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, 2000, 1999 and
1998, the percentage  relationship  to net sales of certain costs,  expenses and
income items.

--------------------------------------------------------------------------------
                                     2000              1999             1998
--------------------------------------------------------------------------------
Net sales ........................  100.0%            100.0%           100.0%
Gross profit .....................   26.7              25.0             24.4
Selling, general and
  administrative expense .........   22.7              20.7             20.5
Other income .....................    0.2               0.2              0.1
Income from operations ...........    4.2               4.5              4.0
Equity in earnings of
  unconsolidated companies .......    0.8               0.5               --
Interest expense .................    1.7               1.3              1.2
Income taxes .....................    1.3               1.4              1.1
Extraordinary charge .............     --              (0.3)              --
Net income .......................    1.9               2.0              1.7
================================================================================

2000 COMPARED WITH 1999

     Net sales for 2000 were $1,014.0 million, a 0.7% increase over net sales of
$1,007.1  million in 1999.  Sales at facilities  that operated for at least nine
months of the year in both 1999 and 2000 decreased 1.2%.  This same-store  sales
decrease is primarily  due to deflation  of commodity  wood prices.  Value-added
products  accounted  for  $410.1  million,  or  40.4% of net  sales in 2000,  an
increase from $348.6 million, or 34.6% of net sales in 1999.

     Gross  profit  increased to $270.4  million,  or 26.7% of net sales in 2000
from $252.0 million, or 25.0% of net sales, in 1999,  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.  In
addition, gross margins of our commodity wood products have increased due to the
impact of the deflationary environment resulting in lower material costs.

     Selling,  general and  administrative  ("SG&A") expense increased to $229.9
million,  or 22.7% of net sales,  in 2000 from $208.8  million,  or 20.7% of net
sales,  in 1999. This increase as a percentage of net sales was due primarily to
the  continued  deflation in prices of commodity  wood products and higher costs
associated with expanding value-added sales. In addition, low unemployment and a
tight labor  market  resulted in higher wage costs in our efforts to attract and
retain high quality employees in 2000.

     In 2000,  other  income  included a $2.2  million  gain on the sale of real
estate in Beaverton,  Oregon, offset by a $1.8 million goodwill asset impairment
charge  resulting  from the pending sale of a business  unit in Grand  Junction,
Colorado.  Other  income  in 1999  included  a $1.4  million  gain on  sales  of
equipment and three  business  units  located in Texas,  offset by costs of $0.8
million related to a postponed private placement of subordinated debt.

     Equity in earnings of unconsolidated  companies  increased to $8.4 million,
net of amortization of goodwill, compared to $5.0 million in 1999. This increase
is  attributed to the improved  profitability  of the companies in which we have
invested and the  inclusion  of equity in earnings  for all of 2000  compared to
only eight months in 1999.

     Interest expense  increased to $17.7 million,  or 1.7% of net sales in 2000
from $13.2 million, or 1.3% of net sales in 1999. The increase was due primarily
to  increases  in interest  rates and average  debt  outstanding.  Average  debt
outstanding  was $175.2  million in 2000 compared  with $156.2  million in 1999.
Average  interest rates on variable rate debt were  approximately  9.3% for 2000
compared  with  7.6% for  1999.  Increased  average  debt  outstanding  resulted
primarily from additional  financing  needed during peak sales months during the
year and from financing of acquisitions made in 1999 and 2000.

     The  provision  for income taxes  decreased  to $13.5  million in 2000 from
$14.4 million in 1999.  The decrease in the provision for income taxes  resulted
primarily  from  decreased  income from  operations in 2000 as compared with the
prior year. In 2000,  our tax rate  increased to 40.7% from 38.5% in 1999.  This
was  primarily due to the  non-deductibility  of the goodwill  asset  impairment
charge for tax purposes.

1999 COMPARED WITH 1998

     Net sales for 1999 were $1,007.1  million,  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 prices.

     SG&A  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 of $1.4 million on sales of
equipment and three  facilities  located in Texas.  This was partially offset by
costs of $0.8 million related to a postponed  private  placement of subordinated
debt.


<PAGE>


     Equity in earnings of unconsolidated  companies  increased to $5.0 million,
net of  amortization  of goodwill,  after  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  increases  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 of 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 in 1999 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.

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 2000,  operations  provided  $41.4 million in cash,  compared with $14.6
million in 1999,  an increase of $26.8  million.  This  increase is  primarily a
result of improved  collections of receivables,  improved inventory  management,
increased  cash   distributions   from  the  Company's  equity   investments  in
unconsolidated  companies and prepayment of 2000 income taxes in 1999, offset by
increased interest payments in 2000. 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,  inventory,  prepaid  expenses and
accounts payable and accrued expenses.

     Actual net working capital was $142.1 million at the end of 2000,  compared
with $139.3  million at the end of 1999.  The  increase  in working  capital was
primarily due to an increase in receivables  and a decrease in payables.  Actual
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,  $6.7 million of
this increase was attributable to locations acquired in 1999.

CAPITAL INVESTMENT AND ACQUISITIONS

     Capital  expenditures,  exclusive of  acquisitions,  were $35.5  million in
2000, $27.4 million in 1999 and $19.6 million in 1998. Capital expenditures were
incurred to acquire additional property and expand and remodel existing building
materials centers and value-added facilities.  Proceeds from the dispositions of
property,  plant and equipment were $11.5 million in 2000,  related primarily to
the sale of the Beaverton, Colorado Springs and South Austin properties.

     In 2000, cash used for acquisitions totaled $5.9 million.  During 2000, the
Company  completed the acquisition of a millwork  facility that was consolidated
into one of the Company's  existing locations and the acquisition of four window
distribution centers along with several sales offices.

     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.

FINANCING

     Net cash used by financing activities was $13.6 million in 2000 compared to
$44.5 million of cash provided in 1999. The Company was able to utilize its cash
from operations to reduce debt levels in 2000.

     The Company's existing senior credit facility provided for borrowings up to
$247.2 million, which includes $108.3 million provided for by the term loan, all
of which was  outstanding at December 31, 2000, and $138.9 million  provided for
by the revolving  credit  facility,  $52.2 million of which was  outstanding  at
December 31, 2000.  Borrowings  under the agreement  bear interest at prime plus
0.50% to 1.50%, or Offshore1 Rate plus 2.00% to 3.00%. The agreement  expires in
2004.

     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,  amortization  (EBITA)  and
limitations  on capital  expenditures,  among  certain other  restrictions.  The
Company is currently in compliance with these covenants and conditions.

     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.

<PAGE>

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. 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 debt  outstanding  at December 31, 2000, a 25 basis point
increase in interest rates would result in approximately  $413,000 of additional
interest costs.

     Commodity wood products, including lumber and panel products, accounted for
approximately 41% and 44% of net sales in 2000 and 1999, respectively. Prices of
commodity wood  products,  which are subject to  significant  volatility,  could
directly  affect  the  Company's  net  sales.  As  disclosed  in  the  financial
statements 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 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  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 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 was required to adopt this Statement, as amended by SFAS
No. 138, on January 1, 2001 and, based on the Company's present and historic use
of  derivative  instruments,  the  adoption  of this  statement  did not  have a
material impact on the Company's  consolidated results of operations,  financial
position or cash flows.

     In  April  2000,   the   Financial   Accounting   Standards   Board  issued
Interpretation No. 44 (FIN 44), "Accounting for Certain  Transactions  Involving
Stock  Compensation-an  interpretation  of APB Opinion No. 25." FIN 44 clarifies
and modifies APB 25, "Accounting for Stock Issued to Employees".  The provisions
of FIN 44 became  effective  in 2000 and did not have a  material  effect on the
Company's results of operations, financial position or cash flows.

     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements".
The SAB summarizes certain staff views in applying generally accepted accounting
principles to revenue  recognition  in financial  statements.  The provisions of
this bulletin became effective in 2000 and did not have a material effect on the
Company's results of operations, financial position or cash flow.

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  cyclicality in the past. The Company's  operations
have been  subject to  fluctuations  from  period to period as a  reflection  of
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 that 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  41% 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,  2000.  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)          2000         1999         1998
---------------------------------------------------------------------------------------
<S>                                                 <C>          <C>           <C>
Net sales ........................................  $1,013,968   $1,007,108    $877,280
Cost of sales ....................................     743,523      755,137     663,122
---------------------------------------------------------------------------------------
Gross profit .....................................     270,445      251,971     214,158
Selling, general and administrative expense ......     229,861      208,775     180,129
Other income (expense), net ......................       1,952        2,466       1,094
---------------------------------------------------------------------------------------
Income from operations ...........................      42,536       45,662      35,123
Equity in earnings of unconsolidated companies,
  net of amortization ............................       8,421        4,978          --
Interest expense .................................      17,722       13,184      10,218
---------------------------------------------------------------------------------------
Income before income taxes and extraordinary item.      33,235       37,456      24,905
Income taxes .....................................      13,523       14,421       9,756
---------------------------------------------------------------------------------------
Income before extraordinary item .................      19,712       23,035      15,149
Extraordinary item, net of tax ...................          --       (3,352)         --
---------------------------------------------------------------------------------------
Net income .......................................  $   19,712   $   19,683    $ 15,149
=======================================================================================
Income before extraordinary item per share:
  Basic ..........................................  $     1.55   $     1.82    $   1.21
  Diluted ........................................  $     1.54   $     1.80    $   1.20
Net income per share:
  Basic ..........................................  $     1.55   $     1.55    $   1.21
  Diluted ........................................  $     1.54   $     1.54    $   1.20
</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)                             2000       1999
----------------------------------------------------------------------------------------
<S>                                                                <C>        <C>
ASSETS
Current assets
  Cash ..........................................................  $   4,570  $    7,452
  Receivables, net ..............................................    111,287     110,123
  Inventories ...................................................     79,023      80,679
  Deferred income tax benefit ...................................      4,375       2,781
  Prepaid expenses ..............................................      3,934       7,652
----------------------------------------------------------------------------------------
    Total current assets ........................................    203,189     208,687
Property, plant and equipment, net ..............................    167,709     153,598
Equity investments in unconsolidated companies ..................     31,787      30,762
Goodwill, net ...................................................     46,679      47,477
Deferred loan costs .............................................      3,981       4,873
Other long-term assets ..........................................      6,289       4,722
----------------------------------------------------------------------------------------
Total assets ....................................................   $459,634    $450,119
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
  Current portion of long-term debt .............................   $     --    $  3,200
  Accounts payable and accrued expenses .........................     61,114      66,204
----------------------------------------------------------------------------------------
    Total current liabilities ...................................     61,114      69,404
Long-term debt, net of current portion ..........................    165,006     170,547
Deferred income taxes ...........................................      6,303       5,124
Other long-term liabilities .....................................      6,656       4,934
----------------------------------------------------------------------------------------
Total liabilities ...............................................    239,079     250,009
----------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' equity
  Common stock, $.001 par value, 20,000,000 shares authorized;
    12,839,607 and 12,679,686 shares outstanding, respectively            13          13
  Additional paid-in capital ....................................    109,166     108,433
  Retained earnings .............................................    111,376      91,664
----------------------------------------------------------------------------------------
    Total shareholders' equity ..................................    220,555     200,110
----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ......................   $459,634    $450,119
========================================================================================
</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>

                                            Common Stock    Additional
                                         -----------------    Paid-In     Retained
(AMOUNTS IN THOUSANDS)                    Shares    Amount    Capital     Earnings      Total
----------------------------------------------------------------------------------------------
<S>                                      <C>        <C>     <C>          <C>         <C>
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
NET INCOME ............................       --      --           --       19,712      19,712
STOCK OPTIONS EXERCISED AND OTHER .....      160      --          733           --         733
----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 ............   12,840     $13     $109,166     $111,376    $220,555
==============================================================================================
</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)                                         2000      1999       1998
--------------------------------------------------------------------------------------------
<S>                                                          <C>       <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................  $ 19,712  $ 19,683   $ 15,149
Adjustments to reconcile net income to cash
   provided by operating activities:
  Depreciation and amortization ...........................    17,213     14,149    12,955
  Deferred income taxes ...................................      (415)      (573)     (137)
  Loss (gain) on sale of assets ...........................    (2,611)    (1,403)       91
  Asset impairment charge .................................     1,800         --        --
  Equity in earnings of unconsolidated companies, net
    of amortization .......................................    (8,421)    (4,978)       --
  Distributions received from unconsolidated companies ....     7,396      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 ........................................       823    (12,418)      733
  Inventories .............................................     2,020     (2,419)    5,974
  Prepaid expenses ........................................     3,735     (5,287)    1,213
  Accounts payable and accrued expenses ...................    (1,465)       662     8,868
  Other long-term liabilities .............................     1,722      1,633         3
  Other, net ..............................................       (69)     2,409       (34)
--------------------------------------------------------------------------------------------
Net cash provided by operating activities .................    41,440     14,617    44,815
--------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .......................   (35,500)   (27,380)  (19,595)
Acquisitions, net of cash acquired ........................    (5,905)   (15,779)  (24,330)
Equity investment in unconsolidated companies .............        --    (26,093)       --
Proceeds from dispositions of property and equipment ......    11,526      4,152       909
Proceeds from sale of business units, net of cash sold ....        --      6,680        --
Investments in preferred stock ............................        --     (1,000)       --
Other, net ................................................      (818)      (511)       --
--------------------------------------------------------------------------------------------
Net cash used in investing activities .....................   (30,697)   (59,931)  (43,016)
--------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under term note .................................    11,100    100,000        --
Net (payments) borrowings under revolving credit agreements   (20,785)    27,792     7,705
Principal payments of unsecured senior notes ..............        --    (66,667)   (9,457)
Principal payments of other note payables .................        --     (8,723)       --
Decrease in net checks in process .........................    (3,880)    (3,112)       --
Deferred financing costs ..................................        --     (4,963)       --
Other, net ................................................       (60)       175        40
-------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities .......   (13,625)    44,502    (1,712)
-------------------------------------------------------------------------------------------
Net change in cash ........................................    (2,882)      (812)       87
Cash, beginning of period .................................     7,452      8,264     8,177
-------------------------------------------------------------------------------------------
Cash, end of period .......................................  $  4,570  $   7,452  $  8,264
==========================================================================================
Supplemental Disclosure of Cash Flow Information Cash paid
    during the year for:
    Interest, net of amounts capitalized ................... $ 16,858  $  13,294  $ 10,389
     Income taxes .......................................... $  9,612  $  21,314     6,068
</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

     Building Materials Holding  Corporation  ("BMHC") operates two wholly-owned
subsidiaries-BMC  West Corporation ("BMHC West") and BMC Framing,  Inc. BMC West
is a  distributor  and  retailer of building  materials in regions of the United
States,   selling  primarily  to  professional   contractors,   as  well  as  to
project-oriented   consumers   (including   professional   repair  and   remodel
contractors  hired by them),  with 137  facilities  organized  into 56  business
units.  BMC West provides  value-added  products,  which include pre-hung doors,
roof trusses and  pre-assembled  windows,  and lumber  pre-cut to meet  customer
specifications.  BMC Framing, Inc., owns a 49% equity interest in Knipp Brothers
Industries,  LLC,  ("KBI") a framing  contractor  in  Arizona  and  Nevada,  KBI
Distribution, LLC ("Distribution"), a provider of building materials in Arizona,
and KB Industries Limited Partnership, a framing contractor in California.

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.  Except for that
disclosed in note 3, in  management's  opinion,  no such  impairment  existed at
December 31, 2000 and 1999.

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, including software costs, are stated 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 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
(expense) net.

     The  Company   capitalizes   interest  on  borrowings   during  the  active
construction period on major capital projects.  Capitalized interest is added to
the cost of the  underlying  asset and is amortized  over the useful life of the
asset.

     In  1999,  the  Company  adopted   Statement  of  Position   ("SOP")  98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal  Use".  SOP  98-1  requires  companies  to  capitalize  certain  costs,
including interest, of computer software developed or obtained for internal use,
provided  that those costs are not research and  development,  and other certain
criteria are met. As a result,  the Company  capitalized  $6,182,000 of internal
use software development costs through December 31, 2000.

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  note  and  the  straight-line  method  for the
Company's revolving credit facility.


<PAGE>

Interest  expense  includes  amortization  of deferred loan costs of $1,166,000,
$341,000, and $410,000 in 2000, 1999, and 1998, respectively.

GOODWILL

     Goodwill is amortized on a  straight-line  basis  generally  over 30 years.
Accumulated  amortization  of goodwill was $6,842,000 and $5,460,000 at December
31, 2000 and 1999,  respectively.

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 2000, 1999 and 1998
advertising expense was $922,000, $1,964,000, and $1,953,000, respectively.


SHIPPING AND HANDLING

     Shipping  and  handling  costs  are  included  in  selling,   general,  and
administrative expense. During 2000, 1999, and 1998, shipping and handling costs
were $19,681,000, $17,443,000, and $15,457,000, 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 was required to adopt this Statement, as amended by SFAS
No. 138, January 1, 2001 and based on the Company's  present and historic use of
derivative  instruments,  the adoption of this Statement did not have a material
impact on the Company's  consolidated results of operations,  financial position
or cash flows.

     In  April  2000,   the   Financial   Accounting   Standards   Board  issued
Interpretation No.44 (FIN 44),  "Accounting for Certain  Transactions  Involving
Stock  Compensation-an  interpretation  of APB Opinion No. 25". FIN 44 clarifies
and modifies APB 25, "Accounting for Stock Issued to Employees".  The provisions
of FIN 44 became  effective  in 2000 and did not have a  material  effect on the
Company's results of operations, financial position or cash flows.

     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting   Bulletin   ("SAB")  No.  101  "Revenue   Recognition  in  Financial
Statements".  The SAB  summarizes  certain  staff  views in  applying  generally
accepted accounting  principles to revenue recognition in financial  statements.
The  provisions  of this  bulletin  became  effective in 2000 and did not have a
material effect on the Company's  results of operations,  financial  position 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
make-whole  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. ASSET IMPAIRMENT CHARGE

     During the fourth quarter of 2000, as a part of its  continuous  evaluation
of its portfolio of business units, the Company completed a strategic evaluation
of a business  unit  located in Grand  Junction,  Colorado.  As a result of this
evaluation,  the Company  entered into a definitive  purchase and sale agreement
for the sale of the business unit. Consequently, the Company determined that the
goodwill  associated  with  this  unit was  impaired  and  recorded  a charge of
$1,800,000,  which is included in other expense.  Net sales and operating profit
for the business unit were $7,185,000, and $411,000,  respectively, in 2000. The
sale of the business unit was completed on February 5, 2001.

4. 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,  including  intangible assets, 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.

     During 2000,  the Company  completed the  acquisition  of Alberta  Sales, a
millwork  facility  that was  consolidated  into the Company's  existing  Carson
Valley  location,  and the  acquisition of four warehouse  distribution  centers
along with several  sales  offices  doing  business

<PAGE>


as Marvin Windows Planning Centers from Frontier  Wholesale  Company.  The total
cash consideration given was $5,905,000.

     The following  summarized  unaudited pro forma results of operations assume
the 2000  acquisitions  occurred as of the beginning of 1999. 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)
--------------------------------------------------------------------------------
                                                        2000             1999
--------------------------------------------------------------------------------
Net sales .......................................    $1,019,706       $1,024,108
Net income ......................................        19,701           19,952
Net income per diluted common share..............    $     1.54       $     1.56

     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 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 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


5. RECEIVABLES

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

--------------------------------------------------------------------------------
                                                        2000           1999
--------------------------------------------------------------------------------
Trade receivables                                   $106,556         $106,965
Other                                                  6,915            5,415
Allowance for returns, discounts
  and doubtful accounts                               (2,184)          (2,257)
--------------------------------------------------------------------------------
                                                    $111,287         $110,123
================================================================================

     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.

6. EQUITY INVESTMENT

     In May 1999, the Company completed the investment of a 49% interest in KBI,
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 KBI and the 51% owner has a
corresponding  right to require the Company to purchase its 51% ownership  after
five years.

     In December 1999,  KBI  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 KBI in proportion
to their  respective  ownership  interest  in KBI.  In 2000,  BMC  Framing  Inc.
participated in the formation of KB Industries Limited  Partnership and acquired
a 49% limited partnership interest.

     Summarized  2000 and 1999 combined  financial  information of the Company's
equity-basis unconsolidated companies follows (in thousands):

--------------------------------------------------------------------------------
                                                         2000          1999
--------------------------------------------------------------------------------
Income statement information:
  Net sales ...................................       $ 161,420      $ 101,354
  Income from operations ......................       $   2,818      $   1,298
  Net income ..................................       $   3,434      $   1,478
  Less other members share of net income.......          (1,751)          (754)
--------------------------------------------------------------------------------
  Company's share of net income ...............           1,683            724
  Other income allocations,
    net of amortization of intangibles ........           6,738          4,254
--------------------------------------------------------------------------------
  Equity in earnings of
    unconsolidated companies ..................       $   8,421      $   4,978
================================================================================
Financial position information:
  Current assets ..............................       $  36,404      $  29,569
  Noncurrent assets ...........................       $   5,750      $   5,444
  Total liabilities (current) .................       $  10,347      $   6,639
  Members capital .............................       $  31,807      $  28,374
--------------------------------------------------------------------------------
  Less other members share of capital .........         (16,222)       (14,471)
  Company's share of capital ..................          15,585         13,903
  Goodwill ....................................          16,202         16,859
--------------------------------------------------------------------------------
Equity investments in unconsolidated companies.       $  31,787      $  30,762
================================================================================

<PAGE>


7. PROPERTY, PLANT AND EQUIPMENT

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

--------------------------------------------------------------------------------
                                                           2000          1999
--------------------------------------------------------------------------------
Land ................................................... $  40,551    $  39,337
Buildings and improvements .............................    94,701       80,414
Machinery and fixtures .................................    43,493       38,391
Handling and delivery equipment.........................    37,486       34,573
Construction in progress ...............................     9,242       11,097
--------------------------------------------------------------------------------
                                                           225,473      203,812
Less accumulated depreciation ..........................   (57,764)     (50,214)
--------------------------------------------------------------------------------
                                                         $ 167,709    $ 153,598
================================================================================


     Interest of $777,000,  $221,000,  and $94,000 has been  capitalized  during
2000,  1999  and  1998,  respectively.   Depreciation  expense  was  $13,576,000
$11,779,000, and $10,484,000 in 2000, 1999 and 1998, respectively.

     At December 31, 2000 the Company had  $5,704,000  of land and buildings and
improvements held for sale accounted for at the lower of cost or market.  During
2000,  the  Company  recorded  net gains  from the sale of assets of  $2,611,000
consisting primarily of the gain on the sale of real estate in Beaverton, Oregon
for approximately  $2,250,000.  During 1999, the Company recorded net gains from
the sale of assets of $1,403,000 consisting primarily of a gain of $1,384,000 on
the sale of three of its centers  (located in  Fredericksburg,  Marble Falls and
Shiner, Texas).

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

--------------------------------------------------------------------------------
                                                              2000        1999
--------------------------------------------------------------------------------
Trade accounts payable ..................................    $29,396     $33,583
Net checks in process ...................................      8,308      12,188
Accrued compensation ....................................     12,782      10,966
Sales tax payable .......................................      3,817       4,114
Other ...................................................      6,811       5,353
--------------------------------------------------------------------------------
                                                             $61,114     $66,204
--------------------------------------------------------------------------------

9. DEBT

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

--------------------------------------------------------------------------------
                                                                         2000
--------------------------------------------------------------------------------
Term note ..........................................................   $108,323
Revolving credit facility ..........................................     52,200
Non-interest bearing term note,
  net of related discount of $1,183 ................................      3,817
Other ..............................................................        666
--------------------------------------------------------------------------------
                                                                       $165,006
================================================================================

     During the fourth  quarter of 1999,  management  entered  into a new senior
credit facility that 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 is
available to fund future  acquisitions.  In June 2000, the Company  executed the
First  Amendment to the senior credit  facility  that added an additional  bank,
Banque Nationale de Paris, and increased its credit availability by $25 million.

     Under the existing  revolving credit facility,  the Company has the ability
to borrow  up to  $138,900,000  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 0.375% to 0.50% per annum is charged on the unused  portion.  At December
31, 2000 the Company had $86,700,000 of remaining  capacity under this revolver.
The term note is due 2004 with annual  commitment  reductions  through 2004, and
bears  interest  at prime  plus .50% to 1.50%,  or  Offshore  Rate plus 2.00% to
3.00%. At December 31, 2000 there was $108,323,000  outstanding  under this term
note.

     The term loan and revolving credit facility are both  collateralized 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 and  amortization and limitations on
capital  expenditures,  among certain other restrictions.  At December 31, 2000,
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  $12,330,000  in 2001,  $13,562,000  in 2002,  $17,850,000  in 2003 and
$121,264,000 in 2004.

     The  $12,330,000  of  principal  payments  due in 2001 are  expected  to be
refinanced  through the unused portion of the revolving  credit  facility.  As a
result,  this amount has been classified as long-term.

     As of December 31, 2000, the Company had $2,800,000 in letters of credit to
guarantee performance or payments to third parties.

10. PREFERRED STOCK

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

<PAGE>

11. STOCK PURCHASE AND INCENTIVE PLANS

SHAREHOLDERS' RIGHTS PLAN

     BMHC  adopted a  shareholder  rights plan that  expires in 2007.  Under the
plan, if a company acquires 15% or more of the Company'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 incentives 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 2000 and 1999, the Company awarded
100,435 and 73,190 units,  respectively,  and recognized compensation expense of
$340,000 and $243,000 respectively.  At December 31, 2000 161,705 units remained
outstanding and unexercised.  Accelerated vesting may occur if there is a change
of control of the Company, as defined in the Cash Equity Plan.

EMPLOYEE STOCK PURCHASE PLAN

     On October 1, 2000, BMHC adopted a non-compensatory Employee Stock Purchase
Plan ("ESPP"). Under the ESPP, eligible employees may elect each year to have up
to 10% of their annual qualified compensation withheld to purchase the Company's
common  stock.  The  purchase  price  of the  stock  is 85% of the  lower of the
beginning of the purchase  period or end of the purchase  period market price of
BMHC's  common  stock.  The  purchase  period is one  month,  commencing  on the
effective date of the ESPP, and continues consecutively after the termination of
the  preceding  purchase  period.  There  were  200,000  shares of common  stock
authorized  for purchase  under the ESPP.  As of December  31, 2000,  there were
197,000 shares available for future purchase under the ESPP.

STOCK AND STOCK OPTION PLANS

     The  Company  has five  stock  and  stock  option  plans,  the 1991  Senior
Management and Field Management Plan, the 1992 Non-Qualified  Stock Option Plan,
the 1993  Employee  Stock  Option  Plan,  the 1993 Second  Amended and  Restated
Non-Employee  Stock Plan and the 2000  Stock  Incentive  Plan (the Stock  Option
Plans).  As of December 31, 2000,  there were  1,746,373  shares of common stock
reserved for issuance under the plans.

     The 1991 Senior  Management  and Field  Management  Plan  provided  for the
granting of options to purchase shares of BMHC's common stock at exercise prices
below fair market value. At December 31, 2000,  there were no options  remaining
for future  grants under the 1991 plan.  Such options  expire ten years from the
date of grant. Options vest over four years from the date of grant and expire at
the end of ten years if unexercised.

     The 1992 Non-Qualified Stock Option Plan and the 1993 Employee Stock Option
Plan  provided for the granting of options,  at the  discretion  of the Board of
Directors,  to purchase  shares of BMHC's  common  stock.  At December 31, 2000,
there were no options remaining for future grants under the 1992 and 1993 plans.
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.

     On  February  18,  2000,   BMHC  amended  the  1993  Amended  and  Restated
Non-Employee  Stock Option Plan to the 1993 Second  Amended and  Restated  Stock
Plan. As a result,  the Company now grants awards of the Company's  common stock
rather than stock option awards under this plan.  This plan is available only to
non-employee directors, and awards vest immediately upon grant. During 2000, the
Company   granted  16,800  shares  of  stock  under  this  plan  and  recognized
compensation expense of $176,400.  At December 31, 2000, 71,700 shares remain in
the plan for future  issuance.  The options that remain  outstanding from grants
under the pre-amended plan are exercisable  after one year following the date of
grant and expire at the end of ten years if unexercised.

On February 18, 2000 BMHC adopted the 2000 Stock Incentive Plan,  which provides
for the granting of sales or bonuses of stock,  restricted stock, stock options,
stock purchase warrants,  other rights to acquire stock,  securities convertible
into  or  redeemable  for  stock,  stock   appreciation   rights,  and  dividend
equivalents.  The number of shares of common stock issued and issuable  pursuant
to all awards  granted  under this plan shall not exceed  600,000,  with  annual
increases  commencing  in 2001 as  defined in the plan.  During  2000 there were
262,000  non-statutory  options  granted  under the plan at a price equal to the
fair market  value of the  Company's  common  stock on the date of grant.  These
grants  vest at an annual  rate of 25%  commencing  on  December  31,  2000.  On
December  1,  2000,  the  Company  granted  an  additional   50,000  and  20,000
non-statutory  stock options under the plan,  which vest at the end of three and
two years,  respectively,  at an exercise  price equal to 85% of the fair market
value of the Company's  common stock on the date of grant.  At December 31, 2000
there were 268,000 shares remaining in the plan for future issuance. All options
outstanding under the plan expire at the end of ten years if unexercised.


<PAGE>


     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 the Company's
common stock on the date the options were  granted.  These  options will vest in
2002,  but vesting may be  accelerated  pursuant to the  Company's  common stock
reaching 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, 2000, 1999 and 1998, is presented in the table below:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                     2000                       1999                        1998
--------------------------------------------------------------------------------------------------------------------------
                                                    WEIGHTED AVERAGE           Weighted Average           Weighted Average
                                            SHARES   EXERCISE PRICE   Shares    Exercise Price    Shares   Exercise Price
--------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>        <C>              <C>           <C>          <C>
Balance at beginning of the year .....    1,074,801     $11.46       920,995        $11.57        795,704      $11.24
Options granted ......................      490,500       9.40       215,750         10.42        173,470       12.52
Options exercised ....................     (143,121)      9.47       (27,388)         3.40        (21,907)       3.05
Options forfeited ....................      (15,507)     14.10       (34,556)        13.95        (26,272)      15.00
--------------------------------------------------------------------------------------------------------------------------
Balance at end of the year ...........    1,406,673     $11.73     1,074,801        $11.46        920,995      $11.57
==========================================================================================================================
Exercisable at end of the year .......      765,526     $13.08       701,594        $11.33        606,187      $10.74
Weighted average fair value of options
  granted at fair value ..............        $6.38                    $6.56                        $6.24
Weighted average fair value of
  options granted below  fair value ..        $5.43                       --                          --
</TABLE>

     The following table summarizes  information about stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                   Options Outstanding                           Options Exercisable
----------------------------------------------------------------------------------------------------------
                        NUMBER      Weighted Average                        NUMBER
                     OUTSTANDING AT    Remaining                         EXERCISABLE AT
    Range of          DECEMBER 31,    Contractual     Weighted Average     DECEMBER 31,  Weighted Average
 Exercise Prices          2000         Life Years      Exercise Price         2000       Exercise Price
----------------------------------------------------------------------------------------------------------
<S>                   <C>                <C>               <C>             <C>               <C>
$ 1.21 to $ 6.85 ...     151,941         5.2               $ 6.04            81,941          $ 5.34
$ 8.67 to $17.00 ...   1,148,936         7.5               $11.47           577,789          $12.42
$19.50 to $29.75 ...     105,796         4.7               $22.70           105,796          $22.70
----------------------------------------------------------------------------------------------------------
$ 1.21 to $29.75 ...   1,406,673        7.07               $11.73           765,526          $13.08
==========================================================================================================
</TABLE>

     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 2000, 1999 and 1998:  risk-free interest rates of
6.0%, 5.4%, and 5.5%, respectively;  estimated lives of approximately 8 years, 6
years and 6 years,  respectively;  and expected stock price  volatility of 52.8%
61.6%, and 42.7%, respectively.

     Had compensation  cost for these plans been determined using the fair value
method,  the  Company's  2000 net income  would have been reduced on a pro forma
basis by  $859,000  and basic and  diluted  earnings  per share  would have been
reduced on a pro forma basis by $0.07.  The 1999 pro forma reductions would have
been a reduction in net income of $617,000; and a reduction in basic and diluted
earnings  per share of $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.

12. INCOME TAXES

     Income taxes for the years ended December 31, 2000, 1999 and 1998 consisted
of the following (in thousands):

--------------------------------------------------------------------------------
                                             2000          1999           1998
--------------------------------------------------------------------------------
Current income taxes
  Federal ..............................   $12,768        $13,912        $8,853
  State ................................     1,170          1,082         1,040
--------------------------------------------------------------------------------
 .......................................    13,938         14,994         9,893
--------------------------------------------------------------------------------
Deferred income taxes
  Federal                                    (383)          (529)         (126)
  State                                       (32)           (44)          (11)
--------------------------------------------------------------------------------
                                             (415)          (573)         (137)
--------------------------------------------------------------------------------
                                          $13,523        $14,421        $9,756
================================================================================

     The tax benefit  associated with  non-statutory  stock options exercised by
employees under the Company's stock plans reduced taxes payable by approximately
$344,000,  $82,000,  and $67,000 for 2000, 1999, and 1998,  respectively.  These
benefits were credited to additional paid-in capital.


<PAGE>

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

--------------------------------------------------------------------------------
                                                   2000      1999     1998
--------------------------------------------------------------------------------
Statutory rate ................................    35.0%     35.0%    35.0%
State income taxes ............................     2.5       2.4      3.0
Asset impairment charge .......................     2.4        --       --
Other .........................................      .8       1.1      1.2
--------------------------------------------------------------------------------
                                                   40.7%     38.5%    39.2%
================================================================================

     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):

--------------------------------------------------------------------------------
                                                        2000          1999
--------------------------------------------------------------------------------
Deferred tax assets
  Tax basis in excess of book
    basis of acquired assets ......................    $     0       $    30
  Inventories, tax basis in
    excess of book basis ..........................      2,246         1,647
  Reserves not yet deductible for tax..............      3,342         2,663
  Other ...........................................      1,877         1,548
--------------------------------------------------------------------------------
  Total deferred tax assets .......................      7,465         5,888
Deferred tax liabilities
  Book basis in excess of tax
    basis of acquired assets ......................        256            --
  Tax in excess of book depreciation ..............      6,997         7,040
  Deferred costs deducted for taxes ...............      2,140         1,191
--------------------------------------------------------------------------------
  Total deferred tax liabilities ..................      9,393         8,231
--------------------------------------------------------------------------------
                                                       $(1,928)      $(2,343)
================================================================================
Classified as
  Deferred income tax
    benefit (current assets) ......................    $ 4,375       $ 2,781
  Deferred income taxes
    (long-term liabilities) .......................     (6,303)       (5,124)
--------------------------------------------------------------------------------
                                                       $(1,928)      $(2,343)
================================================================================

13. NET INCOME PER COMMON SHARE

    Net income per common share was determined as follows:

--------------------------------------------------------------------------------
                                                 2000      1999        1998
--------------------------------------------------------------------------------
Net income available to
  common shareholders ......................   $19,712   $19,683     $15,149
================================================================================
Weighted average shares
  outstanding used to determine
  basic net income per
  common share .............................    12,754    12,667      12,509
Net effect of dilutive
  stock options(1) .........................        69       125         138
--------------------------------------------------------------------------------
Average shares used to
  determine diluted net income
  per common share .........................    12,823    12,792      12,647
================================================================================

(1)Stock  options of  1,247,232,  644,371,  and 493,187 were not included in the
   computation,  because  to do so would have been  anti-dilutive  for the years
   ended December 31, 2000, 1999 and 1998, respectively.

14. 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  $3,050,000,
$2,707,000 and $2,402,000 in 2000, 1999 and 1998, respectively.

     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  $1,309,000 in 2000,  $1,420,000 in 1999, and $1,065,000 in 1998.
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.

15. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

     The Company  leases real  property,  vehicles  and office  equipment  under
operating leases. Rental expense was $7,028,000 in 2000, $6,813,000 in 1999, and
$6,503,000 in 1998. Certain of the leases are  non-cancellable  and have minimum
lease payment requirements of $6,278,000 in 2001, $4,796,000 in 2002, $3,940,000
in 2003, $3,018,000 in 2004, $1,875,000 in 2005 and $5,047,000 thereafter.

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.

16. FINANCIAL INSTRUMENTS

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

--------------------------------------------------------------------------------
                                2000                             1999
--------------------------------------------------------------------------------
                        BOOK             FAIR           Book             Fair
                        VALUE            VALUE          Value           Value
--------------------------------------------------------------------------------
Long-term debt:
  Variable
    rate debt ......  $160,523          $160,523       $170,207        $170,207
  Fixed rate debt ..     4,483             3,857          3,540           3,540
--------------------------------------------------------------------------------
                      $165,006          $164,380       $173,747        $173,747
================================================================================


<PAGE>


     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.

17. 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 products and services
(millwork,  roof and  floor  trusses,  pre-hung  doors,  windows,  moldings  and
installation),   building  materials  (roofing,  siding,  insulation  and  steel
products), and other products (paint, hardware, tools, electrical and plumbing).
Net sales by product for the years ended  December 31, 2000,  1999 and 1998 were
as follows (in thousands):

--------------------------------------------------------------------------------
                                            2000          1999           1998
--------------------------------------------------------------------------------
Net sales
  Wood products ....................    $  417,949     $  444,834      $381,221
  Value-added ......................       410,057        348,569       275,862
  Building materials ...............       117,985        136,757       136,856
  Other ............................        67,977         76,948        83,341
--------------------------------------------------------------------------------
Total revenues .....................    $1,013,968     $1,007,108      $877,280
================================================================================

18. RESULTS OF QUARTERLY OPERATIONS (UNAUDITED)

     Operating  results by quarter for 2000 and 1999 are as follows  (dollars in
thousands, except per share data):

--------------------------------------------------------------------------------
                              First         Second        Third        Fourth
--------------------------------------------------------------------------------
2000
NET SALES ................   $233,467       $271,404     $270,536      $238,561
GROSS PROFIT .............     60,001         70,082       73,380        66,982
INCOME FROM
  OPERATIONS .............      9,661         13,579       13,304         5,992
NET INCOME ...............      4,467          7,033        6,807         1,405
NET INCOME PER DILUTED
  COMMON SHARE(1) ........        .35            .55          .53           .11
COMMON STOCK PRICES:
  HIGH ...................   $ 10.938       $  11.00     $ 10.438      $  9.500
  LOW ....................      8.875           7.75        8.500         7.563

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         13,411       16,161         9,446
Extraordinary item .......         --             --           --        (3,352)
Net income ...............      2,521          7,039        8,964         1,159
Income before
  extraordinary
  item per diluted
  common share ...........   $   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


     During the fourth quarter of 2000, as a part of its  continuous  evaluation
of its portfolio of business units, the Company completed a strategic evaluation
of a business  unit  located in Grand  Junction,  Colorado.  As a result of this
evaluation,  the Company  entered into a definitive  purchase and sale agreement
for the sale of the business unit. Consequently, the Company determined that the
goodwill  associated  with  this  unit was  impaired  and  recorded  a charge of
$1,800,000,  which is included in other expense.  Net sales and operating profit
for the business unit were $7,185,000, and $411,000,  respectively, in 2000. The
sale of the business unit was completed on February 5, 2001.

(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 PUBLIC ACCOUNTANTS



To the Board of Directors and Shareholders
Building Materials Holding Corporation

In our opinion,  the  accompanying  consolidated  balance sheets 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, 2000,
and 1999 and the  results of their  operations  and their cash flows for each of
the  two  years  in the  period  ended  December  31,  2000 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 audits.  We conducted  our audits 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  audits  provide  a
reasonable  basis for our opinion.  The financial  statements of the Company for
the year ended December 31, 1998 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 27, 2001