##### Table of Contents

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UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

---

FORM
10-Q

(Mark One)

|x                                                              |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                   
|-------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------
|                                                               |  |                                                                                                           
|                                                               |  | For the quarterly period ended March 31, 2003                                                             
|                                                               |  |                                                                                                           
|                                                               |  | OR                                                                                                        
|                                                               |  |                                                                                                           
| ̈                                                              |  | 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                                
|                                                              
|                                                              
|Caraustar Industries, Inc.                                    
|(Exact name of registrant as specified in its charter)        
|                                                               |  |                                                                                                           
|North Carolina                                                 |  | 58-1388387                                                                                                
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)                                                                   
|                                                               |  |                                                                                                           
|3100 Joe Jerkins Blvd., Austell, Georgia                       |  | 30106                                                                                                     
|(Address of principal executive offices)                       |  | (Zip Code)                                                                                                
|                                                               |  |                                                                                                           
|(770) 948-3101                                                
|(Registrants telephone number, including area code)          
|                                                               |  |                                                                                                           

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   o
|------- | ------

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

|Yes   x | No   o
|------- | ------

Indicate the number of shares
outstanding of each of issuers classes of common stock, as of the latest practicable date, May 9, 2003.

|Common Stock, $.10 par value |  | 27,910,819   
|---------------------------- |  | -------------
|                             |  |              
|(Class)                      |  | (Outstanding)



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##### Table of Contents

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003

CARAUSTAR INDUSTRIES, INC.

TABLE OF CONTENTS

|               |                                                                                                                     | Page
|-------------- | ------------------------------------------------------------------------------------------------------------------- | ----
|               |                                                                                                                     |     
|PART I        | FINANCIAL INFORMATION                                                                                               |     
|               |                                                                                                                     |     
|Item 1.        | Condensed Consolidated Financial Statements:                                                                        |     
|               |                                                                                                                     |     
|               | Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002                                    | 3   
|               |                                                                                                                     |     
|               | Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2003 and March 31, 2002 | 4   
|               |                                                                                                                     |     
|               | Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2003 and March 31, 2002 | 5   
|               |                                                                                                                     |     
|               | Notes to Condensed Consolidated Financial Statements                                                                | 6   
|               |                                                                                                                     |     
|Item 2.        | Managements Discussion and Analysis of Financial Condition and Results of Operations                               | 22  
|               |                                                                                                                     |     
|Item 3.        | Quantitative and Qualitative Disclosures About Market Risk                                                          | 38  
|               |                                                                                                                     |     
|Item 4.        | Disclosure Controls and Procedures                                                                                  | 38  
|               |                                                                                                                     |     
|PART II       | OTHER INFORMATION                                                                                                   |     
|               |                                                                                                                     |     
|Item 6.        | Exhibits and Reports on Form 8-K                                                                                    | 40  
|               |                                                                                                                     |     
|Signatures     | 41                                                                                                                 
|               |                                                                                                                     |     
|Certifications | 42                                                                                                                 
|               |                                                                                                                     |     
|Exhibit Index  | 44                                                                                                                 

2



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data)

|                                                                                                                                                                          |  | March 31, 2003 |          | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | ----------------- | -
|                                                                                                                                                                          |  |                |          |                   |  
|ASSETS                                                                                                                                                                    |  |                |          |                   |  
|CURRENT ASSETS:                                                                                                                                                           |  |                |          |                   |  
|Cash and cash equivalents                                                                                                                                                 |  | $              | 47,001   |                   | $
|Receivables, net of allowances                                                                                                                                            |  |                | 109,668  |                   |  
|Inventories                                                                                                                                                               |  |                | 109,699  |                   |  
|Refundable income taxes                                                                                                                                                   |  |                | 752      |                   |  
|Other current assets                                                                                                                                                      |  |                | 10,767   |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|Total current assets                                                                                                                                                      |  |                | 277,887  |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                                            |  |                |          |                   |  
|Land                                                                                                                                                                      |  |                | 14,495   |                   |  
|Buildings and improvements                                                                                                                                                |  |                | 149,258  |                   |  
|Machinery and equipment                                                                                                                                                   |  |                | 632,050  |                   |  
|Furniture and fixtures                                                                                                                                                    |  |                | 14,967   |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|                                                                                                                                                                          |  |                | 810,770  |                   |  
|Less accumulated depreciation                                                                                                                                             |  |                | (373,534 | )                 |  
|                                                                                                                                                                          |  |                |          |                   |  
|Property, plant and equipment, net                                                                                                                                        |  |                | 437,236  |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|GOODWILL                                                                                                                                                                  |  |                | 180,629  |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES                                                                                                                                   |  |                | 51,651   |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|OTHER ASSETS                                                                                                                                                              |  |                | 35,088   |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|                                                                                                                                                                          |  | $              | 982,491  |                   | $
|                                                                                                                                                                          |  |                |          |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                      |  |                |          |                   |  
|CURRENT LIABILITIES:                                                                                                                                                      |  |                |          |                   |  
|Current maturities of debt                                                                                                                                                |  | $              | 70       |                   | $
|Accounts payable                                                                                                                                                          |  |                | 64,435   |                   |  
|Accrued liabilities                                                                                                                                                       |  |                | 58,420   |                   |  
|Accrued pension                                                                                                                                                           |  |                | 11,279   |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|Total current liabilities                                                                                                                                                 |  |                | 134,204  |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|SENIOR CREDIT FACILITY                                                                                                                                                    |  |                |         |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|LONG-TERM DEBT, less current maturities                                                                                                                                   |  |                | 531,209  |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|DEFERRED INCOME TAXES                                                                                                                                                     |  |                | 59,193   |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|PENSION LIABILITY                                                                                                                                                         |  |                | 16,232   |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|DEFERRED COMPENSATION                                                                                                                                                     |  |                | 1,480    |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|OTHER LIABILITIES                                                                                                                                                         |  |                | 4,659    |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|MINORITY INTEREST                                                                                                                                                         |  |                | 705      |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|COMMITMENTS AND CONTINGENCIES (Note 12)                                                                                                                                   |  |                |          |                   |  
|SHAREHOLDERS EQUITY:                                                                                                                                                     |  |                |          |                   |  
|Preferred stock, $.10 par value; 5,000,000 shares authorized; none issued                                                                                                 |  |                |         |                   |  
|Common stock, $.10 par value; 60,000,000 shares authorized, 27,910,819 and 27,906,674 shares issued and outstanding at March 31,
2003 and December 31, 2002, respectively |  |                | 2,791    |                   |  
|Additional paid-in capital                                                                                                                                                |  |                | 182,284  |                   |  
|Retained earnings                                                                                                                                                         |  |                | 72,438   |                   |  
|Accumulated other comprehensive loss                                                                                                                                      |  |                | (22,704  | )                 |  
|                                                                                                                                                                          |  |                |          |                   |  
|                                                                                                                                                                          |  |                | 234,809  |                   |  
|                                                                                                                                                                          |  |                |          |                   |  
|                                                                                                                                                                          |  | $              | 982,491  |                   | $
|                                                                                                                                                                          |  |                |          |                   |  

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 March 31, |        
|------------------------------------------------------- |  | ------------------------------------ | -------
|                                                        |  |                                      |        
|                                                        |  | 2003                                 |        
|                                                        |  |                                      |        
|SALES                                                   |  | $                                    | 252,902
|COST OF SALES                                           |  |                                      | 206,346
|                                                        |  |                                      |        
|Gross profit                                            |  |                                      | 46,556 
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  |                                      | 43,594 
|RESTRUCTURING COSTS                                     |  |                                      | 4,332  
|                                                        |  |                                      |        
|Operating (loss) income                                 |  |                                      | (1,370 
|OTHER (EXPENSE) INCOME:                                 |  |                                      |        
|Interest expense                                        |  |                                      | (10,337
|Interest income                                         |  |                                      | 201    
|Gain on extinguishment of debt                          |  |                                      |       
|Equity in income of unconsolidated affiliates           |  |                                      | 20     
|Other, net                                              |  |                                      | 98     
|                                                        |  |                                      |        
|Total other expense                                     |  |                                      | (10,018
|                                                        |  |                                      |        
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                      | (11,388
|MINORITY INTEREST IN (INCOME) LOSSES                    |  |                                      | (5     
|(BENEFIT) PROVISION FOR INCOME TAXES                    |  |                                      | (4,265 
|                                                        |  |                                      |        
|NET (LOSS) INCOME                                       |  | $                                    | (7,128 
|                                                        |  |                                      |        
|OTHER COMPREHENSIVE (LOSS) INCOME:                      |  |                                      |        
|Foreign currency translation adjustment                 |  |                                      | 196    
|                                                        |  |                                      |        
|Comprehensive (loss) income                             |  | $                                    | (6,932 
|                                                        |  |                                      |        
|BASIC                                                   |  |                                      |        
|NET (LOSS) INCOME PER COMMON SHARE                      |  | $                                    | (0.26  
|                                                        |  |                                      |        
|Weighted average number of shares outstanding           |  |                                      | 27,911 
|                                                        |  |                                      |        
|DILUTED                                                 |  |                                      |        
|NET (LOSS) INCOME PER COMMON SHARE                      |  | $                                    | (0.26  
|                                                        |  |                                      |        
|Diluted weighted average number of shares outstanding   |  |                                      | 27,911 
|                                                        |  |                                      |        

The accompanying notes are an integral part of these Condensed Consolidated Financial
Statements.

4



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands)

|                                                                    |  | For the Three Months Ended March 31, |       
|------------------------------------------------------------------- |  | ------------------------------------ | ------
|                                                                    |  |                                      |       
|                                                                    |  | 2003                                 |       
|                                                                    |  |                                      |       
|Cash (used in) provided by                                          |  |                                      |       
|Operating activities:                                               |  |                                      |       
|Net (loss) income                                                   |  | $                                    | (7,128
|Gain from extinguishment of debt                                    |  |                                      |      
|Depreciation and amortization                                       |  |                                      | 7,748 
|Disposal of property, plant and equipment                           |  |                                      | 294   
|Restructuring costs                                                 |  |                                      | 5,627 
|Other noncash adjustments                                           |  |                                      | (1,383
|Equity in income of unconsolidated affiliates, net of distributions |  |                                      | 480   
|Changes in operating assets and liabilities                         |  |                                      | 10,457
|                                                                    |  |                                      |       
|Net cash provided by operating activities                           |  |                                      | 16,095
|                                                                    |  |                                      |       
|Investing activities:                                               |  |                                      |       
|Purchases of property, plant and equipment                          |  |                                      | (6,290
|Acquisitions of businesses, net of cash acquired                    |  |                                      | (707  
|Proceeds from disposal of fixed assets                              |  |                                      | 134   
|Other, net                                                          |  |                                      |      
|                                                                    |  |                                      |       
|Net cash used in investing activities                               |  |                                      | (6,863
|                                                                    |  |                                      |       
|Financing activities:                                               |  |                                      |       
|Repayments of long-term debt                                        |  |                                      |      
|Proceeds from swap agreement unwind                                 |  |                                      | 4,264 
|Dividends paid                                                      |  |                                      |      
|Other                                                               |  |                                      | (809  
|                                                                    |  |                                      |       
|Net cash provided by (used in) financing activities                 |  |                                      | 3,455 
|                                                                    |  |                                      |       
|Net change in cash and cash equivalents                             |  |                                      | 12,687
|Cash and cash equivalents at beginning of period                    |  |                                      | 34,314
|                                                                    |  |                                      |       
|Cash and cash equivalents at end of period                          |  | $                                    | 47,001
|                                                                    |  |                                      |       
|Supplemental Disclosures:                                           |  |                                      |       
|Cash payments for interest                                          |  | $                                    | 850   
|                                                                    |  |                                      |       
|Cash payments for income taxes                                      |  | $                                    | 237   
|                                                                    |  |                                      |       

The accompanying notes are an integral part of these Condensed Consolidated Financial
Statements.

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##### Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 (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 for a fair statement of results for the interim periods. Certain notes and other information have been condensed or omitted from the interim financial statements; therefore, these financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full
year. Certain reclassifications have been made to prior year balances to conform with the 2003 presentation.  Freight costs were reported as a single caption in 2002 and are now classified as a component of cost of sales for 2002 and
2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 2. New Accounting Pronouncements

| | In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). This pronouncement requires entities to record
the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for the amount recorded or
incurs a gain or loss. The Company adopted SFAS No. 143 effective January 1, 2003. The adoption of this pronouncement did not have a material impact on the Companys consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). This pronouncement
requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon managements commitment to an exit plan, which was
generally before an actual liability had been incurred. The Company adopted SFAS No. 146 effective January 1, 2003 and is accounting for current exit and disposal activities in accordance with this pronouncement. The impact of the adoption of this
statement has resulted in the accrual of liabilities as incurred.                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On December 31, 2002 the Company adopted SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS No. 148).
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for companies that voluntarily elect to adopt the fair value recognition and measurement methodology
prescribed by SFAS No. 123.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In addition, regardless of the method a company elects to account for stock-based compensation arrangements, SFAS No. 148 requires additional disclosures in the footnotes
of both interim and annual financial statements regarding the method the Company uses to account for stock-based compensation and the effect of such method on the Companys reported results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations (APB
No. 25) in accounting for its employee stock options. However, interim pro forma information regarding net income and earnings per share is required by SFAS No. 148, which requires that the information be determined as if the Company has
accounted for its employee stock options granted under the fair value method of that statement. The fair values for these options were estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted average
assumptions:                                                                                                                                                                                                           

| | 
| | 

|                        |  |  | 2002        
|----------------------- |  |  | ------------
|                        |  |  |             
|Risk-free interest rate |  |  | 3.39%  4.94
|Expected dividend yield |  |  | 0           
|Expected option lives   |  |  | 8-10 years  
|Expected volatility     |  |  | 39          

| | The total fair values of the options granted during the year ended December 31, 2002 were computed to be approximately $2.3 million, which would be amortized over the
vesting period of the options. As of March 31, 2003 no additional options had been granted.  If the Company had accounted for these plans in accordance with SFAS No. 123, the Companys reported and pro forma net (loss) income and
net (loss) income per share for the three months ended March 31, 2003 and 2002 would have been as follows (in thousands, except per share data):
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |  | Three Months Ended  March 31, |       
|--------------------------------------- |  | ----------------------------- | ------
|                                        |  |                               |       
|                                        |  | 2003                          |       
|                                        |  |                               |       
|Net (loss) income:                      |  |                               |       
|As reported                             |  | $                             | (7,128
|Pro forma                               |  | $                             | (8,144
|Diluted (loss) income per common share: |  |                               |       
|As reported                             |  | $                             | (0.26 
|Pro forma                               |  | $                             | (0.29 
|                                        | 

| | In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Guarantees of Indebtedness of Others (FIN 45), which requires companies to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 provides
specific guidance identifying the characteristics of contracts that are subject to its guidance in its entirety from those only subject to the initial recognition and measurement provisions. The recognition and measurement provisions of FIN 45 are
effective on a prospective basis for guarantees issued or modified after December 31, 2002. The Company adopted FIN 45 effective January 1, 2003. The adoption of this pronouncement did not have a material effect on  the Companys
consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, and Interpretation of ARB
51 (FIN 46).  The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (variable interest entities or
VIEs) and how to determine when and which business enterprise should consolidate the VIE (the primary beneficiary).  This new model for consolidation applies to an entity which either (1) the equity investors (if any) do
not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entitys activities without receiving additional subordinated financial support from other parties.  In addition, FIN 46
requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures regarding the nature, purpose, size and activities of the VIE and the enterprises maximum exposure
to loss as a result of its involvement with the VIE.  The Company is required to adopt this interpretation no later than July 1, 2003 for any VIEs in which it holds a variable interest that it acquired before February 1, 2003.  The
interpretation is effective immediately for any VIEs created after January 31, 2003 and for VIEs in which an enterprise maintains an interest after that date.  The Company believes that adoption of this interpretation will not impact its
condensed consolidated financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In April 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities
(SFAS No. 149).  SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133.  In particular, this
Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

6



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##### Table of Contents

| | special reporting in the statement of cash flows.  This Statement is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to
have a material impact on the Companys consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 3. Acquisitions

| | Each of the following acquisitions is being accounted for under the purchase method of accounting, applying the provisions of Statements of Financial Accounting Standards No.
141. As a result, the Company recorded the assets and liabilities of the acquired companies at their estimated fair values with the excess of the purchase price over these amounts being recorded as goodwill.  Actual allocation of goodwill and
other identifiable assets may change during the allocation period, generally one year following the date of the acquisition.  The financial statements reflect the operating results of the acquired businesses for the periods after their
respective dates of acquisition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Smurfit Industrial Packaging Group

| | On September 30, 2002, the Company acquired certain operating assets (excluding accounts receivable) of the Smurfit Industrial Packaging Group (Smurfit), a business
unit of Jefferson Smurfit Corporation (U.S.), for approximately $67.1 million, and assumed $1.7 million of indebtedness outstanding under certain industrial revenue bonds. Goodwill of approximately $32.0 million and intangible assets of
approximately $8.7 million were recorded in conjunction with the Smurfit Industrial Packaging Group acquisition.  The intangible assets are associated with the value of acquired customer relationships and will be amortized over 15
years.                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Smurfit Industrial Packaging Group operations included 17 paper tube and core plants, 3 uncoated recycled paperboard mills and 3 partition manufacturing plants.  These
facilities are located in 16 states across the U.S. and in Canada.  The Company believes that these assets enhance the Companys capabilities in its tube, core and composite container market and position the Company as a prominent producer
in this market.  In conjunction with the acquisition, the Company is evaluating its existing and acquired locations to determine which locations should be closed or consolidated to achieve economies of scale and other efficiencies.  As of
March 2003, the Company announced the closure of six tube plants, including the four closures communicated in December 2002.  The Company expects to continue the evaluation throughout 2003.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The following unaudited pro forma financial data gives effect to the acquisition of Smurfit Industrial Packaging Group as if it had occurred on January 1, 2002.  The pro
forma financial data is provided for comparative purposes only and is not necessarily indicative of the results which would have been obtained if the Smurfit Industrial Packaging Group acquisition had been effected at that date (in thousands, except
per share amounts):                                                                                                                                                                                                                                                                                                                                                                                                             

|                             |  | Three Months Ended March 31, |        
|---------------------------- |  | ---------------------------- | -------
|                             |  |                              |        
|                             |  | 2002                         |        
|                             |  |                              |        
|Total revenues               |  | $                            | 254,858
|Net (loss) income            |  | $                            | 1,873  
|Net (loss) income per share: |  |                              |        
|Basic                        |  | $                            | 0.07   
|Diluted                      |  | $                            | 0.07   

Caraustar Northwest

| | In January 2003, the Company completed the purchase of its venture partners 50% interests in the equity of Caraustar Northwest, LLC, located in Tacoma, WA, for
approximately $700 thousand. The Tacoma facility, which manufactures tubes, cores and edge protectors and performs custom slitting for customers on the West coast, became a part of the Industrial & Consumer Products Group.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 4. Inventory

| | Inventories are carried at the lower of cost or market. Cost includes materials, labor and overhead. Market, with respect to all inventories, is replacement cost or net
realizable value. The Company estimates write-offs for inventory obsolescence and shrinkage based on managements judgment of future realization.  All inventories are valued using the first-in, first-out method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                             
| | Inventories at March 31, 2003 and December 31, 2002 were as follows (in thousands):                                                                                                                                                                                                                                                                                                         

7



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##### Table of Contents

|                                   |  | March 31, 2003 |         | December 31, 2002 |  
|---------------------------------- |  | -------------- | ------- | ----------------- | -
|                                   |  |                |         |                   |  
|Raw materials and supplies         |  | $              | 46,289  |                   | $
|Finished goods and work in process |  |                | 63,410  |                   |  
|                                   |  |                |         |                   |  
|Total inventory                    |  | $              | 109,699 |                   | $
|                                   |  |                |         |                   |  

Note 5. Senior Credit Facility and Other Long-Term Debt

| | At March 31, 2003 and December 31, 2002, total long-term debt consisted of the following (in thousands):
| | --------------------------------------------------------------------------------------------------------

|                                |  | March 31, 2003 |         | December 31, 2002 |  
|------------------------------- |  | -------------- | ------- | ----------------- | -
|                                |  |                |         |                   |  
|Senior credit facility          |  | $              |        |                   | $
|9 7/8 senior subordinated notes |  |                | 293,822 |                   |  
|7 3/8 senior notes              |  |                | 201,755 |                   |  
|7 1/4 senior notes              |  |                | 25,822  |                   |  
|Other notes payable             |  |                | 9,880   |                   |  
|                                |  |                |         |                   |  
|Total debt                      |  |                | 531,279 |                   |  
|Less current maturities         |  |                | (70     | )                 |  
|                                |  |                |         |                   |  
|Total long-term debt            |  | $              | 531,209 |                   | $
|                                |  |                |         |                   |  

Senior Credit Facility

| | The Companys senior credit facility provides for a revolving line of credit of $47.0 million, subject to borrowing base requirements established by eligible accounts
receivable and inventory.  The facility includes subfacilities of $10.0 million for swingline loans and $43.0 million for letters of credit, usage of which reduces availability under the facility. The facility matures on April 1, 2004. As
of March 31, 2003 and December 31, 2002, no borrowings were outstanding under the facility; however, an aggregate of $38.5 million and $10.0 million in letter of credit obligations were outstanding as of March 31, 2003 and December 31, 2002,
respectively. The Company intends to use the remaining balance of the facility for working capital, capital expenditures and other general corporate purposes, if necessary. In conjunction with a previous amendment, the Company and its subsidiary
guarantors under the senior credit facility granted a first priority security interest in the Companys respective accounts receivable and inventory to secure its obligations under the credit facility and the Companys obligations under
its 50% credit support of the credit facilities of Standard Gypsum and Premier Boxboard.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Borrowings under the facility bear interest at a rate equal to our option, either (1) the base rate (which is equal to the greater of the prime rate most recently announced
by Bank of America, N.A., the administrative agent under the facility, or the federal funds rate plus one-half of 1%) or (2) the adjusted Eurodollar Interbank Offered Rate, in each case plus an applicable margin of 3.25% for Eurodollar rate
loans and 2.00% for base rate loans. Additionally, the undrawn portion of the facility is subject to a facility fee at an annual rate that is set at 0.55%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The facility contains covenants that restrict, among other things, the Companys ability and its 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, make capital expenditures or change the
nature of our business. The facility also contains several financial maintenance covenants, including covenants establishing a maximum leverage ratio, minimum tangible net worth and a minimum fixed charge coverage ratio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The facility contains events of default including, but not limited to, nonpayment of principal or interest, violation of covenants, incorrectness 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | On March 28, 2003, the Company completed a sixth amendment to its senior credit facility. This amendment increased the Companys maximum permitted leverage ratio to 70.0%
for the fiscal quarters ending September 30, 2003 and December 31, 2003 and 67.5% for each succeeding fiscal quarter, lowered the Companys minimum fixed charge coverage ratio from 1.50:1.0 for all fiscal quarters to 0.95:1.0 for the fiscal
quarter ending March 31, 2003, 0.85:1.0 for the fiscal quarters ending June 30, 2003 and September 30, 2003 and 1.05:1.0 for the fiscal quarter ending December 31, 2003, lowered the Companys minimum tangible net worth covenant for
all periods on and after the effective date of the amendment, and lowered the Companys maximum permitted capital expenditures to $30.0 million per fiscal year. For purposes of calculating compliance with the leverage ratio and net worth
covenants, this amendment also established a maximum of $30.0 million for aggregate adjustments to other comprehensive loss related to the Companys defined benefit pension plan. This amendment also increased to $43.0 million our subfacility
for the issuance of letters of credit                                                          

8



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##### Table of Contents

|                                     | under the facility, in order to permit the Company to obtain a letter of credit to replace its Standard Gypsum joint venture guarantee as described below. Finally, this
amendment terminated the quarterly pricing increase established under the fourth amendment to the facility entered into in September 2002 and fixed our maximum interest margins at 3.25% for LIBOR loans and 2.00% for base rate loans. The financial
covenant modifications were necessary to enable the Company to avoid possible violations of its leverage ratio covenant for the third and fourth quarters of 2003, its fixed charge coverage ratio covenant for all quarters during 2003 and its net
worth covenant for the second quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                     | In exchange for these modifications, the Companys lenders required it to permanently reduce the aggregate commitments under the facility from $75.0 million to $47.0
million, to shorten the maturity of the facility from March 29, 2005 to April 1, 2004, and to pay a monthly fee beginning on July 1, 2003 equal to 1.0% of the aggregate commitments under the facility. The Companys lenders also required the
establishment of a borrowing base that restricts availability under the facility based on monthly computations of eligible accounts receivable and inventory, reduced by the Companys net hedging obligations owed to lenders under the facility
and by the amount of the Companys guarantee obligations under its joint venture guarantees that are not secured or replaced by letters of credit. Additionally, the Company is not permitted to borrow or request the issuance of letters of credit
under the facility unless the Company has less than $10.0 million in freely available cash and cash equivalents on its consolidated balance sheet both before and immediately after giving effect to the application of the proceeds of such borrowing.
The amendment also requires the Company to prepay outstanding loans under the facility and/or cash collateralize outstanding letters of credit with the net cash proceeds from any issuance of debt or equity or, to the extent not reinvested in similar
assets, from any sale of assets or insurance or condemnation award. Finally, the amendment prohibits the Company from incurring capital leases or other indebtedness, making acquisitions or other investments, or prepaying other indebtedness unless
the Companys fixed charge coverage ratio for the most recently reported fiscal quarter exceeds 1.50:1.0 (calculated on a pro forma basis with regard to acquisitions), and completely eliminates the Companys ability to pay dividends or
repurchase shares of our stock.
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                     | In connection with this amendment, the Company was also required to amend its security agreement to provide for a springing lien on its machinery and equipment that will become
effective on July 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                     | Prior to this amendment to the Companys senior credit facility, its Standard Gypsum joint venture guarantee contained financial maintenance covenants that were identical to
those contained in its senior credit facility. However, the lenders to Standard Gypsum were unwilling to agree to the modifications that the Company made under the amendment to the senior credit facility. In order to avoid an event of default under
that guarantee, the Company obtained a letter of credit under its senior credit facility in the face amount of $28.4 million. This letter of credit, which expires on January 15, 2004, is issued in favor of the Standard Gypsum lenders and
replaces the Companys guarantee obligations. In exchange for this letter of credit, the Standard Gypsum lenders terminated the Companys guarantee agreement and released its security interests in the Companys accounts receivable and
inventory. The Company must also pay a fee on October 28, 2003 in the amount of 2% of the full amount of this letter of credit in the event the letter of credit remains outstanding on that date. The letter of credit may be drawn in the event of a
default under the Standard Gypsum credit facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                     | Concurrently with the amendments to the Companys senior credit facility and the issuance of the letter of credit to the Standard Gypsum lenders as described above, the
Company entered into an amendment of its Premier Boxboard guarantee that made changes to the financial covenants corresponding to those made in the sixth amendment to the Companys senior credit facility. In exchange for this amendment, the
Premier Boxboard lenders required that the maturity of the Premier Boxboard credit facility be shortened from June 26, 2005 to January 5, 2004 and that the aggregate commitments under the facility be reduced to equal the amount of outstanding
loans and letters of credit of $20.3 million. Any reductions of outstanding loans under the facility may not be reborrowed and will permanently reduce the commitments, thereby effectively requiring the Company to fund Premier Boxboards
operations from its internal cash flow and from any cash contributions that the Company and its joint venture partner are permitted to make. In addition, the Company will be required to pay a fee to the Premier Boxboard lenders of $100,000 on July
1, 2003 and on the first day of each month thereafter until the facility is terminated and all outstandings under the facility are fully paid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Senior Subordinated and Senior Notes
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                     | On June 1, 1999, the Company issued $200 million in aggregate principal amount of its 7 3/8% notes due June 1, 2009. The 7 3/8% notes were issued at a discount to yield an
effective interest rate of 7.473% and pay interest semiannually. The 7 3/8% notes are unsecured obligations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                     | On March 29, 2001, the Company issued $285.0 million of 9 7/8% senior subordinated notes due April 1, 2011 and $29.0 million of 7 1/4% 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. See - Interest Rate Swap Agreements below regarding transactions that lowered the
effective interest rate of the 9 7/8% senior subordinated notes. These publicly traded senior subordinated and senior notes are unsecured, but are guaranteed, on a joint and several basis, by all of the Companys domestic subsidiaries, other
than two that are not wholly-owned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

9



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##### Table of Contents

Interest Rate Swap Agreements

| | During 2001, the Company entered into four interest rate swap agreements in notional amounts totaling $285.0 million. As described below, the Company unwound one of the swaps
and a portion of another, leaving $100 million outstanding at March 31, 2003. The agreements, which have payment and expiration dates that correspond to the terms of the note obligations they cover, effectively converted a portion of the
Companys fixed rate 9 7/8% senior subordinated notes and a portion of the Companys fixed rate 7 3/8% senior notes into variable rate obligations. The variable rates are based on the three-month LIBOR plus a fixed margin.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The following table identifies the debt instrument hedged, the notional amount, the fixed spread and the three-month LIBOR at March 31, 2003 for each of the Companys
interest rate swaps. The March 31, 2003 three-month LIBOR is presented for informational purposes only and does not represent the Companys actual effective rates in place at March 31, 2003.                                                                                                                                                                                                                                                                                      

|Debt Instrument                 |  | Notional Amount (000s) |        | Fixed Spread |  | Three-Month LIBOR at March 31, 2003 |   | Total Variable Rate |      
|------------------------------- |  | ----------------------- | ------ | ------------ |  | ----------------------------------- | - | ------------------- | -----
|                                |  |                         |        |              |  |                                     |   |                     |      
|7 3/8 senior notes              |  | $                       | 25,000 |              |  | 1.445                               | % |                     | 1.288
|7 3/8 senior notes              |  |                         | 25,000 |              |  | 1.775                               |   |                     | 1.288
|9 7/8 senior subordinated notes |  |                         | 50,000 |              |  | 4.495                               |   |                     | 1.288

| | In October 2001, the Company unwound its $185.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes and received $9.1 million from the bank
counter-party. Simultaneously, the Company executed a new swap agreement with a fixed spread that was 85 basis points higher than the original swap agreement. The new swap agreement was the same notional amount, had the same terms and covered the
same notes as the original agreement. The $9.1 million gain, which was classified as a component of debt, will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The $9.1 million
gain lowered the effective interest rate of the 9 7/8% senior subordinated notes from 10.5% to 10.0%.                                                  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In August 2002, the Company unwound its $185 million interest rate swap agreement related to the 9 7/8% senior subordinated notes and received $5.5 million from the bank
counter-party.  Simultaneously, the Company executed a new swap agreement with a fixed spread that was 17 basis points higher than the original swap agreement.  The new swap agreement is the same notional amount, has the same terms and
covers the same notes as the original agreement.  In September 2002, the Company repaid the $5.5 million and entered into a new swap agreement that lowered the fixed spread by 7.5 basis points.                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In November 2002, the Company unwound $50.0 million of its $185.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes, and received
approximately $2.8 million from the bank counter-party. Simultaneously, the Company unwound $50.0 million of one of its interest rate swap agreements related to the 7 3/8% senior notes, and received approximately $3.4 million. The
$6.2 million gain, which was classified as a component of debt, will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The $2.8 million gain lowered the effective
interest rate of the 9 7/8% senior subordinated notes from 10.0% to 9.8%. The $3.4 million gain lowered the effective interest rate of the 7 3/8% senior subordinated notes from 7.5% to 7.2%.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In January 2003, the Company effectively unwound $85.0 million of its $135.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes by
assigning the Companys rights and obligations under the swap to one of the Companys lenders under the senior credit facility. In exchange, the Company received approximately $4.3 million. The Company will accrete this gain into
interest expense over the remaining term of the notes, which will partially offset the increase in interest expense. The gain lowered the effective interest rate of the 9 7/8% senior subordinated notes from 9.8% to 9.5%.                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Under the provisions of SFAS No. 133, the Company has designated and accounted for its interest rate swap agreements as fair value hedges. The Company has assumed no
ineffectiveness with regard to these agreements as they qualify for the short-cut method of accounting for fair value hedges of debt obligations, as prescribed by SFAS No. 133. The aggregate fair value of the swap agreements of approximately $9.5
million as of March 31, 2003 and $15.2 million as of December 31, 2002 is classified as a component of long-term assets and with a corresponding adjustment to long-term debt in the accompanying balance sheet.                                                                                                                                                                                                     

10



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##### Table of Contents

Note 6. Segment Information

| | The Company operates principally in three business segments organized by products. The paperboard segment consists of facilities that manufacture 100% recycled uncoated and
clay-coated paperboard and facilities that collect 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 carton and custom packaging segment consists of facilities that produce printed and unprinted folding cartons and set-up boxes and facilities that provide contract manufacturing and contract packaging services.
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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The following table presents certain business segment information for the three months ended March 31, 2003 and 2002 (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                        |  | Three Months Ended March 31, |        
|------------------------------------------------------- |  | ---------------------------- | -------
|                                                        |  |                              |        
|                                                        |  | 2003                         |        
|                                                        |  |                              |        
|Sales (external customers):                             |  |                              |        
|Paperboard                                              |  | $                            | 89,740 
|Tube, core and composite container                      |  |                              | 89,121 
|Carton and custom packaging                             |  |                              | 74,041 
|                                                        |  |                              |        
|Total                                                   |  | $                            | 252,902
|                                                        |  |                              |        
|Sales (intersegment):                                   |  |                              |        
|Paperboard                                              |  | $                            | 44,363 
|Tube, core and composite container                      |  |                              | 1,482  
|Carton and custom packaging                             |  |                              | 334    
|                                                        |  |                              |        
|Total                                                   |  | $                            | 46,179 
|                                                        |  |                              |        
|Operating income (loss):                                |  |                              |        
|Paperboard(A)                                           |  | $                            | 2,025  
|Tube, core and composite container                      |  |                              | 2,189  
|Carton and custom packaging                             |  |                              | (81    
|                                                        |  |                              |        
|Total                                                   |  |                              | 4,133  
|Corporate expense                                       |  |                              | (5,503 
|                                                        |  |                              |        
|Operating (loss) income                                 |  |                              | (1,370 
|Interest expense                                        |  |                              | (10,337
|Interest income                                         |  |                              | 201    
|Gain on extinguishment of debt                          |  |                              |       
|Equity in income of unconsolidated affiliates           |  |                              | 20     
|Other, net                                              |  |                              | 98     
|                                                        |  |                              |        
|(Loss) income before minority interest and income taxes |  | $                            | (11,388
|                                                        |  |                              |        

---

|(A) | Results include a first quarter 2003 charge to operations of $4.2 million for restructuring costs related to the closing of the Buffalo Paperboard mill located in Lockport, New
York, a $72 thousand charge for severance and termination benefits at the Halifax Paperboard mill, located in Roanoke Rapids, North Carolina, and a $100 thousand charge related to severance and termination benefits related to Carolina Converting,
Inc. located in Fayetteville, North Carolina (See Note 8).  These charges are related to the paperboard segment and are reflected in the segments operating results.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 7. Goodwill and Other Intangible Assets

Goodwill

| | Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under this pronouncement the Company no longer amortizes goodwill,
but instead reviews goodwill on at least an annual basis to determine if there is an impairment.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                         
| | The following is a summary of the changes in the carrying amount of goodwill from December 31, 2002 to March 31, 2003:                                                                                                                                                  

11



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##### Table of Contents

|                                |  | Paperboard |        | Carton and  Custom  Packaging |   | Tube, Core and Composite  Containers |  | Total |       
|------------------------------- |  | ---------- | ------ | ----------------------------- | - | ------------------------------------ |  | ----- | ------
|                                |  |            |        |                               |   |                                      |  |       |       
|Balance as of December 31, 2002 |  | $          | 82,688 |                               | $ | 43,340                               |  | $     | 54,517
|Goodwill acquired               |  |            |       |                               |   |                                     |  |       | 84    
|                                |  |            |        |                               |   |                                      |  |       |       
|Balance as of March 31, 2003    |  | $          | 82,688 |                               | $ | 43,340                               |  | $     | 54,601
|                                |  |            |        |                               |   |                                      |  |       |       

Intangible Assets

| | As of March 31, 2003 the Company had an other intangible asset of $8.2 million, net of $432 thousand of amortization, which is classified with other assets. Amortization expense
for the three months ended March 31, 2003 was $142 thousand.  The intangible asset is associated with the acquisition of certain assets of the Smurfit Industrial Packaging Group 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):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2003 |  | $ | 578   | 
|---- |  | - | ----- | 
|2004 |  |   | 578   | 
|2005 |  |   | 578   | 
|2006 |  |   | 578   | 
|2007 |  |   | 578   | 
|     |  |   |       | 
|     |  | $ | 2,890 | 
|     |  |   |       | 

Note 8. Restructuring Costs

| | In June 2002 the Company recorded a $985 thousand noncash, pretax restructuring charge related to the permanent closure of the Companys Camden and Chicago paperboard mills,
which were shut down in 2000 and 2001, respectively. The $985 thousand charge represents a revised estimate of fixed asset disposals at these mills. The Chicago mill recorded a $1.5 million additional provision while the Camden mill
overestimated the fixed asset write-off and recorded a credit of $500 thousand. As of March 31 2003, an accrual of $85 thousand remained related to the Chicago mills other exit costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In December 2002, the Company initiated a plan to permanently close its Halifax paperboard mill located in Roanoke Rapids, North Carolina. This mill was idled in June 2001 and
the Company planned to restart it when industry demand improved. The Company made the 2002 decision to permanently close and dismantle the mill based on the current and foreseeable conditions of paperboard demand. In connection with this plan, the
Company recorded a pretax charge to operations of approximately $3.4 million. The $3.4 million charge included a $3.0 million impairment charge and a $370 thousand accrual for other exit costs. As of March 31, 2002, there were no
employees remaining at the mill.  During the first quarter of 2003, $72 thousand was accrued for severance and other termination benefits and as of March 31, 2003, $66 thousand had been paid, leaving an accrual of $6 thousand for severance and
other termination benefits.  Also remaining at March 31, 2003 is an accrual of $295 thousand related to other exit costs. The remaining other exit costs are expected to be paid by December 31, 2003. The Company is currently marketing the
property.                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In December 2002, the Company initiated a plan to consolidate its Carolina Converting, Inc. facility in Fayetteville, North Carolina into its Carolina Component Concepts facility
located in Mooresville, North Carolina and recorded a pretax charge to operations of approximately $6.0 million. The decision to consolidate these facilities was initiated by the loss of a significant customer, combined with a significant
decline in demand in other specialty converted products. The $6.0 million charge included a $2.4 million impairment charge for assets and a $3.7 million accrual for other exit costs. A substantial portion of the other exit costs is
related to a real estate lease for which no future economic benefit will be derived. As of March 31, 2003, $100 thousand had been expensed and paid for severance and other termination benefits and an accrual of $3.7 million remained for other exit
costs.  The Carolina Converting, Inc. facility ceased operations in the first quarter of 2003. The other exit costs will be paid through the end of 2006, the end of the real estate lease. The Company will complete the exit plan upon fulfilling
its obligations under the real estate lease, which will end December 2006.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Also in December 2002, the Company initiated a plan to restructure its carton plant in Ashland, Ohio to serve a smaller, more focused carton market and recorded a pretax charge
to operations of approximately $2.4 million. The $2.4 million charge included an impairment charge of $1.2 million for assets, a $494 thousand accrual for severance and termination benefits for 18 hourly and 8 salaried employees
terminated in connection with this plan, as well as a $688 thousand accrual for other exit costs. As of March 31, 2003, an accrual of $379 thousand remained, consisting of $292 thousand for                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| | severance and other termination benefits and $87 thousand for other exit costs. The remaining other exit costs are expected to be paid by December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | In March 2003, the Company announced the permanent closure of its Buffalo Paperboard mill located in Lockport, New York. The Company recorded a charge of approximately
$4.2 million in connection with this closure. The $4.2 million charge included a $3.4 million impairment charge for assets, a $670 thousand accrual for severance and other termination benefits, and a $53 thousand accrual for
other exit costs. As of March 31, 2003, 7 salaried employees remained at the mill to administer severance benefits, collect accounts receivable and dismantle machinery and equipment. All mill closure activities are expected to be completed by June
2003.  Buffalos sales will be transferred to the Companys other paperboard mills.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The following is a summary of restructuring and other costs and the restructuring liability from January 1, 2002 to March 31, 2003 (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                     |  | Asset Impairment |       | Severance and Other Termination Benefits |   | Other Exit Costs |   | Restructuring Liability |       | Total Restructuring  and  Impairment Charge |  
|------------------------------------ |  | ---------------- | ----- | ---------------------------------------- | - | ---------------- | - | ----------------------- | ----- | ------------------------------------------- | -
|                                     |  |                  |       |                                          |   |                  |   |                         |       |                                             |  
|Liability balance, December 31, 2002 |  |                  |       |                                          | $ | 494              |   | $                       | 4,805 |                                             | $
|                                     |  |                  |       |                                          |   |                  |   |                         |       |                                             |  
|First quarter 2003 charges           |  | $                | 3,437 |                                          | $ | 842              |   | $                       | 53    |                                             | $
|                                     |  |                  |       |                                          |   |                  |   |                         |       |                                             |  
|Expenditures                         |  |                  |       |                                          |   | (368             | ) |                         | (582  | )                                           |  
|                                     |  |                  |       |                                          |   |                  |   |                         |       |                                             |  
|Liability balance, March 31, 2003    |  |                  |       |                                          | $ | 968              |   | $                       | 4,276 |                                             | $
|                                     |  |                  |       |                                          |   |                  |   |                         |       |                                             |  

Note 9. (Loss) Income Per Share

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

|                                                             |  | Three Months Ended March 31, |       
|------------------------------------------------------------ |  | ---------------------------- | ------
|                                                             |  |                              |       
|                                                             |  | 2003                         |       
|                                                             |  |                              |       
|Calculation of Basic (Loss) Income Per Share:                |  |                              |       
|Net (loss) income                                            |  | $                            | (7,128
|Weighted average number of common shares outstanding         |  |                              | 27,911
|                                                             |  |                              |       
|Basic (loss) income per share                                |  | $                            | (0.26 
|                                                             |  |                              |       
|Calculation of Diluted (Loss) Income Per Share:              |  |                              |       
|Net (loss) income                                            |  | $                            | (7,128
|Diluted weighted average number of common shares outstanding |  |                              | 27,911
|                                                             |  |                              |       
|Diluted (loss) income per share                              |  | $                            | (0.26 
|                                                             |  |                              |       

| | Approximately 2.1 million and 1.8 million common stock equivalents are excluded from the three month periods ended March 31, 2003 and 2002, respectively. These common stock
equivalents are excluded because they are antidilutive.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                     

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Note 10. Equity Interest in Unconsolidated Affiliate

| | The Company owns 50% of Standard Gypsum, L.P. (Standard).  Standard is a joint venture, accounted for under the equity method, that operates two gypsum
wallboard manufacturing facilities. One facility is located in McQueeny, Texas and the other is in Cumberland City, Tennessee. The joint venture is managed by Temple-Inland Forest Products Corporation, and is the owner of the remaining 50% interest
in the joint venture. Because of the significance of Standards operating results to the Company for the year ended December 31, 2002, Standards summarized income statement for the three month periods ended March 31, 2003 and 2002 is
presented below (in thousands):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                 |  | Three Months Ended March 31, |       
|---------------- |  | ---------------------------- | ------
|                 |  |                              |       
|                 |  | 2003                         |       
|                 |  |                              |       
|Sales            |  | $                            | 22,374
|Gross profit     |  |                              | 2,891 
|Operating income |  |                              | 2,114 
|Net income       |  |                              | 1,562 

Note 11. Guarantor Condensed Consolidating Financial Statements

| | These condensed consolidating financial statements reflect Caraustar Industries, Inc. and Subsidiary Guarantors, which consist of all of the Companys wholly-owned
subsidiaries other than foreign subsidiaries and two domestic subsidiaries that are not wholly-owned. 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 (In thousands)

|                                        |  | As of March 31, 2003 |        
|--------------------------------------- |  | -------------------- | -------
|                                        |  |                      |        
|                                        |  | Parent               |        
|                                        |  |                      |        
|ASSETS                                  |  |                      |        
|CURRENT ASSETS:                         |  |                      |        
|Cash and cash equivalents               |  | $                    | 46,592 
|Intercompany funding                    |  |                      | 76,269 
|Receivables, net of allowances          |  |                      | 1,489  
|Intercompany accounts receivable        |  |                      |       
|Inventories                             |  |                      |       
|Refundable income taxes                 |  |                      | 379    
|Other current assets                    |  |                      | 4,241  
|                                        |  |                      |        
|Total current assets                    |  |                      | 128,970
|                                        |  |                      |        
|PROPERTY, PLANT AND EQUIPMENT           |  |                      | 11,881 
|Less accumulated depreciation           |  |                      | (6,738 
|                                        |  |                      |        
|Property, plant and equipment, net      |  |                      | 5,143  
|                                        |  |                      |        
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES |  |                      | 594,506
|                                        |  |                      |        
|GOODWILL, net                           |  |                      |       
|                                        |  |                      |        
|INVESTMENT IN UNCONSOLIDATED AFFILIATES |  |                      | 51,651 
|                                        |  |                      |        
|OTHER ASSETS                            |  |                      | 25,613 
|                                        |  |                      |        
|                                        |  | $                    | 805,883
|                                        |  |                      |        
|LIABILITIES AND SHAREHOLDERS EQUITY    |  |                      |        
|CURRENT LIABILITIES:                    |  |                      |        
|Current maturities of debt              |  | $                    | 70     
|Accounts payable                        |  |                      | 19,290 
|Accrued liabilities                     |  |                      | 19,479 
|Intercompany accounts payable           |  |                      |       
|Accrued pension                         |  |                      | 11,279 
|                                        |  |                      |        
|Total current liabilities               |  |                      | 50,118 
|                                        |  |                      |        
|SENIOR CREDIT FACILITY                  |  |                      |       
|                                        |  |                      |        
|LONG-TERM DEBT, less current maturities |  |                      | 523,009
|                                        |  |                      |        
|DEFERRED INCOME TAXES                   |  |                      | 45,546 
|                                        |  |                      |        
|PENSION LIABILITY                       |  |                      | 16,232 
|                                        |  |                      |        
|DEFERRED COMPENSATION                   |  |                      | 1,427  
|                                        |  |                      |        
|OTHER LIABILITIES                       |  |                      |       
|                                        |  |                      |        
|MINORITY INTEREST                       |  |                      |       
|                                        |  |                      |        
|SHAREHOLDERS EQUITY:                   |  |                      |        
|Common stock                            |  |                      | 2,730  
|Additional paid-in capital              |  |                      | 207,950
|Retained earnings                       |  |                      | (18,816
|Accumulated other comprehensive loss    |  |                      | (22,313
|                                        |  |                      |        
|                                        |  |                      | 169,551
|                                        |  |                      |        
|                                        |  | $                    | 805,883
|                                        |  |                      |        

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands)

|                                        |  | As of December 31, 2002 |        
|--------------------------------------- |  | ----------------------- | -------
|                                        |  |                         |        
|                                        |  | Parent                  |        
|                                        |  |                         |        
|ASSETS                                  |  |                         |        
|CURRENT ASSETS:                         |  |                         |        
|Cash and cash equivalents               |  | $                       | 33,544 
|Intercompany funding                    |  |                         | 80,940 
|Receivables, net of allowances          |  |                         | 514    
|Intercompany accounts receivable        |  |                         |       
|Inventories                             |  |                         |       
|Refundable income taxes                 |  |                         | 14,578 
|Other current assets                    |  |                         | 1,934  
|                                        |  |                         |        
|Total current assets                    |  |                         | 131,510
|                                        |  |                         |        
|PROPERTY, PLANT, AND EQUIPMENT          |  |                         | 11,660 
|Less accumulated depreciation           |  |                         | (6,220 
|                                        |  |                         |        
|Property, plant, and equipment, net     |  |                         | 5,440  
|                                        |  |                         |        
|INVESTMENT IN CONSOLIDATED SUBSIDARIES  |  |                         | 594,464
|                                        |  |                         |        
|GOODWILL, net                           |  |                         |       
|                                        |  |                         |        
|INVESTMENT IN UNCONSOLIDATED AFFILIATES |  |                         | 52,130 
|                                        |  |                         |        
|OTHER ASSETS                            |  |                         | 27,479 
|                                        |  |                         |        
|                                        |  | $                       | 811,023
|                                        |  |                         |        
|LIABILITIES AND SHAREHOLDERS EQUITY    |  |                         |        
|CURRENT LIABILITIES:                    |  |                         |        
|Current maturities of debt              |  | $                       | 70     
|Accounts payable                        |  |                         | 20,162 
|Accrued liabilities                     |  |                         | 12,184 
|Intercompany accounts payable           |  |                         |       
|Accrued pension                         |  |                         | 11,279 
|                                        |  |                         |        
|Total current liabilities               |  |                         | 43,695 
|                                        |  |                         |        
|SENIOR CREDIT FACILITY                  |  |                         |       
|                                        |  |                         |        
|LONG-TERM DEBT, less current maturities |  |                         | 524,515
|                                        |  |                         |        
|DEFERRED INCOME TAXES                   |  |                         | 46,994 
|                                        |  |                         |        
|PENSION LIABILITY                       |  |                         | 13,572 
|                                        |  |                         |        
|DEFERRED COMPENSATION                   |  |                         | 1,447  
|                                        |  |                         |        
|OTHER LIABILITIES                       |  |                         |       
|                                        |  |                         |        
|MINORITY INTEREST                       |  |                         |       
|                                        |  |                         |        
|SHAREHOLDERS EQUITY                    |  |                         |        
|Common stock                            |  |                         | 2,730  
|Additional paid-in capital              |  |                         | 207,891
|Retained (deficit) earnings             |  |                         | (7,508 
|Accumulated other comprehensive loss    |  |                         | (22,313
|                                        |  |                         |        
|                                        |  |                         | 180,800
|                                        |  |                         |        
|                                        |  | $                       | 811,023
|                                        |  |                         |        

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands)

|                                              |  | For The Three Months Ended March 31, 2003 |        
|--------------------------------------------- |  | ----------------------------------------- | -------
|                                              |  |                                           |        
|                                              |  | Parent                                    |        
|                                              |  |                                           |        
|SALES                                         |  | $                                         |       
|COST OF SALES                                 |  |                                           |       
|                                              |  |                                           |        
|Gross profit                                  |  |                                           |       
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES  |  |                                           | 5,637  
|RESTRUCTURING COSTS                           |  |                                           |       
|                                              |  |                                           |        
|Operating (loss) income                       |  |                                           | (5,637 
|OTHER (EXPENSE) INCOME:                       |  |                                           |        
|Interest expense                              |  |                                           | (10,257
|Interest income                               |  |                                           | 301    
|Equity in income of unconsolidated affiliates |  |                                           | 20     
|Other, net                                    |  |                                           |       
|                                              |  |                                           |        
|                                              |  |                                           | (9,936 
|                                              |  |                                           |        
|(LOSS) INCOME BEFORE MINORITY                 |  |                                           |        
|INTEREST AND INCOME TAXES                     |  |                                           | (15,573
|MINORITY INTEREST IN INCOME                   |  |                                           |       
|BENEFIT FOR INCOME TAXES                      |  |                                           | (4,265 
|                                              |  |                                           |        
|NET (LOSS) INCOME                             |  | $                                         | (11,308
|                                              |  |                                           |        

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands)

|                                                        |  | For The Three Months Ended March 31, 2002 |        
|------------------------------------------------------- |  | ----------------------------------------- | -------
|                                                        |  |                                           |        
|                                                        |  | Parent                                    |        
|                                                        |  |                                           |        
|SALES                                                   |  | $                                         |       
|COST OF SALES                                           |  |                                           |       
|                                                        |  |                                           |        
|Gross profit                                            |  |                                           |       
|SELLING, GENERAL AND ADMINISTRATIVE                     |  |                                           |        
|EXPENSES                                                |  |                                           | 3,408  
|                                                        |  |                                           |        
|Operating (loss) income                                 |  |                                           | (3,408 
|OTHER (EXPENSE) INCOME:                                 |  |                                           |        
|Interest expense                                        |  |                                           | (9,220 
|Interest income                                         |  |                                           | 458    
|Gain on extinguishment of debt                          |  |                                           | 87     
|Equity in income (loss) of unconsolidated affiliates    |  |                                           | 79     
|Other, net                                              |  |                                           |       
|                                                        |  |                                           |        
|                                                        |  |                                           | (8,596 
|                                                        |  |                                           |        
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                           | (12,004
|MINORITY INTEREST IN LOSSES                             |  |                                           |       
|PROVISION FOR INCOME TAXES                              |  |                                           | 236    
|                                                        |  |                                           |        
|NET (LOSS) INCOME                                       |  | $                                         | (12,240
|                                                        |  |                                           |        

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands)

|                                                    |  | For The Three Months Ended March 31, 2003 |       
|--------------------------------------------------- |  | ----------------------------------------- | ------
|                                                    |  |                                           |       
|                                                    |  | Parent                                    |       
|                                                    |  |                                           |       
|Net cash provided by (used in) operating activities |  | $                                         | 9,870 
|                                                    |  |                                           |       
|Investing activities:                               |  |                                           |       
|Purchases of property, plant and equipment          |  |                                           | (277  
|Acquisitions of businesses, net of cash acquired    |  |                                           |      
|Proceeds from disposal of fixed assets              |  |                                           |      
|Other, net                                          |  |                                           |      
|                                                    |  |                                           |       
|Net cash used in investing activities               |  |                                           | (277  
|                                                    |  |                                           |       
|Financing activities:                               |  |                                           |       
|Proceeds from swap agreement unwind                 |  |                                           | 4,264 
|Other                                               |  |                                           | (809  
|                                                    |  |                                           |       
|Net cash provided by financing activities           |  |                                           | 3,455 
|                                                    |  |                                           |       
|Net change in cash and cash equivalents             |  |                                           | 13,048
|Cash and cash equivalents at beginning of period    |  |                                           | 33,544
|                                                    |  |                                           |       
|Cash and cash equivalents at end of period          |  | $                                         | 46,592
|                                                    |  |                                           |       

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands)

|                                                 |  | For The Three Months Ended March 31, 2002 |       
|------------------------------------------------ |  | ----------------------------------------- | ------
|                                                 |  |                                           |       
|                                                 |  | Parent                                    |       
|                                                 |  |                                           |       
|Net cash provided by operating activities        |  | $                                         | 11,475
|                                                 |  |                                           |       
|Investing activities:                            |  |                                           |       
|Purchases of property, plant and equipment       |  |                                           | (565  
|Proceeds from disposal of fixed assets           |  |                                           |      
|Other, net                                       |  |                                           | (222  
|                                                 |  |                                           |       
|Net cash used in investing activities            |  |                                           | (787  
|                                                 |  |                                           |       
|Financing activities:                            |  |                                           |       
|Repayments of long-term debt                     |  |                                           | (6,581
|Dividends paid                                   |  |                                           | (833  
|Other                                            |  |                                           | (328  
|                                                 |  |                                           |       
|Net cash used in financing activities            |  |                                           | (7,742
|                                                 |  |                                           |       
|Net change in cash and cash equivalents          |  |                                           | 2,946 
|Cash and cash equivalents at beginning of period |  |                                           | 63,277
|                                                 |  |                                           |       
|Cash and cash equivalents at end of period       |  | $                                         | 66,223
|                                                 |  |                                           |       

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Note 12. Commitments and Contingencies

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 13. Subsequent Event

| | Subsequent to March 31, 2003, the Company entered into a commitment with new lenders to replace its current $47.0 million facility with a new asset based revolving line of
credit in the amount of $75.0 million secured primarily by accounts receivable and inventory.  The Company expects to close the new facility prior to June 30, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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.

GENERAL

We are a major manufacturer of recycled paperboard and converted paperboard products. We operate in three business segments. The paperboard
segment manufactures 100% recycled uncoated and clay-coated paperboard and collects 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 carton and custom packaging segment produces printed and unprinted folding carton and set-up boxes and provides contract manufacturing and packaging services.

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 41% in the first quarter of 2003. The remaining 59% 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. 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 between mills in response to customer or market demands.

Recovered fiber, which is
derived from recycled paper stock, is our most significant raw material. Historically, the cost of recovered fiber has fluctuated significantly due to market and industry conditions. For example, our average recovered fiber cost per ton of
paperboard produced increased from $43 per ton in 1993 to $144 per ton in 1995, an increase of 235%, before dropping to $66 per ton in 1996. Same-mill recovered fiber cost per ton averaged $85 during 2002 and $81 during the first quarter of 2003.

We raise our selling prices in response to increases in raw material costs. However, we often are unable to pass the full amount of these costs through to our customers on a timely basis, and as
a result often cannot maintain our operating margins in the face of dramatic cost increases. We experience margin shrinkage during all periods of cost increases due to customary time lags in implementing our price increases. We cannot give assurance
that we will be able to recover any future increases in the cost of recovered fiber by raising the prices of our products. Even if we are able to recover future cost increases, our operating margins and results of operations may still be materially
and adversely affected by time delays in the implementation of price increases. See Part I, Item 2,  Risk Factors  Our business and financial performance may be harmed by future increases in raw material costs.

Excluding labor, energy is our most significant manufacturing cost. Energy consists of electrical purchases and fuel used to generate steam used in the paper making process and to operate our
paperboard machines and all of our other converting machinery. In 2002, the average energy cost in our mill system was approximately $50 per ton.  During the first quarter of 2003, energy costs were $66 per ton compared with $49 per ton in the
first quarter of 2002, a 34.7 % increase.  The increase was due primarily to an increase in natural gas costs. Until the last few years, our business had not been significantly affected by energy costs, and we historically have not passed
increases in energy costs through to our customers. Consequently, we were not able to pass through to our customers all of the energy cost increases we incurred.  As a result, our operating margins were adversely affected. Although we continue
to evaluate our energy costs and consider ways to factor energy costs into our pricing, we cannot give assurance that our operating margins and results of operations will not continue to be adversely affected by rising energy costs.

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 two years, the pace of our acquisition activity, and accordingly, our revenue growth, has slowed as we have focused on conserving cash and maximizing the productivity of our existing facilities.  During the third quarter of 2002,
we acquired certain operating assets (excluding accounts receivable) of Smurfit-Stones Industrial Packaging Group.  In addition, during the first quarter of 2003 we completed the purchase of our ventures partners interest in
Caraustar Northwest, LLC located in Tacoma, WA.  See Liquidity and Capital Resources  Acquisitions below.

We are a holding company that currently operates our business
through 25 subsidiaries at March 31, 2003. We also own a 50% interest in two joint ventures with Temple-Inland, Inc. We account for these interests in our joint ventures under the equity method of accounting. See Liquidity and Capital
Resources below.

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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 following are critical
accounting matters which are both very important to the portrayal of our financial condition and results of operations and which require some of managements most difficult, subjective and complex judgments. 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.

Revenue
Recognition.We recognize revenue and the related account receivable when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of criteria (4) is based on managements judgments regarding the collectibility of our accounts receivable. Generally, we recognize revenue when we ship our
manufactured products or when we complete a service and title and risk of loss passes to our customers. Provisions for discounts, returns, allowances, customer rebates and other adjustments are provided for in the same period as the related revenues
are recorded.

Accounts Receivable.We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customers current credit
worthiness, as determined by our review of their current credit information. We continuously monitor collections from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer
collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the
past.These estimates may prove to be inaccurate, in which case we may have overstated or understated the reserve required for uncollectible accounts receivable.

Inventory.Inventories are carried at the lower of cost or market. Cost includes materials, labor and overhead. Market, with respect to all inventories, is replacement cost or net realizable value. Management frequently reviews inventory to determine the
necessity of write-offs for excess, obsolete or unsaleable inventory. These reviews require management to assess customer and market demand. These estimates may prove to be inaccurate, in which case we may have overstated or understated the
write-offs required for excess, obsolete or unsaleable inventory.

Goodwill.Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets.
This pronouncement requires us to perform a goodwill impairment test at least annually. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired
businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired businesses is impaired. Evaluating the impairment of goodwill also requires us to estimate future operating results
and cash flows, which also require judgment by management. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Impairment of
Long-Lived Assets. Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically evaluate long-lived assets, including property, plant and equipment and definite lived intangible
assets whenever events or changes in conditions may indicate that the carrying value may not be recoverable. Factors that management considers important that could initiate an impairment review include the following:

| |  | significant operating losses;                                                                      
| | - | ---------------------------------------------------------------------------------------------------
| |   |                                                                                                    
| |  | significant declines in demand for a product whereby an asset is only able to produce that product;
| |   |                                                                                                    
| |  | assets that are idled;                                                                             
| |   |                                                                                                    
| |  | assets that are likely to be divested                                                              

The impairment review requires management to estimate future
undiscounted cash flows associated with an asset or group of assets and sum the estimated future cash flows. If the future undiscounted cash flows is less than the carrying amount of the asset, then we must estimate the fair value of the asset. If
the fair value of the asset is below the carrying value, then the difference will be written-off. Estimating future cash flows requires management to make judgments regarding future economic conditions, product demand and pricing. Although we
believe our estimates are appropriate, significant differences in the actual performance of the asset or group of assets may materially affect our asset values and results of operations.

Self-Insurance.We are self-insured for the majority of our workers compensation costs and health care costs, subject to specific retention levels. Consulting actuaries and administrators assist us in determining
our liability for self-insured claims. Our self-

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insured workers compensation liability is estimated based on actual claims that are established by a third party administrator. The actual claims are then increased by factors
that reflect our historical claim development. The developed claim is the liability that we record in our financial statements. Our self-insured health care liability is estimated based on our actual claim experience and multiplied by a
lag factor. The lag factor represents claims that have been incurred and should be recorded as a liability, but have not been reported. While we believe that our assumptions are appropriate, significant differences in our actual experience or
significant changes in our assumptions may materially affect our workers compensation costs and group health insurance costs.

Accounting for Income Taxes.As part of the process of
preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary
differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income
taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. We record valuation allowances due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily
consisting of certain state net operating losses carried forward and state tax credits, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could have a material negative
impact on our statement of operations and our balance sheet.

Pension and Other Postretirement Benefits.We maintain a noncontributory defined benefit pension plan (the Pension
Plan). The Pension Plan provides 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. Our policy is to fund benefits attributed to
employees services to date as well as service expected to be earned in the future. During the quarter ended March 31, 2003, no contributions were made to the Pension Plan.  During 2003 we can make contributions to the Pension Plan between
$0 and approximately $11.7 million. We currently plan to make the maximum deductible contribution of $11.7 million.

During 1996, we adopted a supplemental executive retirement plan
(SERP), which provides benefits to participants based on average compensation. The SERP covers certain executives of the Company commencing upon retirement. The SERP was unfunded at March 31, 2003.

The determination of our pension expense and benefit obligation is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the weighted average
discount rate, the weighted average expected rate of return on plan assets and the weighted average rate of compensation increase. Following is a summary of the significant assumptions we are using to determine our net periodic pension expense and
the projected benefit obligation for 2003:

|                                                        |  | 2003 |     
|------------------------------------------------------- |  | ---- | ----
|                                                        |  |      |     
|Weighted average discount rate                          |  |      | 6.75
|Weighted average expected rate of return on plan assets |  |      | 9.00
|Weighted average rate of compensation increase          |  |      | 3.00

In developing our weighted average discount rate, we evaluated input from our
actuaries, including reviewing the rating and maturity of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. Future actual pension expense and benefit obligation will depend on future investment
performance, changes in future discount rates and various other factors related to populations participating in our pension plans. A .25% change in the discount rate would result in a change in the minimum pension liability of approximately $2.2
million.  Based on our analysis of the rating and maturity of long term bonds and the input from our actuaries, we believe that a discount rate of 6.75% is reasonable.

In developing our
expected long-term rate of return, we evaluated such criteria as return expectation by asset class and long-term inflation assumptions. Our expected long-term rate of return is based on an asset allocation assumption of 80% equity and 20% fixed
income. We regularly review our asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate.

The investment performance returns and
declining discount rates increased our unfunded status of the Pension Plan and the SERP plan by approximately $23.3 million in 2002. While we believe that the assumptions we have used are appropriate, significant differences in our actual
experience or significant changes in our assumptions may materially affect our Pension Plan and SERP

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liability.

Depreciation.Management is required to make estimates regarding useful lives and salvage values of
long-lived assets. These estimates can significantly impact depreciation expense and accordingly, both results of operations and the asset values reflected on the balance sheet. During the fourth quarter of 2002, we engaged independent professional
valuation advisors to assist management in evaluating the appropriate remaining estimated useful lives for the acquired Smurfit Industrial Packaging Group machinery and equipment and for our existing machinery and equipment. Management initiated
this review based on industry practice, our actual experience and the lives assigned by the former owner of the acquired Smurfit assets. This review resulted in a change in the average estimated useful lives of machinery and equipment from
approximately 10 years to approximately 20 years.

Three Months Ended March 31, 2003 and 2002

The following table shows volume,
gross paper margins and related data for the periods indicated. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage volumes from our business segments, excluding tonnage produced
or converted by our unconsolidated joint ventures, are combined and presented along end-use market lines. Additional financial information is reported by segment in the notes to the condensed consolidated financial statements.

|                                                          |  | Three Months Ended March 31, |       | Change |   | % Change | 
|--------------------------------------------------------- |  | ---------------------------- | ----- | ------ | - | -------- | 
|                                                          |  |                             
|                                                          |  | 2003                         |       | 2002  
|                                                          |  |                              |       |        |   |          | 
|Production source of paperboard tons sold (in thousands): |  |                              |       |        |   |          | 
|From paperboard mill production                           |  |                              | 256.1 |        |   | 227.0    | 
|Outside purchases                                         |  |                              | 33.9  |        |   | 32.0     | 
|                                                          |  |                              |       |        |   |          | 
|Total paperboard tonnage                                  |  |                              | 290.0 |        |   | 259.0    | 
|                                                          |  |                              |       |        |   |          | 
|Tons sold by market (in thousands):                       |  |                              |       |        |   |          | 
|Tube, core and composite container volume                 |  |                              |       |        |   |          | 
|Paperboard (internal)                                     |  |                              | 62.3  |        |   | 44.4     | 
|Outside purchases                                         |  |                              | 10.8  |        |   | 5.6      | 
|                                                          |  |                              |       |        |   |          | 
|Tube, core and composite container converted products     |  |                              | 73.1  |        |   | 50.0     | 
|Unconverted paperboard                                    |  |                              | 12.4  |        |   | 8.4      | 
|                                                          |  |                              |       |        |   |          | 
|Tube, core and composite container volume                 |  |                              | 85.5  |        |   | 58.4     | 
|Folding carton volume                                     |  |                              |       |        |   |          | 
|Paperboard (internal)                                     |  |                              | 25.9  |        |   | 22.9     | 
|Outside purchases                                         |  |                              | 18.3  |        |   | 25.0     | 
|                                                          |  |                              |       |        |   |          | 
|Folding carton converted products                         |  |                              | 44.2  |        |   | 47.9     | 
|Unconverted paperboard                                    |  |                              | 75.4  |        |   | 58.7     | 
|                                                          |  |                              |       |        |   |          | 
|Folding carton volume                                     |  |                              | 119.6 |        |   | 106.6    | 
|Gypsum wallboard facing paper volume                      |  |                              |       |        |   |          | 
|Unconverted paperboard                                    |  |                              | 29.3  |        |   | 39.7     | 
|Other specialty products volume                           |  |                              |       |        |   |          | 
|Paperboard (internal)                                     |  |                              | 16.2  |        |   | 16.4     | 
|Outside purchases                                         |  |                              | 4.8   |        |   | 1.4      | 
|                                                          |  |                              |       |        |   |          | 
|Other specialty converted products                        |  |                              | 21.0  |        |   | 17.8     | 
|Unconverted paperboard                                    |  |                              | 34.6  |        |   | 36.5     | 
|                                                          |  |                              |       |        |   |          | 
|Other specialty products volume                           |  |                              | 55.6  |        |   | 54.3     | 
|                                                          |  |                              |       |        |   |          | 
|Total paperboard tonnage                                  |  |                              | 290.0 |        |   | 259.0    | 
|                                                          |  |                              |       |        |   |          | 
|Gross paper margins ($/ton):                              |  |                              |       |        |   |          | 
|Paperboard mill:                                          |  |                              |       |        |   |          | 
|Average same-mill net selling price                       |  | $                            | 414   |        | $ | 394      | 
|Average same-mill recovered fiber cost                    |  |                              | 81    |        |   | 60       | 
|                                                          |  |                              |       |        |   |          | 
|Paperboard mill gross paper margin                        |  | $                            | 333   |        | $ | 334      | 
|                                                          |  |                              |       |        |   |          | 
|Tube and core:                                            |  |                              |       |        |   |          | 
|Average same-facility net selling price                   |  | $                            | 804   |        | $ | 771      | 
|Average same-facility paperboard cost                     |  |                              | 461   |        |   | 434      | 
|                                                          |  |                              |       |        |   |          | 
|Tube and core gross paper margin                          |  | $                            | 343   |        | $ | 337      | 
|                                                          |  |                              |       |        |   |          | 

Paperboard tonnage.Total paperboard tonnage for the first quarter of 2003 increased
12.0% to 290.0 thousand tons from 259.0 thousand tons in the first quarter of 2002. Excluding acquisitions completed during 2002 and 2003, total paperboard tonnage decreased 1.4% to 255.2 thousand tons. This decrease was primarily due to the
following:

| |  | A decrease in unconverted paperboard to external customers in the gypsum facing and other specialty end use markets.  Including gypsum facing paper volume transferred to
our 50% owned, unconsolidated Premier Boxboard joint venture, gypsum facing paper volume increased 1% compared to prior year.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | A decrease in internal conversion of paperboard by the carton and custom packaging segment.
| | - | -------------------------------------------------------------------------------------------

These
decreases were offset by:

| |  | Higher sales of unconverted paperboard to external customers in the folding carton end-use market.
| | - | --------------------------------------------------------------------------------------------------
| |   |                                                                                                   
| |  | An increase in internal conversion by the tube, core and composite container segment.             

Tons sold from
paperboard mill production increased 12.8% for the first quarter of 2003 to 256.1 thousand tons, compared with 227.0 thousand tons for the same period last year. Total tonnage converted increased 19.5% for the first quarter of 2003 to 138.3 thousand
tons compared to 115.7 thousand tons in the first quarter of 2002, and increased 2.6% from 2002, excluding acquisitions. Excluding acquisitions completed during 2002 and 2003, volumes in the folding carton and tube, core and composite container
end-use markets increased 5.7% and 13.9%, respectively.

Sales.Our consolidated sales for the three months ended March 31, 2003 increased 15.5% to $252.9 million from
$218.9 million in the same period of 2002 and 2003. Acquisitions completed during 2002 and 2003 accounted for $36.7 million of sales during 2003. These acquisitions included certain assets of the Smurfit Industrial Packaging Group, a
business unit of Jefferson Smurfit Corporation (U.S.), Design Tubes Co., Ltd., and Caraustar Northwest, LLC. The results of operations for these acquisitions were included only from and after the date of the acquisition.  The following table
presents sales by business segment (in thousands):

|                                   |  | Three Months Ended March 31, |         | $ Change |   | % Change | 
|---------------------------------- |  | ---------------------------- | ------- | -------- | - | -------- | 
|                                   |  |                             
|                                   |  | 2003                         |         | 2002    
|                                   |  |                              |         |          |   |          | 
|Paperboard                         |  | $                            | 89,740  |          | $ | 74,568   | 
|Tube, core and composite container |  |                              | 89,121  |          |   | 64,858   | 
|Carton and custom packaging        |  |                              | 74,041  |          |   | 79,476   | 
|                                   |  |                              |         |          |   |          | 
|Total                              |  | $                            | 252,902 |          | $ | 218,902  | 
|                                   |  |                              |         |          |   |          | 

Paperboard Segment

Sales for the
paperboard segment increased primarily due to acquisitions, combined with higher sales from our recovered fiber sales operations and other non-paperboard products.

Tube, Core and
Composite Container Segment

Sales for the tube, core and composite container segment increased primarily due to acquisitions, combined with higher selling prices.

Carton and Custom Packaging Segment

Sales for the carton and custom packaging segment declined due to a decrease in volume, lower selling prices and lower contract
packaging sales.

Gross Profit Margin.Gross profit margin for the first quarter of 2003 decreased to 18.4% of sales from 19.8% in 2002.  This margin decrease was primarily the result
of higher raw material, energy, insurance and pension costs, partially offset by lower depreciation expense.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased $9.6 million in the first quarter of 2003 compared to the first quarter of 2002.  This increase was a result of the following:

| |  | Selling, general and administrative expenses associated with acquired operations.            
| | - | ---------------------------------------------------------------------------------------------
| |   |                                                                                              
| |  | Costs of idling one of two coated recycled paperboard machines at our Rittman, Ohio facility.
| |   |                                                                                              
| |  | Higher pension and insurance costs.                                                          
| |   |                                                                                              
| |  | Higher write-offs of uncollectible accounts receivable.                                      
| |   |                                                                                              
| |  | Costs of consolidating operations.                                                           

Restructuring Costs. In March 2003, we announced the
permanent closure of our Buffalo Paperboard mill located in Lockport, New York. We recorded a charge of approximately $4.2 million in connection with this closure.  The Buffalo mills sales will be transferred to our other paperboard
mills.

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In March 2003, we recorded $172 thousand in severance expense related to the Halifax paperboard mill closure and the consolidation of our converting operations in
Fayetteville, North Carolina.

In December 2002, we initiated a plan to restructure our carton plant in Ashland, Ohio to serve a smaller, more focused carton market and recorded a pretax charge to
operations of approximately $2.4 million. The $2.4 million charge included a $1.2 million  impairment charge for long-lived assets.

In December 2002, we initiated a plan to
permanently close our Halifax paperboard mill located in Roanoke Rapids, North Carolina and recorded a pretax charge to operations of approximately $3.4 million. The $3.4 million charge included a $3.0 million impairment charge for
long-lived assets.

In December 2002, we initiated a plan to consolidate our converting operations in Fayetteville, North Carolina into Carolina Component Concepts, also located in North Carolina,
and recorded a pretax charge to operations of approximately $6.0 million. The $6.0 million charge included a $2.4 million impairment charge for long-lived assets.

In June 2002, we
recorded a $985 thousand noncash, pretax restructuring charge related to the permanent closure of our Camden and Chicago paperboard mills, which were shut down in 2000 and 2001, respectively. The $985 thousand charge represents a revised estimate of
fixed asset disposals at these mills.

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

Operating (Loss) Income.Operating (loss) income for the first quarter of 2003 was a loss of $1.4 million, a $10.8 million decline from operating income of $9.4 million for the same period last year.  The following
table presents operating income (loss) by business segment (in thousands):

|                                   |  | Three Months Ended March 31, |        | $ Change |   | % Change |  
|---------------------------------- |  | ---------------------------- | ------ | -------- | - | -------- | -
|                                   |  |                              |       
|                                   |  | 2003                         |        | 2002     |  
|                                   |  |                              |        |          |   |          |  
|Paperboard                         |  | $                            | 2,025  |          | $ | 9,015    |  
|Tube, core and composite container |  |                              | 2,189  |          |   | 3,121    |  
|Carton and custom packaging        |  |                              | (81    | )        |   | 775      |  
|Corporate expense                  |  |                              | (5,503 | )        |   | (3,497   | )
|                                   |  |                              |        |          |   |          |  
|Total                              |  | $                            | (1,370 | )        | $ | 9,414    |  
|                                   |  |                              |        |          |   |          |  

Paperboard Segment

The decrease in
operating income is the result of the following:

| |                     | Higher energy costs.                                                                                             
| | -------------------- | -----------------------------------------------------------------------------------------------------------------
| |                      |                                                                                                                  
| |                     | Restructuring costs related to the permanent closure of the Buffalo paperboard mill in the first quarter of 2003.
| |                      |                                                                                                                  
| |                     | Costs of idling one of two coated recycled paperboard machines at our Rittman, Ohio facility.                    
| |                      |                                                                                                                  
| |                     | Higher write-offs of uncollectible accounts receivable.                                                          
| |                      |                                                                                                                  
| |                     | Higher raw material, pension and insurance costs.                                                                
| |                      |                                                                                                                  
| | Partially offset by:
| |                     
| |                     | Lower depreciation expense.                                                                                      

Tube, Core and Composite Container Segment

The decrease in operating income is the result of higher energy, pension and insurance costs, combined with costs of consolidating operations. These higher costs were partially offset by lower depreciation
expense.

Carton and Custom Packaging Segment

The decline in operating results is the result of:

| |  | Lower selling prices.
| | - | ---------------------

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| |                     | Increased paperboard costs.                   
| | -------------------- | ----------------------------------------------
| |                      |                                               
| |                     | Lower sales volume.                           
| |                      |                                               
| |                     | Increased energy, pension and insurance costs.
| |                      |                                               
| | Partially offset by:
| |                     
| |                     | Lower depreciation expense.                   

Other Income (Expense).Interest expense increased 11.1% to
$10.3 million for the first quarter of 2003 from $9.3 million in the same period of 2002. This increase was primarily due to the decrease in average notional amount of interest rate swaps outstanding. See Liquidity and Capital
Resources for additional information regarding our debt, interest expense and interest rate swap agreements.

Equity in income from unconsolidated affiliates was $20 thousand in the first
quarter of 2003, an improvement of $17 thousand from equity in income from unconsolidated affiliates of $3 thousand in the first quarter of 2002. This increase was primarily due to improved operating results for Premier Boxboard Limited
(PBL), our paper mill joint venture with Temple-Inland. The improved results were due primarily to decreased depreciation expense and higher sales volume, partially offset by higher energy costs. PBLs improved results were
partially offset by a decline in income  at Standard Gypsum, L.P,  our gypsum wallboard joint venture with Temple-Inland. The decline in income at Standard Gypsum was primarily due to lower selling prices and higher raw material costs,
partially offset by increased sales volume and lower depreciation expense.

Net (Loss) Income.Net loss for the first quarter of 2003 was $7.1 million, or $0.26 net loss per common share,
compared to net income of $499 thousand, or $0.02 net income per diluted common share, for the same period last year.

Liquidity and Capital Resources

Liquidity Sources and Risks.Our primary sources of liquidity are cash from operations and borrowings under the various debt facilities 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 this Report under  Risk Factors in Part I, Item 2. In the first quarter of 2003, we generated $16.1 million in cash from
operations, which is essentially unchanged from the first quarter of 2002. Included in the $16.1 million in cash from operations is a federal tax refund of approximately $17.2 million. Although the timing or certainty cannot be assured, we believe
that our existing cash and liquidity position will be strengthened through the sale of the real estate at our Chicago, Illinois and Baltimore, Maryland paperboard mills. Although we believe that our liquidity will be sufficient to meet expected
needs for the foreseeable future, we could require additional funds from external sources. However, availability for borrowings under our senior credit facility has been substantially reduced in connection with the sixth amendment to the facility
completed on March 28, 2003. We have obtained a commitment for a new credit facility from a new lender (see - Subsequent Events below) and intend to replace our existing senior credit facility during the second quarter of 2003.
However, we can give no assurance that we will be able to replace this credit facility at all or on terms that are acceptable to us. In the event we are unable to do so, we can give no assurance that we will have sufficient liquidity to meet our
cash needs should we face an unexpected downturn in operations.

The availability of liquidity from borrowings is primarily affected by our continued compliance with the terms of the debt
agreements governing these facilities, including the payment of interest and compliance with various covenants and financial maintenance tests. In addition, as described below under  Off-Balance Sheet Arrangements  Joint Venture
Financings, to the extent we are unable to comply with financial maintenance tests under our senior credit facility, we will fail to comply with identical financial maintenance covenant tests under our guarantee of the credit facilities of one
of our joint ventures, which could potentially materially and adversely affect us through a series of cross-defaults under both our joint ventures and our own debt obligations if we were unable to obtain appropriate waivers or amendments with
respect to the underlying violations and any related cross-defaults.

At March 31, 2003 we would not have been in compliance with our senior credit facility and our joint venture guarantees, but
we were able to obtain the appropriate amendments. Absent further material deterioration of the U.S. economy as a whole or the specific sectors on which our business depends (see Part I, Item 2,  Risk Factors  Our business and
financial performance may be adversely affected by downturns in industrial production, housing and construction and the consumption of durable and nondurable goods), we believe it is unlikely that we will breach our covenants under our debt
agreements or joint venture credit support arrangements during 2003 due to the completion of the sixth amendment to our credit facility on March 28, 2003. However, we cannot give assurance that we will achieve our expected future operating results
or continued compliance with our debt covenants, or that, in such event, necessary waivers and amendments from our lenders would be available at all or on acceptable terms. If our debt or that of our joint venture were placed in default, or if we
were called upon to satisfy our joint

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venture support obligations, our liquidity and financial condition would be materially and adversely affected.

Borrowings.At March 31, 2003 and December 31, 2002, total debt (consisting of current maturities of debt, senior credit facility, and other long-term debt, as reported on our consolidated balance sheets) was as
follows (in thousands):

|                                |  | March 31, 2003 |         | December 31, 2002 |  
|------------------------------- |  | -------------- | ------- | ----------------- | -
|                                |  |                |         |                   |  
|Senior credit facility          |  | $              |        |                   | $
|9 7/8 senior subordinated notes |  |                | 293,822 |                   |  
|7 1/4 senior notes              |  |                | 25,822  |                   |  
|7 3/8 senior notes              |  |                | 201,755 |                   |  
|Other notes payable             |  |                | 9,880   |                   |  
|                                |  |                |         |                   |  
|Total debt                      |  | $              | 531,279 |                   | $
|                                |  |                |         |                   |  

Our senior credit facility provides for a revolving line of credit of $47.0 million. The
facility includes subfacilities of $10.0 million for swingline loans and $43.0 million for letters of credit, usage of which reduces availability under the facility. The facility matures on April 1, 2004. As of March 31, 2003 and March 31,
2002, no borrowings were outstanding under the facility; however, an aggregate of $38.5 million and $10.0 million in letter of credit obligations were outstanding as of March 31, 2003 and 2002, respectively. Borrowing availability was
approximately $8.5 million at March 31, 2003. We intend to use the remaining balance of the facility for working capital, capital expenditures and other general corporate purposes, if necessary. In conjunction with an amendment to the facility, we
entered into a security agreement under which we and our subsidiary guarantors under the senior credit facility granted a first priority security interest in our respective accounts receivable and inventory to secure our obligations under the credit
facility and our obligations under our 50% credit support of the credit facilities of Standard Gypsum and Premier Boxboard.

Borrowings under the facility bear interest at a rate equal to our
option, either (1) the base rate (which is equal to the greater of the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility, or the federal funds rate plus one-half of 1%) or (2) the
adjusted Eurodollar Interbank Offered Rate, in each case plus an applicable margin of 3.25% for Eurodollar rate loans and 2.00% for base rate loans. Additionally, the undrawn portion of the facility is subject to a facility fee at an annual rate of
0.55%.

The facility contains covenants that restrict, among other things, our ability 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, make capital expenditures or change the nature of our
business. The facility also contains several financial maintenance covenants, including covenants establishing a maximum leverage ratio, minimum tangible net worth and a minimum fixed charge coverage ratio.

The facility contains events of default including, but not limited to, nonpayment of principal or interest, violation of covenants, incorrectness 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 our Company.

On March 28,
2003, we completed a sixth amendment to our senior credit facility. This amendment increased our maximum permitted leverage ratio to 70.0% for the fiscal quarters ending September 30, 2003 and December 31, 2003 and 67.5% for each succeeding fiscal
quarter, lowered our minimum fixed charge coverage ratio from 1.50:1.0 for all fiscal quarters to 0.95:1.0 for the fiscal quarter ending March 31, 2003, 0.85:1.0 for the fiscal quarter ending June 30, 2003 and September 30, 2003 and
1.05:1.0 for the fiscal quarter ending December 31, 2003, lowered our minimum tangible net worth covenant for all periods on and after the effective date of the amendment, and lowered our maximum permitted capital expenditures to $30.0 million per
fiscal year. For purposes of calculating compliance with our leverage ratio and net worth covenants, this amendment also establishes a maximum of $30.0 million for aggregate adjustments to other comprehensive loss related to our defined benefit
pension plan. This amendment also increases to $43.0 million our subfacility for the issuance of letters of credit under the facility, in order to permit us to obtain a letter of credit to replace our Standard Gypsum joint venture guarantee as
described below. Finally, this amendment terminated the quarterly pricing increase established under the fourth amendment to the facility entered into in September 2002 and fixed our maximum interest margins at 3.25% for LIBOR loans and 2.00% for
base rate loans. The financial covenant modifications were necessary to enable us to avoid possible violations of our leverage ratio covenant for the third and fourth quarters of 2003, our fixed charge coverage ratio covenant for all quarters during
2003 and our net worth covenant for the second quarter of 2003.

In exchange for these modifications, our lenders required us to permanently reduce the aggregate commitments under the facility from
$75.0 million to $47.0 million, to shorten the maturity of the facility from March 29, 2005 to April 1, 2004, and to pay a monthly fee beginning on July 1, 2003 equal to 1.0% of the aggregate commitments under the facility. Our lenders also required
the establishment of a borrowing base that restricts availability under the facility based on monthly computations of eligible

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accounts receivable and inventory, reduced by our net hedging obligations owed to lenders under the facility and by the amount of our guarantee obligations under our joint
venture guarantees that are not secured or replaced by letters of credit. Additionally, we will not be permitted to borrow or request the issuance of letters of credit under the facility unless we have less than $10.0 million in freely available
cash and cash equivalents on our consolidated balance sheet both before and immediately after giving effect to the application of the proceeds of such borrowing. The amendment also requires us to prepay outstanding loans under the facility and/or
cash collateralize outstanding letters of credit with the net cash proceeds from any issuance of debt or equity or, to the extent not reinvested in similar assets, from any sale of assets or insurance or condemnation award. The amendment further
requires us to provide consolidated financial statements and joint venture financial statements to the lenders on a monthly basis. Finally, the amendment prohibits us from incurring capital leases or other indebtedness, making acquisitions or other
investments, or prepaying other indebtedness unless our fixed charge coverage ratio for the most recently reported fiscal quarter exceeds 1.50:1.0 (calculated on a pro forma basis with regard to acquisitions), and completely eliminates our ability
to pay dividends or repurchase shares of our stock.

In connection with this amendment, we were also required to amend our security agreement to provide for a springing lien on our machinery and
equipment that will become effective on July 1, 2003.

See   Subsequent Event below regarding the proposed refinancing our current senior credit facility.

Prior to the sixth amendment to our senior credit facility, our Standard Gypsum joint venture guarantee contained financial maintenance covenants that were identical to those contained in our senior credit
facility. However, the lenders to Standard Gypsum were unwilling to agree to the modifications that we made under the amendment to the senior credit facility. In order to avoid an event of default under that guarantee, we obtained a letter of credit
under our senior credit facility in the face amount of $28.4 million. This letter of credit expires on January 15, 2004, is issued in favor of the Standard Gypsum lenders and replaces our guarantee obligations. In exchange for this letter
of credit, the Standard Gypsum lenders terminated our guarantee agreement and released their security interests in our accounts receivable and inventory. We must also pay a fee on October 28, 2003 in the amount of 2% of the undrawn amount of
this letter of credit in the event the letter of credit remains outstanding on that date. The letter of credit may be drawn in the event of a default under the Standard Gypsum credit facility. In the event we are unable to replace or refinance our
senior credit facility, or to obtain a replacement letter of credit from another financing source, the lenders under the Standard Gypsum facility will be entitled to draw under the letter of credit to satisfy our support obligations, and as a result
we may be unable to reimburse our senior lenders for the amount of such drawing.

Concurrently with the sixth amendment to our senior credit facility and the issuance of the letter of credit to
the Standard Gypsum lenders as described above, we entered into an amendment of our Premier Boxboard guarantee that made changes to the financial covenants corresponding to those made in the sixth amendment to our senior credit facility. In exchange
for this amendment, the Premier Boxboard lenders required that the maturity of the Premier Boxboard credit facility be shortened from June 26, 2005 to January 5, 2004 and that the aggregate commitments under the facility be reduced to
equal the amount of outstanding loans and letters of credit of $20.3 million. Any reductions of outstanding loans under the facility may not be reborrowed and will permanently reduce the commitments, thereby effectively requiring us to fund
Premier Boxboards operations from its internal cash flow and from any cash contributions that we and our joint venture partner are permitted to make. In addition, we will be required to pay a fee to the Premier Boxboard lenders of $100,000 on
July 1, 2003 and on the first day of each month thereafter until the facility is terminated and all outstandings under the facility are fully paid. If we are not able fund Premier Boxboards operations in this manner, its performance could
be adversely affected. Further, if we are unable to refinance this facility prior to January 5, 2004, the entire facility would become immediately due and payable and we would be required to satisfy our guarantee of 50% of the obligations under
the facility. Any acceleration of the obligations under either or both of our joint venture facilities, or any failure to satisfy our support obligations of either joint venture when due, could also cause further defaults and acceleration under our
9 7/8% senior subordinated notes, our 7 1/4% senior notes and our 7 3/8% senior notes.

On June 1, 1999, we issued $200.0 million in aggregate principal amount of our 7
3/8% senior notes due June 1, 2009. Our 7 3/8% senior notes were issued at a discount to yield an effective interest rate of 7.473%, are unsecured obligations of our Company and pay interest semiannually. In connection with the offering of our
7 1/4% senior notes and 9 7/8% senior subordinated notes, as described below, our subsidiary guarantors also guaranteed our 7 3/8% senior notes. In February 2002, we purchased $6.75 million in principal amount of our 7 3/8% senior notes in the
open market. This purchase will lower our interest expense by approximately $500 thousand annually.

On March 29, 2001, we issued $29.0 million in aggregate principal amount of 7 1/4%
senior notes due May 1, 2010 and $285.0 million in aggregate principal amount of 9 7/8% senior subordinated notes due April 1, 2011.The 7 1/4% senior notes and 9 7/8% senior subordinated notes were issued at a discount to yield
effective interest rates of 9.4% and 10.5%, respectively. See -Interest Rate Swap Agreements below regarding transactions that lowered the effective interest rate of the 9 7/8% senior subordinated notes. These publicly traded notes are
unsecured, but are guaranteed, on a joint and several basis, by all of our domestic subsidiaries (subsidiary guarantors), other than two that are not wholly-owned.

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Interest Rate Swap Agreements.During 2001, we entered into four interest rate swap agreements in notional amounts totaling $285.0 million. As described below, we
unwound one of the swaps and a portion of another leaving $100.0 million outstanding at March 31, 2003. The agreements, which have payment and expiration dates that correspond to the terms of the note obligations they cover, effectively converted a
portion of our fixed rate 9 7/8% senior subordinated notes and a portion of our fixed rate 7 3/8% senior notes into variable rate obligations. The variable rates are based on the three-month LIBOR plus a fixed margin. These swap agreements decreased
interest expense by $9.3 million in 2002 and $1.3 million in the first quarter of 2003. We expect our swap agreements to continue to lower our interest expense; however, if the three-month LIBOR increases significantly, our interest expense
could be adversely affected. Based on notional amounts hedged and the three-month LIBOR at March 31, 2003, our swaps would reduce our interest expense by approximately $4.5 million million in 2003. If the three-month LIBOR increases 100
basis points, our savings on interest expense would be reduced by approximately $1.0 million.

The following table identifies the debt instrument hedged, the notional amount, the fixed spread
and the three-month LIBOR at March 31, 2003 for each of our interest rate swaps. The March 31, 2003 three-month LIBOR is presented for informational purposes only and does not represent our actual effective rates in place at March 31,
2003.

|Debt Instrument                 |  | Notional Amount (000s) |        | Fixed Spread |  | Three Month LIBOR at March 31, 2003 |   | Total Variable Rate |      
|------------------------------- |  | ----------------------- | ------ | ------------ |  | ----------------------------------- | - | ------------------- | -----
|                                |  |                         |        |              |  |                                     |   |                     |      
|9 7/8 senior subordinated notes |  | $                       | 50,000 |              |  | 4.495                               | % |                     | 1.288
|7 3/8 senior notes              |  |                         | 25,000 |              |  | 1.445                               |   |                     | 1.288
|7 3/8 senior notes              |  |                         | 25,000 |              |  | 1.775                               |   |                     | 1.288

In October 2001, we unwound our $185.0 million interest rate swap
agreement related to the 9 7/8% senior subordinated notes and received $9.1 million from the bank counter-party. Simultaneously, we executed a new swap agreement with a fixed spread that was 85 basis points higher than the original swap agreement.
The new swap agreement is the same notional amount, has the same terms and covers the same notes as the original agreement. The $9.1 million gain will be accreted to interest expense over the remaining term of the notes and will partially offset the
increase in interest expense. The $9.1 million gain lowered the effective interest rate of the 9 7/8% senior subordinated notes from 10.5% to 10.0%.

In August 2002, we unwound our
$185.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes and received $5.5 million from the bank counter-party. Simultaneously, we executed a new swap agreement with a fixed spread that was 17 basis
points higher than the original swap agreement. The new swap agreement is the same notional amount, has the same terms and covers the same notes as the original agreement. In September 2002, we repaid the $5.5 million and entered into a new
swap agreement that lowered the fixed spread by 7.5 basis points from the August 2002 swap.

In November 2002, we unwound $50.0 million of our $185.0 million interest rate swap agreement
related to the 9 7/8% senior subordinated notes, and received approximately $2.8 million from the bank counter-party. Simultaneously, we unwound $50.0 million of one of our interest rate swap agreements related to the 7 3/8% senior notes,
and received approximately $3.4 million. The $6.2 million gain will be accreted to interest expense over the remaining term of the notes and will partially offset the increase in interest expense. The $2.8 million gain lowered the
effective interest rate of the 9 7/8% senior subordinated notes from 10.0% to 9.8%. The $3.4 million gain lowered the effective interest rate of the 7 3/8% senior notes from 7.5% to 7.2%.

In
January 2003, we effectively unwound $85.0 million of our $135.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes by assigning our rights and obligations under the swap to one of our lenders under the senior
credit facility. In exchange, we received approximately $4.3 million. We will accrete this gain into interest expense over the remaining term of the notes, which will partially offset the increase in interest expense. The gain will lower the
effective interest rate of the 9 7/8% senior subordinated notes from 9.8% to 9.5%.

Off-Balance Sheet Arrangements Joint Venture Financings.As noted above, we own a 50%
interest in two joint ventures with Temple-Inland, Inc.: Standard Gypsum, L.P. and Premier Boxboard Limited LLC. Because we account 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. Prior to March 28, 2003, we guaranteed 50% of certain obligations of these joint ventures. On March 28, 2003 we entered into the sixth amendment to
our senior credit facility, which enabled us to replace our guarantee agreement for the Standard Gypsum facility with a letter of credit issued under our senior credit facility. The replaced guarantee agreement for Standard Gypsum contained
independent financial maintenance covenants that were identical to the covenants under our senior credit facility, and we are no longer obligated to comply with those covenants for the benefit of the Standard Gypsum lenders. However, our guarantee
agreement for the Premier Boxboard credit facility remains in effect and contains the same independent financial maintenance covenants. A default under this guarantee also constitutes a default under the credit facilities of these joint ventures and
a default under our senior credit facility. Our default under one or more of these covenants would technically permit the lenders under the joint venture credit facilities and our joint venture partners respective guarantees of those
facilities, as well as the lenders under our senior credit facility, if they so elected, to prohibit any future

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borrowings under these facilities and to accelerate all such outstanding obligations under these facilities. The resulting acceleration of our obligations could also cause
further defaults and accelerations under our 9 7/8% senior subordinated notes, our 7 1/4% senior notes and our 7 3/8% senior notes. During 2002, we entered into agreements with the Premier Boxboard Limited and Standard Gypsum lenders that correspond
to the amendments made in the third, fourth and fifth amendments to the senior credit facility, as described above. At March 31, 2003, we and our joint venture partner were in compliance with all covenants under these guarantees. However, to the
extent that we are unable to comply with, or are required to seek waivers under, or modifications of, the financial maintenance covenants under our senior credit facility in order to avoid possible events of noncompliance, as described above, we
will need similar waivers or modifications under the Premier Boxboard guarantee.

Standard Gypsum is the obligor under reimbursement agreements pursuant to which direct-pay letters of credit in
the aggregate original amount of approximately $56.2 million have been issued for its account in support of industrial development bond obligations. We are severally obligated for 50% of Standard Gypsums obligations for reimbursement of
letter of credit drawings, interest, fees and other amounts. The other Standard Gypsum partner, Temple-Inland, has guaranteed 50% of Standard Gypsums obligations. As of March 31, 2003, the outstanding letters of credit totaled
approximately $56.2 million, for one-half of which we are obligated (approximately $28.1 million). If either joint venture partner defaults under their respective support arrangements, our total obligation is $28.1 million at
March 31, 2003. On March 28, 2003 we entered into an amendment of the Standard Gypsum facility under which we replaced our guarantee with a letter of credit issued under our senior credit facility. This letter of credit is in the amount of
$28.4 million and expires on January 15, 2004. If we are unable to replace or refinance our existing senior credit facility or to obtain a replacement letter of credit from another financing source prior to such date, or if prior to such
date there is an event of default under the Standard Gypsum facility, the lenders under the Standard Gypsum facility will be entitled to draw under this letter of credit to satisfy our support obligations.

Premier Boxboard is the borrower under a credit facility, the aggregate principal amount of which was reduced from $30.0 million to $20.3 million pursuant to an amendment completed on March 28, 2003. Pursuant to this
amendment, the maturity date of the facility was shortened from June 29, 2005 to January 5, 2004. We have severally and unconditionally guaranteed 50% of Premier Boxboards obligations under the credit facility for principal
(including reimbursement of letter of credit drawings), interest, fees and other amounts. Temple-Inland has similarly guaranteed 50% of Premier Boxboards obligations. As of March 31, 2003, the outstanding principal amount of borrowings
under the facility was approximately $20.2 million (including a $200 thousand undrawn letter of credit), one-half of which we guarantee (approximately $10.1 million). If either joint venture partner defaults under their respective
guarantee agreements, our total obligation is $10.1 million at March 31, 2003.

In addition to the general default risks discussed above with respect to the joint ventures, a substantial
portion of the assets of Premier Boxboard are pledged as security for $50.0 million in outstanding principal amount of senior notes under which Premier Boxboard is the obligor. These notes are guaranteed by Temple-Inland, but are not guaranteed
by us. A default under the Premier Boxboard credit facility would also constitute an event of default under these notes. In the event of default under these notes, the holders would also have recourse to the assets of Premier Boxboard that are
pledged to secure these notes. Thus, any resulting default under these notes could result in the assets of Premier Boxboard being utilized to satisfy creditor claims, which would have a material adverse effect on the financial condition and
operations of Premier Boxboard and, accordingly, our interest in Premier Boxboard. Further, in such an event of default, these assets would not be available to satisfy obligations owing to unsecured creditors of Premier Boxboard, including the
lender under the credit facility, which might make it more likely that our guarantee of the Premier Boxboard credit facility would be the primary source of repayment under the facility in the event Premier Boxboard cannot pay.

Additional contingencies relating to our joint ventures that could affect our liquidity include possible additional capital contributions and buy-sell triggers which, under certain circumstances, give us and our joint
venture partner either the right, or the obligation, to purchase the others interest or to sell an interest to the other. In the case of both Standard Gypsum and Premier Boxboard, neither joint venture partner is obligated or required to make
additional capital contributions without the consent of the other. With regard to buy-sell rights, under the Standard Gypsum joint venture, in general, either party may purchase the others interest upon the occurrence of certain purported
unauthorized transfers or involuntary transfer events (such as bankruptcy). In addition, under the Standard Gypsum joint venture, either (i) in the event of an unresolved deadlock over a material matter or (ii) at any time, either party
may initiate a Russian roulette buyout procedure by which it names a price at which the other party must agree either to sell its interest to the initiating party or to purchase the initiating partys interest. Under the Premier
Boxboard joint venture, in general, mutual buy-sell rights are triggered upon the occurrence of certain purported unauthorized or involuntary transfers, but in the event of certain change of control or deadlock events, the buy-sell rights are
structured such that we are always the party entitled, or obligated, as the case may be, to purchase.

We generally consider our relationship with Temple-Inland to be good with respect to both of
our joint ventures and currently do not anticipate experiencing material liquidity events resulting from either additional capital contributions or buy-sell contingencies with respect to our joint ventures during 2003. However, in light of the
recent amendments to the Premier Boxboard credit facility, as described above, we could be required to fund Premier Boxboards operations with additional cash contributions to the extent it is unable to fund operations with internally generated
cash. We cannot give assurance that material liquidity events will not arise with respect to our joint ventures, and the occurrence of any such events could materially and

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adversely affect our liquidity and financial condition.

Cash from Operations.Cash generated from operations was
$16.1 million for the three month period ended March 31, 2003, which is essentially unchanged from the same period of 2002. Included in the 2003 results was a federal tax refund of $17.2 million which offset the significantly lower
operating results compared with the prior year.

Capital Expenditures.Capital expenditures were $6.3 million in the first quarter of 2003 versus $5.8 million in the first quarter
of 2002. Aggregate capital expenditures of approximately $24.0 million are anticipated for 2003. To conserve cash, we intend to limit capital expenditures for 2003 to cost reduction, productivity improvement and replacement projects.

Acquisitions.On September 30, 2002, we acquired certain operating assets (excluding accounts receivable) of the Smurfit Industrial Packaging Group, a business unit of Jefferson Smurfit Corporation
(U.S.), for approximately $67.1 million, and assumed $1.7 million of indebtedness outstanding under certain industrial revenue bonds. The acquisition was funded with cash on hand. Goodwill and intangible assets of approximately
$40.7 million were recorded in conjunction with the Smurfit Industrial Packaging Group acquisition. Smurfit Industrial Packaging Group operations included 17 paper tube and core plants, 3 uncoated recycled paperboard mills and 3 partition
manufacturing plants. These facilities are located in 16 states across the U.S. and in Canada.

In January 2003, we completed the purchase of our venture partners 50% equity of Caraustar
Northwest, LLC, located in Tacoma, Washington, for approximately $700 thousand. The Tacoma facility, which manufactures tubes, cores and edge protectors and performs custom slitting for customers on the West coast, became a part of our Industrial
& Consumer Products Group.

Dividends.We paid cash dividends of $833 thousand in the first quarter of 2002. Then in February 2002, we announced that we would suspend future dividend
payments on our common stock until our earnings performance exceeds the dividend limitation provision of our senior subordinated notes. We made these decisions to reduce the quarterly dividends to preserve our financial flexibility in light of
difficult industry conditions. As described under  Liquidity and Capital Resources, our senior credit facility prohibits us from paying any dividends.

Share
Purchases.We did not purchase any shares of our common stock during the first quarter of 2003 under our common stock purchase plan. We have cumulatively purchased 3.2 million shares since January 1996. Our board of directors has authorized
purchases of up to 831 thousand additional shares. However, our 9 7/8% senior subordinated notes and our senior credit facility currently preclude us from purchasing our common stock based on our operating results for the last twelve months.

Inflation

Raw material price changes have had, and continue to have, a material negative effect on our operations. Energy prices had a
material effect on our operations in 2003 and 2002. We do not believe that general economic inflation is a significant determinant of our raw material price increases or that, except as it relates to energy prices, it has a material effect on our
operations.

Subsequent Event

Subsequent to March 31, 2003, we obtained a commitment from Bank of America, N.A. to replace our current
$47.0 million senior credit facility with a new asset based revolving line of credit in the amount of $75.0 million, secured primarily by accounts receivable and inventory.  The closing of the facility is subject to customary closing
conditions, including the absence of any material adverse change in our business, the completion of due diligence and the completion of final loan documentation. Although we expect to close the new facility prior to June 30, 2003, we cannot give
assurance that we will be able to complete the facility on terms that are favorable to us.

New Accounting Pronouncements

In July 2001,
the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). This pronouncement requires entities to record the fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for the amount recorded or incurs a gain or loss. We adopted SFAS No. 143 effective January 1,
2003. The adoption of this pronouncement did not have a material impact on our financial statements.

In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated with Exit
or Disposal Activities (SFAS No. 146). This pronouncement addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and

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Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). We adopted SFAS No. 146 effective on January 1, 2003 and have accounted for
exit and disposal activities in accordance with this pronouncement.

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others (FIN 45), which requires companies to recognize, at the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 provides specific guidance identifying the characteristics of contracts that are subject to its guidance in its entirety from those only subject to the initial recognition and measurement provisions. We
have included the required disclosures in our consolidated financial statements. The recognition and measurement provisions of FIN 45 are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption
of the FIN 45 requirements did not have a material effect on our consolidated financial statements.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, and Interpretation of ARB 51 (FIN 46).  The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means
other than through voting rights (variable interest entities or VIEs) and how to determine when and which business enterprise should consolidate the VIE (the primary beneficiary).  This new model for
consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entitys activities without receiving additional
subordinated financial support from other parties.  In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures regarding the nature,
purpose, size and activities of the VIE and the enterprises maximum exposure to loss as a result of its involvement with the VIE.  We are required to adopt this interpretation no later than July 1, 2003 for any VIEs in which we hold a
variable interest that were acquired before February 1, 2003.  The interpretation is effective immediately for any VIEs created after January 31, 2003 and for VIEs in which an enterprise maintains an interest after that date.  We believe
that adoption of this interpretation will not impact our condensed consolidated financial statements.

In April 2003, the Financial Accounting Standards Board issued Statement No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149).  SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133.  In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains
a financing component that warrants special reporting in the statement of cash flows.  This Statement is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on our
financial statements.

Contractual Obligations

For a discussion of our contractual obligations, see Note 7 of Notes to Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. There have been no significant developments with respect to our contractual obligations since December 31, 2002.

Forward-Looking Information

This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition and Results of
Operations, may contain various 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 are based on our beliefs and assumptions, as
well as information currently available to us. When used in this document, the words believe, anticipate, estimate, expect, intend, should, would, could,
or may and similar expressions may identify forward-looking statements. These statements involve risks and uncertainties that could cause our actual results to differ materially depending on a variety of important factors, including, but
not limited to, those identified below under Risk Factors and other factors discussed elsewhere in this Report and 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. The documents that we file with the Securities and Exchange Commission are available from us free of charge on our website www.caraustar.com via hyperlink to a third party
database of documents filed electronically with the SEC, 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). These documents are available for access as soon as reasonably practicable after we electronically file these documents with the SEC.  We do not undertake any obligation to update any
forward-looking statements we make.

Risk Factors

Investors should consider the following risk factors, in addition to the other
information presented in this Report and the other Reports and registration statements we file from time to time with the Securities and Exchange Commission, in evaluating us, our

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business and an investment in our securities. Any of the following risks, as well as other risks and uncertainties, could harm our business and financial results and cause the
value of our securities to decline, which in turn could cause investors to lose all or part of their investment in our Company. The risks below are not the only ones facing our Company. Additional risks not currently known to us or that we currently
deem immaterial also may impair our business.

Our business and financial performance may be harmed by future increases in raw material costs.

Our primary raw material is recycled paper, which is known in our industry as recovered fiber. The cost of recovered fiber has, at times, fluctuated greatly because of factors such as shortages or surpluses created
by market or industry conditions. Although we have historically raised the selling prices of our products in response to raw material price increases, sometimes raw material prices have increased so quickly or to such levels that we have been unable
to pass the price increases through to our customers on a timely basis, which has adversely affected our operating margins. We cannot give assurance that we will be able to pass such price changes through to our customers on a timely basis and
maintain our margins in the face of raw material cost fluctuations in the future.

Our operating margins, cash flow and debt covenant compliance may be adversely affected by rising energy
costs.

Excluding labor, energy is our most significant manufacturing cost. Energy consists of electrical purchases and fuel used to generate steam used in the paper making process and to
operate our paperboard machines and all of our other converting machinery. In 2002, the average energy cost in our mill system was approximately $50 per ton.  During the first quarter of 2003, energy costs were $66 per ton compared with $49 per
ton in the first quarter of 2002, a 36.0% increase.  The increase was due primarily to an increase in natural gas costs. Until the last few years, our business had not been significantly affected by energy costs, and we historically have not
passed increases in energy costs through to our customers. Consequently, we were not able to pass through to our customers all of the energy cost increases we incurred.  As a result, our operating margins were adversely affected. Although we
continue to evaluate our energy costs and consider ways to factor energy costs into our pricing we cannot give assurance that our operating margins and results of operations will not continue to be adversely affected by rising energy
costs.

Our business and financial performance may be adversely affected by downturns in industrial production, housing and construction and the consumption of nondurable and durable
goods.

Demand for our products in our four principal end use markets is primarily driven by the following factors:

| | Tube, core and composite container  industrial production, construction spending and consumer nondurable consumption              
|- | -----------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                    
| | Folding cartons  consumer nondurable consumption and industrial production                                                        
|  |                                                                                                                                    
| | Gypsum wallboard facing paper  single and multifamily construction, repair and remodeling construction and commercial construction
|  |                                                                                                                                    
| | Other specialty products  consumer nondurable consumption and consumer durable consumption.                                       

Downturns in any of these sectors will result in decreased demand for our products. In particular, our business has been adversely affected in recent periods by the general slow down in industrial demand. These conditions are
beyond our ability to control, but have had, and will continue to have, a significant impact on our sales and results of operations.

We are adversely affected by the cycles, conditions and
problems inherent in our industry.

Our operating results tend to reflect the general cyclical nature of the business in which we operate. In addition, our industry has suffered from excess
capacity. Our industry also is capital intensive, which leads to high fixed costs and generally results in continued production as long as prices are sufficient to cover marginal costs. These conditions have contributed to substantial price
competition and volatility within our industry. In the event of a recession, demand and prices are likely to drop substantially. Our profitability historically has been more sensitive to price changes than to changes in volume. Future decreases in
prices for our products would adversely affect our operating results. These factors, coupled with our substantially leveraged financial position, may adversely affect our ability to respond to competition and to other market conditions or to
otherwise take advantage of business opportunities.

Our business may suffer from risks associated with growth and acquisitions.

Historically, we have grown our business, revenues and production capacity to a significant degree through acquisitions. In the current difficult operating climate facing our industry and our financial position, the pace of
our acquisition activity (with the

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exception of our purchase of certain assets of the Smurfit Industrial Packaging Group), and accordingly, our revenue growth, has slowed significantly as we have focused on
conserving cash and maximizing the productivity of our existing facilities. However, we expect to continue evaluating and pursuing acquisition opportunities on a selective basis, subject to available funding and credit flexibility. Growth through
acquisitions involves risks, many of which may continue to affect us based on acquisitions we have completed in the past. For example, we have suffered significant unexpected losses at our Sprague mill in Versailles, Connecticut, which we acquired
from International Paper Company in 1999, resulting from unfavorable fixed price contracts, low capacity utilization, high energy costs and higher fiber costs that we were unable to pass through to our customers. Sprague incurred operating losses of
$5.8 million in 2002 and $1.8 million for the first quarter of 2003. See Managements Discussion and Analysis of Financial Condition and Results of Operations. We cannot give assurance that our acquired businesses will achieve
the same levels of revenue, profit or productivity as our existing locations or otherwise perform as we expect.

Acquisitions also involve specific risks. Some of these risks include:

| | assumption of unanticipated liabilities and contingencies;
|- | ----------------------------------------------------------
|  |                                                           
| | diversion of managements attention; and                  
|  |                                                           
| | possible reduction of our reported earnings because of:   
|  |                                                           
| | goodwill and intangible asset write-offs;                 
|  |                                                           
| | increased interest costs;                                 
|  |                                                           
| | issuances of additional securities or debt; and           
|  |                                                           
| | difficulties in integrating acquired businesses.          
|  |                                                           

As we grow, we can give no assurance that we will be able to:

| | use the increased production capacity of any new or improved facilities;
|- | ------------------------------------------------------------------------
|  |                                                                         
| | identify suitable acquisition candidates;                               
|  |                                                                         
| | complete additional acquisitions; or                                    
|  |                                                                         
| | integrate acquired businesses into our operations.                      

If we cannot raise the necessary capital for, or
use our stock to finance, acquisitions, expansion plans or other significant corporate opportunities, our growth may be impaired.

As described under Managements Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources, we have entered into an amendment to our senior credit facility that, among other things, effectively prohibits us from making acquisitions or
other strategic investments unless our financial performance significantly improves. Without additional capital, or replacement of our existing senior credit facility, we may have to curtail any acquisition and expansion plans or forego other
significant corporate opportunities that may be vital to our long-term success. If our revenues and cash flow do not meet expectations, then we may lose our ability to borrow money or to do so on terms that we consider favorable. Conditions in the
capital markets also will affect our ability to borrow, as well as the terms of those borrowings. In addition, our financial performance and the conditions of the capital markets will also affect the value of our common stock, which could make it a
less attractive form of consideration in making acquisitions. All of these factors could also make it difficult or impossible for us to expand in the future.

Our substantial indebtedness could
adversely affect our cash flow and our ability to fulfill our obligations under our indebtedness.

We have a substantial amount of outstanding indebtedness. See Managements
Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources and Financial Statements and Supplemental Data included in Part I of this Report. In addition, as described in
Managements Discussion and Analysis of Financial Condition and Results of Operations, we have guaranteed indebtedness of, or provided similar credit support to, our joint ventures for which we could also be liable. Our substantial
level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal of, interest on or other amounts due in respect of our indebtedness. We may also obtain additional

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long-term debt, increasing the risks discussed below. Our substantial leverage could have significant consequences to holders of our debt and equity securities. For example,
it could:

| | make it more difficult for us to satisfy our obligations with respect to our indebtedness, including compliance with financial covenants;                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                       
| | increase our vulnerability to general adverse economic and industry conditions;                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                       
| | limit our ability to obtain additional financing;                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                       
| | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the amount of our cash flow available for other purposes,
including capital expenditures and other general corporate purposes;
|  |                                                                                                                                                                                                                                                       
| | require us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;                                                                                                          
|  |                                                                                                                                                                                                                                                       
| | restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;                                                                                                                                    
|  |                                                                                                                                                                                                                                                       
| | limit our flexibility in planning for, or reacting to, changes in our business and our industry;                                                                                                                                                      
|  |                                                                                                                                                                                                                                                       
| | place us at a possible competitive disadvantage compared to our competitors that have less debt;                                                                                                                                                      
|  |                                                                                                                                                                                                                                                       
| | adversely affect the value of our common stock; and                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                       
| | affect our viability as a going concern.                                                                                                                                                                                                              

Our interest expense could be adversely affected by risks
associated with our interest rate swap agreements.

Interest rate swap agreements carry a certain inherent element of interest rate risk. During 2001, we entered into four interest rate swap
agreements in order to take advantage of market conditions. These agreements converted a significant portion of our fixed rate 9 7/8% senior subordinated notes and our fixed rate 7 3/8% senior notes into variable rate obligations. The variable rates
are based on the three-month LIBOR plus a fixed margin. These swap agreements lowered our interest expense in 2001 and 2002, and we expect these agreements to continue to positively impact our interest expense. If, however, LIBOR increases
significantly, our interest expense could be adversely affected. See Managements Discussion and Analysis of Financial Condition and Results of Operations for additional information on our swap agreements.

We are subject to many environmental laws and regulations that require significant expenditures for compliance and remediation efforts, and changes in the law could increase those expenses and adversely affect our
operations.

Compliance with the environmental requirements of international, federal, state and local governments significantly affects our business. Among other things, these requirements
regulate the discharge of materials into the water, air and land and govern the use and disposal of hazardous substances. Under environmental laws, we can be held strictly liable if hazardous substances are found on real property we have ever owned,
operated or used as a disposal site. In recent years, we have adopted a policy of assessing real property for environmental risks prior to purchase. We are aware of issues regarding hazardous substances at some facilities, and we have put into place
a remedial plan at each site where we believe such a plan is necessary. We regularly make capital and operating expenditures to stay in compliance with environmental laws. Despite these compliance efforts, risk of environmental liability is part of
the nature of our business. We cannot give assurance that environmental liabilities, including compliance and remediation costs, will not have a material adverse effect on us in the future. In addition, future events may lead to additional
compliance or other costs that could have a material adverse effect on our business. Such future events could include changes in, or new interpretations of, existing laws, regulations or enforcement policies or further investigation of the potential
health hazards of certain products or business activities.

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FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003

PART I, ITEM 3.

CARAUSTAR INDUSTRIES, INC.

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, 2002. There have been no significant developments with respect to our exposure to interest rate
market risk.  The only change in our exposure to interest rate risk since December 31, 2002 is the unwind of $85.0 million in interest rate swaps in January 2003. See Note 5 to the condensed consolidated financial statements for additional
information about our interest rate swap agreements.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this quarterly report on Form 10-Q, we
evaluated the effectiveness of the design and operation of our disclosure controls and procedures (disclosure controls), and our internal controls and procedures for financial reporting (internal controls). Disclosure
controls mean those controls and other procedures that are designed for the purpose of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this quarterly report, is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms. Internal controls are procedures designed for the purpose of providing reasonable assurance that our transactions are properly authorized, our
assets are safeguarded against unauthorized or improper use and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles. This
evaluation was performed under the supervision and with the participation of management including our Chief Executive Officer and Chief Financial Officer.

Immediately following the signature
pages of this quarterly report are certifications of our Chief Executive Officer and Chief Financial Officer, which are required to be furnished by SEC rules adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. The
information discussed in this section of our quarterly report relates to the evaluations of disclosure controls and internal controls referenced in these certifications and should be read in conjunction with these certifications.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent or detect all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the reality of resource constraints;
accordingly the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and possible misstatements due to fraud or error, if any, within our company have been detected. Among the inherent limitations in controls are the potential for erroneous judgments and decisions or simple errors or
mistakes in the chain of recording, processing, summarizing or reporting information. Additionally, controls can be circumvented by the intentional acts of individuals or multiple persons acting in concert, or by management override. The design of
any system of controls also is based in part on assumptions about the likelihood of future events, and we can give no assurance that our controls as designed will succeed in achieving their stated goals under all potential future conditions; over
time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

In conjunction with its 2002 audit of our
financial statements, our independent accountants, Deloitte & Touche LLP, identified certain items they described as reportable conditions, relating primarily to the decentralized nature of our Company and the inconsistent
application of certain written policies. The Company is in the process of implementing improvements to its policies and has engaged PricewaterhouseCoopers LLP to do an extensive evaluation of the Companys internal controls, both to prepare our
Company to comply with the new annual internal controls certification that will be required as of December 31, 2003 pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rulemaking, as well as to assist the Company in
conforming to certain best practices recommendations with respect to internal controls generally.

In accordance with SEC requirements, our Chief Executive Officer and Chief Financial
Officer note that, since the date of their above-referenced evaluation, otherwise than as discussed above, there have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls,
including any corrective actions with regard to significant deficiencies and material weaknesses.

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Based on the evaluation discussed above, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the disclosures and limitations noted above,
our disclosure controls are effective to timely alert management, including the Chief Executive Officer and Chief Financial Officer, to material information relating to Caraustar and its consolidated subsidiaries, required to be included in the
Companys reports filed under the Securities Exchange Act of 1934.

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FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003

PART II, ITEM 6.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)Exhibits

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

(b)     Reports on Form 8-K

We filed three current reports on Form 8-K during the quarter ended March 31, 2003. The first report, filed on January 17, 2003, incorporated by reference the contents of our press release announcing that we had
recognized an additional minimum liability related to our pension plan, we completed the purchase of Caraustar Northwest, we permanently closed the Halifax paperboard mill located in Roanoke Rapids, North Carolina, we consolidated Carolina
Converting, Inc in Fayetteville, North Carolina, and we restructured the Ashland, Ohio carton facility to serve a smaller, more focused carton market.  Additionally, we announced the completion of a comprehensive review of the remaining
estimated useful lives of our machinery and equipment.

The second report, filed on February 4, 2003, incorporated by reference the contents of our press release announcing our financial results for
the year ended December 31, 2002.

The third report, filed on February 21, 2003, incorporated by reference the contents of our press release announcing that we had indefinitely idled one of two
coated recycled paperboard machines at our Rittman, Ohio facility.

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FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003

SIGNATURES

Pursuant to the requirements 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:                       
|                   |                           
|                   |                           
|Date: May 14, 2003 |                           

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CERTIFICATIONS

I, Thomas V. Brown, President and Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Caraustar;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of
Caraustar as of, and for, the periods presented in this quarterly report;

4. Caraustars other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Caraustar and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to
Caraustar, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of Caraustars disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.
Caraustars other certifying officer and I have disclosed, based on our most recent evaluation, to Caraustars auditors and the audit committee of Caraustars board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect Caraustars ability to record, process, summarize and report financial
data and have identified for Caraustars auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have
a significant role in Caraustars internal controls; and

6. Caraustars other certifying officer and I have indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

|                   |  | By: | /s/ THOMAS V. BROWN                  
|------------------ |  | --- | -------------------------------------
|                   |  |     |                                      
|                   |  |     | President and Chief Executive Officer
|Date: May 14, 2003 |  |     |                                      

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I, Ronald J. Domanico, Vice President and Chief Financial Officer, certify that:

1. I have reviewed this quarterly report
on Form 10-Q of Caraustar;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the
financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Caraustar as of, and for, the periods presented in this
quarterly report;

4. Caraustars other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for Caraustar and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to Caraustar, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of Caraustars disclosure
controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. Caraustars other certifying officer and I have disclosed, based on our
most recent evaluation, to Caraustars auditors and the audit committee of Caraustars board of directors (or persons performing the equivalent function):

a) all significant deficiencies
in the design or operation of internal controls which could adversely affect Caraustars ability to record, process, summarize and report financial data and have identified for Caraustars auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in Caraustars internal controls; and

6. Caraustars other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|                   |  | By: | /s/ RONALD J. DOMANICO                    
|------------------ |  | --- | ------------------------------------------
|                   |  |     |                                           
|                   |  |     | Vice President and Chief Financial Officer
|Date: May 14, 2003 |  |     |                                           

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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])                                                                                                                                                                  
|4.01        |  |  |  | Specimen Common Stock Certificate (Incorporated by reference  Exhibit 4.01 to Registration Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                 
|4.02        |  |  |  | Articles 3 and 4 of the Companys Amended and Restated Articles of Incorporation (included in Exhibit 3.01)                                                                                                                                                                                                                
|4.03        |  |  |  | Article II of the Companys Third Amended and Restated Bylaws (included in Exhibit 3.02)                                                                                                                                                                                                                                   
|4.04        |  |  |  | Amended and Restated Rights Agreement, dated as of May 24, 1999, between Caraustar Industries, Inc. and The Bank of New York as Rights Agent (Incorporated by reference
Exhibit 10.1 to current report on Form 8-K dated June 1, 1999 [SEC File No. 020646])                                                               
|4.05        |  |  |  | Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee, regarding The Companys 7 3/8% Notes due 2009
(Incorporated by reference  Exhibit 4.05 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])                                   
|4.06        |  |  |  | First Supplemental Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee (Incorporated by reference 
Exhibit 4.06 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])                                                               
|4.07        |  |  |  | Second Supplemental Indenture, dated as of March 29, 2001, between the Company, the Subsidiary Guarantors and The Bank of New York, as Trustee, regarding the Companys
7 3/8% Notes due 2009 (Incorporated by reference  Exhibit 4.07 to report on Form 10-K for the year ended December 31, 2000 [SEC File No. 0-20646])
|11.01      |  |  |  | Computation of Earnings Per Share                                                                                                                                                                                                                                                                                          
|            |  |   |  |                                                                                                                                                                                                                                                                                                                            
|99.01*      |  |  |  | Certification of CEO  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            
|99.02*      |  |  |  | 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                                                                                                                                                                 
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                
|* |  | Pursuant to interim guidance provided in SEC Release No. 33-8212, this certification accompanies, but shall not be deemed filed as part of, this Quarterly Report on Form
10-Q.

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