SUMMARY OF RESULTS Q3 2006 Q2 2006 Q3 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) Sales 1,177 1,159 1,241 Operating profit (loss) from continuing operations(1) 89 26 (44) Earnings (loss) from continuing operations 38 (3) (48) Net earnings (loss) 38 (9) (52) Earnings (loss) from continuing operations per common share (in dollars) 0.16 (0.01) (0.21) Net earnings (loss) per common share (in dollars) 0.16 (0.04) (0.23) Excluding specified items(1) Operating profit (loss) from continuing operations 98 44 (26) Earnings (loss) from continuing operations 44 3 (35) Earnings (loss) from continuing operations per common share (in dollars) 0.19 0.01 (0.15) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Operating profit from continuing operations is a non-GAAP measure. For a discussion on specified items and the use of non-GAAP measures, see "Notes to the summary of results" in the appendix.

"I am pleased with Domtar's third quarter results, the best we've seen for several quarters, as our decisions over the past year and the sustained efforts of our employees to deliver on restructuring initiatives have been rewarded," said Raymond Royer, President and Chief Executive Officer. "Higher selling prices for paper, pulp, and packaging combined with lower operating costs have also contributed to these positive results. Given the better operating rates in the North American uncoated freesheet market, we believe we can grow and prosper in this business. On the softwood lumber front, Domtar will start receiving refunds for duties collected by the United States in the near future. Meanwhile, the deteriorating housing market and high fiber costs will keep the lumber industry in a challenging position," added Mr. Royer.

Mr. Royer also stated that "the transition work to create the new Domtar, the largest fine paper company in North America, in the first quarter of 2007, is progressing according to plan, and we are encouraged by the recent favorable decision of the United States antitrust authorities regarding the transaction. We continue to work on the other closing conditions, including regulatory approvals under the Competition Act (Canada) and the Investment Canada Act."

OPERATIONAL REVIEW THIRD QUARTER 2006 COMPARED TO SECOND QUARTER 2006 -----------

In accordance with Canadian generally accepted accounting principles, effective in the second quarter of 2006, the information pertaining to our Vancouver paper mill was no longer included in our Papers business but presented as a discontinued operation and assets held for sale. In July 2006, we reached an agreement to sell the Vancouver paper mill property, subject to a number of closing conditions.

PAPERS Q3 2006 Q2 2006 Variance ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Operating profit from continuing operations 75 17 58 Operating profit from continuing operations, excluding specified items 83 36 47 ------------------------------------------------------------------------- -------------------------------------------------------------------------

The $47 million increase in operating profit from continuing operations excluding specified items in the Papers segment was mainly the result of higher average selling prices for paper and pulp, the settlement of a contract dispute resulting in a payment to Domtar of $14 million, recognition of investment tax credits related to research and development expenditures from prior years, lower energy and freight costs as well as the realization of savings stemming from restructuring activities. These factors were partially offset by lower shipments for paper.

PAPER MERCHANTS Q3 2006 Q2 2006 Variance ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Operating profit from continuing operations 3 3 - Operating profit from continuing operations, excluding specified items 3 3 - ------------------------------------------------------------------------- -------------------------------------------------------------------------

Operating profit from continuing operations in the Paper Merchants segment remained stable. Although shipments were down during the quarter, it was offset by higher average selling prices for paper.

WOOD Q3 2006 Q2 2006 Variance ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Operating loss from continuing operations (17) (10) (7) Operating loss from continuing operations, excluding specified items (17) (9) (8) ------------------------------------------------------------------------- -------------------------------------------------------------------------

Operating loss from continuing operations excluding specified items in the Wood segment increased by $8 million, or $1 million if we exclude the $7 million Crown stumpage fees refund recorded in the second quarter of 2006. This increase is mainly attributable to lower average selling prices, partially offset by lower duties on softwood lumber and benefits realized pursuant to the closure in the second quarter of 2006 of the Malartic and Grand-Remous sawmills.

Effective October 12, 2006, Domtar is entitled to receive a refund for duties collected by the U.S. Government since 2002 plus interest, for a total consideration of approximately US$183 million ($204 million). This refund could be subject to a special charge of 19% by the Canadian Government.

PACKAGING Q3 2006 Q2 2006 Variance ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Operating profit from continuing operations 23 16 7 Operating profit from continuing operations, excluding specified items 24 14 10 ------------------------------------------------------------------------- -------------------------------------------------------------------------

The $10 million increase in operating profit from continuing operations excluding specified items in the Packaging segment (our 50% share of Norampac Inc.) was mainly attributable to higher average selling prices for both containerboard and corrugated containers with lower maintenance costs, partially offset by higher fiber costs.

LIQUIDITY AND CAPITAL ----------- FREE CASH FLOW(1) Q3 2006 Q2 2006 Q3 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Cash flows provided from operating activities of continuing operations before changes in working capital and other items 120 79 17 Changes in working capital and other items (37) (21) 1 ---------------------------- Cash flows provided from operating activities of continuing operations 83 58 18 Net additions to property, plant and equipment (31) (33) (34) ---------------------------- Free cash flow 52 25 (16) ------------------------------------------------------------------------- -------------------------------------------------------------------------

Free cash flow amounted to $52 million in the third quarter of 2006 including $37 million of cash requirements for working capital.

Domtar's net debt-to-total capitalization ratio(1) as at September 30, 2006 stood at 56.7% compared to 57.7% as at December 31, 2005. Domtar's net indebtedness decreased by $105 million, largely due to the positive impact of a stronger Canadian dollar (based on month-end exchange rates) on our U.S. dollar denominated debt and repayments on our revolving credit facility.

(1) For a discussion on the use of non-GAAP measures, see "Notes to the summary of results" in the appendix. OUTLOOK -----------

Domtar does not anticipate any significant changes to current paper and pulp market conditions. The Company will continue to monitor market conditions and respond accordingly. Domtar expects lumber markets to remain weak for the foreseeable future. Nonetheless, the Company intends to realize the full potential of its restructuring plan.

FORWARD-LOOKING STATEMENTS -----------

This press release may contain forward-looking statements relating to trends in, or representing management's beliefs about, Domtar's future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as "anticipate", "believe", "expect", "intend", "aim", "target", "plan", "continue", "estimate", "may", "will", "should" and similar expressions. These statements reflect management's current beliefs and are based on information currently available to management.

Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties such as, but not limited to, general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign currency exchange rates, the ability to integrate acquired businesses into existing operations, the ability to realize anticipated cost savings, the performance of manufacturing operations and other factors referenced herein and in Domtar's continuous disclosure filings. These factors should be considered carefully and undue reliance should not be placed on the forward-looking statements. Although the forward-looking statements are based upon what management believes to be reasonable estimates and assumptions, Domtar cannot ensure that actual results will not be materially different from those expressed or implied by these forward-looking statements. Unless specifically required by law, Domtar assumes no obligation to update or revise these forward-looking statements to reflect new events or circumstances. These risks, uncertainties and other factors include, among other things, those discussed under "Risk Factors" in Domtar's Management's Discussion and Analysis (MD&A).

THIRD QUARTER 2006 RESULTS WEBCAST -----------

You are invited to listen to a live broadcast of the conference call with financial analysts that the Company will be holding today to present its third quarter 2006 financial results. It will take place at 4:00 p.m. (EDT) on the Domtar corporate website at: http://www.domtar.com/.

DOMTAR IS THE THIRD LARGEST PRODUCER OF UNCOATED FREESHEET PAPER IN NORTH AMERICA. IT IS ALSO A LEADING MANUFACTURER OF BUSINESS PAPERS, COMMERCIAL PRINTING AND PUBLICATION PAPERS, AND TECHNICAL AND SPECIALTY PAPERS. DOMTAR MANAGES ACCORDING TO INTERNATIONALLY RECOGNIZED STANDARDS 17 MILLION ACRES OF FORESTLAND IN CANADA AND THE UNITED STATES, AND PRODUCES LUMBER AND OTHER WOOD PRODUCTS. DOMTAR HAS APPROXIMATELY 8,500 EMPLOYEES ACROSS NORTH AMERICA. THE COMPANY ALSO HAS A 50% INVESTMENT INTEREST IN NORAMPAC INC., THE LARGEST CANADIAN PRODUCER OF CONTAINERBOARD. APPENDIX ---------- NOTES TO THE SUMMARY OF RESULTS NOTE 1. ------- SPECIFIED ITEMS

In Domtar's view, specified items are items that do not typify normal operating activities. The following table reconciles operating profit (loss) from continuing operations, earnings (loss) from continuing operations, earnings (loss) from continuing operations per share, determined in accordance with GAAP(x), to operating profit (loss) from continuing operations, earnings (loss) from continuing operations, earnings (loss) from continuing operations per share, excluding specified items.

Q3 2006 Q2 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) Earnings Earnings (loss) from Opera- from Operating conti- ting Earnings conti- profit Earnings nuing profit (loss) nuing from from opera- from from opera- conti- conti- tions conti- conti- tions nuing nuing per share nuing nuing per share opera- opera- (in dol- opera- opera- (in dol- tions tions lars) tions tions lars) As per GAAP(x) 89 38 0.16 26 (3) (0.01) Specified items: Closure and restructuring costs (a) 8 5 19 13 Unrealized mark-to-market (gains) losses (b) 1 1 (1) (1) Income tax legislation modification (c) - - - (4) Foreign exchange (gains) losses on long-term debt (d) - - - (2) Refinancing costs (e) - - - - -------------------------- -------------------------- 9 6 0.03 18 6 0.02 -------------------------- -------------------------- Excluding specified items 98 44 0.19 44 3 0.01 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Q3 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Loss Operat- from ing conti- loss Loss nuing from from opera- conti- conti- tions nuing nuing per share opera- opera- (in dol- tions tions lars) As per GAAP(x) (44) (48) (0.21) Specified items: Closure and restructuring costs (a) 15 10 Unrealized mark-to-market (gains) losses (b) 3 2 Income tax legislation modification (c) - - Foreign exchange (gains) losses on long-term debt (d) - (4) Refinancing costs (e) - 5 -------------------------- 18 13 0.06 -------------------------- Excluding specified items (26) (35) (0.15) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (x) Except for operating profit (loss) from continuing operations which is a non-GAAP measure. See note 2. a) Closure and restructuring costs Domtar's results include closure and restructuring charges. These charges are presented under "Closure and restructuring costs" in the financial statements. b) Unrealized mark-to-market gains or losses Domtar's results include unrealized mark-to-market gains or losses on commodity swap contracts and foreign exchange contracts not considered as hedges for accounting purposes. Such gains or losses are presented under "Selling, general and administrative" expenses in the financial statements. c) Income tax legislation modification Domtar's results include charges related to modifications to the income tax legislation. These charges are presented under "Income tax recovery" in the financial statements. d) Foreign exchange impact on long-term debt Domtar's results include foreign exchange gains or losses on the translation of a portion of its long-term debt. Such gains or losses are presented under "Financing expenses" in the financial statements. e) Refinancing costs Domtar's results include refinancing expenses. These refinancing expenses are presented under "Financing expenses" in the financial statements. NOTE 2. ------- USE OF NON-GAAP MEASURES

Except where otherwise indicated, all financial information reflected herein is determined on the basis of Canadian GAAP.

Operating profit (loss) from continuing operations is a non-GAAP measure that is calculated within Domtar's financial statements. Domtar focuses on operating profit (loss) from continuing operations as this measure enables it to compare its results between periods without regard to debt service or income taxes.

Operating profit (loss) from continuing operations excluding specified items, earnings (loss) from continuing operations excluding specified items, earnings (loss) from continuing operations per common share excluding specified items are non-GAAP measures. Measures excluding specified items are used in evaluating the Company's performance between periods without regard to specified items that adversely or positively affected its GAAP measures.

Free cash flow is a non-GAAP measure that is defined as the amount by which cash flows provided from continuing operating activities, as determined in accordance with GAAP, exceed net additions to property, plant and equipment, as determined in accordance with GAAP. Free cash flow is used in evaluating the Company's ability to service its debt and pay dividends to its shareholders.

Net debt-to-total capitalization ratio is a non-GAAP measure that is calculated as long-term debt and bank indebtedness, net of cash and cash equivalents, to the sum of net debt and shareholders' equity. Domtar's management tracks this ratio on a regular basis in order to assess its debt position.

The above non-GAAP measures have no standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies, and therefore should not be considered in isolation. Domtar believes that it would be useful for investors and other users to be aware of these measures so they can better assess the Company's performance.

Consolidated Financial Statements Three months ended Nine months ended CONSOLIDATED September 30 September 30 EARNINGS 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) --------(Unaudited)------- ---------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Sales 1,055 1,177 1,241 3,163 3,527 3,743 Operating expenses Cost of sales 844 942 1,104 2,668 2,976 3,218 Selling, general and administra- tive 53 59 76 157 175 193 Amortization 71 79 90 213 237 270 Closure and restructuring costs (NOTE 3) 7 8 15 27 30 31 -------------------------- --------------------------- 975 1,088 1,285 3,065 3,418 3,712 -------------------------- --------------------------- Operating profit (loss) from continuing operations 80 89 (44) 98 109 31 Financing expenses 35 39 41 107 119 114 Amortization of deferred gain (1) (1) (2) (4) (4) (4) -------------------------- --------------------------- Earnings (loss) from continuing operations before income taxes 46 51 (83) (5) (6) (79) Income tax expense (recovery) 12 13 (35) (17) (19) (50) -------------------------- --------------------------- Earnings (loss) from continuing operations 34 38 (48) 12 13 (29) Loss from discontinued operations (NOTE 4) - - (4) (7) (8) (11) -------------------------- --------------------------- Net earnings (loss) 34 38 (52) 5 5 (40) -------------------------- --------------------------- -------------------------- --------------------------- Per common share (in dollars) (NOTE 5) Earnings (loss) from continuing operations Basic 0.14 0.16 (0.21) 0.04 0.05 (0.13) Diluted 0.14 0.16 (0.21) 0.04 0.05 (0.13) Net earnings (loss) Basic 0.14 0.16 (0.23) 0.02 0.02 (0.18) Diluted 0.14 0.16 (0.23) 0.02 0.02 (0.18) Weighted average number of common shares outstanding (millions) Basic 230.6 230.6 229.8 230.4 230.4 229.6 Diluted 230.6 230.6 229.8 230.4 230.4 229.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED Three months ended Nine months ended RETAINED September 30 September 30 EARNINGS 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) --------(Unaudited)------- ---------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Retained earnings (deficit) at beginning of period (47) (53) 395 (17) (19) 412 Net earnings (loss) 34 38 (52) 5 5 (40) Dividends on common shares - - (13) - - (41) Dividends on preferred shares - - - (1) (1) (1) Discount on purchase for cancellation of preferred shares 1 1 - 1 1 - -------------------------- --------------------------- Retained earnings (deficit) at end of period (12) (14) 330 (12) (14) 330 -------------------------- --------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. September September December 30 30 31 CONSOLIDATED BALANCE SHEETS As at 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) ----------(Unaudited)-------- US$ $ $ (NOTE 2) Assets Current assets Cash and cash equivalents 56 62 83 Receivables 282 315 294 Inventories 568 633 715 Prepaid expenses 24 27 11 Income and other taxes receivable 18 20 16 Future income taxes 31 35 38 --------------------------- 979 1,092 1,157 Property, plant and equipment 3,028 3,377 3,634 Assets held for sale (NOTE 4) 22 24 - Goodwill 76 85 92 Other assets 271 303 309 --------------------------- 4,376 4,881 5,192 Liabilities and shareholders' equity Current liabilities Bank indebtedness 56 63 21 Trade and other payables 504 562 651 Income and other taxes payable 38 42 29 Long-term debt due within one year 2 2 2 --------------------------- 600 669 703 Long-term debt 1,873 2,089 2,257 Future income taxes 215 240 292 Other liabilities and deferred credits 257 287 331 Shareholders' equity Preferred shares 30 33 36 Common shares 1,602 1,787 1,783 Contributed surplus 13 15 14 Deficit (12) (14) (19) Accumulated foreign currency translation adjustments (NOTE 7) (202) (225) (205) --------------------------- 1,431 1,596 1,609 --------------------------- 4,376 4,881 5,192 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. Three months ended Nine months ended CONSOLIDATED September 30 September 30 CASH FLOWS 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) --------(Unaudited)------- ---------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Operating activities Earnings (loss) from continuing operations 34 38 (48) 12 13 (29) Non-cash items: Amortization and write-down of property, plant and equipment 71 79 97 213 237 279 Future income taxes 5 5 (47) (30) (33) (70) Amortization of deferred gain (1) (1) (2) (4) (4) (4) Closure and restructuring costs, excluding write-down of property, plant and equipment (NOTE 3) 7 8 8 27 30 22 Other (8) (9) 9 (14) (16) 2 -------------------------- --------------------------- 108 120 17 204 227 200 -------------------------- --------------------------- Changes in working capital and other items Receivables (31) (34) (42) (34) (38) (71) Inventories (13) (15) 46 42 47 (12) Prepaid expenses (4) (5) 2 (12) (13) (7) Trade and other payables 20 22 (5) (31) (35) (22) Income and other taxes 7 8 12 11 12 11 Other (4) (4) (6) (8) (9) (23) Payments of closure and restructuring costs (8) (9) (6) (58) (64) (33) -------------------------- --------------------------- (33) (37) 1 (90) (100) (157) -------------------------- --------------------------- Cash flows provided from operating activities of continuing operations 75 83 18 114 127 43 -------------------------- --------------------------- Cash flows used for operating activities of discontinued operations (NOTE 4) (2) (2) (6) (9) (10) (27) -------------------------- --------------------------- Cash flows provided from operating activities 73 81 12 105 117 16 -------------------------- --------------------------- Investing activities Additions to property, plant and equipment (31) (35) (34) (84) (94) (113) Proceeds from disposals of property, plant and equipment 3 4 - 5 6 14 Business acquisition 1 1 - 1 1 - Other - - 3 (3) (3) - -------------------------- --------------------------- Cash flows used for investing activities of continuing operations (27) (30) (31) (81) (90) (99) -------------------------- --------------------------- Cash flows used for investing activities of discontinued operations (NOTE 4) - - - - - (1) -------------------------- --------------------------- Cash flows used for investing activities (27) (30) (31) (81) (90) (100) -------------------------- --------------------------- Financing activities Dividend payments - - (14) (1) (1) (42) Change in bank indebtedness 1 1 3 37 41 11 Change in revolving bank credit, net of expenses (77) (86) (301) (78) (87) (111) Issuance of long-term debt, net of expenses 1 1 482 1 1 482 Repayment of long-term debt - - (177) (1) (1) (267) Premium on redemption of long-term debt - - (7) - - (7) Common shares issued, net of expenses 1 1 2 3 3 6 Redemptions of preferred shares (1) (1) - (2) (2) (2) -------------------------- --------------------------- Cash flows provided from (used for) financing activities of continuing operations (75) (84) (12) (41) (46) 70 -------------------------- --------------------------- Cash flows provided from financing activities of discontinued operations (NOTE 4) - - - - - - -------------------------- --------------------------- Cash flows provided from (used for) financing activities (75) (84) (12) (41) (46) 70 -------------------------- --------------------------- Net decrease in cash and cash equivalents (29) (33) (31) (17) (19) (14) Translation adjustments related to cash and cash equivalents 1 1 1 (2) (2) 2 Cash and cash equivalents at beginning of period 84 94 70 75 83 52 -------------------------- --------------------------- Cash and cash equivalents at end of period 56 62 40 56 62 40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents at end of period, related to: Continuing operations 56 62 40 56 62 40 Discontinued operations - - - - - - -------------------------- --------------------------- Cash and cash equivalents at end of period 56 62 40 56 62 40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THIRD QUARTER 2006 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED) NOTE I. ------- BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present fairly Domtar Inc.'s (Domtar) financial position as at September 30, 2006 and December 31, 2005, as well as its results of operations and its cash flows for the three months and nine months ended September 30, 2006 and 2005.

While management believes that the disclosures presented are adequate, these unaudited interim consolidated financial statements and notes should be read in conjunction with Domtar's annual consolidated financial statements.

These unaudited interim consolidated financial statements follow the same accounting policies as the most recent annual consolidated financial statements.

NOTE 2. ------- UNITED STATES DOLLAR AMOUNTS

The unaudited interim consolidated financial statements are expressed in Canadian dollars and, solely for the convenience of the reader, the 2006 unaudited interim consolidated financial statements and the tables of certain related notes have been translated into U.S. dollars at the September 2006 month-end rate of CAN$1.00 = US$0.8966. This translation should not be construed as an application of the recommendations relating to the accounting for foreign currency translation, but rather as supplemental information for the reader.

NOTE 3. ------- CLOSURE AND RESTRUCTURING COSTS

In 2005, Domtar's management announced a series of targeted measures aimed at returning the Corporation to profitability. The plan included closures of the Cornwall and Ottawa, Ontario paper mills, the Grand-Remous and Malartic, Quebec sawmills, the sale of the Vancouver, British Columbia paper mill and cost-cutting initiatives. This workforce reduction and restructuring plan is in addition to the plans announced in 2004, which covered the Corporation's paper and merchant operations in Canada and the United States.

In 2005, Norampac's management decided to permanently shut down one paper machine at its Red Rock, Ontario containerboard plant and also decided to close three corrugated products plants located in Concord, Ontario, Montreal, Quebec and Buffalo, New York.

As at September 30, 2006, the balance of the provision was $44 million, which includes $35 million related to the Papers segment, $8 million related to the Wood segment and $1 million related to Norampac, representing the Corporation's proportionate share. The following tables provide a reconciliation of all closure and restructuring costs:

Three months ended Three months ended September 30 September 30 Total Papers Wood Packa- Total Papers Wood Packa- Total ging ging ------------------------------------------------------------------------- ------------------------------------------------------------------------- --------------(Unaudited)---------- -------(Unaudited)------- US$ $ $ $ $ $ $ $ $ (NOTE 2) Reversal of provision (11) (12) - - (12) - - - - Labor costs 9 10 - - 10 3 - 4 7 Write-down of certain inventory items 5 6 - - 6 - - - - Write-down of property, plant and equipment - - - - - - - 7 7 Other closure related costs 4 4 - - 4 - - 1 1 ------------------------------------------------------------ Closure and restructuring costs 7 8 - - 8 3 - 12 15 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended Nine months ended September 30 September 30 Total Papers Wood Packa- Total Papers Wood Packa- Total ging ging ------------------------------------------------------------------------- ------------------------------------------------------------------------- --------------(Unaudited)---------- -------(Unaudited)------- US$ $ $ $ $ $ $ $ $ (NOTE 2) Reversal of provision (12) (13) - - (13) (1) - 1 (1) Labor costs 22 22 1 1 24 10 - 4 14 Write-down of certain inventory items 6 7 - - 7 - - - - Write-down of property, plant and equipment - - - - - - - 9 9 Other closure related costs 11 12 - - 12 8 - 1 9 ------------------------------------------------------------ Closure and restructuring costs 27 28 1 1 30 17 - 14 31 ------------------------------------------------------------------------- -------------------------------------------------------------------------

The following table provides a reconciliation of all closure and restructuring cost provisions:

September September December 30 30 31 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------(Unaudited)-------- US$ $ $ (NOTE 2) Balance at beginning of period 76 85 37 Severance payments (40) (45) (32) Reversal of provision (12) (13) (1) Additions Labor costs 11 12 71 Environmental costs - - 10 Other 4 5 - --------------------------- Balance at end of period 39 44 85 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 4. ------- DISCONTINUED OPERATIONS

In November 2005, as part of its restructuring program, Domtar announced its intention to sell the Vancouver, British Columbia paper mill. Effective in the second quarter of 2006, the Vancouver paper mill was not sold and has been permanently closed. Considering the fact that its major product line will not continue to be sold, the Vancouver paper mill will no longer be included in the Papers segment but classified as a discontinued operations in the consolidated earnings and in the consolidated cash flows and the property, plant and equipment as held for sale in the consolidated balance sheets. The consolidated earnings and cash flows for the three months and nine months ended September 30, 2005 have been restated for purposes of comparability with the basis of presentation adopted in the second quarter of 2006. In July 2006, Domtar reached an agreement to sell the Vancouver paper mill property, subject to a number of closing conditions.

The loss from discontinued operations of the Vancouver paper mill is summarized as follows:

Three months ended Nine months ended September 30 September 30 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------(Unaudited)------ -------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Sales 2 2 20 34 38 64 -------------------------- --------------------------- Earnings (loss) from discontinued operations before income tax 1 1 (6) (10) (11) (16) Income tax expense (recovery) 1 1 (2) (3) (3) (5) -------------------------- --------------------------- Loss from discontinued operations - - (4) (7) (8) (11) Basic loss from discontinued operations per share (in dollars) - - (0.02) (0.02) (0.03) (0.05) Diluted loss from discontinued operations per share (in dollars) - - (0.02) (0.02) (0.03) (0.05) ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 5. ------- EARNINGS (LOSS) PER SHARE

The following table provides the reconciliation between basic and diluted earnings (loss) per share:

Three months ended Nine months ended September 30 September 30 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------(Unaudited)------ -------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Earnings (loss) from continuing operations 34 38 (48) 12 13 (29) Dividend requirements of preferred shares - - - 1 1 1 -------------------------- --------------------------- Earnings (loss) from continuing operations applicable to common shares 34 38 (48) 11 12 (30) Net earnings (loss) 34 38 (52) 5 5 (40) Dividend requirements of preferred shares - - - 1 1 1 -------------------------- --------------------------- Net earnings (loss) applicable to common shares 34 38 (52) 4 4 (41) Weighted average number of common shares outstanding (millions) 230.6 230.6 229.8 230.4 230.4 229.6 Effect of dilutive securities (millions) - - - - - - -------------------------- --------------------------- Weighted average number of diluted common shares outstanding (millions) 230.6 230.6 229.8 230.4 230.4 229.6 -------------------------- --------------------------- Basic earnings (loss) from continuing operations per share (in dollars) 0.14 0.16 (0.21) 0.04 0.05 (0.13) Diluted earnings (loss) from continuing operations per share (in dollars) 0.14 0.16 (0.21) 0.04 0.05 (0.13) Basic net earnings (loss) per share (in dollars) 0.14 0.16 (0.23) 0.02 0.02 (0.18) Diluted net earnings (loss) per share (in dollars) 0.14 0.16 (0.23) 0.02 0.02 (0.18) ------------------------------------------------------------------------- -------------------------------------------------------------------------

The following table provides the securities that could potentially dilute basic earnings (loss) per share in the future but were not included in the computation of diluted earnings (loss) per share because to do so would have been anti-dilutive for the periods presented:

September 30 September 30 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Number of shares Options 4,589,495 5,050,990 Bonus shares 67,875 143,325 Rights 84,500 84,500 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 6. ------- RECEIVABLES

As at February 22, 2006, Domtar finalized a new three-year securitization agreement, which includes both U.S. and Canadian receivables. The maximum cash consideration that can be received from the sale of receivables under this new combined agreement is $222 million (US$190 million). As at September 30, 2006, the senior beneficial interest held by third parties amounted to $193 million (US$173 million) under this new securitization program compared to $163 million (US$140 million) as at December 31, 2005 under the old U.S. and Canadian accounts receivable programs.

NOTE 7. ------- ACCUMULATED FOREIGN CURRENCY TRANSLATION ADJUSTMENTS September September December 30 30 31 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------(Unaudited)-------- US$ $ $ (NOTE 2) Balance at beginning of period (184) (205) (190) Effect of changes in exchange rates during the period: On net investment in self-sustaining foreign subsidiaries (76) (85) (69) On certain long-term debt denominated in foreign currencies designated as a hedge of net investment in self-sustaining foreign subsidiaries" 70 78 65 Future income taxes thereon (12) (13) (11) --------------------------- Balance at end of period (202) (225) (205) ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 8. ------- FINANCIAL INSTRUMENTS FOREIGN CURRENCY RISK

In order to reduce the potential negative effects of a fluctuating Canadian dollar, Domtar has entered into various arrangements to stabilize anticipated future net cash inflows denominated in U.S. dollars. The following table provides the detail of the arrangements used as hedging instruments:

September December September December 30 31 30 31 2006 2005 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ---------------(Unaudited)---------- Average exchange Contractual rate amounts (CAN$/US$) (In millions of U.S. dollars) Forward foreign exchange contracts 0 to 12 months 1.18 1.24 144 295 13 to 24 months 1.13 - 2 - Currency options purchased 0 to 12 months 1.13 - 170 - 13 to 24 months 1.12 - 30 - Currency options sold 0 to 12 months 1.19 - 130 - 13 to 24 months 1.19 - 30 - ------------------------------------------------------------------------- -------------------------------------------------------------------------

Forward foreign exchange contracts are contracts whereby Domtar has the obligation to sell U.S. dollars at a specific rate.

Currency options purchased are contracts whereby Domtar has the right, but not the obligation, to sell U.S. dollars at the strike rate if the U.S. dollar trades below that rate. Currency options sold are contracts whereby Domtar has the obligation to sell U.S. dollars at the strike rate if the U.S. dollar trades above that rate.

NOTE 9. ------- DEFINED BENEFIT PLANS AND OTHER EMPLOYEE FUTURE BENEFIT PLANS Three months ended Nine months ended September 30 September 30 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------(Unaudited)------ -------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Net periodic benefit cost for defined benefit plans 14 16 11 40 45 31 Net periodic benefit cost for other employee future benefit plans 2 2 3 6 7 9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 10. -------- SEGMENTED DISCLOSURES

Domtar operates in the four reportable segments described below. Each reportable segment offers different products and services and requires different technology and marketing strategies. The following summary briefly describes the operations included in each of Domtar's reportable segments:

- PAPERS - represents the aggregation of the manufacturing and distribution of business, commercial printing and publication, and technical and specialty papers, as well as pulp. - PAPER MERCHANTS - involves the purchasing, warehousing, sale and distribution of various products made by Domtar and by other manufacturers. These products include business and printing papers, and certain industrial products. - WOOD - comprises the manufacturing and marketing of lumber and wood- based value-added products and the management of forest resources. - PACKAGING - comprises the Corporation's 50% ownership interest in Norampac, a company that manufactures and distributes containerboard and corrugated products.

Domtar evaluates performance based on operating profit, which represents sales, reflecting transfer prices between segments at fair value, less allocable expenses before financing expenses and income taxes.

Three months ended Nine months ended September 30 September 30 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ---------(Unaudited)-------- ---------(Unaudited)-------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Sales Papers 650 725 751 1,910 2,130 2,233 Paper Merchants 233 260 275 711 793 794 Wood 96 107 159 345 385 545 Packaging 148 165 161 431 480 491 -------------------------- --------------------------- Total for reportable segments 1,127 1,257 1,346 3,397 3,788 4,063 Intersegment sales - Papers (59) (66) (71) (194) (217) (211) Intersegment sales - Wood (12) (13) (32) (37) (41) (104) Intersegment sales - Packaging (1) (1) (2) (3) (3) (5) -------------------------- --------------------------- Consolidated sales 1,055 1,177 1,241 3,163 3,527 3,743 -------------------------- --------------------------- -------------------------- --------------------------- Amortization and write-down of property, plant and equipment Papers 55 61 70 164 183 209 Paper Merchants 1 1 - 2 2 2 Wood 8 9 12 24 27 34 Packaging 7 8 15 23 25 34 -------------------------- --------------------------- Consolidated amortization and write-down of property, plant and equipment 71 79 97 213 237 279 -------------------------- --------------------------- -------------------------- --------------------------- Operating profit (loss) from continuing operations Papers 67 75 (30) 67 74 (12) Paper Merchants 3 3 4 9 10 13 Wood (15) (17) (12) (29) (32) 5 Packaging 20 23 (10) 45 50 14 -------------------------- --------------------------- Total for reportable segments 75 84 (48) 92 102 20 Corporate 5 5 4 6 7 11 -------------------------- --------------------------- Consolidated operating profit (loss) from continuing operations 80 89 (44) 98 109 31 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 11. -------- SUBSEQUENT EVENT

On April 27, 2006, the Canadian and U.S. Governments signed a term sheet which addresses the refund of duty deposits and sets out a framework for the management of Canadian softwood lumber exports to the U.S. for a seven-year period. On July 1, 2006, Canada and the U.S. signed a more detailed legal text based upon the term sheet. On September 12, 2006, Canada and the U.S. signed the Softwood Lumber Agreement 2006, which was largely based on the July 1, 2006 legal text. Finally, on October 12, 2006, Canada and the U.S. agreed to certain amendments to the Softwood Lumber Agreement, and the final Agreement took effect on that date. Specific implications of the Agreement include the immediate revocation by the U.S. of the antidumping and countervailing duties orders, with retroactive effect to May 2002; the cessation of countervailing and antidumping duties collections by the U.S.; the termination of ongoing administrative reviews by the U.S.; the prohibition of any new antidumping or countervailing duties investigations in respect of softwood lumber from Canada for the duration of the Agreement and the immediate imposition by the Government of Canada of the export tax regime that is currently before Parliament and has been tentatively approved by a Ways&Means Motion.

As at September 30, 2006, Domtar did not record a receivable for the total cash deposits made since May 2002 and the related interest because the agreement was not in effect. Effective October 12, 2006, Domtar is entitled to receive a refund for duties collected by the U.S. Government since 2002 plus interest for a total consideration of approximately US$183 million ($204 million) which could be subject to a special charge of 19% to be imposed by the Canadian Government.

NOTE 12. -------- ANNOUNCED TRANSACTION

In August 2006, Domtar signed a definitive agreement to combine with Weyerhaeuser's fine paper business and related assets. Under the terms of the transaction, Weyerhaeuser's fine paper business, consisting of 10 primary pulp and paper mills (seven in the United States and three in Canada), converting, forming and warehousing facilities and two sawmills will be transferred into a newly formed company for stock and a cash payment of US$1.35 billion to be provided by the new company through borrowings under a credit facility. Weyerhaeuser will distribute the shares of the new company to its shareholders in either a spin-off or split-off transaction at its own discretion. Domtar will combine with the newly formed company to create the "new Domtar." At the time of the closing, the combined company will be owned approximately 55% by former Weyerhaeuser shareholders and 45% by former Domtar shareholders. The combination is subject to approvals by the shareholders of Domtar by a special resolution, the Superior Court of Quebec, appropriate regulatory and other authorities, as well as customary closing conditions. The transaction is expected to close in the first quarter of 2007. As a result of this transaction, Domtar will become an indirect wholly owned subsidiary of the "new Domtar," a U.S. incorporated company.

NOTE 13. -------- COMPARATIVE FIGURES

To conform with the basis of presentation adopted in the current period, certain figures previously reported have been reclassified.


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