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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007



| ̈ | 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)



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

(770) 948-3101

(Registrants telephone number, including area code)

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

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

Large accelerated
filer ̈Accelerated filer  x                    Non-accelerated filer ̈

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

Indicate the number of shares outstanding of each of issuers classes of common stock, as of the latest practicable date, August 3, 2007.



|                             |  |              
|---------------------------- |  | -------------
|Common Stock, $.10 par value |  | 29,107,521   
|(Class)                      |  | (Outstanding)



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##### Table of Contents

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2007

CARAUSTAR INDUSTRIES, INC.

TABLE OF CONTENTS



|                               |  |                                                                                                                        |  |     
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                        |  | Page
|                               | 
|PART I  FINANCIAL INFORMATION |  |                                                                                                                       
|                               |  |                                                                                                                       
|Item 1.                        |  | Condensed Consolidated Financial Statements (unaudited):                                                               |  |     
|                               |  |                                                                                                                       
|                               |  | Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006                                        |  | 3   
|                               |  |                                                                                                                       
|                               |  | Condensed Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2007 and 2006 |  | 4   
|                               |  |                                                                                                                       
|                               |  | Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2007 and 2006                 |  | 5   
|                               |  |                                                                                                                       
|                               |  | Notes to Condensed Consolidated Financial Statements                                                                   |  | 6   
|                               |  |                                                                                                                       
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 28  
|                               |  |                                                                                                                       
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                             |  | 39  
|                               |  |                                                                                                                       
|Item 4.                        |  | Controls and Procedures                                                                                                |  | 39  
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                                       
|                               |  |                                                                                                                       
|Item 1.                        |  | Legal Proceedings                                                                                                      |  | 39  
|Item 1A.                       |  | Risk Factors                                                                                                           |  | 39  
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                            |  | 39  
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                                    |  | 39  
|Item 6.                        |  | Exhibits                                                                                                               |  | 40  
|                               | 
|Signatures                     |  | 41                                                                                                                    
|                               | 
|Exhibit Index                  |  | 42                                                                                                                    



2



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##### Table of Contents

|ITEM 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)



|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                         |  | June 30,2007 |          |   | December 31,2006 |  
|Assets                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                                          |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                |  | $            | 2,281    |   |                  | $ | 1,022    |  
|Receivables, net of allowances for doubtful accounts, returns, and discounts of $2,957 and $3,062 as of June 30, 2007 and
December 31, 2006, respectively                |  |              | 94,190   |   |                  |   | 85,577   |  
|Inventories                                                                                                                                                              |  |              | 72,001   |   |                  |   | 75,041   |  
|Refundable income taxes                                                                                                                                                  |  |              | 1,515    |   |                  |   | 172      |  
|Current deferred tax assets                                                                                                                                              |  |              | 5,967    |   |                  |   | 9,272    |  
|Other current assets                                                                                                                                                     |  |              | 12,007   |   |                  |   | 8,354    |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                                     |  |              | 187,961  |   |                  |   | 179,438  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Property, plant and equipment:                                                                                                                                           |  |              |          |   |                  |   |          |  
|Land                                                                                                                                                                     |  |              | 10,043   |   |                  |   | 10,316   |  
|Buildings and improvements                                                                                                                                               |  |              | 89,495   |   |                  |   | 93,275   |  
|Machinery and equipment                                                                                                                                                  |  |              | 439,392  |   |                  |   | 436,705  |  
|Furniture and fixtures                                                                                                                                                   |  |              | 32,245   |   |                  |   | 29,975   |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|                                                                                                                                                                         |  |              | 571,175  |   |                  |   | 570,271  |  
|Less accumulated depreciation                                                                                                                                            |  |              | (309,190 | ) |                  |   | (306,666 | )
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Property, plant and equipment, net                                                                                                                                       |  |              | 261,985  |   |                  |   | 263,605  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Goodwill                                                                                                                                                                 |  |              | 127,574  |   |                  |   | 127,574  |  
|Investment in unconsolidated affiliates                                                                                                                                  |  |              | 42,125   |   |                  |   | 41,574   |  
|Other assets                                                                                                                                                             |  |              | 11,759   |   |                  |   | 12,084   |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|                                                                                                                                                                         |  | $            | 631,404  |   |                  | $ | 624,275  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Liabilities and Shareholders Equity                                                                                                                                     |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Current maturities of debt                                                                                                                                               |  | $            | 5,830    |   |                  | $ | 5,830    |  
|Accounts payable                                                                                                                                                         |  |              | 69,883   |   |                  |   | 65,033   |  
|Accrued interest                                                                                                                                                         |  |              | 1,956    |   |                  |   | 1,482    |  
|Accrued compensation                                                                                                                                                     |  |              | 9,132    |   |                  |   | 10,127   |  
|Accrued pension                                                                                                                                                          |  |              | 271      |   |                  |   | 271      |  
|Capital lease obligations                                                                                                                                                |  |              | 335      |   |                  |   | 544      |  
|Other accrued liabilities                                                                                                                                                |  |              | 24,013   |   |                  |   | 27,187   |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                |  |              | 111,420  |   |                  |   | 110,474  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|                                                                                                                                                                         |  |             
|Long-term debt, less current maturities                                                                                                                                  |  |              | 283,507  |   |                  |   | 260,092  |  
|Long-term capital lease obligations                                                                                                                                      |  |              | 27       |   |                  |   | 91       |  
|Deferred income taxes                                                                                                                                                    |  |              | 26,842   |   |                  |   | 43,315   |  
|Pension liability                                                                                                                                                        |  |              | 35,636   |   |                  |   | 38,854   |  
|Other liabilities                                                                                                                                                        |  |              | 24,547   |   |                  |   | 9,863    |  
|Shareholders equity:                                                                                                                                                    |  |              |          |   |                  |   |          |  
|Preferred stock, $.10 par value; 5,000,000 shares authorized, no shares issued                                                                                           |  |              |         |   |                  |   |         |  
|Common stock, $.10 par value; 60,000,000 shares authorized, 29,096,703 and 29,084,246 shares issued and outstanding at June 30, 2007 and
December 31, 2006, respectively |  |              | 2,911    |   |                  |   | 2,909    |  
|Additional paid-in capital                                                                                                                                               |  |              | 192,109  |   |                  |   | 191,411  |  
|Retained deficit                                                                                                                                                         |  |              | (21,863  | ) |                  |   | (7,502   | )
|Accumulated other comprehensive (loss) income:                                                                                                                           |  |              |          |   |                  |   |          |  
|Unrecognized pension and other benefit liabilities                                                                                                                       |  |              | (25,650  | ) |                  |   | (26,791  | )
|Foreign currency translation                                                                                                                                             |  |              | 1,918    |   |                  |   | 1,559    |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Total accumulated other comprehensive loss                                                                                                                               |  |              | (23,732  | ) |                  |   | (25,232  | )
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Total shareholders equity                                                                                                                                               |  |              | 149,425  |   |                  |   | 161,586  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|                                                                                                                                                                         |  | $            | 631,404  |   |                  | $ | 624,275  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  

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



3



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)



|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ---------------------------------- | ------- | - | -------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                   |  | For the Three Months EndedJune 30, |         |   | For the Six Months EndedJune 30, |  
|                                                                                   |  | 2007                               |         |   | 2006                             |   |         | 2007 |  |   | 2006    |  
|Sales                                                                              |  | $                                  | 235,644 |   |                                  | $ | 262,673 |      |  | $ | 468,389 |   |  | $ | 526,554 |  
|Cost of goods sold                                                                 |  |                                    | 204,688 |   |                                  |   | 224,184 |      |  |   | 410,025 |   |  |   | 450,735 |  
|Selling, general and administrative expenses                                       |  |                                    | 26,716  |   |                                  |   | 33,117  |      |  |   | 56,149  |   |  |   | 68,624  |  
|Restructuring and impairment costs                                                 |  |                                    | 3,736   |   |                                  |   | 15,798  |      |  |   | 9,524   |   |  |   | 20,608  |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from operations                                                      |  |                                    | 504     |   |                                  |   | (10,426 | )    |  |   | (7,309  | ) |  |   | (13,413 | )
|Other (expense) income:                                                            |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Interest expense                                                                   |  |                                    | (4,829  | ) |                                  |   | (6,962  | )    |  |   | (9,479  | ) |  |   | (17,125 | )
|Interest income                                                                    |  |                                    | 48      |   |                                  |   | 1,445   |      |  |   | 102     |   |  |   | 3,625   |  
|Equity in income of unconsolidated affiliates                                      |  |                                    | 355     |   |                                  |   | 2,060   |      |  |   | 514     |   |  |   | 3,651   |  
|Gain on sale of interest in Standard Gypsum, L.P.                                  |  |                                    |        |   |                                  |   |        |      |  |   |        |   |  |   | 135,247 |  
|Loss on redemption of senior subordinated notes                                    |  |                                    |        |   |                                  |   | (10,272 | )    |  |   |        |   |  |   | (10,272 | )
|Other, net                                                                         |  |                                    | 81      |   |                                  |   | 19      |      |  |   | 97      |   |  |   | 114     |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|                                                                                   |  |                                    | (4,345  | ) |                                  |   | (13,710 | )    |  |   | (8,766  | ) |  |   | 115,240 |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|(Loss) income from continuing operations before income taxes and minority interest |  |                                    | (3,841  | ) |                                  |   | (24,136 | )    |  |   | (16,075 | ) |  |   | 101,827 |  
|Benefit (provision) for income taxes                                               |  |                                    | 1,533   |   |                                  |   | 8,481   |      |  |   | 4,823   |   |  |   | (35,897 | )
|Minority interest in income                                                        |  |                                    |        |   |                                  |   | (69     | )    |  |   |        |   |  |   | (83     | )
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|(Loss) income from continuing operations                                           |  |                                    | (2,308  | ) |                                  |   | (15,724 | )    |  |   | (11,252 | ) |  |   | 65,847  |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Discontinued operations:                                                           |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations before income taxes                              |  |                                    |        |   |                                  |   | (72     | )    |  |   |        |   |  |   | (1,483  | )
|Benefit for income taxes of discontinued operations                                |  |                                    |        |   |                                  |   | 40      |      |  |   |        |   |  |   | 532     |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations                                                  |  |                                    |        |   |                                  |   | (32     | )    |  |   |        |   |  |   | (951    | )
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Net (loss) income                                                                  |  |                                    | (2,308  | ) |                                  |   | (15,756 | )    |  |   | (11,252 | ) |  |   | 64,896  |  
|Other comprehensive income (loss):                                                 |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Unrecognized pension and other benefit adjustment                                  |  |                                    | 1,141   |   |                                  |   |        |      |  |   | 1,141   |   |  |   |        |  
|Foreign currency translation adjustment                                            |  |                                    | 303     |   |                                  |   | 210     |      |  |   | 359     |   |  |   | 125     |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive (loss) income                                                        |  | $                                  | (864    | ) |                                  | $ | (15,546 | )    |  | $ | (9,752  | ) |  | $ | 65,021  |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Basic (loss) income per common share:                                              |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Continuing operations                                                              |  | $                                  | (0.08   | ) |                                  | $ | (0.55   | )    |  | $ | (0.39   | ) |  | $ | 2.30    |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Discontinued operations                                                            |  | $                                  |        |   |                                  | $ |        |      |  | $ |        |   |  | $ | (0.03   | )
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Net (loss) income                                                                  |  | $                                  | (0.08   | ) |                                  | $ | (0.55   | )    |  | $ | (0.39   | ) |  | $ | 2.27    |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Weighted average number of shares outstanding                                      |  |                                    | 28,615  |   |                                  |   | 28,570  |      |  |   | 28,609  |   |  |   | 28,559  |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Diluted (loss) income per common share:                                            |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Continuing operations                                                              |  | $                                  | (0.08   | ) |                                  | $ | (0.55   | )    |  | $ | (0.39   | ) |  | $ | 2.30    |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Discontinued operations                                                            |  | $                                  |        |   |                                  | $ |        |      |  | $ |        |   |  | $ | (0.03   | )
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Net (loss) income                                                                  |  | $                                  | (0.08   | ) |                                  | $ | (0.55   | )    |  | $ | (0.39   | ) |  | $ | 2.27    |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  
|Diluted weighted average number of shares outstanding                              |  |                                    | 28,615  |   |                                  |   | 28,570  |      |  |   | 28,609  |   |  |   | 28,615  |  
|                                                                                   |  |                                    |         |   |                                  |   |         |      |  |   |         |   |  |   |         |  

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



4



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



|                                                                                     |  |                                  |         |   |      |   |          |  
|------------------------------------------------------------------------------------ |  | -------------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                     |  | For the Six Months EndedJune 30, |        
|                                                                                     |  | 2007                             |         |   | 2006 |  
|Operating activities:                                                                |  |                                  |         |   |      |   |          |  
|Net (loss) income                                                                    |  | $                                | (11,252 | ) |      | $ | 64,896   |  
|Adjustments to reconcile net (loss) income to net cash used in operating activities: |  |                                  |         |   |      |   |          |  
|Depreciation and amortization                                                        |  |                                  | 10,570  |   |      |   | 11,162   |  
|Write-off of deferred debt costs                                                     |  |                                  |        |   |      |   | 155      |  
|Equity-based compensation expense                                                    |  |                                  | 554     |   |      |   | 547      |  
|Loss on redemption of senior subordinated notes                                      |  |                                  |        |   |      |   | 10,272   |  
|Restructuring and impairment costs                                                   |  |                                  | 3,055   |   |      |   | 19,189   |  
|Deferred income taxes                                                                |  |                                  | (5,030  | ) |      |   | 28,126   |  
|Gain on sale of interest in Standard Gypsum, L.P.                                    |  |                                  |        |   |      |   | (135,247 | )
|Loss on sale of assets held for sale                                                 |  |                                  |        |   |      |   | 2,073    |  
|Equity in income of unconsolidated affiliates                                        |  |                                  | (514    | ) |      |   | (3,651   | )
|Distributions from unconsolidated affiliates                                         |  |                                  |        |   |      |   | 3,616    |  
|Changes in operating assets and liabilities, net of acquisitions                     |  |                                  | (9,611  | ) |      |   | (4,688   | )
|                                                                                     |  |                                  |         |   |      |   |          |  
|Net cash used in operating activities                                                |  |                                  | (12,228 | ) |      |   | (3,550   | )
|                                                                                     |  |                                  |         |   |      |   |          |  
|Investing activities:                                                                |  |                                  |         |   |      |   |          |  
|Purchases of property, plant and equipment                                           |  |                                  | (11,600 | ) |      |   | (15,799  | )
|Proceeds from disposal of property, plant and equipment                              |  |                                  | 1,369   |   |      |   | 353      |  
|Proceeds from sale of assets held for sale                                           |  |                                  |        |   |      |   | 7,195    |  
|Acquisition of businesses, net of cash acquired                                      |  |                                  |        |   |      |   | (11,059  | )
|Changes in restricted cash                                                           |  |                                  | (75     | ) |      |   | 10,712   |  
|Net proceeds from sale of interest in Standard Gypsum, L.P.                          |  |                                  |        |   |      |   | 148,460  |  
|Return of investment in unconsolidated affiliates                                    |  |                                  | 41      |   |      |   | 1,384    |  
|Investment in unconsolidated affiliate                                               |  |                                  | (78     | ) |      |   |         |  
|                                                                                     |  |                                  |         |   |      |   |          |  
|Net cash (used in) provided by investing activities                                  |  |                                  | (10,343 | ) |      |   | 141,246  |  
|                                                                                     |  |                                  |         |   |      |   |          |  
|Financing activities:                                                                |  |                                  |         |   |      |   |          |  
|Proceeds from senior credit facility-revolver                                        |  |                                  | 83,954  |   |      |   | 30,000   |  
|Repayments of senior credit facility-revolver                                        |  |                                  | (56,954 | ) |      |   | (15,000  | )
|Proceeds from senior credit facility-term loan                                       |  |                                  |        |   |      |   | 35,000   |  
|Repayments of short and long-term debt                                               |  |                                  | (2,917  | ) |      |   | (274,110 | )
|Deferred debt costs                                                                  |  |                                  |        |   |      |   | (1,135   | )
|Payments for capital lease obligations                                               |  |                                  | (273    | ) |      |   | (248     | )
|Issuances of stock, net of forfeitures                                               |  |                                  | 20      |   |      |   | 92       |  
|                                                                                     |  |                                  |         |   |      |   |          |  
|Net cash provided by (used in) financing activities                                  |  |                                  | 23,830  |   |      |   | (225,401 | )
|                                                                                     |  |                                  |         |   |      |   |          |  
|Net change in cash and cash equivalents                                              |  |                                  | 1,259   |   |      |   | (87,705  | )
|Cash and cash equivalents at beginning of period                                     |  |                                  | 1,022   |   |      |   | 95,152   |  
|                                                                                     |  |                                  |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                           |  | $                                | 2,281   |   |      | $ | 7,447    |  
|                                                                                     |  |                                  |         |   |      |   |          |  
|Supplemental disclosures:                                                            |  |                                  |         |   |      |   |          |  
|Cash payments for interest                                                           |  | $                                | 9,513   |   |      | $ | 22,303   |  
|                                                                                     |  |                                  |         |   |      |   |          |  
|Income tax payments, net                                                             |  | $                                | 174     |   |      | $ | 2,865    |  
|                                                                                     |  |                                  |         |   |      |   |          |  
|Property acquired under capital leases                                               |  |                                  |        |   |      | $ | 36       |  
|                                                                                     |  |                                  |         |   |      |   |          |  

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



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(UNAUDITED)

Note 1.Basis of Presentation

The financial information included herein is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to present
fairly, in all material respects, the financial position of the Company as of June 30, 2007, and the results of operations for the three months and six months ended June 30, 2007 and 2006, and the cash flows for the six months ended
June 30, 2007 and 2006, respectively. The results of operations for the three months and six months ended June 30, 2007 and the cash flows for the six months ended June 30, 2007 are not, and should not be, construed as necessarily
indicative of the results of the operations or cash flows which may be reported for the remainder of 2007.

There were no discontinued operations to be
reported for the three months and six months ended June 30, 2007. For the three months and six months ended June 30, 2006, certain reclassifications of balances have been made between discontinued operations and continuing operations as a
result of the Companys retention of the Tama, Iowa coated recycled paperboard mill, which was announced in December 2006.

The accompanying unaudited
condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain footnote disclosures and other information
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited condensed financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 1 of the notes to the financial
statements included in the Companys Form 10-K, except for the adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement
No. 109) (FIN 48), on January 1, 2007.

Note 2.New Accounting Pronouncements

Effective January 1, 2007, the Company adopted FIN 48, which was issued to clarify the accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the adoption of FIN 48, the Company
recognized a cumulative effect adjustment of $3.1 million, which was accounted for as a reduction to the January 1, 2007 retained earnings balance. See Note 11, Income Taxes, to the Condensed Consolidated Financial Statements for
additional information.

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities 
Including an Amendment of FASB Statement No. 115. This pronouncement permits entities to use the fair value method to measure certain financial assets and liabilities by electing an irrevocable option to use the fair value method at
specified election dates. After election of the option, subsequent changes in fair value would result in the recognition of unrealized gains or losses as period costs during the period the change occurred. SFAS No. 159 becomes effective as of
the beginning of the first fiscal year that begins after November 15, 2007, with early adoption permitted. However, entities may not retroactively apply the provisions of SFAS No. 159 to fiscal years preceding the date of adoption. The
Company is currently evaluating the impact that SFAS No. 159 will have on its financial position and results of operations.

Note
3.Accounting for Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R),
Share-Based Payment (SFAS 123R) which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123R



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##### Table of Contents

supersedes APB 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R requires
all share-based payments to employees, including grants of employee stock options, to be recognized in the statements of operations based on their fair values.

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

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

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

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

There were no options granted during the three months ended June 30, 2007. During the six months ended June 30, 2006,
the Company granted 226,000 options with a weighted-average grant date fair value of $5.96 per share. The Company recorded compensation expense of approximately $220 thousand and $135 thousand for the six months ended June 30, 2007 and 2006,
respectively. The amount reported for the six months ended June 30, 2007 included approximately $106 thousand of compensation expense related to options issued in December 2006. The total intrinsic value of the 3,000 and 11,662 options
exercised during the six months ended June 30, 2007 and 2006, respectively, was insignificant. As of June 30, 2007, there was $505 thousand of total unrecognized compensation cost related to nonvested stock options. The unrecognized cost
is expected to be expensed over a weighted-average period of 4.7 years using the straight-line method.

During the six months ended June 30, 2007, the
Company granted 4,500 shares of nonvested stock at the weighted-average grant date fair value price of $7.46 per share. During the six months ended June 30, 2006, the Company granted 277 thousand shares of nonvested stock at the
weighted-average grant date fair value price of $10.14 per share. The total fair value of nonvested stock that vested during the six months ended June 30, 2007 and 2006 was insignificant. The Company recorded approximately $335 thousand and
$412 thousand of compensation expense during the six months ended June 30, 2007 and 2006, respectively. As of June 30, 2007, there was $4.1 million of total unrecognized compensation cost related to nonvested stock. The unrecognized cost
is expected to be expensed, using the straight-line method, over a weighted-average period of 5.1 years unless specific stock price targets are achieved, at which time the nonvested stock will vest and be expensed during the period the targets are
achieved.

Total compensation expense for nonvested stock and stock options for the six months ended June 30, 2007 and 2006 included in the
Companys results of operations was $555 thousand and $547 thousand, respectively. The Company recognized no windfall tax benefit for the six months ended June 30, 2007 and 2006.



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##### Table of Contents

The following table summarizes the stock option activity during the six months ended June 30, 2007:



|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |  
|----------------------------------------------- |  | --------- | - |  | ------------------------------ | ----- | ----------------------------------------- | --- | -------------------------------------------- | - | -
|                                                |  | Shares    |   |  | Weighted AverageExercise Price |       | Weighted Average RemainingLife (In Years) |     | Aggregate Intrinsic Value (1) (in
thousands)
|Outstanding at December 31, 2006                |  | 1,701,712 |   |  | $                              | 16.30 |                                           |     |                                              |   |  
|Granted                                         |  |          |   |  |                                |      |                                           |     |                                              |   |  
|Forfeited                                       |  | (59,217   | ) |  |                                | 17.40 |                                           |     |                                              |   |  
|Exercised                                       |  | (3,000    | ) |  |                                | 7.05  |                                           |     |                                              |   |  
|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |  
|Outstanding at June 30, 2007                    |  | 1,639,495 |   |  | $                              | 16.28 |                                           | 4.7 |                                              | $ | 0
|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |  
|Vested and expected to vest as of June 30, 2007 |  | 1,615,413 |   |  | $                              | 16.38 |                                           | 4.7 |                                              | $ | 0
|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |  
|Options exercisable as of June 30, 2007         |  | 1,434,361 |   |  | $                              | 17.17 |                                           | 4.3 |                                              | $ | 0
|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |  



|(1) | These amounts represent the difference between the weighted average exercise price and $5.25, the closing price of Caraustar stock on June 29, 2007 (the closing price closest
to the last day of the quarter) as reported on the NASDAQ Stock Market, for all the in-the-money options outstanding.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A summary of the
status of Caraustars nonvested stock as of June 30, 2007 and changes during the six months ended June 30, 2007, is presented below:



|                               |  |         |   |  |                                      |      
|------------------------------ |  | ------- | - |  | ------------------------------------ | -----
|                               |  | Shares  |   |  | Weighted-AverageGrant-DateFair Value
|Nonvested at December 31, 2006 |  | 489,994 |   |  | $                                    | 13.21
|Granted                        |  | 4,500   |   |  |                                      | 7.46 
|Vested                         |  |        |   |  |                                      |     
|Forfeited                      |  | (7,400  | ) |  |                                      | 11.64
|                               |  |         |   |  |                                      |      
|Nonvested at June 30, 2007     |  | 487,094 |   |  | $                                    | 13.18
|                               |  |         |   |  |                                      |      

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



|                         |  |               |  |                  
|------------------------ |  | ------------- |  | -----------------
|                         |  | June 30, 2007 |  | December 31, 2006
|Risk-free interest rate  |  | N/A           |  | 4.65%            
|Expected dividend yield  |  | N/A           |  | 0%               
|Expected life of options |  | N/A           |  | 8 years          
|Expected volatility      |  | N/A           |  | 44%              

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



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##### Table of Contents

Note 4.Inventory

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

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

Inventories at June 30, 2007 and December 31, 2006, were as
follows (in thousands):



|                                   |  |              |        |                  |   |       
|---------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                   |  | June 30,2007 |        | December 31,2006
|Raw materials and supplies         |  | $            | 32,675 |                  | $ | 35,682
|Finished goods and work in process |  |              | 39,326 |                  |   | 39,359
|                                   |  |              |        |                  |   |       
|Total inventory                    |  | $            | 72,001 |                  | $ | 75,041
|                                   |  |              |        |                  |   |       

Note 5.Discontinued Operations and Assets Held for Sale

Discontinued Operations

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

The Company sold its partition operations in February 2006. It sold the Sprague mill and coating components of the Rittman mill in July and August 2006, respectively,
and concluded the sale of its specialty packaging division in December 2006.

In its 2005 financial statements, the Company included the results of
operations of the coated recycled paperboard business, the specialty packaging division, the partition operations, and the Hunt Valley corrugated operation as discontinued operations in the consolidated statements of operations for all periods
presented.

In December 2006, the Company announced the decision to retain its Tama, Iowa coated recycled paperboard mill. The Company exited its two other
coated recycled paperboard mills in July and August 2006, and Tama had been held for sale as part of that group. As a result of the decision to retain the Tama mill, the results of the operations for the Tama mill and the Companys two other
coated recycled paperboard mills, Sprague, Connecticut and Rittman, Ohio were reclassified from discontinued operations to continuing operations in the consolidated statements of operations for all periods presented in its 2006 financial statements.

For all periods presented in the accompanying consolidated statements of operations, discontinued operations include the results of operations and losses
associated with the divestitures of the specialty packaging division, the partition operations, and the Hunt Valley corrugated operation.



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##### Table of Contents

Operating Results Data

There were no discontinued operations for the six months ended June 30, 2007. The following table shows the results of discontinued operations for the three months and six months ended June 30, 2006 (in thousands).



|                                                                  |  |                                |       |   |                              |   |        |  
|----------------------------------------------------------------- |  | ------------------------------ | ----- | - | ---------------------------- | - | ------ | -
|                                                                  |  | Three monthsended June 30,2006 |       |   | Six monthsended June 30,2006 |  
|Sales                                                             |  | $                              | 7,862 |   |                              | $ | 20,701 |  
|Cost of sales                                                     |  |                                | 6,678 |   |                              |   | 17,692 |  
|Selling, general and administrative expenses                      |  |                                | 833   |   |                              |   | 2,192  |  
|Restructuring and impairment costs                                |  |                                | 420   |   |                              |   | 2,300  |  
|                                                                  |  |                                |       |   |                              |   |        |  
|Loss from operations                                              |  |                                | (69   | ) |                              |   | (1,483 | )
|Other income (expense), net                                       |  |                                | (3    | ) |                              |   |       |  
|                                                                  |  |                                |       |   |                              |   |        |  
|Loss from discontinued operations before benefit for income taxes |  |                                | (72   | ) |                              |   | (1,483 | )
|Benefit for income taxes                                          |  |                                | 40    |   |                              |   | 532    |  
|                                                                  |  |                                |       |   |                              |   |        |  
|Loss from discontinued operations                                 |  | $                              | (32   | ) |                              | $ | (951   | )
|                                                                  |  |                                |       |   |                              |   |        |  

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

Note 6.Senior Credit Facility and Long-Term Debt

At June 30, 2007 and December 31, 2006, total long-term debt consisted of the following (in thousands):



|                                           |  |              |         |   |                  |   |         |  
|------------------------------------------ |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                           |  | June 30,2007 |         |   | December 31,2006 |  
|Senior credit facility - revolver          |  | $            | 32,000  |   |                  | $ | 5,000   |  
|Senior credit facility - term loan         |  |              | 28,194  |   |                  |   | 31,111  |  
|73/8%
senior notes                         |  |              | 189,750 |   |                  |   | 189,750 |  
|71/4%
senior notes                         |  |              | 29,000  |   |                  |   | 29,000  |  
|Other notes payable                        |  |              | 8,200   |   |                  |   | 8,200   |  
|Realized interest rate swap agreements (1) |  |              | 2,193   |   |                  |   | 2,861   |  
|                                           |  |              |         |   |                  |   |         |  
|Total debt                                 |  |              | 289,337 |   |                  |   | 265,922 |  
|Less current maturities                    |  |              | (5,830  | ) |                  |   | (5,830  | )
|                                           |  |              |         |   |                  |   |         |  
|Total long-term debt                       |  | $            | 283,507 |   |                  | $ | 260,092 |  
|                                           |  |              |         |   |                  |   |         |  



|(1) | Consists of realized interest rate swap gains less the original issuance discounts and accumulated discount amortization related to the senior notes.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

The carrying value of total debt outstanding at June 30, 2007 maturing during the next five years and thereafter is as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2007       |  | $ | 2,917  
|2008       |  |   | 5,833  
|2009       |  |   | 199,302
|2010       |  |   | 33,307 
|2011       |  |   | 39,778 
|Thereafter |  |   | 8,200  
|           |  |   |        
|Total debt |  | $ | 289,337
|           |  |   |        



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##### Table of Contents

Senior Credit Facility

As of December 31, 2005, the Companys senior credit facility provided for a revolving line of credit of $75.0 million and was secured primarily by a first priority security interest in the Companys accounts receivable and
inventory. The facility included a subfacility of $50.0 million for letters of credit, the usage of which reduced availability under the facility. See discussion of the Companys former senior credit facility in the notes to the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

On March 30, 2006, the Company amended its senior credit facility by
entering into an Amended and Restated Credit Agreement. The agreement provides for a $145.0 million senior secured credit facility (the Senior Credit Facility) consisting of a $110.0 million five-year revolver and a $35.0 million
five-year term loan. The five-year revolver was reduced from $110.0 million to $100.0 million in October 2006. On May 14, 2007, the Company amended its senior credit facility which impacted the calculation of the availability under the senior credit
facility and changed the applicable margins in the pricing grid which is discussed in more detail below. The Senior Credit Facility is secured by substantially all assets of the Company and its domestic subsidiaries other than real property,
including accounts receivable, general intangibles, inventory, and equipment. The Companys subsidiaries are parties to the Senior Credit Facility either as co-borrowers with the Company or as guarantors. At June 30, 2007, the Company had
$28.2 million outstanding under the five-year term loan and $32.0 million outstanding under the revolver.

The revolver matures on the fifth anniversary of
closing and includes a sublimit of $25.0 million for letters of credit. Borrowing availability under the revolver is determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and inventory and
reduced by usage of the revolver, including outstanding letters of credit, and any reserves. Aggregate availability under the revolver was $24.4 million at June 30, 2007. The term loan was drawn in full at closing and is required to be
repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding principal due on the fifth anniversary of closing.

Outstanding principal of the term loan initially bears interest at a rate equal to, at the Companys option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative
agent under the Senior Credit Facility) plus 0.50%, or (2) the adjusted one, two, three, or six-month LIBOR rate plus 2.00%. Outstanding principal under the revolver initially bears interest at a rate equal to, at the Companys option,
either (1) the base rate plus .25% or (2) the adjusted one, two, three, or six-month LIBOR rate plus 1.75%. Pricing under the Senior Credit Facility is determined by reference to a pricing grid under which margins shall be adjusted
prospectively on a quarterly basis as determined by the average availability and fixed charge coverage ratio measured as of the last day of each fiscal quarter, commencing with the fiscal quarter ending June 30, 2007. Under the pricing grid,
the applicable margins for the term loan range from 0.0% to 1.0% for base rate loans and from 1.50% to 2.50% for LIBOR loans, and the applicable margins for the revolver range from 0.0% to 0.75% for base rate loans and from 1.25% to 2.25% for LIBOR
loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for LIBOR loans under the revolver as in
effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%. The actual rates in effect at June 30, 2007 were 7.13% and 7.41% for outstanding revolver and term loan borrowings, respectively.

The Senior Credit Facility contains covenants that restrict, among other things, the ability of the Company and its subsidiaries to create liens, merge or
consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, enter into sale and
leaseback transactions, or change the nature of their business. The Senior Credit Facility contains no financial covenant at this time; however, the Company must maintain a $15.0 million Minimum Availability Reserve at all times. The
availability disclosed is net of this reserve. There is a one-time option to convert to a springing covenant financial structure where the $15.0 million Minimum Availability Reserve would be eliminated; however, a fixed charge ratio
would be tested in the event borrowing availability falls below $20.0 million. The company has not exercised this option. The Senior Credit Facility contains events of default including, but not limited to, nonpayment of principal or interest,
violation of covenants, breaches of representations and warranties, cross-default to other indebtedness, bankruptcy and other insolvency events, material judgments, certain ERISA events, actual or asserted invalidity of loan documentation, and
certain changes of control of the Company.

On May 22, 2007, the Company purchased additional units in its PaperLink, LLC unconsolidated affiliate, which
increased the Companys membership interest to greater than fifty percent. The Company failed to timely pledge the assets of PaperLink as a co-borrower or guarantor of the Companys debt (which debt includes the Companys Senior
Credit Facility and Senior Notes). The Company subsequently determined that this failure was a technical violation of the debt covenants of both the Companys Senior Credit Facility and its Senior Notes, which require  within a specified
time period  that the Company pledge the assets of any affiliate in which its membership interest exceeds fifty percent. Upon determination, the Company decreased its membership interest in PaperLink to forty-nine percent. The Company notified
the administrative agent for its Senior Credit Facility and the Trustee which administers it Senior Notes of the technical and inadvertent violation. On June 29, 2007, the bank group that holds the Companys Senior Credit Facility consented to
and waived any defaults regarding the Companys violation. The Company does not expect any adverse impact from notification to the Trustee. The Company was in compliance with the Senior Credit Facility covenants as of June 30, 2007.



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##### Table of Contents

Senior and Senior Subordinated Notes

On June 1, 1999, the Company issued $200.0 million in aggregate principal amount of 73/8% senior notes due June 1, 2009. The 73/8% senior notes were issued at a discount to yield an effective interest rate of 7.47% and pay interest semiannually. After taking into account realized gains from unwinding
various interest rate swap agreements, the current effective interest rate of the 73/8% senior notes is 6.3%.
The 73/8% senior notes are unsecured obligations of the Company. As of June 30, 2007, the Company has
purchased an aggregate of $10.3 million of these notes in the open market.

On March 29, 2001, the Company issued $285.0 million of 97/8% senior subordinated notes due
April 1, 2011 and $29.0 million of 71/4% senior notes due May 1, 2010. These senior subordinated notes
and senior notes were issued at a discount to yield effective interest rates of 10.5% and 9.4%, respectively. The publicly traded senior subordinated notes were, and the senior notes are, unsecured but guaranteed, on a joint and several basis, by
all but one of the Companys wholly-owned domestic subsidiaries. The senior subordinated notes included a redemption provision which allowed the Company to redeem all or part of the outstanding notes at 105.25% on April 1, 2006 or later.

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

Note 7.Segment Information

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

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



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##### Table of Contents

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



|                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                   |  | Three MonthsEnded June 30, |         |   | Six MonthsEnded June 30, |  
|                                                                                   |  | 2007                       |         |   | 2006                     |   |         | 2007 |  |   | 2006    |  
|Sales (external customers):                                                        |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Paperboard                                                                         |  | $                          | 52,707  |   |                          | $ | 78,479  |      |  | $ | 105,593 |   |  | $ | 157,466 |  
|Recovered fiber                                                                    |  |                            | 38,138  |   |                          |   | 28,931  |      |  |   | 76,236  |   |  |   | 54,564  |  
|Tube, core and composite container                                                 |  |                            | 90,105  |   |                          |   | 96,201  |      |  |   | 175,448 |   |  |   | 192,501 |  
|Folding carton and custom packaging                                                |  |                            | 54,694  |   |                          |   | 59,062  |      |  |   | 111,112 |   |  |   | 122,023 |  
|                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total                                                                              |  | $                          | 235,644 |   |                          | $ | 262,673 |      |  | $ | 468,389 |   |  | $ | 526,554 |  
|                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Sales (intersegment):                                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Paperboard                                                                         |  | $                          | 38,687  |   |                          | $ | 32,437  |      |  | $ | 71,845  |   |  | $ | 64,944  |  
|Recovered fiber                                                                    |  |                            | 22,489  |   |                          |   | 26,215  |      |  |   | 44,937  |   |  |   | 48,413  |  
|Tube, core and composite container                                                 |  |                            | 1,232   |   |                          |   | 1,570   |      |  |   | 2,459   |   |  |   | 2,996   |  
|Folding carton and custom packaging                                                |  |                            | 271     |   |                          |   | 125     |      |  |   | 464     |   |  |   | 691     |  
|                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total                                                                              |  | $                          | 62,679  |   |                          | $ | 60,347  |      |  | $ | 119,705 |   |  | $ | 117,044 |  
|                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations:                                          |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Paperboard (A)                                                                     |  | $                          | 1,932   |   |                          | $ | (6,242  | )    |  | $ | 565     |   |  | $ | (4,617  | )
|Recovered fiber (B)                                                                |  |                            | 1,631   |   |                          |   | 1,383   |      |  |   | 3,047   |   |  |   | 2,310   |  
|Tube, core and composite container (C)                                             |  |                            | 2,169   |   |                          |   | 1,067   |      |  |   | 4,065   |   |  |   | 2,979   |  
|Folding carton and custom packaging (D)                                            |  |                            | 1,405   |   |                          |   | (136    | )    |  |   | (656    | ) |  |   | (1,225  | )
|                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total                                                                              |  |                            | 7,137   |   |                          |   | (3,928  | )    |  |   | 7,021   |   |  |   | (553    | )
|Corporate expense (E)                                                              |  |                            | (6,633  | ) |                          |   | (6,498  | )    |  |   | (14,330 | ) |  |   | (12,860 | )
|                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations                                           |  |                            | 504     |   |                          |   | (10,426 | )    |  |   | (7,309  | ) |  |   | (13,413 | )
|Interest expense                                                                   |  |                            | (4,829  | ) |                          |   | (6,962  | )    |  |   | (9,479  | ) |  |   | (17,125 | )
|Interest income                                                                    |  |                            | 48      |   |                          |   | 1,445   |      |  |   | 102     |   |  |   | 3,625   |  
|Equity in income of unconsolidated affiliates                                      |  |                            | 355     |   |                          |   | 2,060   |      |  |   | 514     |   |  |   | 3,651   |  
|Gain on sale of interest in Standard Gypsum, L.P.                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   | 135,247 |  
|Loss on redemption of senior subordinated notes                                    |  |                            |        |   |                          |   | (10,272 | )    |  |   |        |   |  |   | (10,272 | )
|Other, net                                                                         |  |                            | 81      |   |                          |   | 19      |      |  |   | 97      |   |  |   | 114     |  
|                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|(Loss) income from continuing operations before income taxes and minority interest |  | $                          | (3,841  | ) |                          | $ | (24,136 | )    |  | $ | (16,075 | ) |  | $ | 101,827 |  
|                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  



|(A) | Results for the three months ended June 30, 2007 and 2006 include charges to operations of $2.9 million and $12.4 million, respectively, for restructuring and impairment costs.
Results for the six months ended June 30, 2007 and 2006 include charges to operations of $6.7 million and $17.2 million, respectively, for restructuring and impairment costs. These costs relate primarily to the closing and consolidating of
operations and the disposition of machinery and equipment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(B) | Results for the three months ended June 30, 2007 and 2006 include credits to operations of $23 thousand and $9 thousand, respectively, for restructuring and impairment costs.
Results for the six months ended June 30, 2007 and 2006 include credits to operations of $27 thousand and $47 thousand, respectively, for restructuring and impairment costs. These costs relate primarily to the disposition of machinery and
equipment.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(C) | Results for the three months ended June 30, 2007 and 2006 include charges to operations of $290 thousand and $2.3 million, respectively, for restructuring and impairment costs.
Results for the six months ended June 30, 2007 and 2006 include charges to operations of $963 thousand and $1.9 million, respectively, for restructuring and impairment costs. These costs relate primarily to closing and consolidating operations,
settlement of leases and disposition of machinery and equipment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(D) | Results for the three months ended June 30, 2007 and 2006 include charges to operations of $547 thousand and $1.1 million, respectively, for restructuring and impairment costs.
Results for the six months ended June 30, 2007 and 2006 include charges to operations of $1.9 million and $1.6 million, respectively, for restructuring and impairment costs. These costs relate primarily to closing and consolidating operations
and the disposition of machinery and equipment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(E) | Corporate expense for the six months ended June 30, 2006, reflects a reclassification of legal expenses of $1.2 million from corporate expense to the tube, core and composite
container segment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Note 8.Goodwill and Other Intangible Assets

Goodwill

The Company accounts for goodwill and other
intangible assets pursuant to SFAS No. 142, Goodwill and Other Intangible Assets. Under this pronouncement, the Company performs an impairment test at least annually. The Companys most recent impairment test was performed
during the fourth quarter of 2006 and did not result in an impairment charge. There were no changes in goodwill during the six months ended June 30, 2007.

Intangible Assets

As of June 30, 2007 and December 31, 2006, the Company had an intangible asset of $5.2 million (net of
$2.8 million of accumulated amortization) and $5.5 million (net of $2.5 million of accumulated amortization), respectively, which was classified with other assets. Amortization expense for the six months ended June 30, 2007 and 2006 was $256
thousand and $265 thousand, respectively. The intangible asset is associated with the acquisition of certain assets of the Smurfit Industrial Packaging Group, which was completed in 2002, and is attributable to the acquired customer relationships.
This intangible asset is being amortized over 15 years. Scheduled amortization of the intangible asset for the next five years is as follows (in thousands):



|                |  |   |      
|--------------- |  | - | -----
|2008            |  | $ | 511  
|2009            |  |   | 511  
|2010            |  |   | 511  
|2011            |  |   | 511  
|2012            |  |   | 511  
|                |  |   |      
|Five year total |  | $ | 2,555
|                |  |   |      

Note 9.Restructuring and Impairment Costs

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

In December 2006, the
Company announced the permanent closure of its Vacaville, California tube and core facility. The Company has concluded the process of transitioning this facilitys customers to other facilities and ceased production in March 2007. For the six
months ended June 30, 2007, the Company recorded charges of $33 thousand for severance and other termination benefits and $33 thousand for other exit costs. The Company paid $57 thousand of severance and other termination benefits and $33
thousand in other exit costs, leaving a reserve of $3 thousand for severance and other termination benefits. The Company expects to incur additional charges of $92 thousand for other exit costs. This facility is leased and the plan will be complete
once the Company has vacated the leased facility.

In December 2006, the Company announced the permanent closure of its Grand Rapids, Michigan tube and
core facility. The facility is expected to cease production in July 2007. For the six months ended June 30, 2007, the Company recorded charges of $97 thousand for severance and other termination benefits. The Company paid $24 thousand in
severance and other termination benefits, leaving a reserve of $73 thousand for severance and other termination benefits. The Company expects to incur additional charges of $6 thousand for severance and other termination benefits. The plan will be
complete upon the settlement of lease obligations.

In January 2007, the Company announced the permanent closure of its Lafayette paperboard mill located
in Lafayette, Indiana. The mill ceased production in January 2007. For the six months ended June 30, 2007, the Company recorded charges of $1.6 million for severance and other termination benefits and $964 thousand for other exit costs. The
Company paid $786 thousand of severance and other termination benefits and $964 thousand for other exit costs, leaving a reserve of $862 thousand for severance and other termination benefits. The Company also recorded $904 thousand of additional
impairment related to fixed assets. The Company expects to incur additional charges of $1.1 million related to other exit costs. This plan will be complete upon the sale of the real estate, which the Company is currently marketing.



14



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##### Table of Contents

In January 2007, the Company announced the permanent closure of its Amarillo, Texas tube and core facility. The facility
is expected to cease production in July 2007. For the six months ended June 30, 2007, the Company recorded charges of $67 thousand for severance and other termination benefits and $125 thousand for other exit costs. The Company paid $33
thousand of severance and other termination benefits and $125 thousand in other exit costs, leaving a reserve of $34 thousand for severance and other termination benefits. The Company expects to incur additional charges of $4 thousand for severance
and other termination benefits and $103 thousand of other exit costs. This facility is leased and the plan will be complete once the Company has vacated the leased facility and settled the lease obligation.

In January 2007, the Company announced the permanent closure of its Leyland, England tube and core facility. The facility ceased production in April 2007. For the six
months ended June 30, 2007, the Company recorded charges of $352 thousand for severance and other termination benefits and $14 thousand for other exit costs. The Company paid $312 thousand of severance and other termination benefits and $14
thousand in other exit costs, leaving a reserve of $40 thousand for severance and other termination benefits. The Company expects to incur additional charges of $146 thousand of other exit costs. This plan will be complete upon the sale of the
locations real estate, which the Company is currently marketing.

In June 2007, the Company recorded an impairment charge of $1.7 million related to
its Mooresville paperboard facility located in Mooresville, North Carolina, which the Company disposed of during the second quarter of 2007.

The following
is a summary of restructuring and impairment costs and the restructuring liability from December 31, 2006 to June 30, 2007 (in thousands):



|                                     |  |                                             |       |                                             |   |        |                 |  |   |                              |   |  |           |        |   |  |   |      
|------------------------------------ |  | ------------------------------------------- | ----- | ------------------------------------------- | - | ------ | --------------- |  | - | ---------------------------- | - |  | --------- | ------ | - |  | - | -----
|                                     |  | Asset ImpairmentCharges andLoss onDisposals |       | Severance andOtherTerminationBenefits Costs |   |        | Other ExitCosts |  |   | RestructuringLiability Total |   |  | Total (1)
|Liability balance, December 31, 2006 |  |                                             |       |                                             | $ | 3,246  |                 |  | $ | 81                           |   |  | $         | 3,327  |   |  |   |      
|First quarter 2007 costs             |  | $                                           | 937   |                                             |   | 2,506  |                 |  |   | 2,345                        |   |  |           | 4,851  |   |  | $ | 5,788
|                                     |  |                                             |       |                                             |   |        |                 |  |   |                              |   |  |           |        |   |  |   |      
|Expenditures                         |  |                                             |       |                                             |   | (1,484 | )               |  |   | (2,377                       | ) |  |           | (3,861 | ) |  |   |      
|                                     |  |                                             |       |                                             |   |        |                 |  |   |                              |   |  |           |        |   |  |   |      
|Liability balance, March 31, 2007    |  |                                             |       |                                             |   | 4,268  |                 |  |   | 49                           |   |  |           | 4,317  |   |  |   |      
|                                     |  |                                             |       |                                             |   |        |                 |  |   |                              |   |  |           |        |   |  |   |      
|Second quarter 2007 costs            |  | $                                           | 2,118 |                                             |   | 609    |                 |  |   | 1,009                        |   |  |           | 1,618  |   |  | $ | 3,736
|                                     |  |                                             |       |                                             |   |        |                 |  |   |                              |   |  |           |        |   |  |   |      
|Expenditures                         |  |                                             |       |                                             |   | (840   | )               |  |   | (1,020                       | ) |  |           | (1,860 | ) |  |   |      
|                                     |  |                                             |       |                                             |   |        |                 |  |   |                              |   |  |           |        |   |  |   |      
|Liability balance, June 30, 2007     |  |                                             |       |                                             | $ | 4,037  |                 |  | $ | 38                           |   |  | $         | 4,075  |   |  |   |      
|                                     |  |                                             |       |                                             |   |        |                 |  |   |                              |   |  |           |        |   |  |   |      



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

The following table summarizes restructuring and impairment costs by segment for those plans initiated, but
not completed as of June 30, 2007, and accounted for under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (in thousands):



|                                    |  |                                      |        |                                                            |   |                                                          |  |   |       
|----------------------------------- |  | ------------------------------------ | ------ | ---------------------------------------------------------- | - | -------------------------------------------------------- |  | - | ------
|                                    |  | Cumulative Costs as of June 30, 2007 |        | Estimated Costs to Complete Initiatives as ofJune
30, 2007 |   | Total Estimated Costs of Initiatives as
of June 30, 2007
|Segment                             |  |                                      |        |                                                            |   |                                                          |  |   |       
|Paperboard                          |  | $                                    | 15,400 |                                                            | $ | 2,418                                                    |  | $ | 17,818
|Folding carton and custom packaging |  |                                      | 17,272 |                                                            |   | 441                                                      |  |   | 17,713
|Tube, core and composite container  |  |                                      | 3,784  |                                                            |   | 521                                                      |  |   | 4,305 
|                                    |  |                                      |        |                                                            |   |                                                          |  |   |       
|Total                               |  | $                                    | 36,456 |                                                            | $ | 3,380                                                    |  | $ | 39,836
|                                    |  |                                      |        |                                                            |   |                                                          |  |   |       



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Note 10.Pension Plan and Other Postretirement Benefits

Pension Plan and Supplemental Executive Retirement Plan

Substantially all of the Companys employees hired prior to December 31, 2004 participate in a noncontributory defined benefit pension plan (the Pension Plan). The Pension Plan requires benefits to be paid to all
eligible employees at retirement, based primarily on years of service with the Company and compensation rates in effect near retirement. The Pension Plans assets consist of shares held in collective investment funds and group annuity
contracts. The Companys policy is to fund benefits attributed to employees service to date, as well as service expected to be earned in the future. Based on current estimates, contributions of approximately $11.9 million are expected to
be made during 2007. During the six months ended June 30, 2007, the Company made contributions of $4.7 million to the Pension Plan.

Certain
executives participate in a supplemental executive restoration plan (SERP), which provides enhanced retirement benefits to participants based on average compensation. The SERP is unfunded at June 30, 2007.

Pension expense for the Pension Plan and the SERP includes the following components for the three and six months ended June 30, 2007 and 2006 (in thousands):



|                                              |  |                            |        |   |                            |   |        |      |  |      |     |  |   |    
|--------------------------------------------- |  | -------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | ---- | --- |  | - | ---
|                                              |  | Pension Plan               |        |   | SERP                      
|                                              |  | Three Months EndedJune 30, |        |   | Three Months EndedJune 30,
|                                              |  | 2007                       |        |   | 2006                       |   |        | 2007 |  | 2006
|Service cost of benefits earned               |  | $                          | 726    |   |                            | $ | 711    |      |  | $    | 93  |  | $ | 82 
|Interest cost on projected benefit obligation |  |                            | 1,897  |   |                            |   | 1,741  |      |  |      | 142 |  |   | 131
|Estimated return on plan assets               |  |                            | (1,842 | ) |                            |   | (1,805 | )    |  |      | 0   |  |   | 0  
|Net amortization and deferral                 |  |                            | 934    |   |                            |   | 1,157  |      |  |      | 80  |  |   | 84 
|                                              |  |                            |        |   |                            |   |        |      |  |      |     |  |   |    
|Net pension expense                           |  | $                          | 1,715  |   |                            | $ | 1,804  |      |  | $    | 315 |  | $ | 297
|                                              |  |                            |        |   |                            |   |        |      |  |      |     |  |   |    
|                                              |  |                           
|                                              |  | Pension Plan               |        |   | SERP                      
|                                              |  | Six Months EndedJune 30,   |        |   | Six Months EndedJune 30,  
|                                              |  | 2007                       |        |   | 2006                       |   |        | 2007 |  | 2006
|Service cost of benefits earned               |  | $                          | 1,282  |   |                            | $ | 1,422  |      |  | $    | 181 |  | $ | 164
|Interest cost on projected benefit obligation |  |                            | 3,708  |   |                            |   | 3,482  |      |  |      | 281 |  |   | 261
|Estimated return on plan assets               |  |                            | (3,792 | ) |                            |   | (3,609 | )    |  |      | 0   |  |   | 0  
|Net amortization and deferral                 |  |                            | 1,671  |   |                            |   | 2,314  |      |  |      | 158 |  |   | 168
|                                              |  |                            |        |   |                            |   |        |      |  |      |     |  |   |    
|Net pension expense                           |  | $                          | 2,869  |   |                            | $ | 3,609  |      |  | $    | 620 |  | $ | 593
|                                              |  |                            |        |   |                            |   |        |      |  |      |     |  |   |    

Other Postretirement Benefits

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

Net periodic postretirement benefit cost for the three and six
months ended June 30, 2007 and 2006 included the following components (in thousands):



|                                                               |  |                            |     |                          |   |      |  |      |     |  |   |    
|-------------------------------------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                                               |  | Three Months EndedJune 30, |     | Six Months EndedJune 30,
|                                                               |  | 2007                       |     | 2006                     |   | 2007 |  | 2006
|Service cost of benefits earned                                |  | $                          | 9   |                          | $ | 11   |  | $    | 18  |  | $ | 21 
|Interest cost on accumulated postretirement benefit obligation |  |                            | 89  |                          |   | 87   |  |      | 178 |  |   | 173
|Amortization                                                   |  |                            | 38  |                          |   | 59   |  |      | 76  |  |   | 117
|                                                               |  |                            |     |                          |   |      |  |      |     |  |   |    
|Net postretirement benefit cost                                |  | $                          | 136 |                          | $ | 157  |  | $    | 272 |  | $ | 311
|                                                               |  |                            |     |                          |   |      |  |      |     |  |   |    



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##### Table of Contents

Note 11.Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the liability method of accounting for deferred income taxes. Effective
January 1, 2007, the Company implemented FIN 48. FIN 48 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

As a result of implementing FIN 48, the
Company recognized a net increase of $3.1 million in the reserve for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 retained earnings balance. Upon adoption of FIN 48, the Company had gross unrecognized
tax benefits of $13.3 million (including interest and penalties) at January 1, 2007, of which $4.5 million, if recognized, would affect the annual effective tax rate. The difference between the gross amount of unrecognized tax benefits and the
portion that would affect the effective tax rate is attributable to items that would be offset by existing valuation allowance and the federal tax benefit related to state tax items. No material adjustments have been made to unrecognized tax
benefits as of June 30, 2007.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the income tax provision.
As of January 1, 2007 and June 30, 2007, accrued interest and penalties related to unrecognized tax benefits were $566 thousand and $616 thousand, respectively.

The effective rate of income tax for continuing operations for the six months ended June 30, 2007 was a 30.00% benefit, compared with a 35.25% expense for the same period last year. The effective rates are
different from the statutory rates due to permanent tax adjustments, the inability of the Company to record the tax benefits of losses in certain state and foreign jurisdictions, and changes in the estimated state income tax rates.

The Company and its subsidiaries file income tax returns with the US federal, various state, and foreign jurisdictions. For federal purposes, the years that remain
subject to examination by the IRS include tax years 2003  2006. For state purposes, the years that remain subject to examination by state authorities include tax years 2000  2006. The Company is currently under audit by the state of
Illinois for tax years 2003  2005. No material adjustments are expected to result from this audit.

Note 12.Income Per Share

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



|                                                               |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |       
|-------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------
|                                                               |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30,
|                                                               |  | 2007                       |        |   | 2006                     |   |         | 2007 |  |   | 2006   
|(Loss) income from continuing operations                       |  | $                          | (2,308 | ) |                          | $ | (15,724 | )    |  | $ | (11,252 | ) |  | $ | 65,847
|                                                               |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |       
|Weighted average number of common shares outstanding - basic   |  |                            | 28,615 |   |                          |   | 28,570  |      |  |   | 28,609  |   |  |   | 28,559
|Common share equivalents                                       |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   | 56    
|                                                               |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |       
|Weighted average number of common shares outstanding - diluted |  |                            | 28,615 |   |                          |   | 28,570  |      |  |   | 28,609  |   |  |   | 28,615
|                                                               |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |       
|(Loss) income per share  basic                                |  | $                          | (0.08  | ) |                          | $ | (0.55   | )    |  | $ | (0.39   | ) |  | $ | 2.30  
|                                                               |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |       
|(Loss) income per share - diluted                              |  | $                          | (0.08  | ) |                          | $ | (0.55   | )    |  | $ | (0.39   | ) |  | $ | 2.30  
|                                                               |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |       

The impact of the dilutive effect of common share equivalents has been included in periods with net income. The
number of common share equivalents not included in the computation of diluted weighted average shares for the six months ended June 30, 2007 and 2006 was 1,639,495 and 1,390,281, respectively.



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##### Table of Contents

Note 13.Equity Interests in Unconsolidated Affiliates

Prior to January 17, 2006, the Company owned 50% of Standard Gypsum, L.P. (Standard Gypsum). Standard Gypsum was a joint venture with Temple-Inland, Inc.
(Temple-Inland) that operated two gypsum wallboard manufacturing facilities. One facility is located in McQueeny, Texas, and the other in Cumberland City, Tennessee. The joint venture was accounted for under the equity method and was
managed by Temple-Inland.

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

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



|                      |  |              |         |                  |   |        
|--------------------- |  | ------------ | ------- | ---------------- | - | -------
|                      |  | June 30,2007 |         | December 31,2006
|Current assets        |  | $            | 21,240  |                  | $ | 15,254 
|Noncurrent assets     |  |              | 124,964 |                  |   | 128,561
|Current liabilities   |  |              | 12,241  |                  |   | 10,552 
|Long-term liabilities |  |              | 268     |                  |   | 605    
|Long-term debt        |  |              | 50,000  |                  |   | 50,000 
|Net assets            |  |              | 83,695  |                  |   | 82,658 



|                       |  |                            |        |                          |   |        |  |      |        |  |   |       
|---------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                       |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                       |  | 2007                       |        | 2006                     |   | 2007   |  | 2006
|Sales                  |  | $                          | 32,211 |                          | $ | 31,890 |  | $    | 61,026 |  | $ | 59,959
|Gross profit           |  |                            | 4,408  |                          |   | 7,790  |  |      | 8,054  |  |   | 14,896
|Income from operations |  |                            | 1,700  |                          |   | 4,995  |  |      | 2,899  |  |   | 9,172 
|Net income             |  |                            | 723    |                          |   | 4,050  |  |      | 1,015  |  |   | 7,232 

The Company received no cash distributions from PBL during the six months ended June 30, 2007. During the six
months ended June 30, 2006, the Company received $5.0 million in cash distributions from PBL. The Companys equity interest in earnings from PBL for the three months ended June 30, 2007 and 2006 was approximately $362 thousand and
$2.0 million, respectively. The Companys equity interest in earnings from PBL for the six months ended June 30, 2007 and 2006 was approximately $507 thousand and $3.6 million, respectively.

See discussion of PBLs debt and related obligations in the notes to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Note 14.Guarantor Condensed Consolidating Financial Statements

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



18



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE
SHEETS

(In thousands)



|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|--------------------------------------------- |  | ------------------- | -------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                              |  | As of June 30, 2007 |         
|                                              |  | Parent              |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                        |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current assets:                               |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                     |  | $                   | 1,782    |   |                       | $ | 150      |                          |  | $ | 349          |   |  | $            |         |   |  | $ | 2,281    |  
|Intercompany funding                          |  |                     | (167,695 | ) |                       |   | 179,430  |                          |  |   | (11,735      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                |  |                     | 41       |   |                       |   | 90,472   |                          |  |   | 3,677        |   |  |              |         |   |  |   | 94,190   |  
|Inventories                                   |  |                     |         |   |                       |   | 69,030   |                          |  |   | 2,971        |   |  |              |         |   |  |   | 72,001   |  
|Refundable income taxes                       |  |                     | 1,515    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 1,515    |  
|Current deferred tax assets                   |  |                     | 5,967    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 5,967    |  
|Other current assets                          |  |                     | 5,263    |   |                       |   | 5,634    |                          |  |   | 1,110        |   |  |              |         |   |  |   | 12,007   |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                          |  |                     | (153,127 | ) |                       |   | 344,716  |                          |  |   | (3,628       | ) |  |              |         |   |  |   | 187,961  |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment                 |  |                     | 33,821   |   |                       |   | 514,900  |                          |  |   | 22,454       |   |  |              |         |   |  |   | 571,175  |  
|Less accumulated depreciation                 |  |                     | (13,679  | ) |                       |   | (281,845 | )                        |  |   | (13,666      | ) |  |              |         |   |  |   | (309,190 | )
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net            |  |                     | 20,142   |   |                       |   | 233,055  |                          |  |   | 8,788        |   |  |              |         |   |  |   | 261,985  |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Goodwill                                      |  |                     |         |   |                       |   | 124,072  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 127,574  |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Investment in consolidated subsidiaries       |  |                     | 608,232  |   |                       |   |         |                          |  |   |             |   |  |              | (608,232 | ) |  |   |         |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Investment in unconsolidated affiliates       |  |                     | 42,125   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 42,125   |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Other assets                                  |  |                     | 5,461    |   |                       |   | 6,240    |                          |  |   | 58           |   |  |              |         |   |  |   | 11,759   |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                              |  | $                   | 522,833  |   |                       | $ | 708,083  |                          |  | $ | 8,720        |   |  | $            | (608,232 | ) |  | $ | 631,404  |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY          |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current liabilities:                          |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                    |  | $                   | 5,830    |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 5,830    |  
|Accounts payable                              |  |                     | 13,453   |   |                       |   | 53,857   |                          |  |   | 2,573        |   |  |              |         |   |  |   | 69,883   |  
|Accrued interest                              |  |                     | 1,889    |   |                       |   | 67       |                          |  |   |             |   |  |              |         |   |  |   | 1,956    |  
|Accrued compensation                          |  |                     | 1,102    |   |                       |   | 7,806    |                          |  |   | 224          |   |  |              |         |   |  |   | 9,132    |  
|Accrued pension                               |  |                     | 271      |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 271      |  
|Capital lease obligations                     |  |                     | 307      |   |                       |   | 28       |                          |  |   |             |   |  |              |         |   |  |   | 335      |  
|Other accrued liabilities                     |  |                     | 8,982    |   |                       |   | 14,508   |                          |  |   | 523          |   |  |              |         |   |  |   | 24,013   |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                     |  |                     | 31,834   |   |                       |   | 76,266   |                          |  |   | 3,320        |   |  |              |         |   |  |   | 111,420  |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Long-term debt, less current maturities       |  |                     | 275,307  |   |                       |   | 8,200    |                          |  |   |             |   |  |              |         |   |  |   | 283,507  |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Long-term capital lease obligations           |  |                     |         |   |                       |   | 27       |                          |  |   |             |   |  |              |         |   |  |   | 27       |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Deferred income taxes                         |  |                     | 13,149   |   |                       |   | 12,164   |                          |  |   | 1,529        |   |  |              |         |   |  |   | 26,842   |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Pension liability                             |  |                     | 35,636   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 35,636   |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Other liabilities                             |  |                     | 17,482   |   |                       |   | 7,065    |                          |  |   |             |   |  |              |         |   |  |   | 24,547   |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Shareholders equity:                         |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                  |  |                     | 2,911    |   |                       |   | 772      |                          |  |   | 497          |   |  |              | (1,269   | ) |  |   | 2,911    |  
|Additional paid-in capital                    |  |                     | 192,109  |   |                       |   | 550,471  |                          |  |   | 8,339        |   |  |              | (558,810 | ) |  |   | 192,109  |  
|Retained (deficit) earnings                   |  |                     | (21,863  | ) |                       |   | 53,118   |                          |  |   | (6,883       | ) |  |              | (46,235  | ) |  |   | (21,863  | )
|Accumulated other comprehensive (loss) income |  |                     | (23,732  | ) |                       |   |         |                          |  |   | 1,918        |   |  |              | (1,918   | ) |  |   | (23,732  | )
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total shareholders equity                    |  |                     | 149,425  |   |                       |   | 604,361  |                          |  |   | 3,871        |   |  |              | (608,232 | ) |  |   | 149,425  |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                              |  | $                   | 522,833  |   |                       | $ | 708,083  |                          |  | $ | 8,720        |   |  | $            | (608,232 | ) |  | $ | 631,404  |  
|                                              |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



19



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE
SHEETS

(In thousands)



|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|--------------------------------------------- |  | ----------------------- | -------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                              |  | As of December 31, 2006 |         
|                                              |  | Parent                  |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                        |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current assets:                               |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                     |  | $                       | 154      |   |                       | $ | 88       |                          |  | $ | 780          |   |  | $            |         |   |  | $ | 1,022    |  
|Intercompany funding                          |  |                         | (161,221 | ) |                       |   | 173,562  |                          |  |   | (12,341      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                |  |                         |         |   |                       |   | 81,763   |                          |  |   | 3,814        |   |  |              |         |   |  |   | 85,577   |  
|Intercompany accounts receivable              |  |                         |         |   |                       |   | 8        |                          |  |   | 111          |   |  |              | (119     | ) |  |   |         |  
|Inventories                                   |  |                         |         |   |                       |   | 72,327   |                          |  |   | 2,714        |   |  |              |         |   |  |   | 75,041   |  
|Refundable income taxes                       |  |                         | 172      |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 172      |  
|Current deferred tax assets                   |  |                         | 9,272    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 9,272    |  
|Other current assets                          |  |                         | 4,154    |   |                       |   | 3,588    |                          |  |   | 612          |   |  |              |         |   |  |   | 8,354    |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                          |  |                         | (147,469 | ) |                       |   | 331,336  |                          |  |   | (4,310       | ) |  |              | (119     | ) |  |   | 179,438  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment                 |  |                         | 31,897   |   |                       |   | 514,532  |                          |  |   | 23,842       |   |  |              |         |   |  |   | 570,271  |  
|Less accumulated depreciation                 |  |                         | (12,564  | ) |                       |   | (280,086 | )                        |  |   | (14,016      | ) |  |              |         |   |  |   | (306,666 | )
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net            |  |                         | 19,333   |   |                       |   | 234,446  |                          |  |   | 9,826        |   |  |              |         |   |  |   | 263,605  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Goodwill                                      |  |                         |         |   |                       |   | 124,072  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 127,574  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Investment in consolidated subsidiaries       |  |                         | 600,902  |   |                       |   |         |                          |  |   |             |   |  |              | (600,902 | ) |  |   |         |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Investment in unconsolidated affiliates       |  |                         | 41,574   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 41,574   |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Other assets                                  |  |                         | 5,478    |   |                       |   | 6,544    |                          |  |   | 62           |   |  |              |         |   |  |   | 12,084   |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                              |  | $                       | 519,818  |   |                       | $ | 696,398  |                          |  | $ | 9,080        |   |  | $            | (601,021 | ) |  | $ | 624,275  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY          |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current liabilities:                          |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                    |  | $                       | 5,830    |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 5,830    |  
|Accounts payable                              |  |                         | 13,231   |   |                       |   | 49,236   |                          |  |   | 2,566        |   |  |              |         |   |  |   | 65,033   |  
|Intercompany accounts payable                 |  |                         |         |   |                       |   | 111      |                          |  |   | 8            |   |  |              | (119     | ) |  |   |         |  
|Accrued interest                              |  |                         | 1,415    |   |                       |   | 67       |                          |  |   |             |   |  |              |         |   |  |   | 1,482    |  
|Accrued compensation                          |  |                         | 1,415    |   |                       |   | 8,581    |                          |  |   | 131          |   |  |              |         |   |  |   | 10,127   |  
|Accrued pension                               |  |                         | 271      |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 271      |  
|Capital lease obligations                     |  |                         | 517      |   |                       |   | 27       |                          |  |   |             |   |  |              |         |   |  |   | 544      |  
|Other accrued liabilities                     |  |                         | 11,390   |   |                       |   | 15,179   |                          |  |   | 618          |   |  |              |         |   |  |   | 27,187   |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                     |  |                         | 34,069   |   |                       |   | 73,201   |                          |  |   | 3,323        |   |  |              | (119     | ) |  |   | 110,474  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Long-term debt, less current maturities       |  |                         | 251,892  |   |                       |   | 8,200    |                          |  |   |             |   |  |              |         |   |  |   | 260,092  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Long-term capital lease obligations           |  |                         | 45       |   |                       |   | 46       |                          |  |   |             |   |  |              |         |   |  |   | 91       |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Deferred income taxes                         |  |                         | 30,118   |   |                       |   | 11,697   |                          |  |   | 1,500        |   |  |              |         |   |  |   | 43,315   |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Pension liability                             |  |                         | 38,854   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 38,854   |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Other liabilities                             |  |                         | 3,254    |   |                       |   | 6,609    |                          |  |   |             |   |  |              |         |   |  |   | 9,863    |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Shareholders equity:                         |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                  |  |                         | 2,909    |   |                       |   | 772      |                          |  |   | 497          |   |  |              | (1,269   | ) |  |   | 2,909    |  
|Additional paid-in capital                    |  |                         | 191,411  |   |                       |   | 550,830  |                          |  |   | 8,339        |   |  |              | (559,169 | ) |  |   | 191,411  |  
|Retained (deficit) earnings                   |  |                         | (7,502   | ) |                       |   | 45,043   |                          |  |   | (6,138       | ) |  |              | (38,905  | ) |  |   | (7,502   | )
|Accumulated other comprehensive (loss) income |  |                         | (25,232  | ) |                       |   |         |                          |  |   | 1,559        |   |  |              | (1,559   | ) |  |   | (25,232  | )
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total shareholders equity                    |  |                         | 161,586  |   |                       |   | 596,645  |                          |  |   | 4,257        |   |  |              | (600,902 | ) |  |   | 161,586  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                              |  | $                       | 519,818  |   |                       | $ | 696,398  |                          |  | $ | 9,080        |   |  | $            | (601,021 | ) |  | $ | 624,275  |  
|                                              |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                              |  |                                          |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------- |  | ---------------------------------------- | ------ | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                              |  | For the Three Months Ended June 30, 2007 |       
|                                              |  | Parent                                   |        |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|Sales                                         |  | $                                        |       |   |                       | $ | 298,696 |                          |  | $ | 8,758        |   |  | $            | (71,810 | ) |  | $ | 235,644 |  
|Cost of sales                                 |  |                                          |       |   |                       |   | 268,473 |                          |  |   | 8,025        |   |  |              | (71,810 | ) |  |   | 204,688 |  
|Selling, general and administrative expenses  |  |                                          | 6,804  |   |                       |   | 19,172  |                          |  |   | 740          |   |  |              |        |   |  |   | 26,716  |  
|Restructuring and impairment costs            |  |                                          |       |   |                       |   | 3,661   |                          |  |   | 75           |   |  |              |        |   |  |   | 3,736   |  
|                                              |  |                                          |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income from operations                 |  |                                          | (6,804 | ) |                       |   | 7,390   |                          |  |   | (82          | ) |  |              |        |   |  |   | 504     |  
|Other (expense) income:                       |  |                                          |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                              |  |                                          | (4,728 | ) |                       |   | (101    | )                        |  |   |             |   |  |              |        |   |  |   | (4,829  | )
|Interest income                               |  |                                          | 47     |   |                       |   |        |                          |  |   | 1            |   |  |              |        |   |  |   | 48      |  
|Equity in income of consolidated affiliates   |  |                                          | 7,289  |   |                       |   |        |                          |  |   |             |   |  |              | (7,289  | ) |  |   |        |  
|Equity in income of unconsolidated affiliates |  |                                          | 355    |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 355     |  
|Other, net                                    |  |                                          |       |   |                       |   | 158     |                          |  |   | (77          | ) |  |              |        |   |  |   | 81      |  
|                                              |  |                                          |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                              |  |                                          | 2,963  |   |                       |   | 57      |                          |  |   | (76          | ) |  |              | (7,289  | ) |  |   | (4,345  | )
|                                              |  |                                          |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income before income taxes             |  |                                          | (3,841 | ) |                       |   | 7,447   |                          |  |   | (158         | ) |  |              | (7,289  | ) |  |   | (3,841  | )
|Benefit for income taxes                      |  |                                          | 1,533  |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 1,533   |  
|                                              |  |                                          |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net (loss) income                             |  | $                                        | (2,308 | ) |                       | $ | 7,447   |                          |  | $ | (158         | ) |  | $            | (7,289  | ) |  | $ | (2,308  | )
|                                              |  |                                          |        |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                                          |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                          |  | For the Three Months Ended June 30, 2006 |        
|                                                                          |  | Parent                                   |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|Sales                                                                     |  | $                                        |        |   |                       | $ | 327,361 |                          |  | $ | 12,026       |   |  | $            | (76,714 | ) |  | $ | 262,673 |  
|Cost of sales                                                             |  |                                          |        |   |                       |   | 288,893 |                          |  |   | 12,005       |   |  |              | (76,714 | ) |  |   | 224,184 |  
|Selling, general and administrative expenses                              |  |                                          | 5,500   |   |                       |   | 26,859  |                          |  |   | 758          |   |  |              |        |   |  |   | 33,117  |  
|Restructuring and impairment costs                                        |  |                                          |        |   |                       |   | 15,798  |                          |  |   |             |   |  |              |        |   |  |   | 15,798  |  
|                                                                          |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Loss from operations                                                      |  |                                          | (5,500  | ) |                       |   | (4,189  | )                        |  |   | (737         | ) |  |              |        |   |  |   | (10,426 | )
|Other (expense) income:                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                                                          |  |                                          | (6,859  | ) |                       |   | (101    | )                        |  |   | (2           | ) |  |              |        |   |  |   | (6,962  | )
|Interest income                                                           |  |                                          | 1,445   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 1,445   |  
|Equity in income of consolidated affiliates                               |  |                                          | 1,561   |   |                       |   |        |                          |  |   |             |   |  |              | (1,561  | ) |  |   |        |  
|Equity in income of unconsolidated affiliates                             |  |                                          | 2,060   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 2,060   |  
|Loss on redemption of senior subordinated notes.                          |  |                                          | (10,272 | ) |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | (10,272 | )
|Other, net                                                                |  |                                          |        |   |                       |   | 133     |                          |  |   | (114         | ) |  |              |        |   |  |   | 19      |  
|                                                                          |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                          |  |                                          | (12,065 | ) |                       |   | 32      |                          |  |   | (116         | ) |  |              | (1,561  | ) |  |   | (13,710 | )
|                                                                          |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Loss from continuing operations before income taxes and minority interest |  |                                          | (17,565 | ) |                       |   | (4,157  | )                        |  |   | (853         | ) |  |              | (1,561  | ) |  |   | (24,136 | )
|Benefit for income taxes                                                  |  |                                          | 8,481   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 8,481   |  
|Minority interest in income                                               |  |                                          |        |   |                       |   |        |                          |  |   |             |   |  |              | (69     | ) |  |   | (69     | )
|                                                                          |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Loss from continuing operations                                           |  |                                          | (9,084  | ) |                       |   | (4,157  | )                        |  |   | (853         | ) |  |              | (1,630  | ) |  |   | (15,724 | )
|Discontinued operations:                                                  |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Loss from discontinued operations before income taxes                     |  |                                          |        |   |                       |   | (72     | )                        |  |   |             |   |  |              |        |   |  |   | (72     | )
|Benefit for income taxes of discontinued operations                       |  |                                          |        |   |                       |   | 40      |                          |  |   |             |   |  |              |        |   |  |   | 40      |  
|                                                                          |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Loss from discontinued operations                                         |  |                                          |        |   |                       |   | (32     | )                        |  |   |             |   |  |              |        |   |  |   | (32     | )
|                                                                          |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net loss                                                                  |  | $                                        | (9,084  | ) |                       | $ | (4,189  | )                        |  | $ | (853         | ) |  | $            | (1,630  | ) |  | $ | (15,756 | )
|                                                                          |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                              |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|--------------------------------------------- |  | -------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                              |  | For the Six Months Ended June 30, 2007 |        
|                                              |  | Parent                                 |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|Sales                                         |  | $                                      |        |   |                       | $ | 588,552 |                          |  | $ | 16,632       |   |  | $            | (136,795 | ) |  | $ | 468,389 |  
|Cost of sales                                 |  |                                        |        |   |                       |   | 531,406 |                          |  |   | 15,414       |   |  |              | (136,795 | ) |  |   | 410,025 |  
|Selling, general and administrative expenses  |  |                                        | 14,734  |   |                       |   | 39,844  |                          |  |   | 1,571        |   |  |              |         |   |  |   | 56,149  |  
|Restructuring and impairment costs            |  |                                        | 9       |   |                       |   | 9,150   |                          |  |   | 365          |   |  |              |         |   |  |   | 9,524   |  
|                                              |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                 |  |                                        | (14,743 | ) |                       |   | 8,152   |                          |  |   | (718         | ) |  |              |         |   |  |   | (7,309  | )
|Other (expense) income:                       |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                              |  |                                        | (9,277  | ) |                       |   | (202    | )                        |  |   |             |   |  |              |         |   |  |   | (9,479  | )
|Interest income                               |  |                                        | 101     |   |                       |   |        |                          |  |   | 1            |   |  |              |         |   |  |   | 102     |  
|Equity in income of consolidated affiliates   |  |                                        | 7,330   |   |                       |   |        |                          |  |   |             |   |  |              | (7,330   | ) |  |   |        |  
|Equity in income of unconsolidated affiliates |  |                                        | 514     |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 514     |  
|Other, net                                    |  |                                        |        |   |                       |   | 125     |                          |  |   | (28          | ) |  |              |         |   |  |   | 97      |  
|                                              |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                              |  |                                        | (1,332  | ) |                       |   | (77     | )                        |  |   | (27          | ) |  |              | (7,330   | ) |  |   | (8,766  | )
|                                              |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income before income taxes             |  |                                        | (16,075 | ) |                       |   | 8,075   |                          |  |   | (745         | ) |  |              | (7,330   | ) |  |   | (16,075 | )
|Benefit for income taxes                      |  |                                        | 4,823   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 4,823   |  
|                                              |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Net (loss) income                             |  | $                                      | (11,252 | ) |                       | $ | 8,075   |                          |  | $ | (745         | ) |  | $            | (7,330   | ) |  | $ | (11,252 | )
|                                              |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                                                   |  | For the Six Months Ended June 30, 2006 |        
|                                                                                   |  | Parent                                 |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|Sales                                                                              |  | $                                      |        |   |                       | $ | 653,102 |                          |  | $ | 23,513       |   |  | $            | (150,061 | ) |  | $ | 526,554 |  
|Cost of sales                                                                      |  |                                        |        |   |                       |   | 578,493 |                          |  |   | 22,303       |   |  |              | (150,061 | ) |  |   | 450,735 |  
|Selling, general and administrative expenses                                       |  |                                        | 13,403  |   |                       |   | 53,163  |                          |  |   | 2,058        |   |  |              |         |   |  |   | 68,624  |  
|Restructuring and impairment costs                                                 |  |                                        |        |   |                       |   | 20,608  |                          |  |   |             |   |  |              |         |   |  |   | 20,608  |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                                                      |  |                                        | (13,403 | ) |                       |   | 838     |                          |  |   | (848         | ) |  |              |         |   |  |   | (13,413 | )
|Other (expense) income:                                                            |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                                                   |  |                                        | (16,924 | ) |                       |   | (197    | )                        |  |   | (4           | ) |  |              |         |   |  |   | (17,125 | )
|Interest income                                                                    |  |                                        | 3,625   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 3,625   |  
|Equity in income of consolidated affiliates                                        |  |                                        | 5,555   |   |                       |   |        |                          |  |   |             |   |  |              | (5,555   | ) |  |   |        |  
|Equity in income of unconsolidated affiliates                                      |  |                                        | 3,651   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 3,651   |  
|Gain on sale of interest in Standard Gypsum, L.P.                                  |  |                                        | 135,247 |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 135,247 |  
|Loss on redemption of senior subordinated notes.                                   |  |                                        | (10,272 | ) |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | (10,272 | )
|Other, net                                                                         |  |                                        |        |   |                       |   | 308     |                          |  |   | (194         | ) |  |              |         |   |  |   | 114     |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                                                   |  |                                        | 120,882 |   |                       |   | 111     |                          |  |   | (198         | ) |  |              | (5,555   | ) |  |   | 115,240 |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Income (loss) from continuing operations before income taxes and minority interest |  |                                        | 107,479 |   |                       |   | 949     |                          |  |   | (1,046       | ) |  |              | (5,555   | ) |  |   | 101,827 |  
|Provision for income taxes                                                         |  |                                        | (35,897 | ) |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | (35,897 | )
|Minority interest in income                                                        |  |                                        |        |   |                       |   |        |                          |  |   |             |   |  |              | (83      | ) |  |   | (83     | )
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Income (loss) from continuing operations                                           |  |                                        | 71,582  |   |                       |   | 949     |                          |  |   | (1,046       | ) |  |              | (5,638   | ) |  |   | 65,847  |  
|Discontinued operations:                                                           |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Loss from discontinued operations before income taxes                              |  |                                        |        |   |                       |   | (1,483  | )                        |  |   |             |   |  |              |         |   |  |   | (1,483  | )
|Benefit for income taxes of discontinued operations                                |  |                                        |        |   |                       |   | 532     |                          |  |   |             |   |  |              |         |   |  |   | 532     |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Loss from discontinued operations                                                  |  |                                        |        |   |                       |   | (951    | )                        |  |   |             |   |  |              |         |   |  |   | (951    | )
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Net income (loss)                                                                  |  | $                                      | 71,582  |   |                       | $ | (2      | )                        |  | $ | (1,046       | ) |  | $            | (5,638   | ) |  | $ | 64,896  |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF CASH FLOWS

(In thousands)



|                                                        |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|------------------------------------------------------- |  | -------------------------------------- | ------- | - | --------------------- | - | ------ | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                        |  | For the Six Months Ended June 30, 2007 |        
|                                                        |  | Parent                                 |         |   | GuarantorSubsidiaries |   |        | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash (used in) provided by operating activities     |  | $                                      | (20,138 | ) |                       | $ | 8,389  |                          |  | $ | (479         | ) |              | $ |  |  | $ | (12,228 | )
|                                                        |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Investing activities:                                   |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Purchases of property, plant and equipment              |  |                                        | (1,970  | ) |                       |   | (9,630 | )                        |  |   |             |   |              |   |  |  |   | (11,600 | )
|Proceeds from disposal of property, plant and equipment |  |                                        |        |   |                       |   | 1,321  |                          |  |   | 48           |   |              |   |  |  |   | 1,369   |  
|Changes in restricted cash                              |  |                                        | (75     | ) |                       |   |       |                          |  |   |             |   |              |   |  |  |   | (75     | )
|Return of investment in unconsolidated affiliate        |  |                                        | 41      |   |                       |   |       |                          |  |   |             |   |              |   |  |  |   | 41      |  
|Investment in unconsolidated affiliate                  |  |                                        | (78     | ) |                       |   |       |                          |  |   |             |   |              |   |  |  |   | (78     | )
|                                                        |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash (used in) provided by investing activities     |  |                                        | (2,082  | ) |                       |   | (8,309 | )                        |  |   | 48           |   |              |   |  |  |   | (10,343 | )
|                                                        |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Financing activities:                                   |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Proceeds from senior credit facility - revolver         |  |                                        | 83,954  |   |                       |   |       |                          |  |   |             |   |              |   |  |  |   | 83,954  |  
|Repayments of senior credit facility - revolver         |  |                                        | (56,954 | ) |                       |   |       |                          |  |   |             |   |              |   |  |  |   | (56,954 | )
|Repayments of short and long-term debt                  |  |                                        | (2,917  | ) |                       |   |       |                          |  |   |             |   |              |   |  |  |   | (2,917  | )
|Payments for capital lease obligations                  |  |                                        | (255    | ) |                       |   | (18    | )                        |  |   |             |   |              |   |  |  |   | (273    | )
|Issuances of stock, net of forfeitures                  |  |                                        | 20      |   |                       |   |       |                          |  |   |             |   |              |   |  |  |   | 20      |  
|                                                        |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities     |  |                                        | 23,848  |   |                       |   | (18    | )                        |  |   |             |   |              |   |  |  |   | 23,830  |  
|                                                        |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents    |  |                                        | 1,628   |   |                       |   | 62     |                          |  |   | (431         | ) |              |   |  |  |   | 1,259   |  
|Cash and cash equivalents at beginning of period        |  |                                        | 154     |   |                       |   | 88     |                          |  |   | 780          |   |              |   |  |  |   | 1,022   |  
|                                                        |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period              |  | $                                      | 1,782   |   |                       | $ | 150    |                          |  | $ | 349          |   |              | $ |  |  | $ | 2,281   |  
|                                                        |  |                                        |         |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF CASH FLOWS

(In thousands)



|                                                        |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|------------------------------------------------------- |  | -------------------------------------- | -------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | -------- | -
|                                                        |  | For the Six Months Ended June 30, 2006 |         
|                                                        |  | Parent                                 |          |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash (used in) provided by operating activities     |  | $                                      | (6,189   | ) |                       | $ | 2,927   |                          |  | $ | (288         | ) |              | $ |  |  | $ | (3,550   | )
|                                                        |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Investing activities:                                   |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Purchases of property, plant and equipment              |  |                                        | (5,277   | ) |                       |   | (10,355 | )                        |  |   | (167         | ) |              |   |  |  |   | (15,799  | )
|Proceeds from disposal of property, plant and equipment |  |                                        |         |   |                       |   | 353     |                          |  |   |             |   |              |   |  |  |   | 353      |  
|Proceeds from sale of assets held for sale              |  |                                        |         |   |                       |   | 7,195   |                          |  |   |             |   |              |   |  |  |   | 7,195    |  
|Acquisition of businesses, net of cash acquired         |  |                                        | (11,059  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (11,059  | )
|Changes in restricted cash                              |  |                                        | 10,712   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 10,712   |  
|Proceeds from sale of interest in Standard Gypsum, L.P. |  |                                        | 148,460  |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 148,460  |  
|Return of investment in unconsolidated affiliates       |  |                                        | 1,384    |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 1,384    |  
|                                                        |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net cash provided by (used in) investing activities     |  |                                        | 144,220  |   |                       |   | (2,807  | )                        |  |   | (167         | ) |              |   |  |  |   | 141,246  |  
|                                                        |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Financing activities:                                   |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Proceeds from senior credit facility - revolver         |  |                                        | 30,000   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 30,000   |  
|Repayments of senior credit facility - revolver         |  |                                        | (15,000  | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (15,000  | )
|Proceeds from senior credit facility - term loan        |  |                                        | 35,000   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 35,000   |  
|Repayments of short and long-term debt                  |  |                                        | (274,110 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (274,110 | )
|Deferred debt costs                                     |  |                                        | (1,135   | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (1,135   | )
|Payments for capital lease obligations                  |  |                                        | (241     | ) |                       |   | (7      | )                        |  |   |             |   |              |   |  |  |   | (248     | )
|Issuances of stock, net of forfeitures                  |  |                                        | 92       |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 92       |  
|                                                        |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net cash used in financing activities                   |  |                                        | (225,394 | ) |                       |   | (7      | )                        |  |   |             |   |              |   |  |  |   | (225,401 | )
|                                                        |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Net (decrease) increase in cash and cash equivalents    |  |                                        | (87,363  | ) |                       |   | 113     |                          |  |   | (455         | ) |              |   |  |  |   | (87,705  | )
|Cash and cash equivalents at beginning of period        |  |                                        | 93,998   |   |                       |   | 63      |                          |  |   | 1,091        |   |              |   |  |  |   | 95,152   |  
|                                                        |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  
|Cash and cash equivalents at end of period              |  | $                                      | 6,635    |   |                       | $ | 176     |                          |  | $ | 636          |   |              | $ |  |  | $ | 7,447    |  
|                                                        |  |                                        |          |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |          |  



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Note 15.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 or cash flows.



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##### Table of Contents

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

CARAUSTAR INDUSTRIES, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following is managements discussion and analysis of certain significant factors that have affected our financial condition and operating results during the periods included in the accompanying condensed
consolidated financial statements. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this report, and with managements discussion and
analysis of financial condition and results of operations and consolidated financial statements and notes thereto included in our 2006 Annual Report on Form 10-K.

General

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

Our business is vertically integrated to a large extent. This means that our converting operations consume a large portion of our own paperboard production,
approximately 51% in the first six months of 2007. The remaining 49% 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 specialty paperboard products. These integration statistics do not include volume produced or converted by our 50% owned, unconsolidated joint venture, Premier Boxboard Limited. As part of our strategy to optimize our
operating efficiency, each of our mills can produce recycled paperboard for more than one end-use market. This allows us to shift production among mills in response to customer or market demands.

More recently, in light of the difficult operating climate we have faced, and in an effort to reduce costs and improve our business mix, capacity utilization, and
profitability, restructuring activities have become an important element of our strategy. The previous sales of our interest in Standard Gypsum, our corrugated box plant, and our partition operations, as well as the recent sale of our two coated
recycled paperboard mills and our specialty packaging division, are all part of our strategic transformation plan to reduce our debt and better position ourselves to compete and leverage our expertise in our core businesses.

We are a holding company that operates our business through 22 subsidiaries as of June 30, 2007. We also own a 50% interest in one joint venture with Temple-Inland.
We have two additional joint ventures with unrelated entities in which our investment and share of earnings are immaterial. We account for these interests in our joint ventures under the equity method of accounting. See Liquidity and
Capital Resources  OffBalance Sheet Arrangements  Joint Venture Financings below.

Critical Accounting Policies

Our accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of
America, which require management to make estimates that affect the amounts of revenues, expenses, assets, and liabilities reported. The critical accounting matters that are very important to the portrayal of our financial condition and results of
operations and require some of managements most difficult, subjective, and complex judgments are described in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange
Commission on March 16, 2007. The accounting for these matters involves forming estimates based on current facts, circumstances, and assumptions which, in managements judgment, could change in a manner that would materially affect
managements future estimates with respect to such matters and, accordingly, could cause future reported financial condition and results of operations to differ materially from financial results reported based on managements current
estimates. There have been no material changes in our critical accounting policies during the six month period ended June 30, 2007 other than the adoption of FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109).



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##### Table of Contents

Results of Operations for the Three Months Ended June 30, 2007 and 2006

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



|                                                            |  |                            |  |        |  |       |         |  |       |  
|----------------------------------------------------------- |  | -------------------------- |  | ------ |  | ----- | ------- |  | ----- | -
|                                                            |  | Three Months EndedJune 30, |  | Change |  |       | %Change | 
|                                                            |  | 2007                       |  | 2006   |  |      
|Paperboard volume by end-use market (tons in thousands):    |  |                            |  |        |  |       |         |  |       |  
|Tube, core and composite container market                   |  |                            |  |        |  |       |         |  |       |  
|Volume shipped to internal converters                       |  | 66.9                       |  | 70.8   |  | (3.9  | )       |  | -5.5  | %
|Mill volume shipped to external customers                   |  | 10.7                       |  | 12.5   |  | (1.8  | )       |  | -14.4 | %
|                                                            |  |                            |  |        |  |       |         |  |       |  
|Total                                                       |  | 77.6                       |  | 83.3   |  | (5.7  | )       |  | -6.8  | %
|Folding carton market                                       |  |                            |  |        |  |       |         |  |       |  
|Volume shipped to internal converters                       |  | 33.3                       |  | 39.8   |  | (6.5  | )       |  | -16.3 | %
|Mill volume shipped to external customers                   |  | 23.5                       |  | 64.5   |  | (41.0 | )       |  | -63.6 | %
|                                                            |  |                            |  |        |  |       |         |  |       |  
|Total                                                       |  | 56.8                       |  | 104.3  |  | (47.5 | )       |  | -45.5 | %
|Gypsum wallboard facing paper market                        |  |                            |  |        |  |       |         |  |       |  
|Mill volume shipped to external customers                   |  | 17.9                       |  | 25.6   |  | (7.7  | )       |  | -30.1 | %
|Specialty paperboard products market                        |  |                            |  |        |  |       |         |  |       |  
|Volume shipped to internal converters                       |  | 26.5                       |  | 26.5   |  | 0.0   |         |  | 0.0   | %
|Mill volume shipped to external customers                   |  | 24.1                       |  | 37.5   |  | (13.4 | )       |  | -35.7 | %
|                                                            |  |                            |  |        |  |       |         |  |       |  
|Total                                                       |  | 50.6                       |  | 64.0   |  | (13.4 | )       |  | -20.9 | %
|Total paperboard volume                                     |  | 202.9                      |  | 277.2  |  | (74.3 | )       |  | -26.8 | %
|                                                            |  |                            |  |        |  |       |         |  |       |  
|                                                            |  |                            |  |       
|Paperboard volume by reporting segment (tons in thousands): |  |                            |  |        |  |       |         |  |       |  
|Paperboard segment                                          |  | 94.0                       |  | 158.0  |  | (64.0 | )       |  | -40.5 | %
|Tube, core and composite container segment                  |  | 75.6                       |  | 79.4   |  | (3.8  | )       |  | -4.8  | %
|Folding carton and custom packaging segment                 |  | 33.3                       |  | 39.8   |  | (6.5  | )       |  | -16.3 | %
|                                                            |  |                            |  |        |  |       |         |  |       |  
|Total paperboard volume                                     |  | 202.9                      |  | 277.2  |  | (74.3 | )       |  | -26.8 | %
|                                                            |  |                            |  |        |  |       |         |  |       |  

Paperboard Volume. Total paperboard volume for the three months ended June 30, 2007, decreased
26.8% to 202.9 thousand tons from 277.2 thousand tons for the same period in 2006. Tons sold from paperboard mill production decreased 35.1% to 162.6 thousand tons for the three months ended June 30, 2007, compared to the same
period in 2006. The total volume of paperboard converted decreased 7.6% for the three months ended June 30, 2007.

Total paperboard volume decreased
primarily due to a decrease in sales of unconverted paperboard to the folding carton and the specialty paperboard end-use markets, primarily attributable to the disposition of our Rittman and Sprague coated paperboard operations in 2006. Sales of
unconverted paperboard to the gypsum wallboard facing paper market decreased due to the decline in demand in the wallboard business. Unconverted volume in the tube, core and composite container segment decreased due to lower industry demand.



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##### Table of Contents

Sales. Our consolidated sales for the three months ended June 30, 2007 decreased 10.3% to $235.6
million from $262.7 million for the same period of 2006. The following table presents sales by business segment (in thousands):



|                                    |  |                            |         |          |   |         |          |   |         |   |  |       |  
|----------------------------------- |  | -------------------------- | ------- | -------- | - | ------- | -------- | - | ------- | - |  | ----- | -
|                                    |  | Three Months EndedJune 30, |         | $ Change |   |         | % Change |  
|                                    |  | 2007                       |         | 2006     |   |        
|Paperboard                          |  | $                          | 52,707  |          | $ | 78,479  |          | $ | (25,772 | ) |  | -32.8 | %
|Recovered fiber                     |  |                            | 38,138  |          |   | 28,931  |          |   | 9,207   |   |  | 31.8  | %
|Tube, core and composite container  |  |                            | 90,105  |          |   | 96,201  |          |   | (6,096  | ) |  | -6.3  | %
|Folding carton and custom packaging |  |                            | 54,694  |          |   | 59,062  |          |   | (4,368  | ) |  | -7.4  | %
|                                    |  |                            |         |          |   |         |          |   |         |   |  |       |  
|Total                               |  | $                          | 235,644 |          | $ | 262,673 |          | $ | (27,029 | ) |  | -10.3 | %
|                                    |  |                            |         |          |   |         |          |   |         |   |  |       |  

Paperboard Segment

Sales for the paperboard segment decreased primarily due to lower volume which accounted for a decrease of $40.9 million. This decrease was partially offset by higher selling prices which accounted for an estimated
increase of $15.1 million. Approximately $21.4 million of the volume decrease was due to the disposition of our Rittman and Sprague coated paperboard operations.

Recovered Fiber Segment

Sales for the recovered fiber segment increased primarily due to higher selling prices which accounted for
approximately $8.1 million of the $9.2 million increase. The remaining increase of $1.1 million was primarily due to higher volume.

Tube, Core and
Composite Container Segment

Sales for the tube, core and composite container segment decreased primarily due to lower volume which accounted for a
decrease of $10.6 million. This decrease was partially offset by higher tube and core selling prices which accounted for an estimated increase of $4.8 million in sales.

Carton and Custom Packaging Segment

Sales for the carton and custom packaging segment decreased primarily due
to lower volume of approximately $4.5 million resulting from closing and consolidating operations and eliminating customers with low margins and high credit risk.

Cost of Sales. Cost of sales for the three months ended June 30, 2007 decreased $19.5 million from $224.2 million in 2006 to $204.7 million in 2007. This decrease was primarily due to the following factors:



| |  |  | Lower direct material costs, labor costs, freight costs, and other manufacturing costs of approximately $20.6 million in the paperboard segment related to the
disposition of the Rittman and Sprague coated paperboard operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower direct material costs of approximately $1.4 million in the tube, core and composite container segment primarily due to lower volume.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower energy and fuel costs of $1.4 million in the paperboard segment.
| | - |  | ----------------------------------------------------------------------



| |  |  | Lower direct material costs of approximately $2.5 million in the folding carton and custom packaging segment primarily due to lower volume.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower employee labor costs in the tube, core and composite container segment of approximately $1.1 million.
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Lower other manufacturing costs of $1.3 million in the tube, core and composite container segment.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Lower repair and maintenance costs in the paperboard segment of approximately $641 thousand.
| | - |  | --------------------------------------------------------------------------------------------

These factors were partially offset by the following increased expenses:



| |  |  | Higher direct material costs of approximately $8.2 million in the recovered fiber segment.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Higher direct material costs of 1.5 million in the paperboard segment.
| | - |  | ----------------------------------------------------------------------

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30, 2007 decreased $6.4 million from $33.1 million in 2006 to $26.7
million in 2007. The decrease was primarily due to the following factors:



| |  |  | Elimination of approximately $3.8 million of selling, general and administrative expenses in the paperboard segment related to the disposition of facilities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Elimination of approximately $1.2 million of selling, general and administrative expenses in the carton and custom packaging segment related primarily to facility
closures.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| |  |  | Elimination of approximately $773 thousand of selling, general and administrative expenses in the tube, core and composite container segment related primarily to
the disposition of facilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Restructuring and Impairment Costs.During the three months ended June 30, 2007, we incurred charges
totaling $3.7 million for restructuring and impairment costs. Of this total, approximately $2.1 million was for impairment of assets, $609 thousand for severance and other termination benefits, and $1.0 million for other exit costs. We made payments
of $840 thousand in severance and other termination benefits and $1.0 million for other exit costs during the three months ended June 30, 2007, leaving an estimated liability of $4.1 million at June 30, 2007.

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 three months ended June 30, 2007 was $504 thousand, an increase of $10.9 million
compared to loss from operations of $10.4 million reported for the same period last year. The following table presents income (loss) from operations by business segment (in thousands):



|                                    |  |                            |        |   |          |   |         |          |  |   |        |   |  |         |  
|----------------------------------- |  | -------------------------- | ------ | - | -------- | - | ------- | -------- |  | - | ------ | - |  | ------- | -
|                                    |  | Three Months EndedJune 30, |        |   | $ Change |   |         | % Change | 
|                                    |  | 2007                       |        |   | 2006     |   |         |         
|Paperboard                          |  | $                          | 1,932  |   |          | $ | (6,242  | )        |  | $ | 8,174  |   |  | 131.0   | %
|Recovered fiber                     |  |                            | 1,631  |   |          |   | 1,383   |          |  |   | 248    |   |  | 17.9    | %
|Tube, core and composite container  |  |                            | 2,169  |   |          |   | 1,067   |          |  |   | 1,102  |   |  | 103.3   | %
|Folding carton and custom packaging |  |                            | 1,405  |   |          |   | (136    | )        |  |   | 1,541  |   |  | 1,133.1 | %
|Corporate expense                   |  |                            | (6,633 | ) |          |   | (6,498  | )        |  |   | (135   | ) |  | -2.1    | %
|                                    |  |                            |        |   |          |   |         |          |  |   |        |   |  |         |  
|Total                               |  | $                          | 504    |   |          | $ | (10,426 | )        |  | $ | 10,930 |   |  | 104.8   | %
|                                    |  |                            |        |   |          |   |         |          |  |   |        |   |  |         |  

Paperboard Segment

Income from operations improved primarily due to the following factors:



| |  |  | Higher margins between selling prices and fiber costs increased income from operations by approximately $2.2 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | An improvement of approximately $2.1 million in operating income related to the disposition of the Rittman and Sprague coated paperboard operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower restructuring costs of approximately $9.4 million.
| | - |  | --------------------------------------------------------

These improvements were partially offset by the following factors:



| |  |  | Lower volume reduced income from operations by approximately $4.0 million.
| | - |  | --------------------------------------------------------------------------



| |  |  | The write-off of obsolete inventory of approximately $1.0 million.
| | - |  | ------------------------------------------------------------------

Recovered Fiber Segment

Income from operations improved primarily due to higher selling
prices.

Tube, Core and Composite Container Segment

Income from operations improved primarily due to lower restructuring costs of approximately $2.0 million and lower repair and maintenance costs of $556 thousand. This increase was partially offset by lower volume
which reduced income from operations by approximately $1.8 million.

Carton and Custom Packaging Segment

Income from operations improved primarily due to the lower restructuring costs of approximately $563 thousand and lower depreciation expense of $492
thousand.

Discontinued Operations.The loss from discontinued operations for the three months ended June 30, 2006 was $32 thousand.
There were no results from discontinued operations for the three months ended June 30, 2007. See notes to the condensed consolidated financial statements for additional discussion of discontinued operations.

Other (Expense) Income. Interest expense for the three months ended June 30, 2007 and 2006 was approximately $4.8 million and $7.0 million,
respectively. The decrease in interest expense was primarily due to the redemption of our 9 7/8% senior subordinated notes on May 1, 2006. See Liquidity and Capital Resources for additional information regarding our debt,
interest expense, and interest rate swap agreements.

Equity in Income from Unconsolidated Affiliates.Equity in income from unconsolidated
affiliates was $355 thousand for the three months ended June 30, 2007, a decline of $1.7 million compared to the same period in 2006. This decline was primarily due to a decrease in demand for gypsum wallboard facing paper which was impacted by
the downturn in the housing market.

Benefit for Income Taxes.The effective rate of income tax for continuing operations for the
three months ended June 30, 2007 was a 39.91% benefit, compared with a 35.14% benefit for the same period last year. The effective rates are different from the



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##### Table of Contents

statutory rates due to permanent tax adjustments, the inability of the Company to record the tax benefits of losses in certain state and foreign
jurisdictions, and changes in the estimated state income tax rates.

Net (Loss) Income.Due to the factors discussed above, net loss for the
three months ended June 30, 2007 was $2.3 million, or $0.08 net loss per common share, compared to a net loss of $15.8 million, or $0.55 net income per common share, for the same period last year.

Results of Operations for the Six Months Ended June 30, 2007 and 2006

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



|                                                            |  |                          |  |        |  |        |         |  |       |  
|----------------------------------------------------------- |  | ------------------------ |  | ------ |  | ------ | ------- |  | ----- | -
|                                                            |  | Six Months EndedJune 30, |  | Change |  |        | %Change | 
|                                                            |  | 2007                     |  | 2006   |  |       
|Paperboard volume by end-use market (tons in thousands):    |  |                          |  |        |  |        |         |  |       |  
|Tube, core and composite container market                   |  |                          |  |        |  |        |         |  |       |  
|Volume shipped to internal converters                       |  | 129.7                    |  | 142.1  |  | (12.4  | )       |  | -8.7  | %
|Mill volume shipped to external customers                   |  | 23.4                     |  | 25.5   |  | (2.1   | )       |  | -8.2  | %
|                                                            |  |                          |  |        |  |        |         |  |       |  
|Total                                                       |  | 153.1                    |  | 167.6  |  | (14.5  | )       |  | -8.7  | %
|Folding carton market                                       |  |                          |  |        |  |        |         |  |       |  
|Volume shipped to internal converters                       |  | 66.0                     |  | 79.9   |  | (13.9  | )       |  | -17.4 | %
|Mill volume shipped to external customers                   |  | 48.6                     |  | 131.6  |  | (83.0  | )       |  | -63.1 | %
|                                                            |  |                          |  |        |  |        |         |  |       |  
|Total                                                       |  | 114.6                    |  | 211.5  |  | (96.9  | )       |  | -45.8 | %
|Gypsum wallboard facing paper market                        |  |                          |  |        |  |        |         |  |       |  
|Mill volume shipped to external customers                   |  | 34.5                     |  | 50.6   |  | (16.1  | )       |  | -31.8 | %
|Specialty paperboard products market                        |  |                          |  |        |  |        |         |  |       |  
|Volume shipped to internal converters                       |  | 52.3                     |  | 52.0   |  | 0.3    |         |  | 0.6   | %
|Mill volume shipped to external customers                   |  | 51.4                     |  | 77.2   |  | (25.8  | )       |  | -33.4 | %
|                                                            |  |                          |  |        |  |        |         |  |       |  
|Total                                                       |  | 103.7                    |  | 129.2  |  | (25.5  | )       |  | -19.7 | %
|Total paperboard volume                                     |  | 405.9                    |  | 558.9  |  | (153.0 | )       |  | -27.4 | %
|                                                            |  |                          |  |        |  |        |         |  |       |  
|                                                            |  |                          |  |       
|Paperboard volume by reporting segment (tons in thousands): |  |                          |  |        |  |        |         |  |       |  
|Paperboard segment                                          |  | 193.0                    |  | 317.9  |  | (124.9 | )       |  | -39.3 | %
|Tube, core and composite container segment                  |  | 146.9                    |  | 161.1  |  | (14.2  | )       |  | -8.8  | %
|Folding carton and custom packaging segment                 |  | 66.0                     |  | 79.9   |  | (13.9  | )       |  | -17.4 | %
|                                                            |  |                          |  |        |  |        |         |  |       |  
|Total paperboard volume                                     |  | 405.9                    |  | 558.9  |  | (153.0 | )       |  | -27.4 | %
|                                                            |  |                          |  |        |  |        |         |  |       |  

Paperboard Volume. Total paperboard volume for the six months ended June 30, 2007, decreased
27.4% to 405.9 thousand tons from 558.9 thousand tons for the same period in 2006. Tons sold from paperboard mill production decreased 35.7% to 324.0 thousand tons for the six months ended June 30, 2007, compared to the same
period in 2006. The total volume of paperboard converted decreased 9.5% for the six months ended June 30, 2007.

Total paperboard volume decreased
primarily due to a decrease in sales of unconverted paperboard to the folding carton and the specialty paperboard end-use markets, primarily attributable to the disposition of our Rittman and Sprague coated paperboard operations in 2006. Sales of
unconverted paperboard to the gypsum wallboard facing paper market decreased due to the decline in demand in the wallboard business. Converted volume in the tube, core and composite container segment decreased due to lower sales of converted
paperboard to the tube, core and composite container end-use market partly due to lower industry demand.



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Sales. Our consolidated sales for the six months ended June 30, 2007 decreased 11.1% to $468.4 million
from $526.6 million for the same period of 2006. The following table presents sales by business segment (in thousands):



|                                    |  |                          |         |          |   |         |          |   |         |   |  |       |  
|----------------------------------- |  | ------------------------ | ------- | -------- | - | ------- | -------- | - | ------- | - |  | ----- | -
|                                    |  | Six Months EndedJune 30, |         | $ Change |   |         | % Change |  
|                                    |  | 2007                     |         | 2006     |   |        
|Paperboard                          |  | $                        | 105,593 |          | $ | 157,466 |          | $ | (51,873 | ) |  | -32.9 | %
|Recovered fiber                     |  |                          | 76,236  |          |   | 54,564  |          |   | 21,672  |   |  | 39.7  | %
|Tube, core and composite container  |  |                          | 175,448 |          |   | 192,501 |          |   | (17,053 | ) |  | -8.9  | %
|Folding carton and custom packaging |  |                          | 111,112 |          |   | 122,023 |          |   | (10,911 | ) |  | -8.9  | %
|                                    |  |                          |         |          |   |         |          |   |         |   |  |       |  
|Total                               |  | $                        | 468,389 |          | $ | 526,554 |          | $ | (58,165 | ) |  | -11.1 | %
|                                    |  |                          |         |          |   |         |          |   |         |   |  |       |  

Paperboard Segment

Sales for the paperboard segment decreased primarily due to lower volume which accounted for a decrease of $77.8 million. This decrease was partially offset by higher selling prices which accounted for an estimated
increase of $26.4 million. Approximately $44.3 million of the volume decrease was due to the disposition of our Rittman and Sprague coated paperboard operations.

Recovered Fiber Segment

Sales for the recovered fiber segment increased primarily due to higher selling prices which accounted for
approximately $19.2 million of the $21.7 million increase. The remaining $2.5 million increase was primarily due to higher volume.

Tube, Core and
Composite Container Segment

Sales for the tube, core and composite container segment decreased primarily due to lower volume which accounted for a
decrease of $26.4 million. This decrease was partially offset by higher tube and core selling prices which accounted for an estimated increase of $9.7 million in sales.

Carton and Custom Packaging Segment

Sales for the carton and custom packaging segment decreased primarily due
to lower volume of approximately $10.7 million resulting from closing and consolidating certain operations and eliminating customers with low margins and high credit risk.

Cost of Sales. Cost of sales for the six months ended June 30, 2007 decreased $40.7 million from $450.7 million in 2006 to $410.0 million in 2007. This decrease was primarily due to the
following factors:



| |  |  | Lower direct material costs, labor costs, freight costs, and other manufacturing costs of approximately $43.2 million in the paperboard segment related to the
disposition of the Rittman and Sprague coated paperboard operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower direct material costs of approximately $6.8 million in the tube, core and composite container segment primarily due to lower volume.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower direct material costs of approximately $5.4 million in the folding carton and custom packaging segment primarily due to lower sales.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower employee labor and benefit costs in the tube, core and composite container segment of approximately $2.8 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Lower employee labor and benefit costs in the folding carton and custom packaging segment of approximately $2.2 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower other manufacturing costs of $2.9 million in the tube, core and composite container segment.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Lower repairs and maintenance and energy costs of $1.9 million in the paperboard segment.
| | - |  | -----------------------------------------------------------------------------------------

These factors were partially offset by the following increased expenses:



| |  |  | Higher direct material costs of approximately $18.5 million in the recovered fiber segment.
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Higher direct material costs in the paperboard segment of approximately $6.5 million.
| | - |  | -------------------------------------------------------------------------------------

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2007 decreased
$12.5 million from $68.6 million in 2006 to $56.1 million in 2007. The decrease was primarily due to the following factors:



| |  |  | Elimination of approximately $7.5 million of selling, general and administrative expenses in the paperboard segment related to the disposition of facilities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Elimination of approximately $2.2 million of selling, general and administrative expenses in the carton and custom packaging segment related primarily to facility
closures.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Elimination of approximately $1.7 million of selling, general and administrative expenses in the tube, core and composite container segment related primarily to the
disposition of facilities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | Selling, general and administrative expenses in 2006 included a $1.2 million reserve established for the settlement of a patent infringement dispute.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

Restructuring and Impairment Costs.During the six months ended June 30, 2007, we incurred charges totaling $9.5
million for restructuring and impairment costs. Of this total, approximately $3.1 million was for impairment of assets, $3.1 million for severance and other termination benefits, and $3.3 million for other exit costs. We made payments of $2.3
million in severance and other termination benefits and $3.4 million for other exit costs during the six months ended June 30, 2007, leaving an estimated reserve of $4.1 million at June 30, 2007.

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

Income (Loss) From Operations. Loss from operations for the six months ended June 30, 2007 was $7.3 million, an improvement of $6.1 million compared
to loss from operations of $13.4 million reported for the same period last year. The following table presents income (loss) from operations by business segment (in thousands):



|                                    |  |                          |         |   |          |   |         |          |  |   |        |   |  |       |  
|----------------------------------- |  | ------------------------ | ------- | - | -------- | - | ------- | -------- |  | - | ------ | - |  | ----- | -
|                                    |  | Six Months EndedJune 30, |         |   | $ Change |   |         | % Change | 
|                                    |  | 2007                     |         |   | 2006     |   |         |         
|Paperboard                          |  | $                        | 565     |   |          | $ | (4,617  | )        |  | $ | 5,182  |   |  | 112.2 | %
|Recovered fiber                     |  |                          | 3,047   |   |          |   | 2,310   |          |  |   | 737    |   |  | 31.9  | %
|Tube, core and composite container  |  |                          | 4,065   |   |          |   | 2,979   |          |  |   | 1,086  |   |  | 36.5  | %
|Folding carton and custom packaging |  |                          | (656    | ) |          |   | (1,225  | )        |  |   | 569    |   |  | 46.4  | %
|Corporate expense                   |  |                          | (14,330 | ) |          |   | (12,860 | )        |  |   | (1,470 | ) |  | -11.4 | %
|                                    |  |                          |         |   |          |   |         |          |  |   |        |   |  |       |  
|Total                               |  | $                        | (7,309  | ) |          | $ | (13,413 | )        |  | $ | 6,104  |   |  | 45.5  | %
|                                    |  |                          |         |   |          |   |         |          |  |   |        |   |  |       |  

Paperboard Segment

Income from operations improved primarily due to the following factors:



| |  |  | An improvement of approximately $4.7 million in operating income related to the disposition of the Rittman and Sprague coated paperboard operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower restructuring costs of approximately $10.6 million.
| | - |  | ---------------------------------------------------------

These improvements were partially offset by the following factors:



| |  |  | Lower volume reduced income from operations by approximately $7.7 million.
| | - |  | --------------------------------------------------------------------------



| |  |  | Lower margins between selling prices and fiber costs reduced income from operations by approximately $826 thousand.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | The write-off of obsolete inventory of approximately $1.0 million.
| | - |  | ------------------------------------------------------------------

Recovered Fiber Segment

Income from operations improved primarily due to higher selling
prices. This improvement was partially offset by higher accounts receivable reserve expense of approximately $466 thousand.

Tube, Core and Composite
Container Segment

Income from operations improved primarily due to the following factors:



| |  |  | Higher selling prices improved income from operations by approximately $2.3 million.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Income from operations reported in 2006 was reduced by a $1.2 million reserve established for the settlement of a patent infringement dispute.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower restructuring costs of $903 thousand.
| | - |  | -------------------------------------------



| |  |  | Lower bad debt expense of $615 thousand.
| | - |  | ----------------------------------------

These improvements were partially offset by the following factors:



| |  |  | Lower volume reduced income from operations by approximately $4.1 million.
| | - |  | --------------------------------------------------------------------------

Carton and Custom Packaging Segment

Income from operations improved primarily due to the
lower accelerated depreciation expense of $865 thousand. This improvement was partially offset by higher restructuring costs of approximately $342 thousand.



Discontinued Operations.The loss from discontinued operations for the six months ended June 30, 2006 was $951 thousand. There were no results from
discontinued operations for the six months ended June 30, 2007. See notes to the condensed consolidated financial statements for additional discussion of discontinued operations.

Other (Expense) Income. Interest expense for the six months ended June 30, 2007 and 2006 was approximately $9.5 million and $17.1 million, respectively. The decrease in interest expense was
primarily due to the redemption of our 9 7/8% senior



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##### Table of Contents

subordinated notes on May 1, 2006. See Liquidity and Capital Resources for additional information regarding our debt, interest
expense, and interest rate swap agreements.

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

Equity in Income from Unconsolidated Affiliates.Equity in income from unconsolidated
affiliates was $514 thousand for the six months ended June 30, 2007, a decline of $3.1 million compared to the same period in 2006. This decline was primarily due to a decrease in demand for gypsum wallboard facing paper which was impacted by
the downturn in the housing market.

Benefit (Provision) for Income Taxes.The effective rate of income tax for continuing operations
for the six months ended June 30, 2007 was a 30.00% benefit, compared with a 35.25% expense for the same period last year. The effective rates are different from the statutory rates due to permanent tax adjustments, the inability of the Company
to record the tax benefits of losses in certain state and foreign jurisdictions, and changes in the estimated state income tax rates.

Net (Loss)
Income.Due to the factors discussed above, net loss for the six months ended June 30, 2007 was $11.3 million, or $0.39 net loss per common share, compared to net income of $64.9 million, or $2.27 net income 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 our 2006 Annual Report on Form 10-K under Risk Factors in Part I, Item 1A. We believe that our cash on hand at June 30, 2007 of $2.3
million, together with our borrowing availability under our senior credit facility will be sufficient to meet our cash requirements for the next 12 months. However, it is likely that we will refinance our $200.0 million outstanding senior notes due
in June 2009. We are evaluating various refinancing alternatives. If we are unable to generate cash at projected levels, our ability to generate cash sufficient to meet our long-term requirements is uncertain. The following are some of the factors
that could affect our future ability to generate cash from operations:



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



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



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



| |  |  | Continued increase in raw material and energy costs.
| | - |  | ----------------------------------------------------



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



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

The occurrence, continuation, or exacerbation of these conditions could require us to seek additional funds from external sources in order to meet our liquidity requirements. In such event, our ability to obtain
additional funds would depend on the various business and credit market conditions prevailing at the time, which are difficult to predict and many of which are out of our control. Our ability to secure additional funds could also be materially
adversely affected by our substantial indebtedness. Additional risks related to our substantial indebtedness are discussed under Risk Factors  Our substantial indebtedness could adversely affect our cash flow and our ability to fulfill
our obligations under our indebtedness in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

The availability of
liquidity from our senior credit facility is primarily affected by our collateral base and our continued compliance with the terms of the senior credit facility, including the payment of interest and compliance with various covenants and financial
maintenance tests. On May 22, 2007, the Company purchased additional units in its PaperLink, LLC unconsolidated affiliate, which increased the Companys membership interest to greater than fifty percent. The Company failed to timely pledge the
assets of PaperLink as a co-borrower or guarantor of the Companys debt (which debt includes the Companys Senior Credit Facility and Senior Notes). The Company subsequently determined that this failure was a technical violation of the
debt covenants of both the Companys Senior Credit Facility and its Senior Notes, which require  within a specified time period  that the Company pledge the assets of any affiliate in which its membership interest exceeds fifty
percent. Upon determination, the Company decreased its membership interest in PaperLink to forty-nine percent. The Company notified the administrative agent for its Senior Credit Facility and the Trustee which administers it Senior Notes of the
technical and inadvertent violation. On June 29, 2007, the bank group that holds the Companys Senior Credit Facility consented to and waived any defaults regarding the Companys violation. The Company does not expect any adverse impact
from notification to the Trustee. We were in compliance with the covenants under our senior credit facility as of June 30, 2007. Absent a



35



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##### Table of Contents

deterioration of the U.S. economy as a whole or the specific sectors on which our business depends, we believe we will be in compliance with our covenants
under the senior credit agreement for the next 12 months.

Borrowings.At June 30, 2007 and December 31, 2006, total debt (consisting of
current maturities of debt and long-term debt, as reported on our condensed consolidated balance sheets) was as follows (in thousands):



|                                      |  |               |         |                   |   |        
|------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                      |  | June 30, 2007 |         | December 31, 2006
|Senior credit facility-revolver       |  | $             | 32,000  |                   | $ | 5,000  
|Senior credit facility-term loan      |  |               | 28,194  |                   |   | 31,111 
|73/8%
senior notes                    |  |               | 189,750 |                   |   | 189,750
|71/4%
senior notes                    |  |               | 29,000  |                   |   | 29,000 
|Other notes payable                   |  |               | 8,200   |                   |   | 8,200  
|Realized interest rate swap gains (1) |  |               | 2,193   |                   |   | 2,861  
|                                      |  |               |         |                   |   |        
|Total debt                            |  | $             | 289,337 |                   | $ | 265,922
|                                      |  |               |         |                   |   |        



|(1) | Consists of realized interest rate swap gains less the original issuance discounts and accumulated discount amortization related to the senior notes.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

On March 30, 2006, we amended our senior credit facility by entering into an Amended and Restated Credit Agreement. The agreement provides for a $145.0 million
senior secured credit facility (the Senior Credit Facility) consisting of a $110.0 million five-year revolver and a $35.0 million five-year term loan. The five-year revolver was reduced from $110.0 million to $100.0 million in October
2006. On May 14, 2007, the Company amended its Senior Credit Facility which impacted the calculation of the availability under the Senior Credit Facility and changed the applicable margins in the pricing grid which is discussed in more detail below.
The Senior Credit Facility is secured by substantially all of our assets and our domestic subsidiaries other than real property, including accounts receivable, general intangibles, inventory, and equipment. Our domestic subsidiaries are parties to
the Senior Credit Facility either as co-borrowers with us or as guarantors. At June 30, 2007, we had $28.2 million outstanding under the five-year term loan and $32.0 million outstanding under the revolver.

The revolver matures on the fifth anniversary of closing and includes a sublimit of $25.0 million for letters of credit. Borrowing availability under the revolver is
determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and inventory and reduced by usage of the revolver, including outstanding letters of credit and any reserves. Aggregate availability under
the revolver was $24.4 million at June 30, 2007. The term loan was drawn in full at closing and is required to be repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding principal due
on the fifth anniversary of closing.

Outstanding principal of the term loan initially bears interest at a rate equal to, at our option, either
(1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the Senior Credit Facility) plus 0.50%, or (2) the adjusted one, two, three, or six-month LIBOR rate plus 2.00%.
Outstanding principal under the revolver initially bears interest at a rate equal to, at our option, either (1) the base rate plus .25% or (2) the adjusted one, two, three, or six-month LIBOR rate plus 1.75%. Pricing under the Senior
Credit Facility is determined by reference to a pricing grid under which margins shall be adjusted prospectively on a quarterly basis as determined by the average availability and fixed charge coverage ratio measured as of the last day of each
fiscal quarter, commencing with the fiscal quarter ending June 30, 2007. Under the pricing grid, the applicable margins for the term loan range from 0.0% to 1.0% for base rate loans and from 1.50% to 2.50% for LIBOR loans, and the applicable
margins for the revolver range from 0.0% to 0.75% for base rate loans and from 1.25% to 2.25% for LIBOR loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of credit
are subject to an annual fee equal to the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%. The actual rates in effect at June 30,
2007 were 7.13% and 7.41% for outstanding revolver and term loan borrowings, respectively.

The Senior Credit Facility contains covenants that restrict,
among other things, our and our subsidiaries ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or
acquisitions, enter into certain transactions with affiliates, enter into sale and leaseback transactions, or change the nature of our business. The Senior Credit Facility contains no financial covenant at this time; however, the Company must
maintain a $15.0 million Minimum Availability Reserve at all times. The availability disclosed is net of this reserve. There is a one-time option to convert to a springing covenant financial structure where the $15.0 million
Minimum Availability Reserve would be eliminated; however, a fixed charge ratio would be tested in the event borrowing availability falls below $20.0 million. The company has not exercised this option. The Senior Credit Facility contains
events of default including, but not limited to, nonpayment of principal or interest, violation of covenants, breaches of representations and warranties, cross-default to other indebtedness, bankruptcy, and other insolvency events, material
judgments, certain ERISA events, actual or asserted invalidity of loan documentation, and certain changes of control of the Company.



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On May 1, 2006, we redeemed our outstanding 9 7/8% senior subordinated notes in full at a price of $105.25 for each
$100 of outstanding principal amount of the notes plus $2.1 million of accrued and unpaid interest from April 1, 2006 to May 1, 2006. At the time of redemption, the aggregate outstanding principal amount of the notes was $257.5 million,
and the total redemption price (including accrued and unpaid interest and redemption premium) was $273.1 million. We used proceeds from borrowings at closing under the Senior Credit Facility, together with available cash, to fund the redemption. The
redemption resulted in a $10.3 million loss, which was recognized in May of 2006.

Off-Balance Sheet ArrangementsJoint Venture
Financings. On January 17, 2006, we completed the sale of our 50% interest in our joint venture Standard Gypsum to the joint ventures other 50% partner, Temple-Inland, for $150.0 million. The sale resulted in a gain of approximately
$135.2 million, which was recorded in January 2006. Pursuant to the purchase and sale agreement, we eliminated our guaranty and letter of credit support obligations with respect to Standard Gypsums debt and, as a result, we no longer have any
support obligation with respect to our half of Standard Gypsums debt, which was $28.1 million as of December 31, 2005. We also ceased to be entitled to any distributions from Standard Gypsum for all periods subsequent to January 1,
2006. We provided certain environmental indemnification not to exceed $5.0 million for any claims related to events that occurred prior to the formation of the Standard Gypsum joint venture on April 1, 1996. This indemnification will
terminate January 17, 2011. We did not record a liability related to this indemnification since the probability of an asserted claim is considered remote.

Since December 31, 2006, there have been no material changes in our obligations with respect to our other joint venture, Premier Boxboard Limited. For more information about these obligations and contingencies, see
Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources  Off-Balance Sheet Arrangements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006. Because we account or accounted for the interests in our joint ventures under the equity method of accounting, the indebtedness of these joint ventures is not reflected in the liabilities included on our consolidated balance
sheets.

Cash Used By Operations. Cash used by operations was $12.2 million for the six months ended June 30, 2007, compared with cash used by
operations of $3.6 million for the same period in 2006. This decrease was primarily due to a decline in operating results.

Capital Expenditures.
Capital expenditures were $11.6 million for the six months ended June 30, 2007 versus $15.8 million for the same period in 2006. Aggregate capital expenditures of approximately $25.0 million are anticipated for 2007.

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

Inflation

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

Contractual Obligations

For a discussion of our contractual obligations, see Managements Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources  Contractual Obligations and Note 7 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

The only significant changes to our contractual obligations since December 31, 2006 are the incurrence of debt and interest under the Senior Credit Facility. These
borrowings resulted in payment obligations as of June 30, 2007 as follows (in thousands):



|                                                       |  |                 |        |                  |   |           |  |           |        |                  |   |        |  |   |  
|------------------------------------------------------ |  | --------------- | ------ | ---------------- | - | --------- |  | --------- | ------ | ---------------- | - | ------ |  | - | -
|                                                       |  | Payments due by
|Contractual Obligations                                |  | Total           |        | Less than 1 year |   | 2-3 years |  | 4-5 years |        | More than5 years
|Borrowings:                                            |  |                 |        |                  |   |           |  |           |        |                  |   |        |  |   |  
|Senior credit facility-term loan                       |  | $               | 28,194 |                  | $ | 5,830     |  | $         | 11,666 |                  | $ | 10,698 |  | $ | 
|Senior credit facility-revolver                        |  |                 | 32,000 |                  |   |          |  |           |       |                  |   | 32,000 |  |   | 
|Interest payment obligation for senior credit facility |  |                 | 14,358 |                  |   | 4,118     |  |           | 6,979  |                  |   | 3,261  |  |   | 
|                                                       |  |                 |        |                  |   |           |  |           |        |                  |   |        |  |   |  
|Total                                                  |  | $               | 74,552 |                  | $ | 9,948     |  | $         | 18,645 |                  | $ | 45,959 |  | $ | 
|                                                       |  |                 |        |                  |   |           |  |           |        |                  |   |        |  |   |  



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As of June 30, 2007, the noncurrent portion of our FIN 48 liability, including accrued interest and penalties
related to unrecognized tax benefits, is $13.1 million. At this time, the settlement period for the noncurrent portion of our FIN 48 liability cannot be determined; however, it is not expected to be due within the next 12 months. The Company will
include its FIN 48 liability in the Contractual Obligations table in its Annual Report on Form 10-K for the year ended December 31, 2007.

Forward-Looking Information

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



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##### Table of Contents

PART I



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

For a
discussion of certain market risks related to us, see Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. There have been
no significant developments with respect to our exposure to interest rate market risks other than the debt transactions disclosed in the notes to our condensed consolidated financial statements.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Changes in Internal Control Over
Financial Reporting

In the first quarter of 2007, we began the implementation of a new Enterprise Resource Planning system. Due to this implementation,
internal controls have changed in various functional areas within the company. Management has taken steps to ensure appropriate controls are designed and implemented as each functional area of the system is enacted. This implementation is
anticipated to continue through all of 2007 and into 2008.

Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2007. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2007, our disclosure controls
and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Companys reports that it files or submits under the Securities Exchange Act of 1934.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

From time to time, claims are asserted against
the Company arising out of its operations in the normal course of business. Management does not believe that the Company is a party to any litigation that will have a material adverse effect on its financial condition or results of operation.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

For a discussion of our risk factors, see Risk
Factors in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. There have been no material changes to those risk
factors since the date of the Annual Report.



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

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



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

Our annual
shareholders meeting was held on May 17, 2007. The matters voted upon at the meeting were (1) the election of three Class III directors (Daniel P. Casey, Robert J. Clanin and James E. Rogers), and (2) the ratification of the
selection of Deloitte & Touche LLP as our independent public accountants for fiscal year 2007. Both matters were approved by the following margins:



|                                         |  |            |  |                           |  |             |  |               
|---------------------------------------- |  | ---------- |  | ------------------------- |  | ----------- |  | --------------
|Proposal                                 |  | Votes for  |  | Votes Against or Withheld |  | Abstentions |  | BrokerNonvotes
|Election of Directors:                   |  |            |  |                           |  |             |  |               
|Daniel P. Casey                          |  | 24,668,871 |  | 683,792                   |  |            |  |              
|Robert J. Clanin                         |  | 16,587,631 |  | 8,765,032                 |  |            |  |              
|James E. Rogers                          |  | 24,378,531 |  | 974,132                   |  |            |  |              
|Ratification of Selection of Independent |  |            |  |                           |  |             |  |               
|Public Accountants                       |  | 25,095,168 |  | 215,888                   |  | 41,607      |  |              



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|ITEM 6. | EXHIBITS
|------- | --------

a) Exhibits

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



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SIGNATURES

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



|                     |  |  |  |  |  |                                                   |  |                       
|-------------------- |  |  |  |  |  | ------------------------------------------------- |  | ----------------------
|                     |  |  |  |  |  | CARAUSTAR INDUSTRIES, INC.                       
|                     |  |  |  | 
|                     |  |  |  |  |  | By:                                               |  | /s/ Ronald J. Domanico
|                     |  |  |  |  |  |                                                   |  | Ronald J. Domanico    
|Date: August 9, 2007 |  |  |  |  |  | Senior Vice President and Chief Financial Officer



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EXHIBIT INDEX



|            |  |   |  |                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                           
|3.01        |  |  |  | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference  Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                
|            |  |  
|3.02        |  |  |  | Third Amended and Restated Bylaws of the Company (Incorporated by reference  Exhibit 3.02 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                             
|            |  |  
|10.33      |  |  |  | Second Amendment to Amended and Restated Credit Agreement and First Amendment to Amended and Restated Security Agreement, dated as of May 14, 2007, 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.
|            |  |  
|31.01      |  |  |  | Certification of CEO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                     
|            |  |  
|31.02      |  |  |  | Certification of CFO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                     
|            |  |  
|32.01      |  |  |  | Certification of CEO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                       
|            |  |  
|32.02      |  |  |  | Certification of CFO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                       

---

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



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