Domtar (UFS)

Cost of Sales

Cost of sales amounted to $2,676 million in 2006, a decrease of $108 million, or 3.9%, compared to cost of sales of $2,784 million in 2005. This decrease was primarily due to a reduction in the costs incurred in the production process for pulp, paper and lumber as a result of the paper mill and sawmill closures mentioned above, partially offset by an increase in operating costs at the Canadian facilities as a result of the negative impact of a stronger Canadian dollar, an increase in chemical costs, an increase in supplies (primarily packaging materials) and an increase in other miscellaneous items during 2006, for the facilities that continued to operate.

Cost of Sales

SIZE="2">Cost of sales amounted to $2,676 million in 2006, a decrease of $108 million, or 3.9%, compared to cost of sales of $2,784 million in 2005. This decrease was primarily due to a reduction in the costs incurred in the
production process for pulp, paper and lumber as a result of the paper mill and sawmill closures mentioned above, partially offset by an increase in operating costs at the Canadian facilities as a result of the negative impact of a stronger Canadian
dollar, an increase in chemical costs, an increase in supplies (primarily packaging materials) and an increase in other miscellaneous items during 2006, for the facilities that continued to operate.

COST OF SALES

Year-to-date cost of sales increased by $1,395 million, or 69%, in 2007 compared to year-to-date cost of sales in 2006 primarily due to the acquisition of Domtar Inc. Excluding cost of sales of $1,522 million attributable to Domtar Inc., year-to-date cost of sales in 2007 amounted to $1,896 million, a decrease of $127 million compared to year-to-date cost of sales of 2006. This decrease was mainly attributable to lower costs for freight as well as lower costs due to the mill and sawmill closures mentioned above, partially offset by higher costs for fiber and chemicals, the negative impact of a stronger Canadian dollar and a $5 million increase in an environmental provision recorded in the first quarter of 2007.

Domtar Inc.’s cost of sales for the thirty weeks ended September 30, 2007 amounted to $1,522 million, which were impacted by lower production and shipments for all of its major products, lower costs of freight and energy, partially offset by higher cost of fiber and chemicals, the negative impact of a stronger Canadian dollar and higher cost related to planned maintenance shutdowns.

COST OF SALES

First half cost of sales increased by $754 million, or 53%, in 2007 compared to first half cost of sales in 2006 primarily due to the acquisition of Domtar Inc. Excluding cost of sales of $871 million attributable to Domtar Inc., first half cost of sales in 2007 amounted to $1,301 million, a decrease of $117 million compared to first half cost of sales of 2006. This decrease was mainly attributable to the mill and sawmill closures mentioned above, and lower freight and energy charges, partially offset by higher costs for purchased fiber and chips and an increase in an environmental provision of $5 million recorded in the first quarter of 2007.

Domtar Inc.’s cost of sales for the sixteen weeks ended July 1, 2007 amounted to $871 million, having benefited from lower production and shipments for paper and wood products, lower costs for freight and energy and lower charges on its softwood lumber exports, partially offset by higher costs for purchased fiber and chemicals.

COST OF SALES

Cost of sales increased by $148 million or 21% in the first quarter of 2007 compared to the first quarter of 2006. Excluding the impact of 26 days of results of operations of Domtar Inc., cost of sales in the first quarter of 2007 amounted to $648 million, a decrease of $59 million compared to the first quarter of 2006. This decrease was mainly attributable to the mill and sawmill closures mentioned above, partially offset by higher costs for purchased fiber and chemicals and an increase in environmental provision of $5 million.