
|Incremental stock based compensation expense determined pursuant to SFAS 123, net of related tax effects |  |                                      | (244  | ) |                                     |   | (857  | )
|                                                                                                         |  |                                      |       |   |                                     |   |       |  
|Pro forma net loss                                                                                       |  | $                                    | (199  | ) |                                     | $ | (244  | )
|                                                                                                         |  |                                      |       |   |                                     |   |       |  
|Diluted income (loss) per common share:                                                                  |  |                                      |       |   |                                     |   |       |  
|As reported                                                                                              |  | $                                    | 0.00  |   |                                     | $ | 0.02  |  
|Pro forma                                                                                                |  |                                      | (0.01 | ) |                                     |   | (0.01 | )

The fair market value of the stock options at the date of the grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:



|                         |  |                   |  |                 
|------------------------ |  | ----------------- |  | ----------------
|                         |  | September 30,2006 |  | December 31,2005
|Risk-free interest rate  |  | 4.65%             |  | 4.34%  4.49%   
|Expected dividend yield  |  | 0%                |  | 0%              
|Expected life of options |  | 8 years           |  | 8 years         
|Expected volatility      |  | 44%               |  | 41-43%          

The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected
life of the stock options. Expected volatility and expected life are based on the Companys historical experience. Expected dividend yield was not considered in the option pricing formula since our debt agreements contain certain limitations on
the payment of dividends and currently preclude the Company from doing so. As required by SFAS 123R, the Company will adjust the estimated forfeiture rate based upon actual experience.

Note 4.Inventory

Inventories are carried at the lower of cost or market. The costs included in
inventory include raw materials (recovered fiber for paperboard products and paperboard for converted products), direct and indirect labor and employee benefits, energy and fuel, depreciation, chemicals, general manufacturing overhead and various
other costs of manufacturing. General and administrative costs are not included in inventory costs.

Market, with respect to all inventories, is
replacement cost or net realizable value. The Company reviews inventory at least quarterly to determine the necessity of write-offs for excess, obsolete or unsaleable inventory. The Company estimates reserves for inventory obsolescence and shrinkage
based on managements judgment of future realization. These reviews require management to assess customer and market demand. All inventories are valued using the first-in, first-out method.



8



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##### Table of Contents

Inventories at September 30, 2006 and December 31, 2005, were as follows (in thousands):



|                                   |  |                   |        |                  |   |       
|---------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                   |  | September 30,2006 |        | December 31,2005
|Raw materials and supplies         |  | $                 | 35,570 |                  | $ | 38,555
|Finished goods and work in process |  |                   | 38,963 |                  |   | 32,404
|                                   |  |                   |        |                  |   |       
|Total inventory                    |  | $                 | 74,533 |                  | $ | 70,959
|                                   |  |                   |        |                  |   |       

Note 5.Discontinued Operations and Assets Held for Sale

Discontinued Operations

On December 30, 2005, management
and an authorized committee of the Board of Directors approved a plan to exit from the Companys coated recycled paperboard business, the specialty packaging division and the partition operations. The coated recycled paperboard business is a
component of the paperboard segment and consists of three paperboard mills located in Rittman, Ohio; Versailles, Connecticut; and Tama, Iowa. The specialty packaging division is a component of the folding carton and custom packaging segment and
consists of five facilities located in Robersonville, North Carolina; Bucyrus, Ohio; Strasburg, Ohio; Clifton, New Jersey and Pine Brook, New Jersey. The partition operations are a component of the tube, core and composite container segment and
consist of three facilities located in Litchfield, Illinois; Frenchtown, New Jersey and Covington, Georgia. The Company made the decision to exit these businesses due to recurring losses, poor strategic fit with the Companys other assets and
the long-term prospects for the businesses.

The Company classified the results of operations for these assets as discontinued operations in the
consolidated statements of operations for all periods presented.

Operating Results Data

The following table shows the results of discontinued operations for the three and nine months ended September 30, 2006 and 2005 (in thousands):



|                                                     |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                     |  | Three Months EndedSeptember 30,
2006 |        |   | Nine Months Ended September 30, 2006 |  
|                                                     |  | 2006                                 |        |   | 2005                                 |   |        | 2006 |  |   | 2005    |  
|Sales                                                |  | $                                    | 19,119 |   |                                      | $ | 53,770 |      |  | $ | 98,234  |   |  | $ | 155,161 |  
|Cost of sales                                        |  |                                      | 18,002 |   |                                      |   | 51,621 |      |  |   | 91,116  |   |  |   | 147,410 |  
|Selling, general and administrative expenses         |  |                                      | 2,408  |   |                                      |   | 3,713  |      |  |   | 8,211   |   |  |   | 13,022  |  
|Restructuring and impairment costs                   |  |                                      | 690    |   |                                      |   | 12     |      |  |   | 20,281  |   |  |   | 100     |  
|                                                     |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                 |  |                                      | (1,981 | ) |                                      |   | (1,576 | )    |  |   | (21,374 | ) |  |   | (5,371  | )
|Other income (expense), net                          |  |                                      | (44    | ) |                                      |   | (76    | )    |  |   | (39     | ) |  |   | (151    | )
|                                                     |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations before benefit for income taxes |  |                                      | (2,025 | ) |                                      |   | (1,652 | )    |  |   | (21,413 | ) |  |   | (5,522  | )
|Benefit for income taxes                             |  |                                      | 660    |   |                                      |   | 546    |      |  |   | 7,429   |   |  |   | 1,836   |  
|                                                     |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations                    |  | $                                    | (1,365 | ) |                                      | $ | (1,106 | )    |  | $ | (13,984 | ) |  | $ | (3,686  | )
|                                                     |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  

In December 2005, in connection with the decision to exit these operations and hold them for sale, the Company
recorded pre-tax impairment charges of approximately $82.7 million. Of those pre-tax impairment charges, approximately $74.6 million related to the property, plant and equipment associated with the Companys coated recycled paperboard business
and approximately $8.1 million was related to the property, plant and equipment of the Companys specialty packaging division. In addition, the Company also impaired approximately $10.5 million of goodwill related to its coated recycled
paperboard business. On March 31, 2006, based upon updated estimates of fair market values for the coated recycled paperboard operations, the Company recorded an additional $4.8 million in impairment charges related to the property, plant and
equipment which is recorded in restructuring and impairment costs of discontinued operations.

On February 27, 2006, the Company completed the sale of
its partition business to RTS Packaging LLC, a joint venture between the Rock-Tenn Company and the Sonoco Products Company, for approximately $6.0 million. The Company recorded a loss of approximately $1.9 million associated with this divestiture
which is recorded in restructuring and impairment costs of discontinued operations.



9



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##### Table of Contents

On April 21, 2006, the Company entered into an agreement to sell the assets of Sprague Paperboard, Inc. located in
Versailles, Connecticut to Cascades Inc. for $14.5 million. This sale was completed on July 19, 2006. The Company also entered into an agreement granting Cascades Inc. an option to buy the coating equipment and the customer list of the Rittman,
Ohio coated paperboard mill for $500 thousand. Cascades Inc. exercised its option on August 2, 2006. Upon Cascades Inc.s exercise of its option, the Company ceased its coated recycled paperboard production at the Rittman, Ohio location,
which resulted in a $1.3 million charge for severance benefits in the third quarter of 2006. The Company is currently marketing the other assets of its coated recycled paperboard business and expects that those operations will be disposed of within
the next twelve months.

By June 30, 2006, the Company expected the three coated recycled paperboard mills were going to be sold in two separate
transactions, one transaction resulting in a loss of $12.2 million and the other transaction expected to result in a gain that will offset the loss. As a result, the Company recorded an additional impairment of $12.2 million during the second
quarter of 2006 to recognize the loss on the expected third quarter sale of the Versailles, Connecticut coated paperboard mill and certain coating equipment of the Rittman, Ohio coated paperboard mill. Dependent on timing, purchase price and
structure of the sale of the Companys remaining coated recycled paperboard assets held for sale, the Company expects to recognize a gain in the quarter of disposition.

The Company is evaluating sale opportunities for the remaining assets held for sale and expects to sell these assets within the next twelve months.

Assets and Liabilities Held for Sale

The assets classified as held for sale
at September 30, 2006 and December 31, 2005 are summarized below (in thousands):



|                                                |  |                   |        |                  |   |       
|----------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                                |  | September 30,2006 |        | December 31,2005
|Accounts receivable                             |  | $                 | 6,944  |                  | $ | 19,251
|Inventory                                       |  |                   | 2,158  |                  |   | 12,167
|Property, plant and equipment, net              |  |                   | 14,266 |                  |   | 43,621
|Other assets                                    |  |                   | 324    |                  |   | 1,626 
|                                                |  |                   |        |                  |   |       
|Assets of discontinued operations held for sale |  | $                 | 23,692 |                  | $ | 76,665
|                                                |  |                   |        |                  |   |       
|Accounts payable                                |  | $                 | 4,161  |                  | $ | 16,228
|Accrued compensation                            |  |                   | 566    |                  |   | 1,687 
|Notes payable                                   |  |                   |       |                  |   | 4,700 
|Other liabilities                               |  |                   | 5,476  |                  |   | 8,758 
|                                                |  |                   |        |                  |   |       
|Liabilities of discontinued operations          |  | $                 | 10,203 |                  | $ | 31,373
|                                                |  |                   |        |                  |   |       

Note 6.Senior Credit Facility and Long-Term Debt

At September 30, 2006 and December 31, 2005, total long-term debt consisted of the following (in thousands):



|                                           |  |                   |         |   |                  |   |         |  
|------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                           |  | September 30,2006 |         |   | December 31,2005 |  
|Senior credit facility - revolver          |  | $                 | 812     |   |                  | $ |        |  
|Senior credit facility - term loan         |  |                   | 32,569  |   |                  |   |        |  
|97/8%
senior subordinated notes            |  |                   |        |   |                  |   | 257,500 |  
|73/8%
senior notes                         |  |                   | 189,750 |   |                  |   | 189,750 |  
|71/4%
senior notes                         |  |                   | 29,000  |   |                  |   | 29,000  |  
|Other notes payable (1)                    |  |                   | 9,655   |   |                  |   | 4,955   |  
|Realized interest rate swap agreements (2) |  |                   | 3,190   |   |                  |   | 11,185  |  
|                                           |  |                   |         |   |                  |   |         |  
|Total debt                                 |  |                   | 264,976 |   |                  |   | 492,390 |  
|Less current maturities                    |  |                   | (7,285  | ) |                  |   | (85     | )
|                                           |  |                   |         |   |                  |   |         |  
|Total long-term debt                       |  | $                 | 257,691 |   |                  | $ | 492,305 |  
|                                           |  |                   |         |   |                  |   |         |  

---

|(1) | At December 31, 2005, industrial bonds of $4.7 million (the Sprague bonds) were included in current liabilities of discontinued operations and, therefore, are not reflected in
the above schedule for the period ended December 31, 2005. In accordance with the Sprague sale agreement, which was executed in the third quarter of 2006, the Sprague bonds were retained by the Company and, therefore, have been included in the
above schedule for the period ended September 30, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Consists of realized interest rate swap gains less the original issuance discounts and accumulated discount amortization related to the senior and senior subordinated notes.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The carrying value of total debt outstanding at September 30, 2006 maturing during the next five years and
thereafter is as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2006       |  | $ | 2,913  
|2007       |  |   | 5,833  
|2008       |  |   | 5,833  
|2009       |  |   | 200,641
|2010       |  |   | 32,965 
|Thereafter |  |   | 16,791 
|           |  |   |        
|Total debt |  | $ | 264,976
|           |  |   |        

Senior Credit Facility

As of December 31, 2005 the Companys senior credit facility provided for a revolving line of credit of $75.0 million and was secured primarily by a first priority security interest in the Companys
accounts receivable and inventory. The facility included a subfacility of $50.0 million for letters of credit, the usage of which reduced availability under the facility. As of December 31, 2005, no borrowings were outstanding under the
facility; however, an aggregate of $37.5 million in letter of credit obligations were outstanding. Availability under this facility at December 31, 2005 was limited to $37.5 million after taking into consideration the outstanding letter of
credit obligations. See discussion of the Companys former senior credit facility in the notes to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

On March 30, 2006, the Company amended its senior credit facility by entering into an Amended and Restated Credit Agreement. The agreement provides for a $145.0
million senior secured credit facility (the Senior Credit Facility) consisting of a $110.0 million five-year revolver and a $35.0 million five-year term loan. The five-year revolver was reduced from $110.0 million to $100.0 million in
October 2006. The Senior Credit Facility is secured by substantially all assets of the Company and its domestic subsidiaries other than real property, including accounts receivable, general intangibles, inventory and equipment. The Companys
domestic subsidiaries are parties to the Senior Credit Facility either as co-borrowers with the Company or as guarantors. At September 30, 2006, the Company had $32.6 million outstanding under the five-year term loan and $812 thousand
outstanding under the revolver.

The revolver matures on the fifth anniversary of closing and includes a sublimit of $25.0 million for letters of credit.
Borrowing availability under the revolver is determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and inventory and reduced by usage of the revolver (including outstanding letters of credit)
and any reserves. Aggregate availability under the revolver was $77.8 million at September 30, 2006. The term loan was drawn in full at closing and is required to be repaid in monthly installments based on a level six-year amortization
schedule, with all remaining outstanding principal due on the fifth anniversary of closing.

Outstanding principal of the term loan initially bears
interest at a rate equal to, at the Companys option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the Senior Credit Facility) plus 0.25%, or
(2) the adjusted one, two, three or six-month LIBOR rate plus 1.75%. Outstanding principal under the revolver initially bears interest at a rate equal to, at the Companys option, either (1) the base rate or (2) the adjusted one,
two, three or six-month LIBOR rate plus 1.50%. Beginning with reference to the fiscal quarter ending September 30, 2006, pricing under the Senior Credit Facility will be determined by reference to a pricing grid based on average daily
availability under the revolver for the immediately prior fiscal quarter. Under the pricing grid, the applicable margins for the term loan will range from 0.0% to 0.75% for base rate loans and from 1.50% to 2.25% for LIBOR loans, and the applicable
margins for the revolver will range from 0.0% to 0.5% for base rate loans and from 1.25% to 2.00% for LIBOR loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of
credit are subject to an annual fee equal to the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%. The weighted average rates in effect
for the three months ended September 30, 2006 were 8.25% and 7.44% for outstanding revolver and term loan borrowings, respectively.

The Senior Credit
Facility contains covenants that restrict, among other things, the ability of the Company and its subsidiaries to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital
stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, enter into sale and leaseback transactions or change the nature of their business. The Senior Credit Facility also contains a fixed
charge coverage ratio covenant, which applies only in the event borrowing availability falls below $20.0 million at any time or below $25.0 million for five consecutive business days. The Senior Credit Facility contains events of default including,
but not limited to, nonpayment of principal or interest, violation of covenants, breaches of representations and warranties, cross-default to other



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indebtedness, bankruptcy and other insolvency events, material judgments, certain ERISA events, actual or asserted invalidity of loan documentation and
certain changes of control of the Company. The Company was in compliance with the Senior Credit Facility covenants as of September 30, 2006.

Senior and Senior Subordinated Notes

On June 1, 1999, the Company issued $200.0 million in aggregate principal amount of 73/8% senior notes due June 1, 2009. The 73/8% senior notes were issued at a discount to yield an effective interest rate of 7.47% and pay interest semiannually. After taking into account realized gains from unwinding
various interest rate swap agreements, the current effective interest rate of the 73/8% senior notes is 6.3%.
The 73/8% senior notes are unsecured obligations of the Company. The Company has purchased an aggregate of $10.3
million of these notes in the open market.

On March 29, 2001, the Company issued $285.0 million of 97/8% senior subordinated notes due April 1, 2011 and $29.0 million of 71/4% senior notes due May 1, 2010. These senior subordinated notes and senior notes were issued at a discount to
yield effective interest rates of 10.5% and 9.4%, respectively. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 97/8% senior subordinated notes is 9.4%. These publicly traded senior subordinated and senior notes are unsecured, but
are guaranteed, on a joint and several basis, by all but one of the Companys wholly-owned domestic subsidiaries.

On May 1,
2006, the Company redeemed its outstanding 97/8% senior subordinated
notes in full at a price of $105.25 for each $100 of outstanding principal amount of the notes plus $2.1 million of accrued and unpaid interest from April 1, 2006 to May 1, 2006. At the time of redemption, the aggregate outstanding
principal amount of the notes was $257.5 million, and the total redemption price (including accrued and unpaid interest and redemption premium) was $273.1 million. The Company used proceeds from borrowings at closing under the Senior Credit
Facility, together with available cash, to fund the redemption. The redemption resulted in a $10.3 million loss which was recognized during the three months ended June 30, 2006.

Note 7.Segment Information

The Company
operates principally in four business segments organized by products. The paperboard segment consists of facilities that manufacture 100% recycled uncoated paperboard and a specialty converting operation. The recovered fiber segment consists of
facilities that collect and sell recycled paper and broker recycled paper and other paper rolls. The tube, core, and composite container segment is principally made up of facilities that produce spiral and convolute-wound tubes, cores, and composite
cans. The folding carton and custom packaging segment consists of facilities that produce printed and unprinted folding cartons and set-up boxes. Intersegment sales are recorded at prices which approximate market prices.

Operating results include all costs and expenses directly related to the segment involved. Corporate expenses include corporate, general, administrative and unallocated
information systems expenses.



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The following table presents certain business segment information for the periods indicated (in thousands):



|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                   |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                                   |  | 2006                            |         |   | 2005                           |   |         | 2006 |  |   | 2005    |  
|Sales (external customers):                                                        |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Paperboard                                                                         |  | $                               | 47,361  |   |                                | $ | 43,648  |      |  | $ | 146,413 |   |  | $ | 129,585 |  
|Recovered fiber                                                                    |  |                                 | 34,079  |   |                                |   | 20,766  |      |  |   | 88,643  |   |  |   | 62,359  |  
|Tube, core and composite container                                                 |  |                                 | 91,824  |   |                                |   | 92,869  |      |  |   | 284,325 |   |  |   | 282,794 |  
|Folding carton and custom packaging                                                |  |                                 | 60,019  |   |                                |   | 56,708  |      |  |   | 182,042 |   |  |   | 176,698 |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total                                                                              |  | $                               | 233,283 |   |                                | $ | 213,991 |      |  | $ | 701,423 |   |  | $ | 651,436 |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Sales (intersegment):                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Paperboard                                                                         |  | $                               | 34,819  |   |                                | $ | 38,901  |      |  | $ | 99,763  |   |  | $ | 110,411 |  
|Recovered fiber                                                                    |  |                                 | 21,926  |   |                                |   | 23,456  |      |  |   | 70,339  |   |  |   | 61,063  |  
|Tube, core and composite container                                                 |  |                                 | 1,013   |   |                                |   | 1,352   |      |  |   | 4,009   |   |  |   | 3,975   |  
|Folding carton and custom packaging                                                |  |                                 | 80      |   |                                |   | 215     |      |  |   | 786     |   |  |   | 744     |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total                                                                              |  | $                               | 57,838  |   |                                | $ | 63,924  |      |  | $ | 174,897 |   |  | $ | 176,193 |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from operations:                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Paperboard (A)                                                                     |  | $                               | 1,942   |   |                                | $ | 5,102   |      |  | $ | 15,237  |   |  | $ | 21,293  |  
|Recovered fiber (B)                                                                |  |                                 | 1,040   |   |                                |   | (151    | )    |  |   | 3,350   |   |  |   | 616     |  
|Tube, core and composite container (C)                                             |  |                                 | 1,429   |   |                                |   | 2,003   |      |  |   | 4,408   |   |  |   | 5,315   |  
|Folding carton and custom packaging (D)                                            |  |                                 | 97      |   |                                |   | (576    | )    |  |   | (1,129  | ) |  |   | 2,312   |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                                                   |  |                                 | 4,508   |   |                                |   | 6,378   |      |  |   | 21,866  |   |  |   | 29,536  |  
|Corporate expense                                                                  |  |                                 | (6,297  | ) |                                |   | (4,539  | )    |  |   | (19,157 | ) |  |   | (17,519 | )
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from operations                                                      |  |                                 | (1,789  | ) |                                |   | 1,839   |      |  |   | 2,709   |   |  |   | 12,017  |  
|Interest expense                                                                   |  |                                 | (4,397  | ) |                                |   | (10,399 | )    |  |   | (21,522 | ) |  |   | (31,367 | )
|Interest income                                                                    |  |                                 | 109     |   |                                |   | 748     |      |  |   | 3,734   |   |  |   | 1,811   |  
|Equity in income of unconsolidated affiliates                                      |  |                                 | 1,455   |   |                                |   | 9,615   |      |  |   | 5,106   |   |  |   | 27,531  |  
|                                                                                   |  |                                 |         |  
|Loss on redemption of senior subordinated notes                                    |  |                                 |        |   |                                |   |        |      |  |   | (10,272 | ) |  |   |        |  
|Gain on sale of interest in Standard Gypsum, L.P.                                  |  |                                 |        |   |                                |   |        |      |  |   | 135,247 |   |  |   |        |  
|Other, net                                                                         |  |                                 | (15     | ) |                                |   | 44      |      |  |   | 93      |   |  |   | 331     |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes and minority interest |  | $                               | (4,637  | ) |                                | $ | 1,847   |      |  | $ | 115,095 |   |  | $ | 10,323  |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

---

|(A) | Results for the three-month periods ended September 30, 2006 and 2005 include charges to operations of $702 thousand and credits to operations of $1.5 million, respectively,
for restructuring and impairment costs. Results for the nine-month periods ended September 30, 2006 and 2005 include charges to operations of $959 thousand and credits to operations of $1.5 million, respectively, for restructuring and
impairment costs. Costs relate primarily to the disposition of machinery and equipment and credits relate to gains on the disposition of real estate and settlement of leases.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Results for the three-month periods ended September 30, 2006 and 2005 include credits to operations of $26 thousand and charges to operations of $36 thousand, respectively, for
restructuring and impairment costs. Results for the nine-month periods ended September 30, 2006 and 2005 include credits to operations of $73 thousand and $28 thousand, respectively, for restructuring and impairment costs. These costs relate
primarily to the disposition of machinery and equipment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Results for the three-month periods ended September 30, 2006 and 2005 include charges to operations of $1.5 million and $89 thousand, respectively, for restructuring and
impairment costs. Results for the nine-month periods ended September 30, 2006 and 2005 include charges to operations of $3.5 million and $194 thousand respectively, for restructuring and impairment costs. These costs relate primarily to closing
and consolidating operations within the tube, core and composite container segment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Results for the three-month periods ended September 30, 2006 and 2005 include charges to operations of $538 thousand and $842 thousand, respectively, for restructuring and
impairment costs. Results for the nine-month periods ended September 30, 2006 and 2005 include charges to operations of $2.1 million and $1.6 million, respectively, for restructuring and impairment costs. These costs relate primarily to closing
and consolidating operations within the carton and custom packaging segment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Note 8.Goodwill and Other Intangible Assets

Goodwill

The following is a summary of the changes in the
carrying amount of goodwill, by segment, for the nine months ended September 30, 2006 (in thousands):



|                                 |  |            |        |                |   |                                  |  |                                   |   |  |       |        |   |  |   |         |  
|-------------------------------- |  | ---------- | ------ | -------------- | - | -------------------------------- |  | --------------------------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                 |  | Paperboard |        | RecoveredFiber |   | FoldingCarton andCustomPackaging |  | Tube, Core andCompositeContainers |   |  | Total |       
|Balance as of December 31, 2005  |  | $          | 68,396 |                | $ | 3,777                            |  | $                                 |  |  | $     | 57,102 |   |  | $ | 129,275 |  
|Sale of partition operations     |  |            |       |                |   |                                 |  |                                   |  |  |       | (1,701 | ) |  |   | (1,701  | )
|                                 |  |            |        |                |   |                                  |  |                                   |   |  |       |        |   |  |   |         |  
|Balance as of September 30, 2006 |  | $          | 68,396 |                | $ | 3,777                            |  | $                                 |  |  | $     | 55,401 |   |  | $ | 127,574 |  
|                                 |  |            |        |                |   |                                  |  |                                   |   |  |       |        |   |  |   |         |  

Intangible Assets

As of September 30, 2006 and December 31, 2005, respectively, the Company had an intangible asset of $5.6 million, net of $2.4 million of accumulated amortization, and $6.7 million, net of $1.9 million of
accumulated amortization which is classified with other assets. Amortization expense was $393 thousand for the nine month period ended September 30, 2006 and $426 thousand for the nine month period ended September 30, 2005. The intangible
asset is associated with the acquisition of certain assets of the Smurfit Industrial Packaging Group, which was completed in 2002, and is attributable to the acquired customer relationships. This intangible asset is being amortized over 15 years.
Scheduled amortization of the intangible asset for the next five years is as follows (in thousands):



|                |  |   |      
|--------------- |  | - | -----
|2007            |  | $ | 511  
|2008            |  |   | 511  
|2009            |  |   | 511  
|2010            |  |   | 511  
|2011            |  |   | 511  
|                |  |   |      
|Five year total |  | $ | 2,555
|                |  |   |      

Note 9.Restructuring and Impairment Costs

Restructuring has been a primary component of managements strategy to address the decrease in demand for products and excess industry capacity. In response to these
issues, over the past several years the Company has closed and consolidated facilities within its paperboard; folding carton and custom packaging; and tube, core and composite container segments. These initiatives are designed to enhance the
Companys competitiveness through reduced costs, reduction of geographic overlap, duplicative capabilities, and differentiated quality products and services to the Companys customers.

In January 2006, the Company announced the permanent closure of its Birmingham carton plant located in Birmingham, Alabama. For the nine months ended September 30,
2006, the Company recorded charges of $203 thousand for severance and other termination benefits and charges of $218 thousand for other exit costs. The Company made payments for severance and other termination benefits of $173 thousand and payments
for other exit costs of $127 thousand. To facilitate the transition of customers to other facilities, the Birmingham carton plant ceased operations at the end of the second quarter of 2006. The Company expects to incur an additional $21 thousand in
other exit costs related to the closure of this facility and will complete this plan by the end of 2007 upon satisfaction of the lease obligation.

In
March 2006, the Company negotiated and settled its long-term lease obligation related to the closure of its Mobile, Alabama tube plant, which was permanently closed in September 2005, for $175 thousand and recorded a $541 thousand reversal of the
previous restructuring liability.

In April 2006, the Company announced the permanent closure of its Danville tube plant located in Danville, Virginia. The
customers of the Danville tube plant will be transitioned to the Companys other tube plants. For the nine months ended September 30, 2006, the Company recorded $734 thousand for severance and other termination benefits and $28 thousand
for other exit costs. The Company made payments for severance and other termination benefits of $355 thousand and $28 thousand for other exit costs. The Company expects to incur an additional $90 thousand of severance and other termination benefits
and $120 thousand in other exit costs related to the closure of this facility. This plan will be completed upon sale of the locations real estate, which the Company is currently marketing.



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In May 2006, the Company announced the permanent closure of its Mentor carton plant located in Mentor, Ohio. Most of the
customers of the Mentor carton plant were transitioned to the Companys other carton operations. For the nine months ended September 30, 2006, the Company recorded $817 thousand of severance and other termination benefits and $358 thousand
of other exit costs. The Company made payments for severance and other termination benefits of $687 thousand and payments of $289 thousand for other exit costs. The Company expects to incur an additional $300 thousand in other exit costs. This plan
will be completed upon sale of the locations real estate, which the Company is currently marketing.

For the nine months ended September 30,
2006, the Company recorded an impairment charge of $1.6 million related to a tube and core facility located in Mexico City, Mexico, which the Company disposed of in the third quarter of 2006.

In August 2006, the Company announced a plan to restructure certain functions within its tube, core and composite container segment. The restructuring will allow the
Company to streamline sales and marketing efforts, consolidate and outsource certain engineering costs and close duplicative administrative facilities. During the third quarter of 2006, the Company recorded $693 thousand of severance and other exit
costs and made payments for severance and other termination benefits of $106 thousand. The Company expects to incur an additional $240 thousand of severance and other termination benefits and $225 thousand of other exit costs. This plan will be
completed upon settlement of a real estate lease, which is anticipated to be settled by December 31, 2006.

In October 2006, the Company announced the
permanent closure of its Reading paperboard mill, located in Sinking Springs, Pennsylvania. The customers, most of which are internal, will be transitioned to the Companys other paperboard operations during the fourth quarter of 2006. The
Company expects to incur restructuring charges of approximately $700 thousand. The Company recorded accelerated depreciation expense of approximately $800 thousand during the third quarter, which is reflected in cost of goods sold. This plan will be
completed upon sale of the locations real estate, which the Company is currently marketing.

The following is a summary of restructuring and
impairment costs and the restructuring liability from December 31, 2005 to September 30, 2006 (in thousands):



|                                      |  |                                            |       |                                             |   |       |                 |  |   |                              |   |  |           |        |   |  |   |      
|------------------------------------- |  | ------------------------------------------ | ----- | ------------------------------------------- | - | ----- | --------------- |  | - | ---------------------------- | - |  | --------- | ------ | - |  | - | -----
|                                      |  | AssetImpairmentCharges andLoss onDisposals |       | Severance andOtherTerminationBenefits Costs |   |       | Other ExitCosts |  |   | RestructuringLiability Total |   |  | Total (1)
|Liability balance, December 31, 2005  |  |                                            |       |                                             | $ | 2,263 |                 |  | $ | 867                          |   |  | $         | 3,130  |   |  |   |      
|                                      |  |                                            |       |                                             |  
|First quarter 2006 costs              |  | $                                          | 65    |                                             |   | 161   |                 |  |   | (211                         | ) |  |           | (50    | ) |  | $ | 15   
|                                      |  |                                            |       |                                             |   |       |                 |  |   |                              |   |  |           |        |   |  |   |      
|Expenditures                          |  |                                            |       |                                             |   | (263  | )               |  |   | (481                         | ) |  |           | (744   | ) |  |   |      
|                                      |  |                                            |       |                                             |   |       |                 |  |   |                              |   |  |           |        |   |  |   |      
|Liability balance, March 31, 2006     |  |                                            |       |                                             |   | 2,161 |                 |  |   | 175                          |   |  |           | 2,336  |   |  |   |      
|                                      |  |                                            |       |                                             |  
|Second quarter 2006 costs             |  | $                                          | 2,041 |                                             |   | 1,330 |                 |  |   | 249                          |   |  |           | 1,579  |   |  | $ | 3,620
|                                      |  |                                            |       |                                             |   |       |                 |  |   |                              |   |  |           |        |   |  |   |      
|Expenditures                          |  |                                            |       |                                             |   | (986  | )               |  |   | (172                         | ) |  |           | (1,158 | ) |  |   |      
|                                      |  |                                            |       |                                             |   |       |                 |  |   |                              |   |  |           |        |   |  |   |      
|Liability balance, June 30, 2006      |  |                                            |       |                                             | $ | 2,505 |                 |  | $ | 252                          |   |  | $         | 2,757  |   |  |   |      
|                                      |  |                                            |       |                                             |  
|Third quarter 2006 costs              |  | $                                          | 1,301 |                                             |   | 932   |                 |  |   | 565                          |   |  |           | 1,497  |   |  | $ | 2,798
|                                      |  |                                            |       |                                             |   |       |                 |  |   |                              |   |  |           |        |   |  |   |      
|Expenditures                          |  |                                            |       |                                             |   | (580  | )               |  |   | (658                         | ) |  |           | (1,238 | ) |  |   |      
|                                      |  |                                            |       |                                             |   |       |                 |  |   |                              |   |  |           |        |   |  |   |      
|Liability balance, September 30, 2006 |  |                                            |       |                                             | $ | 2,857 |                 |  | $ | 159                          |   |  | $         | 3,016  |   |  |   |      
|                                      |  |                                            |       |                                             |   |       |                 |  |   |                              |   |  |           |        |   |  |   |      

---

|(1) | Asset impairment charges and loss on disposals, severance and other termination benefit costs and other exit costs are aggregated and reported as restructuring and impairment costs
on the statement of operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table summarizes restructuring and impairment costs by segment for those plans initiated, but
not completed as of September 30, 2006, and accounted for under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (in thousands):



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|                                    |  |                                           |        |                                                                 |   |                                                               |  |   |       
|----------------------------------- |  | ----------------------------------------- | ------ | --------------------------------------------------------------- | - | ------------------------------------------------------------- |  | - | ------
|Segment                             |  | Cumulative Costs as of September 30, 2006 |        | Estimated Costs to Complete Initiatives as
ofSeptember 30, 2006 |   | Total Estimated Costs of Initiatives as
of September 30, 2006
|Paperboard                          |  | $                                         | 1,309  |                                                                 | $ |                                                              |  | $ | 1,309 
|Folding carton and custom packaging |  |                                           | 13,750 |                                                                 |   | 591                                                           |  |   | 14,341
|Tube, core and composite container  |  |                                           | 2,400  |                                                                 |   | 770                                                           |  |   | 3,170 
|                                    |  |                                           |        |                                                                 |   |                                                               |  |   |       
|Total                               |  | $                                         | 17,459 |                                                                 | $ | 1,361                                                         |  | $ | 18,820
|                                    |  |                                           |        |                                                                 |   |                                                               |  |   |       

Note 10.Pension Plan and Other Postretirement Benefits

Pension Plan and Supplemental Executive Retirement Plan

Substantially all of the Companys employees hired prior to December 31, 2004 participate in a noncontributory defined benefit pension plan (the Pension Plan). The Pension Plan requires benefits to be paid to all
eligible employees at retirement, based primarily on years of service with the Company and compensation rates in effect near retirement. The Pension Plans assets consist of shares held in collective investment funds and group annuity
contracts. The Companys policy is to fund benefits attributed to employees service to date, as well as service expected to be earned in the future. Based on current estimates, no contributions will be required during the calendar year
ended December 31, 2006; however, $7.8 million in contributions are expected to be made during the first nine months of 2007, which is classified as a current liability on the Companys September 30, 2006 balance sheet.

Certain executives participate in a supplemental executive restoration plan (SERP), which provides enhanced retirement benefits to participants based on
average compensation. The SERP is unfunded at September 30, 2006.

Pension expense for the Pension Plan and the SERP includes the following components
for the three and nine months ended September 30, 2006 and 2005 (in thousands):



|                                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                              |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                              |  | 2006                            |        |   | 2005                           |   |        | 2006 |  |   | 2005   |  
|Service cost of benefits earned               |  | $                               | 793    |   |                                | $ | 835    |      |  | $ | 2,379  |   |  | $ | 2,505  |  
|Interest cost on projected benefit obligation |  |                                 | 1,872  |   |                                |   | 1,797  |      |  |   | 5,616  |   |  |   | 5,391  |  
|Estimated return on plan assets               |  |                                 | (1,805 | ) |                                |   | (1,607 | )    |  |   | (5,414 | ) |  |   | (4,822 | )
|Net amortization and deferral                 |  |                                 | 1,241  |   |                                |   | 1,295  |      |  |   | 3,722  |   |  |   | 3,886  |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net pension expense                           |  | $                               | 2,101  |   |                                | $ | 2,320  |      |  | $ | 6,303  |   |  | $ | 6,960  |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  

Other Postretirement Benefits

The Company provides postretirement medical benefits to retired employees of certain of its subsidiaries. The Company accounts for these postretirement medical benefits in accordance with SFAS No. 106,
Employers Accounting for Postretirement Benefits Other than Pensions.

Net periodic postretirement benefit cost for the three and nine
months ended September 30, 2006 and 2005 included the following components (in thousands):



|                                                               |  |                                 |     |                                |   |      |  |      |     |  |   |    
|-------------------------------------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                                               |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|                                                               |  | 2006                            |     | 2005                           |   | 2006 |  | 2005
|Service cost of benefits earned                                |  | $                               | 10  |                                | $ | 8    |  | $    | 31  |  | $ | 23 
|Interest cost on accumulated postretirement benefit obligation |  |                                 | 86  |                                |   | 78   |  |      | 259 |  |   | 235
|Amortization                                                   |  |                                 | 59  |                                |   | 17   |  |      | 176 |  |   | 50 
|                                                               |  |                                 |     |                                |   |      |  |      |     |  |   |    
|Net postretirement benefit cost                                |  | $                               | 155 |                                | $ | 103  |  | $    | 466 |  | $ | 308
|                                                               |  |                                 |     |                                |   |      |  |      |     |  |   |    

Note 11.Income Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted income (loss) per share computations for net income (loss) (in
thousands, except per share information):



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|                                                               |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|-------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | ---- | ------ |  | - | ------
|                                                               |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                               |  | 2006                            |        |                                | 2005 |   | 2006   |  | 2005
|Income (loss) from continuing operations                       |  | $                               | (3,707 | )                              |      | $ | 1,151  |  | $    | 73,808 |  | $ | 4,299 
|                                                               |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Weighted average number of common shares outstanding - basic   |  |                                 | 28,584 |                                |      |   | 28,780 |  |      | 28,568 |  |   | 28,769
|Common share equivalents                                       |  |                                 |       |                                |      |   | 98     |  |      | 38     |  |   | 118   
|                                                               |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Weighted average number of common shares outstanding - diluted |  |                                 | 28,584 |                                |      |   | 28,878 |  |      | 28,606 |  |   | 28,887
|                                                               |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Income (loss) per share - basic                                |  | $                               | (0.13  | )                              |      | $ | 0.04   |  | $    | 2.58   |  | $ | 0.15  
|                                                               |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Income (loss) per share - diluted                              |  | $                               | (0.13  | )                              |      | $ | 0.04   |  | $    | 2.58   |  | $ | 0.15  
|                                                               |  |                                 |        |                                |      |   |        |  |      |        |  |   |       

The impact of the dilutive effect of common share equivalents has been included in periods with net income. The
number of common share equivalents not included in the computation of diluted weighted average shares for the nine months ended September 30, 2006 and 2005 were 1,813,295 and 1,046,430, respectively.

Note 12.Equity Interests in Unconsolidated Affiliates

On January 17, 2006 the Company sold its 50% membership interest in Standard Gypsum, L.P. (Standard) to Standards other 50% owner, Temple-Inland, Inc. (Temple-Inland). Pursuant to
the purchase and sale agreement, Temple-Inland purchased the Companys 50% membership interest for $150 million, which resulted in a gain of approximately $135.2 million. Temple-Inland also assumed all of Standards $56.2 million in debt
obligations and other liabilities of Standard. As a result of this transaction, the Company ceased to be entitled to further distributions from Standard for all periods subsequent to January 1, 2006, and all of the Companys rights and
obligations as a partner in Standard ceased. The Company received a final cash distribution of $2.1 million in the first quarter, which was included in the calculation of the gain on sale. The Company limited its retained environmental
indemnification such that its liability cannot exceed $5.0 million for any claims related to events that occurred prior to the formation of the Standard joint venture on April 1, 1996. This indemnification will terminate on January 17,
2011.

Standard was a joint venture that operated two gypsum wallboard manufacturing facilities and was accounted for under the equity method. One facility
is located in McQueeny, Texas, and the other is in Cumberland City, Tennessee. The joint venture was managed by Temple-Inland, Inc. Because of the significance of Standards operating results to the Company, Standards prior year
summarized balance sheet and income statement are presented below (in thousands):



|                      |  |                   |       
|--------------------- |  | ----------------- | ------
|                      |  | December 31, 2005
|Current assets        |  | $                 | 33,353
|Noncurrent assets     |  |                   | 62,016
|Current liabilities   |  |                   | 12,873
|Current debt          |  |                   | 56,200
|Long-term debt        |  |                   |      
|Long-term liabilities |  |                   |      
|Net assets            |  |                   | 26,296



|                       |  |                                      |        |                                     |   |        
|---------------------- |  | ------------------------------------ | ------ | ----------------------------------- | - | -------
|                       |  | Three Months EndedSeptember 30, 2005 |        | Nine Months EndedSeptember 30, 2005
|Sales                  |  | $                                    | 50,689 |                                     | $ | 146,154
|Gross profit           |  |                                      | 18,174 |                                     |   | 50,937 
|Income from operations |  |                                      | 16,751 |                                     |   | 46,864 
|Net income             |  |                                      | 15,135 |                                     |   | 42,931 

---

|* | The actual date of Standards financial statements is October 1, 2005 for the periods ended September 30, 2005.
|- | ---------------------------------------------------------------------------------------------------------------



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The Company owns 50% of Premier Boxboard Limited (PBL). PBL is a joint venture with Temple-Inland, which owns
the remaining 50% interest, and is accounted for under the equity method. PBL produces lightweight gypsum facing paper along with containerboard grades, and is managed by the Company. Because of the significance of PBLs operating results to
the Company, PBLs summarized balance sheets and income statements are presented below (in thousands):



|                      |  |                   |         |                  |   |        
|--------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                      |  | September 30,2006 |         | December 31,2005
|Current assets        |  | $                 | 20,645  |                  | $ | 15,562 
|Noncurrent assets     |  |                   | 130,262 |                  |   | 135,497
|Current liabilities   |  |                   | 18,204  |                  |   | 12,607 
|Long-term liabilities |  |                   | 761     |                  |   | 693    
|Long-term debt        |  |                   | 50,000  |                  |   | 50,000 
|Net assets            |  |                   | 81,942  |                  |   | 87,759 



|                       |  |                                 |        |                                |   |        |  |      |        |  |   |       
|---------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                       |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                       |  | 2006                            |        | 2005                           |   | 2006   |  | 2005
|Sales                  |  | $                               | 32,765 |                                | $ | 29,332 |  | $    | 92,724 |  | $ | 91,671
|Gross profit           |  |                                 | 5,703  |                                |   | 7,340  |  |      | 20,599 |  |   | 22,481
|Income from operations |  |                                 | 3,922  |                                |   | 5,125  |  |      | 13,094 |  |   | 15,244
|Net income (loss)      |  |                                 | 2,928  |                                |   | 4,124  |  |      | 10,160 |  |   | 12,203

The Company received distributions from PBL for the nine months period ended September 30, 2006 and
September 30, 2005 of $8.0 million and $10.0 million, respectively. The Companys equity interest in earnings for the nine months ended September 30, 2006 and September 30, 2005, were approximately $5.1 million and $6.1 million,
respectively. The Companys equity interest in the earnings from PBL for the three months ended September 30, 2006 and September 30, 2005, were approximately $1.5 million and $2.1 million, respectively.

See discussion of PBLs debt and related obligations in the notes to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Note 13.Guarantor Condensed Consolidating Financial Statements

These condensed consolidating financial statements reflect Caraustar Industries, Inc. and its Subsidiary Guarantors, which consist of all but one of the Companys
wholly-owned subsidiaries other than foreign subsidiaries. These nonguarantor subsidiaries are herein referred to as Nonguarantor Subsidiaries. Separate financial statements of the Subsidiary Guarantors are not presented because the
subsidiary guarantees are joint and several and full and unconditional and the Company believes that the condensed consolidating financial statements presented are more meaningful in understanding the financial position of the Subsidiary Guarantors.



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE
SHEETS

(In thousands)



|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|----------------------------------------------- |  | ------------------------ | -------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                |  | As of September 30, 2006 |         
|                                                |  | Parent                   |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                          |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT ASSETS:                                 |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                       |  | $                        | 3,315    |   |                       | $ | 107      |                          |  | $ | 553          |   |  | $            |         |   |  | $ | 3,975    |  
|Intercompany funding                            |  |                          | (164,317 | ) |                       |   | 177,022  |                          |  |   | (12,705      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                  |  |                          |         |   |                       |   | 93,602   |                          |  |   | 4,441        |   |  |              |         |   |  |   | 98,043   |  
|Intercompany accounts receivable                |  |                          |         |   |                       |   | 46       |                          |  |   | 207          |   |  |              | (253     | ) |  |   |         |  
|Inventories                                     |  |                          |         |   |                       |   | 71,324   |                          |  |   | 3,209        |   |  |              |         |   |  |   | 74,533   |  
|Current deferred tax asset                      |  |                          | 10,952   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 10,952   |  
|Other current assets                            |  |                          | 5,060    |   |                       |   | 5,228    |                          |  |   | 504          |   |  |              |         |   |  |   | 10,792   |  
|Assets of discontinued operations held for sale |  |                          |         |   |                       |   | 23,692   |                          |  |   |             |   |  |              |         |   |  |   | 23,692   |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                            |  |                          | (144,990 | ) |                       |   | 371,021  |                          |  |   | (3,791       | ) |  |              | (253     | ) |  |   | 221,987  |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT                   |  |                          | 29,040   |   |                       |   | 501,670  |                          |  |   | 24,293       |   |  |              |         |   |  |   | 555,003  |  
|Less accumulated depreciation                   |  |                          | (12,217  | ) |                       |   | (269,364 | )                        |  |   | (13,826      | ) |  |              |         |   |  |   | (295,407 | )
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net              |  |                          | 16,823   |   |                       |   | 232,306  |                          |  |   | 10,467       |   |  |              |         |   |  |   | 259,596  |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|GOODWILL                                        |  |                          |         |   |                       |   | 124,072  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 127,574  |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES         |  |                          | 616,618  |   |                       |   |         |                          |  |   |             |   |  |              | (616,618 | ) |  |   |         |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES         |  |                          | 41,143   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 41,143   |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER ASSETS                                    |  |                          | 12,363   |   |                       |   | 6,314    |                          |  |   | 64           |   |  |              |         |   |  |   | 18,741   |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                        | 541,957  |   |                       | $ | 733,713  |                          |  | $ | 10,242       |   |  | $            | (616,871 | ) |  | $ | 669,041  |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY            |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT LIABILITIES:                            |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                      |  | $                        | 7,285    |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 7,285    |  
|Accounts payable                                |  |                          | 15,673   |   |                       |   | 58,088   |                          |  |   | 3,369        |   |  |              |         |   |  |   | 77,130   |  
|Intercompany accounts payable                   |  |                          |         |   |                       |   | 207      |                          |  |   | 46           |   |  |              | (253     | ) |  |   |         |  
|Accrued interest                                |  |                          | 5,619    |   |                       |   | 134      |                          |  |   |             |   |  |              |         |   |  |   | 5,753    |  
|Accrued compensation                            |  |                          | 2,116    |   |                       |   | 10,014   |                          |  |   | 196          |   |  |              |         |   |  |   | 12,326   |  
|Accrued pension                                 |  |                          | 7,828    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 7,828    |  
|Capital lease obligations                       |  |                          | 509      |   |                       |   | 20       |                          |  |   |             |   |  |              |         |   |  |   | 529      |  
|Income taxes payable                            |  |                          | 2,390    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 2,390    |  
|Other accrued liabilities                       |  |                          | 4,961    |   |                       |   | 17,178   |                          |  |   | 823          |   |  |              |         |   |  |   | 22,962   |  
|Liabilities of discontinued operations          |  |                          |         |   |                       |   | 10,203   |                          |  |   |             |   |  |              |         |   |  |   | 10,203   |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                       |  |                          | 46,381   |   |                       |   | 95,844   |                          |  |   | 4,434        |   |  |              | (253     | ) |  |   | 146,406  |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LONG-TERM DEBT, less current maturities         |  |                          | 249,491  |   |                       |   | 8,200    |                          |  |   |             |   |  |              |         |   |  |   | 257,691  |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS             |  |                          | 177      |   |                       |   | 60       |                          |  |   |             |   |  |              |         |   |  |   | 237      |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED INCOME TAXES                           |  |                          | 34,981   |   |                       |   | 12,166   |                          |  |   | 1,501        |   |  |              |         |   |  |   | 48,648   |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PENSION LIABILITY                               |  |                          | 40,051   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 40,051   |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LIABILITIES                               |  |                          | 659      |   |                       |   | 5,132    |                          |  |   |             |   |  |              |         |   |  |   | 5,791    |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SHAREHOLDERS EQUITY:                           |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                    |  |                          | 2,907    |   |                       |   | 772      |                          |  |   | 497          |   |  |              | (1,269   | ) |  |   | 2,907    |  
|Additional paid-in capital                      |  |                          | 190,409  |   |                       |   | 550,955  |                          |  |   | 8,339        |   |  |              | (559,294 | ) |  |   | 190,409  |  
|Retained (deficit) earnings                     |  |                          | 4,990    |   |                       |   | 60,584   |                          |  |   | (6,236       | ) |  |              | (54,348  | ) |  |   | 4,990    |  
|Accumulated other comprehensive (loss) income   |  |                          | (28,089  | ) |                       |   |         |                          |  |   | 1,707        |   |  |              | (1,707   | ) |  |   | (28,089  | )
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total Shareholders Equity                      |  |                          | 170,217  |   |                       |   | 612,311  |                          |  |   | 4,307        |   |  |              | (616,618 | ) |  |   | 170,217  |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                        | 541,957  |   |                       | $ | 733,713  |                          |  | $ | 10,242       |   |  | $            | (616,871 | ) |  | $ | 669,041  |  
|                                                |  |                          |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



19



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE
SHEETS

(In thousands)



|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|----------------------------------------------- |  | ----------------------- | -------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                |  | As of December 31, 2005 |         
|                                                |  | Parent                  |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                          |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT ASSETS:                                 |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                       |  | $                       | 93,998   |   |                       | $ | 63       |                          |  | $ | 1,091        |   |  | $            |         |   |  | $ | 95,152   |  
|Intercompany funding                            |  |                         | (123,246 | ) |                       |   | 136,057  |                          |  |   | (12,811      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                  |  |                         |         |   |                       |   | 86,098   |                          |  |   | 4,963        |   |  |              |         |   |  |   | 91,061   |  
|Intercompany accounts receivable                |  |                         |         |   |                       |   | 285      |                          |  |   | 389          |   |  |              | (674     | ) |  |   |         |  
|Inventories                                     |  |                         |         |   |                       |   | 66,936   |                          |  |   | 4,023        |   |  |              |         |   |  |   | 70,959   |  
|Refundable income taxes                         |  |                         | 56       |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 56       |  
|Current deferred tax asset                      |  |                         | 40,259   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 40,259   |  
|Other current assets                            |  |                         | 18,723   |   |                       |   | 2,716    |                          |  |   | 174          |   |  |              |         |   |  |   | 21,613   |  
|Investment in unconsolidated affiliate          |  |                         | 13,212   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 13,212   |  
|Assets of discontinued operations held for sale |  |                         |         |   |                       |   | 76,665   |                          |  |   |             |   |  |              |         |   |  |   | 76,665   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                            |  |                         | 43,002   |   |                       |   | 368,820  |                          |  |   | (2,171       | ) |  |              | (674     | ) |  |   | 408,977  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT                   |  |                         | 20,310   |   |                       |   | 498,441  |                          |  |   | 26,290       |   |  |              |         |   |  |   | 545,041  |  
|Less accumulated depreciation                   |  |                         | (10,968  | ) |                       |   | (265,036 | )                        |  |   | (14,000      | ) |  |              |         |   |  |   | (290,004 | )
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net              |  |                         | 9,342    |   |                       |   | 233,405  |                          |  |   | 12,290       |   |  |              |         |   |  |   | 255,037  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|GOODWILL                                        |  |                         |         |   |                       |   | 125,773  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 129,275  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES         |  |                         | 608,968  |   |                       |   |         |                          |  |   |             |   |  |              | (608,968 | ) |  |   |         |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES         |  |                         | 44,037   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 44,037   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER ASSETS                                    |  |                         | 15,192   |   |                       |   | 6,592    |                          |  |   | 22           |   |  |              |         |   |  |   | 21,806   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                       | 720,541  |   |                       | $ | 734,590  |                          |  | $ | 13,643       |   |  | $            | (609,642 | ) |  | $ | 859,132  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY            |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT LIABILITIES:                            |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                      |  | $                       | 85       |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 85       |  
|Accounts payable                                |  |                         | 26,368   |   |                       |   | 46,033   |                          |  |   | 5,614        |   |  |              |         |   |  |   | 78,015   |  
|Intercompany accounts payable                   |  |                         |         |   |                       |   | 389      |                          |  |   | 285          |   |  |              | (674     | ) |  |   |         |  
|Accrued interest                                |  |                         | 7,976    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 7,976    |  
|Accrued compensation                            |  |                         | 1,657    |   |                       |   | 7,274    |                          |  |   | 215          |   |  |              |         |   |  |   | 9,146    |  
|Capital lease obligations                       |  |                         | 527      |   |                       |   | 15       |                          |  |   |             |   |  |              |         |   |  |   | 542      |  
|Other accrued liabilities                       |  |                         | 8,055    |   |                       |   | 26,129   |                          |  |   | 527          |   |  |              |         |   |  |   | 34,711   |  
|Liabilities of discontinued operations          |  |                         |         |   |                       |   | 31,373   |                          |  |   |             |   |  |              |         |   |  |   | 31,373   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                       |  |                         | 44,668   |   |                       |   | 111,213  |                          |  |   | 6,641        |   |  |              | (674     | ) |  |   | 161,848  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LONG-TERM DEBT, less current maturities         |  |                         | 488,805  |   |                       |   | 3,500    |                          |  |   |             |   |  |              |         |   |  |   | 492,305  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS             |  |                         | 520      |   |                       |   | 41       |                          |  |   |             |   |  |              |         |   |  |   | 561      |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED INCOME TAXES                           |  |                         | 35,056   |   |                       |   | 12,165   |                          |  |   | 1,478        |   |  |              |         |   |  |   | 48,699   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PENSION LIABILITY                               |  |                         | 41,877   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 41,877   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LIABILITIES                               |  |                         | 1,219    |   |                       |   | 4,227    |                          |  |   |             |   |  |              |         |   |  |   | 5,446    |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SHAREHOLDERS EQUITY:                           |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                    |  |                         | 2,879    |   |                       |   | 772      |                          |  |   | 523          |   |  |              | (1,295   | ) |  |   | 2,879    |  
|Additional paid-in capital                      |  |                         | 192,673  |   |                       |   | 550,619  |                          |  |   | 9,167        |   |  |              | (559,786 | ) |  |   | 192,673  |  
|Unearned compensation                           |  |                         | (3,442   | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (3,442   | )
|Retained (deficit) earnings                     |  |                         | (54,834  | ) |                       |   | 52,053   |                          |  |   | (5,082       | ) |  |              | (46,971  | ) |  |   | (54,834  | )
|Accumulated other comprehensive (loss) income   |  |                         | (28,880  | ) |                       |   |         |                          |  |   | 916          |   |  |              | (916     | ) |  |   | (28,880  | )
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total Shareholders Equity                      |  |                         | 108,396  |   |                       |   | 603,444  |                          |  |   | 5,524        |   |  |              | (608,968 | ) |  |   | 108,396  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                       | 720,541  |   |                       | $ | 734,590  |                          |  | $ | 13,643       |   |  | $            | (609,642 | ) |  | $ | 859,132  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                                                   |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                                   |  | For the Three Months Ended September 30, 2006 |       
|                                                                                   |  | Parent                                        |        |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|SALES                                                                              |  | $                                             |       |   |                       | $ | 286,596 |                          |  | $ | 10,596       |   |  | $            | (63,909 | ) |  | $ | 233,283 |  
|COST OF SALES                                                                      |  |                                               |       |   |                       |   | 257,921 |                          |  |   | 8,120        |   |  |              | (63,909 | ) |  |   | 202,132 |  
|SELLING, GENERAL AND ADMINISTRATIVE                                                |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|EXPENSES                                                                           |  |                                               | 5,459  |   |                       |   | 23,584  |                          |  |   | 1,099        |   |  |              |        |   |  |   | 30,142  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                 |  |                                               |       |   |                       |   | 1,157   |                          |  |   | 1,641        |   |  |              |        |   |  |   | 2,798   |  
|                                                                                   |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income from operations                                                      |  |                                               | (5,459 | ) |                       |   | 3,934   |                          |  |   | (264         | ) |  |              |        |   |  |   | (1,789  | )
|OTHER (EXPENSE) INCOME:                                                            |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                                                                   |  |                                               | (4,294 | ) |                       |   | (102    | )                        |  |   | (1           | ) |  |              |        |   |  |   | (4,397  | )
|Interest income                                                                    |  |                                               | 108    |   |                       |   | 1       |                          |  |   |             |   |  |              |        |   |  |   | 109     |  
|Equity in income (loss) of consolidated affiliates                                 |  |                                               | 2,188  |   |                       |   |        |                          |  |   |             |   |  |              | (2,188  | ) |  |   |        |  
|Equity in income of unconsolidated affiliates                                      |  |                                               | 1,455  |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 1,455   |  
|Other, net                                                                         |  |                                               |       |   |                       |   | (172    | )                        |  |   | 157          |   |  |              |        |   |  |   | (15     | )
|                                                                                   |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                   |  |                                               | (543   | ) |                       |   | (273    | )                        |  |   | 156          |   |  |              | (2,188  | ) |  |   | (2,848  | )
|                                                                                   |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                               | (6,002 | ) |                       |   | 3,661   |                          |  |   | (108         | ) |  |              | (2,188  | ) |  |   | (4,637  | )
|PROVISION FOR INCOME TAXES                                                         |  |                                               | 949    |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 949     |  
|MINORITY INTEREST IN INCOME                                                        |  |                                               |       |   |                       |   |        |                          |  |   |             |   |  |              | (19     | ) |  |   | (19     | )
|                                                                                   |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                                           |  |                                               | (5,053 | ) |                       |   | 3,661   |                          |  |   | (108         | ) |  |              | (2,207  | ) |  |   | (3,707  | )
|DISCONTINUED OPERATIONS:                                                           |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                              |  |                                               |       |   |                       |   | (2,025  | )                        |  |   |             |   |  |              |        |   |  |   | (2,025  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                |  |                                               |       |   |                       |   | 660     |                          |  |   |             |   |  |              |        |   |  |   | 660     |  
|                                                                                   |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                                  |  |                                               |       |   |                       |   | (1,365  | )                        |  |   |             |   |  |              |        |   |  |   | (1,365  | )
|                                                                                   |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                                                  |  | $                                             | (5,053 | ) |                       | $ | 2,296   |                          |  | $ | (108         | ) |  | $            | (2,207  | ) |  | $ | (5,072  | )
|                                                                                   |  |                                               |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                                                   |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                                   |  | For the Three Months Ended September 30, 2005 |        
|                                                                                   |  | Parent                                        |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|SALES                                                                              |  | $                                             |        |   |                       | $ | 278,891 |                          |  | $ | 10,655       |   |  | $            | (75,555 | ) |  | $ | 213,991 |  
|COST OF SALES                                                                      |  |                                               |        |   |                       |   | 248,325 |                          |  |   | 10,084       |   |  |              | (75,555 | ) |  |   | 182,854 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                       |  |                                               | 4,536   |   |                       |   | 23,977  |                          |  |   | 1,363        |   |  |              |        |   |  |   | 29,876  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                 |  |                                               | (2      | ) |                       |   | (576    | )                        |  |   |             |   |  |              |        |   |  |   | (578    | )
|                                                                                   |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income from operations                                                      |  |                                               | (4,534  | ) |                       |   | 7,165   |                          |  |   | (792         | ) |  |              |        |   |  |   | 1,839   |  
|OTHER (EXPENSE) INCOME:                                                            |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                                                                   |  |                                               | (10,377 | ) |                       |   | (21     | )                        |  |   | (1           | ) |  |              |         |   |  |   | (10,399 | )
|Interest income                                                                    |  |                                               | 749     |   |                       |   | (1      | )                        |  |   |             |   |  |              |        |   |  |   | 748     |  
|Equity in income (loss) of consolidated affiliates                                 |  |                                               | 5,288   |   |                       |   |        |                          |  |   |             |   |  |              | (5,288  | ) |  |   |        |  
|Equity in income of unconsolidated affiliates                                      |  |                                               | 9,615   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 9,615   |  
|Other, net                                                                         |  |                                               |        |   |                       |   | 89      |                          |  |   | (45          | ) |  |              |        |   |  |   | 44      |  
|                                                                                   |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                   |  |                                               | 5,275   |   |                       |   | 67      |                          |  |   | (46          | ) |  |              | (5,288  | ) |  |   | 8       |  
|                                                                                   |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                               | 741     |   |                       |   | 7,232   |                          |  |   | (838         | ) |  |              | (5,288  | ) |  |   | 1,847   |  
|PROVISION FOR INCOME TAXES                                                         |  |                                               | (664    | ) |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | (664    | )
|MINORITY INTEREST IN INCOME                                                        |  |                                               |        |   |                       |   |        |                          |  |   |             |   |  |              | (32     | ) |  |   | (32     | )
|                                                                                   |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                                           |  |                                               | 77      |   |                       |   | 7,232   |                          |  |   | (838         | ) |  |              | (5,320  | ) |  |   | 1,151   |  
|DISCONTINUED OPERATIONS:                                                           |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                              |  |                                               |        |   |                       |   | (1,652  | )                        |  |   |             |   |  |              |        |   |  |   | (1,652  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                |  |                                               |        |   |                       |   | 546     |                          |  |   |             |   |  |              |        |   |  |   | 546     |  
|                                                                                   |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                                  |  |                                               |        |   |                       |   | (1,106  | )                        |  |   |             |   |  |              |        |   |  |   | (1,106  | )
|                                                                                   |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                                                  |  | $                                             | 77      |   |                       | $ | 6,126   |                          |  | $ | (838         | ) |  | $            | (5,320  | ) |  | $ | 45      |  
|                                                                                   |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | -------------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                                                   |  | For the Nine Months Ended September 30, 2006 |        
|                                                                                   |  | Parent                                       |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                                              |  | $                                            |        |   |                       | $ | 881,284 |                          |  | $ | 34,109       |   |  | $            | (213,970 | ) |  | $ | 701,423 |  
|COST OF SALES                                                                      |  |                                              |        |   |                       |   | 780,992 |                          |  |   | 30,423       |   |  |              | (213,970 | ) |  |   | 597,445 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                       |  |                                              | 18,862  |   |                       |   | 72,817  |                          |  |   | 3,157        |   |  |              |         |   |  |   | 94,836  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                 |  |                                              |        |   |                       |   | 4,792   |                          |  |   | 1,641        |   |  |              |         |   |  |   | 6,433   |  
|                                                                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                                                      |  |                                              | (18,862 | ) |                       |   | 22,683  |                          |  |   | (1,112       | ) |  |              |         |   |  |   | 2,709   |  
|OTHER (EXPENSE) INCOME:                                                            |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                                                   |  |                                              | (21,218 | ) |                       |   | (299    | )                        |  |   | (5           | ) |  |              |         |   |  |   | (21,522 | )
|Interest income                                                                    |  |                                              | 3,733   |   |                       |   | 1       |                          |  |   |             |   |  |              |         |   |  |   | 3,734   |  
|Equity in income (loss) of consolidated affiliates                                 |  |                                              | 7,377   |   |                       |   |        |                          |  |   |             |   |  |              | (7,377   | ) |  |   |        |  
|Equity in income of unconsolidated affiliates                                      |  |                                              | 5,106   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 5,106   |  
|Gain on sale of interest in Standard Gypsum, L.P.                                  |  |                                              | 135,247 |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 135,247 |  
|Loss on redemption of senior subordinated notes.                                   |  |                                              | (10,272 | ) |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | (10,272 | )
|Other, net                                                                         |  |                                              |        |   |                       |   | 130     |                          |  |   | (37          | ) |  |              |         |   |  |   | 93      |  
|                                                                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                                                   |  |                                              | 119,973 |   |                       |   | (168    | )                        |  |   | (42          | ) |  |              | (7,377   | ) |  |   | 112,386 |  
|                                                                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                              | 101,111 |   |                       |   | 22,515  |                          |  |   | (1,154       | ) |  |              | (7,377   | ) |  |   | 115,095 |  
|PROVISION FOR INCOME TAXES                                                         |  |                                              | (41,185 | ) |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | (41,185 | )
|MINORITY INTEREST IN INCOME                                                        |  |                                              |        |   |                       |   |        |                          |  |   |             |   |  |              | (102     | ) |  |   | (102    | )
|                                                                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                                           |  |                                              | 59,926  |   |                       |   | 22,515  |                          |  |   | (1,154       | ) |  |              | (7,479   | ) |  |   | 73,808  |  
|DISCONTINUED OPERATIONS:                                                           |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE                                           |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME TAXES                                                                       |  |                                              |        |   |                       |   | (21,413 | )                        |  |   |             |   |  |              |         |   |  |   | (21,413 | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                |  |                                              |        |   |                       |   | 7,429   |                          |  |   |             |   |  |              |         |   |  |   | 7,429   |  
|                                                                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                                  |  |                                              |        |   |                       |   | (13,984 | )                        |  |   |             |   |  |              |         |   |  |   | (13,984 | )
|                                                                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET INCOME (LOSS)                                                                  |  | $                                            | 59,926  |   |                       | $ | 8,531   |                          |  | $ | (1,154       | ) |  | $            | (7,479   | ) |  | $ | 59,824  |  
|                                                                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                      |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|----------------------------------------------------- |  | -------------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                      |  | For the Nine Months Ended September 30, 2005 |        
|                                                      |  | Parent                                       |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                 |  | $                                            |        |   |                       | $ | 842,201 |                          |  | $ | 32,852       |   |  | $            | (223,617 | ) |  | $ | 651,436 |  
|COST OF SALES                                         |  |                                              |        |   |                       |   | 739,322 |                          |  |   | 31,041       |   |  |              | (223,617 | ) |  |   | 546,746 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES          |  |                                              | 17,486  |   |                       |   | 71,667  |                          |  |   | 3,278        |   |  |              |         |   |  |   | 92,431  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                    |  |                                              | 27      |   |                       |   | 215     |                          |  |   |             |   |  |              |         |   |  |   | 242     |  
|                                                      |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                         |  |                                              | (17,513 | ) |                       |   | 30,997  |                          |  |   | (1,467       | ) |  |              |         |   |  |   | 12,017  |  
|OTHER (EXPENSE) INCOME:                               |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                      |  |                                              | (31,300 | ) |                       |   | (65     | )                        |  |   | (2           | ) |  |              |         |   |  |   | (31,367 | )
|Interest income                                       |  |                                              | 1,811   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 1,811   |  
|Equity in income (loss) of consolidated affiliates    |  |                                              | 25,987  |   |                       |   |        |                          |  |   |             |   |  |              | (25,987  | ) |  |   |        |  
|Equity in income of unconsolidated affiliates         |  |                                              | 27,531  |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 27,531  |  
|Other, net                                            |  |                                              | 121     |   |                       |   | 209     |                          |  |   | 1            |   |  |              |         |   |  |   | 331     |  
|                                                      |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                      |  |                                              | 24,150  |   |                       |   | 144     |                          |  |   | (1           | ) |  |              | (25,987  | ) |  |   | (1,694  | )
|                                                      |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS              |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|BEFORE INCOME TAXES AND MINORITY                      |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INTEREST                                              |  |                                              | 6,637   |   |                       |   | 31,141  |                          |  |   | (1,468       | ) |  |              | (25,987  | ) |  |   | 10,323  |  
|PROVISION FOR INCOME TAXES                            |  |                                              | (5,886  | ) |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | (5,886  | )
|MINORITY INTEREST IN INCOME                           |  |                                              |        |   |                       |   |        |                          |  |   |             |   |  |              | (138     | ) |  |   | (138    | )
|                                                      |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS              |  |                                              | 751     |   |                       |   | 31,141  |                          |  |   | (1,468       | ) |  |              | (26,125  | ) |  |   | 4,299   |  
|DISCONTINUED OPERATIONS:                              |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES |  |                                              |        |   |                       |   | (5,522  | )                        |  |   |             |   |  |              |         |   |  |   | (5,522  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS   |  |                                              |        |   |                       |   | 1,836   |                          |  |   |             |   |  |              |         |   |  |   | 1,836   |  
|                                                      |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                     |  |                                              |        |   |                       |   | (3,686  | )                        |  |   |             |   |  |              |         |   |  |   | (3,686  | )
|                                                      |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET INCOME (LOSS)                                     |  | $                                            | 751     |   |                       | $ | 27,455  |                          |  | $ | (1,468       | ) |  | $            | (26,125  | ) |  | $ | 613     |  
|                                                      |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF CASH FLOWS

(In thousands)



|                                                        |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|------------------------------------------------------- |  | -------------------------------------------- | -------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | -------- | -
|                                                        |  | For the Nine Months Ended September 30, 2006 |         
|                                                        |  | Parent                                       |          |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by (used in) operating activities     |  | $                                            | 8,282    |   |                       | $ | (4,296  | )                        |  | $ | (137         | ) |              | $ |  |  | $ | 3,849    |  
|                                                        |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Investing activities:                                   |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Purchases of property, plant and equipment              |  |                                              | (8,730   | ) |                       |   | (18,866 | )                        |  |   | (285         | ) |              |   |  |  |   | (27,881  | )
|Proceeds from disposal of property, plant and equipment |  |                                              |         |   |                       |   | 828     |                          |  |   | (116         | ) |              |   |  |  |   | 712      |  
|Proceeds from sale of assets held for sale              |  |                                              |         |   |                       |   | 22,390  |                          |  |   |             |   |              |   |  |  |   | 22,390   |  
|Acquisition of businesses, net of cash acquired         |  |                                              | (11,059  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (11,059  | )
|Changes in restricted cash                              |  |                                              | 10,610   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 10,610   |  
|Proceeds from sale of interest in Standard Gypsum, L.P. |  |                                              | 148,460  |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 148,460  |  
|Return of investment in unconsolidated affiliates       |  |                                              | 2,920    |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 2,920    |  
|                                                        |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net cash provided by (used in) investing activities     |  |                                              | 142,201  |   |                       |   | 4,352   |                          |  |   | (401         | ) |              |   |  |  |   | 146,152  |  
|                                                        |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Financing activities:                                   |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Proceeds from senior credit facility-revolver           |  |                                              | 35,332   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 35,332   |  
|Repayments of senior credit facility-revolver           |  |                                              | (34,520  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (34,520  | )
|Proceeds from senior credit facility-term loan          |  |                                              | 35,000   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 35,000   |  
|Repayments of short and long-term debt                  |  |                                              | (275,570 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (275,570 | )
|Deferred debt costs                                     |  |                                              | (1,139   | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (1,139   | )
|Payments for capital lease obligations                  |  |                                              | (361     | ) |                       |   | (12     | )                        |  |   |             |   |              |   |  |  |   | (373     | )
|Issuances of stock, net of forfeitures                  |  |                                              | 92       |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 92       |  
|                                                        |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net cash used in financing activities                   |  |                                              | (241,166 | ) |                       |   | (12     | )                        |  |   |             |   |              |   |  |  |   | (241,178 | )
|                                                        |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net (decrease) increase in cash and cash equivalents    |  |                                              | (90,683  | ) |                       |   | 44      |                          |  |   | (538         | ) |              |   |  |  |   | (91,177  | )
|Cash and cash equivalents at beginning of period        |  |                                              | 93,998   |   |                       |   | 63      |                          |  |   | 1,091        |   |              |   |  |  |   | 95,152   |  
|                                                        |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Cash and cash equivalents at end of period              |  | $                                            | 3,315    |   |                       | $ | 107     |                          |  | $ | 553          |   |              | $ |  |  | $ | 3,975    |  
|                                                        |  |                                              |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF CASH FLOWS

(In thousands)



|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|------------------------------------------------------- |  | -------------------------------------------- | ------ | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                        |  | For the Nine Months Ended September 30, 2005 |       
|                                                        |  | Parent                                       |        |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by operating activities               |  | $                                            | 1,431  |   |                       | $ | 11,634  |                          |  | $ | 124          |   |              | $ |  |  | $ | 13,189  |  
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Investing activities:                                   |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Purchases of property, plant and equipment              |  |                                              | (3,244 | ) |                       |   | (14,425 | )                        |  |   | (313         | ) |              |   |  |  |   | (17,982 | )
|Proceeds from disposal of property, plant and equipment |  |                                              |       |   |                       |   | 2,811   |                          |  |   |             |   |              |   |  |  |   | 2,811   |  
|Changes in restricted cash                              |  |                                              |       |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   |        |  
|Return of investment in unconsolidated affiliates       |  |                                              | 4,672  |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 4,672   |  
|Investment in unconsolidated affiliates                 |  |                                              | (40    | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (40     | )
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) investing activities     |  |                                              | 1,388  |   |                       |   | (11,614 | )                        |  |   | (313         | ) |              |   |  |  |   | (10,539 | )
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Financing activities:                                   |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Repayments of long and short-term debt                  |  |                                              | (2,413 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (2,413  | )
|Swap agreement unwind proceeds                          |  |                                              | 826    |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 826     |  
|Payments for capital lease obligations                  |  |                                              | (376   | ) |                       |   | (4      | )                        |  |   |             |   |              |   |  |  |   | (380    | )
|Issuances of stock, net of forfeitures                  |  |                                              | 231    |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 231     |  
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in financing activities                   |  |                                              | (1,732 | ) |                       |   | (4      | )                        |  |   |             |   |              |   |  |  |   | (1,736  | )
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents    |  |                                              | 1,087  |   |                       |   | 16      |                          |  |   | (189         | ) |              |   |  |  |   | 914     |  
|Cash and cash equivalents at beginning of period        |  |                                              | 88,998 |   |                       |   | 125     |                          |  |   | 633          |   |              |   |  |  |   | 89,756  |  
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period              |  | $                                            | 90,085 |   |                       | $ | 141     |                          |  | $ | 444          |   |              | $ |  |  | $ | 90,670  |  
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  



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Note 14.Commitments and Contingencies

During the second quarter 2006, the Company recorded an accrual of $1.5 million related to a vendor dispute. During the fourth quarter, the Company resolved this matter
for the amount accrued and has fully satisfied the obligation.

The Company is involved in certain litigation arising in the ordinary course of business.
In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Companys financial condition or results of operations or cash flows.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CARAUSTAR INDUSTRIES, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following is
managements discussion and analysis of certain significant factors that have affected our financial condition and operating results during the periods included in the accompanying condensed consolidated financial statements. This discussion
should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this report and with the managements discussion and analysis of financial condition and results of
operations and consolidated financial statements and notes thereto included in our 2005 Annual Report on Form 10-K.

General

We are a major manufacturer of recycled paperboard and converted paperboard products. We operate in four business segments. The paperboard segment manufactures 100%
recycled uncoated paperboard and operates a specialty converting operation. The recovered fiber segment collects and sells recycled paper and brokers recycled paper and other paper rolls. The tube, core and composite container segment produces
spiral and convolute-wound tubes, cores and cans. The folding carton and custom packaging segment produces printed and unprinted folding cartons and set-up boxes.

Our business is vertically integrated to a large extent. This means that our converting operations consume a large portion of our own paperboard production, approximately 50% in the first nine months of 2006. The remaining 50% of our
paperboard production is sold to external customers in any of the four recycled paperboard end-use markets: tube, core and composite containers; folding cartons; gypsum wallboard facing paper and other specialty products. These integration
statistics do not include volume produced or converted by our 50% owned, unconsolidated, joint venture, Premier Boxboard Limited. As part of our strategy to optimize our operating efficiency, each of our mills can produce recycled paperboard for
more than one end-use market. This allows us to shift production among mills in response to customer or market demands.

More recently, in light of the
difficult operating climate we have faced, and in an effort to reduce costs and improve our business mix, capacity deployment and profitability, restructuring activities have become an important element of our strategy. Our recent sale of our
interest in Standard Gypsum and the sale of our partition business, along with our recently announced intention to exit the coated recycled paperboard and specialty contract packaging businesses, are part of our strategic transformation plan to
reduce our debt and better position ourselves to compete and leverage our expertise in our core businesses.

Historically, we have grown our business,
revenues and production capacity to a significant degree through acquisitions. Based on the difficult operating climate for our industry and our financial position over the last several years, the pace of our acquisition activity, and
correspondingly, our revenue growth, has slowed as we have focused on conserving cash and maximizing the productivity of our existing facilities.

We are a
holding company that operates our business through 22 subsidiaries as of September 30, 2006. We also own a 50% interest in one joint venture with Temple-Inland, Inc. We have two additional joint ventures with unrelated entities in which our
investment and share of earnings are immaterial. We account for these interests in our joint ventures under the equity method of accounting. See Liquidity and Capital Resources  Off - Balance Sheet Arrangements  Joint Venture
Financings below.

Critical Accounting Policies

Our accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts
of revenues, expenses, assets and liabilities reported. The critical accounting matters that are very important to the portrayal of our financial condition and results of operations and require some of managements most difficult, subjective
and complex judgments are described in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The accounting for these matters involves forming estimates based on current facts, circumstances and assumptions
which, in managements judgment, could change in a manner that would materially affect managements future estimates with respect to such matters and, accordingly, could cause future reported financial condition and results of operations
to differ materially from financial results reported based on managements current estimates. There have been no material changes in our critical accounting policies during the nine-month period ended September 30, 2006, other than the
adoption of SFAS No. 123(R), Share-Based Payments and SFAS No. 151 Inventory Costs during the three-month period ended March 31, 2006.



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Results of Operations for the Three Months Ended September 30, 2006 and 2005

The volume information shown below includes shipments of paperboard products (excluding volume shipped by our unconsolidated joint ventures) combined and presented along
end-use market lines as well as by reporting segment. It is important to note, however, that a portion of our sales do not have related paperboard volume, such as sales of recovered fiber and sales of plastic products.



|                                                          |  |                                 |  |        |  |       |          |  |        |  
|--------------------------------------------------------- |  | ------------------------------- |  | ------ |  | ----- | -------- |  | ------ | -
|                                                          |  | Three Months EndedSeptember 30, |  | Change |  |       | % Change | 
|                                                          |  | 2006                            |  | 2005   |  |      
|Paperboard volume by end-use market (tons in thousands):  |  |                                 |  |        |  |       |          |  |        |  
|                                                          |  |                                 |  |       
|Tube, core and composite container market                 |  |                                 |  |        |  |       |          |  |        |  
|Volume shipped to internal converters                     |  | 67.1                            |  | 69.5   |  | (2.4  | )        |  | -3.5   | %
|Mill volume shipped to external customers                 |  | 13.9                            |  | 9.8    |  | 4.1   |          |  | 41.8   | %
|Volume related to discontinued operations                 |  |                                |  | 0.4    |  | (0.4  | )        |  | -100.0 | %
|                                                          |  |                                 |  |        |  |       |          |  |        |  
|Total                                                     |  | 81.0                            |  | 79.7   |  | 1.3   |          |  | 1.6    | %
|Folding carton market                                     |  |                                 |  |        |  |       |          |  |        |  
|Volume shipped to internal converters                     |  | 43.5                            |  | 37.4   |  | 6.1   |          |  | 16.3   | %
|Mill volume shipped to external customers                 |  | 11.3                            |  | 12.1   |  | (0.8  | )        |  | -6.6   | %
|Volume related to discontinued operations                 |  | 23.7                            |  | 47.1   |  | (23.4 | )        |  | -49.7  | %
|                                                          |  |                                 |  |        |  |       |          |  |        |  
|Total                                                     |  | 78.5                            |  | 96.6   |  | (18.1 | )        |  | -18.7  | %
|                                                          |  |                                 |  |       
|Gypsum wallboard facing paper market                      |  |                                 |  |        |  |       |          |  |        |  
|Mill volume shipped to external customers                 |  | 19.8                            |  | 24.6   |  | (4.8  | )        |  | -19.5  | %
|                                                          |  |                                 |  |       
|Other specialty products market                           |  |                                 |  |        |  |       |          |  |        |  
|Volume shipped to internal converters                     |  | 25.5                            |  | 20.1   |  | 5.4   |          |  | 26.9   | %
|Mill volume shipped to external customers                 |  | 32.9                            |  | 37.8   |  | (4.9  | )        |  | -13.0  | %
|Volume related to discontinued operations                 |  | 1.6                             |  | 9.5    |  | (7.9  | )        |  | -83.2  | %
|                                                          |  |                                 |  |        |  |       |          |  |        |  
|Total                                                     |  | 60.0                            |  | 67.4   |  | (7.4  | )        |  | -11.0  | %
|                                                          |  |                                 |  |       
|Total paperboard volume                                   |  | 239.3                           |  | 268.3  |  | (29.0 | )        |  | -10.8  | %
|Total paperboard volume excluding discontinued operations |  | 214.0                           |  | 211.3  |  | 2.7   |          |  | 1.3    | %
|                                                          |  |                                 |  |       
|Paperboard volume by reporting segment (in thousands):    |  |                                 |  |        |  |       |          |  |        |  
|Paperboard                                                |  | 94.5                            |  | 97.5   |  | (3.0  | )        |  | -3.1   | %
|Tube, core and composite container market                 |  | 76.0                            |  | 76.3   |  | (0.3  | )        |  | -0.4   | %
|Folding carton and custom packaging                       |  | 43.5                            |  | 37.5   |  | 6.0   |          |  | 16.0   | %
|Volume related to discontinued operations                 |  | 25.3                            |  | 57.0   |  | (31.7 | )        |  | -55.6  | %
|                                                          |  |                                 |  |        |  |       |          |  |        |  
|Total paperboard volume                                   |  | 239.3                           |  | 268.3  |  | (29.0 | )        |  | -10.8  | %
|                                                          |  |                                 |  |        |  |       |          |  |        |  

Paperboard Volume. Total paperboard volume from continuing operations for the three months ended
September 30, 2006, increased 1.3% to 214.0 thousand tons from 211.3 thousand tons for the same period in 2005. Tons sold from paperboard mill production decreased 7.7% to 168.9 thousand tons for the three months ended
September 30, 2006, compared to the same period in 2005. The total volume of paperboard converted increased 7.2% for the three months ended September 30, 2006.

Total paperboard volume increased primarily due to an increase in sales of converted paperboard to the folding carton end-use market; however, this improvement was partially offset by lower sales of unconverted
paperboard to the gypsum wallboard facing paper market.

Sales. Our consolidated sales for the three months ended September 30, 2006
increased 9.0% to $233.3 million from $214.0 million in the same period of 2005. The following table presents sales by business segment (in thousands):



29



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##### Table of Contents

|                                    |  |                                 |         |          |   |         |          |   |        |   |  |      |  
|----------------------------------- |  | ------------------------------- | ------- | -------- | - | ------- | -------- | - | ------ | - |  | ---- | -
|                                    |  | Three Months EndedSeptember 30, |         | $ Change |   |         | % Change |  
|                                    |  | 2006                            |         | 2005     |   |        
|Paperboard                          |  | $                               | 47,361  |          | $ | 43,648  |          | $ | 3,713  |   |  | 8.5  | %
|Recovered fiber                     |  |                                 | 34,079  |          |   | 20,766  |          |   | 13,313 |   |  | 64.1 | %
|Tube, core and composite container  |  |                                 | 91,824  |          |   | 92,869  |          |   | (1,045 | ) |  | -1.1 | %
|Folding carton and custom packaging |  |                                 | 60,019  |          |   | 56,708  |          |   | 3,311  |   |  | 5.8  | %
|                                    |  |                                 |         |          |   |         |          |   |        |   |  |      |  
|Total                               |  | $                               | 233,283 |          | $ | 213,991 |          | $ | 19,292 |   |  | 9.0  | %
|                                    |  |                                 |         |          |   |         |          |   |        |   |  |      |  

Paperboard Segment

Sales for the paperboard segment increased due to higher selling prices which accounted for an increase of $8.1 million. This increase was partially offset by lower paperboard volume which accounted for an estimated
decrease of $3.9 million in sales.

Recovered Fiber Segment

Sales for the recovered fiber segment increased primarily due to higher volume and selling prices. The higher volume was primarily due to increased sales to our 50% owned joint venture, Premier Boxboard, which
accounted for approximately $12.2 million of the $13.3 million increase.

Tube, Core and Composite Container Segment

Sales for the tube, core and composite container segment decreased primarily due to lower volume which accounted for a decrease of $5.2 million. This decrease was
partially offset by higher tube and core selling prices which accounted for an estimated increase of $3.7 million in sales.

Carton and Custom
Packaging Segment

Sales for the carton and custom packaging segment increased due to $7.5 million in sales from the Carolina Carton plant which was
acquired from Sonoco Products Company on December 31, 2005. This increase in sales was partially offset by lower volume of approximately $3.6 million resulting from closing and consolidating operations and eliminating customers with low margins
and high credit risk.

Cost of Sales. Cost of sales for the three months ended September 30, 2006 increased $19.3 million from
$182.8 million in 2005 to $202.1 million in 2006. This increase was primarily due to the following factors:



| |  |  | Higher recovered fiber costs of approximately $10.2 million due to higher sales in the recovered fiber segment.
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Higher freight costs of approximately $2.9 million.
| | - |  | ---------------------------------------------------



| |  |  | Higher direct material costs of approximately $2.8 million in the folding carton and custom packaging segment due to higher sales.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher employee labor costs, energy and fuel, and other manufacturing costs in the paperboard segment of approximately $1.9 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher recovered fiber costs in the paperboard segment of approximately $1.3 million.
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Higher repair and maintenance costs in the paperboard segment of approximately $1.2 million.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Accelerated depreciation expense of $1.4 million related to facility closures.
| | - |  | ------------------------------------------------------------------------------

These factors were partially offset by a reduction in the overall manufacturing costs in the tube, core and composite container segments can group of $1.4 million primarily due to lower sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2006
increased $266 thousand from $29.9 million in 2005 to $30.1 million in 2006. The increase in selling, general and administrative expenses was primarily due to a legal expense of $250 thousand recorded in the carton and custom packaging segment
related to a commercial dispute with a vendor.

Restructuring and Impairment Costs.During the three months ended September 30, 2006, we
incurred charges of $1.3 million for impairment of assets, $932 thousand for severance and other termination benefits, and $565 thousand for other exit costs. We paid $580 thousand in severance and other termination benefits and paid $658 thousand
for other exit costs in the three months ended September 30, 2006, leaving an accrual of $3.0 million at September 30, 2006.

See the notes to
the condensed consolidated financial statements for additional information regarding our restructuring plans.

Income (Loss) From Operations.
Loss from operations for the three months ended September 30, 2006 was $1.8 million, a decrease of $3.6 million compared to income from operations of $1.8 million reported for the same period last year. The following table presents income
(loss) from operations by business segment (in thousands):



30



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##### Table of Contents

|                                    |  |                                 |        |   |          |   |        |          |  |   |        |   |  |        |   
|----------------------------------- |  | ------------------------------- | ------ | - | -------- | - | ------ | -------- |  | - | ------ | - |  | ------ | --
|                                    |  | Three Months EndedSeptember 30, |        |   | $ Change |   |        | % Change | 
|                                    |  | 2006                            |        |   | 2005     |   |        |         
|Paperboard                          |  | $                               | 1,942  |   |          | $ | 5,102  |          |  | $ | (3,160 | ) |  | -61.9  | % 
|Recovered fiber                     |  |                                 | 1,040  |   |          |   | (151   | )        |  |   | 1,191  |   |  | N/A    |   
|Tube, core and composite container  |  |                                 | 1,429  |   |          |   | 2,003  |          |  |   | (574   | ) |  | -28.7  | % 
|Folding carton and custom packaging |  |                                 | 97     |   |          |   | (576   | )        |  |   | 673    |   |  | N/A    |   
|Corporate expense                   |  |                                 | (6,297 | ) |          |   | (4,539 | )        |  |   | (1,758 | ) |  | -38.7  | % 
|                                    |  |                                 |        |   |          |   |        |          |  |   |        |   |  |        |   
|Total                               |  | $                               | (1,789 | ) |          | $ | 1,839  |          |  | $ | (3,628 | ) |  | (197.3 | )%
|                                    |  |                                 |        |   |          |   |        |          |  |   |        |   |  |        |   

Paperboard Segment

Income from operations decreased primarily due to the following factors:



| |  |  | Higher restructuring costs of $2.2 million.
| | - |  | -------------------------------------------



| |  |  | Higher freight and labor costs of approximately $1.7 million.
| | - |  | -------------------------------------------------------------



| |  |  | Higher repair and maintenance costs of $1.2 million.
| | - |  | ----------------------------------------------------



| |  |  | Lower volume reduced income from operations by an estimated $1.2 million.
| | - |  | -------------------------------------------------------------------------



| |  |  | Accelerated depreciation expense of approximately $800 thousand related to a mill closure.
| | - |  | ------------------------------------------------------------------------------------------

These factors were partially offset by higher selling prices which improved income from operations by approximately $3.9 million.

Recovered Fiber Segment

Income from
operations increased primarily due to higher volume and improved pricing, partially offset by higher freight costs.

Tube, Core and Composite
Container Segment

Income from operations decreased primarily due to the following factors:



| |  |  | Higher restructuring costs of $1.5 million.
| | - |  | -------------------------------------------



| |  |  | Higher freight costs of $410 thousand.
| | - |  | --------------------------------------

These factors were
partially offset by higher selling prices which improved income from operations by approximately $1.5 million.

Carton and Custom Packaging Segment

Income from operations increased primarily due to the following factors:



| |  |  | Lower employee benefits of approximately $850 thousand primarily due to a plant closure.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Lower restructuring costs of $300 thousand.
| | - |  | -------------------------------------------

These
factors were partially offset by accelerated depreciation expense of $440 thousand related to a plant closure.

Discontinued Operations.The
loss from discontinued operations for the three months ended September 30, 2006 and 2005 was $1.4 million and $1.1 million, respectively. See notes to the condensed consolidated financial statements for additional discussion of discontinued
operations.

Other (Expense) Income. Interest expense for the three months ended September 30, 2006 and September 30, 2005 was
approximately $4.4 million and $10.4 million, respectively. The decrease in interest expense was primarily due to the redemption of our 97/8% senior subordinated notes on May 1, 2006. See Liquidity and Capital Resources for additional information regarding our debt, interest expense and interest rate swap agreements.

Equity in Income from Unconsolidated Affiliates.Equity in income from unconsolidated affiliates was $1.5 million for the three
months ended September 30, 2006, a decline of $8.2 million compared to the same period in 2005. This decline was primarily due to the sale of our interest in Standard, a joint venture with Temple-Inland, whereby, effective January 1, 2006
we were no longer entitled to earnings or distributions from Standard. This accounted for $7.6 million of the $8.2 million decrease.

(Provision)
Benefit for Income Taxes.The effective rate of income tax for continuing operations for the three months ended September 30, 2006 was a 20.5% benefit, compared with a 36.0% expense for the same period last year. The effective
rates for both periods are different from the statutory rates due to permanent tax adjustments.

Net (Loss) Income.Due to the factors
discussed above, net loss for the three months ended September 30, 2006 was $5.1 million, or $0.18 net loss per common share, compared to net income of $45 thousand, or $0.00 net income per common share, for the same period last year.



31



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##### Table of Contents

Results of Operations for the Nine Months Ended September 30, 2006 and 2005



|                                                          |  |                                |  |        |  |       |          |  |       |  
|--------------------------------------------------------- |  | ------------------------------ |  | ------ |  | ----- | -------- |  | ----- | -
|                                                          |  | Nine Months EndedSeptember 30, |  | Change |  |       | % Change | 
|                                                          |  | 2006                           |  | 2005   |  |      
|Paperboard volume by end-use market (tons in thousands):  |  |                                |  |        |  |       |          |  |       |  
|                                                          |  |                                |  |       
|Tube, core and composite container market                 |  |                                |  |        |  |       |          |  |       |  
|Volume shipped to internal converters                     |  | 209.2                          |  | 211.4  |  | (2.2  | )        |  | -1.0  | %
|Mill volume shipped to external customers                 |  | 39.0                           |  | 34.3   |  | 4.7   |          |  | 13.7  | %
|Volume related to discontinued operations                 |  | 0.4                            |  | 0.9    |  | (0.5  | )        |  | -55.6 | %
|                                                          |  |                                |  |        |  |       |          |  |       |  
|Total                                                     |  | 248.6                          |  | 246.6  |  | 2.0   |          |  | 0.8   | %
|                                                          |  |                                |  |       
|Folding carton market                                     |  |                                |  |        |  |       |          |  |       |  
|Volume shipped to internal converters                     |  | 123.4                          |  | 119.4  |  | 4.0   |          |  | 3.4   | %
|Mill volume shipped to external customers                 |  | 38.7                           |  | 38.2   |  | 0.5   |          |  | 1.3   | %
|Volume related to discontinued operations                 |  | 128.0                          |  | 143.6  |  | (15.6 | )        |  | -10.9 | %
|                                                          |  |                                |  |        |  |       |          |  |       |  
|Total                                                     |  | 290.1                          |  | 301.2  |  | (11.1 | )        |  | -3.7  | %
|                                                          |  |                                |  |       
|Gypsum wallboard facing paper market                      |  |                                |  |        |  |       |          |  |       |  
|Mill volume shipped to external customers                 |  | 70.4                           |  | 58.7   |  | 11.7  |          |  | 19.9  | %
|                                                          |  |                                |  |       
|Other specialty products market                           |  |                                |  |        |  |       |          |  |       |  
|Volume shipped to internal converters                     |  | 75.1                           |  | 67.1   |  | 8.0   |          |  | 11.9  | %
|Mill volume shipped to external customers                 |  | 102.2                          |  | 112.2  |  | (10.0 | )        |  | -8.9  | %
|Volume related to discontinued operations                 |  | 11.8                           |  | 28.4   |  | (16.6 | )        |  | -58.5 | %
|                                                          |  |                                |  |        |  |       |          |  |       |  
|Total                                                     |  | 189.1                          |  | 207.7  |  | (18.6 | )        |  | -9.0  | %
|                                                          |  |                                |  |       
|Total paperboard volume                                   |  | 798.2                          |  | 814.2  |  | (16.0 | )        |  | -2.0  | %
|Total paperboard volume excluding discontinued operations |  | 658.0                          |  | 641.3  |  | 16.7  |          |  | 2.6   | %
|                                                          |  |                                |  |       
|Paperboard volume by reporting segment (in thousands):    |  |                                |  |        |  |       |          |  |       |  
|                                                          |  |                                |  |       
|Paperboard                                                |  | 299.9                          |  | 289.4  |  | 10.5  |          |  | 3.6   | %
|Tube, core and composite container market                 |  | 234.7                          |  | 232.5  |  | 2.2   |          |  | 0.9   | %
|Folding carton and custom packaging                       |  | 123.4                          |  | 119.4  |  | 4.0   |          |  | 3.4   | %
|Volume related to discontinued operations                 |  | 140.2                          |  | 172.9  |  | (32.7 | )        |  | -18.9 | %
|                                                          |  |                                |  |        |  |       |          |  |       |  
|Total paperboard volume                                   |  | 798.2                          |  | 814.2  |  | (16.0 | )        |  | -2.0  | %
|                                                          |  |                                |  |        |  |       |          |  |       |  

Paperboard Volume. Total paperboard volume from continuing operations for the nine months
ended September 30, 2006, increased 2.6% to 658.0 thousand tons from 641.3 thousand tons for the same period in 2005. Tons sold from paperboard mill production was essentially unchanged with only a slight increase of 0.7% for the nine
months ended September 30, 2006, compared to the same period in 2005. The total volume of paperboard converted increased 2.5% for the nine months ended September 30, 2006.

Total paperboard volume increased due to an increase in sales of unconverted paperboard to the gypsum wallboard facing paper and the tube, core and composite container end-use markets, combined with higher converted
sales to the folding carton market. These improvements were partially offset by lower sales of uncoated paperboard to the other specialty products market as well as lower sales of converted paperboard to the tube, core and composite container
market.

Sales. Our consolidated sales for the nine months ended September 30, 2006, increased 7.7% to $701.4 million from $651.4
million for the same period in 2005. The following table presents sales by business segment (in thousands):



32



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##### Table of Contents

|                                    |  |                                |         |          |   |          |  |   |        |  |      |  
|----------------------------------- |  | ------------------------------ | ------- | -------- | - | -------- |  | - | ------ |  | ---- | -
|                                    |  | Nine Months EndedSeptember 30, |         | $ Change |   | % Change | 
|                                    |  | 2006                           |         | 2005     |   |         
|Paperboard                          |  | $                              | 146,413 |          | $ | 129,585  |  | $ | 16,828 |  | 13.0 | %
|Recovered fiber                     |  |                                | 88,643  |          |   | 62,359   |  |   | 26,284 |  | 42.1 | %
|Tube, core and composite container  |  |                                | 284,325 |          |   | 282,794  |  |   | 1,531  |  | 0.5  | %
|Folding carton and custom packaging |  |                                | 182,042 |          |   | 176,698  |  |   | 5,344  |  | 3.0  | %
|                                    |  |                                |         |          |   |          |  |   |        |  |      |  
|Total                               |  | $                              | 701,423 |          | $ | 651,436  |  | $ | 49,987 |  | 7.7  | %
|                                    |  |                                |         |          |   |          |  |   |        |  |      |  

Paperboard Segment

Sales for the paperboard segment increased approximately $18.4 million due to higher selling prices and volume. Selling prices improved due to price increases implemented to offset rising fuel and energy costs and
other manufacturing costs. These increases were partially offset by approximately $1.5 million of decreased sales resulting from lower volume in the paperboard segments converting operations.

Recovered Fiber Segment

Sales for the recovered fiber segment
increased primarily due to higher volume and selling prices. The increased volume was mainly due to increased sales to our 50% owned joint venture, Premier Boxboard, which accounted for approximately $21.6 million of the $26.3 million increase.

Tube, Core and Composite Container Segment

Sales for the tube, core and composite container segment increased due to higher selling prices which accounted for an increase of $10.6 million. This increase was partially offset by lower tube, core and composite container volume which
accounted for an estimated decrease of $9.4 million in sales.

Folding Carton and Custom Packaging Segment

Sales for the carton and custom packaging segment increased due to $18.4 million in sales from the Carolina Carton plant which was acquired from Sonoco Products Company
on December 31, 2005. This increase in sales was partially offset by lower volume of approximately $13.2 million resulting from closing and consolidating operations and eliminating customers with low margins and high credit risk.

Cost of Sales. Cost of sales for the nine months ended September 30, 2006, increased $50.7 million from $546.8 million in 2005 to $597.5 million in
2006. This increase was primarily due to the following factors:



| |  |  | Higher recovered fiber costs of approximately $18.4 million due to higher sales in the recovered fiber segment.
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Higher freight costs of $7.0 million.
| | - |  | -------------------------------------



| |  |  | Higher energy and fuel cost of $6.4 million in the paperboard segment.
| | - |  | ----------------------------------------------------------------------



| |  |  | Higher employee and benefit costs of $4.5 million in the paperboard segment.
| | - |  | ----------------------------------------------------------------------------



| |  |  | Higher direct materials and other manufacturing costs of $4.2 million in the paperboard segment primarily due to higher sales.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher direct material costs of $4.2 million in the folding carton and custom packaging segment primarily due to higher sales.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher repairs and maintenance expense of $3.2 million in the paperboard segment.
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Higher other manufacturing costs of $2.1 million in the folding carton and custom packaging segment primarily due to accelerated depreciation expenses related to plant closures.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher labor costs and energy and fuel costs of $1.4 million in the folding carton and custom packaging segment.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Accelerated depreciation expense of approximately $800 thousand in the paperboard segment related to a mill closure.
| | - |  | --------------------------------------------------------------------------------------------------------------------

These factors were partially offset by lower employee benefit expenses of $1.3 million in the tube, core and composite container segment, primarily due
to lower workers compensation expenses and lower group health costs.

Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the nine months ended September 30, 2006 increased $2.4 million from $92.4 million in 2005 to $94.8 million in 2006. This increase was primarily due to the following factors:



| |  |  | A $2.2 million increase in the key employee incentive compensation expense.
| | - |  | ---------------------------------------------------------------------------



| |  |  | A $1.2 million reserve for the settlement of a patent infringement dispute recorded in the first quarter of 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | An accrual of $500 thousand for deferred compensation related to the retirement of an officer of the company.
| | - |  | -------------------------------------------------------------------------------------------------------------

These factors were partially offset by lower expenses in the information technology department of $2.1 million, due to lower employee salaries expenses,
outside professional services costs and other costs.



33



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##### Table of Contents

Restructuring and Impairment Costs.During the nine months ended September 30, 2006, we
incurred a $3.4 million charge for impairment of assets, a $2.4 million charge for severance and other termination benefits and a $603 thousand charge for other exit costs. During the nine months ended September 30, 2006, we paid $1.8 million
in severance and other termination benefits and paid $1.3 million for other exit costs. See the notes to the condensed consolidated financial statements for additional information regarding our restructuring plans.

Income From Operations.Income from operations for the nine months ended September 30, 2006 was $2.7 million, a decrease of $9.3 million compared with
operating income of $12.0 million reported for the same period in 2005. The following table presents income (loss) from operations by business segment (in thousands):



|                                    |  |                                |         |   |          |   |         |          |  |   |        |   |  |        |  
|----------------------------------- |  | ------------------------------ | ------- | - | -------- | - | ------- | -------- |  | - | ------ | - |  | ------ | -
|                                    |  | Nine Months EndedSeptember 30, |         |   | $ Change |   |         | % Change | 
|                                    |  | 2006                           |         |   | 2005     |   |         |         
|Paperboard                          |  | $                              | 15,237  |   |          | $ | 21,293  |          |  | $ | (6,056 | ) |  | -28.4  | %
|Recovered fiber                     |  |                                | 3,350   |   |          |   | 616     |          |  |   | 2,734  |   |  | 443.8  | %
|Tube, core and composite container  |  |                                | 4,408   |   |          |   | 5,315   |          |  |   | (907   | ) |  | -17.1  | %
|Folding carton and custom packaging |  |                                | (1,129  | ) |          |   | 2,312   |          |  |   | (3,441 | ) |  | -148.8 | %
|Corporate expense                   |  |                                | (19,157 | ) |          |   | (17,519 | )        |  |   | (1,638 | ) |  | -9.3   | %
|                                    |  |                                |         |   |          |   |         |          |  |   |        |   |  |        |  
|Total                               |  | $                              | 2,709   |   |          | $ | 12,017  |          |  | $ | (9,308 | ) |  | -77.5  | %
|                                    |  |                                |         |   |          |   |         |          |  |   |        |   |  |        |  

Paperboard Segment

Income from operations decreased primarily due to the following factors:



| |  |  | Higher fuel and energy costs of approximately $6.4 million.
| | - |  | -----------------------------------------------------------



| |  |  | Higher employee and benefits costs of $4.5 million.
| | - |  | ---------------------------------------------------



| |  |  | Higher repair and maintenance costs of $3.2 million
| | - |  | ---------------------------------------------------



| |  |  | Higher restructuring costs of $2.5 million.
| | - |  | -------------------------------------------



| |  |  | Accelerated depreciation expense of approximately $800 thousand related to a mill closure.
| | - |  | ------------------------------------------------------------------------------------------

These factors were partially offset by the following improvements:



| |  |  | ­ Higher selling prices improved income from operations by approximately $10.0 million.
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Lower employee expenses of $650 thousand primarily due to restructuring activities.
| | - |  | -----------------------------------------------------------------------------------

Recovered Fiber Segment

Income from operations increased primarily due to higher volume.

Tube, Core and Composite Container Segment

Income from operations decreased primarily due to the following factors:



| |  |  | Higher other manufacturing and repair and maintenance costs of approximately $3.6 million.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Higher restructuring costs of $3.3 million.
| | - |  | -------------------------------------------



| |  |  | A $1.2 million reserve for the settlement of a patent infringement dispute recorded in the first quarter of 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Higher freight costs of $1.2 million.
| | - |  | -------------------------------------

These factors were
partially offset by higher selling prices which improved income from operations by approximately $8.5 million.

Folding Carton and Custom Packaging
Segment

Income from operations decreased primarily due to the following factors:



| |  |  | Higher accelerated depreciation expense of $2.1 million related to plant closures.
| | - |  | ----------------------------------------------------------------------------------



| |  |  | A $1.2 million reversal of a reserve in the second quarter of 2005 related to the subsequent collection from a customer that filed Chapter 11 bankruptcy.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Discontinued Operations.The loss from discontinued operations for the nine months ended September 30, 2006 and 2005 was $14.0 million and $3.7
million, respectively. See notes of the condensed consolidated financial statements for additional discussion of discontinued operations.

Other
(Expense) Income.Interest expense for the nine months ended September 30, 2006 and 2005 was approximately $21.5 million and $31.4 million, respectively. The decrease was primarily due to the redemption of our 97/8% senior subordinated notes on May 1, 2006. We recorded a $10.3 million loss in the second quarter of 2006
related to this debt redemption. See Liquidity and Capital Resources for additional information regarding our debt, interest expense and interest rate swap agreements.



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Gain on Sale of Interest in Standard Gypsum, L.P.On January 17, 2006, we sold our 50% membership
interest in Standard Gypsum, L.P. (Standard) to Standards other 50% owner, Temple-Inland. Pursuant to the purchase and sale agreement, Temple-Inland purchased our 50% membership interest for $150 million, which resulted in a gain
of approximately $135.2 million.

Equity in Income of Unconsolidated Affiliates.Equity in income from unconsolidated affiliates was $5.1
million for the nine month period ended September 30, 2006, a decrease of $22.4 million in equity in income from unconsolidated affiliates of $27.5 million in the same period in 2005. This decrease was primarily due to the sale of our interest
in Standard Gypsum, a joint venture with Temple-Inland, whereby, effective January 1, 2006 we were no longer entitled to earnings or distributions from Standard Gypsum; this accounted for approximately $21.5 million of the $22.4 million
decrease.

Provision for Income Taxes.The effective rate of income tax expense for the nine months ended September 30, 2006 and 2005
was 35.8% and 57.0%, respectively. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments. In addition, the income tax expense for the nine months ended September 30, 2005 includes tax
expense of $1.9 million related to an increase in the valuation allowance for state net operating losses resulting from a change in Ohio tax law.

Net Income.Due to the factors discussed above, net income for the nine months ended September 30, 2006 was $59.8 million, or $2.09 net income per common share, compared to a net income of $613 thousand, or $0.02 net
income per common share, for the same period in 2005.

Liquidity and Capital Resources

Liquidity Sources and Risks. Our primary sources of liquidity are cash from operations and borrowings under our senior credit facility, described below. Downturns in operations can significantly affect our
ability to generate cash. Factors that can affect our operating results and liquidity are discussed further in our 2005 Annual Report on Form 10-K under Risk Factors in Part I, Item 1A. We believe that our cash on hand at
September 30, 2006 of $4.0 million, together with borrowing availability under our senior credit facility will be sufficient to meet our cash requirements for the year ending December 31, 2006 and the foreseeable future. Additionally,
based on our historical ability to generate cash, we believe we will be able to meet our long-term cash requirements. However, if we are unable to generate cash at historic levels, our ability to generate cash sufficient to meet long-term
requirements is uncertain. The following are some of the factors that could affect our future ability to generate cash from operations:



| |  |  | A contraction in domestic demand for recycled paperboard and related packaging products similar to what our industry experienced in 2000, 2001 and 2002.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increased market acceptance of alternative products, such as flexible packaging and plastics that have replaced or can replace certain of our packaging products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continued export of domestic industrial manufacturing operations.
| | - |  | -----------------------------------------------------------------



| |  |  | Continued increase in fuel and energy costs.
| | - |  | --------------------------------------------



| |  |  | Market acceptance of price increases and energy surcharges in response to rising operating costs.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Significant unforeseen adverse conditions in our industry or the markets we serve.
| | - |  | ----------------------------------------------------------------------------------

The occurrence, continuation or exacerbation of these conditions could require us to seek additional funds from external sources in order to meet our liquidity requirements. In such event, our ability to obtain
additional funds would depend on the various business and credit market conditions prevailing at the time, which are difficult to predict and many of which are out of our control. Our ability to secure additional funds could also be materially
adversely affected by our substantial indebtedness. Additional risks related to our substantial indebtedness are discussed under Risk Factors  Our substantial indebtedness could adversely affect our cash flow and our ability to fulfill
our obligations under our indebtedness in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

The availability of
liquidity from our senior credit facility is primarily affected by our collateral base and our continued compliance with the terms of the senior credit facility, including the payment of interest and compliance with various covenants and financial
maintenance tests. We were in compliance with the covenants under our senior credit facility as of September 30, 2006. Absent a deterioration of the U.S. economy as a whole or the specific sectors on which our business depends, we believe we
will be in compliance with our covenants under the senior credit agreement during the remainder of 2006 and the foreseeable future.

Borrowings.At
September 30, 2006 and December 31, 2005, total debt (consisting of current maturities of debt and long-term debt, as reported on our condensed consolidated balance sheets) was as follows (in thousands):



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|                                      |  |                   |         |                  |   |        
|------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                      |  | September 30,2006 |         | December 31,2005
|Senior credit facility-revolver       |  | $                 | 812     |                  | $ |       
|Senior credit facility-term loan      |  |                   | 32,569  |                  |   |       
|97/8% senior subordinated notes       |  |                   |        |                  |   | 257,500
|73/8%
senior notes                    |  |                   | 189,750 |                  |   | 189,750
|71/4% senior notes                    |  |                   | 29,000  |                  |   | 29,000 
|Other notes payable (1)               |  |                   | 9,655   |                  |   | 4,955  
|Realized interest rate swap gains (2) |  |                   | 3,190   |                  |   | 11,185 
|                                      |  |                   |         |                  |   |        
|Total debt                            |  | $                 | 264,976 |                  | $ | 492,390
|                                      |  |                   |         |                  |   |        

---

|(1) | At December 31, 2005, industrial bonds of $4.7 million (the Sprague bonds) were included in current liabilities of discontinued operations and, therefore, are not reflected in
the above schedule for the period ended December 31, 2005. In accordance with the Sprague sale agreement, which was executed in the third quarter of 2006, the Sprague bonds were retained by the Company and, therefore, have been included in the
above schedule for the period ended September 30, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Consists of realized interest rate swap gains less the original issuance discounts and accumulated discount amortization related to the senior and senior subordinated notes.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On March 30, 2006, we amended our senior credit facility by entering into an Amended and Restated Credit Agreement (the Senior
Credit Agreement). The Senior Credit Agreement provides for a $145.0 million senior credit facility (the Senior Credit Facility) consisting of a $110.0 million five-year revolver and a $35.0 million five-year term loan. The
five-year revolver was reduced from $110.0 million to $100.0 million in October 2006. The Senior Credit Facility is secured by substantially all of our domestic subsidiaries assets other than real property, including accounts receivable,
general intangibles, inventory and equipment. Our domestic subsidiaries are parties to the Senior Credit Facility either as co-borrowers or as guarantors. At September 30, 2006 a total of $32.6 million was outstanding under the term loan and a
total of $812 thousand was outstanding under the revolver.

The revolver matures on the fifth anniversary of closing and includes a sublimit of $25.0
million for letters of credit. Borrowing availability under the revolver is determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and inventory and reduced by usage of the revolver (including
outstanding letters of credit) and any reserves. Aggregate availability under the revolver was $77.8 million at September 30, 2006. The term loan was drawn in full at closing and is required to be repaid in monthly installments based on a level
six-year amortization schedule, with all remaining outstanding principal due on the fifth anniversary of closing.

Outstanding principal of the term loan
initially bears interest at a rate equal to, at our option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the Senior Credit Facility) plus 0.25%, or
(2) the adjusted one, two, three or six-month LIBOR rate plus 1.75%. Outstanding principal under the revolver initially bears interest at a rate equal to, at our option, either (1) the base rate or (2) the adjusted one, two, three or
six-month LIBOR rate plus 1.50%. Beginning with reference to the fiscal quarter ending September 30, 2006, pricing under the Senior Credit Facility will be determined by reference to a pricing grid based on average daily availability under the
revolver for the immediately prior fiscal quarter. Under the pricing grid, the applicable margins for the term loan will range from 0.0% to 0.75% for base rate loans and from 1.50% to 2.25% for LIBOR loans, and the applicable margins for the
revolver will range from 0.0% to 0.5% for base rate loans and from 1.25% to 2.00% for LIBOR loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of credit are subject
to an annual fee equal to the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%.

The Senior Credit Facility contains covenants that restrict, among other things, our and our subsidiaries ability to create liens, merge or consolidate, dispose of
assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, enter into sale and leaseback transactions or
change the nature of our business. The Senior Credit Facility also contains a fixed charge coverage ratio covenant, which applies only in the event borrowing availability falls below $20.0 million at any time or below $25.0 million for five
consecutive business days. The Senior Credit Facility contains events of default including, but not limited to, nonpayment of principal or interest, violation of covenants, breaches of representations and warranties, cross-default to other
indebtedness, bankruptcy and other insolvency events, material judgments, certain ERISA events, actual or asserted invalidity of loan documentation and certain changes of control of the Company.



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On May 1, 2006, we redeemed our outstanding 97/8% senior subordinated notes in full at a price of $105.25 for each $100 of outstanding principal amount of the
notes plus $2.1 million of accrued and unpaid interest from April 1, 2006 to May 1, 2006. At the time of redemption, the aggregate outstanding principal amount of the notes was $257.5 million, and the total redemption price (including
accrued and unpaid interest and redemption premium) was $273.1 million. We used proceeds from borrowings at closing under the Senior Credit Facility, together with available cash, to fund the redemption. The redemption resulted in a $10.3 million
loss that was recognized in the second quarter of 2006.

Off-Balance Sheet ArrangementsJoint Venture Financings. On
January 17, 2006 we sold our 50% membership interest in Standard Gypsum, L.P. (Standard) to Standards other 50% owner, Temple-Inland. Pursuant to the purchase and sale agreement, Temple-Inland purchased our 50% membership
interest for $150.0 million, which resulted in a gain of approximately $135.2 million. Temple-Inland also assumed all of Standards $56.2 million in debt obligations and other liabilities of Standard. As a result of this transaction, we ceased
to be entitled to any further distributions from Standard for all periods subsequent to January 1, 2006, and all of our rights and obligations as a partner in Standard ceased. Once the sale was completed our guaranty and letter of credit
support obligations in respect of Standards debt were eliminated. We provided certain environmental indemnification not to exceed $5.0 million for any claims related to events that occurred prior to the formation of the Standard joint venture
on April 1, 1996. This indemnification will terminate January 17, 2011.

Since December 31, 2005 there have been no material changes in our
obligations with respect to our other joint venture, Premier Boxboard Limited. For more information about these obligations and contingencies, see Managements Discussion and Analysis of Financial Condition and Results of Operations
 Liquidity and Capital Resources  Off-Balance Sheet Arrangements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Because we account or accounted for these interests in our joint ventures under
the equity method of accounting, the indebtedness of these joint ventures is not reflected in the liabilities included on our consolidated balance sheets.

Cash Provided By Operations. Cash provided by operations was $3.8 million for the nine months ended September 30, 2006, compared with $13.2 million for the same period in 2005. The decrease was primarily due to a $19.0 million
decrease in distributions resulting from the sale of our interest in the Standard Gypsum joint venture; this decrease was partially offset by a $13.1 million pension contribution made in September 2005.

Capital Expenditures. Capital expenditures were $27.9 million for the nine months ended September 30, 2006 versus $18.0 million for the same period in 2005.
Aggregate capital expenditures of approximately $41.3 million are anticipated for 2006. The increase from prior years is primarily due to the implementation of an enterprise resource planning software system, the upgrade of a machine component at
one of our paperboard mills and the installation of a new printing press at one of our carton facilities. To conserve cash, we intend to limit capital expenditures for 2006 to cost reduction, productivity improvement and replacement projects.

Dividends.In February 2002, we announced that we would suspend future dividend payments on our common stock until our earnings performance and
cash flow improve. Our debt agreements contain certain limitations on the payment of dividends and currently preclude us from doing so.

Inflation

Raw material and energy cost changes have had, and continue to have, a material negative effect on our operations. We do not believe that general
economic inflation is a significant determinant of our raw material and energy cost increases or that it has a material effect on our operations.

Contractual Obligations

For a discussion of our contractual obligations, see Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources  Contractual Obligations and Note 7 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.

The only significant changes to our contractual obligations since December 31, 2005 is the incurrence of debt and interest
under the senior credit facility and the redemption of our 97/8% senior subordinated notes. These borrowings and
redemption will increase (decrease) our payment obligations as of September 30, 2006 as follows (in thousands):



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|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |          |   |  |   |  
|------------------------------------------------------ |  | --------------- | -------- | - | ---------------- | - | ------- | --------- |  | - | --------- | - |  | ---------------- | -------- | - |  | - | -
|                                                       |  | Payments due by
|Contractual Obligations                                |  | Total           |          |   | Less than 1 year |   |         | 2-3 years |  |   | 4-5 years |   |  | More than5 years
|Borrowings:                                            |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |          |   |  |   |  
|Senior credit facility-term loan                       |  | $               | 32,569   |   |                  | $ | 5,832   |           |  | $ | 11,664    |   |  | $                | 15,073   |   |  | $ | 
|Senior credit facility-revolver                        |  |                 | 812      |   |                  |   |        |           |  |   |          |   |  |                  | 812      |   |  |   | 
|Interest payment obligation for senior credit facility |  |                 | 6,734    |   |                  |   | 2,267   |           |  |   | 3,231     |   |  |                  | 1,236    |   |  |   | 
|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |          |   |  |   |  
|Subtotal for borrowings                                |  |                 | 40,115   |   |                  |   | 8,099   |           |  |   | 14,895    |   |  |                  | 17,121   |   |  |   | 
|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |          |   |  |   |  
|Redemptions:                                           |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |          |   |  |   |  
|97/8%
senior subordinated notes                        |  |                 | (257,500 | ) |                  |   |        |           |  |   |          |   |  |                  | (257,500 | ) |  |   | 
|Interest on 97/8% obligations                          |  |                 | (127,140 | ) |                  |   | (25,428 | )         |  |   | (50,856   | ) |  |                  | (50,856  | ) |  |   | 
|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |          |   |  |   |  
|Subtotal for redemptions                               |  |                 | (384,640 | ) |                  |   | (25,428 | )         |  |   | (50,856   | ) |  |                  | (308,356 | ) |  |   | 
|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |          |   |  |   |  

Forward-Looking Information

This quarterly report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that represent our expectations, anticipations or beliefs about future events, including our operating results, financial
condition, liquidity, expenditures, and compliance with legal and regulatory requirements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. These statements involve risks and
uncertainties that could cause actual results to differ materially depending on a variety of important factors, including, but not limited to, fluctuations in raw material prices and energy costs, increases in pension and insurance costs, downturns
in industrial production, housing and construction and the consumption of durable and nondurable goods, the degree and nature of competition, demand for our products, the degree of success achieved by our new product initiatives, changes in
government regulations, the application or interpretation of those regulations or in the systems, personnel, technologies or other resources we devote to compliance with regulations, our ability to complete acquisitions and successfully integrate
the operations of acquired businesses, our ability to successfully dispose of our assets held for sale, our ability to service our substantial indebtedness, unforeseen difficulties with the integration of our accounting and control operations or IT
systems.Additional relevant risk factors that could cause actual results to differ materially are discussed in our most recent Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. With respect to
such forward-looking statements, we claim protection under the Private Securities Litigation Reform Act of 1995. Our SEC filings are available from us, and also may be examined at public reference facilities maintained by the Securities and Exchange
Commission or, to the extent filed via EDGAR, accessed through the Web Site of the Securities and Exchange Commission (http://www.sec.gov). We do not undertake any obligation to update any forward-looking statements we make.



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PART I

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of certain market risks related to us,
see Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. There have been no significant developments with respect to our
exposure to interest rate market risks other than the debt transactions disclosed in the notes to our condensed consolidated financial statements.

ITEM 4. CONTROLS AND PROCEDURES

Changes in Internal Control Over Financial Reporting

There was no material change to our internal control over financial reporting during the third quarter of 2006 that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2006. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2006, our disclosure
controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Companys reports that it files or submits under the Securities Exchange Act of 1934.

PART II. OTHER INFORMATION

On April 21, 2006, the Company entered into an option agreement with Cascades Inc. regarding
certain components of paper machines numbers 2 and 3 located at the Companys Rittman, Ohio (the Rittman Equipment) and the customer list. The exercise price of the option is $500,000. On August 2, 2006 Cascades exercised its
option regarding the Rittman Equipment. Caraustar has, in turn, elected to temporarily idle the Rittman paper machines, while conducting other activities at the Rittman mill, in order to more effectively market and sell the remaining components of
the Rittman paper machines. The permanent idling of the Rittman paper machines may trigger or accelerate state and/or federal environmental obligations related to the landfill or other portions of the property on which the Rittman facility is
located. The Company is evaluating potential environmental obligations, but has not yet determined the nature or extent of those obligations, if any.

ITEM 1A. RISK FACTORS

For a discussion of our risk factors, see Risk Factors in Managements Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. There have been material changes to those risk factors since the date of the Annual Report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In February 2002, we announced that we would suspend
future dividend payments on our common stock until our earnings performance and cash flows improve. Our debt agreements contain certain limitations on the payment of dividends and currently preclude us from doing so.

ITEM 6. EXHIBITS

a) Exhibits

The Exhibits to this Report on Form 10-Q are listed in the accompanying Exhibit Index.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                       |  |                            |  |                                                                     
|---------------------- |  | -------------------------- |  | --------------------------------------------------------------------
|                       |  | CARAUSTAR INDUSTRIES, INC.
|                       |  |                           
|                       |  | By:                        |  | /s/ Ronald J. Domanico                                              
|Date: November 9, 2006 |  |                            |  | Ronald J. Domanico Senior Vice President and Chief
Financial Officer



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EXHIBIT INDEX



|            |  |   |  |                                                                                                                                                                       
|----------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                           
|3.01        |  |  |  | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference  Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646])
|            |  |  
|3.02        |  |  |  | Third Amended and Restated Bylaws of the Company (Incorporated by reference  Exhibit 3.02 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])             
|            |  |  
|31.01      |  |  |  | Certification of CEO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                     
|            |  |  
|31.02      |  |  |  | Certification of CFO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                     
|            |  |  
|32.01      |  |  |  | Certification of CEO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                       
|            |  |  
|32.02      |  |  |  | Certification of CFO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                       

---

| | Filed herewith
|- | --------------



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