FINANCIAL REVIEW
                                          Building Materials Holding Corporation

This   financial   review  covers   management's   discussion  and  analysis  of
consolidated  financial  condition and  operating  results and should be read in
conjunction  with the  financial  statements  and the  notes  thereto  appearing
elsewhere in this Annual Report.

RESULTS OF OPERATIONS

The following  table sets forth for the years ended December 31, 1999,  1998 and
1997, the percentage  relationship  to net sales of certain costs,  expenses and
income items.

---------------------------------------------------------------------
                                           1999      1998     1997
---------------------------------------------------------------------
Net sales .........................        100.0%    100.0%   100.0%
Gross profit ......................         25.0      24.4     23.1
Selling, general and
  administrative expense ..........         20.7      20.5     20.0
Other income ......................          0.2       0.1      0.3
Income from operations ............          4.5       4.0      3.4
Equity in earnings of
  unconsolidated subsidiaries......          0.5        --       --
Interest expense ..................          1.3       1.2      1.2
Income taxes ......................          1.4       1.1      0.9
Extraordinary item ................         (0.3)       --       --
Net income ........................          2.0       1.7      1.3
---------------------------------------------------------------------


1999 COMPARED WITH 1998

Net sales for 1999 were $1.0 billion,  a 14.8% increase over net sales of $877.3
million in 1998.  Sales in 1999 were  positively  affected by favorable  overall
economic conditions, including strong employment levels and consumer confidence.
Acquisitions  of building  materials  centers and  value-added  facilities  that
occurred  in 1998 and 1999  contributed  a 5.3%  increase  to net sales in 1999.
Sales at  facilities  that operated for at least nine months of the year in both
1998 and 1999 increased 13.5%.  This same-store sales increase is largely due to
the shift in our focus toward  value-added  products  that attract new customers
and gives us the  opportunity  to increase our total sales per building  permit.
Value-added  products  accounted  for $348.6  million,  or 34.6% of net sales in
1999, an increase from $275.9 million, or 31.4% of net sales in 1998.

      Gross profit  increased to $252.0  million,  or 25.0% of net sales in 1999
from $214.2 million, or 24.4% of net sales, in 1998,  primarily as a result of a
positive effect of the increased mix of higher-margin, value-added products such
as pre-hung doors,  millwork,  roof trusses and pre-assembled windows and higher
commodity wood product prices.

      Selling,  general and administrative ("SG&A") expenses increased to $208.8
million,  or 20.7% of net sales,  in 1999 from $180.1  million,  or 20.5% of net
sales,  in 1998. This increase as a percentage of net sales was due primarily to
higher costs  associated with expanding  value-added  sales and costs associated
with  integrating new operating units acquired in the fourth quarter of 1998 and
the full year of 1999. In addition,  low  unemployment  and a tight labor market
resulted  in higher  wage costs in 1999 in an effort to attract  and retain high
quality employees.

      Other income increased  primarily from a gain on the sale of equipment and
three centers located in Texas of $1,384,000. This was partially offset by costs
of $768,000, related to a postponed private placement of subordinated debt.

      Equity  in  earnings  of  unconsolidated  subsidiaries  increased  to $5.0
million, net of amortization of goodwill,  after the completion of an investment
of a 49% interest in Knipp Brothers Industries,  LLC, a framing company, and KBI
Distribution, LLC, a lumber yard, during 1999.

      Interest expense increased to $13.2 million,  or 1.3% of net sales in 1999
from $10.2 million, or 1.2% of net sales in 1998. The increase was due primarily
to an increase in interest  rates and average  debt  outstanding.  Average  debt
outstanding  was $156.2  million in 1999 compared  with $121.9  million in 1998.
Average  interest rates on variable rate debt were  approximately  7.6% for 1999
compared  with  6.8% for  1998.  Increased  average  debt  outstanding  resulted
primarily  from higher  working  capital  requirements  resulting from increased
sales activity and from financing acquisitions made in 1999.

      The  provision  for income taxes  increased to $14.4  million in 1999 from
$9.8 million in 1998.  The increase in the provision  for income taxes  resulted
primarily  from  increased  income from  operations in 1999 as compared with the
prior year. In 1999,  our tax rate  decreased to 38.5% from 39.2% in 1998.  This
was primarily due to a decrease in our state income taxes.

      The Company entered into a new senior secured credit facility and used the
net proceeds to repay amounts  borrowed under its prior senior credit  facility,
two  outstanding  series  of  senior  notes  and a  promissory  note  issued  in
connection with an acquisition.  Upon repayment of the senior notes, the Company
paid a redemption  premium and wrote-off  related deferred  financing costs, the
aggregate  of which is reflected  as an  extraordinary  charge that reduced 1999
earnings by $3.4 million, or $0.26 per diluted share, net of tax.

1998 COMPARED WITH 1997

Net sales for 1998  were  $877.3  million,  a 20.5%  increase  over net sales of
$728.1  million  in  1997.   Acquisitions  of  building  materials  centers  and
value-added  facilities  which  occurred  in 1997 and 1998  contributed  a 14.5%
increase to net sales in 1998. Same-store sales increased 8.1%.


<PAGE>

      Gross profit  increased to $214.2  million,  or 24.4% of net sales in 1998
from $168.4 million,  or 23.1% of net sales,  in 1997,  primarily as a result of
the increased mix of higher-margin, value-added products such as pre-hung doors,
millwork,  roof trusses and pre-assembled  windows.  These value-added  products
accounted  for $275.9  million,  or 31.4% of net sales in 1998, an increase from
$176.0 million, or 24.2% of net sales in 1997.

      SG&A expenses, increased to $180.1 million, or 20.5% of net sales, in 1998
from  $145.9  million,  or  20.0% of net  sales,  in 1997.  This  increase  as a
percentage  of net sales was due  primarily  to lower  prices for wood  products
which decreased sales and thereby  increased SG&A as a percent of sales,  higher
costs  associated with expanding  value-added  sales,  and costs associated with
integrating new operating units. In addition, low unemployment and a tight labor
market  resulted in higher wage costs in 1998 in an effort to attract and retain
high quality employees.

      Although  consistent as a percent of sales,  interest expense increased to
$10.2 million in 1998 from $8.7 million in 1997.  The increase was due primarily
to an increase in average debt outstanding.  Average debt outstanding was $121.9
million in 1998 compared with $99.0 million in 1997.  Average  interest rates on
variable rate debt were approximately 6.8% for 1998 compared with 6.9% for 1997.
Increased  average  debt  outstanding  resulted  primarily  from higher  working
capital  requirements as a result of increased sales and from  acquisitions made
in late 1997 and 1998.

      The provision for income taxes increased to $9.8 million in 1998 from $6.2
million  in 1997.  The  increase  in the  provision  for income  taxes  resulted
primarily  from  increased  income from  operations in 1998 as compared with the
prior year.

      As a result of the foregoing factors, net income increased $5.7 million to
$15.1 million in 1998, or 1.7% of net sales,  as compared with $9.5 million,  or
1.3% of net sales in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

The  Company's  primary need for capital  resources is to fund future growth and
capital expenditures, as well as to finance its working capital needs which have
been increasing as the Company has grown in recent years. Capital resources have
primarily consisted of cash flows from operations and incurrence of debt.

OPERATIONS

In 1999,  operations provided $14.6 million in cash, compared with $44.8 million
in 1998,  a decrease  of $30.2  million  due  primarily  to changes in  accounts
receivable,  inventories,  prepaid  expenses  and  accounts  payable and accrued
expenses.  Net working  capital was $139.3 million at the end of 1999,  compared
with $116.7  million at the end of 1998.  The  increase  in working  capital was
primarily  the result of higher sales  activity  over 1998 levels.  Receivables,
net, increased $18.0 million,  or 19.6% compared to the prior year, however $6.8
million of this increase was attributable to locations acquired in 1999.

      In 1998,  operations  provided $44.8 million in cash,  compared with $35.3
million in 1997.  This increase was due primarily to increases in net income and
improvements in working capital,  net of  acquisitions.  Net working capital was
$116.7  million at the end of 1998,  compared with $118.6  million at the end of
1997. The decrease in working  capital was primarily the result of the effort by
management to increase inventory turns and decrease days sales outstanding.

CAPITAL INVESTMENT AND ACQUISITIONS

Capital expenditures,  exclusive of acquisitions, were $27.4 million in 1999 and
$19.6  million in 1998 and $13.3  million in 1997.  The  principal  property and
equipment  expenditures  included purchases of additional property and expansion
of existing building materials centers and value-added facilities.

      In 1999, cash used for acquisitions and equity  investments  totaled $41.9
million.  During 1999, the Company completed four  transactions,  including nine
value-added facilities and two equity-basis investments.

      In 1998, cash used for acquisitions  totaled $24.3 million, as the Company
completed  eight  acquisitions.   These  acquisitions  included  three  building
materials centers and eleven value-added facilities.


<PAGE>

FINANCING

Net cash provided by financing  activities was $44.5 million in 1999 compared to
$1.7 million of cash used in 1998. The Company utilized its available  borrowing
capacity to finance its growth during 1999.

      The Company's  borrowing  capacity under its new revolving credit facility
is currently $125 million. Borrowings under the agreement bear interest at prime
plus 0.50% to 1.50%, or Offshore Rate plus 2.00% to 3.00%. The agreement expires
in 2004. At year-end the Company had $54.8 million of unborrowed  capacity under
this  agreement.  Borrowings  under the revolver  increased to $70.2  million at
year-end  1999 from $42.4  million at year-end  1998  primarily due to increased
borrowings  needed to complete the Company's 1999  acquisitions and equity-basis
investments.

      The agreements related to these borrowings contain covenants providing for
the  maintenance  of certain  financial  ratios and conditions  including  total
funded debt to earnings before  interest,  taxes,  depreciation and amortization
(EBITDA)  and   limitations  on  capital   expenditures,   among  certain  other
restrictions.  The Company is currently in compliance  with these  covenants and
conditions.

      In the third quarter of 1998, the Company filed a shelf  registration with
the Securities and Exchange  Commission to register  2,000,000  shares of common
stock.  These shares may be issued from time to time in  connection  with future
business combinations, mergers and/or acquisitions.

      Based on the Company's ability to generate cash flow from operations,  its
borrowing  capacity  under the  revolver and its access to equity  markets,  the
Company believes it will have sufficient capital to meet its anticipated needs.

DISCLOSURES OF CERTAIN MARKET RISKS

The Company  experiences  changes in interest expense when market interest rates
change.  Changes  in  the  Company's  debt  could  also  increase  these  risks.
Previously, the Company has managed its exposure to market interest rate changes
through periodic refinancing of its variable rate debt with fixed rate term debt
obligations.  Based on average debt outstanding at December 31, 1999, a 25 basis
point  increase in  interest  rates would  result in  approximately  $434,000 of
additional interest costs.

      Commodity wood products,  including  lumber and panel products,  currently
account for  approximately  44% of the Company's net sales.  Prices of commodity
wood  products,  which are subject to  significant  volatility,  could  directly
affect the  Company's  net sales.  The Company  does not utilize any  derivative
financial instruments.

QUARTERLY RESULTS AND SEASONALITY

The Company's first and fourth quarters  historically are adversely  affected by
weather patterns in the Company's markets which result in decreases in levels of
building and construction activity. In addition,  quarterly results historically
have  reflected,  and are  expected to continue  to reflect,  fluctuations  from
period to period as a  consequence  of the  impact  of  various  other  factors,
including general economic conditions,  commodity wood product prices,  interest
rates,  building  permit  activity,  single-family  housing  starts,  employment
levels,  consumer  confidence  and the  availability  of credit to  professional
contractors.

      The  composition  and level of working  capital  typically  change  during
periods  of  increasing  sales  as the  Company  carries  more  inventories  and
receivables.  Working capital levels typically  increase in the second and third
quarters  of the  year  due  to  higher  sales  during  the  peak  building  and
construction  season.  These  increases  historically  have resulted in negative
operating cash flows during this peak season, which generally have been financed
through the revolving credit agreement.  Collection of receivables and reduction
in inventory levels  following the peak of the building and construction  season
have more than offset this negative


<PAGE>

cash flow in recent  years.  The Company  believes it will  continue to generate
positive annual cash flows from operating activities.

NEW ACCOUNTING STANDARDS

In June,  1998, the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  (SFAS)  No.  133,  Accounting  for  Derivative
Instruments  and  Hedging  Activities.  The  Company is  required  to adopt this
statement in the first  quarter of 2001 and based on the  Company's  present and
historic use of  derivative  instruments  the adoption of this  Statement is not
expected  to have a material  impact on the  Company's  consolidated  results of
operations, financial condition, or cash flows.

OUTLOOK

The Company's financial  performance could be negatively impacted by any adverse
economic  changes  in  the  Company's  geographic  market  areas.  The  building
materials industry has seen considerable  cyclicality in the past. The Company's
operations have been subject to substantial  fluctuations from period to period,
as a reflection of these changes in general economic conditions,  commodity wood
product prices, building permit activity,  interest rates, single-family housing
starts, employment levels, consumer confidence and the availability of credit to
professional  contractors  and  homeowners.   These  factors  may  have  a  more
significant impact on the Company, which derives a significant percentage of its
net sales from professional contractors, than on those building supply companies
which  target a broad  range of  retail  customers.  The  Company  expects  that
fluctuations from period to period will continue in the future.

      Additionally,  the Company's results of operations throughout the year are
impacted by the weather in the states in which the Company has  operations.  The
Company's  financial  performance could be negatively  impacted by poor weather,
which historically has affected building activity levels in the Company's market
areas in the first and  fourth  quarters.  Commodity  wood  products,  including
lumber  and panel  products,  currently  account  for  approximately  44% of the
Company's net sales.  Prices of commodity  wood  products,  which are subject to
significant volatility, directly affect the Company's sales, and future declines
in  commodity  wood  prices  could  adversely  impact the  Company's  results of
operations.

      Certain  statements  in the  Financial  Review and elsewhere in the Annual
Report to  Shareholders  may constitute  forward-looking  statements  within the
meaning  of  the  Private  Securities   Litigation  Reform  Act  of  1995.  Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors that may cause the actual results,  performance or achievements of
the Company,  or industry  results,  to be materially  different from any future
results,   performance   or   achievements   expressed   or   implied   by  such
forward-looking statements. Such factors are discussed in detail above or in the
Company's  Form 10-K for the fiscal year ended  December 31,  1999.  Given these
uncertainties,  prospective  investors are cautioned not to place undue reliance
on such  forward-looking  statements.  The Company  disclaims any  obligation to
update any such factors or to publicly  announce the results of any revisions to
any of the  forward-looking  statements  contained in the Annual  Report on Form
10-K except as required by law.


<PAGE>


                                               CONSOLIDATED STATEMENTS OF INCOME
                                          Building Materials Holding Corporation
<TABLE>
<CAPTION>

                                                                                        For the years ended December 31,
---------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)                                          1999           1998          1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>            <C>           <C>
Net sales ......................................................................   $ 1,007,108    $   877,280   $   728,065
Cost of sales ..................................................................       755,137        663,122       559,655
---------------------------------------------------------------------------------------------------------------------------
Gross profit ...................................................................       251,971        214,158       168,410
Selling, general and administrative expense ....................................       208,775        180,129       145,935
Other income ...................................................................         2,466          1,094         1,882
---------------------------------------------------------------------------------------------------------------------------
Income from operations .........................................................        45,662         35,123        24,357
Equity in earnings of unconsolidated companies, net of amortization ............         4,978             --            --
Interest expense ...............................................................        13,184         10,218         8,666
---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item ..............................        37,456         24,905        15,691
Income taxes ...................................................................        14,421          9,756         6,198
---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item ...............................................        23,035         15,149         9,493
Extraordinary item, net of tax .................................................        (3,352)            --            --
---------------------------------------------------------------------------------------------------------------------------
Net income .....................................................................   $    19,683    $    15,149   $     9,493
===========================================================================================================================
Income before extraordinary item per common share:
  Basic ........................................................................   $      1.82    $      1.21   $      0.80
  Diluted ......................................................................   $      1.80    $      1.20   $      0.78

Net income per common share:
  Basic ........................................................................   $      1.55    $      1.21   $      0.80
  Diluted ......................................................................   $      1.54    $      1.20   $      0.78
</TABLE>

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


<PAGE>

CONSOLIDATED BALANCE SHEETS
Building Materials Holding Corporation

<TABLE>
<CAPTION>
                                                                                At December 31,
------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)                                      1999       1998
------------------------------------------------------------------------------------------------
<S>                                                                          <C>        <C>
ASSETS
Current assets
  Cash ...................................................................   $  7,452   $  8,264
  Receivables, net .......................................................    110,123     92,113
  Inventories ............................................................     80,679     78,746
  Deferred income tax benefit ............................................      2,781      2,488
  Prepaid expenses .......................................................      7,652      2,355
------------------------------------------------------------------------------------------------
    Total current assets .................................................    208,687    183,966
Property, plant and equipment, net .......................................    153,598    139,585
Equity investments in unconsolidated companies ...........................     30,762         --
Goodwill, net ............................................................     47,477     43,903
Deferred loan costs ......................................................      4,873        914
Other ....................................................................      4,722      5,613
------------------------------------------------------------------------------------------------
Total assets .............................................................   $450,119   $373,981
------------------------------------------------------------------------------------------------


LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
  Current portion of long-term debt ......................................   $  3,200   $     --
  Accounts payable and accrued expenses ..................................     66,204     67,222
------------------------------------------------------------------------------------------------
    Total current liabilities ............................................     69,404     67,222
Long-term debt, net of current portion ...................................    170,547    117,805
Deferred income taxes ....................................................      5,124      5,404
Other long-term liabilities ..............................................      4,934      3,300
Shareholders' equity
  Common stock, $.001 par value, 20,000,000 shares authorized;
    12,679,686 and 12,652,298 shares outstanding, respectively............         13         13
Additional paid-in capital ...............................................    108,433    108,256
Retained earnings ........................................................     91,664     71,981
------------------------------------------------------------------------------------------------
  Total shareholders' equity .............................................    200,110    180,250
Total liabilities and shareholders' equity ...............................   $450,119   $373,981
------------------------------------------------------------------------------------------------
</TABLE>

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


<PAGE>


                                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                          Building Materials Holding Corporation
<TABLE>
<CAPTION>

                                                                    Additional
                                                 Common Stock        Paid-In     Retained
(AMOUNTS IN THOUSANDS)                         Shares     Amount     Capital     Earnings      Total
------------------------------------------------------------------------------------------------------
<S>                                            <C>      <C>         <C>         <C>          <C>
Balance, December 31, 1996 ..............      11,825   $      12   $  97,731   $  47,345    $ 145,088
  Net income ............................          --          --          --       9,493        9,493
  Accretion of redeemable preferred stock          --          --          --          (6)          (6)
  Stock issued for acquisitions .........         492          --       6,300          --        6,300
  Stock options exercised and other .....          14          --          76          --           76
------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ..............      12,331          12     104,107      56,832      160,951
  Net income ............................          --          --          --      15,149       15,149
  Stock issued for acquisitions .........         299          --       4,000          --        4,000
  Stock options exercised and other .....          22           1         149          --          150
------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ..............      12,652          13     108,256      71,981      180,250
  Net income ............................          --          --          --      19,683       19,683
  Stock options exercised and other .....          28          --         177          --          177
------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 ..............      12,680   $      13   $ 108,433   $  91,664    $ 200,110
------------------------------------------------------------------------------------------------------
</TABLE>

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


<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
Building Materials Holding Corporation

<TABLE>
<CAPTION>
                                                                                          For the years ended December 31,
--------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)                                                                     1999        1998         1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .........................................................................   $  19,683    $  15,149    $   9,493
Adjustments to reconcile net income to cash provided by operating activities:
  Depreciation and amortization ....................................................      14,149       12,955       11,009
  Deferred income taxes ............................................................        (573)        (137)        (117)
  Loss (gain) on sales of assets and location centers ..............................      (1,403)          91         (466)
  Equity in earnings of unconsolidated subsidiaries, net of amortization ...........      (4,978)          --           --
  Distributions received from unconsolidated subsidiaries ..........................       2,496           --           --
  Extraordinary item, write-off of deferred financing costs ........................         663           --           --
Changes in assets and liabilities, net of effects of acquisitions and location sales
  Receivables, net .................................................................     (12,418)         733       (3,064)
  Inventories ......................................................................      (2,419)       5,974        9,452
  Prepaid expenses .................................................................      (5,287)       1,213       (1,484)
  Accounts payable and accrued expenses ............................................         662        8,868       10,655
  Other assets .....................................................................       2,409          (34)      (1,350)
  Other long-term liabilities ......................................................       1,633            3        1,212
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ..........................................      14,617       44,815       35,340
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ................................................     (27,380)     (19,595)     (13,289)
Acquisitions, net of cash acquired .................................................     (15,779)     (24,330)     (40,231)
Equity investments in unconsolidated subsidiaries ..................................     (26,093)          --           --
Proceeds from sale of building materials centers, net of cash sold .................       6,680           --           --
Proceeds from dispositions of property and equipment ...............................       4,152          909        1,450
Investments in preferred stock .....................................................      (1,000)          --           --
Other, net .........................................................................        (511)          --           --
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ..............................................     (59,931)     (43,016)     (52,070)
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under term note ..........................................................     100,000           --           --
Net borrowings under revolving credit agreements ...................................      27,792        7,705       20,630
Principal payments of unsecured senior notes .......................................     (66,667)      (9,457)        (561)
Principal payments of other notes payable ..........................................      (8,723)          --           --
Deferred financing costs ...........................................................      (4,963)          --           --
Decrease in book overdrafts ........................................................      (3,112)          --           --
Redemption of preferred stock ......................................................          --           --       (2,000)
Other, net .........................................................................         175           40         (228)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ................................      44,502       (1,712)      17,841
--------------------------------------------------------------------------------------------------------------------------
Net change in cash .................................................................        (812)          87        1,111
Cash, beginning of year ............................................................       8,264        8,177        7,066
--------------------------------------------------------------------------------------------------------------------------
Cash, end of year ..................................................................   $   7,452    $   8,264    $   8,177
--------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
  Cash paid during the year for:
    Interest, net of amounts capitalized ...........................................   $  13,294    $  10,389    $   8,353
    Income taxes ...................................................................   $  21,314    $   6,068    $   5,567
</TABLE>

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


<PAGE>


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                          Building Materials Holding Corporation

1.    ORGANIZATIONAL STRUCTURE,  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES

ORGANIZATIONAL STRUCTURE AND NATURE OF OPERATIONS

On September  23, 1997,  Building  Materials  Holding  Corporation  ("BMHC") was
formed to provide its  predecessor,  BMC West Corporation  ("BMC West"),  with a
holding company organizational structure that can accommodate future growth from
internal  operations,  acquisitions or joint ventures,  broaden the alternatives
available for future financing and generally provide for greater  administrative
and operational flexibility. BMC West's outstanding capital stock was converted,
on a share for share basis,  into capital  stock of Building  Materials  Holding
Corporation.  BMHC's common stock is listed on the Nasdaq  National Market under
the symbol BMHC.

      BMHC operates two wholly-owned subsidiaries--BMC West Corporation and BMHC
Framing, Inc. BMC West is a regional provider of building materials and services
in  the  United  States,  selling  primarily  to  professional  contractors  and
builders,  as  well as to  project-oriented  consumers  (including  professional
repair and remodel  contractors  hired by them);  through 53 building  materials
centers and  value-added  facilities,  located  throughout the Western and South
Central United States. BMC West provides value-added conversion products,  which
include  pre-hung doors,  roof and floor trusses and  pre-assembled  windows and
lumber pre-cut to meet customer  specifications.  BMHC Framing, Inc., owns a 49%
equity  interest in Knipp Brothers  Industries,  LLC,  ("Industries")  a framing
contractor in Arizona and Nevada, and a 49% equity interest in KBI Distribution,
LLC ("Distribution"), a provider of building materials in Arizona.

PRINCIPLES OF CONSOLIDATION

The  consolidated  financial  statements  include  the  accounts of BMHC and its
wholly-owned  subsidiaries  (the "Company").  The equity method of accounting is
used for  investments  in which  the  Company  has  significant  influence.  All
significant   intercompany   balances  and   transactions   are   eliminated  in
consolidation.

RECLASSIFICATIONS

Certain  reclassifications  have been made to amounts reported in prior periods,
none of which affect the Company's financial position, results of operations, or
cash flows.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles  in the United States of America  requires  management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and contingent  assets and liabilities at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual amounts could differ from those estimates.

      The Company reviews the  recoverability of all long-lived assets including
goodwill, whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.  The measurement of any impairment is
based  primarily  on the ability to recover the cost of  long-lived  assets from
expected future  operating cash flows on an undiscounted  basis. In management's
opinion, no such impairment existed at December 31, 1999 and 1998.

CASH AND CASH EQUIVALENTS

Cash   represents   amounts  on  deposit  with   high-credit-quality   financial
institutions  and such balances may, at times,  exceed FDIC limits.  The Company
considers all highly liquid  investments that have a maturity of three months or
less at the date of purchase to be cash equivalents.

INVENTORIES

Inventories consist principally of materials purchased for resale and are stated
at the lower of average cost or market.

PROPERTY, PLANT AND EQUIPMENT

Property,  plant and  equipment are recorded at cost and  depreciated  using the
straight-line  method.  The  estimated  useful lives are ten to thirty years for
buildings  and  improvements,  seven to ten years for machinery and fixtures and
three to ten years for handling and delivery equipment.

      Major additions and improvements including interest costs, are capitalized
while maintenance and repairs that do not extend the useful life of the property
are expensed as incurred.  Gains and losses from dispositions of property, plant
and equipment are included in the Company's  consolidated statement of income in
other income.

DEFERRED LOAN COSTS

Loan costs are  capitalized  upon the issuance of long-term  debt and  amortized
over the life of the related debt using the  effective  interest rate method for
the  Company's  term  notes  and the  straight-line  method  for  the  Company's
revolving  credit facility.  Interest expense includes  amortization of deferred
loan  costs  of  $341,000,  $410,000  and  $315,000  in  1999,  1998  and  1997,
respectively.

GOODWILL

Goodwill  is  amortized  on a  straight-line  basis  over 30 years.  Accumulated
amortization  of goodwill was $5,460,000 and $3,840,000 at December 31, 1999 and
1998, respectively.


<PAGE>

OTHER ASSETS

Other assets consist of cash surrender values on Company owned life insurance, a
preferred  stock  investment  accounted  for  at  historical  cost,  non-compete
agreements   arising  from  acquisitions  and  trade  rebates   receivable  from
cooperative supplier organizations.

      The  non-compete  agreements  are  amortized  over the life of the related
agreements (two to five years).

REVENUE RECOGNITION

Revenues are  recognized  when title to the goods passes to the buyer,  which is
generally at the time of delivery.

STOCK COMPENSATION

The Company records  compensation  expense associated with awards of stock using
the intrinsic method rather than the fair value method.

ADVERTISING

Advertising  costs  are  expensed  when  incurred.  During  1999,  1998 and 1997
advertising expense was $1,964,000, $1,953,000 and $2,200,000, respectively.

NEW ACCOUNTING STANDARDS

In June,  1998, the Financial  Accounting  Standards  Board issued SFAS No. 133,
Accounting  for Derivative  Instruments  and Hedging  Activities.  The Statement
establishes  accounting and reporting standards requiring derivative instruments
(including  certain  derivative  instruments  embedded  in other  contracts)  be
recorded in the balance sheet as either an asset or liability  measured at their
fair value. The Company is required to adopt this Statement in the first quarter
of 2001 and  based on the  Company's  present  and  historic  use of  derivative
instruments  the adoption of this Statement is not currently  expected to have a
material impact on the Company's  consolidated results of operations,  financial
condition, or cash flows.

2.    EXTRAORDINARY ITEM

During the fourth  quarter of 1999,  the  Company  repaid its  unsecured  senior
subordinated notes prior to maturity.  In connection with this early retirement,
the  Company  wrote off  $663,000  of  related  deferred  loan  costs and paid a
makewhole  premium  of  $4,788,000.   These  costs  are  included  in  the  1999
consolidated  statement of income as an extraordinary  item, net of a $2,099,000
tax benefit.

3. ACQUISITIONS

Businesses  acquired are accounted for using the purchase  method of accounting.
Under this  accounting  method,  the  purchase  price is allocated to the assets
acquired and  liabilities  assumed based on their  estimated  fair values at the
date of  acquisition.  Any excess of the purchase  price over the estimated fair
value of the net assets acquired is recorded as goodwill.  Operating  results of
the acquired  businesses are included in the  consolidated  statements of income
from the date of acquisition.

      In  1999,  the  Company   completed  three   acquisitions   involving  six
value-added  facilities  located in  Colorado,  Montana,  Nevada and Texas.  The
aggregate purchase price was $19,319,000,  consisting of $15,779,000 in cash and
a note payable for $3,540,000, net of discount. The issuance of the note payable
is considered a non-cash transaction for purposes of the consolidated  statement
of cash flows.

      The following  summarized unaudited pro forma results of operations assume
the 1999  acquisitions  occurred as of the  beginning of 1999 and 1998.  The pro
forma data has been prepared for comparative  purposes only. It does not purport
to be indicative  of the results of operations  that would have resulted had the
acquisitions  been consummated at the beginning of the years presented,  or that
may occur in the future. (in thousands, except per share data).

                                              Unaudited
---------------------------------------------------------------------
                                          1999        1998
---------------------------------------------------------------------

Net sales .........................   $1,037,304   $  908,886
Income before extraordinary item ..       25,516       17,333
Net income ........................       22,164       17,333
Income before extraordinary item
  per diluted common share ........         1.99         1.37
Net income per diluted common share         1.73         1.37

      In 1998, the Company completed eight acquisitions involving three building
materials  centers  and  eleven  value-added  facilities  located  in  Colorado,
Montana, Nevada, Oregon, Texas and Washington. The total consideration given was
$33,978,000,  consisting of $24,330,000 in cash, a note payable for  $5,023,000,
299,343 shares of common stock valued at $4,000,000 and other assumed  operating
liabilities  of  $625,000.  The  issuance  of the note  payable,  payment of the
Company's  common  stock  and  the  assumption  of  operating   liabilities  are
considered non-cash  transactions for purposes of the consolidated  statement of
cash flows.


<PAGE>

      The following  summarized unaudited pro forma results of operations assume
the 1998  acquisitions  occurred as of the  beginning of 1998 and 1997.  The pro
forma data has been prepared for comparative  purposes only. It does not purport
to be indicative  of the results of operations  that would have resulted had the
acquisitions  been consummated at the beginning of the years presented,  or that
may occur in the future. (in thousands, except share data.)

                                         Unaudited
---------------------------------------------------------
                                      1998          1997
---------------------------------------------------------
Net sales ......................   $920,140      $796,448
Net income .....................     15,313         9,656
Per diluted common share........       1.20           .78

4. RECEIVABLES

Receivables consisted of the following at December 31, (in thousands):

---------------------------------------------------------
                                      1999         1998
---------------------------------------------------------

Trade receivables ..............   $ 106,965    $  90,968
Other ..........................       5,415        3,207
Allowance for returns, discounts
  and doubtful accounts ........      (2,257)      (2,062)
---------------------------------------------------------
                                   $ 110,123    $  92,113
---------------------------------------------------------

      No one  customer  exceeds  2% of net  sales.  Because  the  customers  are
dispersed  among the  Company's  various  markets,  its  credit  risk to any one
customer  or state  economy is not  significant.  The Company  performs  ongoing
credit  evaluations  of its  customers  and provides an  allowance  for doubtful
accounts when events or circumstances indicate that collection is doubtful.

5.    EQUITY INVESTMENTS

In  May  1999,  the  Company  completed  the  investment  of a 49%  interest  in
Industries, a framing company with operations in Phoenix and Tucson, Arizona and
Las Vegas,  Nevada. The total cost was $28,293,000  consisting of $26,093,000 in
cash and $2,200,000  from various assets of its Phoenix  operation.  The Company
has the right to acquire the remaining  51% interest in  Industries  and the 51%
owner has a  corresponding  right to require  the  Company to  purchase  its 51%
ownership after five years.

      In December 1999, Industries contributed the net assets and liabilities of
its lumberyard  operation to Distribution in consideration  for a 100% ownership
interest,  which was  subsequently  distributed  to the members of Industries in
proportion to their respective ownership interest in Industries.

      Summarized   1999  combined   financial   information   of  the  Company's
equity-basis  unconsolidated companies follows (in thousands):

Income statement information:
  Net sales ...............................................   $ 101,354
  Income from operations ..................................   $   1,298

  Net income ..............................................   $   1,478
  Other members' share of net income ......................        (754)
-----------------------------------------------------------------------
  Company's share of net income ...........................         724
  Other income allocations, net of amortization of goodwill       4,254
-----------------------------------------------------------------------
  Equity in earnings of unconsolidated companies ..........   $   4,978
-----------------------------------------------------------------------
Financial position information:
  Current assets ..........................................   $  29,569
  Noncurrent assets .......................................   $   5,444
  Total liabilities (current) .............................   $   6,639

  Members' capital ........................................   $  28,374
  Other members' share of capital .........................     (14,471)
-----------------------------------------------------------------------
  Company's share of capital ..............................      13,903
  Goodwill ................................................      16,859
-----------------------------------------------------------------------
  Equity investments in unconsolidated companies ..........   $  30,762
-----------------------------------------------------------------------

6. PROPERTY, PLANT AND EQUIPMENT

Property,  plant and  equipment  consisted of the  following at December 31, (in
thousands):

----------------------------------------------------------------
                                              1999        1998
----------------------------------------------------------------

Land ..................................   $  39,337    $  38,794
Buildings and improvements ............      80,414       76,018
Machinery and fixtures ................      38,391       30,725
Handling and delivery equipment........      34,573       30,812
Construction in progress ..............      11,097        6,915
----------------------------------------------------------------
                                            203,812      183,264
Less accumulated depreciation .........     (50,214)     (43,679)
----------------------------------------------------------------
                                          $ 153,598    $ 139,585
----------------------------------------------------------------

      Interest of  $221,000,  $94,000 and $0 has been  capitalized  during 1999,
1998 and 1997, respectively.  Depreciation expense was $11,779,000,  $10,484,000
and $9,055,000 in 1999, 1998 and 1997, respectively.

      At December 31, 1999 the Company had  $7,658,000 of land and buildings and
improvements held for sale.

      In  December  1999,  the  Company  sold three of its  centers  (located in
Fredericksburg,  Marble Falls and Shiner, Texas) to Parker Lumber and recorded a
gain of $1,384,000.


<PAGE>

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following at December 31,
(in thousands):

-------------------------------------------------------------------------------
                                                             1999       1998
-------------------------------------------------------------------------------
Trade accounts payable ...............................   $  33,583    $  30,209
Book overdrafts ......................................      12,188       15,300
Accrued compensation .................................      10,966        8,937
Sales tax payable ....................................       4,114        3,734
Income taxes payable .................................          --        3,607
Other ................................................       5,353        5,435
-------------------------------------------------------------------------------
                                                         $  66,204    $  67,222
-------------------------------------------------------------------------------


8. DEBT

Debt consisted of the following at December 31, (in thousands):

-------------------------------------------------------------------------------
                                                                      1999
-------------------------------------------------------------------------------

Term note .....................................................   $ 100,000
Revolving credit facility .....................................      70,207
Non-interest bearing term note, net of related
  discount of $1,460 ..........................................       3,540
-------------------------------------------------------------------------------
                                                                    173,747
Less current portion ..........................................      (3,200)
-------------------------------------------------------------------------------
                                                                  $ 170,547
-------------------------------------------------------------------------------

      During the fourth  quarter of 1999,  management  entered into a new senior
credit facility which included a revolving credit facility of $125,000,000 and a
term note of  $100,000,000.  The financing was arranged through Bank of America,
N.A., as  administrative  agent,  and nine other banks. The facility was used to
repay the Company's  8.10% and 9.18%  unsecured  senior notes and other debt and
will be available to fund future acquisitions.

      Under the existing revolving credit facility,  the Company has the ability
to borrow  up to  $125,000,000  due 2004.  Borrowings  under the  revolver  bear
interest at prime plus 0.50% to 1.50%,  or Offshore Rate plus 2.00% to 3.00%.  A
fee of .375% to .50% per annum is charged on the unused portion. At December 31,
1999 the Company had  $54,793,000 of unborrowed  capacity under this  agreement.
The $100,000,000 term note is due 2004 and bears interest at prime plus 0.50% to
1.50%, or Offshore Rate plus 2.00% to 3.00%.

      The term  note and  revolving  credit  facility  are both  secured  by the
following assets:  all accounts,  chattel paper,  deposit  accounts,  documents,
equipment, general intangibles, pledged collateral,  inventory, books, letter of
credit proceeds and deeds of trust on certain real property.

      The agreements related to the above borrowings contain covenants providing
for the maintenance of certain  financial ratios and conditions  including total
funded debt to capitalization;  consolidated net worth; and coverage ratio which
includes earnings before interest, taxes, depreciation and amortization (EBITDA)
and limitations on capital  expenditures,  among certain other restrictions.  At
December  31,  1999,  the Company was in  compliance  with these  covenants  and
conditions.

      In connection  with a 1999  acquisition,  the Company  issued a $5,000,000
non-interest  bearing  five-year  term  note to the  previous  owner as  partial
consideration  for the  purchase.  The  note has been  recorded  assuming  a 15%
effective  interest  rate  resulting in a discount of $1,460,000 at December 31,
1999.  Under the terms of the note,  principal  payments are due beginning 2004;
however,  accelerated  payments may be due based on the operating results of the
acquired  facilities  during  each of the  next  five  years.  The  Company  has
discounted  its  principal  payments  for this note  based on  estimates  of the
operating results of the acquired business.

      The  scheduled   principal  payments  of  debt  are  $3,200,000  in  2000,
$10,800,000 in 2001,  $12,150,000 in 2002,  $16,000,000 in 2003 and $131,597,000
in 2004.

9. PREFERRED STOCK

BMHC has  2,000,000  shares of  preferred  stock  authorized  but not  currently
issued.

      In 1987, BMC West authorized and issued 50,000 shares of Class B preferred
stock with a total mandatory redemption requirement of $5,000,000 due $1,000,000
annually  through 1996 and  $2,000,000 in 1997. As of December 31, 1996,  20,000
shares of Class B preferred stock were outstanding. During 1997, these remaining
shares were redeemed for $2,000,000.

10. STOCK PURCHASE AND INCENTIVE PLANS

Shareholders' Rights Plan

BMHC adopted a shareholder rights plan which expires in 2007. Under the plan, if
a company  acquires 15% or more of BMHC's stock or makes a tender or other offer
to do so without the approval of the Board of Directors, shareholders would have
the right to purchase  stock of BMHC or the  acquiring  company at a significant
discount.  The Board of Directors of BMHC has the right to redeem the rights for
a nominal  amount,  to extend the period  before  shareholders  may exercise the
rights or to take other  actions  permitted  by the plan.  The rights trade with
BMHC's stock but do not give shareholders any voting rights.  The rights plan is
intended to encourage any person  seeking to acquire BMHC to negotiate  with the
Board of Directors.

Cash Equity Plan

On April 1, 1999,  BMHC adopted a Cash Equity Plan to provide  incentive for key
management  employees.  The awards vest after three years from the date of grant
and expire after five years. Each unit under an award allows for an exchange for
cash in the amount of the fair market  value of BMHC's  common stock at the date
of exercise.  The number of units  available  for grant,  including  those units
outstanding and unexercised,  cannot exceed  two-percent of BMHC's common shares
outstanding  at any given time.  During  1999,  BMHC  awarded  73,190  units and
recognized  compensation  expense of $243,000.  Accelerated vesting may occur if
there is a change of control of BMHC, as defined in the Cash Equity Plan.


<PAGE>

STOCK OPTION PLANS

BMHC has  four  stock  option  plans:  the  1991  Senior  Management  and  Field
Management  Plan,  the 1992  Non-Qualified  Stock Option Plan, the 1993 Employee
Stock Option Plan and the 1993 Non-Employee  Stock Option Plan (the Stock Option
Plans).  A total of  1,397,000  shares of common  stock have been  reserved  for
potential grants under the Stock Option Plans.

      The 1991 Senior  Management  and Field  Management  Plan  provides for the
granting of options to purchase shares of BMHC's common stock at exercise prices
below fair market value. At December 31, 1999,  options to purchase 2,898 shares
under this plan remain outstanding.  Such options expire ten years from the date
of grant.

      The 1992  Non-Qualified  Stock  Option  Plan and the 1993  Employee  Stock
Option Plan provide for the granting of options,  at the discretion of the Board
of Directors,  to purchase  shares of BMHC's common stock. At December 31, 1999,
options to  purchase  7,812 and  149,179  shares  from the 1992 and 1993  plans,
respectively, remain outstanding. The exercise price is equal to the fair market
value of BMHC's  common stock on the date the options are granted.  Options vest
over five  years  from the date of grant  and  expire at the end of ten years if
unexercised.

      The 1993  Non-Employee  Stock Option Plan is available only to nonemployee
directors.  Options  granted under this plan have an exercise price equal to the
fair market value of BMHC's common stock on the date the options are granted. At
December  31, 1999,  options to purchase  88,500  shares of BMHC's  common stock
under this plan remain  outstanding.  The options are exercisable after one year
following the date of grant and expire at the end of ten years if unexercised.

      During  1997,  as an  additional  incentive  to attract a member of senior
management,  the Board of  Directors  authorized  and  issued an award of 50,000
options.  The exercise price was equal to the fair market value of BMHC's common
stock on the date the options were granted. These options will vest in 2002, but
vesting may be  accelerated  if BMHC's common stock reaches  certain fair market
values.  These options expire 10 years from the date of grant,  or 2007, and are
included in the tables below.

      A summary of the  activity of the Stock  Option  Plans for the years ended
December 31, 1999, 1998 and 1997, is presented in the table below:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                         1999                        1998                        1997
---------------------------------------------------------------------------------------------------------------------------------
                                                                    Weighted                 Weighted                Weighted
                                                                     Average                  Average                 Average
                                                         Shares   Exercise Price   Shares  Exercise Price  Shares  Exercise Price
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>          <C>            <C>        <C>         <C>        <C>
Balance at beginning of the year ..................      920,995    $   11.57      795,704    $   11.24   603,060    $   10.76
Options granted ...................................      215,750        10.42      173,470        12.52   227,170        12.47
Options exercised .................................      (27,388)        3.40      (21,907)        3.05   (13,946)        4.46
Options forfeited .................................      (34,556)       13.95      (26,272)       15.00   (20,580)       15.35
---------------------------------------------------------------------------------------------------------------------------------
Balance at end of the year ........................    1,074,801    $   11.46      920,995    $   11.57   795,704    $   11.24
---------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of the year ....................      701,594    $   11.33      606,187    $   10.74   526,285    $    9.78
Weighted average fair value of options granted ....   $     6.56                  $   6.24               $   5.93
</TABLE>

      The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                                              Options Outstanding                                        Options Exercisable
------------------------------------------------------------------------------------------------------------------------------------
                            Number             Weighted Average                                    Number
                        Outstanding at             Remaining                                   Exercisable at
Range of                   December               Contractual           Weighted Average          December          Weighted Average
Exercise Prices            31, 1999               Life Years             Exercise Price           31, 1999           Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>                       <C>                    <C>                    <C>                    <C>
$ 1.21 to $ 5.67             225,062                  1.5                    $ 2.89                 225,062                $ 2.89
$ 8.67 to $17.00             741,902                  7.5                     12.43                 379,006                 13.34
$19.50 to $29.75             107,837                  5.7                     22.64                  97,526                 22.97
------------------------------------------------------------------------------------------------------------------------------------
$ 1.21 to $29.75           1,074,801                  6.0                    $11.46                 701,594                $11.33
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

      The fair  value of each  option  grant is  estimated  on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997:  risk-free interest rates of
5.4%, 5.5% and 6.0%,  respectively;  estimated lives of approximately 6 years, 6
years and 6 years,  respectively;  and expected stock price volatility of 61.6%,
42.7% and 38.0%, respectively.

      Had compensation cost for these plans been determined using the fair value
method,  the  Company's  1999 net income  would have been reduced on a pro forma
basis by  $617,000  and basic and  diluted  earnings  per share  would have been
reduced on a pro forma basis by $0.05.  The 1998 pro forma reductions would have
been a reduction in net income of $437,000, and a reduction in basic and diluted
earnings  per share of $0.03.  The 1997 pro forma  reductions  would have been a
reduction  in net  income of  $351,000,  and a  reduction  in basic and  diluted
earnings per share of $0.03.

11.   INCOME TAXES

Income taxes for the years ended  December 31, 1999,  1998 and 1997 consisted of
the following (in thousands):

--------------------------------------------------------------------------------
                                        1999       1998        1997
--------------------------------------------------------------------------------
Current income taxes
  Federal ........................   $ 13,912    $  8,853    $  5,480
  State ..........................      1,082       1,040         835
--------------------------------------------------------------------------------
                                       14,994       9,893       6,315
Deferred income taxes
  Federal ........................       (529)       (126)       (102)
  State ..........................        (44)        (11)        (15)
--------------------------------------------------------------------------------
                                         (573)       (137)       (117)
--------------------------------------------------------------------------------
                                     $ 14,421    $  9,756    $  6,198
--------------------------------------------------------------------------------

      A reconciliation  of the statutory  Federal income tax rate to the rate as
provided in the consolidated statements of income follows:

--------------------------------------------------------------------------------
                                             1999         1998       1997
--------------------------------------------------------------------------------
Statutory rate ........................     35.0%         35.0%      35.0%
State income taxes.....................      2.4           3.0        3.4
Other .................................      1.1           1.2        1.1
--------------------------------------------------------------------------------
                                            38.5%         39.2%      39.5%
--------------------------------------------------------------------------------

Deferred income taxes are provided to reflect temporary  differences between the
financial and tax bases of assets and liabilities  using  presently  enacted tax
rates and laws.

      The components of deferred income taxes included in the Company's year-end
balance sheets were as follows (in thousands):

--------------------------------------------------------------------------------
                                                            1999       1998
--------------------------------------------------------------------------------
Deferred tax assets
  Tax basis in excess of book basis
    of acquired assets ................................   $    30    $    30
  Inventories, tax basis in excess of book basis.......     1,647      1,901
  Reserves not yet deductible for tax .................     2,663      2,077
  Other ...............................................     1,548      1,276
--------------------------------------------------------------------------------
  Total deferred tax assets ...........................     5,888      5,284
--------------------------------------------------------------------------------
Deferred tax liabilities
  Tax in excess of book depreciation ..................     7,040      7,046
  Deferred costs deducted for taxes ...................     1,191      1,154
--------------------------------------------------------------------------------
  Total deferred tax liabilities ......................     8,231      8,200
--------------------------------------------------------------------------------
                                                          $(2,343)   $(2,916)

Classified as
  Deferred income tax benefit (current assets) ........   $ 2,781    $ 2,488
  Deferred income taxes (long-term liabilities) .......    (5,124)    (5,404)
--------------------------------------------------------------------------------
                                                          $(2,343)   $(2,916)
--------------------------------------------------------------------------------

12. NET INCOME PER COMMON SHARE

Net income per common share was determined as follows (in thousands):

--------------------------------------------------------------------------------
                                             1999      1998       1997
--------------------------------------------------------------------------------
Net income ............................   $ 19,683   $ 15,149   $  9,493
Class B preferred stock accretion .....         --         --         (6)
--------------------------------------------------------------------------------
Net income available to
  common shareholders .................   $ 19,683   $ 15,149   $  9,487
--------------------------------------------------------------------------------
Weighted average shares
  outstanding used to determine
  basic net income per common share ...     12,667     12,509     11,919
Net effect of dilutive stock options(1)        125        138        218
--------------------------------------------------------------------------------
Average shares used to
  determine diluted net income
per common share ......................     12,792     12,647     12,137
--------------------------------------------------------------------------------

(1)   STOCK  OPTIONS OF 644,371,  493,187 AND 495,140  WERE NOT  INCLUDED IN THE
      COMPUTATION,  BECAUSE TO DO SO WOULD HAVE BEEN ANTI-DILUTIVE FOR THE YEARS
      ENDED DECEMBER 31, 1999, 1998 AND 1997, RESPECTIVELY.

13.   RETIREMENT PLANS

BMHC has a savings  and  retirement  plan for its  salaried  and  certain of its
hourly employees  whereby the eligible  employees may contribute a percentage of
their  earnings  to a trust,  i.e.,  a  401(k)  plan.  The  Company  also  makes
contributions  to the trust based on a percentage of the  contributions  made by
the participating  employees and a percentage of net income for the period.  The
Company's  contributions  are charged against  operations and were $2,707,000 in
1999, $2,402,000 in 1998 and $1,449,000 in 1997.


<PAGE>

      BMHC has a  supplemental  retirement  plan  for  selected  key  management
employees and directors.  The  contributions  are based on the Company achieving
certain  operating  earnings levels.  Pursuant to this plan, the Company charged
operations  for  $1,420,000 in 1999,  $1,065,000 in 1998,  and $606,000 in 1997.
BMHC has  purchased  company-owned  life  insurance  in order to have a  funding
mechanism for this plan. Retirement payments will be paid to the participants or
their beneficiary over a 15-year period subsequent to retirement or death.

      BMHC does not provide any other postretirement benefits for its employees.

14.   COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases real property,  vehicles and office equipment under operating
leases. Rental expense was $6,813,000 in 1999, $6,503,000 in 1998, $5,180,000 in
1997.  Certain of the leases are  noncancelable  and have minimum  lease payment
requirements  of  $6,143,000 in 2000,  $4,487,000  in 2001,  $3,179,000 in 2002,
$2,425,000 in 2003 and $1,655,000 in 2004.

LEGAL PROCEEDINGS

The Company is involved in  litigation  and other legal  matters  arising in the
normal course of business. In the opinion of management,  the Company's recovery
or  liability,  if any,  under  any of these  matters  will not have a  material
adverse  effect on the  Company's  financial  position,  liquidity or results of
operations.

15. FINANCIAL INSTRUMENTS

The book value compared with the fair value of financial instruments at December
31, were as follows (in thousands):

--------------------------------------------------------------------------------
                                            1999                  1998
--------------------------------------------------------------------------------
                                       Book       Fair       Book       Fair
                                       Value      Value      Value      Value
--------------------------------------------------------------------------------
Long-term debt:
  Variable rate debt...........      $167,607   $167,607   $ 42,415   $ 42,415
  Fixed rate debt .............         3,540      3,540     75,390     79,713
--------------------------------------------------------------------------------
                                     $171,147   $171,147   $117,805   $122,128
--------------------------------------------------------------------------------

The book  values of cash and cash  equivalents,  accounts  receivable,  accounts
payable and variable interest rate long-term debt approximated fair value due to
either the  short-term  maturities or current  variable  interest rates of these
instruments.

      The fair  value of fixed  rate  debt  has been  estimated  based  upon the
discounted  cash flows using the  Company's  incremental  rate of borrowing  for
similar debt.

16. BUSINESS SEGMENT AND PRODUCTS

The Company's  chief  operating  decision  makers consist of senior managers who
work together to allocate resources to and assess the performance of each of the
Company's individual locations.

Management   believes  its  locations   have  similar   operating  and  economic
characteristics  and has  aggregated  its  operations  into a  single  reporting
segment, that being the supply and distribution of lumber and building materials
to professional contractors and project oriented consumers.

      The Company's  locations  principally  derive  revenues from wood products
(lumber,  plywood and oriented strand board),  value-added  (millwork,  roof and
floor  trusses,  pre-hung  doors,  windows  and  moldings),  building  materials
(roofing,  siding,  insulation and steel  products) and other  revenues  (paint,
hardware,  tools,  electrical and plumbing).  Net sales by product for the years
ended December 31, 1999, 1998 and 1997 were as follows (in thousands):

--------------------------------------------------------------------------------
                                           1999        1998          1997
--------------------------------------------------------------------------------
Net sales
Wood products ......................   $  444,834   $  381,221   $  340,972
Value-added ........................      348,569      275,862      175,955
Building materials..................      136,757      136,856      138,332
Other ..............................       76,948       83,341       72,806
--------------------------------------------------------------------------------
Total revenues .....................   $1,007,108   $  877,280   $  728,065
--------------------------------------------------------------------------------

17.   RESULTS OF QUARTERLY OPERATIONS (UNAUDITED)

Operating  results  by  quarter  for 1999 and 1998 are as  follows  (dollars  in
thousands, except per share data):

--------------------------------------------------------------------------------
                              First      Second       Third     Fourth
--------------------------------------------------------------------------------
1999
  Net sales ............   $ 215,625   $ 256,005   $ 288,715   $ 246,763
  Gross profit .........      54,111      64,165      69,805      63,890
  Income from
    operations .........       6,644      14,444      18,286       6,288
  Extraordinary item ...          --          --          --      (3,352)
  Net income ...........       2,521       7,039       8,964       1,159
  Income before extra-
    ordinary item per
    diluted common
    share(1) ...........   $    0.20   $    0.55   $    0.70   $    0.35
  Net income per
    diluted common
    share(1) ...........   $    0.20   $    0.55   $    0.70   $    0.09
Common stock prices:
  High .................   $  12.625   $  12.750   $  13.313   $  11.750
  Low ..................       9.375       9.750      10.000       7.500

1998
  Net sales ............   $ 183,631   $ 226,017   $ 249,757   $ 217,875
  Gross profit .........      43,965      54,604      61,108      54,481
  Income from
    operations .........       3,902      10,532      13,565       7,124
  Net income ...........         850       4,754       6,723       2,822
  Net income per diluted
    common share(1) ....   $    0.07   $    0.38   $    0.53   $    0.22
Common stock prices:
  High .................   $  13.625   $  14.875   $  14.438   $  13.063
  Low ..................      10.625      11.500      10.500       9.313

(1)   NET INCOME PER SHARE  CALCULATIONS  ARE BASED ON THE AVERAGE COMMON SHARES
      OUTSTANDING FOR EACH PERIOD PRESENTED.  ACCORDINGLY,  THE TOTAL OF THE PER
      SHARE FIGURES FOR THE QUARTERS MAY NOT EQUAL THE PER SHARE FIGURE REPORTED
      FOR THE YEAR.


<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Building Materials Holding Corporation

In our opinion,  the accompanying  consolidated balance sheet as of December 31,
1999 and the related consolidated statements of income, shareholders' equity and
cash flows present fairly, in all material  respects,  the financial position of
Building  Materials Holding  Corporation and its subsidiaries (the "Company") at
December 31, 1999, and the results of their  operations and their cash flows for
the year then ended in conformity with accounting  principles generally accepted
in  the  United  States  of  America.   These   financial   statements  are  the
responsibility of the Company's management;  our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards  generally accepted in
the United  States of America,  which require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable basis for the opinion expressed above. The financial
statements  of the  Company as of  December  31, 1998 and for the two years then
ended were audited by other  independent  accountants whose report dated January
25, 1999 expressed an unqualified opinion on those statements.


/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
    PRICEWATERHOUSECOOPERS LLP


San Francisco, California
February 17, 2000