The North American coated paper industry is cyclical, and like other cyclical industries, it is largely affected by the interplay of demand and supply. Demand and supply factors affecting the coated paper industry, as well as historical price trends, are discussed below.

Coated paper demand is primarily driven by advertising and print media usage. Advertising spending and magazine and catalog circulation tend to rise when GDP in the U.S. is robust and typically decline in a sluggish economy. According to RISI, GDP in the U.S. is expected to grow at an average of 2.9% per annum through 2010. According to RISI, U.S. coated paper demand accounted for approximately 92% of North American demand in 2005. North American demand for coated paper is therefore highly correlated to changes in U.S. GDP.

North American customers purchased approximately 12.6 million tons of coated paper in 2005. According to RISI, from 2000 to 2003, North American coated paper demand declined from approximately 12.2 million to approximately 11.7 million tons.

In North America and the United States, supply is determined by both local coated paper production and imports from sources outside North America or the United States, principally Europe and Asia. The volume of coated paper imports from Europe and Asia is a function of worldwide supply and demand for coated paper, the exchange rate of the U.S. dollar relative to other currencies, especially the Euro, market prices in North America and other markets and the cost of ocean-going freight. North American and U.S. demand exceeded supply in 2005 by 7% and 15%, respectively, and demand is forecasted by RISI to continue to exceed supply through 2010. Therefore, imports have become a structural part of the North American and U.S. coated paper marketplaces. Coated paper production capacity in Asia, and China in particular, is expected to increase in the future.

The Company is the largest coated paper manufacturer in North America based on production capacity, according to RISI. Coated papers are used primarily in media and marketing applications, including corporate annual reports, high-end advertising brochures, magazines, catalogs, and direct mail advertising. Coated paper has a higher level of smoothness than uncoated paper, which is achieved by applying a coating that is typically clay-based, on the surface of the paper. As a result, coated paper achieves higher reprographic quality and printability.

Coated paper comes in coated freesheet and coated groundwood, which generally differ in price and quality. The chemically treated pulp used in freesheet applications produces brighter and smoother paper than the mechanical pulp used in groundwood papers. The Company produces coated freesheet papers in No. 1, No. 2 and No. 3 grades for higher-end uses such as corporate annual reports and high-end advertising and coated label paper with its C1S (coated one-side) paper line, which is used primarily for label and specialty applications. The Company produces coated groundwood papers in No. 3 and No. 4 grades for use in applications requiring lighter paper stock such as magazines, catalogs and inserts. The Company also sells coated seconds, which are paper products that are damaged, defective or otherwise do not meet quality specifications. Coated seconds are sold at a discount, typically to merchants for use by printers that have needs for these products.

Each of the Company’s paper grades is produced in a variety of weights, sizes and finishes, that can be gloss, dull or matte. The coating process changes the gloss, ink absorption qualities, texture and opacity of the paper to meet customers’ performance requirements. Most of the Company’s coated paper is shipped in rolls, while a portion is cut into sheets. The Company also produces uncoated paper and pulp.

Uncoated paper is typically is used for business forms, business stationery, general printing paper and photocopy paper. The Company typically produces uncoated paper to fill unused capacity, such as when it has excess capacity on a paper machine, but not on a coater.

Pulp is the primary raw material used in the production of printing, writing and packaging paper and tissue. Pulp is the generic term that describes the cellulose fiber developed from wood. These cellulose fibers may be separated by mechanical, thermo-mechanical or chemical processes.

Cost of sales for the first quarter of 2006 was $451 million compared to $411 million for the first quarter of 2005, an increase of 9.7%.

Maintenance expense at mills totaled $36 million and $41 million in the first quarter of 2006 and 2005, respectively.

Interest expense for the first quarter of 2006 was $43 million compared to $2 million for the first quarter of 2005.