FORM 6-K

SECURITIES AND EXCHANGE COMMISSION ~~Washington, D.C. 20549~~

Washington, D.C. 20549

REPORT OF FOREIGN ISSUER

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of ~~October~~ August, ~~2003~~ 2004.

DOMTAR INC.

395 de Maisonneuve Blvd. West, Montréal, Québec H3A 1L6

[Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.]

Form 20-F o Form 40-F üþ

[Indicate by check mark whether the registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.]

Yes o No üþ

[If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-.........

Enclosed are Domtar Inc.’s ~~third~~ second quarter results for the period ended ~~September~~June 30, ~~2003~~2004.

TABLE OF CONTENTS

~~Management’s Discussion and Analysis~~	Management’s Discussion and Analysis
	OUR BUSINESS
	Summary of Financial Results
	Summary of operating results
	Second Quarter 2004 vs Second Quarter 2003 Overview
	Third quarter 2003 vs third quarter 2002 overview
	Paper Merchants
	Nine months ended september 30, 2003 vs nine months ended september 30, 2002
	Papers
	Paper merchants
	Wood
	Financing expenses and income taxes
	Packaging
	Balance sheet
	Financing Expenses and Income Taxes
	Liquidity and capital resources
	Balance Sheet
	Accounting change
	Liquidity and Capital Resources
	Risks and uncertainties
	Off Balance Sheet Arrangements
	Sensitivity analysis
	Guarantees
	Contractual Obligations and Commercial Commitments
	Selected Quarterly Financial Information
	Accounting Changes
	Critical Accounting Policies
	Risks and Uncertainties
	Sensitivity Analysis
	Outlook
	Consolidated Earnings
	Certifications
	Consolidated Retained Earnings
	Consolidated Balance Sheets
	Consolidated Cash Flows
	Notes to Consolidated Financial Statements
SIGNATURES

(DOMTAR COVER)

Domtar Second Quarter 2004 Results www.domtar.com

Highlights

–		Domtar’s financial results continued to be negatively impacted by the effect of a weak US dollar (a $29 million impact, including the effect of our hedging program, when compared to the second quarter of 2003).

–		Price increases for pulp, paper, lumber, and linerboard were announced in the quarter:

	–		Average selling prices for paper, Domtar’s most important product, increased by 3% but remained near historical lows. These increases were supported by strong shipments. In fact, an allocation system was implemented for some products.

	–		Average selling prices for lumber were exceptionally high and contributed significantly to the overall results.

Recent developments

–		Domtar launched a new magazine and catalog paper that meets the standards of most environmental groups. Indeed, Domtar EarthChoice* is a unique, unrivaled product that is not only FSC (Forest Stewardship Council) certified, but also contains 30% recycled post-consumer fiber.

		* Trademark registration is pending.

(CIRCLE GRAPHIC)

On the cover:
Louis Fortin, Third hand, Christian Lefebvre, Labourer, Ottawa-Hull mill

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, 22 million acres of forestland in Canada and the United States, and produces lumber and other wood products. Domtar has 11,000 employees across North America. The Company also has a 50% investment interest in Norampac Inc., the largest Canadian producer of containerboard.

Domtar Inc. Second Quarter 2004 1

Domtar Inc.


Highlights	2004			2004			2003		2003²			2002
(In millions of Canadian dollars, unless otherwise noted)	Three			Three			Three
	months			months			months
	ended			ended			ended		Year ended			Year ended
	June 30			March 31			June 30		December 31			December 31
	(Unaudited)			(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Operating results	$			$			$		$			$
Sales¹		1,346			1,225			1,336		5,167			5,859
EBITDA³		122			58			152		516			809
Operating profit (loss)³		28			(33	)		56		(92	)		384
Excluding specified items⁴		33			(31	)		55		129			447
Net earnings (loss)		(1	)		(44	)		8		(190	)		141
Excluding specified items⁴		3			(41	)		12		(6	)		183
Net earnings (loss) per common share (in dollars)		(0.01	)		(0.19	)		0.03		(0.84	)		0.62
Excluding specified items⁴ (in dollars)		0.01			(0.18	)		0.05		(0.04	)		0.80
Cash flows provided from (used for) operating activities per common share⁵ (in dollars)		0.33			(0.30	)		0.64		1.53			2.98
Weighted average number of common shares outstanding (millions)		228.6			228.2			227.2		227.3			227.2
Balance sheet data
Total assets		5,999								5,847			6,847
Long-term debt		2,253								2,054			2,444
Shareholders’ equity		2,139								2,167			2,554
Net debt-to-total capitalization³ (%)		51								48			49
Book value per common share⁶ (in dollars)		9.13								9.34			11.02
Others
Cash flows provided from (used for) operating activities		76								348			677
Free cash flow³		26								123			454
Annualized return on equity (ROE)⁷ (%)		(0.3	)							(8	)		6

¹		Comparative figures have been reclassed to reflect the application of new accounting recommendations.

²		Certain figures have been restated to reflect the application of new accounting recommendations.

³		EBITDA, Operating profit, Net debt-to-total capitalization and Free cash flow are non-GAAP measures. Refer to the Management’s Discussion and Analysis (MD&A) of the related period for further information (explanation, calculations, etc.).

⁴		Measures excluding specified items are non-GAAP measures. Refer to the MD&A of the related period for further information (explanations, calculations, etc.)

⁵		Cash flows provided from (used for) operating activities per common share is a non-GAAP measure which is determined by dividing Cash flows from (used for) operating activities, on the Consolidated Cash Flow, by the weighted average number of common shares outstanding (basic). This measure has no standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation. Domtar believes that this non-GAAP measure is useful for investors and other users to analyze its performance.

⁶		Book value per common share is a non-GAAP measure which is determined by dividing shareholder’s equity, excluding preferred shares, by the number of common shares outstanding (basic) at the end of the period. This measure has no standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation. Domtar believes that this non-GAAP measure is useful for investors and other users to analyze its performance.

⁷		Annualized return on equity (ROE) is a non-GAAP measure which is calculated as net earnings, after dividend payments on preferred shares, to total average common shareholders’ equity. We use this measure in assessing the returns we provide to our shareholders and, as such, feel it would be useful for investors and other users to be aware of this measure so they can better assess our performance. ROE has no standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation.

(BAR GRAPHS)

(PERCENTAGE COVER)

2 Corporate Overview

10% Wood 12% Packaging 15% Paper Merchants 63% Papers

Sylvie Desaulniers Utility hand, Ottawa-Hull Converting Center

Percentages are based on sales for the six-month period ended June 30, 2004.

1 Including sales through our own Paper Merchants business. 2 Excluding sales of Domtar paper.

Domtar Inc. Second Quarter 2004 3

Management’s Discussion and Analysis

~~Management’s~~Montreal, ~~Discussion~~Quebec July 30, ~~and Analysis~~2004

Management’s Discussion and Analysis (MD&A) relates to the financial ~~condition~~ condition and results of ~~operations of~~ Domtar’s ~~Inc~~operations. ~~and~~Throughout ~~its~~this ~~subsidiaries~~MD&A, ~~(the~~unless ~~Corporation)~~otherwise specified, ~~as well as its joint ventures (collectively~~ “Domtar).”, ~~Domtar’s common~~“we”, ~~shares~~“us” ~~are listed on the Toronto~~ and ~~New~~“our” ~~York~~refer ~~stock~~to ~~exchanges.~~Domtar ~~The MD&A contains statements that are forward-looking in nature~~Inc. ~~Such statements involve~~, ~~known~~its ~~and~~subsidiaries, ~~unknown~~as ~~risks~~well ~~and uncertainties such~~ as ~~general~~its ~~economic~~joint ~~and business conditions~~ventures, ~~product selling prices, raw material~~ and ~~operating~~“the ~~costs, changes~~Corporation” inrefers ~~foreign currency exchange rates, our ability~~ to ~~integrate~~Domtar ~~acquired businesses~~Inc. ~~into our existing operations,~~ and ~~other~~its ~~factors~~subsidiaries. ~~referenced herein and in the Corporation~~Domtar’s ~~continuous~~common ~~disclosure~~shares ~~filings. Therefore, the actual~~are ~~results~~listed ofon the ~~Corporation~~Toronto ~~may~~and beNew ~~materially~~York ~~different~~stock ~~from those expressed or implied by such forward-looking statements~~exchanges. Except where otherwise indicated, all financial information reflected herein is ~~expressed in Canadian dollars and~~ determined on the basis of Canadian generally accepted accounting principles (Canadian GAAP). This interim MD&A should be read in conjunction with ~~the Corporation~~Domtar’s unaudited interim consolidated financial statements and notes thereto as well as with ~~the Corporation~~ Domtar’s most recent annual MD&A and audited consolidated ~~financial~~ financial statements and notes thereto1.

In accordance with industry practice, in this MD&A, the term “ton” or the symbol “ST” refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tons, and the term “tonne” or the symbol “MT” refers to a metric ton. In this MD&A, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars, and the term “dollars” and the symbols “$” and “CAN$” refer to Canadian dollars. The term “U.S. dollars” and the symbol “US$” refer to United States dollars.

Forward-looking statements
This MD&A contains statements that are forward-looking in nature. Statements preceded by the words “believe”, “expect”, “anticipate”, “aim”, “target”, “plan”, “intend”, “continue”, “estimate”, “may”, “will”, “should” and similar expressions are forward-looking statements. 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, our ability to integrate acquired businesses into our existing operations, and other factors referenced herein and in Domtar’s continuous disclosure filings. Therefore, Domtar’s actual results may be materially different from those expressed or implied by such forward-looking statements.

Second Quarter 2004 Overview

During the second quarter of 2004, we saw a noticeable improvement in market conditions as demand improved and product pricing increased. This was in sharp contrast to the ten-year low pricing environment experienced at the end of 2003 and the beginning of 2004. Shipments for most of our paper products were strong and an allocation system was implemented for some products. This allowed us to introduce several price increases, which should be fully implemented by the third quarter of 2004. Prices also increased for pulp, lumber and linerboard. However, the negative effects of the weak U.S. dollar, softwood lumber duties on our exports to the U.S. and higher freight costs and energy costs continue to impact our results.

Our 2003 Annual Report can be found on our website at www.domtar.com.

~~DOMTAR INC. MANAGEMENT~~4 Management’Ss ~~DISCUSSION~~Discussion ~~AND~~and ~~ANALYSIS~~Analysis

~~OUR~~Our ~~BUSINESS~~Business

Domtar’s reporting segments correspond to the following business activities: Papers, Paper Merchants, Wood and Packaging.

~~PAPERS~~Papers We are the third largest integrated manufacturer and marketer of uncoated freesheet paper in North America. We operate six pulp and paper facilities in Canada and five in the United States, with an annual paper production capacity of approximately 2.7 million tons, complemented by strategically located warehouses and sales offices. Over 50% of our paper production capacity is located in the United States and approximately 90% of our paper sales are made to customers in the United States. Uncoated and coated freesheet papers are used for business, commercial printing and publication and technical and specialty applications. The chart below illustrates our principal paper products and our annual paper production capacity.

We ~~are~~sell ~~the~~paper ~~third~~primarily ~~largest~~through ~~integrated~~a ~~manufacturer~~large ~~and~~network ~~marketer~~ of ~~uncoated freesheet~~owned ~~paper~~and inindependent merchants ~~North~~that ~~America.~~distribute Weour ~~operate~~paper ~~six~~products ~~pulp~~from ~~and~~over ~~paper~~350 locations ~~facilities in~~throughout ~~Canada~~North ~~and~~America. ~~five~~We inalso ~~the~~sell ~~United~~our ~~States,~~products ~~with~~to ana ~~annual~~variety ~~paper~~of ~~production~~customers, ~~capacity~~including ofbusiness ~~approximately~~offices, ~~2.8 million~~office ~~tons~~equipment ~~of paper~~manufacturers, ~~complemented~~retail byoutlets, ~~strategically~~commercial ~~located~~printers, ~~warehouses~~publishers and ~~sales offices~~converters. ~~More~~In ~~than~~addition, ~~50%~~we ofsell ~~our~~pulp ~~paper production capacity is located~~ in ~~the~~excess ~~United States and approximately 85%~~ of our ~~paper~~ ~~sales~~own ~~are~~internal ~~generated~~requirements. inWe ~~that~~also ~~country.~~purchase ~~Uncoated~~pulp ~~and~~to ~~coated~~optimize ~~freesheet~~paper ~~papers, our~~production ~~principal~~and ~~products,~~freight ~~are~~costs. ~~used~~For ~~for~~the ~~business,~~first ~~commercial~~six ~~printing~~months ~~and~~of ~~publication~~2004, ~~and~~ ~~technical~~our ~~and~~net ~~specialty~~market ~~applications. The chart below illustrates our~~pulp ~~principal~~position ~~paper~~(shipments ~~products~~less ~~and~~purchases) ~~our~~was ~~annual~~approximately ~~paper~~365,000 ~~production capacity~~tons.

Categories

Business Papers

Commercial Printing and Publication Papers

Technical and Specialty Papers

Types

Uncoated Freesheet

Coated Freesheet

Uncoated and Coated Freesheet

Grades

Copy

Premium imaging / Technology papers

Offset Business converting

Lightweight Opaques Text, cover and writing

Lightweight Premium Regular

Flexible packaging Abrasive papers Decorative papers Imaging papers Label papers Medical disposables

Applications

Photocopies Office documents Presentations

Pamphlets Brochures Direct mail Commercial printing Forms & envelopes

Stationery Brochures Annual reports Books Catalogues

Brochures Annual reports Books Magazines Catalogues

Food & candy wrappings Surgical gowns Repositionable note pads Security check papers Wallpapers

Capacity*

As at September 30, 2003:

approximately 2.8 million tons

0.8 million tons

0.2 million tons

0.6 million tons

0.4 million tons

29%

22%

14%

Our Papers business is our most important segment, representing 57% of our consolidated sales in the first six months of 2004, or 63% when including sales of Domtar paper through our own Paper Merchants business.

*Paper ~~The~~Merchants Our ~~allocation~~Paper Merchants business comprises the purchasing, warehousing, sale and distribution of ~~production~~various ~~capacity~~products ~~may~~made ~~vary~~by ~~from~~us ~~year~~and toby ~~year~~other inmanufacturers. ~~order~~These products toinclude ~~take~~business ~~advantage~~and ofprinting ~~market~~papers, ~~conditions~~graphic arts supplies and certain industrial products. Our Canadian paper merchants operate a total of eight branches in eastern Canada (three by

COMMERCIAL PRINTING AND

TECHNICAL AND

CATEGORY

BUSINESS PAPERS

PUBLICATION PAPERS

SPECIALTY PAPERS

COATED

UNCOATED AND

TYPE

UNCOATED FREESHEET

FREESHEET

COATED FREESHEET

GRADE

Copy

Premium
imaging/
Technology
papers

Offset
Business
converting

Lightweight
Opaques
Text, cover
and writing

Lightweight
Premium
Regular

Flexible packaging
Abrasive papers
Decorative papers
Imaging papers
Label papers
Medical disposables

APPLICATION

Photocopies
Office documents
Presentations

Pamphlets
Brochures
Direct mail
Commercial
printing
Forms &
envelopes

Stationery
Brochures
Annual reports
Books
Catalogues

Brochures
Annual reports
Books
Magazines
Catalogues

Food & candy wrappings
Surgical gowns
Repositionable note pads
Security check papers
Wallpapers

CAPACITY*

As at June 30, 2004:

approximately 2.7 million tons

0.9 million tons
33%

0.2 million tons
7%

0.5 million tons
19%

0.4 million tons
15%

0.3 million tons
11%

0.4 million tons
15%

The allocation of production capacity may vary from period to period in order to take advantage of market conditions. The production capacity reflects the decision we made on December 24, 2003 (announced on January 8, 2004), to close one paper machine at our Vancouver mill, resulting in the permanent curtailment of 45,000 tons of paper manufacturing capacity.

WeDomtar ~~sell paper primarily through a large network of owned and independent merchants that distribute our paper products from over 350 locations throughout North America~~Inc. WeSecond ~~also~~Quarter ~~sell our products to a variety of customers, including~~2004 5 ~~business offices, office equipment manufacturers, retail outlets, commercial~~ ~~printers, publishers and converters. In addition, we sell pulp in excess of~~ our own internal requirements. We also purchase pulp to optimize paper production and freight costs. At December 31, 2002, our net market pulp position (shipments less purchases) was approximately 630,000 tons.

~~Our~~Buntin ~~Papers~~Reid ~~business~~in isOntario, two by JBR/La Maison du Papier in Quebec and three by The Paper House in the Atlantic Provinces), while our ~~most~~U.S. ~~important~~paper ~~segment~~merchant ~~representing~~(RIS Paper) ~~59%~~services a large customer base from 20 locations, including 17 distribution centers, in the Northeast, Midwest and Mid-Atlantic regions of ~~our~~the ~~consolidated~~United ~~net~~States. Our Paper Merchants business represented 21% of our consolidated sales ~~during~~in the first ~~nine~~six months of ~~2003~~2004, or 6515% when ~~including~~ excluding sales of Domtar paper ~~through our own Paper Merchants business~~.

~~PAPER~~Wood Our ~~MERCHANTS~~Wood business comprises the manufacturing and marketing of lumber and wood-based value-added products, as well as the management of forest resources. We operate 11 sawmills (six in Quebec and five in Ontario) and one remanufacturing facility (in Quebec), with an annual capacity of 1.1 billion board feet of lumber. We also have investments in four businesses that produce wood products. We seek to optimize 22 million acres of forestland for which we are responsible in Canada and the United States through efficient management and the application of certified sustainable forest management practices such that a continuous supply of wood is available for future needs. Our Wood business represented 10% of our consolidated sales in the first six months of 2004.

Packaging Our ~~Paper~~Packaging ~~Merchants~~ business comprises ~~the~~our ~~purchasing,~~50% ~~warehousing,~~ownership ~~sale~~interest ~~and distribution~~in ofNorampac ~~various~~Inc. (Norampac), ~~products~~a ~~made~~joint byventure usbetween ~~and~~Domtar ~~by other manufacturers~~Inc. ~~These products include business~~ and ~~printing~~Cascades ~~papers,~~Inc. ~~graphic~~We ~~arts~~do ~~supplies and~~not ~~certain~~manage ~~industrial~~the ~~products.~~day-to-day ~~Our~~operations ~~Canadian~~of ~~paper~~Norampac. ~~merchants~~The ~~operate~~Board aof ~~total~~Directors of ~~eight~~Norampac ~~branches~~is incomposed ~~eastern~~of ~~Canada~~four ~~(three~~representatives byeach ~~Buntin~~from ~~Reid~~Domtar inInc. ~~Ontario,~~and ~~two by~~Cascades ~~JBR/La~~Inc. ~~Maison~~The duChairman ~~Papier~~of inthe ~~Québec~~Board ~~and~~is ~~three~~a byDomtar ~~The~~Inc. ~~Paper~~representative, ~~House~~while in the ~~Atlantic~~ ~~Provinces),~~President ~~while~~and ~~our~~CEO ~~U.S.~~is ~~paper merchant (RIS Paper) services~~ a ~~large~~Cascades ~~customer base~~Inc. ~~from~~representative. 20Norampac’s ~~locations~~debt ~~in the Northeast, Midwest and the Mid~~is non-~~Atlantic~~recourse ~~regions of~~to ~~the~~Domtar ~~United States~~Inc. ~~Our~~As ~~Paper~~required ~~Merchants~~by ~~business~~Canadian ~~represented~~GAAP, ~~22%~~we ofaccount for our ~~consolidated~~50% ~~net~~interest ~~sales~~in ~~during~~Norampac using the ~~first~~proportionate ~~nine~~consolidation ~~months of 2003, or 16% when excluding sales of Domtar paper~~method.

~~WOOD~~ Norampac’s network of 25 corrugated packaging plants, strategically located across Canada and the United States, provides full-service packaging solutions and produces a broad range of products. These facilities are fully integrated on a direct or indirect basis with Norampac’s eight containerboard mills (located in Ontario, Quebec, British Columbia, New York State and northern France) for a combined annual capacity of approximately 1.6 million tons. Our Packaging business represented 12% of our consolidated sales in the first six months of 2004.

Business strategy Our ~~Wood~~overall ~~business~~strategic ~~comprises~~objective ~~the~~is ~~manufacturing~~to ~~and~~be ~~marketing~~a ofworld ~~lumber~~leader ~~and wood-based~~in ~~value-added products, as well as~~ the ~~management~~paper ~~of forest resources. We operate 11 sawmills~~industry, ~~one planer mill and one remanufacturing facility,~~ ~~with~~particularly anin ~~annual~~uncoated ~~capacity of 1~~free-sheet.~~2 billion~~ ~~board~~We ~~feet~~have ofdeveloped ~~lumber.~~our Webusiness ~~also have~~strategies ~~investments~~around in three ~~businesses~~pillars: ~~(two~~meeting ofand ~~which~~anticipating ~~are~~the ~~joint~~ever-changing ~~ventures)~~needs ~~that produce~~of ~~wood~~customers, ~~products.~~providing Weour ~~seek~~shareholders towith ~~optimize~~attractive ~~forestlands~~returns, ~~for~~and ~~which~~fostering ~~we are responsible~~a ~~through~~dynamic ~~efficient management~~ and ~~the~~creative ~~application~~environment ~~of certified sustainable forest management practices such that a continuous supply of wood is available~~ for ~~future~~our ~~needs.~~employees ~~Our~~in ~~Wood~~which ~~business~~shared ~~represented~~human ~~7% of our consolidated net~~values ~~sales~~and ~~during~~personal ~~the~~commitment ~~first nine months of 2003~~prevail.

OnOur ~~June 19,~~business ~~2003,~~strategies weare ~~announced~~to ancontinue ~~agreement-in-principle with Tembec Inc.~~to: ~~(Tembec) for the creation of a 50-50 joint venture that will merge our lumber~~ ~~operations in Ontario and Québec (except for our Lebel-sur-Quévillon sawmill).~~ This joint venture will also market the softwood lumber from Tembec’s British Columbia sawmill operations, as well as manage the operations and market the softwood lumber of our Lebel-sur-Quévillon sawmill.

~~This~~– ~~transaction~~meet isthe ~~subject~~needs of our customers in order to ~~certain~~enhance ~~conditions,~~customer ~~including~~loyalty; – improve the ~~completion~~productivity of ~~due~~ ~~diligence,~~our mills and the ~~review~~quality of ~~potential~~our ~~synergies,~~products ~~the~~and ~~negotiation~~services; of– ~~definitive agreements,~~broaden asour ~~well~~distribution ascapabilities; ~~approvals~~– bygrow ~~the~~through ~~respective~~acquisitions ~~boards~~and alliances within our area of ~~directors,~~expertise; – maintain strict financial discipline; – support the ~~government,~~ personal growth and ~~other~~participation ~~required~~of ~~approvals,~~employees; ~~most~~and of– ~~which~~maintain ~~are~~our ~~currently~~good ~~underway~~citizenship.

Through these strategies, we aim to be one of the most attractive investments in the North American basic materials sectors by providing superior returns to our shareholders.

~~PACKAGING~~6 Management’s Discussion and Analysis

~~Our~~Summary ~~Packaging business comprises our 50% ownership interest in Norampac Inc. (Norampac), a joint venture between Domtar Inc. and Cascades Inc. The Board~~ of ~~Directors~~ ofFinancial ~~Norampac is composed of four representatives each from Domtar Inc.~~Results ~~and Cascades Inc. The Chairman of the Board is a Domtar Inc. representative,~~ ~~while the President and CEO is a Cascades Inc. representative. Norampac’s debt~~ ~~is non-recourse to Domtar Inc. As required by Canadian GAAP, we accounted for our 50% interest in Norampac using the proportionate consolidation method.~~

Norampac’s network of 25 corrugated packaging plants, strategically located across Canada and including facilities in the United States and Mexico, provides full-service packaging solutions and produces a broad range of products. These facilities are fully integrated on a direct or indirect basis with Norampac’s eight containerboard mills (located in Ontario, Québec, British Columbia, New York State and northern France) for a combined annual capacity of more than 1.6 million tons. Our Packaging business represented 12% of our consolidated net sales during the first nine months of 2003.


		Three months ended June 30						Six months ended June 30
Financial highlights		2004			2003			2004			2003
(In millions of Canadian dollars, unless otherwise noted)
Sales			1,346			1,336			2,571			2,724
EBITDA¹			122			152			180			328
Operating profit (loss)¹			28			56			(5	)		134
Excluding specified items²			33			55			2			128
Net earnings (loss)			(1	)		8			(45	)		35
Excluding specified items²			3			12			(38	)		34
Net earnings (loss) per share (in dollars):
Basic			(0.01	)		0.03			(0.20	)		0.15
Basic, excluding specified items²			0.01			0.05			(0.17	)		0.14
Diluted			(0.01	)		0.03			(0.20	)		0.15
Operating profit (loss), excluding specified items, per segment²:
Papers			6			57			(24	)		133
Paper Merchants			5			5			11			12
Wood			6			(20	)		(7	)		(41	)
Packaging			12			13			17			24
Corporate			4			—			5			—

Total			33			55			2			128
Selling price index³, before the impact of lumber duties (%)			96			95			93			94
Shipments to capacity ratio for papers (%)			97			92			98			91
Average exchange rates	CAN$		1.359			1.398			1.339			1.454
	US$		0.736			0.715			0.747			0.689
Dividends per share (in dollars):
Series A preferred shares			0.56			0.56			1.13			1.13
Series B preferred shares			0.17			0.22			0.37			0.42
Common shares			0.06			0.06			0.12			0.10


	June 30,		Dec. 31,
	2004		2003
Total assets		5,999		5,847
Total long-term debt, including current portion		2,262		2,059

¹		EBITDA (Earnings Before Interest (Financing expenses), Taxes and Amortization) is a non-GAAP measure and is determined by adding back amortization expense, including portions related to specified items (impairment losses and write-downs), financing expenses and income taxes to net earnings (see “EBITDA” table). Operating profit is also a non-GAAP measure that is calculated within our financial statements. We focus on EBITDA and operating profit as these measures enable us to compare our results between periods without regard to debt service or income taxes (for operating profit) and without regard to amortization (for EBITDA). As such, we believe it would be useful for investors and other users to be aware of these measures so they can better assess our performance. Our EBITDA and operating profit 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.

²		See “Specified items affecting results and non-GAAP measures”.

³		Selling price index is derived from transaction prices for the majority of our products, weighted for production capacity, in relation to trend pricing. Trend pricing is based on a consensus of analysts of normalized pricing as at November 30, 2003. See “Sensitivity Analysis”.

~~SUMMARY~~Domtar OFInc. ~~OPERATING~~Second ~~RESULTS~~Quarter 2004 7

~~Financial~~Specified ~~Highlights~~items affecting (results and non-GAAP measures Our operating results include specified items that, in ~~millions~~our view, do not typify our normal operating activities, thus affecting the comparability of ~~Canadian~~our results. ~~dollars~~To measure our performance and that of our business segments from period to period without variations caused by specified items, ~~unless~~we ~~otherwise~~focus ~~noted)~~on operating profit excluding specified items, net earnings excluding specified items, net earnings per share excluding specified items and other such measures excluding specified items. We define specified items as items such as charges for: impairment of assets, facility or machine closures, changes in income tax legislation, debt restructuring, mark-to-market gains and losses on hedging contracts not considered as hedges for accounting purposes, Norampac’s foreign exchange impact on its long-term debt translation and other items that, in our view, do not typify normal operating activities.

			Three months ended						Nine months ended
			September 30						September 30
			2003			2002			2003			2002
Net sales				1,166			1,390			3,702			4,134
Operating profit				36			136			170			286
Paper Closure Costs				(5	)		—			(5	)		45
Operating profit excluding Paper Closure Costs(1)				31			136			165			331
Net earnings				3			59			38			103
Net earnings per share (basic)				0.01			0.26			0.16			0.45
Operating profit (loss) excluding Paper Closure Costs by segment:
	Papers			22			121			161			244
	Paper Merchants			4			6			16			20
	Wood			(11	)		(10	)		(52	)		13
	Packaging			16			21			40			56
	Corporate			—			(2	)		—			(2	)
		Total		31			136			165			331
Selling price index before impact of lumber duties (%)				92			93			93			93

Operating profit excluding specified items, net earnings excluding specified items, net earnings per share excluding specified items and other such measures excluding specified items are non-GAAP measures. We believe that it is useful for investors and other users to be aware of the specified factors that adversely or positively affected our GAAP results, and that these non-GAAP measures provide investors and other users with a measure of performance to compare our results between periods without regard to these specified items which do not typify normal operating activities in our view. These 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.

~~THIRD~~ The ~~QUARTER~~following ~~2003~~tables VSreconcile ~~THIRD~~our ~~QUARTER~~net ~~2002~~earnings ~~OVERVIEW~~and net earnings per share, determined in accordance with GAAP, to our net earnings excluding specified items and net earnings per share excluding specified items, and reconcile our operating profit to our operating profit excluding specified items:

Net Sales of $1.2 Billion


Specified items	Three months ended June 30, 2004								Three months ended June 30, 2003
						Net
			Net			earnings									Net
	Operating		earnings			(loss)			Operating			Net			earnings
	profit		(loss)			per share			profit			earnings			per share
(In millions of Canadian dollars, except per share amounts)
As per GAAP¹		28		(1	)		(0.01	)		56			8			0.03
Specified items:
Refinancing expenses ⁽ⁱ⁾		—		—						—			7
Closure and restructuring costs ⁽ⁱⁱ⁾		—		—						—			—
Unrealized mark-to-market gains and losses ⁽ⁱⁱⁱ⁾		5		3						(1	)		(1	)
Foreign exchange impact on long-term debt ^(iv)		—		1						—			(2	)

		5		4			0.02			(1	)		4			0.02

Excluding specified items		33		3			0.01			55			12			0.05

~~Net sales in the third quarter of 2003 totaled $~~1~~,166 million,~~ ~~down~~Except ~~$224 million~~for oroperating ~~16%~~profit ~~from~~which ~~net~~is ~~sales of $1,390 million in the third quarter of 2002. This decrease was mainly attributable to~~ a 9%non-GAAP variation in our effective exchange rate (net of the effect of our hedging program) stemming from a stronger Canadian dollar on both domestic and export sales, as well as lower shipments for all of our businesses except corrugated containersmeasure. InSee ~~addition, our~~note ~~businesses experienced lower selling prices during the third quarter of 2003 compared to the same period last year~~1, aspage declines in selling prices for our major categories of paper (copy, offset and uncoated papers), hardwood pulp and packaging products were partially offset by increases in selling prices for some papers (coated papers and technical and specialty papers), softwood pulp, and lumber6.

Benchmark U.S. dollar denominated nominal prices(2) for the third quarter of 2003 were at 92% of trend(3) prices, a decrease from the corresponding quarter of 2002, where benchmark nominal prices were at 93% of trend prices. However, in our domestic marketplace, Canadian dollar denominated prices were negatively impacted by the strengthening of the Canadian currency given that these are derived from U.S. dollar denominated prices.

(1)		Operating profit excluding Paper Closure Costs is a non-GAAP measure. Our operating profit determined in accordance with GAAP for 2002 included the costs associated with the closure of certain paper machines and facilities, while our operating profit for 2003 included the reversal of certain of these costs. Accordingly, we believe that it is useful for investors to be aware of a significant factor that adversely affected our GAAP operating profit in 2002 but positively affected our GAAP operating profit in 2003, and that operating profit excluding Paper Closure Costs provides investors with a measure of performance to compare our operating results between periods without regard to these costs nor their reversal.
(2)		See “Sensitivity Analysis”.
(3)		Based on a consensus of analysts of normalized pricing as at November 30, 2002 (See “Sensitivity Analysis”), excluding the impact of lumber duties.

~~Operating~~8 Management’s ~~Profit~~Discussion ofand ~~$36 Million~~Analysis

Operating profit in the third quarter of 2003 totaled $36 million, down $100 million or 74% from an operating profit of $136 million in the third quarter of 2002. During the third quarter of 2003, a $5 million ($3 million net of income taxes, or $0.01 per common share) reversal of a previously recorded $45 million provision related to the permanent shutdown of the St. Catharines, Ontario paper mill (referred to as “Paper Closure Costs”) was recorded largely as a result of changes to the initial approach to dismantling the mill. When excluding Paper Closure Costs, the decline in operating profit between the third quarter of 2003 and the third quarter of 2002 totaled $105 million or 77%. This decrease is largely due to the effect of a stronger Canadian dollar on both domestic and export sales net of the effect of our hedging program and overall lower selling prices for our products (combined impact of $85 million), as well as significantly lower shipments ($29 million). This was partially offset by lower purchased fiber costs. In addition, we experienced higher energy prices and the effect of the mid-August 2003 power outage, which were more than offset by the positive impact of our quality and profitability improvement programs.


Specified items	Six months ended June 30, 2004									Six months ended June 30, 2003
							Net
	Operating			Net			earnings									Net
	profit			earnings			(loss)			Operating			Net			earnings
	(loss)			(loss)			per share			profit			earnings			per share
(In millions of Canadian dollars, except per share amounts)
As per GAAP¹		(5	)		(45	)		(0.20	)		134			35			0.15
Specified items:
Refinancing expenses⁽ⁱ⁾		—			—						—			7
Closure and restructuring costs⁽ⁱⁱ⁾		8			6						—			—
Unrealized mark-to-market gains and losses⁽ⁱⁱⁱ⁾		(1	)		(1	)					(6	)		(4	)
Foreign exchange impact on long-term debt^(iv)		—			2						—			(4	)

		7			7			0.03			(6	)		(1	)		(0.01	)

Excluding specified items		2			38			(0.17	)		128			34			0.14

~~Cost~~1 ofExcept ~~sales~~for ~~decreased~~operating byprofit ~~$105 million~~(loss) orwhich ~~10%~~is ~~in the third quarter of 2003 compared to the corresponding quarter of 2002. This decrease was mainly due to the impact of~~ a ~~stronger~~non-GAAP ~~Canadian dollar on our U~~measure.S. ~~dollar~~See ~~denominated operating~~note ~~expenses and to lower shipments~~1, aspage well as to the impact of our quality and profitability improvement programs. This decrease was partially offset by higher energy costs, as well as by the inclusion of fewer investment tax credits (related to research and development expenses of current and prior years) in the third quarter of 2003 ($6 ~~million) compared to the corresponding period of 2002 ($12 million)~~.

~~Sales~~(i) In the second quarter of 2003, ~~general~~a ~~and~~$10 ~~administrative~~million charge (~~SG&A~~$7 million net of income taxes) was recorded following the refinancing of substantially all of Norampac’s existing credit facilities and long-term debt, except those of its joint venture. This charge was recorded in the financial statements under “Financing expenses”. ~~decreased~~(ii) In the first half of 2004, we continued the implementation of best practices in our Canadian Pulp and Paper Manufacturing Group. This restructuring plan has impacted our Cornwall, Espanola, Ottawa-Hull, Port Huron (located in the U.S.) and Windsor mills. In all, 330 positions will be affected by the plan from 2004 to 2006: 181 from severance; 129 from attrition; 14 from redeployment in other activities; and 6 currently vacant positions that will not be filled. The total severance and termination costs accrued for the three months ended March 31, 2004, representing all of the severance and termination costs related to the plan, amounted to $12 16 million or ($11 million net of income taxes), which includes $3 million for pension curtailment costs. Further costs related to the plan expected to be incurred over 2004 to 2006, including training costs of $6 million, of which $1 million ($1 million net of income taxes) was incurred in the second quarter of 2004, outplacement costs of $1 million and pension settlements, which are not yet determinable, will be expensed as incurred. To accomplish this plan, we will invest approximately $14% million in capital expenditures over 2004 to 2006. As at June 30, 2004, the ~~third~~balance of the provision was $14 million. In addition, in the fourth quarter of 2003, ~~compared~~we decided to permanently shut down one paper machine at our Vancouver paper mill. In the ~~same~~second ~~period~~quarter of 2004, $2 million ($1 million net of income taxes) was reversed from the provision as the costs of severance were less than originally estimated. Further costs of $1 million (nil net of income taxes) related to the dismantling of the paper machine were recorded in ~~2002~~the second quarter or 2004. ~~This decrease~~As at June 30, 2004, the balance of the provision was ~~explained~~$1 bymillion. In the ~~impact~~first quarter of 2004, we sold our St. Catharines, Ontario, paper mill, closed in September 2002, for $1 million to a ~~stronger~~third ~~Canadian~~party ~~dollar~~who onagreed ~~our~~to Upurchase it in its existing state.~~S. dollar~~ ~~denominated~~As such, the majority of the remaining provision for closure costs, ~~lower~~amounting ~~employee~~to ~~profit-sharing~~$8 ~~expenses~~million ($5 million net of income taxes), was reversed, leaving a balance of $1 million that represents remaining severance and ~~other cost~~commitments ~~reduction~~and ~~initiatives~~contingencies related to environmental matters. (iii) For the three months and the six months ended June 30, 2004, we recorded mark-to-market losses of $5 million ($3 million net of income taxes) and mark-to-market gains of $1 million ($1 million net of income taxes), respectively, on commodity swap contracts not considered as hedges for accounting purposes. For the three

Net Earnings of $3 Million

Net earnings for the third quarter of 2003 amounted to $3 million ($0.01 per common share) compared to net earnings of $59 million ($0.26 per common share) in the third quarter of 2002. This quarter-over-quarter deterioration was due to the factors mentioned above, partially offset by an income tax recovery recorded during the third quarter of 2003 and a decrease in financing expenses due to lower debt levels, lower interest rates, and the positive impact of a stronger Canadian dollar on our U.S. dollar denominated debt and related interest expense.

~~NINE~~Domtar ~~MONTHS~~Inc. ~~ENDED~~Second ~~SEPTEMBER~~Quarter ~~30, 2003 VS NINE MONTHS ENDED SEPTEMBER 30, 2002~~2004 9

~~Net~~months and six months ended June 30, 2003, we recorded mark-to-market gains of $1 million ($1 million net of income taxes) and $6 million ($4 million net of income taxes), respectively, on certain foreign exchange contracts not considered as hedges for accounting purposes. Mark-to-market gains and losses are recorded in the financial statements under “Sales, general and administrative” expenses. (iv) For the three months and the six months ended June 30, 2004, our results included a $2 million charge ($1 million net of income taxes) and a $3 million charge ($2 million net of income taxes), respectively, reflecting our 50% share of Norampac’s foreign exchange losses on the translation of its long-term debt.7 ~~Billion~~ For the three months and the six months ended June 30, 2003, our results included a $3 million benefit ($2 million net of income taxes) and a $5 million benefit ($4 million net of income taxes), respectively, reflecting our 50% share of Norampac’s foreign exchange gains on the translation of its long-term debt. Foreign exchange gains and losses on the translation of Norampac’s long-term debt are recorded in the financial statements under “Financing expenses”.

~~Net~~Second ~~sales~~Quarter ~~for~~2004 ~~the~~vs ~~nine~~Second ~~months~~Quarter ~~ended September 30,~~ 2003, ~~totaled $3,702 million,~~Overview ~~down $432 million or 10% from net sales of $4,134 million over the same period~~ ~~in 2002. This decrease was mainly due to the negative impact of a stronger~~ Canadian dollar on both domestic and export sales net of the effect of our hedging program, and lower shipments for all our principal products except corrugated containers. In addition, the results for the first nine months of 2002 were impacted by the reversal of a $28 million provision, of which $8 million was recorded in the first quarter of 2002 and $20 million was recorded in the second half of 2001, for countervailing and antidumping duties pertaining to the Canada-U.S. softwood lumber dispute. Our businesses experienced overall similar selling prices in the nine months ended September 30, 2003, when compared to the same period last year, as higher selling prices in pulp and coated paper products were offset by a decline in selling prices for lumber, packaging products, and certain other paper products.

~~Benchmark~~Sales Uof $1.S.3 billion Sales ~~dollar~~in ~~denominated~~the ~~nominal~~second ~~prices~~quarter ~~for~~of ~~the~~2004 ~~first~~totaled ~~nine~~$1,346 million, ~~months~~an increase of $10 million over sales of $1,336 million in the second quarter of 2003. ~~were~~This increase atwas ~~93%~~mainly attributable to higher shipments for the majority of ~~trend~~our products. In addition, our businesses experienced higher selling prices, ~~unchanged~~on average, ~~from~~in the ~~corresponding~~second quarter of 2004 compared to the same period inlast year as ~~2002.~~significant ~~However,~~increases in ~~our~~the ~~domestic~~selling ~~marketplace,~~prices ~~Canadian~~of ~~dollar~~lumber ~~denominated~~and higher selling prices for pulp and packaging products were ~~negatively~~partially ~~impacted~~offset by decreases in the selling ~~strengthening~~prices of paper. Partially mitigating the ~~Canadian~~increase ~~currency~~in ~~given~~sales was the ~~that~~effect ~~these~~of ~~are~~a ~~derived~~3% ~~from~~decline in the quarter-over-quarter average value of the U.S. dollar when compared to the Canadian dollar ~~denominated~~(approximate ~~prices~~$45 million impact, including the effect of our hedging program).

~~Operating~~ Overall, ~~Profit~~our U.S. dollar denominated average transaction prices for the second quarter of ~~$170~~2004 ~~Million~~were at 96% of trend1 prices, an increase from the corresponding quarter of 2003 where our transaction prices were at 95% of trend prices. Within Canada, however, the decline of the U.S. dollar negatively impacted our Canadian dollar denominated prices, which are derived from U.S. dollar denominated prices.

Operating profit ~~for~~of ~~the nine months ended September~~$28 ~~30,~~million Cost ~~2003,~~of ~~totaled~~sales ~~$170 million,~~increased ~~down~~by $~~116~~41 million or 414% ~~from~~in ~~operating~~the ~~profit~~second quarter of ~~$286 million over~~2004 ~~the~~compared ~~same~~to ~~period in 2002. When excluding Paper Closure Costs,~~ the ~~decrease~~second ~~in operating~~quarter ~~profit~~of ~~totaled $166 million~~2003. This ~~decrease~~increase is ~~largely~~in ~~due~~line towith the ~~negative~~increase ~~impact~~in ~~of a stronger Canadian dollar on both domestic and export~~ sales ~~net~~ ~~of the effect of our hedging program~~generated, asmainly ~~well~~reflecting ashigher ~~lower~~ shipments for ~~all~~the ~~our~~majority ~~principal~~of ~~products~~our ~~except corrugated containers~~products. InHigher ~~addition~~freight costs, ~~we experienced~~ a $3110 million increase in duties ~~energy~~on ~~prices~~our insoftwood lumber exports to the ~~first~~U.S., ~~nine~~higher ~~months~~purchased offiber costs ~~2003~~and ~~compared~~higher toenergy ~~the~~costs ~~corresponding~~further ~~period~~increased inour ~~2002~~cost ~~which,~~of ~~however,~~sales. ~~was~~These ~~more~~factors ~~than~~were partially offset by the positive impact of ~~our~~a ~~quality~~weaker ~~and~~U.S. ~~profitability~~dollar ~~improvement~~on our U.S. ~~programs~~dollar denominated operating expenses.

~~Cost~~ Selling, ofgeneral ~~sales~~and administrative (SG&A) expenses decreased by $~~235~~ 1 million or 71% in the ~~first~~second ~~nine~~quarter ~~months~~ of ~~2003~~ 2004 compared to the ~~corresponding~~second ~~period~~quarter inof 2003. ~~2002,~~When ~~mainly~~excluding ~~due~~specified toitems, ~~the~~SG&A ~~impact~~decreased ofby ~~a stronger~~$7 million ~~Canadian~~or ~~dollar~~9% onin ~~our~~the second ~~U.S.~~quarter ~~dollar~~of ~~denominated~~2004 ~~operating~~compared ~~expenses,~~to ~~a decrease~~the insecond ~~purchased~~quarter ~~fiber~~of ~~costs,~~2003. ~~lower~~This ~~product~~decrease was ~~shipments,~~primarily ~~and~~attributable to the positive impact of ~~our~~ ~~quality~~a ~~and~~weaker ~~profitability improvement programs~~U.S. ~~These~~dollar ~~factors were~~on ~~partially~~our ~~offset~~U.S. bydollar andenominated ~~increase~~costs inand ~~energy~~higher ~~costs~~royalty revenues.

~~SG&A~~ Operating ~~expenses~~profit ~~decreased~~in bythe second quarter of 2004 amounted to $28 million compared orto ~~11%~~$56 million in the ~~first~~second ~~nine~~quarter ~~months~~ of 2003 ~~compared~~. toWhen ~~the~~excluding ~~same~~specified items, ~~period~~operating inprofit ~~2002.~~amounted ~~This~~to ~~mainly~~$33 million, ~~reflected~~a ~~the~~decrease ~~impact~~ of a$22 million from ~~stronger~~an ~~Canadian~~operating ~~dollar~~profit onof ~~our~~$55 million ~~U.S.~~when ~~dollar~~excluding ~~denominated~~specified ~~costs~~items ~~and~~in the ~~inclusion~~second quarter of a2003. ~~$6 million~~This ~~mark-to-market~~decrease ~~gain~~was onlargely ~~certain~~due ~~foreign~~to ~~exchange~~the ~~contracts~~$29 million ~~not~~negative ~~considered~~impact asof ~~hedges~~the inweaker ~~the~~U.S. ~~results~~dollar, ~~for~~including the ~~first~~effect ~~nine~~of ~~months~~our ofhedging ~~2003~~program. ~~Lower~~ ~~employee~~Higher ~~profit-sharing~~freight ~~expenses~~costs, inhigher ~~the~~duties ~~first~~on ~~nine~~our ~~months~~softwood oflumber ~~2003~~exports ~~compared~~ to the ~~same period last year~~U.S., higher aspurchased ~~well~~fiber ascosts ~~other~~and ~~cost~~higher ~~reduction~~energy ~~initiatives,~~costs ~~also~~ further contributed to the ~~decrease in SG&A.~~

~~Net~~1 ~~Earnings~~Trend pricing is based on a consensus of ~~$38~~analysts ~~Million~~ of normalized pricing as at November 30, 2003. See “Sensitivity Analysis”.

Net earnings for the first nine months of 2003 totaled $38 million ($0.16 per common share) compared to net earnings of $103 million ($0.45 per common share) for the same period of 2002. This decrease was due to the factors mentioned above, as well as a $10 million ($7 million net of income taxes or $0.03 per common share) charge related to our proportionate share of Norampac’s premium paid and the write-off of financing costs with respect to the refinancing of its long-term debt included in financing expenses in the second quarter of 2003. The decrease in net earnings was partially offset by lower overall income taxes and financing expenses.

~~PAPERS~~10 Management’s Discussion and Analysis

~~Selected~~decrease ~~Information (~~in ~~millions~~operating profit. These factors were partially offset by higher shipments for the majority of ~~Canadian~~our ~~dollars,~~products ~~unless~~and ~~otherwise~~higher ~~noted)~~overall selling prices.

			Three months ended					Nine months ended
			September 30					September 30
			2003			2002		2003			2002
Net sales				667			833		2,180			2,413
Operating profit				27			121		166			199
Paper Closure Costs				(5	)		—		(5	)		45
Operating profit excluding Paper Closure Costs				22			121		161			244
Shipments:
	Paper (’000 ST)			632			676		1,893			1,973
	Pulp (’000 ADST)			185			196		581			584
Paper shipments product offering (%):
	Copy and offset grades			54			53		54			55
	Uncoated commercial printing & publication and premium imaging grades			25			24		24			18
	Coated commercial printing & publication grades			11			13		11			13
	Technical & specialty grades			10			10		11			14
		Total		100			100		100			100
Benchmark nominal prices(1):
	Copy 20 lb sheets (US$/ton)			760			772		780			771
	Offset 50 lb rolls (US$/ton)			600			690		642			685
	Coated publication, no. 3, 60 lb, rolls (US$/ton)			805			740		810			767
	Pulp NBSK — US market (US$/ADMT)			550			510		546			491
	Pulp NBHK — Japan market(2) (US$/ADMT)			467			473		468			419
Selling price index — Papers segment (%)				89			92		92			91

As a result of the above-mentioned factors, EBITDA for the second quarter of 2004 amounted to $122 million compared to $152 million in the second quarter of 2003.

(1)	Source: Pulp & Paper Week.
	Three months ended June 30						Six months ended June 30
(2)	Based on Pulp & Paper Week’s Southern Bleached Hardwood Kraft pulp prices for Japan, increased by an average differential of US$15/ADMT between Northern and Southern Bleached Hardwood Kraft pulp prices.
EBITDA	2004			2003			2004			2003
(In millions of Canadian dollars)
Net earnings (loss)		(1	)		8			(45	)		35
Income tax expense (recovery)		(11	)		1			(38	)		12
Financing expenses		41			48			80			89
Amortization of deferred gain		(1	)		(1	)		(2	)		(2	)
Amortization		94			96			185			194
EBITDA		122			152			180			328

~~Sales~~Net loss of $1 million Net loss in the second quarter of 2004 amounted to $1 million ($0.01 per common share) compared to net earnings of $8 million ($0.03 per common share) in the second quarter of 2003. When excluding specified items, net earnings totaled $3 million ($0.01 per common share) in the second quarter of 2004, down $9 million compared to $12 million ($0.05 per common share) in the second quarter of 2003. This deterioration in net earnings was attributable to the factors mentioned above, partially offset by an income tax recovery and ~~Operating~~lower ~~Profit~~financing expenses.

~~Net~~Six ~~sales~~Months inEnded ~~our Papers business amounted to $667~~June ~~million in the third quarter of 2003~~30, a2004 ~~decrease~~vs ofSix ~~$166 million~~Months orEnded 20% in comparison to the third quarter of 2002. This decrease was primarily due to the unfavorable impact of a stronger Canadian dollar on both domestic and export sales and lower shipments of both paper and pulp. In addition, this business experienced overall lower selling prices, as declines in selling prices for copy, offset and uncoated paper products, as well as hardwood pulp, was partially offset by increases in selling prices for softwood pulp, coated paper products, and technical and specialty papers. On a year-to-date basis, sales of pulp and paper decreased by $233June ~~million in 2003 or 10% compared to the same period in 2002~~30, ~~for the~~2003 ~~same reasons as noted above except for prices. On a year-to-date~~ ~~basis, the business experienced overall higher selling prices, as increases in softwood~~ ~~and hardwood pulp, coated paper products prices, and technical and specialty papers were partially offset by decreases in copy, offset, and uncoated paper products.~~

Sales for the six months ended June 30, 2004 totaled $2,571 million, down $153 million or 6% from sales of $2,724 million over the same period of 2003. This decrease was mainly due to the negative impact of a weaker U.S. dollar when compared to the Canadian dollar (approximate $190 million impact, including the effect of our hedging program). In addition, lower selling prices for papers also contributed to the decrease in sales but were partially mitigated by a significant increase in lumber selling prices and higher pulp selling prices. Overall, our U.S. dollar denominated average transaction prices for the first six months of 2004 were at 93% of trend prices, a decrease from the corresponding period of 2003 where our transaction prices were at 94% of trend prices. In addition, within Canada, the decline of the U.S. dollar negatively impacted our Canadian dollar denominated prices, which are derived from U.S. dollar denominated prices. However, higher shipments for all of our products partially offset the decrease in sales.

Cost of sales decreased by $3 million or by less than 1% in the first six months of 2004 compared to the corresponding period of 2003. The positive impact of a weaker U.S. dollar on our U.S. dollar denominated operating expenses was almost entirely mitigated by the effect of higher shipments for the majority of our products, an increase in duties on our softwood lumber exports to the U.S., as well as an increase in purchased fibre and freight costs.

SG&A expenses decreased by $10 million or 6% in the first half of 2004 compared to the same period of 2003. When excluding specified items, SG&A expenses decreased by $15 million or 9% in the first half of 2004 compared to the same period of 2003. This decrease primarily reflects the impact of a weaker U.S. dollar on our U.S. dollar denominated costs as well as higher royalty revenues.

Operating loss for the six months ended June 30, 2004 totaled $5 million compared to an operating profit of $134 million for the six months ended June 30, 2003. When excluding specified items, operating profit for the first half of 2004 amounted to $2 million, down $126 million from an operating profit of $128 million when excluding specified items over the same period in 2003. This decrease

~~Operating~~Domtar profit in our Papers business totaled $27 million in the third quarter of 2003, or $22 million when excluding the reversal of $5 million in Paper Closure Costs, compared to $121 million in the third quarter of 2002Inc. ~~This~~ ~~$99 million~~Second ~~decrease~~Quarter ~~in operating profit stems from the negative impact of~~2004 11 ~~a stronger Canadian dollar on both domestic and export sales, lower shipments~~ ~~for both paper and pulp, and overall lower selling prices. In addition, the~~ benefits stemming from our quality and profitability improvement programs helped us to partially mitigate the effect of higher purchased fiber and energy costs, and the impact of the mid-August power outage. Operating profit amounted to $166 million for the first nine months of 2003 (or $161 million when excluding the $5 million reversal of Paper Closure Costs) compared to $199 million in 2002 (or $244 million when excluding Paper Closure Costs). This decrease of $83 million or 34% was largely due to the negative impact of a stronger Canadian dollar on both domestic and export sales, lower shipments for both paper and pulp, higher purchased fiber costs, and higher energy costs. These factors were partially offset by overall higher selling prices and the benefits stemming from our quality and profitability improvement programs.

~~Pricing~~is ~~Environment~~largely attributable to the negative impact of a weaker U.S. dollar ($108 million impact, including the effect of our hedging program), lower selling prices, a $14 million increase in duties on our softwood lumber exports to the U.S., as well as higher purchased fibre costs and freight costs. These factors were partially offset by an overall increase in shipments for all of our products.

~~The~~ Net ~~decrease~~loss infor ~~our~~the ~~average~~six-month ~~U.S.~~period ~~dollar~~ended ~~denominated~~June 30, ~~transaction~~2004 ~~prices~~totaled ~~in the~~$45 million ~~third~~($0.20 ~~quarter~~per ofcommon ~~2003~~share) compared to ~~the~~net ~~third~~earnings ~~quarter~~ of ~~2002~~$35 million in($0.15 ~~our Papers~~per ~~segment~~common ~~was~~share) ~~similar~~for tothe ~~that~~same period of ~~benchmark~~2003. ~~nominal~~When ~~prices.~~excluding Onspecified aitems, ~~year-to-date~~net ~~basis,~~loss for the ~~increase~~first inhalf ~~our~~of ~~average~~2004 ~~U.S.~~amounted ~~dollar~~to ~~denominated~~$38 million ~~transaction~~($0.17 ~~prices~~per common ~~was~~share) ~~higher~~compared ~~than~~to ~~that~~net ~~for~~earnings ~~benchmark~~of ~~nominal~~$34 million ~~prices~~($0.14 ~~However,~~per ~~for~~common ~~both~~share) ~~of these~~when ~~comparative~~excluding ~~periods,~~specified items for the ~~strengthening~~same period of ~~the~~2003. ~~Canadian~~This ~~currency negatively~~$72 million ~~impacted~~decrease ~~our~~in ~~Canadian~~net ~~dollar~~earnings ~~denominated~~is ~~prices~~largely inattributable ~~our~~to ~~domestic~~the ~~marketplace~~same factors mentioned ~~given~~above, ~~that~~partially ~~these~~offset ~~are~~by ~~derived~~an ~~from~~income ~~U.S.~~tax ~~dollar~~recovery ~~denominated~~and ~~prices~~lower financing expenses.

~~Our average transaction prices for 20 lb copy sheets (business papers) and 50~~Papers ~~lb offset rolls (uncoated commercial printing & publication papers) decreased~~ by an average of US$45/ton in the third quarter of 2003 compared to the corresponding period of 2002. Benchmark nominal prices decreased by an average of US$51/ton for the same period. For the nine-month period ended September 30, 2003, our average transaction prices for 20 lb copy sheets and 50 lb offset rolls decreased by an average of US$14/ton compared to a decrease of US$17/ton in benchmark nominal prices over the same period.

Softwood and hardwood domestic pulp prices decreased by US$30/tonne on July 1, 2003, after successive increases of US$20/tonne on February 1, 2003, US$40/tonne on March 1, 2003, and US$40/tonne on April 1, 2003. Our Northern Bleached Softwood Kraft (NBSK) pulp transaction prices increased by US$34/tonne in the third quarter of 2003 compared to the same period in 2002 and by US$50/tonne in the nine-month period ended September 30, 2003, compared to the same period in 2002, while benchmark nominal prices increased by US$40/tonne and US$55/tonne, respectively, over the same periods. Our Northern Bleached Hardwood Kraft (NBHK) pulp transaction prices decreased by US$16/tonne on a quarter-over-quarter basis, while benchmark nominal prices for NBHK — Japan decreased by US$6/tonne over the same period. On a year-to-date basis, the increase in our NBHK pulp transaction prices was consistent with that of benchmark nominal prices for NBHK — Japan. Benchmark nominal prices for NBHK — Japan increased by US$49/tonne in the nine-month period ended September 30, 2003, compared to the corresponding period of last year. As of October 1, 2003, we announced an increase of US$15/tonne in our softwood and hardwood domestic pulp prices, with a possible further increase of US$15/tonne as of November 1, 2003.


		Three months ended June 30				Six months ended June 30
Selected information		2004		2003		2004			2003
(In millions of Canadian dollars, unless otherwise noted)
Sales			761		799		1,471			1,631
EBITDA			78		135		109			294
Operating profit (loss)			5		58		(33	)		139
Operating profit (loss), excluding specified items			6		57		(24	)		133
Shipments:
Paper (in thousands of ST)			659		634		1,322			1,261
Pulp (in thousands of ADST)			199		189		409			396
Paper shipments product offering (%):
Copy and offset grades			53		54		54			53
Uncoated commercial printing & publication and premium imaging grades			21		20		21			21
Coated commercial printing & publication grades			11		12		10			12
Technical & specialty grades			15		14		15			14

Total			100		100		100			100
Benchmark nominal prices¹:
Copy 20 lb sheet	(US$/ton)		783		787		753			790
Offset 50 lb rolls	(US$/ton)		652		653		620			663
Coated publication, no. 3, 60 lb rolls	(US$/ton)		772		815		774			813
Pulp NBSK — US market	(US$/ADMT)		660		580		630			544
Pulp NBHK — Japan market²	(US$/ADMT)		520		504		494			468
Selling price index³ — Papers segment (%)			91		95		89			94

¹		Source: Pulp & Paper Week. As such, these prices do not necessarily reflect our transaction prices.

²		Based on Pulp & Paper Week’s Southern Bleached Hardwood Kraft pulp prices for Japan, increased by an average differential of US$15/ADMT between Northern and Southern Bleached Hardwood Kraft pulp prices.

³		Selling price index is derived from transaction prices for the majority of our products, weighted for production capacity, in relation to trend pricing. Trend pricing is based on a consensus of analysts of normalized trend pricing as at November 30, 2003. See “Sensitivity Analysis”.

Sales and operating profit
Sales in our Papers business amounted to $761 million in the second quarter of 2004, a decrease of $38 million or 5% in comparison to the second quarter of 2003. This decrease was primarily due to the unfavorable impact of a weaker U.S. dollar and lower selling prices for paper. Mitigating this decrease were overall higher shipments for both pulp and paper and increases in the selling prices of softwood and hardwood pulp. For the six-month

~~Operations~~12 Management’s Discussion and Analysis

~~Our~~period ~~shipment~~ended toJune 30, ~~capacity~~2004, ~~ratio~~sales ~~stood at 92% for the current quarter~~ of ~~2003 compared~~pulp ~~to 100% in the corresponding quarter last year,~~ and ~~stood~~paper atdecreased ~~92%~~by ~~for~~$160 million ~~the first nine months of 2003~~ compared to ~~97% in~~ the ~~corresponding~~six-month period ~~last year.~~ended ~~Our Papers business was impacted by our decisions to curtail production to match customer demand and by production disruptions caused mainly by the mid-August~~June 30, 2003 ~~power~~for ~~outage in~~ the ~~eastern~~same ~~United~~reasons ~~States and Canada and labor~~as ~~issues~~noted above.

In Operating profit in our Papers business totaled $5 million in the ~~latter~~second quarter ~~part~~of 2004 (or $6 million when excluding specified items) compared to an operating profit of $58 million in the ~~third~~second quarter of 2003 (or $57 million when excluding specified items). This $51 million decrease in operating profit stems primarily from lower selling prices for our papers, ~~new~~the ~~6-year~~negative ~~labor~~impact of ~~agreements~~a weaker U.S. dollar, higher freight costs, higher purchased fibre costs and higher energy costs. These factors were ~~signed~~partially ~~with~~offset ~~PACE~~by ~~union~~higher ~~members~~shipments for atpulp and paper, higher selling prices for pulp and lower amortization expense. For the first six months of 2004, operating loss amounted to $33 million (or $24 million when excluding specified items) compared to an operating profit of $139 million in the same period of 2003 (or $133 million when excluding specified items). This decrease of $157 million was mainly attributable to lower selling prices for our ~~Port~~papers, ~~Huron~~the negative impact of a weaker U.S. dollar, ~~Port~~higher ~~Edwards~~freight costs and ~~Nekoosa~~higher purchased fiber costs. ~~mills~~Partially offsetting this decrease in operating profit were higher shipments of pulp and paper, higher pulp selling prices and lower amortization expense.

~~During~~Pricing environment In our Papers business, our average transaction prices, denominated in U.S. dollars, decreased in the ~~third~~second quarter of 2004 compared to the second quarter of 2003. Within Canada, wethe ~~also~~decline ~~continued~~of tothe ~~focus~~U.S. dollar further negatively impacted our ~~efforts~~Canadian ondollar denominated prices, which are derived from U.S. dollar denominated prices. On a year-to-date basis, our average U.S. dollar ~~quality~~denominated ~~and~~transaction ~~profitability~~prices ~~improvement~~also ~~programs~~decreased in 2004 compared to 2003.

Our average transaction prices for 20 lb copy sheets (business papers) and 50 lb offset rolls (uncoated commercial printing & publication papers), which represented approximately 45% of our paper sales in the second quarter of 2004, were lower on average by US$22/ton in the second quarter of 2004 compared to the second quarter of 2003. On a year-to-date basis, our average transaction prices for copy and offset were lower on average by US$52/ton in 2004 compared to 2003. However, during the first quarter of 2004, price increases of US$60/ton were announced for both copy and offset grades effective March 1, 2004. Subsequent price increases for offset rolls of US$40/ton and US$50/ton for copy papers were announced effective May 1, 2004. As at June 30, 2004, the price increases announced for offset rolls, which are on allocation, have been fully implemented. As at June 30, 2004, the price increases announced for copy papers have not been fully realized due to normal delays in implementation. A further price increase of US$40/ton was announced for a number of uncoated commercial printing grades effective with all new orders as of June 7, 2004.

Our Northern Bleached Softwood Kraft (NBSK) and our Northern Bleached Hardwood Kraft (NBHK) pulp transaction prices increased by US$50/tonne and US$10/tonne, respectively, in the second quarter of 2004 compared to the second quarter of 2003. On a year-to-date basis, our average transaction prices for NBSK and NBHK pulp were higher by US$61/tonne and US$8/tonne, respectively, in 2004 compared to 2003. During the first quarter of 2004, two successive US$20/tonne price increases for softwood pulp were implemented, the first, effective February 1, 2004 and the second, effective March 1, 2004. During the second quarter of 2004, a further US$30/tonne price increase for both softwood and hardwood pulp was partially implemented, effective April 1, 2004. In addition, we announced a further price increase of US$30/tonne on softwood pulp, effective June 1, 2004.

Operations
Our paper shipments increased by 25,000 tons in the second quarter of 2004 compared to the second quarter of 2003 due to stronger demand. Our paper shipments to capacity ratio stood at 97% for the second quarter of 2004 compared to 92% in the second quarter of 2003.

In November 2003, employees at our Vancouver paper mill went on strike after rejecting our offer for the renewal of their collective agreement. In January 2004, the strike was resolved and a new five-year labor agreement was signed with the Communications, Energy and Paperworkers Union of Canada members. The mill resumed operations in early-February 2004.

Certain collective agreements for the Cornwall, Ottawa-Hull, Espanola and Lebel-sur-Quevillon mills are due for renewal in the third quarter of 2004.

~~PAPER~~Domtar ~~MERCHANTS~~Inc. Second Quarter 2004 13

~~Selected~~Restructuring ~~Information~~plan (In January 2004, we proceeded with our plan to reorganize production activities at our Vancouver paper mill to better meet customer demands and increase the mill’s profitability. Accordingly, we shut down one of the mill’s two paper machines and restructured the activities of the other to optimize manufacturing of our Domtar Luna coated paper. This process resulted in ~~millions~~the permanent curtailment of ~~Canadian~~45,000 ~~dollars)~~tons of paper manufacturing capacity and the termination of 85 employees. These steps are expected to increase product quality and availability, expand our market share of coated papers, improve the mill’s efficiency and better respond to Asian competition.

	Three months ended				Nine months ended
	September 30				September 30
	2003		2002		2003		2002
Net sales		266		300		831		897
Operating profit		4		6		16		20

In the first six months of 2004, we continued the implementation of best practices at the remaining operations within our Canadian Pulp and Paper Manufacturing Group with the objective of ensuring that the mills within this Group are profitable when the Canadian dollar is valued at 75 cents to the U.S. dollar and paper prices are at cycle-low levels. This restructuring plan will impact our Cornwall, Espanola, Ottawa-Hull, Port Huron (located in the United States) and Windsor mills. In all, 330 positions will be affected over the course of 2004 to 2006. In order to accomplish this plan, we will invest approximately $14 million in capital expenditures from 2004 to 2006. Once fully implemented, these initiatives, in conjunction with the reorganization of the operations at our Vancouver paper mill, are expected to generate annual savings of approximately $50 million.

~~Sales~~In addition, capital investments, such as the roll out of an Enterprise Resource Planning (ERP) system and ~~Operating~~the ~~Profit~~implementation of a new paper shipment logistics and transportation management system, are expected to further reduce costs and enhance our competitiveness. We anticipate that these initiatives will further mitigate the impact of rising costs, particularly in the areas of energy and fiber, the latter being affected by the Canada-U.S. softwood lumber dispute.

~~Net sales in our~~ Paper Merchants ~~business amounted to $266 million, a decrease~~ ~~of $34 million or 11% in comparison to the third quarter of 2002. This~~ decrease was due to lower paper selling prices and the negative impact of a stronger Canadian dollar combined with a slight reduction in overall tons sold compared to the same period in 2002. On a year-to-date basis, net sales totaled $831 million in 2003 compared to $897 million in the corresponding period in 2002. This decrease of $66 million or 7% was due to the cumulative effect of second and third quarter lower pricing levels and the negative impact of a stronger Canadian dollar.

Operating profit for the third quarter of 2003 was $4 million (reflecting an operating margin of 1.5%) compared to $6 million in the third quarter of 2002 (reflecting an operating margin of 2.0%). This decrease was attributable to reduced gross profit from the negative impact of a stronger Canadian dollar and lower pricing for some paper products. In addition, a decrease in warehouse shipments, which generate higher gross profit than direct mill shipments, negatively impacted overall gross profit. Cost reduction initiatives alleviated a portion of the reduced gross profit variance. On a year-to-date basis, operating profit amounted to $16 million in 2003 (reflecting an operating margin of 1.9%) compared to $20 million for the same period in 2002 (reflecting an operating margin of 2.2%). This decrease is attributable to the same factors as mentioned above for the quarter-over-quarter analysis.


	Three months ended June 30				Six months ended June 30
Selected information	2004		2003		2004		2003
(In millions of Canadian dollars)
Sales		268		265		531		565
EBITDA		5		5		12		13
Operating profit		5		5		11		12

Sales and operating profit
Our Paper Merchants business generated sales of $268 million in the second quarter of 2004, an increase of $3 million or 1% in comparison to the second quarter of 2003. This increase was due to increased paper shipments, partially offset by the negative impact of a weaker U.S. dollar and lower pricing levels in the second quarter of 2004 compared to the second quarter of 2003. For the six-month period ended June 30, 2004, sales amounted to $531 million, a decrease of $34 million or 6% in comparison to the corresponding period of 2003. This decrease is attributable to the negative impact of a weaker U.S. dollar and lower paper selling prices, partially offset by higher shipments.

Operating profit in the second quarter of 2004 totaled $5 million compared to $5 million in the second quarter of 2003 (reflecting an operating margin of 1.9% for both periods). Higher overall shipments were offset by lower pricing levels due in part to the weakness of the U.S. currency on Canadian merchant shipments and an increased proportion of lower priced direct mill shipments. Operating profit totaled $11 million in the first six months of 2004 compared to $12 million (reflecting an operating margin of 2.1% for both periods) in the same period of 2003. This decrease in operating profit is due to the negative impact of a weaker U.S. dollar in the first half of 2004 when compared to the first half of 2003.

~~WOOD~~14 Management’s Discussion and Analysis

~~Selected Information~~Wood ~~(in millions of Canadian dollars, unless otherwise noted)~~

			Three months ended							Nine months ended
				Three months ended June 30							Six months ended June 30
			September 30							September 30
Selected information				2004			2003				2004				2003
			2003			2002				2003				2002
(In millions of Canadian dollars, unless otherwise noted)
Net sales				87			100				253				371
Sales					156			110				264				210
Operating profit (loss)				(11	)		(10	)			(52	)			13
EBITDA					18			(10	)			16				(21	)
Shipments (millions of FBM)				252			254				738				784
Operating profit (loss)					6			(20	)			(7	)			(41	)
Shipments product offering (%):
Shipments (in millions of FBM)					267			259				495				486
	Random lengths			37			42				41				43
Shipments product offering (%):
	Studs			37			38				36				36
Random lengths					42			43				39				43
	Value-added			18			15				18				15
Studs					34			34				35				35
	Industrial			8			5				5				6
Value-added					20			18				21				17
		Total		100			100				100				100
Industrial					4			5				5				5
Benchmark nominal prices(1):
Total					100			100				100				100
	Lumber 2x4 R/L no. 1 & no. 2 (US$/MFBM)			381			319				331				345
Benchmark nominal prices1:
	Lumber 2x4x8 stud (US$/MFBM)			360			328				331				350
Lumber G.L. 2 x 4 x 8 stud		(US$/MFBM)			434			318				402				316
Selling price index — Wood
Lumber G.L. 2 x 4 R/L no. 1 & no. 2		(US$/MFBM)			495			306				464				306
segment, before the impact oflumber duties (%)				100			91				92				97
Selling price index2 - Wood segment, before the impact of lumber duties (%)					131			91				120				90
Lumber duties:
Lumber duties (cash deposits)					21			11				33				19
	Cash deposits			13			17				32				22
	Provision (net of reversal)			—			—				—				(20	)
		Total		13			17				32				2

(1) Source: Random Lengths.

¹		Source: Random Lengths. As such, these prices do not necessarily reflect our transaction prices.

²		Selling price index is derived from transaction prices for the majority of our products, weighted for production capacity, in relation to trend pricing. Trend pricing is based on a consensus of analysts of normalized pricing as at November 30, 2003. See “Sensitivity Analysis”.

Sales and ~~Operating~~operating ~~Profit~~profit Sales for our Wood business amounted to $156 million in the second quarter of 2004, an increase of $46 million compared to the second quarter of 2003. This increase in sales is largely due to a significant increase in the selling price of lumber and an increase in shipments, partially offset by the negative impact of a weaker U.S. dollar. For the six-month period ended June 30, 2004, sales for our Wood business amounted to $264 million, an increase of $54 million compared to the corresponding period of 2003. This increase is largely due to the same factors explained above.

~~Net~~ Operating ~~sales~~profit in ~~our Wood business totaled $87 million in~~ the ~~third~~second quarter of ~~2003,~~ ~~representing~~2004 aamounted to $136 million ~~decrease~~ compared to ~~the~~an ~~third~~operating ~~quarter~~loss of ~~2002.~~ ~~This~~$20 million ~~decrease~~in ~~was explained by~~ the ~~negative~~second ~~impact~~quarter of ~~a stronger~~2003. ~~Canadian~~This ~~dollar~~$26 million onincrease ~~both~~in ~~domestic~~operating ~~and~~profit ~~export~~is ~~sales~~attributable ~~and~~to ~~lower lumber shipments.~~significantly ~~The~~higher ~~overall~~selling ~~decrease~~prices infor ~~net~~lumber, ~~sales was~~ partially offset by ~~a significant increase in lumber prices and~~ the ~~positive~~negative impact of ~~lower lumber duties ($4~~a ~~million)~~weaker ~~on a quarter-over-quarter basis~~U.S. Ondollar aand ~~year-to-date~~higher ~~basis,~~duties ~~net~~on ~~sales amounted~~our tosoftwood ~~$253 million~~lumber inexports ~~2003 compared~~ to ~~$371 million~~the ~~for~~U.S. For the ~~same~~six-month period in ~~2002.~~ended ~~This decrease of $118~~June ~~million~~30, ~~was~~2004, ~~mainly~~operating ~~due~~loss ~~to the reversal of a $28 million provision~~ for ~~countervailing~~our ~~and antidumping duties on exports of~~Wood ~~softwood~~business ~~lumber~~amounted to ~~the United States in the second quarter of 2002 (of which~~ $8 7 million, ~~was~~an ~~recorded~~improvement in ~~the~~profitability ~~first quarter~~ of ~~2002 and~~ $2034 million ~~was recorded~~ incompared to the ~~second~~corresponding ~~half~~period of ~~2001,~~2003. ~~lower~~This ~~lumber~~increase ~~prices~~is inattributable ~~2003,~~ to the ~~negative~~same ~~impact~~factors ~~of a~~impacting ~~stronger~~the ~~Canadian~~quarter-over-quarter ~~dollar~~variation onin ~~both domestic and export sales, and lower~~operating ~~shipments~~profit.

~~Cash~~Domtar deposits of $13 million were made on our exports of softwood lumber to the United States during the third quarter of 2003 (or $32 million on a year-to-date basis) compared to $17 million in the corresponding period in 2002 (or $22 million on a year-to-date basis)Inc. ~~Since~~Second ~~May 22,~~Quarter ~~2002, cash deposits of~~2004 15 ~~$63 million for countervailing and antidumping duties have been made and~~ ~~expensed by Domtar.~~

~~Operating~~Cash ~~loss~~deposits ~~for the third quarter~~ of ~~2003 amounted to~~ $1121 million ~~(or~~were ~~an operating~~made ~~profit~~on ofour ~~$2 million~~softwood ~~when excluding the impact of~~ lumber ~~duties) compared~~exports to ~~an operating loss of $10 million in~~ the ~~corresponding period of~~ ~~2002~~United ~~(or~~States ~~$7 million~~during ~~operating profit when excluding~~ the ~~impact~~second quarter of ~~lumber duties).~~2004 ~~This~~compared to $511 million ~~decline~~ in ~~operating profit when excluding~~ the ~~impact~~ ofcorresponding ~~lumber~~period ~~duties was primarily a result~~ of ~~the~~2003. ~~negative~~Since ~~impact of a stronger Canadian dollar on both domestic and export sales~~May 22, ~~as well as lower lumber shipments~~2002, ~~partially~~cash ~~offset~~deposits ~~by a significant increase in lumber selling prices and the positive impact~~ of ~~our quality and profitability improvement programs. On a year-to-date basis, operating loss amounted to~~ $52109 million ~~(or $20 million~~ ~~operating~~for ~~loss~~countervailing ~~when~~and ~~excluding~~antidumping ~~the impact of lumber~~ duties) ~~compared~~have tobeen ~~an operating~~made ~~profit~~and ofexpensed ~~$13 million~~by Domtar (orat ~~$15 million~~a ~~operating~~stable ~~profit~~rate ~~when excluding the impact~~ of ~~lumber duties~~27.22%). ~~This $35 million decline in operating profit~~ ~~when excluding lumber duties is largely the result of a general erosion in~~ ~~lumber selling prices, the unfavorable impact of a stronger Canadian dollar on~~ ~~both domestic and export sales, and lower shipments, partially offset by the positive impact of our quality and profitability improvement programs.~~

Pricing ~~Environment~~environment Our transaction prices for Great Lakes 2x4 studs and random lengths increased by US$122/MFBM and US$195/MFBM, respectively, in the second quarter of 2004 compared to the second quarter of 2003. Our Canadian dollar denominated prices rose by a lesser amount, given that these are derived from U.S. dollar denominated prices. On a year-to-date basis, our average transaction prices for Great Lakes 2X4 studs and random lengths increased by US$89/MFBM and US$161/MFBM, respectively, in 2004 compared to 2003.

~~The~~Operations During ~~increase~~the infirst ~~our~~half ~~average~~of ~~U.S.~~2003, ~~dollar~~our ~~denominated~~operations ~~transaction~~were ~~prices~~negatively ~~before~~impacted by ~~the~~temporary ~~impact~~mill ofclosures. ~~lumber~~Our ~~duties~~Ste-Marie sawmill was ~~lower~~closed ~~than~~in ~~that~~2002 ~~for~~due ~~benchmark~~to ~~nominal prices on~~the ~~a quarter~~Canada-~~over-quarter basis~~U.S. ~~Our~~softwood ~~average~~lumber ~~transaction~~dispute ~~prices~~and inonly reopened at the ~~third quarter~~end of May 2003 ~~for Great Lakes 2x4 studs and random lengths increased by~~ ~~US$26/MFBM~~ and ~~US$48/MFBM,~~our ~~respectively,~~Grand-Remous ~~compared~~sawmill toceased ~~the~~operations ~~corresponding period~~ in 2002, ~~while~~due ~~benchmark~~to ~~nominal~~a ~~prices~~dispute ~~increased by US$32/MFBM and US$62/MFBM,~~between ~~respectively, over~~ the ~~same~~Barriere ~~period.~~Lake ~~The~~First ~~smaller~~Nation ~~increase~~and ~~reflects~~ the ~~fact that~~governments ~~benchmark nominal prices increased significantly at the end~~ of ~~the~~Quebec ~~third quarter~~and ofCanada ~~2003, whereas our transaction prices will~~ and only ~~reflect~~reopened ~~this~~at ~~increase during~~ the ~~fourth~~end ~~quarter~~ of April 2003. OnThe asale ~~year-to-date~~of ~~basis,~~ the ~~decrease~~Sault ~~in our average U~~Ste.S. ~~dollar~~Marie hardwood ~~denominated~~lumber ~~transaction~~facility ~~prices~~in ~~before~~March 2003 and the ~~impact~~Daveluyville ofremanufacturing ~~lumber~~facility ~~duties~~in ~~was~~April 2003 ~~fairly~~also ~~consistent~~impacted ~~with~~our ~~that~~operations ~~for~~negatively ~~benchmark nominal prices. Average benchmark nominal prices~~ in the ~~first~~second quarter ~~nine months~~ of 2003. ~~for Great Lakes 2x4 studs were lower by US$19/MFBM~~Furthermore, ~~while~~extended ~~average~~holiday ~~benchmark~~shutdowns ~~nominal prices~~at ~~for~~several ~~random~~mills ~~lengths were lower by US$14/MFBM compared to the~~in ~~corresponding period of 2002. In addition, for both of these comparative~~order ~~periods,~~to ~~Canadian~~avoid ~~dollar~~inventory ~~denominated~~buildups ~~pricing~~ in ~~our~~a ~~domestic~~declining ~~marketplace~~product-pricing ~~was~~environment further negatively impacted byour ~~the~~operations ~~strengthening~~during of the ~~Canadian~~first ~~currency~~half of 2003.

~~Operations~~ Throughout the first quarter of 2004, our operations were also negatively impacted by temporary mill closures. Production at our White River sawmill was halted in mid-2003 due to difficult market conditions and overcapacity within the North American market, as well as the Canada-U.S. softwood lumber dispute and only reopened in late February 2004. In addition, labor disruptions at a transportation supplier, as well as particularly cold weather affected our productivity.

In ~~June 2002, a decision was taken to halt~~ the ~~Ste-Marie~~first ~~sawmill~~quarter ~~operations~~of ~~for an~~2004, ~~undetermined~~we ~~period~~announced ofa ~~time~~reduction ~~due~~in to the ~~Canada-U.S. softwood lumber dispute.~~operations ~~The~~of ~~Ste-Marie~~our Chapleau sawmill ~~resumed~~to ~~full~~one ~~operations~~shift, oneffective ~~May~~April 2030, ~~2003. In July 2002~~2004, ~~the~~ ~~Grand-Remous sawmill ceased operations~~ due to a ~~dispute between the~~ ~~Barriere~~substantial ~~Lake~~reduction ~~First~~in ~~Nation~~fiber ~~and~~supply ~~the~~availability. ~~governments~~This ofdecision ~~Québec~~is ~~and Canada. The~~expected ~~dispute~~to ~~was~~impact ~~settled~~approximately ~~and~~64 ~~the~~employees ~~Grand-Remous~~for ~~sawmill~~an ~~resumed~~undetermined ~~full~~period ~~operations~~of ~~on April 28, 2003~~time.

~~The~~ During ~~usual~~the ~~two-week~~first ~~holiday~~quarter ~~shutdowns~~of ~~at the Lebel-sur-Quévillon~~2004, ~~Matagami~~we ~~and Malartic~~formed ~~sawmills~~a ~~were~~50-50 ~~extended~~joint ~~for~~venture ~~an additional two weeks to avoid producing~~with ~~for~~Gogama ~~inventory~~Forest ~~build-ups~~Products ~~in a declining product price environment~~Ltd. ~~These sawmills~~that ~~resumed~~created ~~operations~~a onfully ~~January 20~~integrated sawmill, ~~2003.~~kiln ~~Our Ontario sawmills also~~and ~~took~~planer ~~some~~operation ~~market-related downtime~~ in ~~January 2003.~~Northern AsOntario athat ~~result,~~produces ~~production was curtailed by~~ approximately 2460 million board feet per year of lumber inpreviously ~~the~~dried ~~first~~and ~~quarter~~dressed at our Sault Ste. ofMarie ~~2003~~planer facility.

In We ~~March 2003,~~continued weto ~~sold~~pursue ~~the~~sawmill ~~Sault~~modernization ~~Ste~~projects aimed at improving profitability in our Wood business. On a year-~~Marie~~to-date ~~hardwood~~basis, ~~lumber~~the ~~facility~~Matagami, Ste-Marie, Timmins and inMalartic sawmills achieved productivity improvement ~~April 2003,~~gains wein ~~sold~~2004 in comparison to the ~~Daveluyville~~corresponding ~~remanufacturing~~period ~~facility,~~of ~~following~~2003. anWe will ~~earlier~~continue ~~decision~~to inexamine ~~November 2002~~opportunities to ~~shut~~further ~~down~~improve ~~these~~the ~~facilities~~profitability ~~because~~ of the ~~challenging~~Wood ~~market~~business ~~conditions~~through additional cost reductions and strategic alternatives.

As16 Management’s ofDiscussion June 23, 2003, we halted production at the White River, Ontario sawmill for an expected six-month period due to difficult market conditions brought about by overcapacity within the North American market and ~~the Canada-U.S.~~Analysis ~~softwood lumber dispute.~~

~~On August 25, 2003, we announced the permanent closure of our Sault Ste-Marie~~Packaging ~~planer facility as of October 17, 2003, due to challenging market conditions~~ ~~and the Canada-U.S. softwood lumber dispute.~~

Despite the challenging environment in our Wood business, we continued to pursue sawmill modernization projects aimed at improving profitability. On a year-to-date basis, the Elk Lake, Ste-Marie, Val d’Or, Timmins, Matagami, Chapleau, Grand Remous and Malartic sawmills achieved productivity improvement gains.


		Three months ended June 30				Six months ended June 30
Selected information		2004		2003		2004		2003
(In millions of Canadian dollars, unless otherwise noted)
Sales			161		162		305		318
EBITDA			16		21		35		40
Operating profit			8		13		19		24
Operating profit, excluding specified items			12		13		17		24
Shipments¹:
Containerboard (in thousands of ST)			80		77		157		160
Corrugated containers (in millions of square feet)			1,699		1,737		3,329		3,287
Benchmark nominal prices²:
Unbleached kraft linerboard, 42 lb East	(US$/ton)		462		425		437		427
Selling price index³ - Packaging segment			97		95		94		93

¹		Represents 50% of Norampac’s trade shipments.

²		Source: Pulp & Paper Week. As such, these prices do not necessarily reflect our transaction prices.

³		Selling price index is derived from transaction prices for the majority of our products, weighted for production capacity, in relation to trend pricing. Trend pricing is based on a consensus of analysts of normalized pricing as at November 30, 2003. See “Sensitivity Analysis”.

Sales and operating profit
Our 50% share of Norampac’s sales amounted to $161 million in the second quarter of 2004, a decrease of $1 million or less than 1% over the second quarter of 2003. This stability in sales is mainly attributable to the negative impact of a weaker U.S. dollar on selling prices and lower shipments of corrugated containers being almost fully offset by higher shipments for containerboard. For the six-month period ended June 30, 2004, our 50% share of Norampac’s sales totaled $305 million, a decrease of $13 million or 4% compared to the same period last year. This decrease is mainly attributable to the negative impact of a weaker U.S. dollar on selling prices and lower containerboard shipments, being partially offset by higher shipments of corrugated containers due to shipments of recent acquisitions.

Our 50% share of Norampac’s operating profit amounted to $8 million in the second quarter of 2004 (or $12 million when excluding specified items), a decrease of $1 million when compared to $13 million operating profit in the corresponding quarter of 2003. This decrease is mainly attributable to the same factors impacting sales, as well as to higher freight and energy costs, partially offset by lower purchased fiber costs. For the six-month period ended June 30, 2004, our proportionate share of Norampac’s operating profit totaled $19 million (or $17 million when excluding specified items) compared to $24 million in the same period last year. This $7 million or 29% decrease in operating profit on a year-to-date basis is mainly attributable to the same factors impacting year-to-date sales, as well as to higher freight costs. Partially mitigating this decrease were lower purchased fiber and energy costs.

Pricing environment
In the second quarter of 2004, higher U.S. dollar selling prices for both containerboard and corrugated containers were negatively impacted by a weaker U.S. dollar resulting in lower average reported Canadian selling prices for both containerboard and corrugated containers compared to the same period last year. On a year-to-date basis, average reported Canadian selling prices were lower due to the same factors explained above.

During the first quarter of 2004, a US$50/ton price increase for containerboard became effective February 23, 2004. A second price increase of US$50/ton announced in the second quarter of 2004, effective July 1, 2004, is being implemented.

During the first quarter of 2004, an 8.5% price increase for corrugated boxes became effective March 23, 2004. A second price increase of 10% was announced in the second quarter of 2004, effective July 19, 2004.

~~PACKAGING~~Domtar Inc. Second Quarter 2004 17

~~Selected~~Operations During ~~Information~~the second quarter of 2004, Norampac’s North American containerboard (mill capacity utilization rate, excluding the Burnaby paper mill currently on strike, was approximately 94%, up from 91% in ~~millions~~the second quarter of ~~Canadian~~2003. ~~dollars~~In addition, ~~unless~~Norampac’s ~~otherwise~~North ~~noted)~~American integration level, the percentage of containerboard produced by Norampac that is consumed by its own box plants, increased to 65% in the second quarter of 2004, up from 63% in the second quarter of 2003.

		Three months ended				Nine months ended
		September 30				September 30
		2003		2002		2003		2002
Net sales			146		157		438		453
Operating profit			16		21		40		56
Shipments(1):
	Containerboard (’000 ST)		82		84		243		256
	Corrugated containers (millions of square feet)		1,759		1,671		5,046		4,837
Benchmark nominal prices(2):
	Unbleached kraft linerboard, 42lb East (US$/ton)		418		437		424		423
Selling price index — Packaging segment (%)			101		106		102		102

Financing Expenses and Income Taxes

(1)		Represents 50% of Norampac’s trade shipments.
(2)		Source: Pulp & Paper Week.

Financing expenses
In the second quarter of 2004, financing expenses amounted to $41 million compared to $48 million in the second quarter of 2003. When excluding specified items, financing expenses totaled $39 million in the second quarter of 2004 compared to $41 million in the second quarter of 2003. This $2 million decrease in financing expenses is due to lower interest rates in Canada and the impact of a lower U.S. dollar on our U.S. dollar interest expense, partially offset by higher debt levels. For the six-month period ended June 30, 2004, financing expenses amounted to $80 million (or $77 million when excluding specified items) compared to $89 million in the corresponding period of 2003 (or $84 million when excluding specified items). This decrease is largely due to the same factors mentioned above.

~~Sales~~Income taxes Our income tax recovery in the second quarter of 2004 was $11 million, compared to an income tax expense of $1 million in the second quarter of 2003. For the six-month period ended June 30, 2004, our income tax recovery totaled $38 million, compared to an income tax expense of $12 million in the corresponding period of 2003. The variations in the income tax expense/recovery in these periods result from a combination of factors, including a tax recovery adjustment of $4 million in the second quarter of 2004 following the reassessment of prior years by tax authorities, the relative effect of permanent differences in minimal profit/loss situations, the mix and ~~Operating~~level ~~Profit~~of earnings between our different tax jurisdictions, and differences in tax rates applicable to our foreign subsidiaries.

~~Our~~Balance ~~50% share of Norampac’s net sales amounted to $146 million in the third~~Sheet ~~quarter of 2003, a decrease of $11 million or 7% over the same quarter of 2002.~~ On a year-to-date basis, our 50% share of Norampac’s net sales amounted to $438 million compared to $453 million in the same period of 2002, representing a decrease of $15 million or 3%. For both these comparative periods, the decreases were mainly due to lower net selling prices for both corrugated products and containerboard attributable to the negative impact of a stronger Canadian dollar on both domestic and export sales, as well as to lower shipments for containerboard and corrugated products when not taking into account the recently acquired facilities.

Our ~~50%~~total ~~share~~consolidated ofassets ~~Norampac’s~~were ~~operating~~$5,999 million ~~profit~~as ~~amounted~~at June 30, 2004 compared to $165,847 million as at December 31, a2003. Receivables amounted to $5 298 million as orat ~~24%~~June 30, ~~decrease~~2004, ~~from~~an ~~the~~increase of $21101 million ~~operating~~when ~~profit~~compared ~~reported~~to $197 million as at December 31, 2003. This increase mainly reflects higher sales in the ~~third~~month ~~quarter~~of June 2004 compared to the month of ~~2002.~~December 2003 ~~This~~due ~~decline~~to ~~was~~demand ~~explained~~and seasonality, byas well as the ~~same~~positive ~~factors~~impact of a stronger U.S. dollar, based on ~~impacting~~month-end ~~net~~exchange ~~sales~~rates, on our U.S. dollar denominated receivables. Total inventories as at June 30, 2004 were $665 million, a decrease of $5 million when compared to $670 million as at December 31, 2003. This decrease mainly reflects higher shipments when compared to production and inventory reduction programs, partially offset by the positive impact of a ~~decrease~~stronger inU.S. ~~purchased~~dollar, based ~~fiber~~on ~~costs~~month-end exchange rates, on our U.S. dollar denominated inventories. ~~Our~~Property, ~~share~~plant ofand ~~Norampac’s~~equipment ~~operating~~as ~~profit~~at ~~was~~June 30, 2004 totaled $404,524 million compared ~~for~~to ~~the~~$4,532 million ~~first~~as ~~nine~~at December 31, 2003. This $8 million decrease in ~~months~~property, plant and equipment was mainly due to a lower level of ~~2003~~capital expenditures compared to amortization expense, partially offset by the effect of a stronger U.S. dollar, based on month-end exchange rate, on our U.S. mill assets. Other assets stood at $56228 million ~~for~~as ~~the~~at ~~same~~June 30, ~~period~~2004 ofcompared ~~2002.~~to ~~This~~$212 ~~decrease~~million ofas at December 31, 2003. This $16 million ~~can~~increase bewas ~~explained~~mainly bydue ~~the~~to higher ~~same~~funding ~~factors~~of ~~impacting~~our ~~net sales~~pension assets as compared to pension expense, as well as to byNorampac’s ~~higher~~mark-to-market ~~energy~~unrealized ~~prices,~~gain ~~partially~~on ~~offset~~commodity byswap acontracts (long-term ~~decrease~~receivable) in ~~purchased~~ ~~fiber~~the ~~costs~~six-month period ended June 30, 2004.

~~Pricing~~ Trade ~~Environment~~and other payables were $648 million as at June 30, 2004, relatively stable when compared to $652 million as at December 31, 2003. This stability in trade and other payables is explained by higher

Benchmark nominal prices for kraft linerboard decreased by 4% in the third quarter of 2003 compared to the third quarter of 2002, while Norampac’s average net selling prices for containerboard decreased by 13% during the same period. Benchmark nominal prices for kraft linerboard remained flat in the first nine months of 2003 compared to the same period of 2002, while Norampac’s average net selling prices for containerboard decreased by 6% during the same period. For both these comparative periods, the greater decrease of average net selling prices over benchmark nominal prices is primarily due to the impact of the stronger Canadian dollar on Norampac’s net selling prices.

~~Norampac~~18 Management’s ~~net~~Discussion ~~selling prices for corrugated boxes in the third quarter of 2003 decreased by 8% compared to the corresponding period in 2002~~ and ~~by 4% in the~~Analysis ~~first nine months of 2003 compared to the corresponding period in 2002.~~

~~Operations~~pension and environmental accruals, which were transferred from other long-term liabilities as they became current, as well as the negative impact of a stronger U.S. dollar on our U.S. dollar denominated payables, based on month-end exchange rates, offset by lower employee related and capital projects accruals due to timing of payments and other timing issues. Long-term debt (including the portion due within one year) was $2,262 million as at June 30, 2004, an increase of $203 million compared to $2,059 million as at December 31, 2003, mainly attributable to an increase in our borrowings under our revolving credit facility. The negative impact of a stronger U.S. dollar, based on month-end exchange rates, on our U.S. dollar denominated debt further explains this increase in our long-term debt. Accumulated foreign currency translation adjustments were negative $113 million as at June 30, 2004 compared to negative $145 million as at December 31, 2003. This variation mainly reflected the net impact of a stronger U.S. dollar on the net assets of our self-sustaining U.S. subsidiaries, or $80 million, net of the impact of a stronger U.S. dollar on the long-term debt designated as a hedge of the above-mentioned net assets, or $58 million, and its corresponding income tax effect of $10 million.

~~During~~Liquidity ~~the~~and ~~third~~Capital ~~quarter of 2003, Norampac took market-related downtime at its~~Resources ~~containerboard mills for a total of 20,700 tons, compared to 15,600 tons over~~ the corresponding period in 2002. This reflects Norampac’s commitment to adjust production to customers’ needs. On a year-to-date basis, Norampac curtailed production by 84,700 tons in 2003 compared to 71,600 tons in the corresponding period in 2002.


	Three months ended June 30						Six months ended June 30
Selected information	2004			2003			2004			2003
(In millions of Canadian dollars, unless otherwise noted)
Cash flows provided from operating activities before changes in working capital and other items		83			112			100			245
Changes in working capital and other items		(7	)		33			(93	)		(124	)

Cash flows provided from operating activities		76			145			7			121
Net additions to property, plant and equipment		(50	)		(43	)		(91	)		(84	)

Free cash flow¹		26			102			(84	)		37


	June 30,		Dec. 31,
	2004		2003
Tet debt-to-total capitalization ratio² (%)		51		48

¹		Free cash flow is a non-GAAP measure that we define as the amount by which cash flows provided from operating activities, as determined in accordance with GAAP, exceeds net additions to property, plant and equipment, as determined in accordance with GAAP. We use free cash flow in evaluating our ability and that of our business segments to service our debt and pay dividends to our shareholders and, as such, believe it would be useful for investors and other users to be aware of this measure so they can better assess our performance. Our free cash flow measure has no standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation.

²		Net debt-to-total capitalization ratio is a non-GAAP measure (see “Net debt-to-total capitalization ratio” table). We track this ratio on a regular basis in order to assess our debt position. We therefore believe it would be useful for investors and other users to be aware of this measure so they can better assess our performance. Net debt-to-total capitalization ratio has no standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation.

Our principal cash requirements are for working capital, capital expenditures, principal and interest payments on our debt and dividend payments. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our revolving credit facility. We also have the ability to fund liquidity requirements through the issuance of debt and/or equity. The availability and cost of debt financing is dependent, among other things, upon our credit ratings.

~~FINANCING~~Domtar ~~EXPENSES~~Inc. ~~AND~~Second ~~INCOME~~Quarter ~~TAXES~~2004 19

~~Financing~~Operating ~~Expenses~~activities Cash flows provided from operating activities in the second quarter of 2004 amounted to $76 million compared to $145 million in the second quarter of 2003. This $69 million decrease in cash flows provided from operating activities is primarily due to increased requirements for working capital in the second quarter of 2004 compared to the second quarter of 2003 due to trade and other payables fluctuations, inventory fluctuations and income and other taxes payable fluctuations. A reduction in EBITDA generated in the second quarter of 2004 compared to the second quarter of 2003, explained previously, also contributed to the decrease in cash flows provided from operating activities. On a year-to-date basis, cash flows provided from operating activities totaled $7 million in 2004 compared to $121 million in 2003. This decrease mainly reflects the significant decrease in EBITDA explained previously. The first half of the year is also typically impacted by seasonally high requirements for working capital. Our operating cash flow requirements are primarily for salaries and benefits, the purchase of fiber, energy and raw materials, and other expenses such as property taxes.

~~During~~In the ~~third~~first quarter of ~~2003~~2004, ~~financing~~we ~~expenses~~terminated, ~~amounted~~prior to ~~$41 million~~maturity, ainterest ~~$10 million~~rate ~~decrease~~swap ~~over~~contracts, ~~the~~which ~~corresponding~~were ~~period~~initially indesignated ~~2002.~~as ~~This~~a ~~decrease mainly~~hedge ~~reflects~~of the ~~impacts~~fair value of ~~lower~~the ~~debt~~5.375% ~~levels,~~notes ~~lower~~due ~~interest rates~~November 2013, ~~and~~for ~~a stronger~~net ~~Canadian~~cash ~~dollar.~~proceeds Onof ~~a year-to-date basis, financing expenses totaled~~ $~~130~~ 20 million ~~in 2003, or~~ (US$~~120~~15 million). ~~when~~The ~~excluding~~gain ~~the~~of $1017 million, ~~impact~~recorded ~~of Norampac’s~~under ~~refinancing of substantially all of its outstanding credit~~“Other ~~facilities~~liabilities and ~~senior~~deferred ~~notes in the second quarter of 2003~~credits”, ~~compared~~will tobe ~~$146 million~~amortized ~~for~~over the ~~first~~original designated ~~nine~~hedging ~~months~~period of ~~2002.~~the ~~This~~underlying ~~$26 million~~5.375% ~~decrease~~notes ~~was~~ due to ~~the~~in ~~same factors impacting third quarter results~~November 2013.

~~Income~~We ~~Taxes~~sell a portion of our Canadian and American receivables through securitization programs. We use securitization of our receivables as an alternative to traditional financing by reducing our working capital requirements. As at June 30, 2004, the value of securitized receivables amounted to $256 million compared to $227 million as at December 31, 2003.

~~Our~~We ~~income~~expect ~~tax~~to ~~recovery~~continue ~~for~~to ~~the~~sell ~~third~~receivables ~~quarter~~on ~~of 2003 was $6 million compared to~~ an ~~income~~ongoing ~~tax~~basis, ~~expense~~given ~~of $28 million in~~ the attractive ~~third~~discount ~~quarter of 2002~~rates. OnShould ~~a year-to-date~~we ~~basis,~~decide ~~our income tax expense amounted~~ to ~~$6 million~~discontinue inthese ~~2003~~programs, our ~~reflecting~~working ancapital ~~effective~~and ~~tax~~our ~~rate~~bank ofdebt ~~13.6%,~~requirements ~~compared~~would toincrease. anSuch ~~income~~sales ~~tax expense~~ of ~~$41 million~~receivables inare ~~2002,~~contingent ~~reflecting~~upon anthe ~~income~~Corporation ~~tax~~retaining ~~rate~~specified ~~of 28~~credit ratings.~~5%.~~ The ~~variations~~loss ~~in the~~of ~~effective~~such ~~tax~~ratings ~~rates in 2003 compared to 2002~~would, ~~both~~absent onappropriate ~~a quarterly and year-to-date comparative basis~~waivers, ~~result mainly from the mix and level of~~increase ~~earnings between~~ our ~~different~~working ~~tax~~capital ~~jurisdictions~~ and ~~differences in tax rates applicable to~~ our ~~foreign~~bank ~~subsidiaries~~debt requirements.

~~BALANCE~~Investing ~~SHEET~~activities Cash flows used for investing activities in the second quarter of 2004 totaled $58 million, compared to $53 million in the second quarter of 2003, and $99 million, compared to $94 million on a year-to-date basis. Increases in net additions to property, plant and equipment were partially offset by decreases in cash flows used for Norampac’s business acquisitions for both of these comparative periods. We intend to limit our annual capital expenditures to well below 75% of amortization, or $290 million in 2004, including approximately $120 million for capital expenditures relating to the long-term sustainability of our equipment.

~~Our~~We ~~total~~generated ~~consolidated~~free ~~assets~~cash ~~were~~flow ~~$6,335 million as at September 30, 2003, compared to $6,847 million as at December 31, 2002. Receivables amounted to $330 million as at September 30, 2003, an increase~~ of $26 million ~~when compared to $304 million as at December 31, 2002. This increase reflects seasonally higher receivables~~ in ~~September than December, partially offset by~~ the ~~effect of~~second aquarter stronger Canadian dollar on our U.S. dollar denominated retained interest in receivables sold through our securitization program and our U.S. dollar denominated receivables. Total inventories as at September 30, 2003, were $705 million, a decrease of ~~$31 million when~~ 2004 compared to $~~736~~102 million ~~as at December 31, 2002. This decrease reflects the cyclical nature of our forest operations, market-related downtime taken~~ in ~~our Papers business during~~ the ~~first~~second ~~nine months~~quarter of 2003. inFor ~~order~~the ~~to adjust our production to meet customers’ needs, and~~six-month ~~the~~period ~~impact~~ended ~~of a stronger Canadian dollar. Property, plant and equipment as at September~~June 30, ~~2003~~2004, ~~totaled~~free ~~$4,860 million~~cash ~~compared~~flow amounted to ~~$5,387 million~~negative ~~as at December 31, 2002. This~~ $~~527~~84 million ~~decrease was mainly due to the effect of~~ ~~a stronger Canadian dollar and a lower level of capital expenditures as~~ compared to ~~amortization~~positive ~~expense. Other assets stood at~~ $~~198~~37 million asin ~~at September 30,~~the ~~2003,~~same ~~compared~~period toof ~~$205 million~~last ~~as at December 31, 2002~~year. ~~This $7~~These ~~million~~decreases ~~decrease~~in ~~was~~free ~~mainly~~cash ~~due~~flow toare aattributable ~~$13 million reclassification of share purchase loans receivable~~ to ~~common~~reduced ~~shares,~~operating ~~partially~~cash ~~offset by an increase in the funding of our pension assets as compared to pension expense~~flow.

~~Trade~~Financing ~~and~~activities Cash ~~other~~flow ~~payables~~used ~~were~~for ~~$662 million~~financing asactivities atamounted ~~September 30, 2003, compared~~ to $~~749~~11 million asin atthe ~~December 31, 2002, reflecting a decrease of $87 million.~~second ~~This~~quarter ~~decrease was mainly due to lower employee profit-sharing accruals, the effect~~ of ~~the~~2004 timing of purchases and payments, and the effect of a stronger Canadian dollar on our U.S. dollar denominated trade and other payables. Long-term debt (including the portion due within one year) as at September 30, 2003, decreased to $2,201 million compared to $~~2,514~~106 million ~~as at December 31, 2002, mainly reflecting a decrease~~ in the ~~Canadian~~second ~~value~~quarter of ~~our U~~2003.S. ~~dollar~~The ~~denominated~~decrease ~~debt~~in ~~due~~cash toflows ~~the~~used ~~impact~~for offinancing aactivities ~~rising~~is ~~Canadian~~attributable ~~dollar.~~to ~~Accumulated~~lower ~~foreign~~repayments ~~currency~~made ~~translation~~on ~~adjustments~~our ~~were~~long-term ~~negative~~debt ~~$111 million~~and asrevolving ~~at September 30,~~credit ~~2003,~~facility aon ~~decrease of $113 million from the balance as at December 31, 2002. This decrease mainly reflected the net impact of~~ a ~~stronger Canadian~~ ~~dollar on the net assets of our self~~quarter-~~sustaining~~over-quarter ~~U.S. subsidiaries~~basis, ~~or $311 million,~~ net of ~~the~~Norampac’s ~~impact~~refinancing ofactivities ain ~~stronger Canadian dollar on~~ the ~~long-term debt~~ ~~designated~~second asquarter aof ~~hedge~~2003. ofFor the ~~above~~six-~~mentioned~~month ~~net~~period ~~assets,~~ended ~~or $224~~June ~~million~~30, ~~and~~2004, cash ~~its~~flows ~~corresponding~~provided ~~income~~from ~~tax~~financing ~~effect~~activities ofamounted to $26122 million. ~~Had~~compared ~~we not~~to ~~designated~~cash ~~certain~~flows ~~long~~used ~~term~~for ~~debts~~financing asactivities ~~a hedge~~ of ~~our net investments in self-sustaining foreign subsidiaries, the unrealized foreign exchange gain, net of income taxes, of~~ $~~198~~26 million, ~~currently recorded~~ in the ~~“Accumulated foreign currency~~corresponding ~~translation~~period ~~adjustments”~~of ~~account,~~2003 ~~would~~and ~~have~~is ~~increased~~attributable ~~our~~to ~~results of operations for~~ the ~~nine-month~~same ~~period~~factors ~~ended~~explained ~~September 30, 2003~~above.

20 Management’s Discussion and Analysis


	As at June 30,			As at Dec. 31,
Net debt-to-total capitalization ratio	2004			2003
(In millions of Canadian dollars, unless otherwise noted)
Bank indebtedness		26			19
Long-term debt (including portion due within one year)		2,262			2,059
Cash and cash equivalents		(77	)		(48	)

Net debt		2,211			2,030
Shareholders’ equity		2,139			2,167

Total capitalization		4,350			4,197
Net debt-to-total capitalization ratio (%)		51			48

As at June 30, 2004, our net debt-to-total capitalization ratio stood at 51% compared to 48% as at December 31, 2003. Net indebtedness, including $203 million representing our 50% share of the net indebtedness of Norampac, was $2,211 million as at June 30, 2004. This compares to $2,030 million as at December 31, 2003, including $180 million for our 50% share of the net indebtedness of Norampac. The $181 million increase in net indebtedness was largely due to increased borrowings under our revolving credit facilities and the negative impact of a stronger U.S. dollar, based on month-end exchange rates, on our U.S. dollar denominated debt.

As at June 30, 2004, the balance of the US$1 billion bank term loan initially entered into to finance our 2001 acquisition of four U.S. mills was US$74 million ($99 million) compared to US$76 million ($99 million) as at December 31, 2003. The term loan bears interest based on the U.S. dollar LIBOR rate or the U.S. prime rate, plus a margin that varies with Domtar’s credit rating.

As at June 30, 2004, of the US$500 million revolving credit facility, US$116 million ($155 million) was drawn, US$8 million ($11 million) of letters of credit were outstanding and US$17 million ($23 million) was drawn in the form of overdraft and included in “Bank indebtedness”, resulting in US$359 million ($481 million) of availability under this facility. No provision was recorded relating to outstanding letters of credit as we use these letters to guarantee our own obligations to third parties. As at December 31, 2003, US$23 million ($30 million) was drawn, US$8 million ($10 million) of letters of credit were outstanding and US$5 million ($7 million) was drawn in the form of overdraft and included in “Bank indebtedness”. Borrowings under this revolving credit facility bear interest at a rate based on the Canadian dollar bankers’ acceptance or the U.S. dollar LIBOR rate or the prime rate, plus a margin that varies with Domtar’s credit rating. This bank facility also requires commitment fees in accordance with standard banking practices.

Our borrowing agreements contain restrictive covenants. In particular, our unsecured bank credit facility contains covenants that require compliance with certain financial ratios on a quarterly basis. In addition, the indentures related to the 10% and 10.85% debentures limit the amount of dividends that we may pay, the amount of shares that we may repurchase for cancellation and the amount of new long-term debt we may incur.

In the second quarter of 2004, common shares amounting to $6 million ($13 million on a year-to-date basis) were issued pursuant to our stock option and share purchase plans versus $2 million for the second quarter of 2003 ($6 million on a year-to-date basis). We did not purchase for cancellation any of our common shares in either of the six-month periods ended June 30, 2004 or June 30, 2003.

As at July 30, 2004, we had 229,960,341 common shares, 69,576 Series A Preferred Shares and 1,530,000 Series B Preferred Shares, which were issued and outstanding.

As at July 30, 2004, we had 5,498,834 common shares purchase options issued and outstanding under the Executive stock option and Share purchase plan.

~~LIQUIDITY~~Domtar ~~AND~~Inc. ~~CAPITAL~~Second ~~RESOURCES~~Quarter 2004 21

~~Selected~~Off ~~Information (in~~Balance ~~millions~~Sheet ~~of Canadian dollars, unless otherwise noted)~~Arrangements

	Three months ended						Nine months ended
	September 30						September 30
	2003			2002			2003			2002
Cash flows provided from operating activities before changes in working capital and other items		80			180			325			470
Changes in working capital and other items		15			(11	)		(109	)		(43	)
Cash flows provided from operating activities		95			169			216			427
Net additions to property, plant and equipment		(61	)		(46	)		(145	)		(128	)
Free cash flow(1)		34			123			71			299

In the normal course of business, we finance certain of our activities off balance sheet through leases and securitizations. The description of these arrangements and their impact on our results of operations and financial position for the year ended December 31, 2003 can be found on page 56 of our 2003 Annual Report¹ and have not changed materially since December 31, 2003.

	Sept 30,		Dec 31,
	2003		2002
Net debt-to-total-capitalization ratio (in %)		47		49

Guarantees

~~(1)~~Domtar ~~Free~~has ~~cash~~provided ~~flow~~certain isguarantees awith ~~non-GAAP~~regards ~~measure~~to ~~that~~its wepension ~~define~~plans, asits E.B. ~~the~~Eddy ~~amount~~acquisition byin ~~which cash flows from operating activities~~1998, asthe ~~determined~~sales inof ~~accordance~~its ~~with~~businesses ~~GAAP,~~and ~~exceeds~~real ~~net additions to property~~estate, ~~plant~~its debt agreements and ~~equipment,~~its asleases. ~~determined~~The indescription ~~accordance~~of ~~with~~these ~~GAAP.~~guarantees ~~Our~~and ~~definition~~their impact ~~may~~on ~~not~~our beresults ~~comparable~~of tooperations ~~free~~and ~~cash~~financial ~~flow~~position ~~reported~~for bythe ~~other~~year ~~companies.~~ended December 31, We2003 ~~believe~~can ~~that~~be ~~free~~found ~~cash~~on ~~flow~~pages is56 ~~frequently~~and ~~used~~57 byof ~~investors~~our in2003 ~~evaluating~~Annual ~~the~~Report1 and ~~ability~~have ofnot achanged ~~company~~materially tosince ~~service~~December 31, ~~its debt~~2003.

~~Our~~Contractual ~~principal~~Obligations ~~liquidity requirements are for working capital, capital expenditures,~~ and ~~principal~~Commercial ~~and interest payments on our debt. We expect to~~Commitments ~~fund our liquidity needs primarily with internally generated funds from our~~ ~~operations and, to the extent necessary, through borrowings under our revolving credit facility. We also have the ability to fund liquidity requirements through the issuance of debt and/or equity.~~

~~Operating~~In ~~Activities~~the normal course of business, we enter into certain contractual obligations and commercial commitments, such as debentures and notes, operating leases, letters of credit and others. The summary of our obligations and commitments as at December 31, 2003 can be found on page 57 of our 2003 Annual Report1 and has not materially changed since December 31, 2003.

~~Cash~~ For ~~flows provided from operating activities in~~ the ~~third~~foreseeable ~~quarter~~future, ofwe ~~2003 amounted~~expect ~~to $95 million compared to $169 million in the corresponding quarter of 2002. This decrease in~~ cash flows from operations isand ~~mainly attributable to a decrease in net earnings compared to the third quarter of 2002. Cash flows provided~~ from ~~operating activities in the first nine months of 2003 amounted to~~ ~~$216 million~~our ~~compared~~various tosources ~~$427 million in the same period~~ of ~~2002.~~financing ~~This decrease on a year-~~to~~-date~~ ~~comparative~~be ~~basis~~sufficient ~~is due~~ to ameet ~~decrease~~our ~~in net~~contractual ~~earnings~~obligations and, tocommercial ~~a lesser degree, to increased requirements for working capital~~commitments. ~~As at September 30, 2003, the off balance sheet impact of the~~ ~~accounts receivable securitization program represented $234 million compared to~~ ~~$263 million as at December 31, 2002. We expect to continue to sell~~ ~~receivables in the future on an ongoing basis, given the attractive discount~~ rates. Should we decide to discontinue these programs, our working capital and bank debt requirements would increase. Such sales of receivables are contingent upon Domtar retaining specified credit ratings.

~~Investing~~1 ~~Activities~~ Our 2003 Annual Report can be found on our website at www.domtar.com.

Cash flows used for investing activities in the third quarter of 2003 totaled $62 million compared to $43 million in the corresponding quarter of 2002. On a year-to-date basis, cash flows used for investing activities amounted to $156 million in 2003 compared to $149 million in the corresponding period of 2002. Investing activities in the first nine months of 2003 included $11 million related to our portion of Norampac’s business acquisitions, while this amount represented $27 million in the corresponding period of 2002.

Net additions to property, plant and equipment amounted to $61 million in the third quarter of 2003 and $145 million for the first nine months of 2003, and $46 million and $128 million, respectively, in the corresponding periods of 2002. The overall increases in net additions to property, plant and equipment in comparison to the previous year, both on a quarterly and year-to-date basis, relate primarily to the deployment of an Enterprise Resource Planning (ERP) system within our Papers business. We intend to limit our annual capital expenditures to well below 75% of amortization in 2003.

~~Free~~22 Management’s ~~cash~~Discussion ~~flow (cash flows from operating activities less net additions to property, plant~~ and ~~equipment) for the third quarter of 2003 amounted to $34~~Analysis ~~million compared to $123 million in the corresponding period of 2002. This~~ ~~decrease in free cash flow on a quarter-over-quarter basis is attributable to~~ reduced operating cash flow as well as increased capital spending. On a year-to-date basis, free cash flow for 2003 totaled $71 million compared to $299 million in 2002 due to the same factors as explained above.

~~Financing~~Selected ~~Activities~~Quarterly Financial Information

~~Cash~~Selected ~~flows~~quarterly ~~provided~~financial ~~from~~information ~~financing activities totaled $1 million in the third quarter of 2003 compared to $117 million used~~ for ~~financing activities in~~ the ~~third~~ ~~quarter~~ten ofmost ~~2002.~~recently ~~Cash flows used for financing activities in the first~~completed ~~nine~~quarters ~~months~~ending ~~of 2003 amounted to $25~~June ~~million compared to $241 million in the corresponding period of 2002. For both the above comparative periods~~30, ~~the decreases~~2004 inis ~~cash~~disclosed ~~flows used for financing activities were due to fewer net~~below: ~~repayments of long-term debt in 2003 compared to 2002.~~

As at September 30, 2003, our net debt-to-total-capitalization ratio was 47%, down from 49% as at December 31, 2002. Net indebtedness, including $203 million representing our 50% share of the net indebtedness of Norampac, was $2,140 million as at September 30, 2003. This compares to $2,496 million as at December 31, 2002, including $191 million for our 50% share of the net indebtedness of Norampac. The $356 million decrease in net indebtedness was largely due to the positive impact of a stronger Canadian dollar on our U.S. dollar denominated debt. In addition, the Corporation’s debt repayments for the nine-month period ended September 30, 2003, were more than offset by Norampac’s refinancing of its long-term debt. We had a stated objective of a net debt-to-total-capitalization ratio of 45% by December 31, 2003, absent the impact of any growth-related initiatives. In the current economic environment (impacting pricing and volumes), no further improvements are expected by year-end.


	2002											2003												2004
Selected quarterly
financial information	1st			2nd		3rd		4th		Year		1st		2nd		3rd		4th			Year			1st			2nd
(In millions of Canadian dollars, unless otherwise noted)
Sales		1,421			1,485		1,499		1,454		5,859		1,388		1,336		1,266		1,177			5,167			1,225			1,346
EBITDA		142			217		233		217		809		176		152		131		57			516			58			122
Operating profit (loss)		32			118		136		98		384		78		56		36		(262	)		(92	)		(33	)		28
Excluding specified items		77			118		136		116		447		73		55		31		(30	)		129			(31	)		33
Net earnings (loss)		(11	)		55		59		38		141		27		8		3		(228	)		(190	)		(44	)		(1	)
Excluding specified items		19			54		60		50		183		22		12		–		(40	)		(6	)		(41	)		3
Net earnings (loss) per share (in dollars):
Basic		(0.05	)		0.24		0.26		0.17		0.62		0.12		0.03		0.01		(1.00	)		(0.84	)		(0.19	)		(0.01	)
Basic, excluding specified items		0.08			0.24		0.26		0.22		0.80		0.09		0.05		–		(0.18	)		(0.04	)		(0.18	)		0.01
Diluted		(0.05	)		0.24		0.26		0.17		0.61		0.12		0.03		0.01		(1.00	)		(0.84	)		(0.19	)		(0.01	)
Selling price index (%)		90			92		93		92		92		93		95		91		90			92			89			96
Shipments to capacity ratio for papers (%)		94			93		98		94		95		91		92		92		88			91			98			97
Average exchange rates
CAN$		1.594			1.554		1.563		1.569		1.570		1.510		1.398		1.380		1.316			1.401			1.318			1.359
US$		0.627			0.644		0.640		0.637		0.637		0.662		0.715		0.725		0.760			0.714			0.759			0.736

AsSales atand ~~September 30,~~operating profit have experienced a steady decline since the beginning of 2003, through the ~~balance~~first quarter of 2004. This is mainly in line with the ~~US$1 billion~~steady ~~bank~~weakening ~~term~~of ~~loan~~the U.S. dollar and continued low selling prices, ~~initially~~as ~~entered~~evidenced ~~into~~by toour ~~finance~~selling ~~our~~price ~~2001~~index. ~~acquisition~~In addition, ~~was~~low ~~US$434 million~~shipments further ~~($586 million),~~impacted ~~compared~~our results. Our quality and profitability improvement programs initiated in 2002 contributed to ~~US$480 million~~the ~~($758 million)~~positive asresults atin ~~December 31~~that year, but were ~~2002.~~hampered ~~The~~by ~~term~~difficult ~~loan~~market ~~bears~~conditions ~~interest~~in ~~based~~2003. onThese programs, when excluding the ~~U.S.~~impact ~~dollar~~of ~~LIBOR~~lower ~~rate~~volumes, ordid enable us to more than offset the impact of Uinflation on salaries and benefits.S. ~~prime~~We ~~rate,~~plan ~~plus~~to astrengthen ~~margin~~these ~~that~~programs ~~varies~~so ~~with~~as to ~~Domtar’s~~reduce ~~credit~~our ~~rating~~costs further.

As The atfirst ~~September 30,~~half ~~2003,~~ of 2004 is showing the ~~US$500 million~~first ~~revolving~~signs ~~credit~~of ~~facility,~~recovery in terms of ~~US$41 million~~demand ~~($55 million)~~as ~~was~~our ~~drawn~~shipments ~~and~~to ~~US$7 million~~capacity ~~($10 million)~~ratio offor ~~letters of~~papers ~~credit~~climbed ~~were~~to ~~outstanding,~~97% ~~resulting~~from an 88% low in ~~US$452 million~~the ~~($611 million)~~fourth quarter of ~~availability~~ ~~under~~2003. ~~this~~Our ~~facility.~~results Asin atthe ~~December 31,~~first ~~2002,~~quarter ~~US$5 million~~of ~~($8~~2004 ~~million)~~remained ~~was~~in-line ~~drawn~~with our performance in the ~~form~~fourth quarter of ~~overdraft~~2003. This was mainly attributable to higher shipments and ~~US$6 million~~sustained ~~($9 million)~~efforts ofto reduce costs ~~letters~~being ofoffset ~~credit~~by ~~were~~lower ~~outstanding~~selling prices. ~~Borrowings~~However, ~~under~~the ~~this~~second ~~revolving~~quarter ~~credit~~of 2004 is ~~facility~~showing ~~bear~~a ~~interest~~marked atimprovement aover ~~rate~~our ~~based~~first onquarter ~~the~~of ~~Canadian~~2004. ~~dollar~~This ~~bankers’ acceptance~~is ordue ~~the~~to higher ~~U.S.~~selling ~~dollar~~prices ~~LIBOR~~for ~~rate~~all orof ~~the~~our ~~prime~~products ~~rate,~~as ~~plus~~price aincreases ~~margin~~announced ~~that~~are ~~varies~~being ~~with~~implemented ~~Domtar’s~~in ~~credit~~the ~~rating~~market. This ~~bank~~is ~~facility~~evidenced ~~also~~by ~~requires~~our selling price index, ~~commitment~~which ~~fees~~reached 96% in ~~accordance~~the ~~with~~second ~~standard~~quarter ~~banking~~of ~~practices~~2004 compared to 89% in the first quarter of 2004.

~~Our~~ In ~~borrowing~~addition, ~~agreements~~in ~~contain~~light ~~restrictive~~of ~~covenants.~~the Incontinued ~~particular,~~weakness ~~our unsecured~~in ~~bank~~the ~~credit~~U.S. ~~facility~~dollar ~~contains~~and ~~covenants~~the low ~~that~~pricing ~~require~~environment, ~~compliance~~we ~~with certain~~continued ~~financial~~the ~~ratios~~restructuring onof aour ~~quarterly~~Canadian ~~basis.~~Pulp and ~~Moreover,~~Paper ~~the~~Manufacturing ~~indentures related~~Group’s operations to ~~the~~ensure ~~10%~~that ~~and~~they ~~10.85%~~are ~~debentures~~profitable when ~~limit~~ the ~~amount~~Canadian ofdollar ~~dividends~~is ~~that~~valued ~~we may~~at ~~pay,~~75 cents to the ~~amount~~U.S. ofdollar ~~shares~~and ~~that~~paper prices weare ~~may~~at ~~repurchase~~cycle-low ~~for~~levels. ~~cancellation~~We ~~and~~anticipate ~~the amount~~that ofthis ~~new~~initiative, ~~debt~~in conjunction wewith ~~may~~the ~~incur.~~Vancouver

In the third quarter of 2003, common shares amounting to $6 million ($12 million on a year-to-date basis), versus $3 million for the corresponding period of 2002 ($13 million on a year-to-date basis), were issued pursuant to our stock option and share purchase plans. We did not purchase for cancellation any of our common shares in either of the nine-month periods ended September 30, 2003, and September 30, 2002.

On May 1, 2003, we announced an increase of our annual common share dividend to 24 cents per share (or 6 cents per quarter) from 14 cents per share (or 3.5 cents per quarter). Without compromising our firm desire to continue our profitable growth and maintain a strong balance sheet, this increase is the first step towards achieving our goal of paying a dividend of approximately 20% of normalized net earnings over a business cycle. The first payment of our new 6 cents quarterly dividend for the quarter ended June 30, 2003 was paid on July 2, 2003 to shareholders of record as of June 2, 2003.

~~ACCOUNTING~~Domtar ~~CHANGE~~Inc. Second Quarter 2004 23

~~Share~~reorganization, ~~Purchase~~will ~~Financing~~generate approximately $50 million once fully implemented. This initiative is an important contribution to our efforts to improve our profitability by $200 million in order to reach our goal of providing shareholders with a 15% return on equity over a business cycle. The remaining $150 million is expected to be achieved in 2004 and 2005, arising from our quality and profitability improvement programs, including the benefits resulting from the roll out of an ERP system, the implementation of a new paper shipment logistics and transportation management system and Kaïzen continuous improvement workshops.

~~On January 1~~ Typically, ~~2003,~~second we adopted prospectively the new Canadian Institute of Chartered Accountants (CICA) recommendations relating to share purchase loans receivable. Accordingly, share purchase loans as at January 1, 2003, amounting to $11 million, were reclassified from “Other assets” to “Common shares” and ~~interest~~ ~~revenue~~third ~~was~~quarters ~~treated as a reduction of dividends. The common shares purchased with these loans~~ are ~~held~~seasonally stronger in ~~trust as security for the share purchase loans (the loans). The loans are interest bearing at the dividend rate and have defined repayment~~ terms ~~not exceeding 10 years. As at September 30, 2003, there were 945,640 common shares (December 31, 2002 — 1,000,333 common shares) held in trust with respect to employee loans~~ of ~~$13 million (December 31, 2002 — $11~~ ~~million). The market value~~results, as atdemand ~~September 30,~~normally ~~2003,~~picks ofup ~~the~~during ~~shares held in trust was $14 million or $15.22 per share (December 31, 2002 — $16 million or $15.70 per share). These common shares were not considered as being outstanding for~~ the ~~calculation~~spring ~~of the basic earnings per share. The adoption of these recommendations has no significant impact on the basic earnings per share for the three months~~ and ~~nine~~summer months ~~ended September 30, 2003~~.

Accounting Changes

Generally Accepted Accounting Principles and financial statement presentation
On January 1, 2004, we adopted the new Canadian Institute of Chartered Accountants’ (CICA) Handbook Section 1100 “Generally Accepted Accounting Principles” recommendations and 1400 “General Standards of Financial Statement Presentation” recommendations. Section 1100 describes what constitutes Canadian Generally Accepted Accounting Principles (GAAP) and its sources and provides guidance on sources to consult when selecting accounting policies and determining appropriate disclosures when a matter is not dealt with explicitly in the primary sources of GAAP, thereby recodifying the Canadian GAAP hierarchy. Section 1400 provides general guidance on financial statement presentation and further clarifies what constitutes fair presentation in accordance with GAAP.

In accordance with the transitional provisions of the new accounting recommendations, we reclassified delivery costs as well as countervailing and antidumping duties on exports of softwood lumber to the United States from “Sales” to “Cost of sales”. For the three months and six months ended June 30, 2004, delivery costs amounted to $99 million and $184 million, respectively (2003 – $85 million and $169 million, respectively) and countervailing and antidumping duties amounted to $21 million and $33 million, respectively (2003 –$11 million and $19 million, respectively).

The adoption of these recommendations has no other significant impact on the unaudited interim consolidated financial statements.

Hedging relationships
On January 1, 2004, we adopted the new CICA Accounting Guideline 13 (AcG-13) “Hedging Relationships”. This accounting guideline addresses the identification, designation, documentation and effectiveness of the hedging relationships for the purpose of applying hedge accounting. In addition, it deals with the discontinuance of hedge accounting and establishes conditions for applying hedge accounting. Under this guideline, documentation of the information related to hedging relationships is required and the effectiveness of the hedges must be demonstrated and documented. As of January 1, 2004, we have in place all necessary hedge documentation to apply hedge accounting for interest rate swaps, forward foreign exchange contracts, foreign currency options and bunker oil swaps.

For the pulp swaps, as well as the old corrugated containers, the unbleached kraft linerboard and the semi-chemical medium paper swaps, we do not meet the criteria for hedge effectiveness. As a result, we have to account for these contracts at their fair value. The fair value of these contracts is re-evaluated each quarter and a gain or loss is recorded in the Consolidated earnings. Notwithstanding the fact that these commodity swap contracts do not meet the criteria of AcG-13, we believe, from an operational and cash flow point of view, that these contracts are effective in managing our risk. For the three months and six months ended June 30, 2004, a loss of $5 million and a gain of $1 million, respectively, were included in “Selling, general and administrative” expenses, representing the loss or gain on the mark-to-market of the commodity swaps.

Asset retirement obligations
On January 1, 2004, we adopted retroactively with restatement of prior periods the new CICA Handbook Section 3110 “Asset Retirement Obligations”, which requires entities to record a liability at fair value when there is a legal obligation associated to the retirement of an asset in the period

~~RISKS~~24 Management’s ~~AND~~Discussion ~~UNCERTAINTIES~~and Analysis

~~Product~~in ~~Prices~~which is incurred a legal obligation associated to the retirement of an asset. The associated costs are capitalized as part of the carrying value of the related asset and depreciated over its remaining useful life. The liability is accreted using a credit adjusted risk free interest rate. Section 3110 is analogous to U.S. GAAP SFAS 143 “Accounting for Asset Retirement Obligations”, which was adopted for U.S. GAAP purposes on January 1, 2003. Asset retirement obligations in connection with the adoption of Section 3110 were primarily linked to landfill capping obligations, asbestos removal obligations on equipment and demolition of certain abandoned buildings. For such assets, a liability will be initially recognized in the period in which sufficient information exists to estimate a range of possible settlement dates. For the three months and six months ended June 30, 2004, the adoption of Section 3110 has increased our net loss by $0.6 million and $1.2 million, respectively (2003 – nil and nil, respectively). As at June 30, 2004, the adoption of Section 3110 has also decreased the opening retained earnings by $4 million (2003 – nil), decreased assets by $0.8 million (December 31, 2003 – $8.4 million) and increased liabilities by $0.4 million (December 31, 2003 – decreased liabilities by $4.4 million).

~~Our~~Employee ~~financial~~future ~~performance~~benefits On isJanuary 1, ~~sensitive~~2004, to the ~~selling~~CICA ~~prices~~amended ofCICA ~~our~~Handbook ~~products.~~Section 3461 “Employee ~~The~~Future ~~markets~~Benefits”. ~~for~~Section 3461 ~~most~~required ~~paper,~~additional ~~pulp~~disclosures about the assets, ~~lumber~~cash flows and ~~packaging~~net ~~products~~periodic ~~are~~benefit ~~cyclical and~~cost ~~are~~of ~~influenced~~defined bybenefit apension plans ~~variety~~and ofother ~~factors~~employee ~~beyond~~future ~~our~~benefit ~~control~~plans. ~~These~~The ~~factors include~~new ~~periods~~annual ofdisclosures ~~excess~~are effective ~~product~~for ~~supply~~years ~~due~~ending toon ~~industry~~or ~~capacity~~after ~~additions~~June 30, ~~periods~~ of2004, ~~decreased~~and ~~demand~~new ~~due~~interim disclosures toare ~~weak~~effective ~~general~~for ~~economic~~periods ~~activity~~ending inon ~~North America~~ or ~~international~~after ~~markets,~~that ~~inventory~~date. ~~de-stocking~~As byat ~~customers and~~June ~~fluctuations~~30, in2004, ~~currency~~we ~~exchange~~adopted ~~rates.~~the ~~During~~amendments ~~periods~~ of ~~low~~Section 3461 ~~prices,~~and weprovided ~~have~~additional ~~experienced~~interim inperiod ~~the~~disclosures ~~past,~~of ~~and~~the ~~could~~defined ~~experience~~benefit inpension ~~the~~plans ~~future,~~and ~~reduced revenues~~other ~~and~~employee ~~margins,~~future ~~resulting~~benefit plans in ~~substantial~~Note ~~declines~~10 into ~~profitability~~the ~~and~~unaudited ~~sometimes,~~interim consolidated ~~net~~financial ~~losses~~statements. ~~(See “Sensitivity Analysis”.)~~

~~Operational~~Critical ~~Risks~~Accounting Policies

The ~~activities~~preparation ~~conducted~~of byfinancial ~~our~~statements ~~businesses~~in ~~are~~conformity ~~subject~~with toCanadian ~~a number of~~GAAP ~~operational~~requires ~~risks~~management ~~including~~to ~~competition,~~make ~~performance~~estimates ofand ~~key~~assumptions ~~suppliers~~that ~~and distributors,~~affect ~~renewal~~our results of ~~collective~~operations ~~agreements,~~and ~~regulatory~~financial ~~risks,~~position. ~~successful integration~~On ofan ~~new~~ongoing ~~acquisitions~~basis, ~~retention~~management ofreviews its ~~key~~estimates, ~~personnel~~including ~~and~~those ~~reliability~~related ~~of information~~to ~~systems.~~environmental ~~In addition~~matters, ~~operating~~useful ~~costs~~lives, impairment ~~for~~of ~~our~~long-lived ~~businesses~~assets ~~can~~and ~~be affected~~goodwill, bypension ~~changes in energy~~ and other ~~raw~~employee ~~material~~future benefit ~~prices~~plans, asand aincome ~~result~~taxes ~~of changing~~based ~~economic~~upon orcurrently ~~political~~available ~~conditions~~information. Actual orresults ~~due~~could todiffer ~~particular~~from ~~supply~~those ~~and demand considerations~~estimates.

~~The~~ These ~~Corporation~~critical ~~has~~accounting ~~commodity~~policies ~~swap~~reflect ~~agreements~~matters tothat ~~manage~~contain a ~~portion of our price~~ ~~risk~~significant ~~associated~~level ~~with sales~~ of ~~NBSK~~management ~~pulp.~~estimates ~~These~~about ~~agreements~~future ~~fix~~events, reflect the ~~sales price~~most ofcomplex ~~NBSK~~and ~~pulp~~subjective ~~for 9~~judgments,~~000~~ ~~tonnes in 2003, 36,000 tonnes in 2004, 33,000 tonnes in 2005~~ and ~~6,000~~are ~~tonnes~~subject into ~~2006.~~a ~~The~~ fair ~~value~~degree of ~~these instruments, as at~~ ~~September 30,~~measurement ~~2003, represented a net unrealized loss of $1~~uncertainty.~~1 million (US$0.8~~ ~~million).~~

The ~~Corporation~~discussion ~~also~~on ~~has~~the ~~energy~~methodology ~~commodity~~and ~~swap~~assumptions ~~agreements~~underlying ~~to manage a portion~~these ofcritical ~~our~~accounting ~~price~~estimates, ~~risk~~their ~~associated~~effect ~~with~~on ~~purchases~~our results of ~~bunker~~operations ~~oil.~~and financial ~~These~~position ~~agreements fix~~for the ~~purchase~~year ~~price~~ended ofDecember 31, ~~bunker~~2003 ~~oil~~as ~~for~~well aas ~~commitment~~the effect of ~~360,000~~changes ~~barrels~~to ~~in 2004~~these ~~and~~estimates ~~180,000~~can ~~barrels~~be infound ~~2005.~~on ~~The~~pages ~~fair~~63 ~~value~~to 68 of ~~these~~our ~~instruments,~~2003 ~~as at~~Annual ~~September 30,~~Report1 ~~2003,~~and ~~represented~~have anot ~~net~~materially ~~unrealized~~changed ~~gain~~since ~~of $0.4~~December ~~million~~31, ~~(US$0~~2003.3 ~~million).~~

~~Foreign~~1 ~~Exchange~~ Our 2003 Annual Report can be found on our website at www.domtar.com.

Our revenues for many of our products are affected by fluctuations in the exchange rate between the Canadian dollar and the U.S. dollar. Any decrease in the value of the U.S. dollar relative to the Canadian dollar reduces our profitability. The prices for many of our products, including those we sell in Canada, are generally driven by U.S. prices of similar products. Our U.S. dollar export sales, net of U.S. dollar purchases, represent approximately US$1 billion annually. Exchange rate fluctuations are beyond our control and the U.S. dollar may depreciate against the Canadian dollar in the future, which would result in lower revenues and margins. The Corporation has currency options sold totaling US$53 million maturing in 2003 and 2004, which limit it from benefiting from a U.S. dollar trading above an average exchange rate of 1.6. In order to reduce the potential negative effect of a weakening U.S. dollar, we may hedge the value of a portion of our future U.S. dollar net cash inflows for periods of up to three years. The Corporation’s hedging arrangements as at September 30, 2003, included forward contracts totaling US$20 million that commit it to selling U.S. dollars at an average exchange rate of 1.5 in 2003, as well as currency options purchased totaling US$50 million that give the Corporation the option to sell U.S. dollars at 1.35 in 2004.

Environment

We are subject to United States and Canadian environmental regulations relating to, among other matters, effluent and air emissions, harvesting, sylviculture activities, waste management and groundwater quality. These regulations require us to obtain and comply with the conditions of permits and authorizations from the appropriate governmental authorities. Regulatory authorities exercise considerable discretion in whether or not to issue permits and the timing of permit issuances. In addition, changes in environmental laws and regulations or their application could require us to make significant expenditures that could negatively impact our financial results and financial condition.

~~Failure~~Domtar toInc. ~~comply~~Second ~~with~~Quarter ~~applicable environmental laws, regulations or permit~~2004 25 ~~requirements may result in fines or penalties or enforcement actions by the~~ ~~regulators, including regulatory or judicial orders enjoining or curtailing~~ operations or requiring corrective measures, installation of environmental control equipment or remedial actions, any of which could entail significant expenditures and could negatively impact our financial results and financial condition.

WeRisks ~~continue to take remedial action under our Care~~ and ~~Control program at a~~Uncertainties ~~number of former operating sites, especially in the wood preserving sector, due~~ ~~to possible soil, sediment or groundwater contamination. The investigation and~~ remediation process is lengthy and subject to the uncertainties of changes in legal requirements, the development of technological application and the allocation of liability among potentially responsible parties.

AsProduct atprices Our ~~September 30,~~financial ~~2003,~~performance weis ~~had~~sensitive ato ~~provision~~the ofselling ~~$68 million~~prices ~~for~~of ~~environmental matters~~our products. The ~~While~~markets wefor ~~believe~~most ~~that~~paper, wepulp, ~~have~~lumber ~~determined~~and ~~the~~packaging ~~costs~~products ~~for~~are ~~environmental~~cyclical ~~matters~~and ~~likely~~are toinfluenced beby ~~incurred,~~a ~~based~~variety onof ~~known~~factors ~~information,~~beyond our ~~ongoing~~control. ~~efforts~~These factors toinclude ~~identify~~periods ~~potential~~of ~~environmental~~excess ~~concerns~~product ~~that~~supply ~~may~~due beto ~~associated~~industry ~~with~~capacity ~~our~~additions, ~~former~~periods ~~and~~of ~~present~~decreased ~~operations~~demand ~~may~~due ~~lead~~ to ~~future~~weak ~~environmental~~general ~~investigations.~~economic activity in North ~~These~~America ~~efforts~~or ~~may~~international ~~result~~markets, inventory de-stocking by customers and fluctuations in ~~the~~currency ~~determination~~exchange rates. During periods of ~~additional~~low ~~environmental~~prices, ~~costs~~we have experienced in the past, and ~~liabilities~~could experience in the future, ~~which~~reduced ~~cannot~~revenues and ~~reasonably~~margins beresulting ~~estimated~~in atsubstantial ~~this~~declines ~~time~~in profitability and sometimes, net losses. See “Sensitivity Analysis”.

~~Lumber~~Operational ~~Export~~risks The ~~Duties~~activities conducted by our businesses are subject to a number of operational risks including competition, performance of key suppliers and distributors, renewal of collective agreements, regulatory risks, successful integration of new acquisitions, retention of key personnel and reliability of information systems. In addition, operating costs for our businesses can be affected by changes in energy and other raw material prices as a result of changing economic or political conditions or due to particular supply and demand considerations.

Foreign exchange Our ~~sales~~revenues for many of ~~Wood~~our ~~represented~~products ~~approximately~~are 7%affected by fluctuations in the exchange rate between the Canadian dollar and the U.S. dollar. The prices for many of our ~~consolidated~~products, ~~net~~including ~~sales~~those we sell in Canada, are generally driven ~~for~~by ~~the~~U.S. ~~first~~prices ~~nine~~of ~~months~~similar products. As a result, any decrease in the value of the U.S. dollar relative to the Canadian dollar reduces our profitability as was the case in 2003 and wein ~~exported~~the ~~approximately~~first ~~53%~~half of 2004. Our U.S. dollar sales, net of U.S. dollar purchases for our operating activities, represent approximately ~~softwood~~US$1 billion ~~lumber~~annually. ~~products~~This amount is reduced by interest on our U.S. dollar denominated debt (approximately $0.1 billion annually). Exchange rate fluctuations are beyond our control and the U.S. dollar may continue to depreciate against the ~~United~~Canadian ~~States~~dollar in the future, which would result in lower revenues and margins.

~~The~~Environment We ~~United~~are ~~States~~subject ~~Department~~to ofAmerican ~~Commerce~~and ~~announced~~Canadian ~~that~~environmental itlaws ~~had~~and ~~imposed~~regulations ~~cash~~for ~~deposit~~effluent ~~requirements~~and onair ~~the~~emissions, ~~Canadian~~harvesting, ~~softwood~~sylviculture ~~lumber~~activities, ~~industry~~waste management ~~with~~and agroundwater ~~final~~quality, among others. These laws and regulations ~~aggregate~~require ~~countervailing~~us to obtain and ~~antidumping~~comply ~~rate~~with authorization requirements of ~~27.22%,~~the appropriate ~~that~~governmental ~~is,~~authorities ~~18.79%~~who exercise considerable discretion for ~~countervailing~~authorization issuances and 8their timing.~~43%~~ ~~for~~Failure ~~antidumping.~~to ~~Since~~comply ~~May 22,~~with ~~2002~~applicable environmental laws, ~~based~~regulations onand apermit ~~final decision~~requirements ofmay ~~the~~result ~~United~~in ~~States~~fines, penalties ~~International~~or ~~Trade~~enforcement ~~Commission~~actions ~~(ITC)~~by the authorities, weincluding ~~have~~regulatory or ~~made~~judicial ~~the~~orders ~~required~~enjoining ~~cash~~or ~~deposits~~curtailing onoperations ~~our~~or ~~exports~~requiring corrective measures, installation of ~~softwood~~environmental ~~lumber~~control toequipment ~~the~~or ~~United~~remedial actions, ~~States.~~any ~~The~~of ~~Canadian~~which ~~government~~could ~~has~~entail ~~challenged~~significant ~~both~~expenditures ~~the~~and ~~countervailing~~negatively ~~and~~impact our ~~antidumping~~financial ~~rates~~results ~~with~~and ~~the~~financial ~~World~~condition. ~~Trade~~Changes ~~Organization~~to ~~(WTO)~~ environmental laws and regulations ~~under~~and/or ~~the~~their ~~North~~application may require us to make significant ~~American~~expenditures ~~Free~~that ~~Trade~~could ~~Agreement~~negatively ~~(NAFTA)~~impact our financial results and financial condition.

We ~~are~~continue ~~currently~~to ~~experiencing,~~take ~~and~~remedial ~~may~~action ~~continue~~under toour ~~experience,~~Care ~~reduced~~and ~~revenues~~Control program at ~~and~~a ~~margins~~number of former operating sites, especially in ~~our~~the ~~Wood~~wood ~~business~~preserving assector, due ato ~~result~~possible ofsoil, ~~countervailing~~sediment ~~and~~or ~~antidumping~~groundwater contamination. The investigation ~~duty~~and ~~applications~~remediation orprocess asis alengthy ~~result~~and subject to the uncertainties of ~~any~~changes in ~~new~~legal ~~arrangement~~requirements, ~~between~~technological developments and the ~~United~~allocation of ~~States~~liability ~~and~~among ~~Canada~~potentially responsible parties.

~~Legal~~ We ~~Proceedings~~had a provision of $62 million for environmental matters as at June 30, 2004. While we believe that we have determined the costs for environmental matters likely to be incurred, based on known information, our ongoing efforts to identify potential environmental concerns that may be associated with our former and present operations may lead to future environmental investigations. These efforts may result in the determination of additional environmental costs and liabilities, which cannot be reasonably estimated at this time.

In the normal course of our operations, we become involved in various legal actions. While the final outcome with respect to actions outstanding or pending as at September 30, 2003, cannot be predicted with certainty, it is our opinion that their resolution will not have a material adverse effect on our financial position, earnings or cash flows.

In April 2003, the Canadian Competition Bureau began an investigation of Canada’s major distributors of carbonless paper and other fine paper products, including Domtar. Since the investigation is still at an early stage, we have no information that would allow us to predict the outcome of this investigation or the impact, if any, it may have on us.

~~SENSITIVITY~~26 Management’s ~~ANALYSIS~~Discussion and Analysis

In addition, the pulp and paper industry in the United States is subject to Cluster Rules that further regulate effluent and air emissions. We comply with all present regulations.

Lumber export duties
The United States Department of Commerce announced that it had imposed cash deposit requirements on the Canadian softwood lumber industry with a final aggregate countervailing and antidumping rate of 27.22%, that is, 18.79% for countervailing and 8.43% for antidumping. Since May 22, 2002, based on a final decision by the United States International Trade Commission, we have made the required cash deposits on our exports of softwood lumber to the United States. The Canadian government has challenged both the countervailing and antidumping rates with the World Trade Organization and the North American Free Trade Agreement.

We are currently experiencing, and may continue to experience, reduced revenues and margins in our Wood business as a result of countervailing and antidumping duty applications or any new arrangements between the United States and Canada.

Legal proceedings
In the normal course of our operations, we become involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending as at June 30, 2004 cannot be predicted with certainty, it is our belief that their resolution will not have a material adverse effect on our financial position, earnings or cash flows.

In April 2003, the Canadian Competition Bureau (the “Bureau”) began an investigation of Canada’s major distributors of carbonless paper and other fine paper products, including our Paper Merchants in Canada. In March 2004, the Bureau expanded its investigation to include dealings between the Corporation and Xerox Canada Limited. Although the investigation is continuing, we are not able to predict the outcome of this investigation or the impact, if any, it may have on us.

Domtar Inc. Second Quarter 2004 27

Sensitivity Analysis

Our operating profit, net earnings and earnings per share can be impacted by the following sensitivities:

			Annual impact on(1)&(2)
		Approximate annual impact on1, 2
		Operating	~~Operating~~		Net	~~Net~~		Earnings	~~Earnings~~
(in millions of Canadian dollars, except per share amounts)			profit			earnings			per share
		profit			earnings			per share
Each US$10/unit change in price of: (3)
(In millions of Canadian dollars, except per share amounts)
Papers
Each US$10/unit change in the selling price of the following products3:
	Copy and offset grades			21			14			0.06
Papers
	Uncoated commercial printing & publication and premium imaging grades			9			6			0.03
Copy and offset grades			19			13			0.05
	Coated commercial printing & publication grades			5			3			0.01
Uncoated commercial printing & publication and premium imaging grades			8			5			0.02
	Technical & specialty grades			6			4			0.02
Coated commercial printing & publication grades			5			3			0.01
	Pulp — net position			8			5			0.02
Technical & specialty grades			5			3			0.02
Wood
Pulp – net position			9			6			0.03
	Lumber			14			9			0.04
Wood
Packaging
Lumber			13			8			0.04
	Containerboard			5			3			0.01
Packaging
Foreign exchange (CAN$0.01 change in relative value to the U.S. dollar before hedging)
Containerboard			4			3			0.01
Impact of US$ pricing on export sales, net of US$ purchases, excluding Norampac				10*			7			0.03
Foreign exchange (CAN$0.01 change in relative value to the U.S. dollar before hedging)
Interest rate
Impact of US$ pricing on export sales, net of US$ purchases, excluding Norampac			105			6			0.03
1% change in interest rates on our floating rate debt (excluding Norampac)				N/A			5			0.02
Interest rate
Energy(4)
1% change in interest rates on our floating rate debt (excluding Norampac)			N/A			5			0.02
Natural gas
Energy4
	US$0.25/MMBtu change in price before hedging			6			4			0.02
Natural gas: US $0.25/MMBtu change in price before hedging			6			4			0.02
Crude oil
Crude oil: US$1/barrel change in price before hedging			3			2			0.01
	US$1/barrel change in price before hedging			2			1			0.01

(1)		Based on a budgeted 2003 exchange rate of 1.515.
1		Based on budgeted exchange rate of 1.333.
(2)		Based on a marginal tax rate of 35%.
2		Based on a marginal tax rate of 35%.
(3)		Based on budgeted 2003 capacity (in tons, tonnes or MFBM).
3		Based on budgeted 2004 capacity (in tons, tonnes or MFBM).
(4)		Based on budgeted 2003 consumption levels. The allocation between energy sources may vary during the year in order to take advantage of market conditions.
4		Based on budgeted 2004 consumption levels. The allocation between energy sources may vary during the year in order to take advantage of market conditions.
*		In addition, significant fluctuations in the value of the U.S. currency will also have an impact on our product pricing in Canada over time given that Canadian pricing is derived from U.S. dollar denominated prices.
5		In addition, significant fluctuations in the value of the U.S. currency will also have an impact on our product pricing in Canada over time given that Canadian pricing is derived from U.S. dollar denominated prices.
		Note that Domtar may, from time to time, hedge part of its foreign exchange, net pulp, containerboard, interest rate and energy positions.

																										Q3			Q3
Benchmark nominal prices(1)		1995			1996			1997			1998			1999			2000			2001			2002			2002			2003			Trend(2)
Papers:
	Copy 20 lb sheets (US$/ton)		1,123			848			769			780			778			877			815			776			772			760			831
	Offset 50 lb rolls (US$/ton)		983			736			756			666			659			757			719			692			690			600			751
	Coated publication, no. 3, 60 lb rolls (US$/ton)		1,200			943			941			909			851			948			853			767			740			805			984
	Pulp NBSK (US$/ADMT)		874			586			588			544			541			685			558			491			510			550			595
Wood:
	Lumber 2x4x8 (US$/MFBM)		335			403			383			376			390			316			345			334			328			360			360
Packaging:
	Unbleached kraft linerboard, 42 lb East (US$/ton)		511			371			336			373			400			468			445			427			437			418			414
Selling price index, before acquisition of four US mills			120	%		100	%		99	%		94	%		93	%		102	%
Selling price index, before impact of lumber duties																					98	%		93	%		93	%		92	%		100	%
Average Canadian dollar exchange rate			1.372			1.364			1.385			1.484			1.486			1.485			1.549			1.570			1.563			1.380
			0.729			0.733			0.722			0.674			0.673			0.672			0.646			0.637			0.640			0.725

28 Management’s Discussion and Analysis

(1)	Source: Pulp & Paper Week and Random Lengths. The term “ton” refers to a short ton, an imperial unit of measurement which equals 0.9072 metric tonnes
Benchmark																													Q2			Q2
(2)	Source: Consensus of analysts of normalized pricing as at November 30, 2002.
nominal prices1		1995			1996			1997			1998			1999			2000			2001			2002			2003			2003			2004			Trend2
Papers
Copy 20 lb sheets	(US$/ton)		1,123			848			769			780			778			877			815			776			768			787			783			824
Offset 50 lb rolls	(US$/ton)		983			736			756			666			659			757			719			692			628			653			652			735
Coated publication, no. 3, 60 lb rolls	(US$/ton)		1,200			943			941			909			851			948			853			767			804			815			772			931
Pulp NBSK	(US$/ADMT)		874			586			588			544			541			685			558			491			553			580			660			596
Wood
Lumber 2x4x8	(US$/MFBM)		335			403			383			376			390			316			345			334			327			318			434			342
Packaging
Unbleached kraft linerboard, 42 lb East	(US$/ton)		511			371			336			373			400			468			445			427			421			425			462			421
Selling price index3 before acquisition of four US mills			120	%		100	%		99	%		94	%		93	%		102	%
Selling price index3 before impact of lumber duties																					97	%		92	%		92	%		95	%		96	%		100	%
Average exchange rates	CAN$		1.372			1.364			1.385			1.484			1.486			1.485			1.549			1.570			1.401			1.398			1.359
	US$		0.729			0.733			0.722			0.674			0.673			0.673			0.646			0.637			0.714			0.715			0.736

OUTLOOK

¹		Source: Pulp & Paper Week and Random Lengths.

²		Source: Consensus of analysts of normalized pricing as at November 30, 2003.

³		Selling price index is derived using transaction prices for the majority of our products, weighted for production capacity, in relation to trend pricing.

~~Our current business environment is impacted by factors beyond our control,~~Outlook ~~such as soft economic conditions, currency fluctuations, and high energy costs.~~ Within this context, we will maintain our efforts to reduce costs and improve efficiency. This means pursuing initiatives and investments that will provide our customers with a competitive advantage such as deploying an integrated planning system, improving our product offering and delivering on time. We will also continue to monitor inventory closely and adjust production in order to match supply with customer demand, even if this leads to market-related downtime and affects our profitability improvement programs.

~~That~~During ~~being~~the ~~said~~second quarter of 2004, we finally felt the Ubenefits of improved economic conditions in North America.S. ~~economy~~This ~~appears~~translated tointo bemuch ~~showing~~stronger ~~signs~~demand and better pricing for most of ~~recovery,~~our asproducts. During the third quarter of 2004, ~~evidenced~~we byshould benefit from the ~~slight~~full ~~improvement~~implementation of the paper price increases announced in ~~demand~~the second quarter. On the other hand, we do not believe that the high pricing experienced for ~~our~~lumber ~~papers~~during atthe second quarter of 2004 is sustainable. In addition to potentially benefiting from the ~~beginning~~overall improvement in market conditions, we will continue to focus on implementing our quality and profitability improvement programs, notably to ensure that all of our Canadian pulp and paper operations are profitable when the ~~fourth~~Canadian ~~quarter~~dollar ofis ~~2003~~valued at 75 cents to the U.S. dollar.

~~We will pursue our objectives of delivering superior returns to our~~Certifications ~~shareholders, even in difficult market conditions, and of positioning ourselves~~ ~~to take full advantage of any improvement in the economy.~~

We have complied with the Multilateral Instrument 52-109 “Certification of Disclosure in Issuers’ Annual and Interim Filings” issued by the Canadian Securities Administrators and have filed form 52-109FT2 “Certification of Interim Filings during Transition Period” with the appropriate securities regulators in Canada. These certificates can be found on the SEDAR website.

Additional information, including our Annual Information Form, is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov/edgar.shtml.

Domtar Inc. Second Quarter 2004 29

Consolidated Earnings(In millions of Canadian dollars, unless otherwise noted)


	Three months ended June 30									Six months ended June 30
Consolidated earnings	2004			2004			2003			2004			2004			2003
(In millions of Canadian dollars,
unless otherwise noted)	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	US$									US$
	(Note 3)			$			$			(Note 3)			$			$
Sales (Note 2)		1,004			1,346			1,336			1,918			2,571			2,724
Operating expenses
Cost of sales (Note 2)		855			1,146			1,105			1,668			2,236			2,239
Selling, general and administrative (Note 2)		58			78			79			110			147			157
Amortization		70			94			96			138			185			194
Closure and restructuring costs (Note 5)		–			–			–			6			8			–

		983			1,318			1,280			1,922			2,576			2,590

Operating profit (loss)		21			28			56			(4	)		(5	)		134
Financing expenses (Note 6)		31			41			48			59			80			89
Amortization of deferred gain		(1	)		(1	)		(1	)		(1	)		(2	)		(2	)

Earnings (loss) before income taxes		(9	)		(12	)		9			(62	)		(83	)		47
Income tax expense (recovery)		(8	)		(11	)		1			(28	)		(38	)		12

Net earnings (loss)		(1	)		(1	)		8			(34	)		(45	)		35

Per common share (in dollars) (Note 7)
Net earnings (loss)
Basic		(0.01	)		(0.01	)		0.03			(0.15	)		(0.20	)		0.15
Diluted		(0.01	)		(0.01	)		0.03			(0.15	)		(0.20	)		0.15
Weighted average number of common shares outstanding (millions)
Basic		228.6			228.6			227.2			228.4			228.4			227.0
Diluted		228.6			228.6			229.0			228.4			228.4			228.9

			Three months ended September 30									Nine months ended September 30
			2003			2003			2002			2003			2003			2002
						(Unaudited)									(Unaudited)
			US$			$			$			US$			$			$
			(Note 3)									(Note 3)
Net sales				864			1,166			1,390			2,741			3,702			4,134
Operating expenses
		Cost of sales		717			968			1,073			2,241			3,026			3,261
		Selling, general and administrative		54			72			84			165			222			250
		Amortization		70			95			97			214			289			292
		Closure costs (reversal) (Note 9)		(4	)		(5	)		—			(4	)		(5	)		45
				837			1,130			1,254			2,616			3,532			3,848
Operating profit				27			36			136			125			170			286
Financing expenses (Note 7)				30			41			51			96			130			146
Amortization of deferred gain				(1	)		(2	)		(2	)		(3	)		(4	)		(4	)
Earnings (loss) before income taxes				(2	)		(3	)		87			32			44			144
Income tax expense (recovery) (Note 4)				(4	)		(6	)		28			4			6			41
Net earnings				2			3			59			28			38			103
Per common share (Note 8)
	Net earnings
		Basic		0.01			0.01			0.26			0.12			0.16			0.45
		Diluted		0.01			0.01			0.26			0.12			0.16			0.45
Weighted average number of common shares outstanding (millions)
		Basic		227.4			227.4			227.4			227.2			227.2			227.1
		Diluted		229.1			229.1			228.3			228.9			228.9			228.0

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

~~Domtar~~30 Consolidated ~~Inc.~~Financial Statements

Consolidated Retained Earnings(In millions of Canadian dollars, unless otherwise noted)


	June 30			June 30			Dec. 31
Consolidated balance sheets	2004			2004			2003
(In millions of Canadian dollars, unless otherwise noted)	(Unaudited)			(Unaudited)			(Unaudited)
							$
	US$						Restated
	(Note 3)			$			(Note 2)
Assets
Current assets
Cash and cash equivalents		57			77			48
Receivables		222			298			197
Inventories		496			665			670
Prepaid expenses		22			29			22
Income and other taxes receivable		28			37			29
Future income taxes		45			60			60

		870			1,166			1,026
Property, plant and equipment		3,375			4,524			4,532
Goodwill		60			81			77
Other assets		170			228			212

		4,475			5,999			5,847

Liabilities and shareholders’ equity
Current liabilities
Bank indebtedness		19			26			19
Trade and other payables		483			648			652
Income and other taxes payable		28			37			28
Long-term debt due within one year		7			9			5

		537			720			704
Long-term debt		1,681			2,253			2,054
Future income taxes		388			521			562
Other liabilities and deferred credits		273			366			360
Shareholders’ equity
Preferred shares		30			40			42
Common shares		1,320			1,769			1,756
Contributed surplus		6			8			6
Retained earnings		324			435			508
Accumulated foreign currency translation adjustments (Note 9)		(84	)		(113	)		(145	)

		1,596			2,139			2,167

		4,475			5,999			5,847

	Three months ended September 30									Nine months ended September 30
	2003			2003			2002			2003			2003			2002
				(Unaudited)									(Unaudited)
	US$			$			$			US$			$			$
	(Note 3)									(Note 3)
Retained earnings at beginning of period		566			765			672			558			753			645
Net earnings		2			3			59			28			38			103
Dividends on common shares		(10	)		(14	)		(8	)		(27	)		(36	)		(24	)
Dividends on preferred shares		—			—			—			(1	)		(1	)		(1	)
Retained earnings at end of period		558			754			723			558			754			723

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

Domtar Inc. Second Quarter 2004 31

Consolidated Balance Sheets(In millions of Canadian dollars, unless otherwise noted)


	Three months ended June 30									Six months ended June 30
Consolidated cash flows	2004			2004			2003			2004			2004			2003
(In millions of Canadian dollars,
unless otherwise noted)	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	US$									US$
	(Note 3)			$			$			(Note 3)			$			$
Operating activities
Net earnings (loss)		(1	)		(1	)		8			(34	)		(45	)		35
Non-cash items:
Amortization		70			94			96			138			185			194
Future income taxes		(9	)		(13	)		–			(32	)		(43	)		6
Amortization of deferred gain		(1	)		(1	)		(1	)		(1	)		(2	)		(2	)
Closure and restructuring costs (Note 5)		–			–			–			6			8			–
Refinancing costs (Note 6)		–			–			10			–			–			10
Other		3			4			(1	)		(2	)		(3	)		2

		62			83			112			75			100			245

Changes in working capital and other items
Receivables		(1	)		(2	)		(6	)		(74	)		(99	)		(50	)
Inventories		24			32			36			10			14			(4	)
Prepaid expenses		4			5			5			(7	)		(9	)		(4	)
Trade and other payables		(35	)		(46	)		(13	)		(20	)		(26	)		(66	)
Income and other taxes		(2	)		(3	)		9			4			6			8
Early settlement of interest rate swaps (Note 8)		–			–			–			15			20			–
Other		8			11			5			4			5			(2	)
Payments of closure costs, net of proceed on disposition		(3	)		(4	)		(3	)		(2	)		(4	)		(6	)

		(5	)		(7	)		33			(70	)		(93	)		(124	)

Cash flows provided from operating activities		57			76			145			5			7			121

Investing activities
Net additions to property, plant and equipment		(37	)		(50	)		(43	)		(68	)		(91	)		(84	)
Business acquisitions (Note 4)		(6	)		(8	)		(10	)		(6	)		(8	)		(10	)

Cash flows used for investing activities		(43	)		(58	)		(53	)		(74	)		(99	)		(94	)

Financing activities
Dividend payments		(11	)		(14	)		(8	)		(21	)		(28	)		(17	)
Change in bank indebtedness		3			4			(5	)		6			8			2
Change in revolving bank credit, net of expenses		(12	)		(16	)		(63	)		92			124			33
Issuance of long-term debt, net of expenses		7			10			169			8			11			169
Repayment of long-term debt		–			–			(194	)		(3	)		(4	)		(211	)
Premium on redemption of long-term debt (Note 6)		–			–			(7	)		–			–			(7	)
Common shares issued, net of expenses		5			6			2			10			13			6
Redemptions of preferred shares		(1	)		(1	)		–			(1	)		(2	)		(1	)

Cash flows provided from (used for) financing activities		(9	)		(11	)		(106	)		91			122			(26	)

Net increase (decrease) in cash and cash equivalents		5			7			(14	)		22			30			1
Translation adjustments related to cash and cash equivalents		(1	)		(1	)		(1	)		(1	)		(1	)		(4	)
Cash and cash equivalents at beginning of period		53			71			50			36			48			38

Cash and cash equivalents at end of period		57			77			35			57			77			35

		September 30			September 30			December 31
		2003			2003			2002
		(Unaudited)			(Unaudited)
		US$			$			$
		(Note 3)
Assets
Current assets
	Cash and cash equivalents		53			71			38
	Receivables		244			330			304
	Inventories		522			705			736
	Prepaid expenses		19			25			22
	Future income taxes		51			69			76
			889			1,200			1,176
Property, plant and equipment			3,599			4,860			5,387
Goodwill			57			77			79
Other assets			146			198			205
			4,691			6,335			6,847
Liabilities and shareholders’ equity
Current liabilities
	Bank indebtedness		8			10			20
	Trade and other payables		490			662			749
	Income and other taxes payable		23			31			15
	Long-term debt due within one year		28			38			70
			549			741			854
Long-term debt			1,602			2,163			2,444
Future income taxes			462			625			625
Other liabilities and deferred credits			268			362			370
Shareholders’ equity
	Preferred shares		32			43			44
	Common shares		1,298			1,753			1,752
	Contributed surplus		4			5			3
	Retained earnings		558			754			753
	Accumulated foreign currency translation adjustments (Note 10)		(82	)		(111	)		2
			1,810			2,444			2,554
			4,691			6,335			6,847

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

~~Domtar~~32 Consolidated ~~Inc.~~Financial Statements

Consolidated Cash Flows(In millions of Canadian dollars, unless otherwise noted)


	Three months ended June 30									Six months ended June 30
Consolidated retained earnings	2004			2004			2003			2004			2004			2003
(In millions of Canadian dollars,
unless otherwise noted)	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	US$									US$
	(Note 3)			$			$			(Note 3)			$			$
Retained earnings at beginning of period – as reported		336			451			771			382			512			753
Cumulative effect of changes in accounting policies (Note 2)		–			–			–			(3	)		(4	)		–

Retained earnings at beginning of period – as restated		336			451			771			379			508			753
Net earnings (loss)		(1	)		(1	)		8			(34	)		(45	)		35
Dividends on common shares		(10	)		(14	)		(13	)		(20	)		(27	)		(22	)
Dividends on preferred shares		(1	)		(1	)		(1	)		(1	)		(1	)		(1	)

Retained earnings at end of period		324			435			765			324			435			765

		Three months ended September 30									Nine months ended September 30
		2003			2003			2002			2003			2003			2002
					(Unaudited)									(Unaudited)
		US$(Note 3)			$			$			US$(Note 3)			$			$
Operating activities
Net earnings			2			3			59			28			38			103
Non-cash items:
	Amortization (Note 9)		70			95			97			214			289			306
	Future income taxes		(9	)		(13	)		20			(5	)		(7	)		21
	Amortization of deferred gain		(1	)		(2	)		(2	)		(3	)		(4	)		(4	)
	Closure costs excluding write down of property, plant and equipment (Note 9)		(4	)		(5	)		—			(4	)		(5	)		31
	Refinancing costs (Note 7)		—			—			—			8			10			—
	Other		1			2			6			3			4			13
			59			80			180			241			325			470
Changes in working capital and other items
	Receivables		6			8			(61	)		(31	)		(42	)		(94	)
	Inventories		(9	)		(12	)		10			(12	)		(16	)		69
	Prepaid expenses		—			—			—			(3	)		(4	)		(2	)
	Trade and other payables		14			19			12			(35	)		(47	)		(50	)
	Income and other taxes payable		7			9			25			13			17			25
	Other		(7	)		(9	)		7			(8	)		(11	)		13
Payments of closure costs			—			—			(4	)		(5	)		(6	)		(4	)
			11			15			(11	)		(81	)		(109	)		(43	)
	Cash flows provided from operating activities		70			95			169			160			216			427
Investing activities
Net additions to property, plant and equipment			(45	)		(61	)		(46	)		(108	)		(145	)		(128	)
Business acquisition (Note 5)			—			(1	)		—			(8	)		(11	)		(27	)
Other			—			—			3			—			—			6
	Cash flows used for investing activities		(45	)		(62	)		(43	)		(116	)		(156	)		(149	)
Financing activities
Dividend payments			(10	)		(14	)		(8	)		(23	)		(31	)		(25	)
Change in bank indebtedness			(11	)		(15	)		6			(10	)		(13	)		(4	)
Change in revolving bank credit, net of expenses			27			36			(7	)		51			69			29
Issuance of long-term debt, net of expenses			—			—			—			125			169			—
Repayment of long-term debt			(8	)		(11	)		(110	)		(164	)		(222	)		(252	)
Premium on redemption of long-term debt (Note 7)			—			—			—			(5	)		(7	)		—
Common shares issued, net of expenses			4			6			3			9			12			13
Redemptions of preferred shares			(1	)		(1	)		(1	)		(1	)		(2	)		(2	)
	Cash flows provided from (used for) financing activities		1			1			(117	)		(18	)		(25	)		(241	)
Net increase in cash and cash equivalents			26			34			9			26			35			37
Translation adjustments related to cash and cash equivalents			1			2			—			(1	)		(2	)		—
Cash and cash equivalents at beginning of period			26			35			64			28			38			36
Cash and cash equivalents at end of period			53			71			73			53			71			73

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

Domtar Inc. Second Quarter 2004 33

Notes to Consolidated Financial Statements

Three months and ~~nine~~six months ended ~~September~~June 30, ~~2003~~ 2004 (In millions of Canadian dollars, unless otherwise noted)

Note 1. ~~BASIS~~Basis OFof ~~PRESENTATION~~presentation

In the opinion of management, the accompanying unaudited interim ~~consolidated~~ 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~~June 30, 2004 ~~2003~~ and December 31, ~~2002~~2003, as well as its results of operations and its cash flows for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2003~~2004 and ~~2002~~2003.

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

These unaudited interim consolidated financial statements follow the same accounting policies as the most recent annual consolidated financial statements, except as described in Note 2.

Note 2. ~~ACCOUNTING~~Accounting ~~CHANGE~~changes

~~Share~~Generally ~~purchase~~Accepted ~~financing~~Accounting Principles and financial statement presentation On January 1, 2004, Domtar adopted the new Canadian Institute of Chartered Accountants’ (CICA) Handbook Section 1100 “Generally Accepted Accounting Principles” recommendations and 1400 “General Standards of Financial Statement Presentation” recommendations. Section 1100 describes what constitutes Canadian Generally Accepted Accounting Principles (GAAP) and its sources and provides guidance on sources to consult when selecting accounting policies and determining appropriate disclosures when a matter is not dealt with explicitly in the primary sources of GAAP, thereby recodifying the Canadian GAAP hierarchy. Section 1400 provides general guidance on financial statement presentation and further clarifies what constitutes fair presentation in accordance with GAAP.

On In ~~January 1,~~accordance ~~2003,~~with ~~Domtar~~the ~~adopted~~transitional ~~prospectively~~provisions of the new ~~Canadian Institute of~~accounting ~~Chartered~~recommendations, ~~Accountants~~Domtar ~~(CICA) recommendations~~reclassified ~~relating~~delivery tocosts ~~share~~as ~~purchase~~well ~~loans~~as ~~receivable.~~countervailing ~~Accordingly,~~and ~~share~~antidumping ~~purchase~~duties ~~loans~~on asexports atof ~~January 1,~~softwood ~~2003,~~lumber ~~amounting~~ to ~~$11 million,~~the United ~~were~~States ~~reclassified~~ from “~~Other assets~~Sales” to “~~Common~~Cost ~~shares” and interest revenue was treated as a reduction~~ of ~~dividends~~sales”. ~~The~~For ~~common shares purchased with these loans are held in trust as security for~~ the ~~share~~three ~~purchase loans~~months ~~(the loans). The loans are interest bearing at the dividend rate~~ and ~~have~~six ~~defined~~months ~~repayment~~ended ~~terms not exceeding ten years. As at September~~June 30, ~~2003~~2004, ~~there~~ ~~were~~delivery ~~945,640~~costs ~~common~~amounted ~~shares~~to ~~(December~~$99 ~~31,~~million ~~2002~~and ~~— 1~~$184 million,~~000,333~~ ~~common~~respectively ~~shares) held~~(2003 in— ~~trust with respect to employee loans of~~ $1385 million ~~(December 31,~~and ~~2002 —~~ $11169 million~~). The market value~~, asrespectively) and atcountervailing ~~September 30,~~and ~~2003,~~antidumping ofduties ~~the~~amounted ~~shares~~to ~~held in trust was~~ $1421 million orand $~~15.22~~33 million, ~~per~~respectively ~~share~~ (~~December 31,~~2003 ~~2002~~ — $1611 million or $15.70 per share). These common shares were not considered as being outstanding for the calculation of the basic earnings per share. The adoption of these recommendations has no significant impact on the basic earnings per share for the three months and ~~nine months ended September~~$19 30million, ~~2003~~respectively).

3. The ~~UNITED~~adoption ~~STATES~~of ~~DOLLAR~~these ~~AMOUNTS~~recommendations has no other significant impact on the unaudited interim consolidated financial statements.

The unaudited interim consolidated financial statements are expressed in Canadian dollars and, solely for the convenience of the reader, the 2003 unaudited interim consolidated financial statements and the tables of certain related notes have been translated into U.S. dollars at the September 2003 month-end rate of CAN$1.3504 = US$1.00. 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.

4.34 Notes ~~INCOME~~to ~~TAX~~Consolidated Financial Statements

~~The~~Note ~~income tax provision for the three and nine months ended September 30, 2003, includes an adjustment to reflect the revised effective tax rate for the full year 2003~~2. ~~The~~Accounting ~~variations~~changes ~~in the effective tax rates in 2003 compared to~~(continued) ~~2002, both on a quarterly and year-to-date comparative basis, result mainly~~ ~~from the mix and level of earnings between the different tax jurisdictions and~~ ~~differences in tax rate applicable to the foreign subsidiaries.~~

5Hedging relationships On January 1, 2004, Domtar adopted the new CICA Accounting Guideline 13 (AcG-13) “Hedging Relationships”. ~~BUSINESS~~This ~~ACQUISITION~~accounting guideline addresses the identification, designation, documentation and effectiveness of the hedging relationships for the purpose of applying hedge accounting. In addition, it deals with the discontinuance of hedge accounting and establishes conditions for applying hedge accounting. Under this guideline, documentation of the information related to hedging relationships is required and the effectiveness of the hedges must be demonstrated and documented. As of January 1, 2004, Domtar has in place all necessary hedge documentation to apply hedge accounting for interest rate swaps, forward foreign exchange contracts, foreign currency options and bunker oil swaps.

On For ~~April 14,~~the ~~2003~~pulp swaps as well as the old corrugated containers, ~~Norampac~~the unbleached (akraft 50linerboard and the semi-50chemical ~~joint~~medium ~~venture~~paper ~~with~~swaps, ~~Cascades~~Domtar does ~~Inc~~not meet the criteria for hedge effectiveness.) ~~acquired~~As a result, Domtar has ~~the~~to ~~assets~~account for these contracts at their fair value. The fair value of ~~Georgia~~these contracts is re-~~Pacific’s~~evaluated ~~corrugated~~each ~~products~~quarter ~~converting~~and ~~plant~~a ~~located~~gain or loss is recorded in the ~~Schenectady,~~Consolidated ~~New York~~earnings. ~~The~~Notwithstanding ~~aggregate~~the ~~purchase~~fact ~~price~~that these commodity swap contracts do not meet the criteria under AcG-13, ~~subject~~Domtar tobelieves, ~~certain~~from an ~~adjustments~~operational and cash flow point of view, isthat ~~approximately~~these ~~$31 million~~contracts ~~(US$21 million)~~are (effective in managing its risk. For the ~~Corporation’s proportionate~~three ~~share~~months ~~being~~and ~~$15~~six months ended June ~~million~~30, 2004, ~~(US~~a loss of $115 million)) and isa ~~comprised~~gain of $~~20 million (US$14~~1 million), respectively, are included in ~~cash~~“Selling, general and ~~all~~administrative” ofrepresenting the loss ~~operating~~or ~~assets~~gain ofon the ~~Norampac’s~~ ~~Dallas~~marked ~~Forth-Worth,~~to ~~Texas~~market ~~plant~~of ~~valued~~the atcommodity ~~approximately $11 million (US$7 million)~~swaps.

Asset retirement obligations On January 1, 2004, Domtar adopted retroactively with restatement of prior periods the new CICA Handbook Section 3110 “Asset Retirement Obligations”, which requires entities to record a liability, at fair value, in the period in which is incurred a legal obligation associated to the retirement of an asset. The associated costs are capitalized as part of the carrying value of the related asset and depreciated over its remaining useful life. The liability is accreted using a credit adjusted risk free interest rate. Section 3110 is analogous to U.S. GAAP SFAS 143 “Accounting for Asset Retirement Obligations”, which was adopted for U.S. GAAP purposes on January 1, 2003. Asset retirement obligations in connection with the adoption of Section 3110 were primarily linked to landfill capping obligations, asbestos removal obligations on equipment and demolition of certain abandoned buildings. For such assets, a liability will be initially recognized in the period in which sufficient information exists to estimate a range of possible settlement dates. For the three months and six months ended June 30, 2004, the adoption of Section 3110 has increased the net loss by $0.6 million and $1.2 million, ~~JOINT~~respectively ~~VENTURE~~(2003 — nil and nil, respectively). As at June 30, 2004, the adoption of Section 3110 has also decreased the opening retained earnings by $4 million (2003 — nil), decreased assets by $0.8 million (December 31, 2003 — $8.4 million) and increased liabilities by $0.4 million (December 31, 2003 — decreased liabilities by $4.4 million).

Employee future benefits On ~~June~~January 191, ~~2003~~2004, ~~Domtar~~the ~~announced~~CICA anamended ~~agreement-in-principle~~CICA ~~with~~Handbook ~~Tembec~~Section 3461 ~~Inc.~~“Employee ~~(Tembec)~~Future ~~for~~Benefits”. Section 3461 requires additional disclosures about the assets, ~~creation~~cash flows and net periodic benefit cost of adefined ~~50-50~~benefit pension ~~joint~~plans ~~venture~~and ~~that~~other ~~will~~employee ~~merge~~future ~~their~~benefit ~~lumber operations~~plans. inThe ~~Ontario~~new ~~and~~annual disclosures ~~Québec~~are ~~(except~~effective for ~~the~~years ~~Lebel-sur-Quévillon~~ending ~~sawmill).~~on or after June 30, 2004, and ~~The~~new ~~joint~~interim ~~venture~~disclosures ~~will~~are ~~also~~effective ~~market~~for ~~the~~periods ~~softwood~~ending ~~lumber~~on ~~from~~or ~~Tembec’s~~after ~~British~~that ~~Columbia~~date. ~~sawmill~~As ~~operations~~at asJune 30, ~~well~~2004, asDomtar ~~manage~~adopted the ~~operations~~amendments of Section 3461 and ~~market~~provided additional interim period disclosures of the defined benefit ~~softwood~~pension ~~lumber~~plans ofand ~~Domtar’s~~other ~~Lebel-sur-Quévillon~~employee ~~sawmill~~future benefit plans in Note 10.

The transaction is subject to certain conditions, including the completion of due diligence, the review of potential synergies, the negotiation of definitive agreements, as well as approvals by the respective boards of directors, the government, and other required approvals, most of which are currently underway.

7. REFINANCING OF LONG-TERM DEBT

On May 28, 2003, Norampac completed a series of financial transactions to substantially refinance all of its existing credit facilities, except those of its joint venture. Norampac secured a new five-year revolving credit facility of $350 million. The new revolving credit facility is secured by all the inventories and receivables of Norampac Inc. and its North American subsidiaries and by property, plant and equipment of two of its containerboard mills and three of its converting facilities. As at September 30, 2003, the Corporation’s proportionate share amount secured under the new revolving credit facility relating to receivables, inventories and property, plant and equipment amounted to $89 million, $46 million and $208 million, respectively.

In addition, Norampac issued new Senior unsecured notes for an aggregate amount of US$250 million. The notes bear a 6.75% coupon and will mature in 2013. The aggregate proceeds of these two transactions were used to repay the existing credit facilities for an amount of approximately $67 million at the time of the refinancing and were used to redeem both the 9.5% US$150 million and the 9.375% $100 million notes due in 2008.

Norampac recorded a charge of $20 million ($14 million for a call premium paid to redeem both the 9.5% US$150 million notes and 9.375% $100 million notes, $5 million related to the write-off of debt issue costs and a $1 million foreign exchange loss) related to the refinancing. An amount of $10 million ($7 million net of income taxes, or $0.03 per common share) representing the Corporation’s proportionate share of Norampac’s debt refinancing costs is recorded under “Financing expenses”.

8Domtar Inc. ~~EARNINGS~~Second ~~PER~~Quarter ~~SHARE~~2004 35

~~The~~Note ~~following~~3. ~~table~~United ~~provides the reconciliation between basic and diluted~~States ~~earnings~~dollar ~~per share.~~amounts

	Three months ended September 30						Nine months ended September 30
	2003		2003		2002		2003		2003		2002
			(Unaudited)						(Unaudited)
	US$		$		$		US$		$		$
	(Note 3)						(Note 3)
Net earnings		2		3		59		28		38		103
Dividend requirements of preferred shares		—		—		—		1		1		1
Net earnings applicable to common shares		2		3		59		27		37		102
Weighted average number of common shares outstanding (millions)		227.4		227.4		227.4		227.2		227.2		227.1
Effect of dilutive stock options (millions)		1.7		1.7		0.9		1.7		1.7		0.9
Weighted average number of common shares outstanding (millions)		229.1		229.1		228.3		228.9		228.9		228.0
Basic earnings per share		0.01		0.01		0.26		0.12		0.16		0.45
Diluted earnings per share		0.01		0.01		0.26		0.12		0.16		0.45

The unaudited interim consolidated financial statements are expressed in Canadian dollars and, solely for the convenience of the reader, the 2004 unaudited interim consolidated financial statements and the tables of certain related notes have been translated into U.S. dollars at the June 2004 month-end rate of CAN$1.00 = US$0.7460. 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.

AsNote at4. ~~October 31, 2003, Domtar~~Business ~~had 228,650,021 common shares, 69,576 Series A Preferred~~acquisitions ~~Shares and 1,620,000 Series B Preferred Shares, which were issued and outstanding.~~

AsOn ~~at October~~April 312, ~~2003~~2004, ~~Domtar had~~Norampac ~~5,883,042~~(a ~~common~~50-50 joint venture with Cascades Inc.) acquired the shares ~~purchase~~of ~~options~~Johnson ~~issued~~Corrugated Products Corp., a corrugated ~~and~~products ~~outstanding~~plant in Thompson, ~~under~~Connecticut. The Corporation’s proportionate share of the ~~Executive~~consideration ~~stock~~is ~~option~~approximately ~~and~~$8 million ~~Share~~(US$6 million) excluding ~~purchase~~fees ~~plan~~related to the transaction.

9 On April 14, 2003, Norampac acquired the assets of Georgia-Pacific’s corrugated products converting plant located in Schenectady, New York. ~~CLOSURE~~The aggregate ~~COSTS~~purchase price, subject to certain adjustments, is approximately $31 million (US$21 million) (the Corporation’s proportionate share being $15 million (US$11 million)) and is comprised of $20 million (US$14 million) in cash and all of the operating assets of Norampac’s Dallas Forth-Worth, Texas plant valued at approximately $11 million (US$7 million).

OnNote ~~March 27, 2002, Domtar announced plans to permanently shutdown the St~~5. ~~Catharines,~~ ~~Ontario,~~Closure paper mill. This shutdown, which occurred at the end of September 2002, resulted in a charge to first quarter 2002 earnings of $45 million ($30 million net of income taxes, or $0.13 per common share), including $14 million related to the write-down to the estimated net realizable value of property, plant and ~~equipment as well as a provision of $31 million for other~~ ~~commitments~~restructuring ~~and contingencies related to this paper mill. As at September 30,~~costs ~~2003, the balance of the provision was $10 million. The results for the three~~ ~~months and the nine months ended September 30, 2003 include a reduction in the~~ ~~closure cost provision in the amount of $5 million ($3 million net of income taxes or $0.01 per common share) largely as a result of changes to the initial approach to dismantling the mill.~~

Closure costs On ~~November~~March 2931, ~~2002~~2004, Domtar ~~announced~~sold ~~plans to permanently shutdown~~ the ~~Daveluyville,~~ ~~Québec, wood products remanufacturing facility and the Sault Ste~~St. ~~Marie~~ Catharines, Ontario, ~~hardwood~~paper ~~lumber operations. These shutdowns~~mill, which ~~occurred~~was ~~at the~~closed ~~end of January 2003, resulted~~ in ~~a charge to fourth quarter~~ September 2002, ~~earnings of~~for $181 million ~~($12 million~~to ~~net~~a ofthird ~~income~~party ~~taxes, or $0.05 per common share),~~who ~~including~~agreed ~~$13 million related~~ to ~~the~~purchase ~~write-down~~it toin ~~the~~its ~~estimated~~existing ~~net~~state. ~~realizable value~~As ~~of property~~such, ~~plant~~the ~~and~~majority ~~equipment as well as a provision~~ of ~~$5 million for~~the ~~other~~remaining ~~commitments~~closure ~~and~~cost ~~contingencies~~provision ~~related~~was ~~to these locations. As at September 30~~reversed, ~~2003,~~leaving ~~the~~ a balance of ~~the provision was~~ $1 million. ~~Domtar~~that ~~sold~~represents ~~the~~remaining ~~Sault~~severance ~~Ste.~~and ~~Marie~~commitments and ~~Daveluyville~~contingencies ~~facilities,~~related onto ~~March 14~~environmental ~~and April 8, 2003, respectively, for a total of $3 million~~matters.

Workforce reduction and restructuring costs
In March 2004, Domtar’s management committed to a workforce reduction and restructuring plan in the Canadian Pulp and Paper Manufacturing Group. The plan affects Domtar’s Cornwall, Espanola, Ottawa-Hull, Port Huron and Windsor mills. In all, 330 positions will be affected by this plan over 2004 to 2006: 181 from severance; 129 from attrition; 14 from redeployment to other activities; and 6 currently vacant positions that will not be filled. The total severance and termination benefit costs accrued for the six months ended June 30, 2004, representing all of the severance and termination costs related to the plan, amounted to $16 million (which included $3 million for pension curtailment costs). Further costs related to the plan expected to be incurred over 2004 to 2006 include training costs of $6 million, $1 million of which was incurred in the second quarter of 2004, outplacement costs of $1 million and pension settlements, which are not yet determinable, will be expensed as incurred. To accomplish this plan, Domtar will invest approximately $14 million in capital expenditures over 2004 to 2006. As at June 30, 2004, the balance of the provision was $14 million.

In December 2003, Domtar’s management decided to permanently shut down one paper machine at its Vancouver, British Columbia paper mill. In the second quarter of 2004, $2 million was reversed from the provision, as the costs of severance were less than originally estimated. Further costs of $1 million related to the dismantling of the paper machine were recorded in the second quarter of 2004. As at June 30, 2004, the balance of the provision was $1 million.

~~10.~~36 Notes ~~ACCUMULATED~~to ~~FOREIGN~~Consolidated ~~CURRENCY~~Financial ~~TRANSLATION ADJUSTMENTS~~Statements

		September 30			September 30			December 31
		2003			2003			2002
		(Unaudited)			(Unaudited)
		US$			$			$
		(Note 3)
Balance at beginning of period			1			2			2
Effect of changes in exchange rates during the period:
	On the net investment in self-sustaining foreign subsidiaries		(230	)		(311	)		(18	)
	On certain long-term debt denominated in foreign currencies designated as a hedge of the net investment in self-sustaining foreign subsidiaries		166			224			18
	Income tax expense		(19	)		(26	)		—
Balance at end of period			(82	)		(111	)		2

Note 5. Closure and restructuring costs (continued)

~~11.~~The ~~SEGMENTED~~following ~~DISCLOSURES~~table provides a reconciliation of all closure cost provisions for the six months ended June 30, 2004:


	Restructuring costs
	Canadian Pulp
	and Paper			Closure
	Manufacturing			costs
	Group*			St. Catharines			Total
	$			$			$
Balance at beginning of period		5			8			13
Severance payments		(4	)		—			(4	)
Reversal of provision		(2	)		(8	)		(10	)
Proceed on disposition		—			1			1
Additions
Labour costs		16			—			16

Balance at end of period		15			1			16

The balance at the beginning of the year represents the provision related to the permanent shut down of one paper machine at the Vancouver, British Columbia, paper mill recorded in December 2003.

Note 6. Refinancing of long-term debt in 2003

On May 28, 2003, Norampac completed a series of financial transactions to substantially refinance all of its existing credit facilities, except those of its joint venture. In the second quarter of 2003, an amount of $10 million representing the Corporation’s proportionate share of Norampac’s debt refinancing costs was recorded under “Financing expenses”.

Domtar Inc. Second Quarter 2004 37

Note 7. Earnings (loss) per share

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


	Three months ended June 30								Six months ended June 30
	2004			2004			2003		2004			2004			2003
	(Unaudited)			(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)
	US$								US$
	(Note 3)			$			$		(Note 3)			$			$
Net earnings (loss)		(1	)		(1	)		8		(34	)		(45	)		35
Dividend requirements of preferred shares		1			1			1		1			1			1

Net earnings (loss) applicable to common shares		(2	)		(2	)		7		(35	)		(46	)		34
Weighted average number of common shares outstanding (millions)		228.6			228.6			227.2		228.4			228.4			227.0
Effect of dilutive stock options (millions)		—			—			1.8		—			—			1.9

Weighted average number of diluted common shares outstanding (millions)		228.6			228.6			229.0		228.4			228.4			228.9
Basic earnings (loss) per share (in dollars)		(0.01	)		(0.01	)		0.03		(0.15	)		(0.20	)		0.15
Diluted earnings (loss) per share (in dollars)		(0.01	)		(0.01	)		0.03		(0.15	)		(0.20	)		0.15

Note 8. Interest rate risks

In the first quarter of 2004, the Corporation terminated, prior to maturity, interest rate swap contracts for net cash proceeds of $20 million (US$15 million). The gain of $17 million recorded under “Other liabilities and deferred credits” is being amortized over the original designated hedging period of the underlying 5.375% notes due in November 2013.

38 Notes to Consolidated Financial Statements

Note 9. Accumulated foreign currency translation adjustments


	Six months			Six months			Twelve months
	ended			ended			ended
	June 30			June 30			Dec. 31
	2004			2004			2003
	(Unaudited)			(Unaudited)			(Unaudited)
	US$
	(Note 3)			$			$
Balance at beginning of period		(108	)		(145	)		2
Effect of changes in exchange rates during the period:
On the net investment in self-sustaining foreign subsidiaries		60			80			(391	)
On certain long-term debt denominated in foreign currencies designated as a hedge of the net investment in self-sustaining foreign subsidiaries		(43	)		(58	)		282
Future income taxes thereon		7			10			(38	)

Balance at end of period		(84	)		(113	)		(145	)

Note 10. Defined benefit plans and other employee future benefit plans


	Three months ended June 30						Six months ended June 30
	2004		2004		2003		2004		2004		2003
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
	US$						US$
	(Note 3)		$		$		(Note 3)		$		$
Net periodic benefit cost for defined benefit plans		10		13		8		16		22		14
Net periodic benefit cost for other employee future benefit plans		2		3		4		4		6		7

Domtar Inc. Second Quarter 2004 39

Note 11. 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 asand ~~well as~~ by other manufacturers. These products include business and printing papers, graphic arts supplies and certain industrial products. • Wood — comprises the manufacturing and marketing of lumber and wood-based value-added products asand ~~well as~~ 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.

~~11.~~40 Notes ~~SEGMENTED~~to ~~DISCLOSURES~~Consolidated ~~(CONTINUED)~~Financial Statements

Note 11. Segmented ~~Data~~disclosures (continued)

			Three months ended September 30												Nine months ended September 30
		Three months ended June 30												Six months ended June 30
			2003				2003				2002				2003				2003				2002
Segmented data		2004				2004				2003				2004				2004				2003
		(Unaudited)				(Unaudited)	~~(Unaudited)~~			(Unaudited)				(Unaudited)				(Unaudited)	~~(Unaudited)~~			(Unaudited)
		US$	~~US$~~				$				$			US$	~~US$~~				$				$
		(Note 3)	~~(Note 3)~~			$				$				(Note 3)	~~(Note 3)~~			$				$
Net sales
Sales
Papers	~~Papers~~		624	~~544~~			836	~~734~~			871	~~905~~			1,212	~~1,775~~			1,624	~~2,396~~			1,788	~~2,658~~
Paper Merchants	~~Paper Merchants~~		200	~~197~~			268	~~266~~			265	~~300~~			396	~~615~~			531	~~831~~			565	~~897~~
	Wood (a)			88				119				131				256				346				437
Wood			142				191				144				249				334				271
Packaging	~~Packaging~~		122	~~109~~			163	~~147~~			164	~~159~~			230	~~328~~			309	~~443~~			322	~~459~~
Total for reportable segments			1,088	~~938~~			1,458	~~1,266~~			1,444	~~1,495~~			2,087	~~2,974~~			2,798	~~4,016~~			2,946	~~4,451~~
	Intersegment sales-Papers			(50	)			(67	)			(72	)			(160	)			(216	)			(245	)
Intersegment sales – Papers			(56	)			(75	)			(72	)			(114	)			(153	)			(157	)
	Intersegment sales-Wood			(23	)			(32	)			(31	)			(69	)			(93	)			(66	)
Intersegment sales – Wood			(27	)			(35	)			(34	)			(52	)			(70	)			(61	)
	Intersegment sales-Packaging			(1	)			(1	)			(2	)			(4	)			(5	)			(6	)
Intersegment sales – Packaging			(1	)			(2	)			(2	)			(3	)			(4	)			(4	)
Consolidated net sales				864				1,166				1,390				2,741				3,702				4,134
Consolidated sales			1,004				1,346				1,336				1,918				2,571				2,724
Operating profit (loss)
	Papers (b) (c)			20				27				121				123				166				199
Papers(a)(b)			4				5				58				(25	)			(33	)			139
Paper Merchants	~~Paper Merchants~~		4	3			5	4			5	6			8	12			11	16			12	20
	Wood (a)			(8	)			(11	)			(10	)			(39	)			(52	)			13
Wood			4				6				(20	)			(5	)			(7	)			(41	)
	Packaging			12				16				21				29				40				56
Packaging(c)			6				8				13				14				19				24
Total for reportable segments			18	27			24	36			56	~~138~~			(8	~~125~~)			(10	~~170~~)			134	~~288~~
Corporate	~~Corporate~~		3	—			4	—			–	(2	)		4	—			5	—			–	(2	)
Consolidated operating profit				27				36				136				125				170				286
Consolidated operating profit (loss)			21				28				56				(4	)			(5	)			134

(a) The ~~net sales and the~~ operating ~~profit~~loss for the ~~nine~~six months ended ~~September~~June 30, ~~2002,~~2004 ~~reflect~~reflects a ~~net~~reversal ~~effect~~ of athe ~~$20~~closure ~~million~~cost provision ~~reversal,~~relating ~~for~~to ~~countervailing~~the ~~and~~sale ~~antidumping duties on exports~~ of ~~softwood lumber to~~ the ~~United~~St. ~~States~~Catharines, ~~($20~~Ontario, ~~million~~paper ~~recorded~~mill in the ~~second~~amount ~~half~~ of ~~2001,~~ $8 million ~~recorded~~and inreflects ~~the~~a ~~first~~$16 ~~quarter~~million ofprovision ~~2002~~for workforce reduction and arestructuring ~~reversal~~costs of ~~$28~~the ~~million~~Canadian inPulp ~~the~~and ~~second~~Paper ~~quarter~~Manufacturing ~~of 2002)~~Group. (b) The ~~2002 year-to-date~~ operating profit ~~reflects~~(loss) afor ~~$45~~the ~~million~~three ~~charge,~~months ~~including~~and ~~$14~~six ~~million~~months ~~related~~ended toJune ~~the~~30, ~~write-down~~2004 includes a loss of ~~property,~~$1 ~~plant~~million and ~~equipment~~$1 million, ~~relating~~respectively, torepresenting the ~~permanent~~loss ~~shutdown~~on of the ~~St.~~marked ~~Catharines,~~to ~~Ontario,~~market ~~paper~~of ~~mill~~the pulp swaps. (c) The ~~results~~operating profit (loss) for the three months and ~~the~~six ~~nine~~ months ended ~~September~~June 30, ~~2003~~2004 ~~include~~includes a ~~reduction~~loss ~~in the closure cost provision in the amount~~ of $54 million ~~largely~~and as a ~~result~~gain of ~~changes~~$2 tomillion, ~~the~~respectively, ~~initial~~representing ~~approach to dismantling~~ the ~~mill.~~Corporation’s ~~(c)~~proportionate ~~The~~share ~~three~~of ~~months~~Norampac’s ~~and~~loss ~~nine~~or ~~months~~gain ~~ended~~on ~~September 30, 2002, include~~ the ~~recognition~~marked ~~of $12 million for investment tax credits related~~ to ~~research~~market ~~and~~of ~~development~~the ~~expenses~~old ofcorrugated ~~prior years~~containers, ~~reflected~~the asunbleached akraft ~~reduction~~linerboard ofand the ~~cost~~semi-chemical ofmedium ~~sales~~paper swaps.

Note 12. ~~COMPARATIVE~~Comparative ~~FIGURES~~figures

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

(MAN AND TREE)

So do we.

New Domtar EarthChoice with an impressive 30% post-consumer content, and Domtar Schooner®, the first paper of its kind to receive Forest Stewardship Council certification, are certified all the way from the forest floor to “out-the-door”. Once again we’ve “out-greened” the competition, just by giving nature what it needs, and people what they want. Because paper would be boring without people.


Domtar A Different Feel.

FOR FURTHER INFORMATION


INVESTOR RELATIONS	HEAD OFFICE	BROKERAGE FIRMS THAT FOLLOW DOMTAR:
Daniel Buron	395 de Maisonneuve Blvd. West	BMO Nesbitt Burns
Senior Vice-President and	Montreal, Qc, Canada H3A 1L6	CIBC World Markets
Chief Financial Officer	Tel.: (514) 848-5400	D.A. Davidson & Company
Tel.: (514) 848-5234	www.domtar.com	Desjardins Securities Deutsche Bank Securities
Jean-Sébastien Vanbrugghe		Equity Research Associates
Manager, Corporate Finance	COMMUNICATIONS	Goldman Sachs & Company
Tel.: (514) 848-5469	Tel.: (514) 848-5213	J.P. Morgan Securities
Fax: (514) 848-5638	Fax: (514) 848-6878	Merrill Lynch & Company
E-mail: ir@domtar.com		National Bank Financial
		Raymond James
		RBC Capital Markets
		Salman Partners
		Scotia Capital
		Smith Barney Citigroup
		TD Newcrest
		UBS


		FSC SW-COC-681 and SW-COC-1000 FSC Trademark © 1996, Forest Stewardship Council A.C.

Covers printed on FSC-certified Domtar Cornwall® C1C 10 pt.; pages 1 to 40 printed on FSC-certified Domtar EarthChoice®, 60 lb. At least 17.5% of the fiber used in the manufacturing process of FSC-certified Domtar Cornwall® and FSC-certified Domtar EarthChoice® papers come from well-managed forests, independently certified by Smartwood according to the rules of the Forest Stewardship Council. FSC-certified Domtar Cornwall® also contains 10% recycled post-consumer waste paper, and FSC-certified Domtar EarthChoice® contains 30% recycled post-consumer waste paper. FSC Suppliers SW-COC-681 and SW-COC-1000. This document was printed by Transcontinental Litho Acme, Montreal, SW-COC-952.


Printed in Canada		Design: www.nolin.ca

SIGNATURES

Pursuant to the requirements 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.

				DOMTAR INC.
	DOMTAR INC. (Registrant)
				(Registrant)
Date: August 11, 2004	By:	/s/
Date:		October 31, 2003	By	/s/ RAZVAN L. THEODORU
		Razvan L. Theodoru
				Razvan L. Theodoru Corporate Secretary
		Corporate Secretary

Filing Compare · DOMTAR INC /CANADA