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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended September 30,
2003



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



For the transition period
from  to



Commission File Number 0-20646



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Caraustar Industries, Inc.

(Exact name of registrant as specified in its charter)



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|North Carolina                                                 |  | 58-1388387                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|3100 Joe Jerkins Blvd., Austell, Georgia                       |  | 30106                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



(770) 948-3101

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



Indicate the number of shares outstanding of each of issuers classes of common stock, as of the latest practicable
date, November 6, 2003.



|Common Stock, $.10 par value |  | 28,147,732   
|---------------------------- |  | -------------
|(Class)                      |  | (Outstanding)



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##### Table of Contents

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003



CARAUSTAR INDUSTRIES, INC.



TABLE OF CONTENTS



|              |  |                                                                                                                                            |  | Page
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|PART I       |  | FINANCIAL INFORMATION                                                                                                                      |  |     
|              |  |                                                                                                                                           
|Item 1.       |  | Condensed Consolidated Financial Statements:                                                                                               |  |     
|              |  |                                                                                                                                           
|              |  | Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002                                                       |  | 3   
|              |  |                                                                                                                                           
|              |  | Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2003 and September 30, 2002 |  | 4   
|              |  |                                                                                                                                           
|              |  | Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2003 and September 30, 2002                 |  | 5   
|              |  |                                                                                                                                           
|              |  | Notes to Condensed Consolidated Financial Statements                                                                                       |  | 6   
|              |  |                                                                                                                                           
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                      |  | 24  
|              |  |                                                                                                                                           
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                 |  | 41  
|              |  |                                                                                                                                           
|Item 4.       |  | Controls and Procedures                                                                                                                    |  | 41  
|              |  |                                                                                                                                           
|PART II      |  | OTHER INFORMATION                                                                                                                          |  |     
|              |  |                                                                                                                                           
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                                                                           |  | 42  
|              | 
|Signatures    |  | 43                                                                                                                                        
|              | 
|Exhibit Index |  | 44                                                                                                                                        



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)



|                                                                                                                                                                              |  | September 30,2003 |          |   | December 31,2002 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | -
|ASSETS                                                                                                                                                                        |  |                   |          |   |                  |  
|CURRENT ASSETS:                                                                                                                                                               |  |                   |          |   |                  |  
|Cash and cash equivalents                                                                                                                                                     |  | $                 | 76,476   |   |                  | $
|Receivables, net of allowances                                                                                                                                                |  |                   | 105,597  |   |                  |  
|Inventories                                                                                                                                                                   |  |                   | 94,223   |   |                  |  
|Refundable income taxes                                                                                                                                                       |  |                   | 615      |   |                  |  
|Other current assets                                                                                                                                                          |  |                   | 7,924    |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|Total current assets                                                                                                                                                          |  |                   | 284,835  |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                                                |  |                   |          |   |                  |  
|Land                                                                                                                                                                          |  |                   | 13,534   |   |                  |  
|Buildings and improvements                                                                                                                                                    |  |                   | 145,747  |   |                  |  
|Machinery and equipment                                                                                                                                                       |  |                   | 630,605  |   |                  |  
|Furniture and fixtures                                                                                                                                                        |  |                   | 15,535   |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|                                                                                                                                                                              |  |                   | 805,421  |   |                  |  
|Less accumulated depreciation                                                                                                                                                 |  |                   | (383,333 | ) |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|Property, plant and equipment, net                                                                                                                                            |  |                   | 422,088  |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|GOODWILL                                                                                                                                                                      |  |                   | 183,130  |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES                                                                                                                                       |  |                   | 53,451   |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|OTHER ASSETS                                                                                                                                                                  |  |                   | 29,087   |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|                                                                                                                                                                              |  | $                 | 972,591  |   |                  | $
|                                                                                                                                                                              |  |                   |          |   |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                          |  |                   |          |   |                  |  
|CURRENT LIABILITIES:                                                                                                                                                          |  |                   |          |   |                  |  
|Current maturities of debt                                                                                                                                                    |  | $                 | 101      |   |                  | $
|Accounts payable                                                                                                                                                              |  |                   | 69,541   |   |                  |  
|Accrued interest                                                                                                                                                              |  |                   | 20,069   |   |                  |  
|Accrued compensation                                                                                                                                                          |  |                   | 12,104   |   |                  |  
|Accrued pension                                                                                                                                                               |  |                   |         |   |                  |  
|Other accrued liabilities                                                                                                                                                     |  |                   | 31,713   |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|Total current liabilities                                                                                                                                                     |  |                   | 133,528  |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|SENIOR CREDIT FACILITY                                                                                                                                                        |  |                   |         |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|OTHER LONG-TERM DEBT, less current maturities                                                                                                                                 |  |                   | 532,666  |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|DEFERRED INCOME TAXES                                                                                                                                                         |  |                   | 52,990   |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|PENSION LIABILITY                                                                                                                                                             |  |                   | 21,320   |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|DEFERRED COMPENSATION                                                                                                                                                         |  |                   | 1,411    |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|OTHER LIABILITIES                                                                                                                                                             |  |                   | 5,642    |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|MINORITY INTEREST                                                                                                                                                             |  |                   | 608      |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|COMMITMENTS AND CONTINGENCIES (Note 13)                                                                                                                                       |  |                   |          |   |                  |  
|SHAREHOLDERS EQUITY:                                                                                                                                                         |  |                   |          |   |                  |  
|Preferred stock, $.10 par value; 5,000,000 shares authorized; none issued                                                                                                     |  |                   |         |   |                  |  
|Common stock, $.10 par value; 60,000,000 shares authorized, 28,147,732 and 27,906,674 shares issued and outstanding at September
30, 2003 and December 31, 2002, respectively |  |                   | 2,815    |   |                  |  
|Additional paid-in capital                                                                                                                                                    |  |                   | 182,384  |   |                  |  
|Retained earnings                                                                                                                                                             |  |                   | 61,456   |   |                  |  
|Accumulated other comprehensive loss                                                                                                                                          |  |                   | (22,229  | ) |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|                                                                                                                                                                              |  |                   | 224,426  |   |                  |  
|                                                                                                                                                                              |  |                   |          |   |                  |  
|                                                                                                                                                                              |  | $                 | 972,591  |   |                  | $
|                                                                                                                                                                              |  |                   |          |   |                  |  



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



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)



|                                               |  | For The Three Months Ended September 30, |         |   | For The Nine Months Ended September 30, |  
|---------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------------------------------- | -
|                                               |  | 2003                                     |         |   | 2002                                    |  
|SALES                                          |  | $                                        | 253,013 |   |                                         | $
|COST OF SALES                                  |  |                                          | 208,392 |   |                                         |  
|                                               |  |                                          |         |   |                                         |  
|Gross profit                                   |  |                                          | 44,621  |   |                                         |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES   |  |                                          | 35,138  |   |                                         |  
|RESTRUCTURING AND IMPAIRMENT COSTS             |  |                                          | 3,085   |   |                                         |  
|                                               |  |                                          |         |   |                                         |  
|Income from operations                         |  |                                          | 6,398   |   |                                         |  
|OTHER (EXPENSE) INCOME:                        |  |                                          |         |   |                                         |  
|Interest expense                               |  |                                          | (11,251 | ) |                                         |  
|Interest income                                |  |                                          | 286     |   |                                         |  
|Write-off of deferred debt costs               |  |                                          |        |   |                                         |  
|Equity in income of unconsolidated affiliates  |  |                                          | 3,217   |   |                                         |  
|Other, net                                     |  |                                          | (93     | ) |                                         |  
|                                               |  |                                          |         |   |                                         |  
|Total other expense                            |  |                                          | (7,841  | ) |                                         |  
|                                               |  |                                          |         |   |                                         |  
|LOSS BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                          | (1,443  | ) |                                         |  
|MINORITY INTEREST IN LOSSES                    |  |                                          | 155     |   |                                         |  
|BENEFIT FOR INCOME TAXES                       |  |                                          | (141    | ) |                                         |  
|                                               |  |                                          |         |   |                                         |  
|NET LOSS                                       |  | $                                        | (1,147  | ) |                                         | $
|                                               |  |                                          |         |   |                                         |  
|OTHER COMPREHENSIVE LOSS:                      |  |                                          |         |   |                                         |  
|Foreign currency translation adjustment        |  |                                          | (52     | ) |                                         |  
|                                               |  |                                          |         |   |                                         |  
|Comprehensive loss                             |  | $                                        | (1,199  | ) |                                         | $
|                                               |  |                                          |         |   |                                         |  
|BASIC                                          |  |                                          |         |   |                                         |  
|NET LOSS PER COMMON SHARE                      |  | $                                        | (0.04   | ) |                                         | $
|                                               |  |                                          |         |   |                                         |  
|Weighted average number of shares outstanding  |  |                                          | 27,990  |   |                                         |  
|                                               |  |                                          |         |   |                                         |  
|DILUTED                                        |  |                                          |         |   |                                         |  
|NET LOSS PER COMMON SHARE                      |  | $                                        | (0.04   | ) |                                         | $
|                                               |  |                                          |         |   |                                         |  
|Weighted average number of shares outstanding  |  |                                          | 27,990  |   |                                         |  
|                                               |  |                                          |         |   |                                         |  



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



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



|                                                                    |  | For the Nine Months Ended September 30, |        
|------------------------------------------------------------------- |  | --------------------------------------- | -------
|                                                                    |  | 2003                                    |        
|Cash (used in) provided by                                          |  |                                         |        
|Operating activities:                                               |  |                                         |        
|Net loss                                                            |  | $                                       | (18,110
|Depreciation and amortization                                       |  |                                         | 22,130 
|Write-off of deferred debt costs                                    |  |                                         | 1,812  
|Disposal of property, plant and equipment                           |  |                                         | 1,116  
|Restructuring costs                                                 |  |                                         | 8,547  
|Other noncash adjustments                                           |  |                                         | (7,640 
|Equity in income of unconsolidated affiliates, net of distributions |  |                                         | (1,031 
|Changes in operating assets and liabilities                         |  |                                         | 36,024 
|                                                                    |  |                                         |        
|Net cash provided by operating activities                           |  |                                         | 42,848 
|                                                                    |  |                                         |        
|Investing activities:                                               |  |                                         |        
|Purchases of property, plant and equipment                          |  |                                         | (14,707
|Acquisitions of businesses, net of cash acquired                    |  |                                         | (695   
|Proceeds from disposal of fixed assets                              |  |                                         | 984    
|Investment in unconsolidated affiliates                             |  |                                         |       
|Other, net                                                          |  |                                         |       
|                                                                    |  |                                         |        
|Net cash used in investing activities                               |  |                                         | (14,418
|                                                                    |  |                                         |        
|Financing activities:                                               |  |                                         |        
|Proceeds from senior credit facility                                |  |                                         |       
|Repayments of short and long-term debt                              |  |                                         | (17    
|Proceeds from swap agreement unwind                                 |  |                                         | 15,950 
|Dividends paid                                                      |  |                                         |       
|Deferred debt costs                                                 |  |                                         | (2,201 
|                                                                    |  |                                         |        
|Net cash provided by financing activities                           |  |                                         | 13,732 
|                                                                    |  |                                         |        
|Net change in cash and cash equivalents                             |  |                                         | 42,162 
|Cash and cash equivalents at beginning of period                    |  |                                         | 34,314 
|                                                                    |  |                                         |        
|Cash and cash equivalents at end of period                          |  | $                                       | 76,476 
|                                                                    |  |                                         |        
|Supplemental Disclosures:                                           |  |                                         |        
|Cash payments for interest                                          |  | $                                       | 20,237 
|                                                                    |  |                                         |        
|Income tax refunds, net of payments                                 |  | $                                       | 17,157 
|                                                                    |  |                                         |        
|Stock issued for acquisitions                                       |  | $                                       |       
|                                                                    |  |                                         |        



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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 nine months ended September 30, 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
Statement of Financial Accounting Standards (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 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. 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 as of the grant dates using the Black-Scholes option pricing model. The following
assumptions were used for options granted during the nine months ended September 30, 2003 and the year-ended December 31, 2002:



|                        |  | 2003          |  | 2002         
|----------------------- |  | ------------- |  | -------------
|Risk-free interest rate |  | 3.54%  4.22% |  | 3.39%  4.94%
|Expected dividend yield |  | 0%            |  | 0%           
|Expected option lives   |  | 8-10 years    |  | 8-10 years   
|Expected volatility     |  | 39%           |  | 39%          



The total fair values
of the options granted during the nine months ended September 30, 2003 and the year ended December 31, 2002 were computed to be approximately $1.0 million and $2.3 million, respectively. If the Company had accounted for these and other options
issued prior to 2002 in accordance with SFAS No. 123, the Companys reported and pro forma net loss and net loss per share for the three months and nine months ended September 30, 2003 and 2002 would have been as follows (in thousands, except
per share data):



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|                               |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | -
|                               |  | 2003                            |        |   | 2002                           |  
|Net loss:                      |  |                                 |        |   |                                |  
|As reported                    |  | $                               | (1,147 | ) |                                | $
|Pro forma                      |  | $                               | (1,437 | ) |                                | $
|Diluted loss per common share: |  |                                 |        |   |                                |  
|As reported                    |  | $                               | (0.04  | ) |                                | $
|Pro forma                      |  | $                               | (0.05  | ) |                                | $



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, an 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 for 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 adopted this interpretation effective July 1, 2003. The Company does not currently hold any VIEs and the adoption of this interpretation did not have
a material impact the Companys consolidated financial statements or disclosures.



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. The adoption of this statement did not have a material impact on the Companys consolidated financial statements.



In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (SFAS No. 150). SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003. The adoption of this statement on June 1, 2003, did not have an 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.



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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 $34.5 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 evaluated its existing and acquired locations to determine which locations should be closed or consolidated to achieve economies of scale and other efficiencies. In March 2003, the Company announced the closure of six tube plants,
including the four closures communicated in December 2002. The Company announced the closure of two additional tube plants during the second quarter of 2003, bringing the total number of tube plant closures to eight. The Company does not expect to
close any more tube plants in conjunction with this acquisition.



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 MonthsEnded September 30,2002 |         |   | Nine MonthsEnded September 30, 2002 |  
|------------------- |  | ----------------------------------- | ------- | - | ----------------------------------- | -
|Total revenues      |  | $                                   | 285,337 |   |                                     | $
|Net loss            |  | $                                   | (2,829  | ) |                                     | $
|Net loss per share: |  |                                     |         |   |                                     |  
|Basic               |  | $                                   | (0.11   | ) |                                     | $
|Diluted             |  | $                                   | (0.11   | ) |                                     | $



Caraustar
Northwest



In January 2003, the Company completed the
purchase of its venture partners 50% interest 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 September 30, 2003 and December 31, 2002 were as follows (in thousands):



|                                   |  | September 30,2003 |        | December 31,2002
|---------------------------------- |  | ----------------- | ------ | ----------------
|Raw materials and supplies         |  | $                 | 40,320 |                 
|Finished goods and work in process |  |                   | 53,903 |                 
|                                   |  |                   |        |                 
|Total inventory                    |  | $                 | 94,223 |                 
|                                   |  |                   |        |                 



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##### Table of Contents

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



At September 30, 2003 and December 31, 2002, total long-term debt consisted
of the following (in thousands):



|                                                 |  | September 30,2003 |         |   | December 31,2002 |  
|------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | -
|Senior credit facility                           |  | $                 |        |   |                  | $
|97/8% senior subordinated notes                  |  |                   | 285,000 |   |                  |  
|73/8% senior notes                               |  |                   | 193,250 |   |                  |  
|71/4% senior notes                               |  |                   | 29,000  |   |                  |  
|Other notes payable                              |  |                   | 9,973   |   |                  |  
|Mark-to-market value of interest swap agreements |  |                   | (34     | ) |                  |  
|Realized interest rate swap gains (1)            |  |                   | 15,578  |   |                  |  
|                                                 |  |                   |         |   |                  |  
|Total debt                                       |  |                   | 532,767 |   |                  |  
|Less current maturities                          |  |                   | (101    | ) |                  |  
|                                                 |  |                   |         |   |                  |  
|Total long-term debt                             |  | $                 | 532,666 |   |                  | $
|                                                 |  |                   |         |   |                  |  

---

|(1) | Net of discounts, premiums and amortization. As described below under Interest Rate Swap Agreements, realized gains resulting from unwinding interest rate swaps are
recorded as a component of debt and will be accreted as a reduction to interest expense over the remaining term of the debt.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Senior Credit Facility



Effective June 24, 2003, the Company completed a refinancing of its senior credit facility. The new facility provides for a revolving line of credit of
$75.0 million and is secured primarily by a first priority security interest in the Companys accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by
eligible accounts receivable and inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. In addition to outstanding letters of credit, certain other reserves
reduce borrowing availability. As of September 30, 2003, no borrowings were outstanding under the facility; however, an aggregate of $47.0 million in letter of credit obligations were outstanding, as well as $2.4 million in reserves that reduce
borrowing availability. Availability under the facility at September 30, 2003 was limited to $15.6 million after taking into consideration outstanding letter of credit obligations and minimum borrowing availability requirements.



Borrowings under the facility bear interest at a rate equal to, at the
Companys option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility) plus a margin of 0.50% or (2) the adjusted Eurodollar Interbank Offered Rate plus
a margin of 2.50%. The undrawn portion of the facility is subject to a facility fee at an annual rate of 0.50%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for Eurodollar-based loans.



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 in excess of $30.0 million per year or change the nature of their business. The facility also contains a fixed charge coverage ratio covenant, which applies
only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts receivable and inventory (less reserves and aggregate
credit outstandings) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstandings) in excess of $37.5 million. The fixed charge ratio covenant did not require measurement at September 30, 2003.



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.



In conjunction with refinancing the senior credit facility, a letter of credit of approximately $10.1 million was issued under the new facility in favor of the lenders to the Companys 50% owned Premier Boxboard
joint venture. In exchange for this letter of credit, the lenders terminated the Companys guarantee agreement and relinquished its interest in any security related to Premier Boxboards credit facility. The Company is required to maintain
this letter of credit in place during the term of the Premier Boxboard credit facility. Premier Boxboard paid off a portion of the outstanding borrowings during the third quarter and the letter of credit was lowered to $8.6 million.



For information regarding the Companys former senior credit facility,
see the Form 10-K and Form 10-Q for the periods ended December 31, 2002 and March 31, 2003, respectively.



9



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Senior Subordinated and Senior Notes



On June 1, 1999, the Company issued $200.0 million in aggregate principal
amount of its 73/8% notes due June 1, 2009. The 73/8% notes were issued at a discount to yield an effective interest rate of 7.473% and pay interest semiannually. After taking into account realized gains
from unwinding various interest rate swap agreements, the current effective interest rate of the 73/8% senior
subordinated notes is 6.4%. See Interest Rate Swap Agreements below regarding transactions that lowered the effective interest rate of the 73/8% senior subordinated notes. The 73/8% notes are unsecured
obligations of the Company. In February 2002, the Company purchased $6.75 million of these notes in the open market.



On March 29, 2001, the Company issued $285.0 million of 97/8% senior subordinated notes due April 1, 2011 and $29.0 million of 71/4% senior notes due May 1, 2010. These senior subordinated notes and senior notes were issued at a discount to yield effective interest rates of 10.5% and 9.4%, respectively. After taking into account realized gains from unwinding
various interest rate swap agreements, the current effective interest rate of the 97/8% senior subordinated
notes is 9.2%. See Interest Rate Swap Agreements below regarding transactions that lowered the effective interest rate of the 97/8% 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.



Interest Rate Swap Agreements



In January 2003, the Company effectively unwound $85.0 million of its $135.0 million interest rate swap agreement related to the 97/8% 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 $4.3 million gain, which is 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 gain lowered the effective interest rate of the 97/8% senior subordinated notes by approximately 30 basis
points.



In May 2003, the Company unwound the
remaining $50.0 million of its interest rate swap agreement related to the 97/8% senior subordinated notes, and
received approximately $4.6 million from the bank counter-party. Simultaneously, the Company unwound $50.0 million of its remaining interest rate swap agreement related to the 73/8% senior notes, and received approximately $7.1 million. The $11.7 million gain, which is 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 $4.6 million gain lowered the effective interest rate of the 97/8% senior subordinated notes by approximately 30 basis points. The $7.1 million gain lowered the effective interest rate of the 73/8% senior subordinated notes by approximately 80 basis points.



In July 2003 the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and
expiration dates that correspond to the terms of the note obligations it covers, effectively converted $50.0 million of the Companys fixed rate 97/8% senior subordinated notes into variable rate obligations. The variable rates are based on six-month LIBOR plus a fixed margin.



Under the provisions of SFAS No. 133, the Company designated and accounted for its interest rate swap agreements as fair
value hedges. The Company assumed no ineffectiveness with regard to these agreements as they qualified 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 $34 thousand as of September 30, 2003 is classified as a component of long-term liabilities, with a corresponding adjustment to long-term debt. The December 31, 2002 aggregate fair value of the swaps was $15.2
million and is classified as a component of long-term assets, with a corresponding adjustment to long-term debt in the accompanying balance sheet.



Note 6.Long-term Equity Incentive Plan



In May 2003, the Companys board of directors and shareholders approved a long-term equity incentive plan, which became effective May 7, 2003. Under
the provisions of the plan, participating key employees are rewarded, in the form of common share purchase options, restricted common shares, or a combination of both, for improving the Companys financial performance in a manner that is
consistent with the creation of increased shareholder value. All options awarded under the plan will have an exercise price not less than 100% of the fair market value of a share of common stock on the date of grant. Options will have a vesting
schedule of up to five years and expire after ten years. The Companys board of directors authorized and shareholders approved, an aggregate of 4.0 million common shares for issuance under this plan. As of September 30, 2003, 233 thousand stock
options and 230 thousand restricted shares have been granted under this plan.



10



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##### Table of Contents

Note 7.Segment Information



The Company operates principally in three business segments organized by product. 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 periods indicated (in thousands):



|                                               |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|---------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | -
|                                               |  | 2003                             |         |   | 2002                            |  
|Sales (external customers):                    |  |                                  |         |   |                                 |  
|Paperboard                                     |  | $                                | 81,485  |   |                                 | $
|Tube, core and composite container             |  |                                  | 96,583  |   |                                 |  
|Carton and custom packaging                    |  |                                  | 74,945  |   |                                 |  
|                                               |  |                                  |         |   |                                 |  
|Total                                          |  | $                                | 253,013 |   |                                 | $
|                                               |  |                                  |         |   |                                 |  
|Sales (intersegment):                          |  |                                  |         |   |                                 |  
|Paperboard                                     |  | $                                | 49,067  |   |                                 | $
|Tube, core and composite container             |  |                                  | 1,325   |   |                                 |  
|Carton and custom packaging                    |  |                                  | 206     |   |                                 |  
|                                               |  |                                  |         |   |                                 |  
|Total                                          |  | $                                | 50,598  |   |                                 | $
|                                               |  |                                  |         |   |                                 |  
|Income (loss) from operations:                 |  |                                  |         |   |                                 |  
|Paperboard(A)                                  |  | $                                | 10,666  |   |                                 | $
|Tube, core and composite container             |  |                                  | 2,712   |   |                                 |  
|Carton and custom packaging(B)                 |  |                                  | (1,687  | ) |                                 |  
|                                               |  |                                  |         |   |                                 |  
|Total                                          |  |                                  | 11,691  |   |                                 |  
|Corporate expense                              |  |                                  | (5,293  | ) |                                 |  
|                                               |  |                                  |         |   |                                 |  
|Income from operations                         |  |                                  | 6,398   |   |                                 |  
|Interest expense                               |  |                                  | (11,251 | ) |                                 |  
|Interest income                                |  |                                  | 286     |   |                                 |  
|Write-off of deferred debt costs               |  |                                  |        |   |                                 |  
|Equity in income of unconsolidated affiliates  |  |                                  | 3,217   |   |                                 |  
|Other, net                                     |  |                                  | (93     | ) |                                 |  
|                                               |  |                                  |         |   |                                 |  
|Loss before minority interest and income taxes |  | $                                | (1,443  | ) |                                 | $
|                                               |  |                                  |         |   |                                 |  

---

|(A) | Third quarter 2003 results include an adjustment increasing income from operations $360 thousand to revise the estimate of fixed asset disposals related to closing the Buffalo
paperboard mill. The third quarter 2003 results also include ongoing restructuring costs of $173 thousand related to closing the Buffalo paperboard mill. Year-to-date 2003 results include charges to operations for restructuring costs of $4.4 million
related to the Buffalo paperboard mill, the Carolina Converting, Inc. operation and the Halifax paperboard mill. These charges are related to the paperboard segment and are reflected in the segments operating results. Year-to-date 2002 results
include a $985 thousand charge to operations related to the revised estimate of fixed asset disposals at the Camden and Chicago paperboard mills. (See Note 9).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Third quarter and year-to-date 2003 results include charges to operations of $3.3 million and $4.8 million, respectively, for restructuring costs related to the closing of the
Ashland Carton plant. These charges are related to the carton and custom packaging segment and are reflected in the segments operating results. (See Note 9).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Note 8.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 next test will be performed during the fourth
quarter of 2003.



The following is a summary of the changes in
the carrying amount of goodwill from December 31, 2002 to September 30, 2003:



|                                           |  | Paperboard |        | Carton andCustomPackaging |   | Tube, Core andCompositeContainers |  | Total
|------------------------------------------ |  | ---------- | ------ | ------------------------- | - | --------------------------------- |  | -----
|Balance as of December 31, 2002            |  | $          | 82,688 |                           | $ | 43,340                            |  | $    
|Goodwill acquired and purchase adjustments |  |            |       |                           |   |                                  |  |      
|                                           |  |            |        |                           |   |                                   |  |      
|Balance as of September 30, 2003           |  | $          | 82,688 |                           | $ | 43,340                            |  | $    
|                                           |  |            |        |                           |   |                                   |  |      



Intangible
Assets



As of September 30, 2003 the Company had an
other intangible asset of $8.0 million, net of $716 thousand of amortization, which is classified as other assets. Amortization expense for the nine months ended September 30, 2003 was $426 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 9.Restructuring and
Impairment Charges



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 $0.5 million. During the first nine
months of 2003, the remaining $197 thousand of other exit costs were paid and no accrual remained at September 30, 2003.



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 decision to permanently close and dismantle the mill based on the 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 September 30, 2003, there were no employees
remaining at the mill. During the first nine months of 2003, $276 thousand of the accrual was paid for other exit costs and an accrual of $94 thousand remained. The remaining other exit costs are expected to be paid by December 31, 2003. In addition
to the original accrual, $72 thousand was expensed and paid for severance and other termination benefits incurred during the first nine months of 2003. The Company is currently marketing the property for sale.



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 $3.6
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. During the first nine months of 2003, $628 thousand of the accrual was paid
for other exit costs and an accrual of $2.9 million remained. In addition to the original accrual, $114 thousand was expensed and paid for severance and other termination benefits incurred during the first nine months of 2003. The Carolina
Converting, Inc. facility ceased



12



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operations in the first quarter of 2003. As of September 30, 2003, several employees remained to wind down the business, dismantle the machinery and
equipment and clean the facility. 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 other 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. During the first nine months of
2003, $494 thousand had been paid for severance and other termination benefits, $604 thousand had been paid for other exit costs and an accrual of $60 thousand remained for other exit costs.



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 September 30, 2003 there were no employees remaining at the mill. During the first nine months of 2003, $670 thousand of the original accrual had been
paid for severance and other termination benefits, $28 thousand had been paid for other exit costs and an accrual of $25 thousand remained for other exit costs. An additional $432 thousand was expensed and paid for ongoing other exit costs incurred
during the first nine months of 2003. In September 2003, the restructuring expense was reduced by $360 thousand related to the final disposition of fixed assets. All mill closure activities are expected to be completed by December 31, 2003.



In June 2003, the Company initiated a plan to permanently
close its Ashland, Ohio carton facility. As mentioned above, the Company downsized this facility in December 2002; however, due to severe margin pressure and excess industry capacity, the Company decided to close the facility. The Company recorded
an asset impairment charge for long-lived assets of $1.6 million in June 2003. During the third quarter of 2003, the Company recorded an additional charge of approximately $3.0 million, which includes a $1.5 million impairment charge for assets, a
$1.4 million accrual for severance and other termination benefits and an accrual of $25 thousand for other exit costs. During the first nine months of 2003, $277 thousand of the accrual had been paid for severance and other termination benefits and
an accrual of $1.1 million remained for severance and other termination benefits and $25 thousand remained for other exit costs. In addition, $281 thousand was expensed and paid for ongoing other exit costs incurred during the third quarter of 2003.
Substantially all of the Ashland carton sales will be transferred to the Companys other carton manufacturing facilities.



The following is a summary of restructuring and impairment costs and the activity in the restructuring liability from January 1, 2002 to September 30,
2003 (in thousands):



|                                      |  | AssetImpairment |       | Severance andOtherTerminationBenefits |   |       | Other ExitCosts |  |   | RestructuringLiability |   |  | TotalRestructuringandImpairmentCosts
|------------------------------------- |  | --------------- | ----- | ------------------------------------- | - | ----- | --------------- |  | - | ---------------------- | - |  | ------------------------------------
|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                  |   |  |                                     
|Second quarter 2003 charges           |  | $               | 1,563 |                                       |   | 14    |                 |  |   | 258                    |   |  |                                     
|                                      |  |                 |       |                                       |   |       |                 |  |   |                        |   |  |                                     
|Expenditures                          |  |                 |       |                                       |   | (638  | )               |  |   | (941                   | ) |  |                                     
|                                      |  |                 |       |                                       |   |       |                 |  |   |                        |   |  |                                     
|Liability balance, June 30, 2003      |  |                 |       |                                       |   | 344   |                 |  |   | 3,593                  |   |  |                                     
|Third quarter 2003 charges            |  | $               | 1,182 |                                       |   | 1,424 |                 |  |   | 479                    |   |  |                                     
|                                      |  |                 |       |                                       |   |       |                 |  |   |                        |   |  |                                     
|Expenditures                          |  |                 |       |                                       |   | (620  | )               |  |   | (923                   | ) |  |                                     
|                                      |  |                 |       |                                       |   |       |                 |  |   |                        |   |  |                                     
|Liability balance, September 30, 2003 |  |                 |       |                                       | $ | 1,148 |                 |  | $ | 3,149                  |   |  | $                                   
|                                      |  |                 |       |                                       |   |       |                 |  |   |                        |   |  |                                     



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Note 10.Loss Per Share



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



|                                                     |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|---------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                     |  | 2003                             |        |   | 2002                            |  
|Calculation of Basic Loss Per Share:                 |  |                                  |        |   |                                 |  
|Net loss                                             |  | $                                | (1,147 | ) |                                 | $
|Weighted average number of common shares outstanding |  |                                  | 27,990 |   |                                 |  
|                                                     |  |                                  |        |   |                                 |  
|Basic loss per share                                 |  | $                                | (0.04  | ) |                                 | $
|                                                     |  |                                  |        |   |                                 |  
|Calculation of Diluted Loss Per Share:               |  |                                  |        |   |                                 |  
|Net loss                                             |  | $                                | (1,147 | ) |                                 | $
|Weighted average number of common shares outstanding |  |                                  | 27,990 |   |                                 |  
|                                                     |  |                                  |        |   |                                 |  
|Diluted loss per share                               |  | $                                | (0.04  | ) |                                 | $
|                                                     |  |                                  |        |   |                                 |  



Approximately 2.2
million common stock equivalents are excluded from the three-month periods ended September 30, 2003 and 2002 and approximately 2.2 million and 2.3 million common stock equivalents are excluded from the first nine months of 2003 and 2002,
respectively. These common stock equivalents are excluded because they are antidilutive.



Note 11.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, which 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 and nine-month periods ended
September 30, 2003 and 2002 is presented below (in thousands):



|                       |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|---------------------- |  | ------------------------------- | ------ | ------------------------------
|                       |  | 2003                            |        | 2002                          
|Sales                  |  | $                               | 25,615 |                               
|Gross profit           |  |                                 | 5,206  |                               
|Income from operations |  |                                 | 4,335  |                               
|                       |  |                                 |        |                               
|Net income             |  | $                               | 3,796  |                               
|                       |  |                                 |        |                               



Note 12.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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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)



|                                              |  | As of September 30, 2003 |        
|--------------------------------------------- |  | ------------------------ | -------
|                                              |  | Parent                   |        
|ASSETS                                        |  |                          |        
|CURRENT ASSETS:                               |  |                          |        
|Cash and cash equivalents                     |  | $                        | 75,163 
|Intercompany funding                          |  |                          | 14,452 
|Receivables, net of allowances                |  |                          | 495    
|Intercompany accounts receivable              |  |                          |       
|Inventories                                   |  |                          |       
|Refundable income taxes                       |  |                          | 145    
|Other current assets                          |  |                          | 3,477  
|                                              |  |                          |        
|Total current assets                          |  |                          | 93,732 
|                                              |  |                          |        
|PROPERTY, PLANT AND EQUIPMENT                 |  |                          | 12,465 
|Less accumulated depreciation                 |  |                          | (7,596 
|                                              |  |                          |        
|Property, plant and equipment, net            |  |                          | 4,869  
|                                              |  |                          |        
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES       |  |                          | 594,509
|                                              |  |                          |        
|GOODWILL                                      |  |                          |       
|                                              |  |                          |        
|INVESTMENT IN UNCONSOLIDATED AFFILIATES       |  |                          | 53,451 
|                                              |  |                          |        
|OTHER ASSETS                                  |  |                          | 14,474 
|                                              |  |                          |        
|                                              |  | $                        | 761,035
|                                              |  |                          |        
|LIABILITIES AND SHAREHOLDERS EQUITY          |  |                          |        
|CURRENT LIABILITIES:                          |  |                          |        
|Current maturities of debt                    |  | $                        | 70     
|Accounts payable                              |  |                          | 13,210 
|Intercompany accounts payable                 |  |                          |       
|Accrued interest                              |  |                          | 19,865 
|Accrued compensation                          |  |                          | 666    
|Accrued pension                               |  |                          |       
|Other accrued liabilities                     |  |                          | 15,269 
|                                              |  |                          |        
|Total current liabilities                     |  |                          | 49,080 
|                                              |  |                          |        
|SENIOR CREDIT FACILITY                        |  |                          |       
|                                              |  |                          |        
|OTHER LONG-TERM DEBT, less current maturities |  |                          | 524,404
|                                              |  |                          |        
|DEFERRED INCOME TAXES                         |  |                          | 39,318 
|                                              |  |                          |        
|PENSION LIABILITY                             |  |                          | 1,083  
|                                              |  |                          |        
|DEFERRED COMPENSATION                         |  |                          | 1,358  
|                                              |  |                          |        
|OTHER LIABILITIES                             |  |                          | 33     
|                                              |  |                          |        
|MINORITY INTEREST                             |  |                          |       
|                                              |  |                          |        
|SHAREHOLDERS EQUITY:                         |  |                          |        
|Common stock                                  |  |                          | 2,754  
|Additional paid-in capital                    |  |                          | 208,050
|Retained (deficit) earnings                   |  |                          | (42,732
|Accumulated other comprehensive (loss) income |  |                          | (22,313
|                                              |  |                          |        
|                                              |  |                          | 145,759
|                                              |  |                          |        
|                                              |  | $                        | 761,035
|                                              |  |                          |        



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##### Table of Contents

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                                      |  |                         |       
|                                              |  |                         |        
|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 
|Intercompany accounts payable                 |  |                         |       
|Accrued interest                              |  |                         | 8,615  
|Accrued compensation                          |  |                         | 652    
|Accrued pension                               |  |                         | 7,279  
|Other accrued liabilities                     |  |                         | 6,917  
|                                              |  |                         |        
|Total current liabilities                     |  |                         | 43,695 
|                                              |  |                         |        
|SENIOR CREDIT FACILITY                        |  |                         |       
|                                              |  |                         |        
|OTHER 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 September 30, 2003 |        
|------------------------------------------------------- |  | --------------------------------------------- | -------
|                                                        |  | Parent                                        |        
|SALES                                                   |  | $                                             |       
|COST OF SALES                                           |  |                                               |       
|                                                        |  |                                               |        
|Gross profit (loss)                                     |  |                                               |       
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  |                                               | 5,434  
|RESTRUCTURING AND IMPAIRMENT COSTS                      |  |                                               |       
|                                                        |  |                                               |        
|(Loss) income from operations                           |  |                                               | (5,434 
|OTHER (EXPENSE) INCOME:                                 |  |                                               |        
|Interest expense                                        |  |                                               | (11,175
|Interest income                                         |  |                                               | 389    
|Write-off of deferred debt costs                        |  |                                               |       
|Equity in income of unconsolidated affiliates           |  |                                               | 3,217  
|Other, net                                              |  |                                               |       
|                                                        |  |                                               |        
|                                                        |  |                                               | (7,569 
|                                                        |  |                                               |        
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                               | (13,003
|MINORITY INTEREST IN LOSSES                             |  |                                               |       
|BENEFIT FOR INCOME TAXES                                |  |                                               | (124   
|                                                        |  |                                               |        
|NET (LOSS) INCOME                                       |  | $                                             | (12,879
|                                                        |  |                                               |        



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)



|                                                        |  | For The Three Months Ended September 30, 2002 |        
|------------------------------------------------------- |  | --------------------------------------------- | -------
|                                                        |  | Parent                                        |        
|SALES                                                   |  | $                                             |       
|COST OF SALES                                           |  |                                               | (47    
|                                                        |  |                                               |        
|Gross profit                                            |  |                                               | 47     
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  |                                               | 4,525  
|RESTRUCTURING AND IMPAIRMENT COSTS                      |  |                                               |       
|                                                        |  |                                               |        
|(Loss) income from operations                           |  |                                               | (4,478 
|OTHER (EXPENSE) INCOME:                                 |  |                                               |        
|Interest expense                                        |  |                                               | (9,347 
|Interest income                                         |  |                                               | 588    
|Equity in income (loss) of unconsolidated affiliates    |  |                                               | 870    
|Other, net                                              |  |                                               |       
|                                                        |  |                                               |        
|                                                        |  |                                               | (7,889 
|                                                        |  |                                               |        
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                               | (12,367
|MINORITY INTEREST IN LOSSES                             |  |                                               |       
|BENEFIT FOR INCOME TAXES                                |  |                                               | (2,690 
|                                                        |  |                                               |        
|NET (LOSS) INCOME                                       |  | $                                             | (9,677 
|                                                        |  |                                               |        



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)



|                                                        |  | For The Nine Months Ended September 30, 2003 |        
|------------------------------------------------------- |  | -------------------------------------------- | -------
|                                                        |  | Parent                                       |        
|SALES                                                   |  | $                                            |       
|COST OF SALES                                           |  |                                              |       
|                                                        |  |                                              |        
|Gross profit                                            |  |                                              |       
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  |                                              | 16,639 
|RESTRUCTURING AND IMPAIRMENT COSTS                      |  |                                              |       
|                                                        |  |                                              |        
|(Loss) income from operations                           |  |                                              | (16,639
|OTHER (EXPENSE) INCOME:                                 |  |                                              |        
|Interest expense                                        |  |                                              | (32,590
|Interest income                                         |  |                                              | 1,031  
|Write-off of deferred debt costs                        |  |                                              | (1,812 
|Equity in income of unconsolidated affiliates           |  |                                              | 4,681  
|Other, net                                              |  |                                              |       
|                                                        |  |                                              |        
|                                                        |  |                                              | (28,690
|                                                        |  |                                              |        
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                              | (45,329
|MINORITY INTEREST IN LOSSES                             |  |                                              |       
|(BENEFIT) PROVISION FOR INCOME TAXES                    |  |                                              | (10,105
|                                                        |  |                                              |        
|NET (LOSS) INCOME                                       |  | $                                            | (35,224
|                                                        |  |                                              |        



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)



|                                                        |  | For The Nine Months Ended September 30, 2002 |        
|------------------------------------------------------- |  | -------------------------------------------- | -------
|                                                        |  | Parent                                       |        
|SALES                                                   |  | $                                            |       
|COST OF SALES                                           |  |                                              | (141   
|                                                        |  |                                              |        
|Gross profit                                            |  |                                              | 141    
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  |                                              | 11,491 
|RESTRUCTURING AND IMPAIRMENT COSTS                      |  |                                              |       
|                                                        |  |                                              |        
|(Loss) income from operations                           |  |                                              | (11,350
|OTHER (EXPENSE) INCOME:                                 |  |                                              |        
|Interest expense                                        |  |                                              | (27,855
|Interest income                                         |  |                                              | 1,636  
|Equity in income (loss) of unconsolidated affiliates    |  |                                              | 1,987  
|Other, net                                              |  |                                              |       
|                                                        |  |                                              |        
|                                                        |  |                                              | (24,232
|                                                        |  |                                              |        
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                              | (35,582
|MINORITY INTEREST IN LOSSES                             |  |                                              |       
|BENEFIT FOR INCOME TAXES                                |  |                                              | (2,822 
|                                                        |  |                                              |        
|NET (LOSS) INCOME                                       |  | $                                            | (32,760
|                                                        |  |                                              |        



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)



|                                                    |  | For The Nine Months Ended September 30, 2003 |       
|--------------------------------------------------- |  | -------------------------------------------- | ------
|                                                    |  | Parent                                       |       
|Net cash provided by operating activities           |  | $                                            | 29,092
|                                                    |  |                                              |       
|Investing activities:                               |  |                                              |       
|Purchases of property, plant and equipment          |  |                                              | (1,222
|Acquisitions of businesses, net of cash acquired    |  |                                              |      
|Proceeds from disposal of fixed assets              |  |                                              |      
|                                                    |  |                                              |       
|Net cash used in investing activities               |  |                                              | (1,222
|                                                    |  |                                              |       
|Financing activities:                               |  |                                              |       
|Repayments of short and long-term debt              |  |                                              |      
|Proceeds from swap agreement unwind                 |  |                                              | 15,950
|Deferred debt costs                                 |  |                                              | (2,201
|                                                    |  |                                              |       
|Net cash provided by (used in) financing activities |  |                                              | 13,749
|                                                    |  |                                              |       
|Net change in cash and cash equivalents             |  |                                              | 41,619
|Cash and cash equivalents at beginning of period    |  |                                              | 33,544
|                                                    |  |                                              |       
|Cash and cash equivalents at end of period          |  | $                                            | 75,163
|                                                    |  |                                              |       



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)



|                                                    |  | For The Nine Months Ended September 30, 2002 |        
|--------------------------------------------------- |  | -------------------------------------------- | -------
|                                                    |  | Parent                                       |        
|Net cash (used in) provided by operating activities |  | $                                            | (26,763
|                                                    |  |                                              |        
|Investing activities:                               |  |                                              |        
|Purchases of property, plant and equipment          |  |                                              | (1,284 
|Acquisitions of businesses, net of cash acquired    |  |                                              |       
|Proceeds from disposal of fixed assets              |  |                                              |       
|Investment in unconsolidated affiliates             |  |                                              |       
|Other, net                                          |  |                                              | (833   
|                                                    |  |                                              |        
|Net cash used in investing activities               |  |                                              | (2,117 
|                                                    |  |                                              |        
|Financing activities:                               |  |                                              |        
|Proceeds from senior credit facility                |  |                                              | 38,000 
|Repayments of short and long-term debt              |  |                                              | (6,580 
|Dividends paid                                      |  |                                              | (833   
|Deferred debt costs                                 |  |                                              | (1,320 
|                                                    |  |                                              |        
|Net cash provided by (used in) financing activities |  |                                              | 29,267 
|                                                    |  |                                              |        
|Net change in cash and cash equivalents             |  |                                              | 387    
|Cash and cash equivalents at beginning of period    |  |                                              | 63,277 
|                                                    |  |                                              |        
|Cash and cash equivalents at end of period          |  | $                                            | 63,664 
|                                                    |  |                                              |        



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##### Table of Contents

Note 13.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 14.Subsequent Event



On October 24, 2003, Standard Gypsum, L.P. put into place substitute
direct-pay letters of credit in support of its industrial development bond obligations, in the aggregate amount of $57.4 million. Concurrently with the issuance by Standard Gypsum of the substitute letters of credit, the Company cancelled the $28.4
million supporting letter of credit previously issued under its senior credit facility in favor of the former issuing lender, and issued a new $28.7 million letter of credit in favor of the new issuing lender. This new letter of credit expires on
October 24, 2004.



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##### Table of Contents

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 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 42% in the first nine months of 2003. The remaining 58% of our
paperboard production is sold to external customers in any of the four recycled paperboard end-use markets: tube, core and composite containers; folding cartons; gypsum wallboard facing paper and other specialty products. These integration
statistics do not include volume produced or converted by our 50% owned, unconsolidated, joint ventures Premier Boxboard Limited and Standard Gypsum, LLP. 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 $87 during the first nine months 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 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 nine months of 2003, energy costs were $62 per ton compared with $48 per ton in the first nine months of 2002, a 30.0% 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 have not been able to pass through to our customers all of the energy cost
increases we have incurred. As a result, our operating margins have been 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 correspondingly, 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 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 26 subsidiaries. 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.



24



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##### Table of Contents

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 that an arrangement exists; (2) ownership has transferred to the
customer; (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 periodically
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 produced by an asset capable of producing only that product;
| | - | ---------------------------------------------------------------------------------------------------------



| |  | assets that are idled; or
| | - | -------------------------



| |  | 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.



25



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##### Table of Contents

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-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 time 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 September 2003, the maximum deductible contribution of $11.7 million was made to the Pension Plan relating to the 2002 plan year. Based on our current estimate of future funding requirements, we
do not expect to make a contribution for the 2003 plan year.



During 1996, we
adopted a supplemental executive retirement plan (SERP), which provides benefits to certain named participants based on average compensation. The SERP covers certain executives of the Company commencing upon retirement. The SERP was
unfunded at September 30, 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. The following table is a summary of the significant assumptions we are using as of the last valuation date to determine our net periodic pension expense and the projected benefit
obligation for 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 0.25% change in the discount rate would result in a change in the
minimum pension liability of approximately $2.2 million.



In developing our
expected weighted average rate of return on plan assets, 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.



26



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##### Table of Contents

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 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 new machinery and equipment from approximately 10 years to approximately 20 years.



Three Months Ended September 30, 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 September 30, |       |      |   |        | % Change |  
|--------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | ------ | -------- | -
|                                                          |  | 2003                             |       | 2002 |   | Change |          |  
|Production source of paperboard tons sold (in thousands): |  |                                  |       |      |   |        |          |  
|From paperboard mill production                           |  |                                  | 243.5 |      |   | 238.6  |          |  
|Outside purchases                                         |  |                                  | 33.2  |      |   | 30.1   |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Total paperboard tonnage                                  |  |                                  | 276.7 |      |   | 268.7  |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Tons sold by market (in thousands):                       |  |                                  |       |      |   |        |          |  
|Tube, core and composite container volume                 |  |                                  |       |      |   |        |          |  
|Paperboard (internal)                                     |  |                                  | 63.0  |      |   | 50.0   |          |  
|Outside purchases                                         |  |                                  | 9.8   |      |   | 8.7    |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Tube, core and composite container converted products     |  |                                  | 72.8  |      |   | 58.7   |          |  
|Unconverted paperboard                                    |  |                                  | 10.4  |      |   | 10.1   |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Tube, core and composite container volume                 |  |                                  | 83.2  |      |   | 68.8   |          |  
|Folding carton volume                                     |  |                                  |       |      |   |        |          |  
|Paperboard (internal)                                     |  |                                  | 22.5  |      |   | 24.4   |          |  
|Outside purchases                                         |  |                                  | 19.1  |      |   | 20.3   |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Folding carton converted products                         |  |                                  | 41.6  |      |   | 44.7   |          |  
|Unconverted paperboard                                    |  |                                  | 64.9  |      |   | 70.4   |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Folding carton volume                                     |  |                                  | 106.5 |      |   | 115.1  |          |  
|Gypsum wallboard facing paper volume                      |  |                                  |       |      |   |        |          |  
|Unconverted paperboard                                    |  |                                  | 27.9  |      |   | 34.1   |          |  
|Other specialty products volume                           |  |                                  |       |      |   |        |          |  
|Paperboard (internal)                                     |  |                                  | 18.1  |      |   | 16.6   |          |  
|Outside purchases                                         |  |                                  | 4.3   |      |   | 1.1    |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Other specialty converted products                        |  |                                  | 22.4  |      |   | 17.7   |          |  
|Unconverted paperboard                                    |  |                                  | 36.7  |      |   | 33.0   |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Other specialty products volume                           |  |                                  | 59.1  |      |   | 50.7   |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Total paperboard tonnage                                  |  |                                  | 276.7 |      |   | 268.7  |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Gross paper margins ($/ton):                              |  |                                  |       |      |   |        |          |  
|Paperboard mill:                                          |  |                                  |       |      |   |        |          |  
|Average same-mill net selling price                       |  | $                                | 424   |      | $ | 411    |          | $
|Average same-mill recovered fiber cost                    |  |                                  | 88    |      |   | 113    |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Paperboard mill gross paper margin                        |  | $                                | 336   |      | $ | 298    |          | $
|                                                          |  |                                  |       |      |   |        |          |  
|Tube and core:                                            |  |                                  |       |      |   |        |          |  
|Average same-facility net selling price                   |  | $                                | 819   |      | $ | 797    |          | $
|Average same-facility paperboard cost                     |  |                                  | 465   |      |   | 451    |          |  
|                                                          |  |                                  |       |      |   |        |          |  
|Tube and core gross paper margin                          |  | $                                | 354   |      | $ | 346    |          | $
|                                                          |  |                                  |       |      |   |        |          |  



27



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##### Table of Contents

Paperboard tonnage.Total paperboard tonnage for the third quarter of 2003 increased 3.0% to 276.7 thousand tons
from 268.7 thousand tons in the third quarter of 2002. This increase was primarily due to the following:



| |  | An increase in internal conversion of paperboard by the tube, core and composite container and other specialty end-use markets and an increase in sales of unconverted paperboard to
external customers in the other specialty end-use market.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This
increase was partially offset by the following:



| |  | A decrease in sales of unconverted paperboard to external customers in the gypsum wallboard facing paper and folding carton end-use markets and a decrease in internal conversion of
paperboard by the folding carton end-use market. The decrease in sales of gypsum wallboard facing paper was the result of transferring volume from our Buffalo paper mill, which was closed in March 2003, to our 50% owned, unconsolidated, Premier
Boxboard joint venture. Including the volume from Premier Boxboard, gypsum wallboard facing paper increased 10.5% in the third quarter of 2003 versus the same period last year. The decrease in unconverted paperboard volume sold to external customers
was also caused by idling one of two coated recycled paperboard machines at the Rittman, Ohio facility in April 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Tons sold from paperboard mill production increased 2.1% for the third quarter of 2003 to 243.5 thousand tons, compared with 238.6 thousand tons for the same
period last year. Total tonnage converted by our converting operations increased 13.0% for the third quarter of 2003 to 136.8 thousand tons compared to 121.1 thousand tons in the third quarter of 2002.



Sales.Our consolidated sales for the three months ended September 30, 2003 increased
6.9% to $253.0 million from $236.7 million in the same period of 2002. The following table presents sales by business segment (in thousands):



|                                   |  | Three Months EndedSeptember 30, |         | $ Change |   |         | % Change |  
|---------------------------------- |  | ------------------------------- | ------- | -------- | - | ------- | -------- | -
|                                   |  | 2003                            |         | 2002     |   |        
|Paperboard                         |  | $                               | 81,485  |          | $ | 85,981  |          | $
|Tube, core and composite container |  |                                 | 96,583  |          |   | 68,563  |          |  
|Carton and custom packaging        |  |                                 | 74,945  |          |   | 82,185  |          |  
|                                   |  |                                 |         |          |   |         |          |  
|Total                              |  | $                               | 253,013 |          | $ | 236,729 |          | $
|                                   |  |                                 |         |          |   |         |          |  



Paperboard Segment



Sales for the paperboard segment decreased primarily due to lower volume and lower sales
from our recovered fiber sales operation. These decreases were partially offset by sales from acquisitions and higher selling prices.



Tube, Core and Composite Container Segment



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



Carton and Custom Packaging Segment



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



Gross Profit Margin.Gross profit margin for the
third quarter of 2003 increased to 17.6% of sales from 16.1% in 2002. This margin increase was primarily the result of lower depreciation expense and higher gross paper margins in the paperboard and the tube, core and composite container segments,
partially offset by higher energy, insurance and pension costs and lower selling prices in the carton and custom packaging segment.



Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased to $35.1 million in the third quarter of 2003, a decrease of
$2.2 million from the third quarter of 2002. This decrease was a result of the following:



| |  | Reductions through savings initiatives, which includes facility closures.
| | - | -------------------------------------------------------------------------



| |  | A $1.9 million recovery of accounts receivable previously written-off related to a significant carton customer that filed Chapter 11 bankruptcy.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Lower expense related to uncollectible accounts receivable.
| | - | -----------------------------------------------------------



This decrease was partially offset by:



| |  | Selling, general and administrative expenses associated with acquired operations.
| | - | ---------------------------------------------------------------------------------



| |  | Higher pension and insurance costs.
| | - | -----------------------------------



| |  | Costs of consolidating operations.
| | - | ----------------------------------



Restructuring and Impairment Costs.In June 2003, we initiated a plan to permanently close our Ashland, Ohio facility. As mentioned below, we restructured this
facility in December 2002; however, due to severe margin pressure and excess industry capacity, the aggressive downsizing undertaken in December 2002 was unsuccessful. We recorded an additional $3.0 million charge in the third quarter in connection
with this closure. Most of the Ashland carton sales will be transferred to our other carton manufacturing facilities.



28



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##### Table of Contents

Income (loss) from operations.Income from operations for the third quarter of 2003 was $6.4 million, a $5.5
million increase from the same period last year. The following table presents income (loss) from operations by business segment (in thousands):



|                                   |  | Three Months EndedSeptember 30, |        |   | $ Change |   |        | % Change | 
|---------------------------------- |  | ------------------------------- | ------ | - | -------- | - | ------ | -------- | 
|                                   |  | 2003                            |        |   | 2002     |   |        |         
|Paperboard                         |  | $                               | 10,666 |   |          | $ | 1,882  |          | 
|Tube, core and composite container |  |                                 | 2,712  |   |          |   | 2,798  |          | 
|Carton and custom packaging        |  |                                 | (1,687 | ) |          |   | 1,599  |          | 
|Corporate expense                  |  |                                 | (5,293 | ) |          |   | (5,428 | )        | 
|                                   |  |                                 |        |   |          |   |        |          | 
|Total                              |  | $                               | 6,398  |   |          | $ | 851    |          | 
|                                   |  |                                 |        |   |          |   |        |          | 



Paperboard Segment



The increase in income from operations was a result of the following:



| |  | Lower depreciation expense.
| | - | ---------------------------



| |  | Higher gross paper margins.
| | - | ---------------------------



| |  | Results from acquisitions.
| | - | --------------------------



| |  | Savings from cost reduction initiatives.
| | - | ----------------------------------------



This increase was partially offset by:



| |  | Lower same-mill volume.
| | - | -----------------------



| |  | Higher energy costs.
| | - | --------------------



| |  | Higher pension and insurance costs.
| | - | -----------------------------------



| |  | Higher short-term operating costs related to idling one of two coated recycled paperboard machines at the Rittman, Ohio facility.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



Tube, Core and Composite Container Segment



The decrease in income from operations is the result of higher energy, pension and insurance
costs, and costs of consolidating operations, partially offset by higher gross paper margins, results from acquisitions and lower depreciation expense.



Carton and Custom Packaging Segment



The decline in operating results is the result of:



| |  | Restructuring charges related to the permanent closure of the Ashland Carton Plant. See notes to the consolidated financial statements for additional information regarding this
restructuring plan.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | Higher paperboard costs.
| | - | ------------------------



| |  | Lower sales volume.
| | - | -------------------



| |  | Increased energy, pension and insurance costs.
| | - | ----------------------------------------------



This decline was partially offset by:



| |  | Lower depreciation expense.
| | - | ---------------------------



| |  | A $1.9 million recovery of accounts receivable previously written-off in relation to a significant carton customer that filed Chapter 11 bankruptcy.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



Other Income (Expense).Interest expense increased 19.3% to $11.3 million for the
third quarter of 2003 from $9.4 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 $3.2 million in the third quarter of 2003, an improvement of $2.4 million from equity in income from unconsolidated affiliates of $826 thousand in the third 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 higher volume, improved gross paper margin and lower
depreciation expense, 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.



Benefit for income taxes. The effective income tax benefit for the third quarter of 2003 was 9.8% compared with 37.3% for the same period last year. The effective
rates for both periods are different from the statutory rates due to permanent tax adjustments. In addition, the third quarter of 2003 included $300 thousand of additional tax expense relating to an estimated future impairment of state net operating
losses.



Net Loss.Net loss for the third quarter of 2003 was $1.1
million, or $0.04 net loss per common share, compared to net loss of $4.5 million, or $0.16 net loss per common share, for the same period last year.



29



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##### Table of Contents

Nine Months Ended September 30, 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.



|                                                          |  | Nine MonthsEndedSeptember 30, |       |      |   |        | % Change |  
|--------------------------------------------------------- |  | ----------------------------- | ----- | ---- | - | ------ | -------- | -
|                                                          |  | 2003                          |       | 2002 |   | Change |          |  
|Production source of paperboard tons sold (in thousands): |  |                               |       |      |   |        |          |  
|From paperboard mill production                           |  |                               | 735.1 |      |   | 703.2  |          |  
|Outside purchases                                         |  |                               | 97.8  |      |   | 92.7   |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Total paperboard tonnage                                  |  |                               | 832.9 |      |   | 795.9  |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Tons sold by market (in thousands):                       |  |                               |       |      |   |        |          |  
|Tube, core and composite container volume                 |  |                               |       |      |   |        |          |  
|Paperboard (internal)                                     |  |                               | 188.4 |      |   | 142.9  |          |  
|Outside purchases                                         |  |                               | 30.7  |      |   | 23.3   |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Tube, core and composite container converted products     |  |                               | 219.1 |      |   | 166.2  |          |  
|Unconverted paperboard                                    |  |                               | 33.3  |      |   | 27.7   |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Tube, core and composite container volume                 |  |                               | 252.4 |      |   | 193.9  |          |  
|Folding carton volume                                     |  |                               |       |      |   |        |          |  
|Paperboard (internal)                                     |  |                               | 68.7  |      |   | 74.3   |          |  
|Outside purchases                                         |  |                               | 54.2  |      |   | 65.5   |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Folding carton converted products                         |  |                               | 122.9 |      |   | 139.8  |          |  
|Unconverted paperboard                                    |  |                               | 204.2 |      |   | 189.5  |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Folding carton volume                                     |  |                               | 327.1 |      |   | 329.3  |          |  
|Gypsum wallboard facing paper volume                      |  |                               |       |      |   |        |          |  
|Unconverted paperboard                                    |  |                               | 82.1  |      |   | 108.2  |          |  
|Other specialty products volume                           |  |                               |       |      |   |        |          |  
|Paperboard (internal)                                     |  |                               | 53.3  |      |   | 50.1   |          |  
|Outside purchases                                         |  |                               | 12.9  |      |   | 3.9    |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Other specialty converted products                        |  |                               | 66.2  |      |   | 54.0   |          |  
|Unconverted paperboard                                    |  |                               | 105.1 |      |   | 110.5  |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Other specialty products volume                           |  |                               | 171.3 |      |   | 164.5  |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Total paperboard tonnage                                  |  |                               | 832.9 |      |   | 795.9  |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Gross paper margins ($/ton):                              |  |                               |       |      |   |        |          |  
|Paperboard mill:                                          |  |                               |       |      |   |        |          |  
|Average same-mill net selling price                       |  | $                             | 420   |      | $ | 398    |          | $
|Average same-mill recovered fiber cost                    |  |                               | 87    |      |   | 84     |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Paperboard mill gross paper margin                        |  | $                             | 333   |      | $ | 314    |          | $
|                                                          |  |                               |       |      |   |        |          |  
|Tube and core:                                            |  |                               |       |      |   |        |          |  
|Average same-facility net selling price                   |  | $                             | 811   |      | $ | 782    |          | $
|Average same-facility paperboard cost                     |  |                               | 465   |      |   | 438    |          |  
|                                                          |  |                               |       |      |   |        |          |  
|Tube and core gross paper margin                          |  | $                             | 346   |      | $ | 344    |          | $
|                                                          |  |                               |       |      |   |        |          |  



Paperboard tonnage.Total
paperboard tonnage for the first nine months of 2003 increased 4.6% to 832.9 thousand tons from 795.9 thousand tons in the first nine months of 2002. This increase was primarily due to the following:



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



This increase
was partially offset by:



| |  | A decrease in sales of unconverted paperboard to external customers in the gypsum wallboard facing paper end-use market and a decrease in internal conversion of paperboard by the
folding carton end-use market. The decrease in sales of gypsum wallboard facing paper was the result of transferring volume from our Buffalo paper mill, which was closed in March 2003, to our 50% owned, unconsolidated, Premier Boxboard joint
venture. Including the volume from Premier Boxboard, gypsum wallboard facing paper increased 3.4% during the first nine months of 2003 versus the same period last year. The decrease in unconverted paperboard volume sold to external customers was
also caused by idling one of two coated recycled paperboard machines at the Rittman, Ohio facility in April 2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Tons sold from paperboard mill production increased 4.5% for the first nine months of 2003 to 735.1 thousand tons, compared with 703.2 thousand tons for the same period
last year. Total tonnage converted by our converting operations increased 13.4% for the first nine months of 2003 to 408.2 thousand tons compared to 359.9 thousand tons in the first nine months of 2002.



30



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##### Table of Contents

Sales.Our consolidated sales for the nine months ended September 30, 2003 increased 9.9% to $752.8 million from
$684.8 million in the same period of 2002. The following table presents sales by business segment (in thousands):



|                                   |  | Nine Months EndedSeptember 30, |         | $ Change |   |         | % Change |  
|---------------------------------- |  | ------------------------------ | ------- | -------- | - | ------- | -------- | -
|                                   |  | 2003                           |         | 2002     |   |        
|Paperboard                         |  | $                              | 245,074 |          | $ | 237,750 |          | $
|Tube, core and composite container |  |                                | 287,122 |          |   | 202,363 |          |  
|Carton and custom packaging        |  |                                | 220,562 |          |   | 244,640 |          |  
|                                   |  |                                |         |          |   |         |          |  
|Total                              |  | $                              | 752,758 |          | $ | 684,753 |          | $
|                                   |  |                                |         |          |   |         |          |  



Paperboard Segment



Sales for the paperboard segment increased primarily due to acquisitions, higher
paperboard selling prices and higher sales from converted paperboard products. These increases were partially offset by lower paperboard volume on a same-mill basis.



Tube, Core and Composite Container Segment



Sales for the tube, core and composite container segment increased primarily due to acquisitions and 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 nine months of 2003 decreased to 17.8% of sales from 18.4% in 2002. This margin decrease was primarily the result of higher energy, insurance and pension costs, higher inventory write-offs and lower
selling prices in the carton and custom packaging segment, partially offset by lower depreciation expense and higher gross paper margins in the paperboard segment.



Selling, General and Administrative Expenses.Selling, general and administrative expenses increased to $124.0 million in the first
nine months of 2003, an increase of $16.3 million compared to the same period last year. This increase was a result of the following:



| |  | Selling, general and administrative expenses associated with acquired operations.
| | - | ---------------------------------------------------------------------------------



| |  | Higher pension and insurance costs.
| | - | -----------------------------------



| |  | Higher expense related to uncollectible accounts receivable.
| | - | ------------------------------------------------------------



| |  | Cost of idling one of the two coated recycled paperboard machines at our Rittman, Ohio facility.
| | - | ------------------------------------------------------------------------------------------------



| |  | Costs of consolidating operations.
| | - | ----------------------------------



This decline was partially offset by:



| |  | Reductions through savings initiatives, which includes facility closures.
| | - | -------------------------------------------------------------------------



Restructuring and Impairment Costs. In June 2003, we initiated a plan to permanently close our Ashland, Ohio carton facility. As mentioned below, we restructured
this facility in December 2002; however, due to severe margin pressure and excess industry capacity, the aggressive downsizing undertaken in December 2002 was unsuccessful. We recorded a charge of approximately $4.8 in connection with this closure.
The $4.8 million charge included a $1.5 million impairment charge for long-lived assets. Most of the Ashland carton sales will be transferred to our other carton manufacturing facilities.



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. During the first nine months of 2003, we recorded an additional $71 thousand of restructuring costs. The majority of the Buffalo mills sales will be transferred to our other paperboard
mills and the PBL joint venture.



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.



31



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##### Table of Contents

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.



Income (loss) from operations.Income from operations for the first nine months of 2003 was $727 thousand, a $16.5 million decline from income from operations of $17.2 million for the same period last year. The following table presents income (loss) from operations by
business segment (in thousands):



|                                   |  | Nine Months EndedSeptember 30, |         |   | $ Change |   |         | % Change | 
|---------------------------------- |  | ------------------------------ | ------- | - | -------- | - | ------- | -------- | 
|                                   |  | 2003                           |         |   | 2002     |   |         |         
|Paperboard                         |  | $                              | 17,261  |   |          | $ | 15,407  |          | 
|Tube, core and composite container |  |                                | 7,652   |   |          |   | 9,025   |          | 
|Carton and custom packaging        |  |                                | (7,961  | ) |          |   | 5,084   |          | 
|Corporate expense                  |  |                                | (16,225 | ) |          |   | (12,309 | )        | 
|                                   |  |                                |         |   |          |   |         |          | 
|Total                              |  | $                              | 727     |   |          | $ | 17,207  |          | 
|                                   |  |                                |         |   |          |   |         |          | 



Paperboard Segment



The increase in income from operations was a result of the following:



| |  | Lower depreciation expense.
| | - | ---------------------------



| |  | Higher gross paper margins.
| | - | ---------------------------



| |  | Results from acquisitions.
| | - | --------------------------



This increase was partially offset by:



| |  | Restructuring costs.
| | - | --------------------



| |  | Cost of idling one of the two coated recycled paperboard machines at our Rittman, Ohio facility.
| | - | ------------------------------------------------------------------------------------------------



| |  | Higher energy costs.
| | - | --------------------



| |  | Higher expense related to uncollectible accounts receivable.
| | - | ------------------------------------------------------------



| |  | Higher pension and insurance costs.
| | - | -----------------------------------



Tube, Core and Composite Container Segment



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



Carton and Custom Packaging Segment



The decline in operating results is the result of:



| |  | Higher expense related to uncollectible accounts receivable.
| | - | ------------------------------------------------------------



| |  | Restructuring and impairment costs.
| | - | -----------------------------------



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



| |  | Increased paperboard costs.
| | - | ---------------------------



| |  | Lower sales volume.
| | - | -------------------



| |  | Increased energy, pension and insurance costs.
| | - | ----------------------------------------------



This decline was partially offset by:



| |  | Lower depreciation expense.
| | - | ---------------------------



Other Income (Expense).Interest expense increased 16.8% to $32.8 million for the first nine months of 2003 from $28.1 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.



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Equity in income from unconsolidated affiliates was $4.7 million in the first nine months of 2003, an improvement of $2.8
million from equity in income from unconsolidated affiliates of $1.9 million in the first nine months 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 to higher volume, improved gross paper margin and lower depreciation expense, 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 energy and raw material costs, partially offset by increased sales volume and
lower depreciation expense.



Benefit for income taxes. The effective
income tax benefit for the nine-month period ended September 30, 2003 was 35.6% compared with 38.4% for the same period last year. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments.



Net Loss.Net loss for the first nine months of 2003 was $18.1 million,
or $0.65 net loss per common share, compared to net loss of $4.6 million, or $0.16 net loss per 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 our senior credit facility, described below. Downturns
in operations can significantly affect our ability to generate cash. Factors that can affect our operating results and liquidity are discussed further in this Report under  Risk Factors in Part I, Item 2. In the first nine months
of 2003, we generated $42.8 million in cash from operations, which is a 23.2% or $12.9 million decline from the first nine months of 2002. Although the timing or certainty of the following events 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 and internal cost reduction initiatives. 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.



The availability of liquidity from borrowings is primarily affected by our continued compliance with the terms of the agreement governing our senior credit facility, including the payment of interest and compliance
with various covenants and financial maintenance tests. 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 likely that we will be in compliance with our covenants
under our senior credit agreement during 2003 and 2004.



Borrowings.At
September 30, 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):



|                                                 |  | September 30,2003 |         |   | December 31,2002
|------------------------------------------------ |  | ----------------- | ------- | - | ----------------
|Senior credit facility                           |  | $                 |        |   |                 
|97/8% senior subordinated notes                  |  |                   | 285,000 |   |                 
|73/8% senior notes                               |  |                   | 193,250 |   |                 
|71/4% senior notes                               |  |                   | 29,000  |   |                 
|Other notes payable                              |  |                   | 9,973   |   |                 
|Mark-to-market value of interest swap agreements |  |                   | (34     | ) |                 
|Realized interest rate swap gains (1)            |  |                   | 15,578  |   |                 
|                                                 |  |                   |         |   |                 
|Total debt                                       |  | $                 | 532,767 |   |                 
|                                                 |  |                   |         |   |                 

---

|(1) | Net of discounts, premiums and amortization. As described below under Interest Rate Swap Agreements, realized gains resulting from unwinding interest rate swaps are
recorded as a component of debt and will be accreted as a reduction to interest expense over the remaining term of the debt.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Effective June 24, 2003, we completed a refinancing of our senior credit facility. The new facility provides for a revolving line of credit of $75.0 million and is
secured primarily by a first priority security interest in our accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts receivable and
inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. In addition to outstanding letters of credit, certain other reserves reduce borrowing availability. As of
September 30, 2003, no borrowings were outstanding under the facility; however, an aggregate of $47.0 million in letter of credit obligations were outstanding, as well as $2.4 million in reserves that reduce borrowing availability. Availability
under the facility at September 30, 2003 was limited to $15.6 million after taking into consideration outstanding letter of credit obligations and minimum borrowing availability requirements.



Borrowings under the facility bear interest at a rate equal to, at our option, either (1) the
base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility) plus a margin of 0.50% or (2) the adjusted Eurodollar Interbank Offered Rate plus a margin of 2.50%. The undrawn
portion of the facility is subject to a facility fee at an annual rate of 0.50%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for Eurodollar-based loans.



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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 in excess of $30.0 million per year or change the nature of our business. The facility also contains a fixed charge coverage ratio covenant, which applies only in the event borrowing availability falls below $10.0 million
or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts receivable and inventory (less reserves and aggregate credit outstandings) in excess of $75.0 million or the amount of
eligible inventory (less reserves and aggregate credit outstandings) in excess of $37.5 million. The fixed charge ratio covenant did not require measurement at September 30, 2003.



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 June 1, 1999, we issued $200.0 million in aggregate
principal amount of our 73/8% senior notes due June 1, 2009. Our 73/8% 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. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 73/8% senior subordinated notes is 6.4%. See -Interest Rate Swap Agreements below regarding transactions that lowered the effective interest rates of the 73/8% senior subordinated notes. In connection with the offering of our 71/4% senior notes and 97/8% senior subordinated notes, as described below, our subsidiary guarantors also guaranteed our 73/8% senior notes. In February 2002, we purchased $6.75 million in principal amount of our 73/8%
senior notes in the open market. This purchase lowered our interest expense approximately $500 thousand annually.



On March 29, 2001, we issued $29.0 million in aggregate principal amount of 71/4% senior notes due May 1, 2010 and $285.0 million in aggregate principal amount of 97/8% senior subordinated notes due April 1, 2011. The 71/4% senior notes and 97/8% senior subordinated notes were issued at a discount to yield effective
interest rates of 9.4% and 10.5%, respectively. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 73/8% senior subordinated notes is 9.2%. See -Interest Rate Swap Agreements below regarding transactions that lowered the effective interest rates
of the 97/8% 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.



Interest Rate Swap Agreements.In January 2003, we effectively unwound $85.0 million of our $135.0 million interest rate swap
agreement related to the 97/8% 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 97/8% senior subordinated notes by approximately
30 basis points.



In May 2003, we unwound the remaining $50.0
million of our $50.0 million interest rate swap agreement related to the 97/8% senior subordinated notes, and
received approximately $4.6 million from the bank counter-party. Simultaneously, we unwound $50.0 million of our remaining interest rate swap agreements related to the 73/8% senior notes, and received approximately $7.1 million. The $11.7 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 $4.6 million gain lowered the effective interest rate of the 97/8% senior subordinated notes by approximately 30 basis points. The $7.1 million gain lowered the effective interest rate of the 73/8% senior subordinated notes by approximately 80 basis points.



In July 2003 we entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that
correspond to the terms of the note obligations it covers, effectively converted $50.0 million of our fixed rate 97/8% senior subordinated notes into variable rate obligations. The variable rates are based on the sixmonth LIBOR plus a fixed margin.



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.



Standard Gypsum is the obligor under
reimbursement agreements pursuant to which direct-pay letters of credit in the aggregate amount of approximately $56.2 million were originally 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



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obligations. As of September 30, 2003, the outstanding letters of credit totaled approximately $56.8 million, for one-half of which we are obligated
(approximately $28.4 million). If either joint venture partner had defaulted under its support arrangements, our total obligation would have been $28.4 million at September 30, 2003.



As described below under Subsequent Event, Standard Gypsum replaced these letters of credit in October 2003 with new
direct-pay letters of credit in the aggregate amount of $57.4 million, issued by a replacement lender. Our obligation with respect to these letters of credit is supported by a letter of credit in the face amount of $28.7 million, issued in favor of
the Standard Gypsum lender. This letter of credit was issued under our senior credit facility and expires on October 24, 2004. The letter of credit may be drawn in the event of a default under the Standard Gypsum reimbursement agreement, and such a
default would be triggered by, among other things, our failure to renew or extend this letter of credit. In the event we are unable to renew, extend or otherwise replace this letter of credit, the lender under the Standard Gypsum facility would be
entitled to draw under the letter of credit to satisfy our support obligations, and we would then be obligated to reimburse our senior lenders for the amount of such drawing.



Premier Boxboard is the borrower under a credit facility, the aggregate principal amount of which was reduced from $30.0 million to $20.2
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 are severally obligated for 50% of Premier Boxboards
obligations for reimbursement of letter of credit drawings, interest, fees and other amounts. Temple-Inland has guaranteed 50% of Premier Boxboards obligations. As of September 30, 2003, the outstanding principal amount of borrowings under the
facility was approximately $17.2 million (including a $200 thousand undrawn letter of credit), for one-half of which we are obligated (approximately $8.6 million). If either joint venture partner had defaulted under its support arrangements, our
total obligation would have been $8.6 million at September 30, 2003. Our obligation is supported by a letter of credit in the face amount of $8.6 million, issued in favor of the Premier Boxboard lenders. This letter of credit was issued in June 2003
under our new senior credit facility in replacement of a guarantee agreement, and expires in June 2004.



Any reductions of outstanding loans under the Premier Boxboard credit facility may not be reborrowed and will permanently reduce the commitments. The reduction of the commitments under this credit facility eliminates
availability for borrowings unless we are able to reduce outstandings under the facility, and effectively requires 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. If we are not able to 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 the lenders under the Premier Boxboard facility will be entitled to draw under the letter of credit to satisfy our support obligations.



In the event that we were called upon to reimburse drawings under either or both of our joint
venture letter of credit support obligations, we believe that we would be able to satisfy such obligations by having our senior lenders treat these reimbursement obligations as revolving credit loans under our senior credit agreement. The full $37.0
million of these letter of credit obligations outstanding as of September 30, 2003 has already been counted in determining the $15.6 million in borrowing availability under our senior credit facility as of September 30, 2003. Our cash on hand is
also a potential source of repayment of some or all of these reimbursement obligations. However, we can give no assurance that we will be able to obtain, on a timely basis, the renewals, extensions or refinancings necessary to avoid being called
upon to satisfy either or both of our joint venture support obligations, or that we will be able to reimburse our senior lenders in the event of drawings under one or both of the letters of credit. Any resulting acceleration and default in repayment
of these support obligations could cause further defaults and acceleration under our 97/8% senior subordinated
notes, our 71/4% senior notes and our 73/8% senior notes.



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 lenders 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



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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 adversely affect our liquidity and financial condition.



Cash from Operations.Cash generated from operations was $42.8 million for the
nine-month period ended September 30, 2003 compared with $55.8 million for the same period of 2002. The decrease was primarily due to lower operating results, partially offset by a reduction in working capital. The reduction in working capital is
the result of management initiatives to reduce inventory and lengthen payment terms to vendors towards industry averages.



Capital Expenditures.Capital expenditures were $14.7 million in the first nine months of 2003 versus $16.1 million in the first nine months 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 $43.2 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% interest 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 our Industrial & Consumer Products Group.



Dividends.We paid cash dividends of $833 thousand in the first quarter
of 2002. 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. As described under 
Liquidity and Capital Resources, our new senior credit facility prohibits us from paying any dividends.



Inflation



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



Subsequent Event



On October 24, 2003, Standard Gypsum, L.P. put into place substitute direct-pay letters of
credit in support of its industrial development bond obligations, in the aggregate amount of $57.4 million. Concurrently with the issuance by Standard Gypsum of the substitute letters of credit, we cancelled the $28.4 million supporting letter of
credit previously issued under our senior credit facility in favor of the former issuing lender, and issued a new $28.7 million letter of credit in favor of the new issuing lender. This new letter of credit expires October 24, 2004. See
Liquidity and Capital Resources above.



New Accounting
Pronouncements



In July 2001, the FASB issued Statement of Financial
Accounting Standards (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



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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 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. We adopted SFAS No. 146 effective January 1, 2003 and are accounting for current exit and disposal activities in accordance with this pronouncement. The adoption of this statement has resulted in the accrual of liabilities as incurred.



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, an 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 adopted this interpretation effective July 1, 2003. We do not currently hold any VIEs and the adoption of this interpretation did not have a material impact on our consolidated financial statements or
disclosures.



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. The adoption of this statement did not have a material
impact on our financial statements.



In May 2003, the Financial Accounting
Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. The adoption of this statement on June 1, 2003, did not have
an impact on our consolidated 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



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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 website 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 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 and cash flow 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 third quarter of 2003, energy costs were $58 per ton compared with $45 per ton in the third quarter of 2002, a 30.0% 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 have not been able to pass through to our customers
all of the energy cost increases we have incurred. As a result, our operating margins have been 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.



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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 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 $4.0 million in 2002 and $4.6 million for the first nine months of 2003. 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 a new senior credit facility that, among other things, imposes limitations on our ability to make acquisitions
or other strategic investments. Without additional capital, 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 the consolidated financial statements 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 provided 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 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



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| |  | 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. In
July 2003, we entered into an interest rate swap agreement in order to take advantage of market conditions. This agreement converted $50.0 million of our fixed rate 97/8% senior subordinated notes into variable rate obligations. The variable rates are based on the six-month LIBOR plus a fixed margin. This swap agreement will lower our interest
expense in 2003, and we expect this agreement 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. Where we believe necessary or appropriate, we have initiated response actions or
obtained indemnities from predecessor owners. 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 response 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, discoveries of past releases, 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 SEPTEMBER 30, 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. See Note 5 to the condensed consolidated financial statements for additional information about our interest rate swap agreements and transactions since December 31,
2002.



ITEM 4. CONTROLS AND PROCEDURES



As of the end of the period covered by this quarterly report on Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (disclosure controls). Included with the exhibits to
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 disclosures regarding internal control over financial reporting 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 control over financial reporting 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, 2004 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.



Based on the evaluation discussed
above, and subject to the disclosures and limitations noted above, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls, are effective to provide reasonable assurance that management, including the
Chief Executive Officer and Chief Financial Officer is timely alerted 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.



Subject to the disclosures and limitations noted above, there has been
no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003



PART II, ITEM 4.



PART II. OTHER INFORMATION



ITEM 5.OTHER INFORMATION



2004 Annual Meeting Date



Our 2004 annual meeting of shareholders will be held on Wednesday May 19, 2004.



ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K



| | b) | Exhibits
| | -- | --------



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



| | b) | Reports on Form 8-K
| | -- | -------------------



We furnished three current reports on Form 8-K during the quarter ended September 30, 2003. The first report, furnished on August 5, 2003, attached our press release announcing our financial results for the quarter
ended June 30, 2003.



The second report, furnished on August 14, 2003, attached
our press release announcing our revised financial results for the quarter ended June 30, 2003.



The third report, furnished on September 25, 2003, attached excerpts from a management presentation.



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##### Table of Contents

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

/s/ Ronald J. DomanicoVice President and Chief Financial Officer (Principal Financial
Officer)


Date: November 14, 2003



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##### Table of Contents

EXHIBIT INDEX



|ExhibitNo. |  |   |  | 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 73/8% 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 73/8% 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])                                                                                                                                    
|           |  |  
|10.01      |  |  |  | Credit Agreement, dated as of June 24, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as
guarantors listed therein, and Bank of America, N.A. as the Administrative Agent regarding the Companys $75.0 million Senior Credit facility (Incorporated by reference  Exhibit 10.01 to report on Form 10-Q for the quarter ended June 30,
2003 [SEC File No. 0-20646]).
|           |  |  
|10.02      |  |  |  | Security Agreement, dated as of June 24, 2003, by and among the Company and certain subsidiaries identified therein, as guarantors, and Bank of America, N.A, as Administrative
Agent (Incorporated by reference  Exhibit 10.02 to report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No. 0-20646])                                                                                                                                           
|           |  |  
|10.03      |  |  |  | First Amendment to Credit Agreement, dated as of July 8, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the
Company identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference  Exhibit 10.03 to report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No. 0-20646])                                               
|           |  |  
|11.01     |  |  |  | Computation of Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |  |  
|31.01     |  |  |  | Certification of CEO  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                               
|           |  |  
|31.02     |  |  |  | Certification of CFO  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                               
|           |  |  
|32.01     |  |  |  | Certification of CEO  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                               
|           |  |  
|32.02     |  |  |  | Certification of CFO  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                               

---

| | Filed or furnished herewith
|- | ---------------------------



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