##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended June 30, 2006



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

For the transition period from  to

Commission File Number 0-20646



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Caraustar Industries, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|North Carolina                                                 |  | 58-1388387                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                              |  |           
|------------------------------------------------------------- |  | ----------
|5000 Austell Powder Springs Road, Suite 300, Austell, Georgia |  | 30106     
|(Address of principal executive offices)                      |  | (Zip Code)

(770) 948-3101

(Registrants telephone number, including area code)



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

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

Indicate the number of shares outstanding of each of issuers classes of common stock, as of the latest practicable
date, August 3, 2006.



|                             |  |              
|---------------------------- |  | -------------
|Common Stock, $.10 par value |  | 28,071,648   
|(Class)                      |  | (Outstanding)



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##### Table of Contents

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

CARAUSTAR INDUSTRIES, INC.

TABLE OF CONTENTS



|                               |  |                                                                                                                        |  |     
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                        |  | Page
|PART I  FINANCIAL INFORMATION |  |                                                                                                                       
|                               |  |                                                                                                                       
|Item 1.                        |  | Condensed Consolidated Financial Statements (unaudited):                                                               |  |     
|                               |  |                                                                                                                       
|                               |  | Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                                        |  | 3   
|                               |  |                                                                                                                       
|                               |  | Condensed Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2006 and 2005 |  | 4   
|                               |  |                                                                                                                       
|                               |  | Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2006 and 2005                 |  | 5   
|                               |  |                                                                                                                       
|                               |  | Notes to Condensed Consolidated Financial Statements                                                                   |  | 6   
|                               |  |                                                                                                                       
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 27  
|                               |  |                                                                                                                       
|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                                                                    |  | 40  
|                               |  |                                                                                                                       
|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 30,2006 |          |   | December 31,2005 |  
|ASSETS                                                                                                                                                                   | 
|CURRENT ASSETS:                                                                                                                                                          |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                |  | $            | 7,447    |   |                  | $ | 95,152   |  
|Receivables, net of allowances for doubtful accounts, returns, and discounts of $2,570 and $2,613 as of June 30, 2006 and
December 31, 2005, respectively                |  |              | 96,521   |   |                  |   | 91,061   |  
|Inventories                                                                                                                                                              |  |              | 70,883   |   |                  |   | 70,959   |  
|Refundable income taxes                                                                                                                                                  |  |              |         |   |                  |   | 56       |  
|Current deferred tax asset                                                                                                                                               |  |              | 8,682    |   |                  |   | 40,259   |  
|Other current assets                                                                                                                                                     |  |              | 11,413   |   |                  |   | 21,613   |  
|Investment in unconsolidated affiliate                                                                                                                                   |  |              |         |   |                  |   | 13,212   |  
|Assets of discontinued operations held for sale                                                                                                                          |  |              | 64,060   |   |                  |   | 76,665   |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                                     |  |              | 259,006  |   |                  |   | 408,977  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                                           |  |              |          |   |                  |   |          |  
|Land                                                                                                                                                                     |  |              | 9,715    |   |                  |   | 7,931    |  
|Buildings and improvements                                                                                                                                               |  |              | 92,171   |   |                  |   | 97,536   |  
|Machinery and equipment                                                                                                                                                  |  |              | 429,845  |   |                  |   | 424,503  |  
|Furniture and fixtures                                                                                                                                                   |  |              | 14,739   |   |                  |   | 15,071   |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|                                                                                                                                                                         |  |              | 546,470  |   |                  |   | 545,041  |  
|Less accumulated depreciation                                                                                                                                            |  |              | (294,931 | ) |                  |   | (290,004 | )
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Property, plant and equipment, net                                                                                                                                       |  |              | 251,539  |   |                  |   | 255,037  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|GOODWILL                                                                                                                                                                 |  |              | 127,574  |   |                  |   | 129,275  |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES                                                                                                                                  |  |              | 42,688   |   |                  |   | 44,037   |  
|OTHER ASSETS                                                                                                                                                             |  |              | 19,130   |   |                  |   | 21,806   |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|                                                                                                                                                                         |  | $            | 699,937  |   |                  | $ | 859,132  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  |              |          |   |                  |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Current maturities of debt                                                                                                                                               |  | $            | 5,915    |   |                  | $ | 85       |  
|Accounts payable                                                                                                                                                         |  |              | 76,454   |   |                  |   | 78,015   |  
|Accrued interest                                                                                                                                                         |  |              | 1,667    |   |                  |   | 7,976    |  
|Accrued compensation                                                                                                                                                     |  |              | 9,528    |   |                  |   | 9,146    |  
|Capital lease obligations                                                                                                                                                |  |              | 522      |   |                  |   | 542      |  
|Income taxes payable                                                                                                                                                     |  |              | 4,642    |   |                  |   |         |  
|Other accrued liabilities                                                                                                                                                |  |              | 22,984   |   |                  |   | 34,711   |  
|Liabilities of discontinued operations                                                                                                                                   |  |              | 19,499   |   |                  |   | 31,373   |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                |  |              | 141,211  |   |                  |   | 161,848  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|LONG-TERM DEBT, less current maturities                                                                                                                                  |  |              | 275,031  |   |                  |   | 492,305  |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS                                                                                                                                      |  |              | 369      |   |                  |   | 561      |  
|DEFERRED INCOME TAXES                                                                                                                                                    |  |              | 49,872   |   |                  |   | 48,699   |  
|PENSION LIABILITY                                                                                                                                                        |  |              | 45,795   |   |                  |   | 41,877   |  
|OTHER LIABILITIES                                                                                                                                                        |  |              | 5,928    |   |                  |   | 5,446    |  
|COMMITMENTS AND CONTINGENCIES (Note 14)                                                                                                                                  |  |              |          |   |                  |   |          |  
|SHAREHOLDERS EQUITY:                                                                                                                                                    |  |              |          |   |                  |   |          |  
|Preferred stock, $.10 par value; 5,000,000 shares authorized, no shares issued                                                                                           |  |              |         |   |                  |   |         |  
|Common stock, $.10 par value; 60,000,000 shares authorized, 29,070,804 and 28,785,519 shares issued and outstanding at June 30, 2006 and
December 31, 2005, respectively |  |              | 2,908    |   |                  |   | 2,879    |  
|Additional paid-in capital                                                                                                                                               |  |              | 189,966  |   |                  |   | 192,673  |  
|Unearned compensation                                                                                                                                                    |  |              |         |   |                  |   | (3,442   | )
|Retained earnings (deficit)                                                                                                                                              |  |              | 17,612   |   |                  |   | (54,834  | )
|Accumulated other comprehensive (loss) income:                                                                                                                           |  |              |          |   |                  |   |          |  
|Minimum pension liability adjustment                                                                                                                                     |  |              | (29,796  | ) |                  |   | (29,796  | )
|Foreign currency translation                                                                                                                                             |  |              | 1,041    |   |                  |   | 916      |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Total accumulated other comprehensive loss                                                                                                                               |  |              | (28,755  | ) |                  |   | (28,880  | )
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Total Shareholders Equity                                                                                                                                               |  |              | 181,731  |   |                  |   | 108,396  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  
|                                                                                                                                                                         |  | $            | 699,937  |   |                  | $ | 859,132  |  
|                                                                                                                                                                         |  |              |          |   |                  |   |          |  

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



3



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)



|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | --------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                   |  | For the Three Months Ended
June 30, |         |   | For the Six Months Ended
June 30, |  
|                                                                                   |  | 2006                                |         |   | 2005                              |   |         | 2006 |  |   | 2005    |  
|SALES                                                                              |  | $                                   | 233,834 |   |                                   | $ | 217,223 |      |  | $ | 468,140 |   |  | $ | 437,445 |  
|COST OF SALES                                                                      |  |                                     | 197,299 |   |                                   |   | 181,050 |      |  |   | 395,313 |   |  |   | 363,892 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                       |  |                                     | 31,043  |   |                                   |   | 30,698  |      |  |   | 64,694  |   |  |   | 62,555  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                 |  |                                     | 3,620   |   |                                   |   | 258     |      |  |   | 3,635   |   |  |   | 820     |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|Income from operations                                                             |  |                                     | 1,872   |   |                                   |   | 5,217   |      |  |   | 4,498   |   |  |   | 10,178  |  
|OTHER (EXPENSE) INCOME:                                                            |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|Interest expense                                                                   |  |                                     | (7,029  | ) |                                   |   | (10,358 | )    |  |   | (17,125 | ) |  |   | (20,968 | )
|Interest income                                                                    |  |                                     | 1,445   |   |                                   |   | 554     |      |  |   | 3,625   |   |  |   | 1,063   |  
|Equity in income of unconsolidated affiliates                                      |  |                                     | 2,060   |   |                                   |   | 9,560   |      |  |   | 3,651   |   |  |   | 17,916  |  
|Gain on sale of interest in Standard Gypsum, L.P.                                  |  |                                     |        |   |                                   |   |        |      |  |   | 135,247 |   |  |   |        |  
|(Loss) gain on redemption of senior subordinated notes                             |  |                                     | (10,272 | ) |                                   |   | 121     |      |  |   | (10,272 | ) |  |   | 121     |  
|Other, net                                                                         |  |                                     | 15      |   |                                   |   | 100     |      |  |   | 108     |   |  |   | 166     |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|                                                                                   |  |                                     | (13,781 | ) |                                   |   | (23     | )    |  |   | 115,234 |   |  |   | (1,702  | )
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                     | (11,909 | ) |                                   |   | 5,194   |      |  |   | 119,732 |   |  |   | 8,476   |  
|BENEFIT (PROVISION) FOR INCOME TAXES                                               |  |                                     | 3,859   |   |                                   |   | (4,022  | )    |  |   | (42,500 | ) |  |   | (5,222  | )
|MINORITY INTEREST IN INCOME                                                        |  |                                     | (69     | ) |                                   |   | (81     | )    |  |   | (83     | ) |  |   | (106    | )
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                                           |  |                                     | (8,119  | ) |                                   |   | 1,091   |      |  |   | 77,149  |   |  |   | 3,148   |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|DISCONTINUED OPERATIONS:                                                           |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                              |  |                                     | (121    | ) |                                   |   | (1,480  | )    |  |   | (7,210  | ) |  |   | (3,870  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                |  |                                     | 34      |   |                                   |   | 503     |      |  |   | 2,507   |   |  |   | 1,290   |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                                  |  |                                     | (87     | ) |                                   |   | (977    | )    |  |   | (4,703  | ) |  |   | (2,580  | )
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|NET INCOME (LOSS)                                                                  |  |                                     | (8,206  | ) |                                   |   | 114     |      |  |   | 72,446  |   |  |   | 568     |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|OTHER COMPREHENSIVE INCOME (LOSS):                                                 |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|Foreign currency translation adjustment                                            |  |                                     | 210     |   |                                   |   | (95     | )    |  |   | 125     |   |  |   | (213    | )
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|COMPREHENSIVE INCOME (LOSS)                                                        |  | $                                   | (7,996  | ) |                                   | $ | 19      |      |  | $ | 72,571  |   |  | $ | 355     |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|BASIC INCOME (LOSS) PER COMMON SHARE                                               |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|                                                                                   |  |                                     |         |  
|CONTINUING OPERATIONS                                                              |  | $                                   | (0.28   | ) |                                   | $ | 0.04    |      |  | $ | 2.70    |   |  | $ | 0.11    |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|DISCONTINUED OPERATIONS                                                            |  | $                                   | 0.00    |   |                                   | $ | (0.04   | )    |  | $ | (0.16   | ) |  | $ | (0.09   | )
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|NET                                                                                |  | $                                   | (0.28   | ) |                                   | $ | 0.00    |      |  | $ | 2.54    |   |  | $ | 0.02    |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                                      |  |                                     | 28,570  |   |                                   |   | 28,765  |      |  |   | 28,559  |   |  |   | 28,763  |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|DILUTED INCOME (LOSS) PER COMMON SHARE                                             |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|CONTINUING OPERATIONS                                                              |  | $                                   | (0.28   | ) |                                   | $ | 0.04    |      |  | $ | 2.70    |   |  | $ | 0.11    |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|DISCONTINUED OPERATIONS                                                            |  | $                                   | 0.00    |   |                                   | $ | (0.04   | )    |  | $ | (0.16   | ) |  | $ | (0.09   | )
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|NET                                                                                |  | $                                   | (0.28   | ) |                                   | $ | 0.00    |      |  | $ | 2.54    |   |  | $ | 0.02    |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                              |  |                                     | 28,570  |   |                                   |   | 28,857  |      |  |   | 28,615  |   |  |   | 28,892  |  
|                                                                                   |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  

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 Ended
June 30, |         
|                                                        |  | 2006                              |          |   | 2005 |  
|OPERATING ACTIVITIES:                                   |  |                                   |          |   |      |   |         |  
|Net income                                              |  | $                                 | 72,446   |   |      | $ | 568     |  
|Depreciation and amortization                           |  |                                   | 11,162   |   |      |   | 14,127  |  
|Write-off of deferred debt costs                        |  |                                   | 155      |   |      |   |        |  
|Equity-based compensation expense                       |  |                                   | 547      |   |      |   | 458     |  
|Loss (gain) on redemption of senior subordinated notes  |  |                                   | 10,272   |   |      |   | (121    | )
|Restructuring and impairment costs                      |  |                                   | 7,011    |   |      |   | 249     |  
|Deferred income taxes                                   |  |                                   | 32,754   |   |      |   | 3,765   |  
|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           |  |                                   | (3,651   | ) |      |   | (17,916 | )
|Distributions from unconsolidated affiliates            |  |                                   | 3,616    |   |      |   | 14,766  |  
|Changes in operating assets and liabilities             |  |                                   | (4,688   | ) |      |   | (8,470  | )
|                                                        |  |                                   |          |   |      |   |         |  
|Net cash (used in) provided by operating activities     |  |                                   | (3,550   | ) |      |   | 7,426   |  
|                                                        |  |                                   |          |   |      |   |         |  
|INVESTING ACTIVITIES:                                   |  |                                   |          |   |      |   |         |  
|Purchases of property, plant and equipment              |  |                                   | (15,799  | ) |      |   | (11,551 | )
|Proceeds from disposal of property, plant and equipment |  |                                   | 353      |   |      |   | 1,105   |  
|Proceeds from sale of assets held for sale              |  |                                   | 7,195    |   |      |   |        |  
|Acquisition of businesses, net of cash acquired         |  |                                   | (11,059  | ) |      |   |        |  
|Changes in restricted cash                              |  |                                   | 10,712   |   |      |   | (69     | )
|Proceeds from sale of interest in Standard Gypsum, L.P. |  |                                   | 148,460  |   |      |   |        |  
|Return of investment in unconsolidated affiliates       |  |                                   | 1,384    |   |      |   | 1,734   |  
|Investment in unconsolidated affiliates                 |  |                                   |         |   |      |   | (40     | )
|                                                        |  |                                   |          |   |      |   |         |  
|Net cash provided by (used in) investing activities     |  |                                   | 141,246  |   |      |   | (8,821  | )
|                                                        |  |                                   |          |   |      |   |         |  
|FINANCING ACTIVITIES:                                   |  |                                   |          |   |      |   |         |  
|Proceeds from senior credit facility-revolver           |  |                                   | 30,000   |   |      |   |        |  
|Repayments of senior credit facility-revolver           |  |                                   | (15,000  | ) |      |   |        |  
|Proceeds from senior credit facility-term loan          |  |                                   | 35,000   |   |      |   |        |  
|Repayments of short and long-term debt                  |  |                                   | (274,110 | ) |      |   | (2,413  | )
|Deferred debt costs                                     |  |                                   | (1,135   | ) |      |   |        |  
|Swap agreement unwind proceeds                          |  |                                   |         |   |      |   | 826     |  
|Payments for capital lease obligations                  |  |                                   | (248     | ) |      |   | (234    | )
|Issuances of stock, net of forfeitures                  |  |                                   | 92       |   |      |   | 198     |  
|                                                        |  |                                   |          |   |      |   |         |  
|Net cash used in financing activities                   |  |                                   | (225,401 | ) |      |   | (1,623  | )
|                                                        |  |                                   |          |   |      |   |         |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS               |  |                                   | (87,705  | ) |      |   | (3,018  | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD        |  |                                   | 95,152   |   |      |   | 89,756  |  
|                                                        |  |                                   |          |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD              |  | $                                 | 7,447    |   |      | $ | 86,738  |  
|                                                        |  |                                   |          |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES:                               |  |                                   |          |   |      |   |         |  
|Cash payments for interest                              |  | $                                 | 22,303   |   |      | $ | 23,075  |  
|                                                        |  |                                   |          |   |      |   |         |  
|Income tax payments, net                                |  | $                                 | 2,865    |   |      | $ | 274     |  
|                                                        |  |                                   |          |   |      |   |         |  
|Property acquired under capital leases                  |  | $                                 | 36       |   |      | $ | 1,532   |  
|                                                        |  |                                   |          |   |      |   |         |  

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



5



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006

(UNAUDITED)

Note 1.Basis of Presentation

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

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

Note 2.New Accounting Pronouncements

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

Note 3.Accounting for Stock-Based Compensation

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

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

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

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



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##### Table of Contents

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

During the six months ended June 30, 2006, the Company granted 225 thousand options with a weighted average grant-date fair value of $5.96 per share. There were no options granted during the six months ended June 30, 2005.
The Company recorded approximately $135 thousand of compensation expense for the six months ended June 30, 2006. The total intrinsic value of the 11.7 thousand options exercised during the six months ended June 30, 2006 was
approximately $14 thousand valued as of June 30, 2006.

During the six months ended June 30, 2006, the Company granted
277 thousand PARS at the weighted average grant-date fair value price of $10.14 per share. There were no PARS granted during the six months ended June 30, 2005. The Company recorded approximately $412 thousand and $458 thousand of
compensation expense in the six months ended June 30, 2006 and June 30, 2005, respectively.

Total compensation expense for PARS
and non-qualified stock options for the six months ended June 30, 2006 and 2005 was $547 thousand and $458 thousand, respectively. The Company recognized no windfall tax benefit for the six months ended June 30, 2006.

The following table summarizes the stock option activity during the six months ended June 30, 2006:



|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |    
|----------------------------------------------- |  | --------- | - |  | ------------------------------ | ----- | ----------------------------------------- | --- | -------------------------------------------- | - | ---
|                                                |  | Shares    |   |  | Weighted AverageExercise Price |       | Weighted Average RemainingLife (In Years) |     | Aggregate Intrinsic Value (1) (in
thousands)
|Outstanding at December 31, 2005                |  | 1,618,959 |   |  | $                              | 17.51 |                                           |     |                                              |   |    
|Granted                                         |  | 224,550   |   |  |                                | 10.59 |                                           |     |                                              |   |    
|Forfeited                                       |  | (98,027   | ) |  |                                | 21.75 |                                           |     |                                              |   |    
|Exercised                                       |  | (11,662   | ) |  |                                | 7.83  |                                           |     |                                              |   |    
|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |    
|Outstanding at June 30, 2006                    |  | 1,733,820 |   |  | $                              | 16.44 |                                           | 5.6 |                                              | $ | 435
|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |    
|Vested and expected to vest as of June 30, 2006 |  | 1,702,043 |   |  | $                              | 16.57 |                                           | 5.6 |                                              | $ | 424
|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |    
|Options exercisable as of June 30, 2006         |  | 1,390,501 |   |  | $                              | 18.09 |                                           | 4.9 |                                              | $ | 339
|                                                |  |           |   |  |                                |       |                                           |     |                                              |   |    

---

|(1) | These amounts represent the difference between the exercise price and $9.00, the closing price of Caraustar stock on June 30, 2006 as reported on the NASDAQ Stock Market, for
all the in-the-money options outstanding.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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



|                               |  |         |   |  |                                      |      
|------------------------------ |  | ------- | - |  | ------------------------------------ | -----
|                               |  | Shares  |   |  | Weighted-AverageGrant-DateFair Value
|Nonvested at December 31, 2005 |  | 238,294 |   |  | $                                    | 16.95
|Granted                        |  | 276,550 |   |  |                                      | 10.14
|Vested                         |  | (500    | ) |  |                                      | 17.05
|Forfeited                      |  | (8,950  | ) |  |                                      | 13.58
|                               |  |         |   |  |                                      |      
|Nonvested at June 30, 2006     |  | 505,394 |   |  | $                                    | 13.28
|                               |  |         |   |  |                                      |      

As of June 30, 2006 there was $5.5 million of total unrecognized compensation cost related to
PARS. The unrecognized cost is expected to be expensed over a weighted-average period of 6.1 years unless specific stock price targets are achieved, then the PARS will vest and be expensed during the period the targets are achieved. The total value
of PARS vested during the six months ended June 30, 2006 was $9 thousand.

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



|                                                                                                         |  |                                  |      |   |                               |   |      |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---- | - | ----------------------------- | - | ---- | -
|                                                                                                         |  | Three Months Ended June 30, 2005 |      |   | Six MonthsEnded June 30, 2005 |  
|Net income (loss):                                                                                       |  |                                  |      |   |                               |   |      |  
|As reported                                                                                              |  | $                                | 114  |   |                               | $ | 568  |  
|Incremental stock based compensation expense determined pursuant to SFAS 123, net of related tax effects |  |                                  | (255 | ) |                               |   | (614 | )
|                                                                                                         |  |                                  |      |   |                               |   |      |  
|Pro forma net (loss) income                                                                              |  | $                                | (141 | ) |                               | $ | (46  | )
|                                                                                                         |  |                                  |      |   |                               |   |      |  
|Diluted income (loss) per common share:                                                                  |  |                                  |      |   |                               |   |      |  
|As reported                                                                                              |  | $                                | 0.00 |   |                               | $ | 0.02 |  
|Pro forma                                                                                                |  |                                  | 0.00 |   |                               |   | 0.00 |  

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

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

Note 4.Inventory

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

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



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##### Table of Contents

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



|                                   |  |              |        |                  |   |       
|---------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                   |  | June 30,2006 |        | December 31,2005
|Raw materials and supplies         |  | $            | 32,869 |                  | $ | 38,555
|Finished goods and work in process |  |              | 38,014 |                  |   | 32,404
|                                   |  |              |        |                  |   |       
|Total inventory                    |  | $            | 70,883 |                  | $ | 70,959
|                                   |  |              |        |                  |   |       

Note 5.Discontinued Operations and Assets Held for Sale

Discontinued Operations

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

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

Operating Results Data

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



|                                                     |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|---------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                     |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                     |  | 2006                        |        |   | 2005                      |   |        | 2006 |  |   | 2005   |  
|Sales                                                |  | $                           | 36,701 |   |                           | $ | 52,089 |      |  | $ | 79,115 |   |  | $ | 101,391 |  
|Cost of sales                                        |  |                             | 33,563 |   |                           |   | 48,734 |      |  |   | 73,114 |   |  |   | 95,789  |  
|Selling, general and administrative expenses         |  |                             | 2,907  |   |                           |   | 4,755  |      |  |   | 5,803  |   |  |   | 9,309   |  
|Restructuring and impairment costs                   |  |                             | 420    |   |                           |   | 47     |      |  |   | 7,414  |   |  |   | 88      |  
|                                                     |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Loss from operations                                 |  |                             | (189   | ) |                           |   | (1,447 | )    |  |   | (7,216 | ) |  |   | (3,795  | )
|Other income (expense), net                          |  |                             | 68     |   |                           |   | (33    | )    |  |   | 6      |   |  |   | (75     | )
|                                                     |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Loss from operations before benefit for income taxes |  |                             | (121   | ) |                           |   | (1,480 | )    |  |   | (7,210 | ) |  |   | (3,870  | )
|Benefit for income taxes                             |  |                             | 34     |   |                           |   | 503    |      |  |   | 2,507  |   |  |   | 1,290   |  
|                                                     |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Loss from discontinued operations                    |  | $                           | (87    | ) |                           | $ | (977   | )    |  | $ | (4,703 | ) |  | $ | (2,580  | )
|                                                     |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  

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

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



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##### Table of Contents

On April 21, 2006 the Company entered into an agreement to sell the assets of Sprague Paperboard,
Inc. located in Versailles, Connecticut to Cascades Inc. for approximately $14.5 million. This sale was completed on July 19, 2006 and will result in a loss of approximately $6.9 million in the third quarter of 2006. The Company also entered
into an agreement granting Cascades Inc. an option to buy the coating equipment and the customer list of the Rittman, OH coated paperboard mill for $500 thousand. Cascades Inc. exercised its option on August 2, 2006. Upon Cascades Inc.s
option exercise, the Company ceased its coated recycled paperboard production at the Rittman, Ohio location, which will result in an estimated $1.7 million charge for severance benefits in the third quarter of 2006. The Company is currently
marketing the assets of its other coated recycled paperboard machines and expects that the operations will be disposed of by December 31, 2006. Depending on the timing, expected proceeds and structure of the sales for all of the Companys
remaining coated recycled paperboard assets held for sale, the Company expects to recognize a gain in the quarter of disposition.

The
Company is evaluating sale opportunities for the remaining assets held for sale and expects to sell these assets by the end of 2006.

Assets and
Liabilities Held for Sale

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



|                                                |  |              |        |                  |   |       
|----------------------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                                |  | June 30,2006 |        | December 31,2005
|Accounts receivable                             |  | $            | 17,253 |                  | $ | 19,251
|Inventory                                       |  |              | 8,268  |                  |   | 12,167
|Property, plant and equipment, net              |  |              | 37,855 |                  |   | 43,621
|Other assets                                    |  |              | 684    |                  |   | 1,626 
|                                                |  |              |        |                  |   |       
|Assets of discontinued operations held for sale |  | $            | 64,060 |                  | $ | 76,665
|                                                |  |              |        |                  |   |       
|Accounts payable                                |  | $            | 11,544 |                  | $ | 16,228
|Accrued compensation                            |  |              | 1,139  |                  |   | 1,687 
|Notes payable                                   |  |              |       |                  |   | 4,700 
|Other liabilities                               |  |              | 6,816  |                  |   | 8,758 
|                                                |  |              |        |                  |   |       
|Liabilities of discontinued operations          |  | $            | 19,499 |                  | $ | 31,373
|                                                |  |              |        |                  |   |       

Note 6.Senior Credit Facility and Long-Term Debt

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



|                                           |  |               |         |   |                   |   |         |  
|------------------------------------------ |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                           |  | June 30, 2006 |         |   | December 31, 2005 |  
|Senior credit facility - revolver          |  | $             | 15,000  |   |                   | $ |        |  
|Senior credit facility - term loan         |  |               | 34,028  |   |                   |   |        |  
|97/8%
senior subordinated notes            |  |               |        |   |                   |   | 257,500 |  
|73/8%
senior notes                         |  |               | 189,750 |   |                   |   | 189,750 |  
|71/4%
senior notes                         |  |               | 29,000  |   |                   |   | 29,000  |  
|Other notes payable (1)                    |  |               | 9,655   |   |                   |   | 4,955   |  
|Realized interest rate swap agreements (2) |  |               | 3,513   |   |                   |   | 11,185  |  
|                                           |  |               |         |   |                   |   |         |  
|Total debt                                 |  |               | 280,946 |   |                   |   | 492,390 |  
|Less current maturities                    |  |               | (5,915  | ) |                   |   | (85     | )
|                                           |  |               |         |   |                   |   |         |  
|Total long-term debt                       |  | $             | 275,031 |   |                   | $ | 492,305 |  
|                                           |  |               |         |   |                   |   |         |  

---

|(1) | At December 31, 2005, industrial bonds of $4.7 million (the Sprague bonds) were included in current liabilities of discontinued operations and are not reflected in the schedule
above. The Sprague bonds were retained by the Company pursuant to the sale agreement; therefore, the bonds are included in the schedule above as of June 30, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



|           |  |   |        
|---------- |  | - | -------
|2006       |  | $ | 3,488  
|2007       |  |   | 5,929  
|2008       |  |   | 5,933  
|2009       |  |   | 201,182
|2010       |  |   | 32,977 
|Thereafter |  |   | 31,437 
|           |  |   |        
|Total debt |  | $ | 280,946
|           |  |   |        



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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. As of December 31, 2005, no borrowings were outstanding under the
facility; however, an aggregate of $37.5 million in letter of credit obligations were outstanding. Availability under this facility at December 31, 2005 was limited to $37.5 million after taking into consideration the outstanding letter of
credit obligations. See discussion of the Companys former senior credit facility in the notes to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

On March 30, 2006, the Company amended its senior credit facility by entering into an Amended and Restated Credit Agreement. The agreement provides
for a $145.0 million senior secured credit facility (the Senior Credit Facility) consisting of a $110.0 million five-year revolver and a $35.0 million five-year term loan. The Senior Credit Facility is secured by substantially all assets
of the Company and its domestic subsidiaries other than real property, including accounts receivable, general intangibles, inventory and equipment. The Companys domestic subsidiaries are parties to the Senior Credit Facility either as
co-borrowers with the Company or as guarantors. At June 30, 2006 the Company had $34.0 million outstanding under the five-year term loan and $15.0 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 $69.1 million at June 30, 2006. The term loan was drawn in full at closing and is required to be repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding
principal due on the fifth anniversary of closing.

Outstanding principal of the term loan initially bears interest at a rate equal to, at
the Companys option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the Senior Credit Facility) plus 0.25%, or (2) the adjusted one, two, three or
six-month LIBOR rate plus 1.75%. Outstanding principal under the revolver initially bears interest at a rate equal to, at the Companys option, either (1) the base rate or (2) the adjusted one, two, three or six-month LIBOR rate plus
1.50%. Beginning with reference to the fiscal quarter ending September 30, 2006, pricing under the Senior Credit Facility will be determined by reference to a pricing grid based on average daily availability under the revolver for the
immediately prior fiscal quarter. Under the pricing grid, the applicable margins for the term loan will range from 0.0% to 0.75% for base rate loans and from 1.50% to 2.25% for LIBOR loans, and the applicable margins for the revolver will range from
0.0% to 0.5% for base rate loans and from 1.25% to 2.00% for LIBOR loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of credit are subject to an annual fee equal to
the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%. The actual rates in effect at June 30, 2006 were 6.69% and 6.86% for
outstanding revolver and term loan borrowings, respectively.

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

Senior and Senior Subordinated Notes

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



11



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

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

Note 7.Segment Information

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

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

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



|                                                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                   |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                                   |  | 2006                        |         |   | 2005                      |   |         | 2006 |  |   | 2005    |  
|Sales (external customers):                                                        |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Paperboard                                                                         |  | $                           | 49,640  |   |                           | $ | 43,157  |      |  | $ | 99,052  |   |  | $ | 85,937  |  
|Recovered fiber                                                                    |  |                             | 28,931  |   |                           |   | 20,423  |      |  |   | 54,564  |   |  |   | 41,593  |  
|Tube, core and composite container                                                 |  |                             | 96,201  |   |                           |   | 95,056  |      |  |   | 192,501 |   |  |   | 189,925 |  
|Folding carton and custom packaging                                                |  |                             | 59,062  |   |                           |   | 58,587  |      |  |   | 122,023 |   |  |   | 119,990 |  
|                                                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total                                                                              |  | $                           | 233,834 |   |                           | $ | 217,223 |      |  | $ | 468,140 |   |  | $ | 437,445 |  
|                                                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Sales (intersegment):                                                              |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Paperboard                                                                         |  | $                           | 32,437  |   |                           | $ | 33,971  |      |  | $ | 64,944  |   |  | $ | 71,510  |  
|Recovered fiber                                                                    |  |                             | 26,215  |   |                           |   | 20,611  |      |  |   | 48,413  |   |  |   | 37,607  |  
|Tube, core and composite container                                                 |  |                             | 1,570   |   |                           |   | 1,504   |      |  |   | 2,996   |   |  |   | 2,623   |  
|Folding carton and custom packaging                                                |  |                             | 125     |   |                           |   | 320     |      |  |   | 706     |   |  |   | 529     |  
|                                                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total                                                                              |  | $                           | 60,347  |   |                           | $ | 56,406  |      |  | $ | 117,059 |   |  | $ | 112,269 |  
|                                                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from operations:                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Paperboard (A)                                                                     |  | $                           | 6,057   |   |                           | $ | 7,160   |      |  | $ | 13,295  |   |  | $ | 16,191  |  
|Recovered fiber (B)                                                                |  |                             | 1,383   |   |                           |   | (68     | )    |  |   | 2,310   |   |  |   | 767     |  
|Tube, core and composite container (C)                                             |  |                             | 1,067   |   |                           |   | 2,562   |      |  |   | 2,979   |   |  |   | 3,312   |  
|Folding carton and custom packaging (D)                                            |  |                             | (137    | ) |                           |   | 2,034   |      |  |   | (1,226  | ) |  |   | 2,888   |  
|                                                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|                                                                                   |  |                             | 8,370   |   |                           |   | 11,688  |      |  |   | 17,358  |   |  |   | 23,158  |  
|Corporate expense                                                                  |  |                             | (6,498  | ) |                           |   | (6,471  | )    |  |   | (12,860 | ) |  |   | (12,980 | )
|                                                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Income from operations                                                             |  |                             | 1,872   |   |                           |   | 5,217   |      |  |   | 4,498   |   |  |   | 10,178  |  
|Interest expense                                                                   |  |                             | (7,029  | ) |                           |   | (10,358 | )    |  |   | (17,125 | ) |  |   | (20,968 | )
|Interest income                                                                    |  |                             | 1,445   |   |                           |   | 554     |      |  |   | 3,625   |   |  |   | 1,063   |  
|Equity in income of unconsolidated affiliates                                      |  |                             | 2,060   |   |                           |   | 9,560   |      |  |   | 3,651   |   |  |   | 17,916  |  
|(Loss) gain on redemption of senior subordinated notes                             |  |                             | (10,272 | ) |                           |   | 121     |      |  |   | (10,272 | ) |  |   | 121     |  
|Gain on sale of interest in Standard Gypsum, L.P.                                  |  |                             |        |   |                           |   |        |      |  |   | 135,247 |   |  |   |        |  
|Other, net                                                                         |  |                             | 15      |   |                           |   | 100     |      |  |   | 108     |   |  |   | 166     |  
|                                                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes and minority interest |  | $                           | (11,909 | ) |                           | $ | 5,194   |      |  | $ | 119,732 |   |  | $ | 8,476   |  
|                                                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  

---

|(A) | Results for the three-month periods ended June 30, 2006 and 2005 include charges to operations of $180 thousand and $45 thousand, respectively, for restructuring and impairment
costs. Results for the six-month periods ended June 30, 2006 and 2005 include charges to operations of $257 thousand and $8 thousand respectively, for restructuring and impairment costs. These costs relate primarily to the disposition of
machinery and equipment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(B) | Results for the three-month periods ended June 30, 2006 and 2005 include credits to operations of $9 thousand and $69 thousand, respectively, for restructuring and impairment
costs. Results for the six-month periods ended June 30, 2006 and 2005 include credits to operations of $47 thousand and $64 thousand respectively, for restructuring and impairment costs. These costs relate primarily to the disposition of
machinery and equipment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Results for the three-month periods ended June 30, 2006 and 2005 include charges to operations of $2.3 million and credits to operations of $19 thousand, respectively, for
restructuring and impairment costs. Results for the six-month periods ended June 30, 2006 and 2005 include charges to operations of $1.9 million and $105 thousand respectively, for restructuring and impairment costs. These costs relate to
closing and consolidating operations within the tube, core and composite container segment.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Results for the three-month periods ended June 30, 2006 and 2005 include charges to operations of $1.1 million and $314 thousand, respectively, for restructuring and impairment
costs. Results for the six-month periods ended June 30, 2006 and 2005 include charges to operations of $1.6 million and $742 thousand respectively, for restructuring and impairment costs. These costs relate to closing and consolidating
operations within the carton and custom packaging segment.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 8.Goodwill and Other Intangible Assets

Goodwill

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



|                                |  |            |        |                 |   |                                     |  |                                     |   |  |       |        |   |  |   |         |  
|------------------------------- |  | ---------- | ------ | --------------- | - | ----------------------------------- |  | ----------------------------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                |  | Paperboard |        | Recovered Fiber |   | Folding Carton and Custom Packaging |  | Tube, Core and Composite Containers |   |  | Total |       
|Balance as of December 31, 2005 |  | $          | 68,396 |                 | $ | 3,777                               |  | $                                   |  |  | $     | 57,102 |   |  | $ | 129,275 |  
|Sale of partition operations    |  |            |       |                 |   |                                    |  |                                     |  |  |       | (1,701 | ) |  |   | (1,701  | )
|                                |  |            |        |                 |   |                                     |  |                                     |   |  |       |        |   |  |   |         |  
|Balance as of June 30, 2006     |  | $          | 68,396 |                 | $ | 3,777                               |  | $                                   |  |  | $     | 55,401 |   |  | $ | 127,574 |  
|                                |  |            |        |                 |   |                                     |  |                                     |   |  |       |        |   |  |   |         |  

Intangible Assets

As of June 30, 2006 and December 31, 2005, respectively, the Company had an intangible asset of $5.8 million, net of $2.2 million of accumulated amortization, and $6.7 million, net of $1.9 million of
accumulated amortization which is classified with other assets. Amortization expense was $265 thousand for the six month period ended June 30, 2006 and $284 thousand for the six month period ended June 30, 2005. The intangible asset is
associated with the acquisition of certain assets of the Smurfit Industrial Packaging Group, which was completed in 2002, and is attributable to the acquired customer relationships. This intangible asset is being amortized over 15 years. Scheduled
amortization of the intangible asset for the next five years is as follows (in thousands):



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



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##### Table of Contents

Note 9.Restructuring and Impairment Costs

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

In January 2006, the Company announced the permanent closure of its Birmingham carton plant located in Birmingham, Alabama. For the six months ended
June 30, 2006, the Company recorded charges of $211 thousand for severance and other termination benefits and made payments for severance and other termination benefits of $152 thousand. In order to facilitate the transition of customers to
other facilities the Birmingham carton plant ceased operations at the end of the second quarter of 2006. The Company expects to incur an additional $321 thousand in other exit costs related to the closure of this facility and will complete this plan
by the end of 2007 upon satisfaction of the lease obligation.

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

In April 2006, the Company announced the permanent closure of its Danville tube plant located in Danville, Virginia. The customers of the Danville tube
plant will be transitioned to the Companys other tube plants. The Company recorded $428 thousand of severance and other termination benefits and made payments for severance and other termination benefits of $104 thousand. The Company expects
to incur an additional $452 thousand related to severance and other termination benefits during the third quarter as the terminated employees earn the benefits. The Company expects to incur $370 thousand in other exit costs related to the closure of
this facility and will complete this plan upon the sale of real estate, which the Company is currently marketing.

In May 2006, the Company
announced the permanent closure of its Mentor carton plant located in Mentor, Ohio. The customers of the Mentor carton plant will be transitioned to the Companys other carton plants. The Company recorded $882 thousand of severance and other
termination benefits and made payments for severance and other termination benefits of $591 thousand. The Company also recorded expense of $106 thousand for other exit costs and made payments for other exits costs of $29 thousand. The Company
expects to incur an additional $1.4 million in other exit costs related to the closure of this facility and will complete this plan upon the sale of real estate, which the Company is currently marketing.

In June 2006, the Company recorded an impairment charge of $1.2 million related to a tube and core facility located in Mexico City, Mexico, which the
Company expects to dispose of in the third quarter of 2006.

In August 2006, the Company announced a plan to restructure certain functions
within its tube, core and composite container segment. The restructuring will allow the Company streamline sales and marketing efforts, outsource certain engineering costs and close duplicative administrative facilities. The Company estimates
severance and termination costs of $1.7 million will be incurred during the third quarter of 2006.

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



|                                     |  |                                              |       |                                                |   |       |                  |  |   |                               |   |  |           |        |   |  |   |      
|------------------------------------ |  | -------------------------------------------- | ----- | ---------------------------------------------- | - | ----- | ---------------- |  | - | ----------------------------- | - |  | --------- | ------ | - |  | - | -----
|                                     |  | Asset ImpairmentCharges and Loss
onDisposals |       | Severance and Other Termination Benefits Costs |   |       | Other Exit Costs |  |   | Restructuring Liability Total |   |  | Total (1)
|Liability balance, December 31, 2005 |  |                                              |       |                                                | $ | 2,263 |                  |  | $ | 867                           |   |  | $         | 3,130  |   |  |   |      
|                                     |  |                                              |       |                                                |  
|First quarter 2006 costs             |  | $                                            | 65    |                                                |   | 161   |                  |  |   | (211                          | ) |  |           | (50    | ) |  | $ | 15   
|                                     |  |                                              |       |                                                |   |       |                  |  |   |                               |   |  |           |        |   |  |   |      
|Expenditures                         |  |                                              |       |                                                |   | (263  | )                |  |   | (481                          | ) |  |           | (744   | ) |  |   |      
|                                     |  |                                              |       |                                                |   |       |                  |  |   |                               |   |  |           |        |   |  |   |      
|Liability balance, March 31, 2006    |  |                                              |       |                                                |   | 2,161 |                  |  |   | 175                           |   |  |           | 2,336  |   |  |   |      
|                                     |  |                                              |       |                                                |  
|Second quarter 2006 costs            |  | $                                            | 2,041 |                                                |   | 1,330 |                  |  |   | 249                           |   |  |           | 1,579  |   |  | $ | 3,620
|                                     |  |                                              |       |                                                |   |       |                  |  |   |                               |   |  |           |        |   |  |   |      
|Expenditures                         |  |                                              |       |                                                |   | (986  | )                |  |   | (172                          | ) |  |           | (1,158 | ) |  |   |      
|                                     |  |                                              |       |                                                |   |       |                  |  |   |                               |   |  |           |        |   |  |   |      
|Liability balance, June 30, 2006     |  |                                              |       |                                                | $ | 2,505 |                  |  | $ | 252                           |   |  | $         | 2,757  |   |  |   |      
|                                     |  |                                              |       |                                                |   |       |                  |  |   |                               |   |  |           |        |   |  |   |      

---

|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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



|                                    |  |                                      |        |                                                             |   |                                                          |  |   |       
|----------------------------------- |  | ------------------------------------ | ------ | ----------------------------------------------------------- | - | -------------------------------------------------------- |  | - | ------
|Segment                             |  | Cumulative Costs as of June 30, 2006 |        | Estimated Costs to Complete Initiatives as
of June 30, 2006 |   | Total Estimated Costs of Initiatives as
of June 30, 2006
|Paperboard                          |  | $                                    | 1,309  |                                                             | $ |                                                         |  | $ | 1,309 
|Folding carton and custom packaging |  |                                      | 13,299 |                                                             |   | 1,910                                                    |  |   | 15,209
|Tube, core and composite container  |  |                                      | 1,354  |                                                             |   | 990                                                      |  |   | 2,344 
|                                    |  |                                      |        |                                                             |   |                                                          |  |   |       
|Total                               |  | $                                    | 15,962 |                                                             | $ | 2,900                                                    |  | $ | 18,862
|                                    |  |                                      |        |                                                             |   |                                                          |  |   |       

Note 10.Pension Plan and Other Postretirement Benefits

Pension Plan and Supplemental Executive Retirement Plan

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

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, 2006.

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



|                                              |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                              |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                              |  | 2006                        |        |   | 2005                      |   |        | 2006 |  |   | 2005   |  
|Service cost of benefits earned               |  | $                           | 793    |   |                           | $ | 863    |      |  | $ | 1,586  |   |  | $ | 1,725  |  
|Interest cost on projected benefit obligation |  |                             | 1,872  |   |                           |   | 2,035  |      |  |   | 3,743  |   |  |   | 4,070  |  
|Estimated return on plan assets               |  |                             | (1,805 | ) |                           |   | (1,740 | )    |  |   | (3,609 | ) |  |   | (3,480 | )
|Net amortization and deferral                 |  |                             | 1,241  |   |                           |   | 1,667  |      |  |   | 2,482  |   |  |   | 3,335  |  
|                                              |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net pension expense                           |  | $                           | 2,101  |   |                           | $ | 2,825  |      |  | $ | 4,202  |   |  | $ | 5,650  |  
|                                              |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  

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, 2006 and 2005 included the following components (in thousands):



|                                                               |  |                             |     |                           |   |      |  |      |     |  |   |    
|-------------------------------------------------------------- |  | --------------------------- | --- | ------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                                                               |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                                                               |  | 2006                        |     | 2005                      |   | 2006 |  | 2005
|Service cost of benefits earned                                |  | $                           | 11  |                           | $ | 8    |  | $    | 21  |  | $ | 15 
|Interest cost on accumulated postretirement benefit obligation |  |                             | 87  |                           |   | 78   |  |      | 173 |  |   | 157
|Amortization                                                   |  |                             | 59  |                           |   | 17   |  |      | 117 |  |   | 33 
|                                                               |  |                             |     |                           |   |      |  |      |     |  |   |    
|Net postretirement benefit cost                                |  | $                           | 157 |                           | $ | 103  |  | $    | 311 |  | $ | 205
|                                                               |  |                             |     |                           |   |      |  |      |     |  |   |    



15



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##### Table of Contents

Note 11.Income Per Share

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



|                                                               |  |                             |        |                           |      |   |        |  |      |        |  |   |       
|-------------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | ---- | - | ------ |  | ---- | ------ |  | - | ------
|                                                               |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                                               |  | 2006                        |        |                           | 2005 |   | 2006   |  | 2005
|Income (loss) from continuing operations                       |  | $                           | (8,119 | )                         |      | $ | 1,091  |  | $    | 77,149 |  | $ | 3,148 
|                                                               |  |                             |        |                           |      |   |        |  |      |        |  |   |       
|Weighted average number of common shares outstanding - basic   |  |                             | 28,570 |                           |      |   | 28,765 |  |      | 28,559 |  |   | 28,763
|Common share equivalents                                       |  |                             |       |                           |      |   | 92     |  |      | 56     |  |   | 129   
|                                                               |  |                             |        |                           |      |   |        |  |      |        |  |   |       
|Weighted average number of common shares outstanding - diluted |  |                             | 28,570 |                           |      |   | 28,857 |  |      | 28,615 |  |   | 28,892
|                                                               |  |                             |        |                           |      |   |        |  |      |        |  |   |       
|Income (loss) per share - basic                                |  | $                           | (0.28  | )                         |      | $ | 0.04   |  | $    | 2.70   |  | $ | 0.11  
|                                                               |  |                             |        |                           |      |   |        |  |      |        |  |   |       
|Income (loss) per share - diluted                              |  | $                           | (0.28  | )                         |      | $ | 0.04   |  | $    | 2.70   |  | $ | 0.11  
|                                                               |  |                             |        |                           |      |   |        |  |      |        |  |   |       

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, 2006 and 2005 were 1,390,281 and 1,092,743, respectively.

Note 12.Equity Interests in Unconsolidated Affiliates

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

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



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



16



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##### Table of Contents

|                       |  |                                  |        |                                |   |       
|---------------------- |  | -------------------------------- | ------ | ------------------------------ | - | ------
|                       |  | Three Months Ended June 30, 2005 |        | Six Months Ended June 30, 2005
|Sales                  |  | $                                | 50,303 |                                | $ | 95,465
|Gross profit           |  |                                  | 17,078 |                                |   | 32,763
|Income from operations |  |                                  | 16,345 |                                |   | 30,113
|Net income             |  |                                  | 14,790 |                                |   | 27,796

---

|* | The actual dates of Standards financial statements are July 2, 2005 for the periods ending June 30, 2005.
|- | ----------------------------------------------------------------------------------------------------------

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 30,2006 |         | December 31,2005
|Current assets        |  | $            | 18,410  |                  | $ | 15,562 
|Noncurrent assets     |  |              | 131,925 |                  |   | 135,497
|Current liabilities   |  |              | 14,542  |                  |   | 12,607 
|Long-term liabilities |  |              | 778     |                  |   | 693    
|Long-term debt        |  |              | 50,000  |                  |   | 50,000 
|Net assets            |  |              | 85,015  |                  |   | 87,759 



|                       |  |                             |        |                           |   |        |  |      |        |  |   |       
|---------------------- |  | --------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                       |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                       |  | 2006                        |        | 2005                      |   | 2006   |  | 2005
|Sales                  |  | $                           | 31,890 |                           | $ | 32,893 |  | $    | 59,959 |  | $ | 62,339
|Gross profit           |  |                             | 7,790  |                           |   | 7,350  |  |      | 14,896 |  |   | 15,141
|Income from operations |  |                             | 4,995  |                           |   | 5,354  |  |      | 9,172  |  |   | 10,119
|Net income (loss)      |  |                             | 4,050  |                           |   | 4,341  |  |      | 7,232  |  |   | 8,079 

The Company received $5.0 million in distributions from PBL for each six month period ended
June 30, 2006, and June 30, 2005. The Companys equity interest in the earnings from PBL for the three months ended June 30, 2006 and June 30, 2005, were approximately $2.0 million and $2.2 million, respectively. The
Companys equity interest in earnings for the six months ended June 30, 2006 and June 30, 2005, were approximately $3.6 million and $4.0 million, respectively.

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

Note 13.Guarantor Condensed Consolidating Financial Statements

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



17



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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, 2006 |         
|                                                |  | Parent              |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                          |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  |                     |          |   |                      
|CURRENT ASSETS:                                 |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                       |  | $                   | 6,635    |   |                       | $ | 176      |                          |  | $ | 636          |   |  | $            |         |   |  | $ | 7,447    |  
|Intercompany funding                            |  |                     | (145,004 | ) |                       |   | 156,326  |                          |  |   | (11,322      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                  |  |                     |         |   |                       |   | 91,285   |                          |  |   | 5,236        |   |  |              |         |   |  |   | 96,521   |  
|Intercompany accounts receivable                |  |                     |         |   |                       |   | 87       |                          |  |   | 235          |   |  |              | (322     | ) |  |   |         |  
|Inventories                                     |  |                     |         |   |                       |   | 67,265   |                          |  |   | 3,618        |   |  |              |         |   |  |   | 70,883   |  
|Refundable income taxes                         |  |                     |         |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   |         |  
|Current deferred tax asset                      |  |                     | 8,682    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 8,682    |  
|Other current assets                            |  |                     | 4,927    |   |                       |   | 6,198    |                          |  |   | 288          |   |  |              |         |   |  |   | 11,413   |  
|Assets of discontinued operations held for sale |  |                     |          |   |                       |   | 64,060   |                          |  |   |             |   |  |              |         |   |  |   | 64,060   |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                            |  |                     | (124,760 | ) |                       |   | 385,397  |                          |  |   | (1,309       | ) |  |              | (322     | ) |  |   | 259,006  |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT                   |  |                     | 25,587   |   |                       |   | 494,531  |                          |  |   | 26,352       |   |  |              |         |   |  |   | 546,470  |  
|Less accumulated depreciation                   |  |                     | (11,817  | ) |                       |   | (267,564 | )                        |  |   | (15,550      | ) |  |              |         |   |  |   | (294,931 | )
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net              |  |                     | 13,770   |   |                       |   | 226,967  |                          |  |   | 10,802       |   |  |              |         |   |  |   | 251,539  |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|GOODWILL                                        |  |                     |         |   |                       |   | 124,072  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 127,574  |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES         |  |                     | 583,924  |   |                       |   | 131,669  |                          |  |   |             |   |  |              | (715,593 | ) |  |   |         |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES         |  |                     | 42,688   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 42,688   |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER ASSETS                                    |  |                     | 12,473   |   |                       |   | 6,657    |                          |  |   |             |   |  |              |         |   |  |   | 19,130   |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                   | 528,095  |   |                       | $ | 874,762  |                          |  | $ | 12,995       |   |  | $            | (715,915 | ) |  | $ | 699,937  |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY            |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  |                     |          |   |                      
|CURRENT LIABILITIES:                            |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                      |  | $                   | 5,915    |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 5,915    |  
|Accounts payable                                |  |                     | 18,596   |   |                       |   | 51,952   |                          |  |   | 5,906        |   |  |              |         |   |  |   | 76,454   |  
|Intercompany accounts payable                   |  |                     |         |   |                       |   | 235      |                          |  |   | 87           |   |  |              | (322     | ) |  |   |         |  
|Accrued interest                                |  |                     | 1,600    |   |                       |   | 67       |                          |  |   |             |   |  |              |         |   |  |   | 1,667    |  
|Accrued compensation                            |  |                     | 1,466    |   |                       |   | 7,828    |                          |  |   | 234          |   |  |              |         |   |  |   | 9,528    |  
|Capital lease obligations                       |  |                     | 501      |   |                       |   | 21       |                          |  |   |             |   |  |              |         |   |  |   | 522      |  
|Income taxes payable                            |  |                     | 4,642    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 4,642    |  
|Other accrued liabilities                       |  |                     | 1,581    |   |                       |   | 20,739   |                          |  |   | 664          |   |  |              |         |   |  |   | 22,984   |  
|Liabilities of discontinued operations          |  |                     |         |   |                       |   | 19,499   |                          |  |   |             |   |  |              |         |   |  |   | 19,499   |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                       |  |                     | 34,301   |   |                       |   | 100,341  |                          |  |   | 6,891        |   |  |              | (322     | ) |  |   | 141,211  |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LONG-TERM DEBT, less current maturities         |  |                     | 266,831  |   |                       |   | 8,200    |                          |  |   |             |   |  |              |         |   |  |   | 275,031  |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS             |  |                     | 307      |   |                       |   | 62       |                          |  |   |             |   |  |              |         |   |  |   | 369      |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED INCOME TAXES                           |  |                     | 36,205   |   |                       |   | 12,166   |                          |  |   | 1,501        |   |  |              |         |   |  |   | 49,872   |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PENSION LIABILITY                               |  |                     | 45,795   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 45,795   |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LIABILITIES                               |  |                     | 695      |   |                       |   | 4,735    |                          |  |   |             |   |  |              | 498      |   |  |   | 5,928    |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SHAREHOLDERS EQUITY:                           |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                    |  |                     | 2,794    |   |                       |   | 772      |                          |  |   | 523          |   |  |              | (1,181   | ) |  |   | 2,908    |  
|Additional paid-in capital                      |  |                     | 195,124  |   |                       |   | 682,282  |                          |  |   | 9,167        |   |  |              | (696,607 | ) |  |   | 189,966  |  
|Retained (deficit) earnings                     |  |                     | (24,161  | ) |                       |   | 66,204   |                          |  |   | (6,128       | ) |  |              | (18,303  | ) |  |   | 17,612   |  
|Accumulated other comprehensive (loss) income   |  |                     | (29,796  | ) |                       |   |         |                          |  |   | 1,041        |   |  |              |         |   |  |   | (28,755  | )
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total Shareholders Equity                      |  |                     | 143,961  |   |                       |   | 749,258  |                          |  |   | 4,603        |   |  |              | (716,091 | ) |  |   | 181,731  |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                   | 528,095  |   |                       | $ | 874,762  |                          |  | $ | 12,995       |   |  | $            | (715,915 | ) |  | $ | 699,937  |  
|                                                |  |                     |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



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 December 31, 2005 |         
|                                                |  | Parent                  |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                          |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  |                         |          |   |                      
|CURRENT ASSETS:                                 |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                       |  | $                       | 93,998   |   |                       | $ | 63       |                          |  | $ | 1,091        |   |  | $            |         |   |  | $ | 95,152   |  
|Intercompany funding                            |  |                         | (123,246 | ) |                       |   | 136,057  |                          |  |   | (12,811      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                  |  |                         |         |   |                       |   | 86,098   |                          |  |   | 4,963        |   |  |              |         |   |  |   | 91,061   |  
|Intercompany accounts receivable                |  |                         |         |   |                       |   | 285      |                          |  |   | 389          |   |  |              | (674     | ) |  |   |         |  
|Inventories                                     |  |                         |         |   |                       |   | 66,936   |                          |  |   | 4,023        |   |  |              |         |   |  |   | 70,959   |  
|Refundable income taxes                         |  |                         | 56       |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 56       |  
|Current deferred tax asset                      |  |                         | 40,259   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 40,259   |  
|Other current assets                            |  |                         | 18,723   |   |                       |   | 2,716    |                          |  |   | 174          |   |  |              |         |   |  |   | 21,613   |  
|Investment in unconsolidated affiliate          |  |                         | 13,212   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 13,212   |  
|Assets of discontinued operations held for sale |  |                         |         |   |                       |   | 76,665   |                          |  |   |             |   |  |              |         |   |  |   | 76,665   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                            |  |                         | 43,002   |   |                       |   | 368,820  |                          |  |   | (2,171       | ) |  |              | (674     | ) |  |   | 408,977  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT                   |  |                         | 20,310   |   |                       |   | 498,441  |                          |  |   | 26,290       |   |  |              |         |   |  |   | 545,041  |  
|Less accumulated depreciation                   |  |                         | (10,968  | ) |                       |   | (265,036 | )                        |  |   | (14,000      | ) |  |              |         |   |  |   | (290,004 | )
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net              |  |                         | 9,342    |   |                       |   | 233,405  |                          |  |   | 12,290       |   |  |              |         |   |  |   | 255,037  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|GOODWILL                                        |  |                         |         |   |                       |   | 125,773  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 129,275  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES         |  |                         | 583,924  |   |                       |   | 131,669  |                          |  |   |             |   |  |              | (715,593 | ) |  |   |         |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES         |  |                         | 44,037   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 44,037   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER ASSETS                                    |  |                         | 15,192   |   |                       |   | 6,592    |                          |  |   | 22           |   |  |              |         |   |  |   | 21,806   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                       | 695,497  |   |                       | $ | 866,259  |                          |  | $ | 13,643       |   |  | $            | (716,267 | ) |  | $ | 859,132  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY            |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  |                         |          |   |                      
|CURRENT LIABILITIES:                            |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                      |  | $                       | 85       |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 85       |  
|Accounts payable                                |  |                         | 26,368   |   |                       |   | 46,033   |                          |  |   | 5,614        |   |  |              |         |   |  |   | 78,015   |  
|Intercompany accounts payable                   |  |                         |         |   |                       |   | 389      |                          |  |   | 285          |   |  |              | (674     | ) |  |   |         |  
|Accrued interest                                |  |                         | 7,976    |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 7,976    |  
|Accrued compensation                            |  |                         | 1,657    |   |                       |   | 7,274    |                          |  |   | 215          |   |  |              |         |   |  |   | 9,146    |  
|Capital lease obligations                       |  |                         | 527      |   |                       |   | 15       |                          |  |   |             |   |  |              |         |   |  |   | 542      |  
|Other accrued liabilities                       |  |                         | 8,055    |   |                       |   | 26,129   |                          |  |   | 527          |   |  |              |         |   |  |   | 34,711   |  
|Liabilities of discontinued operations          |  |                         |         |   |                       |   | 31,373   |                          |  |   |             |   |  |              |         |   |  |   | 31,373   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                       |  |                         | 44,668   |   |                       |   | 111,213  |                          |  |   | 6,641        |   |  |              | (674     | ) |  |   | 161,848  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LONG-TERM DEBT, less current maturities         |  |                         | 488,805  |   |                       |   | 3,500    |                          |  |   |             |   |  |              |         |   |  |   | 492,305  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS             |  |                         | 520      |   |                       |   | 41       |                          |  |   |             |   |  |              |         |   |  |   | 561      |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED INCOME TAXES                           |  |                         | 35,056   |   |                       |   | 12,165   |                          |  |   | 1,478        |   |  |              |         |   |  |   | 48,699   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PENSION LIABILITY                               |  |                         | 41,877   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 41,877   |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LIABILITIES                               |  |                         | 804      |   |                       |   | 4,227    |                          |  |   |             |   |  |              | 415      |   |  |   | 5,446    |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SHAREHOLDERS EQUITY:                           |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                    |  |                         | 2,765    |   |                       |   | 772      |                          |  |   | 523          |   |  |              | (1,181   | ) |  |   | 2,879    |  
|Additional paid-in capital                      |  |                         | 197,825  |   |                       |   | 682,288  |                          |  |   | 9,167        |   |  |              | (696,607 | ) |  |   | 192,673  |  
|Unearned compensation                           |  |                         | (3,442   | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (3,442   | )
|Retained (deficit) earnings                     |  |                         | (83,585  | ) |                       |   | 52,053   |                          |  |   | (5,082       | ) |  |              | (18,220  | ) |  |   | (54,834  | )
|Accumulated other comprehensive (loss) income   |  |                         | (29,796  | ) |                       |   |         |                          |  |   | 916          |   |  |              |         |   |  |   | (28,880  | )
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total Shareholders Equity                      |  |                         | 83,767   |   |                       |   | 735,113  |                          |  |   | 5,524        |   |  |              | (716,008 | ) |  |   | 108,396  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                |  | $                       | 695,497  |   |                       | $ | 866,259  |                          |  | $ | 13,643       |   |  | $            | (716,267 | ) |  | $ | 859,132  |  
|                                                |  |                         |          |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                                   |  | For the Three Months Ended June 30, 2006 |        
|                                                                                   |  | Parent                                   |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|SALES                                                                              |  | $                                        |        |   |                       | $ | 298,522 |                          |  | $ | 12,026       |   |  | $            | (76,714 | ) |  | $ | 233,834 |  
|COST OF SALES                                                                      |  |                                          |        |   |                       |   | 262,008 |                          |  |   | 12,005       |   |  |              | (76,714 | ) |  |   | 197,299 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                       |  |                                          | 5,500   |   |                       |   | 24,785  |                          |  |   | 758          |   |  |              |        |   |  |   | 31,043  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                 |  |                                          |        |   |                       |   | 3,620   |                          |  |   |             |   |  |              |        |   |  |   | 3,620   |  
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income from operations                                                      |  |                                          | (5,500  | ) |                       |   | 8,109   |                          |  |   | (737         | ) |  |              |        |   |  |   | 1,872   |  
|OTHER (EXPENSE) INCOME:                                                            |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                                                                   |  |                                          | (6,859  | ) |                       |   | (168    | )                        |  |   | (2           | ) |  |              |        |   |  |   | (7,029  | )
|Interest income                                                                    |  |                                          | 1,445   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 1,445   |  
|Equity in income of unconsolidated affiliates                                      |  |                                          | 2,060   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 2,060   |  
|Other, net                                                                         |  |                                          | (10,272 | ) |                       |   | 129     |                          |  |   | (114         | ) |  |              |        |   |  |   | (10,257 | )
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                   |  |                                          | (13,626 | ) |                       |   | (39     | )                        |  |   | (116         | ) |  |              |        |   |  |   | (13,781 | )
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                          | (19,126 | ) |                       |   | 8,070   |                          |  |   | (853         | ) |  |              |        |   |  |   | (11,909 | )
|PROVISION FOR INCOME TAXES                                                         |  |                                          | 3,859   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 3,859   |  
|MINORITY INTEREST IN INCOME                                                        |  |                                          |        |   |                       |   |        |                          |  |   |             |   |  |              | (69     | ) |  |   | (69     | )
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                                           |  |                                          | (15,267 | ) |                       |   | 8,070   |                          |  |   | (853         | ) |  |              | (69     | ) |  |   | (8,119  | )
|DISCONTINUED OPERATIONS:                                                           |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                              |  |                                          |        |   |                       |   | (121    | )                        |  |   |             |   |  |              |        |   |  |   | (121    | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                |  |                                          |        |   |                       |   | 34      |                          |  |   |             |   |  |              |        |   |  |   | 34      |  
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                                  |  |                                          |        |   |                       |   | (87     | )                        |  |   |             |   |  |              |        |   |  |   | (87     | )
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                                                  |  | $                                        | (15,267 | ) |                       | $ | 7,983   |                          |  | $ | (853         | ) |  | $            | (69     | ) |  | $ | (8,206  | )
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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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, 2005 |        
|                                                                                   |  | Parent                                   |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|SALES                                                                              |  | $                                        |        |   |                       | $ | 278,644 |                          |  | $ | 11,453       |   |  | $            | (72,874 | ) |  | $ | 217,223 |  
|COST OF SALES                                                                      |  |                                          |        |   |                       |   | 243,222 |                          |  |   | 10,702       |   |  |              | (72,874 | ) |  |   | 181,050 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                       |  |                                          | 6,505   |   |                       |   | 23,259  |                          |  |   | 934          |   |  |              |        |   |  |   | 30,698  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                 |  |                                          | (13     | ) |                       |   | 271     |                          |  |   |             |   |  |              |        |   |  |   | 258     |  
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income from operations                                                      |  |                                          | (6,492  | ) |                       |   | 11,892  |                          |  |   | (183         | ) |  |              |        |   |  |   | 5,217   |  
|OTHER (EXPENSE) INCOME:                                                            |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                                                                   |  |                                          | (10,333 | ) |                       |   | (24     | )                        |  |   | (1           | ) |  |              |         |   |  |   | (10,358 | )
|Interest income                                                                    |  |                                          | 554     |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 554     |  
|Equity in income of unconsolidated affiliates                                      |  |                                          | 9,560   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 9,560   |  
|Other, net                                                                         |  |                                          | 121     |   |                       |   | 72      |                          |  |   | 28           |   |  |              |        |   |  |   | 221     |  
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                   |  |                                          | (98     | ) |                       |   | 48      |                          |  |   | 27           |   |  |              |        |   |  |   | (23     | )
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                          | (6,590  | ) |                       |   | 11,940  |                          |  |   | (156         | ) |  |              |        |   |  |   | 5,194   |  
|PROVISION FOR INCOME TAXES                                                         |  |                                          | (4,022  | ) |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | (4,022  | )
|MINORITY INTEREST IN INCOME                                                        |  |                                          |        |   |                       |   |        |                          |  |   |             |   |  |              | (81     | ) |  |   | (81     | )
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                                           |  |                                          | (10,612 | ) |                       |   | 11,940  |                          |  |   | (156         | ) |  |              | (81     | ) |  |   | 1,091   |  
|DISCONTINUED OPERATIONS:                                                           |  |                                          |        |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   |        |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                              |  |                                          |        |   |                       |   | (1,480  | )                        |  |   |             |   |  |              |        |   |  |   | (1,480  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                |  |                                          |        |   |                       |   | 503     |                          |  |   |             |   |  |              |        |   |  |   | 503     |  
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                                  |  |                                          |        |   |                       |   | (977    | )                        |  |   |             |   |  |              |        |   |  |   | (977    | )
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                                                  |  | $                                        | (10,612 | ) |                       | $ | 10,963  |                          |  | $ | (156         | ) |  | $            | (81     | ) |  | $ | 114     |  
|                                                                                   |  |                                          |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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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                                                                              |  | $                                      |        |   |                       | $ | 594,688 |                          |  | $ | 23,513       |   |  | $            | (150,061 | ) |  | $ | 468,140 |  
|COST OF SALES                                                                      |  |                                        |        |   |                       |   | 523,071 |                          |  |   | 22,303       |   |  |              | (150,061 | ) |  |   | 395,313 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                       |  |                                        | 13,403  |   |                       |   | 49,233  |                          |  |   | 2,058        |   |  |              |         |   |  |   | 64,694  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                 |  |                                        |        |   |                       |   | 3,635   |                          |  |   |             |   |  |              |         |   |  |   | 3,635   |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                                                      |  |                                        | (13,403 | ) |                       |   | 18,749  |                          |  |   | (848         | ) |  |              |         |   |  |   | 4,498   |  
|OTHER (EXPENSE) INCOME:                                                            |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                                                   |  |                                        | (16,924 | ) |                       |   | (197    | )                        |  |   | (4           | ) |  |              |         |   |  |   | (17,125 | )
|Interest income                                                                    |  |                                        | 3,625   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 3,625   |  
|Equity in income of unconsolidated affiliates                                      |  |                                        | 3,651   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 3,651   |  
|Other, net                                                                         |  |                                        | 124,975 |   |                       |   | 302     |                          |  |   | (194         | ) |  |              |         |   |  |   | 125,083 |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                                                   |  |                                        | 115,327 |   |                       |   | 105     |                          |  |   | (198         | ) |  |              |         |   |  |   | 115,234 |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                        | 101,924 |   |                       |   | 18,854  |                          |  |   | (1,046       | ) |  |              |         |   |  |   | 119,732 |  
|PROVISION FOR INCOME TAXES                                                         |  |                                        | (42,500 | ) |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | (42,500 | )
|MINORITY INTEREST IN INCOME                                                        |  |                                        |        |   |                       |   |        |                          |  |   |             |   |  |              | (83      | ) |  |   | (83     | )
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                                           |  |                                        | 59,424  |   |                       |   | 18,854  |                          |  |   | (1,046       | ) |  |              | (83      | ) |  |   | 77,149  |  
|DISCONTINUED OPERATIONS:                                                           |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                              |  |                                        |        |   |                       |   | (7,210  | )                        |  |   |             |   |  |              |         |   |  |   | (7,210  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                |  |                                        |        |   |                       |   | 2,507   |                          |  |   |             |   |  |              |         |   |  |   | 2,507   |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                                  |  |                                        |        |   |                       |   | (4,703  | )                        |  |   |             |   |  |              |         |   |  |   | (4,703  | )
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET INCOME (LOSS)                                                                  |  | $                                      | 59,424  |   |                       | $ | 14,151  |                          |  | $ | (1,046       | ) |  | $            | (83      | ) |  | $ | 72,446  |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  



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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, 2005 |        
|                                                                                   |  | Parent                                 |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                                              |  | $                                      |        |   |                       | $ | 563,310 |                          |  | $ | 22,197       |   |  | $            | (148,062 | ) |  | $ | 437,445 |  
|COST OF SALES                                                                      |  |                                        |        |   |                       |   | 490,997 |                          |  |   | 20,957       |   |  |              | (148,062 | ) |  |   | 363,892 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                       |  |                                        | 12,950  |   |                       |   | 47,690  |                          |  |   | 1,915        |   |  |              |         |   |  |   | 62,555  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                                                 |  |                                        | 29      |   |                       |   | 791     |                          |  |   |             |   |  |              |         |   |  |   | 820     |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                                                      |  |                                        | (12,979 | ) |                       |   | 23,832  |                          |  |   | (675         | ) |  |              |         |   |  |   | 10,178  |  
|OTHER (EXPENSE) INCOME:                                                            |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                                                   |  |                                        | (20,923 | ) |                       |   | (44     | )                        |  |   | (1           | ) |  |              |         |   |  |   | (20,968 | )
|Interest income                                                                    |  |                                        | 1,062   |   |                       |   | 1       |                          |  |   |             |   |  |              |         |   |  |   | 1,063   |  
|Equity in income of unconsolidated affiliates                                      |  |                                        | 17,916  |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 17,916  |  
|Other, net                                                                         |  |                                        | 121     |   |                       |   | 120     |                          |  |   | 46           |   |  |              |         |   |  |   | 287     |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                                                   |  |                                        | (1,824  | ) |                       |   | 77      |                          |  |   | 45           |   |  |              |         |   |  |   | (1,702  | )
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST |  |                                        | (14,803 | ) |                       |   | 23,909  |                          |  |   | (630         | ) |  |              |         |   |  |   | 8,476   |  
|PROVISION FOR INCOME TAXES                                                         |  |                                        | (5,222  | ) |                       |   |        |                          |  |   |             |   |  |              |          |   |  |   | (5,222  | )
|MINORITY INTEREST IN INCOME                                                        |  |                                        |        |   |                       |   |        |                          |  |   |             |   |  |              | (106     | ) |  |   | (106    | )
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                                           |  |                                        | (20,025 | ) |                       |   | 23,909  |                          |  |   | (630         | ) |  |              | (106     | ) |  |   | 3,148   |  
|DISCONTINUED OPERATIONS:                                                           |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES                              |  |                                        |        |   |                       |   | (3,870  | )                        |  |   |             |   |  |              |         |   |  |   | (3,870  | )
|BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS                                |  |                                        |        |   |                       |   | 1,290   |                          |  |   |             |   |  |              |         |   |  |   | 1,290   |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                                                  |  |                                        |        |   |                       |   | (2,580  | )                        |  |   |             |   |  |              |         |   |  |   | (2,580  | )
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET INCOME (LOSS)                                                                  |  | $                                      | (20,025 | ) |                       | $ | 21,329  |                          |  | $ | (630         | ) |  | $            | (106     | ) |  | $ | 568     |  
|                                                                                   |  |                                        |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  



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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) provided by 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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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, 2005 |       
|                                                        |  | Parent                                 |        |   | GuarantorSubsidiaries |   |        | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash (used in) provided by operating activities     |  | $                                      | (2,362 | ) |                       | $ | 8,963  |                          |  | $ | 825          |   |              | $ |  |  | $ | 7,426   |  
|                                                        |  |                                        |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Investing activities:                                   |  |                                        |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Purchases of property, plant and equipment              |  |                                        | (2,607 | ) |                       |   | (8,743 | )                        |  |   | (201         | ) |              |   |  |  |   | (11,551 | )
|Proceeds from disposal of property, plant and equipment |  |                                        |       |   |                       |   | 1,105  |                          |  |   |             |   |              |   |  |  |   | 1,105   |  
|Changes in restricted cash                              |  |                                        | (69    | ) |                       |   |        |                          |  |   |              |   |              |   |   |  |   | (69     | )
|Return of investment in unconsolidated affiliates       |  |                                        | 1,734  |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   | 1,734   |  
|Investment in unconsolidated affiliates                 |  |                                        | (40    | ) |                       |   |       |                          |  |   |             |   |              |   |  |  |   | (40     | )
|                                                        |  |                                        |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                   |  |                                        | (982   | ) |                       |   | (7,638 | )                        |  |   | (201         | ) |              |   |  |  |   | (8,821  | )
|                                                        |  |                                        |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Financing activities:                                   |  |                                        |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Repayments of long and short-term debt                  |  |                                        | (2,413 | ) |                       |   |       |                          |  |   |             |   |              |   |  |  |   | (2,413  | )
|Swap agreement unwind proceeds                          |  |                                        | 826    |   |                       |   |       |                          |  |   |             |   |              |   |  |  |   | 826     |  
|                                                        |  |                                        |        |   |                      
|Payments for capital lease obligations                  |  |                                        | (230   | ) |                       |   | (4     | )                        |  |   |             |   |              |   |  |  |   | (234    | )
|Issuances of stock, net of forfeitures                  |  |                                        | 198    |   |                       |   |       |                          |  |   |             |   |              |   |  |  |   | 198     |  
|                                                        |  |                                        |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in financing activities                   |  |                                        | (1,619 | ) |                       |   | (4     | )                        |  |   |             |   |              |   |  |  |   | (1,623  | )
|                                                        |  |                                        |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Net (decrease) increase in cash and cash equivalents    |  |                                        | (4,963 | ) |                       |   | 1,321  |                          |  |   | 624          |   |              |   |  |  |   | (3,018  | )
|Cash and cash equivalents at beginning of period        |  |                                        | 88,998 |   |                       |   | 125    |                          |  |   | 633          |   |              |   |  |  |   | 89,756  |  
|                                                        |  |                                        |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period              |  | $                                      | 84,035 |   |                       | $ | 1,446  |                          |  | $ | 1,257        |   |              | $ |  |  | $ | 86,738  |  
|                                                        |  |                                        |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |         |  



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##### Table of Contents

Note 14.Commitments and Contingencies

On May 11, 2006, the lawsuit filed by Research Plastics, Inc. against Federal Packaging, Inc. (an entity which was acquired and merged into the
Companys Industrial and Consumer Products Group) in the United States Federal District Court for the Eastern District of Michigan, Southern Division was settled and dismissed. The Company recorded an accrual of $1.2 million in the first
quarter of 2006 to reserve for the settlement. The Company paid $1.2 million to Research Plastics during the second quarter of 2006 to settle the dispute. In addition, the parties exchanged mutual releases regarding all existing and potential claims
arising from the alleged patent infringement.

During the year ended December 31, 2005 the Company recorded a $1.9 million reserve for
customer claims arising from the Companys specialty packaging division. On May 8, 2006 the Company and the customer executed an agreement to settle the customer claims by paying approximately $2.0 million in cash and provided other
concessions to the customer. This settlement was fully reserved as of March 31, 2006 and no additional reserves are expected. Additionally and in accordance with the settlement agreement, the Company will continue to supply the customer with
product through the transition period which the parties anticipate will be through June 30, 2006. The Company made the final payment to settle this obligation in July 2006.

On April 21, 2006, the Company entered into an option agreement with Cascades, Inc. regarding certain components of Rittman paper machines numbers 2
and 3 (the Rittman Equipment) and the Rittman customer list. The exercise price of the option is $500 thousand. On August 3, 2006 Cascades exercised its option on the Rittman Equipment. The Company is currently evaluating its
alternatives regarding how best to effectuate the sale of the remaining components of the Rittman paper machines and the remaining assets.

On July 14, 2006 the Company entered into a consent order with the Connecticut Department of Environmental Protection (CT DEP) relating to air, water and emissions violations arising during the Companys ownership and operation of
the coated recycled paperboard mill located in Sprague, CT. The CT DEPs review of the Companys compliance obligations was triggered by the sale of the Sprague mill. The CT DEPs review is customary upon notification of an impending
transaction. In July 2006, the Company paid $130 thousand to the CT DEP in full satisfaction of penalties imposed by the CT DEP in connection with its review.

During the second quarter 2006, the Company recorded an accrual of $1.5 million to reserve for a dispute with a vendor. The Company expects to settle the dispute for the amount reserved in the third quarter of 2006.



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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 the managements discussion and analysis of financial condition and
results of operations and consolidated financial statements and notes thereto included in our 2005 Annual Report on Form 10-K.

General

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

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

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

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

We are a holding company that operates our business through 24 subsidiaries as of June 30, 2006. We also own a
50% interest in one joint venture with Temple-Inland, Inc. We have two additional joint ventures with unrelated entities in which our investment and share of earnings are immaterial. We account for these interests in our joint ventures under the
equity method of accounting. See Liquidity and Capital Resources  Off - Balance Sheet Arrangements  Joint Venture Financings below.

Critical Accounting Policies

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



27



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##### Table of Contents

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

The following table shows paperboard shipment volume, selling price per ton, recovered fiber cost per ton for the paperboard mills, and paperboard cost
per ton for the tube and core operations for the periods indicated. The information below showing average selling price and average cost per ton, is presented because management believes they are the most significant indicators of profitability for
the paperboard segment and the tube, core and composite container segment. Historically, recovered fiber has been our largest raw material cost component and their costs have fluctuated significantly due to market and industry conditions. However,
these drivers are not the only factors that can impact these segments. See Risk Factors in Part II, Item 1A below and of our Form 10-K for additional discussion of factors that impact our business. Also note that a portion of our
sales do not have related paperboard volume, such as sales of contract packaging services and sales of recovered fiber. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage
volumes from our business segments, excluding tonnage produced or converted by our unconsolidated joint ventures, are combined and presented along end-use market lines.



|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|------------------------------------------------------------ |  | --------------------------- | ----- | ------ | - | ----- | -------- | ---- | - |  | ----- | -
|                                                             |  | Three Months Ended June 30, |       | Change |   |       | % Change |     
|                                                             |  | 2006                        |       | 2005   |   |      
|Paperboard tons shipped by production source (in thousands): |  |                             |       |        |   |       |          |      |   |  |       |  
|From internal paperboard mill production                     |  |                             | 195.1 |        |   | 184.7 |          | 10.4 |   |  | 5.6   | %
|Purchases from external sources                              |  |                             | 26.6  |        |   | 28.7  |          | (2.1 | ) |  | -7.3  | %
|Volume from discontinued operations                          |  |                             | 55.4  |        |   | 56.9  |          | (1.5 | ) |  | -2.6  | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Total paperboard tonnage                                     |  |                             | 277.1 |        |   | 270.3 |          | 6.8  |   |  | 2.5   | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Paperboard tons shipped by end-use market (in thousands):    |  |                             |       |        |   |       |          |      |   |  |       |  
|Tube, core and composite container volume                    |  |                             |       |        |   |       |          |      |   |  |       |  
|Paperboard (internal)                                        |  |                             | 61.2  |        |   | 60.6  |          | 0.6  |   |  | 1.0   | %
|Purchases from external sources                              |  |                             | 9.6   |        |   | 10.8  |          | (1.2 | ) |  | -11.1 | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Tube, core and composite container converted products        |  |                             | 70.8  |        |   | 71.4  |          | (0.6 | ) |  | -0.8  | %
|Unconverted paperboard shipped to external customers         |  |                             | 12.4  |        |   | 11.9  |          | 0.5  |   |  | 4.2   | %
|Volume from discontinued operations                          |  |                             | 0.1   |        |   | 0.2   |          | (0.1 | ) |  | -50.0 | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Tube, core and composite container volume                    |  |                             | 83.3  |        |   | 83.5  |          | (0.2 | ) |  | -0.2  | %
|Folding carton volume                                        |  |                             |       |        |   |       |          |      |   |  |       |  
|Paperboard (internal)                                        |  |                             | 25.2  |        |   | 22.4  |          | 2.8  |   |  | 12.5  | %
|Purchases from external sources                              |  |                             | 14.6  |        |   | 16.0  |          | (1.4 | ) |  | -8.8  | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Folding carton converted products                            |  |                             | 39.8  |        |   | 38.4  |          | 1.4  |   |  | 3.6   | %
|Unconverted paperboard shipped to external customers         |  |                             | 12.8  |        |   | 12.4  |          | 0.4  |   |  | 3.2   | %
|Volume from discontinued operations                          |  |                             | 51.7  |        |   | 48.3  |          | 3.4  |   |  | 7.0   | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Folding carton volume                                        |  |                             | 104.3 |        |   | 99.1  |          | 5.2  |   |  | 5.2   | %
|Gypsum wallboard facing paper volume                         |  |                             |       |        |   |       |          |      |   |  |       |  
|Unconverted paperboard shipped to external customers         |  |                             | 25.6  |        |   | 15.7  |          | 9.9  |   |  | 63.1  | %
|Other specialty products volume                              |  |                             |       |        |   |       |          |      |   |  |       |  
|Paperboard (internal)                                        |  |                             | 24.0  |        |   | 22.3  |          | 1.7  |   |  | 7.6   | %
|Purchases from external sources                              |  |                             | 2.4   |        |   | 1.9   |          | 0.5  |   |  | 26.3  | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Other specialty converted products                           |  |                             | 26.4  |        |   | 24.2  |          | 2.2  |   |  | 9.1   | %
|Unconverted paperboard shipped to external customers         |  |                             | 33.9  |        |   | 39.4  |          | (5.5 | ) |  | -14.0 | %
|Volume from discontinued operations                          |  |                             | 3.6   |        |   | 8.4   |          | (4.8 | ) |  | -57.1 | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Other specialty products volume                              |  |                             | 63.9  |        |   | 72.0  |          | (8.1 | ) |  | -11.3 | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Total paperboard tonnage                                     |  |                             | 277.1 |        |   | 270.3 |          | 6.8  |   |  | 2.5   | %
|                                                             |  |                             |       |        |   |       |          |      |   |  |       |  
|Selling price and cost data ($/ton):                         |  |                             |       |        |   |       |          |      |   |  |       |  
|Paperboard mills:                                            |  |                             |       |        |   |       |          |      |   |  |       |  
|Average selling price                                        |  | $                           | 467   |        | $ | 452   |          | 15   |   |  | 3.3   | %
|Average recovered fiber cost                                 |  |                             | 106   |        |   | 107   |          | (1   | ) |  | -0.9  | %
|Tube and core facilities:                                    |  |                             |       |        |   |       |          |      |   |  |       |  
|Average selling price                                        |  | $                           | 990   |        | $ | 942   |          | 48   |   |  | 5.1   | %
|Average paperboard cost                                      |  |                             | 499   |        |   | 491   |          | 8    |   |  | 1.6   | %



28



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##### Table of Contents

The following table shows paperboard shipment volume on our business segment basis (in
thousands of tons).



|                                                                        |  |                             |  |        |  |      |          |  |        |  
|----------------------------------------------------------------------- |  | --------------------------- |  | ------ |  | ---- | -------- |  | ------ | -
|                                                                        |  | Three Months Ended June 30, |  | Change |  |      | % Change | 
|                                                                        |  | 2006                        |  | 2005   |  |     
|Paperboard                                                              |  |                             |  |        |  |      |          |  |        |  
|Unconverted paperboard shipped to external customers                    |  | 84.7                        |  | 79.4   |  | 5.3  |          |  | 6.7    | %
|Paperboard shipped internally to converters in the paperboard segment   |  | 17.9                        |  | 16.8   |  | 1.1  |          |  | 6.5    | %
|Paperboard purchased externally by converters in the paperboard segment |  | 0.0                         |  | 0.2    |  | (0.2 | )        |  | -100.0 | %
|Volume from discontinued operations                                     |  | 55.4                        |  | 51.5   |  | 3.9  |          |  | 7.6    | %
|                                                                        |  |                             |  |        |  |      |          |  |        |  
|Total volume                                                            |  | 158.0                       |  | 147.9  |  | 10.1 |          |  | 6.8    | %
|                                                                        |  |                             |  |       
|Tube, core and composite container                                      |  |                             |  |        |  |      |          |  |        |  
|Paperboard (internal)                                                   |  | 67.3                        |  | 66.1   |  | 1.2  |          |  | 1.8    | %
|Purchases from external sources                                         |  | 12.0                        |  | 12.5   |  | (0.5 | )        |  | -4.0   | %
|Volume from discontinued operations                                     |  | 0.0                         |  | 4.6    |  | (4.6 | )        |  | -100.0 | %
|                                                                        |  |                             |  |        |  |      |          |  |        |  
|Total volume converted                                                  |  | 79.3                        |  | 83.2   |  | (3.9 | )        |  | -4.7   | %
|                                                                        |  |                             |  |       
|Folding carton and custom packaging                                     |  |                             |  |        |  |      |          |  |        |  
|Paperboard (internal)                                                   |  | 25.2                        |  | 22.4   |  | 2.8  |          |  | 12.5   | %
|Purchases from external sources                                         |  | 14.6                        |  | 16.0   |  | (1.4 | )        |  | -8.8   | %
|Volume from discontinued operations                                     |  | 0.0                         |  | 0.8    |  | (0.8 | )        |  | -100.0 | %
|                                                                        |  |                             |  |        |  |      |          |  |        |  
|Total volume converted                                                  |  | 39.8                        |  | 39.2   |  | 0.6  |          |  | 1.5    | %
|                                                                        |  |                             |  |        |  |      |          |  |        |  
|Total paperboard tonnage                                                |  | 277.1                       |  | 270.3  |  | 6.8  |          |  | 2.5    | %
|                                                                        |  |                             |  |        |  |      |          |  |        |  

Paperboard Tonnage. Total paperboard tonnage from continuing operations for the
three months ended June 30, 2006, increased 3.9% to 221.7 thousand tons from 213.4 thousand tons for the same period in 2005. Tons sold from paperboard mill production increased 5.6% to 195.1 thousand tons for the three months
ended June 30, 2006, compared to the same period in 2005. Total tonnage converted increased 2.2% for the three months ended June 30, 2006.

Total
paperboard tonnage increased primarily due to an increase in sales of unconverted paperboard to the gypsum wallboard facing paper market due to the completion of an equipment upgrade at our Sweetwater mill. This improvement was partially offset by
lower sales of unconverted paperboard in the other specialty end-use market.

Sales. Our consolidated sales for the three
months ended June 30, 2006 increased 7.6% to $233.8 million from $217.2 million in the same period of 2005. The following table presents sales by business segment (in thousands):



|                                    |  |                            |         |          |   |          |  |   |        |  |      |  
|----------------------------------- |  | -------------------------- | ------- | -------- | - | -------- |  | - | ------ |  | ---- | -
|                                    |  | Three Months EndedJune 30, |         | $ Change |   | % Change | 
|                                    |  | 2006                       |         | 2005     |   |         
|Paperboard                          |  | $                          | 49,640  |          | $ | 43,157   |  | $ | 6,483  |  | 15.0 | %
|Recovered fiber                     |  |                            | 28,931  |          |   | 20,423   |  |   | 8,508  |  | 41.7 | %
|Tube, core and composite container  |  |                            | 96,201  |          |   | 95,056   |  |   | 1,145  |  | 1.2  | %
|Folding carton and custom packaging |  |                            | 59,062  |          |   | 58,587   |  |   | 475    |  | 0.8  | %
|                                    |  |                            |         |          |   |          |  |   |        |  |      |  
|Total                               |  | $                          | 233,834 |          | $ | 217,223  |  | $ | 16,611 |  | 7.6  | %
|                                    |  |                            |         |          |   |          |  |   |        |  |      |  

Paperboard Segment

Sales for the paperboard segment increased approximately $7.0 million due to higher selling prices and volume. Selling prices improved due to price increases implemented to offset rising fuel and energy costs and other manufacturing costs.
These increases were partially offset by lower volume in the paperboard segments converting operations.

Recovered Fiber Segment

Sales for the recovered fiber segment increased primarily due to higher volume sold to our 50% owned joint venture, Premier Boxboard.

Tube, Core and Composite Container Segment

Sales for the tube, core
and composite container segment increased due to higher selling prices which accounted for an increase of $3.8 million. This increase was partially offset by lower tube and core and other converted products volume which accounted for an estimated
$2.8 million decrease in sales.



29



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##### Table of Contents

Carton and Custom Packaging Segment

Sales for the carton and custom packaging segment increased due to $5.2 million in sales from the Carolina carton plant which was acquired from Sonoco Products Company on December 31, 2005. This increase in sales
was partially offset by lower volume resulting from closing and consolidating operations and shedding customers with low margins and high credit risk which accounted for an estimated $4.8 million sales decrease.

Cost of Sales. Cost of sales for the three months ended June 30, 2006 increased $16.2 million from $181.1 million in 2005 to
$197.3 million in 2006. This increase was due primarily to the following:



| |  |  | Higher recovered fiber costs of approximately $5.7 million resulting from higher sales in the recovered fiber segment.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Higher labor, materials and other manufacturing costs of $1.8 million in the tube, core and composite container segment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher repair and maintenance, labor costs and other manufacturing costs in the paperboard segment of approximately $1.6 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher freight costs of approximately $1.6 million.
| | - |  | ---------------------------------------------------



| |  |  | Expense of $1.5 million was recorded in the second quarter of 2006 related to a dispute with a vendor.
| | - |  | ------------------------------------------------------------------------------------------------------



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



| |  |  | Accelerated depreciation expense and other expenses related to facility closures of $1.2 million.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Higher volume increased direct materials cost in the paperboard segment by approximately $1.3.
| | - |  | ----------------------------------------------------------------------------------------------

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30,
2006 increased $300 thousand from $30.7 million in 2005 to $31.0 million in 2006. The increase in selling, general and administrative expense is primarily due to an accrual of $500 thousand for deferred compensation related to the retirement of an
officer of the company.

Restructuring and Impairment Costs.During the three months ended June 30, 2006 we incurred a
$2.0 million charge for impairment of assets, $1.3 million in severance and other termination benefits and a charge of $249 thousand for other exit costs. We paid $986 thousand in severance and other termination benefits and paid $172 thousand for
other exit costs in the three months ended June 30, 2006, leaving an accrual of $2.8 million at June 30, 2006.

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

Income From
Operations. Income from operations for the three months ended June 30, 2006 was $1.9 million, a decrease of $3.3 million from operating income of $5.2 million for the same period last year. The following table presents income (loss)
from operations by business segment (in thousands):



|                                    |  |                             |        |   |          |   |        |          |  |   |        |   |  |       |   
|----------------------------------- |  | --------------------------- | ------ | - | -------- | - | ------ | -------- |  | - | ------ | - |  | ----- | --
|                                    |  | Three Months Ended June 30, |        |   | $ Change |   |        | % Change | 
|                                    |  | 2006                        |        |   | 2005     |   |        |         
|Paperboard                          |  | $                           | 6,057  |   |          | $ | 7,160  |          |  | $ | (1,103 | ) |  | (15.4 | )%
|Recovered fiber                     |  |                             | 1,383  |   |          |   | (68    | )        |  |   | 1,451  |   |  | N/A   |   
|Tube, core and composite container  |  |                             | 1,067  |   |          |   | 2,562  |          |  |   | (1,495 | ) |  | (58.4 | )%
|Folding carton and custom packaging |  |                             | (137   | ) |          |   | 2,034  |          |  |   | (2,171 | ) |  | N/A   |   
|Corporate expense                   |  |                             | (6,498 | ) |          |   | (6,471 | )        |  |   | (27    | ) |  | (0.4  | )%
|                                    |  |                             |        |   |          |   |        |          |  |   |        |   |  |       |   
|Total                               |  | $                           | 1,872  |   |          | $ | 5,217  |          |  | $ | (3,345 | ) |  | (64.1 | )%
|                                    |  |                             |        |   |          |   |        |          |  |   |        |   |  |       |   

Paperboard Segment

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



| |  |  | Higher repair and maintenance costs, labor costs and other manufacturing costs of approximately $1.6 million.
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Expense of $1.5 million was recorded in the second quarter of 2006 related to a dispute with a vendor.
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Higher fuel and energy costs of $1.4 million.
| | - |  | ---------------------------------------------

These factors were partially offset by:

| |  |  | Higher selling prices improved income from operations by approximately $2.8 million.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Higher volume improved operating income by an estimated $500 thousand.
| | - |  | ----------------------------------------------------------------------

Recovered Fiber Segment

The increase in income from operations was a result of higher volume and improved pricing,
partially offset by higher freight costs.

Tube, Core and Composite Container Segment

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



| |  |  | Higher labor, materials and other manufacturing costs of $1.8 million.
| | - |  | ----------------------------------------------------------------------



30



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##### Table of Contents

| |  |  | Higher restructuring costs of $1.6 million.
| | - |  | -------------------------------------------



| |  |  | Accelerated depreciation expense of approximately $800 thousand related to plant closures in the second quarter of 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher freight costs of $500 thousand.
| | - |  | --------------------------------------

These factors were
partially offset by higher selling prices which improved income from operations by approximately $3.0 million.

Folding Carton and Custom Packaging
Segment

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



| |  |  | Accelerated depreciation expense of $500 thousand and severance and other termination benefits of $1.0 million related to restructuring activities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower selling prices for a significant customer reduced income from operations by approximately $700 thousand.
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | A $700 thousand reversal of a reserve in the second quarter of 2005 related to a customer that filed Chapter 11 bankruptcy.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

These factors were partially offset by accelerated depreciation expense of $640 thousand and severance and other termination benefits of $200 thousand
recorded in the second quarter of 2005 related to a plant closure.

Discontinued Operations.The loss from discontinued
operations for the three months ended June 30, 2006 and 2005 was $87 thousand and $977 thousand, respectively. See notes to the condensed consolidated financial statements for additional discussion of discontinued operations.

Other (Expense) Income. Interest expense for the three months ended June 30, 2006 and June 30, 2005 was approximately $7.0
million and $10.4 million, respectively. The decrease in interest expense was primarily due to the redemption of our 97/8% senior subordinated notes on May 1, 2006. We recorded a $10.3 million loss in the three months ended June 30, 2006 related to this debt redemption. 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 $2.1 million for the three months ended June 30, 2006, a decline of $7.5 million compared to the same period in 2005. This decline was primarily due to the sale of our
interest in Standard, a joint venture with Temple-Inland, whereby, effective January 1, 2006 we were no longer entitled to earnings or distributions from Standard. This accounted for $7.4 million of the $7.5 million decrease.

(Provision) Benefit for Income Taxes.The effective rate of income tax benefit (expense) on continuing operations for the three
months ended June 30, 2006 was a 32.4% benefit, compared with a 77.4% expense for the same period last year. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments. In addition, the income
tax expense for the three months ended June 30, 2005 includes tax expense of $1.9 million related to an increase in the valuation allowance for state net operating losses resulting from a change in Ohio tax law.

Net (Loss) Income.Due to the factors discussed above, net loss for the three months ended June 30, 2006 was $8.2 million, or $0.28
net loss per common share, compared to net income of $114 thousand, or $0.00 net income per common share, for the same period last year.



31



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##### Table of Contents

Results of Operations for the Six Months Ended June 30, 2006 and 2005



|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|------------------------------------------------------------ |  | ------------------------ | ----- | ------ | - | ----- | -------- | - | ----- | - |  | ----- | -
|                                                             |  | Six Months EndedJune 30, |       | Change |   |       | % Change |  
|                                                             |  | 2006                     |       | 2005   |   |      
|Paperboard tons shipped by production source (in thousands): |  |                          |       |        |   |       |          |   |       |   |  |       |  
|From internal paperboard mill production                     |  |                          | 389.1 |        |   | 371.2 |          |   | 17.9  |   |  | 4.8   | %
|Purchases from external sources                              |  |                          | 54.9  |        |   | 59.0  |          |   | (4.1  | ) |  | -6.9  | %
|Volume from discontinued operations                          |  |                          | 114.9 |        |   | 115.7 |          |   | (0.8  | ) |  | -0.7  | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Total paperboard tonnage                                     |  |                          | 558.9 |        |   | 545.9 |          |   | 13.0  |   |  | 2.4   | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Paperboard tons shipped by end-use market (in thousands):    |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Tube, core and composite container volume                    |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Paperboard (internal)                                        |  |                          | 122.3 |        |   | 121.4 |          |   | 0.9   |   |  | 0.7   | %
|Purchases from external sources                              |  |                          | 19.8  |        |   | 20.5  |          |   | (0.7  | ) |  | -3.4  | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Tube, core and composite container converted products        |  |                          | 142.1 |        |   | 141.9 |          |   | 0.2   |   |  | 0.1   | %
|Unconverted paperboard shipped to external customers         |  |                          | 25.1  |        |   | 24.5  |          |   | 0.6   |   |  | 2.4   | %
|Volume from discontinued operations                          |  |                          | 0.4   |        |   | 0.5   |          |   | (0.1  | ) |  | -20.0 | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Tube, core and composite container volume                    |  |                          | 167.6 |        |   | 166.9 |          |   | 0.7   |   |  | 0.4   | %
|Folding carton volume                                        |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Paperboard (internal)                                        |  |                          | 49.2  |        |   | 47.2  |          |   | 2.0   |   |  | 4.2   | %
|Purchases from external sources                              |  |                          | 30.7  |        |   | 34.8  |          |   | (4.1  | ) |  | -11.8 | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Folding carton converted products                            |  |                          | 79.9  |        |   | 82.0  |          |   | (2.1  | ) |  | -2.6  | %
|Unconverted paperboard shipped to external customers         |  |                          | 27.3  |        |   | 26.2  |          |   | 1.1   |   |  | 4.2   | %
|Volume from discontinued operations                          |  |                          | 104.3 |        |   | 96.3  |          |   | 8.0   |   |  | 8.3   | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Folding carton volume                                        |  |                          | 211.5 |        |   | 204.5 |          |   | 7.0   |   |  | 3.4   | %
|Gypsum wallboard facing paper volume                         |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Unconverted paperboard shipped to external customers         |  |                          | 50.6  |        |   | 34.1  |          |   | 16.5  |   |  | 48.4  | %
|Other specialty products volume                              |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Paperboard (internal)                                        |  |                          | 45.2  |        |   | 43.5  |          |   | 1.7   |   |  | 3.9   | %
|Purchases from external sources                              |  |                          | 4.4   |        |   | 3.7   |          |   | 0.7   |   |  | 18.9  | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Other specialty converted products                           |  |                          | 49.6  |        |   | 47.2  |          |   | 2.4   |   |  | 5.1   | %
|Unconverted paperboard shipped to external customers         |  |                          | 69.4  |        |   | 74.3  |          |   | (4.9  | ) |  | -6.6  | %
|Volume from discontinued operations                          |  |                          | 10.2  |        |   | 18.9  |          |   | (8.7  | ) |  | -46.0 | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Other specialty products volume                              |  |                          | 129.2 |        |   | 140.4 |          |   | (11.2 | ) |  | -8.0  | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Total paperboard tonnage                                     |  |                          | 558.9 |        |   | 545.9 |          |   | 13.0  |   |  | 2.4   | %
|                                                             |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Selling price and cost data ($/ton):                         |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Paperboard mills:                                            |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Average selling price                                        |  | $                        | 467   |        | $ | 460   |          | $ | 7     |   |  | 1.5   | %
|Average recovered fiber cost                                 |  |                          | 98    |        |   | 109   |          |   | (11   | ) |  | -10.1 | %
|Tube and core facilities:                                    |  |                          |       |        |   |       |          |   |       |   |  |       |  
|Average selling price                                        |  | $                        | 980   |        | $ | 939   |          | $ | 41    |   |  | 4.4   | %
|Average paperboard cost                                      |  |                          | 499   |        |   | 502   |          |   | (3    | ) |  | -0.6  | %

The following table shows paperboard shipment volume on our business segment
basis (thousands of tons).



|                                                                        |  |                           |  |        |  |      |          |  |        |   
|----------------------------------------------------------------------- |  | ------------------------- |  | ------ |  | ---- | -------- |  | ------ | --
|                                                                        |  | Six Months Ended June 30, |  | Change |  |      | % Change | 
|                                                                        |  | 2006                      |  | 2005   |  |     
|Paperboard segment                                                      |  |                           |  |        |  |      |          |  |        |   
|Unconverted paperboard shipped to external customers                    |  | 172.4                     |  | 159.0  |  | 13.4 |          |  | 8.4    | % 
|Paperboard shipped internally to converters in the paperboard segment   |  | 33.0                      |  | 32.5   |  | 0.5  |          |  | 1.5    | % 
|Paperboard purchased externally by converters in the paperboard segment |  | 0.0                       |  | 0.3    |  | (0.3 | )        |  | -100.0 | % 
|Volume from discontinued operations                                     |  | 112.5                     |  | 106.4  |  | 6.1  |          |  | 5.7    | % 
|                                                                        |  |                           |  |        |  |      |          |  |        |   
|Total volume                                                            |  | 317.9                     |  | 298.2  |  | 19.7 |          |  | 6.6    | % 
|Tube, core and composite container segment                              |  |                           |  |        |  |      |          |  |        |   
|Paperboard (internal)                                                   |  | 134.5                     |  | 132.5  |  | 2.0  |          |  | 1.5    | % 
|Purchases from external sources                                         |  | 24.2                      |  | 23.8   |  | 0.4  |          |  | 1.7    | % 
|Volume from discontinued operations                                     |  | 2.4                       |  | 7.7    |  | (5.3 | )        |  | -68.8  | % 
|                                                                        |  |                           |  |        |  |      |          |  |        |   
|Total volume converted                                                  |  | 161.1                     |  | 164.0  |  | (2.9 | )        |  | (1.8   | )%
|                                                                        |  |                           |  |       
|Carton and custom packaging segment                                     |  |                           |  |        |  |      |          |  |        |   
|Paperboard (internal)                                                   |  | 49.2                      |  | 47.3   |  | 1.9  |          |  | 4.0    | % 
|Purchases from external sources                                         |  | 30.7                      |  | 34.8   |  | (4.1 | )        |  | -11.8  | % 
|Volume from discontinued operations                                     |  | 0.0                       |  | 1.6    |  | (1.6 | )        |  | -100.0 | % 
|                                                                        |  |                           |  |        |  |      |          |  |        |   
|Total volume converted                                                  |  | 79.9                      |  | 83.7   |  | (3.8 | )        |  | -4.5   | % 
|                                                                        |  |                           |  |        |  |      |          |  |        |   
|Total paperboard tonnage                                                |  | 558.9                     |  | 545.9  |  | 13.0 |          |  | 2.4    | % 
|                                                                        |  |                           |  |        |  |      |          |  |        |   

Paperboard Tonnage. Total paperboard tonnage from continuing operations for
the six months ended June 30, 2006, increased 3.2% to 444.0 thousand tons from 430.2 thousand tons for the same period in 2005. Tons sold from paperboard mill production increased 4.8% for the six months ended June 30, 2006,
compared to the same period in 2005. Total tonnage converted was essentially unchanged for the six months ended June 30, 2006 compared with the same period in 2005.



32



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##### Table of Contents

Total paperboard tonnage increased due to an increase in sales of unconverted paperboard to the gypsum wallboard facing
paper markets, combined with higher converting volume in our other specialty markets.

Sales. Our consolidated sales for the
six months ended June 30, 2006, increased 7.0% to $468.1 million from $437.4 million for the same period in 2005. The following table presents sales by business segment (in thousands):



|                                    |  |                          |         |          |   |          |  |   |        |  |      |  
|----------------------------------- |  | ------------------------ | ------- | -------- | - | -------- |  | - | ------ |  | ---- | -
|                                    |  | Six Months EndedJune 30, |         | $ Change |   | % Change | 
|                                    |  | 2006                     |         | 2005     |   |         
|Paperboard                          |  | $                        | 99,052  |          | $ | 85,937   |  | $ | 13,115 |  | 15.3 | %
|Recovered fiber                     |  |                          | 54,564  |          |   | 41,593   |  |   | 12,971 |  | 31.2 | %
|Tube, core and composite container  |  |                          | 192,501 |          |   | 189,925  |  |   | 2,576  |  | 1.4  | %
|Folding carton and custom packaging |  |                          | 122,023 |          |   | 119,990  |  |   | 2,033  |  | 1.7  | %
|                                    |  |                          |         |          |   |          |  |   |        |  |      |  
|Total                               |  | $                        | 468,140 |          | $ | 437,445  |  | $ | 30,695 |  | 7.0  | %
|                                    |  |                          |         |          |   |          |  |   |        |  |      |  

Paperboard Segment

Sales for the paperboard segment increased approximately $14.2 million due to higher selling prices and volume. Selling prices improved due to prices increases implemented to offset rising fuel and energy costs and other manufacturing
costs. These increases were partially offset by approximately $1.0 million from lower volume in the paperboard segments converting operations.

Recovered Fiber Segment

Sales for the recovered fiber segment increased due to primarily to higher volume sold to our 50% owned joint
venture, Premier Boxboard Limited.

Tube, Core and Composite Container Segment

Sales for the tube, core and composite container segment increased due to higher selling prices which accounted for an increase of $6.5 million. This increase was partially offset by lower tube, core and other product
volume which accounted for and estimated $3.9 million decrease in sales.

Folding Carton and Custom Packaging Segment

Sales for the carton and custom packaging segment increased due to $10.9 million in sales from the Carolina carton plant which was acquired from Sonoco Products Company
on December 31, 2005. This increase in sales was partially offset by lower volume resulting from closing and consolidating operations and shedding customers with low margins and high credit risk.

Cost of Sales. Cost of sales for the six months ended June 30, 2006, increased $31.4 million from $363.9 million in 2005 to $395.3
million in 2006. This increase was due to the following factors:



| |  |  | Higher recovered fiber costs of approximately $8.2 million resulting from higher sales in the recovered fiber segment.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Higher freight costs of $4.3 million.
| | - |  | -------------------------------------



| |  |  | Higher repairs and maintenance expense, labor cost and other higher manufacturing costs of $4.1 million in the paperboard segment.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher materials costs and other variable manufacturing costs in the paperboard segment of approximately $3.8 million driven primarily by higher volume.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher energy and fuel costs of $3.7 million in the paperboard segment.
| | - |  | -----------------------------------------------------------------------



| |  |  | Higher direct materials and other manufacturing costs of $3.2 million in the folding carton and custom packaging group due to higher sales.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accelerated depreciation expense of approximately $2.1 million related to facility closures.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Expense of $1.5 million was recorded in the second quarter of 2006 related to a dispute with a vendor.
| | - |  | ------------------------------------------------------------------------------------------------------

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2006
increased $2.1 million from $62.6 million in 2005 to $64.7 million in 2006. Selling, general and administrative expenses increased due to the following factors:



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



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



| |  |  | Higher allowance for accounts receivable reserves of $600 thousand.
| | - |  | -------------------------------------------------------------------

Restructuring and Impairment Costs. During the six months ended June 30, 2006, we incurred a $2.1 million charge for impairment of assets, a $1.5 million charge for severance and other
termination benefits and $38 thousand for other exit costs. In the six months ended June 30, 2006 we paid $1.2 million in severance and other termination benefits and paid $653 thousand for other exit costs.



33



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##### Table of Contents

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

Income From Operations.Income from operations for the six months ended June 30, 2006 was $4.5
million, a decrease of $5.7 million compared with operating income of $10.2 million for the same period in 2005. The following table presents income (loss) from operations by business segment (in thousands):



|                                    |  |                           |         |   |          |   |         |          |  |   |        |   |  |       |   
|----------------------------------- |  | ------------------------- | ------- | - | -------- | - | ------- | -------- |  | - | ------ | - |  | ----- | --
|                                    |  | Six Months Ended June 30, |         |   | $ Change |   |         | % Change | 
|                                    |  | 2006                      |         |   | 2005     |   |         |         
|Paperboard                          |  | $                         | 13,295  |   |          | $ | 16,191  |          |  | $ | (2,896 | ) |  | (17.9 | )%
|Recovered fiber                     |  |                           | 2,310   |   |          |   | 767     |          |  |   | 1,543  |   |  | 201.2 | % 
|Tube, core and composite container  |  |                           | 2,979   |   |          |   | 3,312   |          |  |   | (333   | ) |  | (10.1 | )%
|Folding carton and custom packaging |  |                           | (1,226  | ) |          |   | 2,888   |          |  |   | (4,114 | ) |  | N/A   |   
|Corporate expense                   |  |                           | (12,860 | ) |          |   | (12,980 | )        |  |   | 120    |   |  | (0.9  | )%
|                                    |  |                           |         |   |          |   |         |          |  |   |        |   |  |       |   
|Total                               |  | $                         | 4,498   |   |          | $ | 10,178  |          |  | $ | (5,680 | ) |  | (55.8 | )%
|                                    |  |                           |         |   |          |   |         |          |  |   |        |   |  |       |   

Paperboard Segment

Income from operations decreased due to the following factors:



| |  |  | Higher repair and maintenance costs, labor costs and other manufacturing costs of approximately $4.1 million.
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Higher fuel and energy costs of $3.7 million.
| | - |  | ---------------------------------------------



| |  |  | Expense of $1.5 million was recorded in the second quarter of 2006 related to a dispute with a vendor.
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Higher freight costs of $1.3 million.
| | - |  | -------------------------------------

These factors were
partially offset by:



| |  |  | Higher selling prices improved income from operations by approximately $6.1 million.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Higher volume improved operating income by an estimated $1.5 million.
| | - |  | ---------------------------------------------------------------------

Recovered Fiber Segment

Income from operations improved primarily due to higher volume and margins.

Tube, Core and Composite Container Segment

Income
from operations decreased due to the following factors:



| |  |  | Higher materials, other manufacturing costs and labor of $2.7 million.
| | - |  | ----------------------------------------------------------------------



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



| |  |  | Higher restructuring costs of $1.0 million.
| | - |  | -------------------------------------------



| |  |  | Higher freight costs of $800 thousand.
| | - |  | --------------------------------------



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

These factors were partially offset by higher selling prices, combined with slightly lower paperboard costs, which improved operating income by
approximately $6.0 million.

Folding Carton and Custom Packaging Segment

Income from operations decreased due to the following factors:



| |  |  | Accelerated depreciation expense of $1.6 million and severance and other termination benefits of $1.1 million related to restructuring activities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower selling prices for a significant customer reduced income from operations by approximately $1.2 million.
| | - |  | -------------------------------------------------------------------------------------------------------------



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

These factors were partially offset by the following:



| |  |  | Accelerated depreciation expense of $640 thousand and severance and other termination benefits of $200 thousand recorded in the first six months of 2005 related to a plant closure.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Discontinued Operations.The loss from discontinued operations for the six months ended June 30, 2006 and
2005 was $4.7 million and $2.6 million, respectively. See notes of the condensed consolidated financial statements for additional discussion of discontinued operations.

Other (Expense) Income.Interest expense for the six months ended June 30, 2006 and 2005 was approximately $17.1 million and $21.0 million, respectively. The decrease was primarily due to the
redemption of our 97/8% senior subordinated notes on May 1, 2006. We recorded a $10.3 million loss in the
six months ended June 30, 2006 related to this redemption. See Liquidity and Capital Resources for additional information regarding our debt, interest expense and interest rate swap agreements.



34



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##### Table of Contents

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

Equity in Income of Unconsolidated Affiliates.Equity in income from
unconsolidated affiliates was $3.7 million in the six month period ended June 30, 2006, a decrease of $14.3 million in equity in income from unconsolidated affiliates of $17.9 million in the same period in 2005. This decrease was primarily due
to the sale of our interest in Standard Gypsum, a joint venture with Temple-Inland, whereby, effective January 1, 2006 we were no longer entitled to earnings or distributions from Standard Gypsum, this accounted for approximately $13.9 million
of the $14.3 million decrease.

Provision for Income Taxes.The effective rate of income tax expense for the six months ended
June 30, 2006 was 35.4%, compared to an effective rate of income tax benefit 61.6% for the six months ended June 30, 2005. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments. In
addition, the income tax expense for the six months ended June 30, 2005 includes tax expense of $1.9 million related to an increase in the valuation allowance for state net operating losses resulting from a change in Ohio tax law.

Net Income.Due to the factors discussed above, net income for the six months ended June 30, 2006 was $72.4 million, or $2.54 net
income per common share, compared to a net income of $568 thousand, or $0.02 net income per common share, for the same period in 2005.

Liquidity and
Capital Resources

Liquidity Sources and Risks. Our primary sources of liquidity are cash from operations and borrowings under
our senior credit facility, described below. Downturns in operations can significantly affect our ability to generate cash. Factors that can affect our operating results and liquidity are discussed further in our 2005 Annual Report on Form 10-K
under Risk Factors in Part I, Item 1A. We believe that our cash on hand at June 30, 2006 of $7.4 million, together with borrowing availability under our senior credit facility will be sufficient to meet our cash
requirements for the year ending December 31, 2006 and the foreseeable future. Additionally, based on our historical ability to generate cash, we believe we will be able to meet our long-term cash requirements. However, if we are unable to
generate cash at historic levels, our ability to generate cash sufficient to meet long-term requirements is uncertain. The following are factors that could affect our future ability to generate cash from operations:



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



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



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



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



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



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

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

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



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##### Table of Contents

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



|                                      |  |               |         |                   |   |        
|------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                      |  | June 30, 2006 |         | December 31, 2005
|Senior credit facility-revolver       |  | $             | 15,000  |                   | $ |       
|Senior credit facility-term loan      |  |               | 34,028  |                   |   |       
|97/8%
senior subordinated notes       |  |               |        |                   |   | 257,500
|73/8%
senior notes                    |  |               | 189,750 |                   |   | 189,750
|71/4%
senior notes                    |  |               | 29,000  |                   |   | 29,000 
|Other notes payable (1)               |  |               | 9,655   |                   |   | 4,955  
|Realized interest rate swap gains (2) |  |               | 3,513   |                   |   | 11,185 
|                                      |  |               |         |                   |   |        
|Total debt                            |  | $             | 280,946 |                   | $ | 492,390
|                                      |  |               |         |                   |   |        

---

|(1) | As of December 31, 2005, industrial revenue bonds of $4.7 million (the Sprague bonds) were included in current liabilities of discontinued operations and are not reflected in
the schedule above. Based on current information, these bonds are to be retained upon disposal of the Sprague mill and are included in the schedule above as of June 30, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

On March 30, 2006, we amended our senior credit facility by entering into an Amended and Restated Credit Agreement (the
Senior Credit Agreement). The Senior Credit Agreement provides for a $145.0 million senior credit facility (the Senior Credit Facility) consisting of a $110.0 million five-year revolver and a $35.0 million five-year term
loan. The Senior Credit Facility is secured by substantially all of our domestic subsidiaries assets other than real property, including accounts receivable, general intangibles, inventory and equipment. Our domestic subsidiaries are parties
to the Senior Credit Facility either as co-borrowers or as guarantors. At June 30, 2006 a total of $34.0 million was outstanding under the term loan and a total of $15.0 million was outstanding under the revolver.

The revolver matures on the fifth anniversary of closing and includes a sublimit of $25.0 million for letters of credit. Borrowing availability under the
revolver is determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and inventory and reduced by usage of the revolver (including outstanding letters of credit) and any reserves. Aggregate
availability under the revolver was $69.1 million at June 30, 2006. The term loan was drawn in full at closing and is required to be repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding
principal due on the fifth anniversary of closing.

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

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



36



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##### Table of Contents

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

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

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

Cash Provided By (Used In) Operations. Cash used by operations was $3.6 million for the six months ended June 30, 2006, compared with cash provided by operations of $7.4 million for the same period in 2005. The decrease in 2006
compared to the same period in 2005 was due primarily to an $11.5 million decrease in distributions resulting from the sale of our interest in Standard Gypsum joint venture.

Capital Expenditures. Capital expenditures were $15.8 million for the six months ended June 30, 2006 versus $11.6 million for the same period
of 2005. Aggregate capital expenditures of approximately $29.0 million are anticipated for 2006. To conserve cash, we intend to limit capital expenditures for 2006 to cost reduction, productivity improvement and replacement projects.

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

Inflation

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

Contractual Obligations

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



37



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##### Table of Contents

The only significant changes to our contractual obligations since December 31, 2005 is the
incurrence of debt and interest under the senior credit facility and the redemption of our 97/8% senior
subordinates notes. These borrowings and redemption will increase (decrease) our payment obligations 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                       |  | $               | 34,028   |   |                  | $ | 5,832   |           |  | $ | 11,664    |   |  | $                | 16,532  |   |  | $ |         |  
|Senior credit facility-revolver                        |  |                 | 15,000   |   |                  |   |        |           |  |   |          |   |  |                  | 15,000  |   |  |   |         |  
|Interest payment obligation for senior credit facility |  |                 | 13,147   |   |                  |   | 3,703   |           |  |   | 5,770     |   |  |                  | 3,674   |   |  |   |         |  
|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |         |   |  |   |          |  
|Subtotal for borrowings                                |  |                 | 62,175   |   |                  |   | 9,535   |           |  |   | 17,434    |   |  |                  | 35,206  |   |  |   |         |  
|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |         |   |  |   |          |  
|Redemptions:                                           |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |         |   |  |   |          |  
|97/8%
senior subordinated notes                        |  |                 | (257,500 | ) |                  |   |        |           |  |   |          |   |  |                  |        |   |  |   | (257,500 | )
|Interest on 97/8% obligations                          |  |                 | (127,140 | ) |                  |   | (25,428 | )         |  |   | (38,142   | ) |  |                  | (38,142 | ) |  |   | (25,428  | )
|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |         |   |  |   |          |  
|Subtotal for redemptions                               |  |                 | (384,640 | ) |                  |   | (25,428 | )         |  |   | (38,142   | ) |  |                  | (38,142 | ) |  |   | (282,928 | )
|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |         |   |  |   |          |  
|Net change in contractual obligations                  |  | $               | (322,465 | ) |                  | $ | (15,893 | )         |  | $ | (20,708   | ) |  | $                | (2,936  | ) |  | $ | (282,928 | )
|                                                       |  |                 |          |   |                  |   |         |           |  |   |           |   |  |                  |         |   |  |   |          |  

Forward-Looking Information

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



38



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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, 2005. There have been no significant developments
with respect to our exposure to interest rate market risks other than the debt transactions disclosed in the notes to our condensed consolidated financial statements.

ITEM 4. CONTROLS AND PROCEDURES

Changes in Internal Control Over Financial Reporting

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

Disclosure Controls and Procedures.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 11, 2006, the lawsuit filed by Research Plastics, Inc. against
Federal Packaging, Inc. (an entity which was acquired and merged into the Companys Industrial and Consumer Products Group) in the United States Federal District Court for the Eastern District of Michigan, Southern Division was settled and
dismissed. The Company paid $1.2 million to Research Plastics as part of the settlement. In addition, the parties exchanged mutual releases regarding all existing and potential claims arising from the alleged patent infringement.

During the year ended December 31, 2005 the Company recorded a $1.9 million reserve for customer claims arising from the Companys specialty
packaging division. On May 8, 2006 the Company and the customer executed an agreement to settle the customer claims by paying approximately $2.0 million in cash and will provide other concessions to the customer. This settlement was fully
reserved as of March 31, 2006 and no additional reserves are expected. Additionally, in accordance with the settlement agreement, the Company will continue to supply the customer with product through the transition period which the parties
anticipate will be through June 30, 2006. The Company made the final payment to settle this obligation in July 2006.

ITEM 1A. RISK FACTORS

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

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

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



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

Our annual shareholders meeting
was held on May 17, 2006. The matters voted upon at the meeting were (1) the election of four Class II directors (Ronald J. Domanico, Charles H. Greiner, Jr., John T. Heald, Jr. and Michael J. Keough), and (2) the ratification of the
selection of Deloitte & Touche LLP as our independent public accountants for fiscal year 2006. Both matters were approved by the following margins:



|                                                            |  |            |  |                           |  |             |  |                
|----------------------------------------------------------- |  | ---------- |  | ------------------------- |  | ----------- |  | ---------------
|Proposal                                                    |  | Votes for  |  | Votes Against or Withheld |  | Abstentions |  | Broker Nonvotes
|Election of Directors                                       |  |            |  |                           |  |             |  |                
|Ronald J. Domanico                                          |  | 24,445,198 |  | 1,569,680                 |  |            |  |               
|Charles H. Greiner, Jr.                                     |  | 25,366,947 |  | 647,931                   |  |            |  |               
|John T. Heald, Jr.                                          |  | 25,366,033 |  | 648,845                   |  |            |  |               
|Michael J. Keough                                           |  | 25,366,810 |  | 648,068                   |  |            |  |               
|Ratification of Selection of Independent Public Accountants |  | 25,647,088 |  | 317,392                   |  | 50,398      |  |               

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. DomanicoRonald J. DomanicoSenior Vice President and Chief Financial Officer


Date: August 8, 2006



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EXHIBIT INDEX



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

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



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