##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K





|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

|   |  |                                          
|-- |  | -----------------------------------------
|   |  | For the Fiscal Year Ended January 1, 2005
|or

|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

| |  |                                                    
| |  | ---------------------------------------------------
| |  | For
    the Transition Period
    From           to

Commission File Number 001-08634


Temple-Inland Inc.


(Exact Name of Registrant as Specified in its Charter)


|         |  |           
|-------- |  | ----------
|Delaware |  | 75-1903917

|                                                                   |  |                                                        
|------------------------------------------------------------------ |  | -------------------------------------------------------
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S.
    Employer            Identification
    No.)

1300 MoPac Expressway South


Austin, Texas 78746


(Address of principal executive offices, including Zip
code)


Registrants telephone number, including area code:
(512) 434-5800


Securities registered pursuant to Section 12(b) of the
Act:


|                                                                                                                           |  |                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Title of Each Class                                                                                                        |  | Name of Each Exchange On Which Registered                                                                                                                 
|                                                                                                                           |  |                                                                                                                                                           
|Common Stock, $1.00 Par Value per Share,
    non-cumulative
    Preferred Share Purchase Rights
    7.50% Upper
    DECSSM |  | New York Stock Exchange
    The Pacific Exchange
    New York Stock Exchange
    The Pacific Exchange
    New York Stock Exchange
    The Pacific Exchange






Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.     Yes þ          No o


Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o


Indicate by check mark whether the registrant is an
accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes þ       No o






DOCUMENTS INCORPORATED BY REFERENCE












---










TABLE OF CONTENTS


|                                             |          |  |                                                                                                                      |      |  |     | 
|-------------------------------------------- | -------- |  | -------------------------------------------------------------------------------------------------------------------- | ---- |  | --- | 
|                                             |          |  |                                                                                                                      | Page | 
|                                             |          |  |                                                                                                                      |      | 
|PART I.                                      |          |  |                                                                                                                      |      |  |    
|                                             | Item 1.  |  | Business                                                                                                             |      |  | 1   | 
|                                             | Item 2.  |  | Properties                                                                                                           |      |  | 10  | 
|                                             | Item 3.  |  | Legal Proceedings                                                                                                    |      |  | 14  | 
|                                             | Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                                              |      |  | 15  | 
|                                            
|PART II.                                     |          |  |                                                                                                                      |      |  |    
|                                             | Item 5.  |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases
    of Equity Securities |      |  | 16  | 
|                                             | Item 6.  |  | Selected Financial Data                                                                                              |      |  | 17  | 
|                                             | Item 7.  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |      |  | 19  | 
|                                             | Item 7A. |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |      |  | 46  | 
|                                             | Item 8.  |  | Financial Statements and Supplementary
    Data                                                                      |      |  | 47  | 
|                                             | Item 9.  |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |      |  | 104 | 
|                                             | Item 9A. |  | Controls and Procedures                                                                                              |      |  | 104 | 
|                                             | Item 9B. |  | Other Information                                                                                                    |      |  | 106 | 
|                                            
|PART III.                                    |          |  |                                                                                                                      |      |  |    
|                                             | Item 10. |  | Directors and Executive Officers of the
    Registrant                                                               |      |  | 107 | 
|                                             | Item 11. |  | Executive Compensation                                                                                               |      |  | 107 | 
|                                             | Item 12. |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |      |  | 108 | 
|                                             | Item 13. |  | Certain Relationships and Related
    Transactions                                                                   |      |  | 108 | 
|                                             | Item 14. |  | Principal Accounting Fees and Services                                                                               |      |  | 108 | 
|                                            
|PART IV.                                     |          |  |                                                                                                                      |      |  |    
|                                             | Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                                  |      |  | 108 | 
|Subsidiaries of the Company                 
|Consent of Ernst & Young LLP                
|Certification of CEO Pursuant to Section 302
|Certification of CFO Pursuant to Section 302
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906



i



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##### Table of Contents






PART I







|        |         
|------- | --------
|Item 1. | Business

Introduction






| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | corrugated packaging, which provided 58 percent of our
    consolidated net revenues for 2004, is a vertically integrated
    corrugated packaging operation that consists of:



| |   |                                    
| | - | -----------------------------------
| |  | five linerboard mills,             
|
| |  | one corrugating medium mill, and   
|
| |  | 72 converting and other facilities;



| |   |                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | forest products, which provided 20 percent of our
    consolidated net revenues for 2004, manages our forest resources
    of approximately two million acres of timberland in Texas,
    Louisiana, Georgia, and Alabama (including our approximately
    173,000 acres of high-value land located near Atlanta,
    Georgia), and manufactures a wide range of building products,
    including:



| |   |                           
| | - | --------------------------
| |  | lumber,                   
|
| |  | particleboard,            
|
| |  | medium density fiberboard,
|
| |  | gypsum wallboard, and     
|
| |  | fiberboard; and           



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | financial services, which provided 22 percent of our
    consolidated net revenues for 2004, provides financial services
    in the areas of:



| |   |                                 
| | - | --------------------------------
| |  | consumer and commercial banking,
|
| |  | real estate development, and    
|
| |  | insurance.                      





| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | TIN Inc., which operates our corrugated packaging and forest
    products segments,
|
| |  | Temple-Inland Financial Services Inc., a financial services
    holding company,   
|
| |  | Guaranty Holdings Inc. I, a financial services holding
    company, and            
|
| |  | Guaranty Bank (Guaranty), a savings bank.                                        

http://www.templeinland.com


1



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##### Table of Contents



Financial Information




Narrative Description of the Business




Temple-Inland Inc.


Selected Subsidiary Chart







Corrugated Packaging.






2



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##### Table of Contents











Forest Products.








Financial Services.


Savings Bank






3



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##### Table of Contents













Mortgage Banking




Real Estate


Other Information.


4



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Raw Materials




|              |  |            |    |  
|------------- |  | ---------- | -- | -
|              |  | Percentage |   
|              |  | Supplied   |   
|Raw Material  |  | Internally |   
|              |  |            |   
|Sawtimber     |  |            | 59 | %
|Pine Pulpwood |  |            | 42 | %











Energy






5



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##### Table of Contents







Employees




|                                                                                                      |  |                                                                                                                                                                                                                                                      |  |                                                                                                                                        |  |                                                              |                  | 
|----------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------ | ---------------- | 
|Location                                                                                              |  | Bargaining Unit(s)                                                                                                                                                                                                                                   |  | Employees Covered                                                                                                                      |  | Expiration Dates                                             |                 
|                                                                                                      |  |                                                                                                                                                                                                                                                      |  |                                                                                                                                        |  |                                                              |                 
|Linerboard Mill, Orange, Texas                                                                        |  | Paper, Allied-Industrial, Chemical and Energy Workers Intl.
    (PACE), Local 1398, and PACE, Local 391                                                                                                                                            |  | 219 Hourly Production Employees and 109 Hourly Maintenance
    Employees                                                               |  |                                                              | July 31, 2005    | 
|Linerboard Mill, Bogalusa, Louisiana                                                                  |  | PACE, Local 189, International Brotherhood of Electrical
    Workers (IBEW), Local 1077, and Office and
    Professional Employees International Union (OPEIU),
    Local 89                                                                     |  | 243 Hourly Production Employees, 124 Hourly
    Maintenance Employees, 28 Electrical Maintenance Employees,
    and 9 Office Employees |  | August 1, 2006 (PACE and IBEW), and October 11, 2006 (OPEIU)
|Linerboard Mill, Rome, Georgia                                                                        |  | PACE, Local 804, IBEW, Local 613, United Association
    of Journeymen & Apprentices of the Plumbing &
    Pipefitting Industry of the U.S. and Canada, Local 72, and
    International Association of Machinists & Aerospace
    Workers, Local 414 |  | 267 Hourly Production Employees, 36 Electrical
    Maintenance Employees, and 122 Hourly Maintenance Employees                         |  |                                                              | July 31, 2006    | 
|Evansville, Indiana, Louisville, Kentucky, and Middletown, Ohio,
    Box Plants (Northern Multiple) |  | PACE, Local 1046, PACE, Local 1737, and PACE,
    Local 114, respectively                                                                                                                                                                            |  | 108, 102, and 97 Hourly Production Employees, respectively                                                                             |  |                                                              | April 30, 2008   | 
|Rome, Georgia, and Orlando, Florida, Box Plants
    (Southern Multiple)                             |  | PACE Local 838 and PACE Local 834, respectively                                                                                                                                                                                                      |  | 123 and 96 Hourly Production Employees, respectively                                                                                   |  |                                                              | December 1, 2008 | 





6



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##### Table of Contents



Environmental Protection














| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The first phase of MACT I covered the Hazardous Air
    Pollutant (HAP) emissions from Low Volume High
    Concentration Sources and pulp mill foul condensate streams at
    three containerboard mills. Compliance was required by April
    2002, and we spent approximately $15 million to meet the
    requirements of this rule.
|
| |  | The second phase of MACT I covered HAP emissions from High
    Volume Low Concentration sources at three containerboard mills.
    Compliance is required by April 2006, and we estimate capital
    expenditures to be approximately $7 million to meet these
    requirements.                                                        







7



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Competition










8



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##### Table of Contents



Executive Officers of the Registrant




|                       |  |     |    |  |        |                                                        
|---------------------- |  | --- | -- |  | ------ | -------------------------------------------------------
|Name                   |  | Age |    |  | Office
|                       |  |     |    |  |       
|Kenneth M. Jastrow, II |  |     | 57 |  |        | Chairman of the Board and Chief Executive Officer      
|M. Richard Warner      |  |     | 53 |  |        | President                                              
|J. Patrick Maley III   |  |     | 43 |  |        | Executive Vice President                               
|Bart J. Doney          |  |     | 55 |  |        | Group Vice President                                   
|Kenneth R. Dubuque     |  |     | 56 |  |        | Group Vice President                                   
|Jack C. Sweeny         |  |     | 58 |  |        | Group Vice President                                   
|Doyle R. Simons        |  |     | 41 |  |        | Executive Vice President                               
|Randall D. Levy        |  |     | 53 |  |        | Chief Financial Officer                                
|Louis R. Brill         |  |     | 63 |  |        | Chief Accounting Officer and Vice President            
|Scott Smith            |  |     | 50 |  |        | Chief Information Officer                              
|J. Bradley Johnston    |  |     | 49 |  |        | Chief Administrative Officer and General Counsel       
|Leslie K. ONeal       |  |     | 49 |  |        | Vice President, Assistant General Counsel and Secretary
|David W. Turpin        |  |     | 54 |  |        | Treasurer                                              

















9



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##### Table of Contents




















|        |           
|------- | ----------
|Item 2. | Properties



Containerboard Mills


|                            |  |                                |  |           |   |           |          |  |           |            |  |  |           | 
|--------------------------- |  | ------------------------------ |  | --------- | - | --------- | -------- |  | --------- | ---------- |  |  | --------- | 
|                            |  |                                |  | Number of |   |           | Annual   |  |           | 2004       | 
|Location                    |  | Product                        |  | Machines  |   |           | Capacity |  |           | Production | 
|                            |  |                                |  |           |   |           |          |  |           |            | 
|                            |  |                                |  |           |   | (In tons) |         
|Ontario, California         |  | Linerboard                     |  |           | 1 |           |          |  | 335,730   |            |  |  | 338,605   | 
|Rome, Georgia               |  | Linerboard                     |  |           | 2 |           |          |  | 758,960   |            |  |  | 728,993   | 
|Orange, Texas               |  | Linerboard                     |  |           | 2 |           |          |  | 681,990   |            |  |  | 677,760   | 
|Bogalusa, Louisiana         |  | Linerboard                     |  |           | 2 |           |          |  | 866,360   |            |  |  | 855,860   | 
|Maysville, Kentucky         |  | Linerboard                     |  |           | 1 |           |          |  | 425,980   |            |  |  | 424,704   | 
|New Johnsonville, Tennessee |  | Medium                         |  |           | 1 |           |          |  | 321,290   |            |  |  | 315,996   | 
|                            |  |                                |  |           |   |           |          |  |           |            | 
|                            |  |                                |  |           |   |           |          |  | 3,390,310 |            |  |  | 3,341,918 | 
|                            |  |                                |  |           |   |           |          |  |           |            | 
|Newport, Indiana*           |  | Medium and gypsum facing paper |  |           | 1 |           |          |  | 278,225   |            |  |  | 263,709   | 






|  |                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The table shows the full capacity of this facility that is owned
    by a joint venture in which we own a 50 percent interest.
    In 2004, we purchased 100,604 tons of medium from the venture.

Corrugated Packaging Plants*


|                               |  |            
|------------------------------ |  | -----------
|                               |  | Corrugator 
|Location                       |  | Size       
|                               |  |            
|Phoenix, Arizona               |  | 98        
|Fort Smith, Arkansas           |  | 87        
|Fort Smith, Arkansas(1)***     |  | None       
|Antioch, California            |  | 78        
|Bell, California               |  | 97        
|Buena
    Park, California(1)  |  | 85        
|City of Industry, California** |  | 87 and 98

10



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##### Table of Contents



|                                 |  |                
|-------------------------------- |  | ---------------
|                                 |  | Corrugator     
|Location                         |  | Size           
|                                 |  |                
|El
    Centro, California(1)     |  | 87            
|Gilroy, California(1)            |  | 87            
|Gilroy, California(1)***         |  | 110           
|Ontario, California              |  | 87            
|Santa Fe Springs, California     |  | 97            
|Santa Fe Springs, California**   |  | 87 87 and 78
|Santa Fe Springs, California***  |  | None           
|Tracy, California**              |  | 87 and 87    
|Union
    City, California(1)*** |  | None           
|Wheat Ridge, Colorado            |  | 87            
|Newark, Delaware                 |  | 87            
|Orlando, Florida                 |  | 98            
|Tampa, Florida(1)                |  | 78            
|Atlanta, Georgia                 |  | 87            
|Rome, Georgia                    |  | 98            
|Carol Stream, Illinois           |  | 87            
|Chicago, Illinois                |  | 87            
|Chicago, Illinois***             |  | None           
|Elgin, Illinois                  |  | 78            
|Elgin, Illinois***               |  | None           
|Crawfordsville, Indiana          |  | 98            
|Evansville, Indiana              |  | 98            
|Indianapolis, Indiana            |  | 87            
|St. Anthony, Indiana***          |  | None           
|Tipton, Indiana(1)***            |  | 110           
|Garden City, Kansas              |  | 98            
|Kansas City, Kansas              |  | 87            
|Louisville, Kentucky             |  | 98            
|Bogalusa, Louisiana              |  | 97            
|Minden, Louisiana                |  | 98            
|Minneapolis, Minnesota           |  | 87            
|St. Louis, Missouri              |  | 87            
|St. Louis, Missouri***           |  | 98            
|Milltown, New
    Jersey(1)***   |  | None           
|Spotswood, New Jersey            |  | 87            
|Binghamton, New York             |  | 87            
|Buffalo, New York***             |  | None           
|Scotia, New York***              |  | None           
|Utica, New York***               |  | None           
|Warren County, North Carolina    |  | 98            
|Madison, Ohio***                 |  | None           
|Marion, Ohio                     |  | 87            
|Middletown, Ohio                 |  | 98            
|Streetsboro, Ohio                |  | 98            
|Biglerville, Pennsylvania        |  | 98            
|Hazleton, Pennsylvania           |  | 98            

11



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##### Table of Contents



|                                  |  |           
|--------------------------------- |  | ----------
|                                  |  | Corrugator
|Location                          |  | Size      
|                                  |  |           
|Kennett Square, Pennsylvania***   |  | None      
|Littlestown, Pennsylvania***      |  | None      
|Scranton, Pennsylvania            |  | 68       
|Vega Alta, Puerto Rico            |  | 87       
|Lexington, South Carolina         |  | 98       
|Ashland
    City, Tennessee(1)*** |  | None      
|Elizabethton, Tennessee(1)***     |  | None      
|Dallas, Texas                     |  | 98       
|Edinburg, Texas                   |  | 87       
|San Antonio, Texas                |  | 98       
|San Antonio, Texas***             |  | None      
|Petersburg, Virginia              |  | 87       
|San Jose Iturbide, Mexico         |  | 98       
|Monterrey, Mexico                 |  | 87       
|Los Mochis, Sinaloa, Mexico       |  | 80       
|Guadalajara, Mexico(1)***         |  | None      






|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | The annual capacity of the box plants is a function of the
    product mix, customer requirements and the type of converting
    equipment installed and operating at each plant, each of which
    varies from time to time.
|   
|**  | These plants each contain more than one corrugator.                                                                                                                                                                          
|   
|*** | Sheet or sheet feeder plants.                                                                                                                                                                                                



|    |                   
|--- | ------------------
|(1) | Leased facilities.

tm


Forest Products


|            |  |                     |  |                 |     |   
|----------- |  | ------------------- |  | --------------- | --- | --
|            |  |                     |  | Rated Annual    |    
|Description |  | Location            |  | Capacity        |    
|            |  |                     |  |                 |    
|            |  |                     |  | (In millions of |    
|            |  |                     |  | board feet)     |    
|Lumber      |  | Diboll, Texas       |  |                 | 181 | * 
|Lumber      |  | Pineland, Texas     |  |                 | 310 | **
|Lumber      |  | Buna, Texas         |  |                 | 198 |   
|Lumber      |  | Rome, Georgia       |  |                 | 147 |   
|Lumber      |  | DeQuincy, Louisiana |  |                 | 198 |   






| |   |                                                                         
| | - | ------------------------------------------------------------------------
| | * | Includes separate finger jointing capacity of 10 million
    board feet.



|   |                                                                    
|-- | -------------------------------------------------------------------
|** | Includes separate stud mill capacity of 110 million board
    feet.

12



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##### Table of Contents



|                                 |  |                            |  |                 |     | 
|-------------------------------- |  | -------------------------- |  | --------------- | --- | 
|                                 |  |                            |  | Rated Annual    |    
|Description                      |  | Location                   |  | Capacity        |    
|                                 |  |                            |  |                 |    
|                                 |  |                            |  | (In millions of |    
|                                 |  |                            |  | square feet)    |    
|Fiberboard                       |  | Diboll, Texas              |  |                 | 460 | 
|Particleboard                    |  | Monroeville, Alabama       |  |                 | 160 | 
|Particleboard                    |  | Thomson, Georgia           |  |                 | 150 | 
|Particleboard                    |  | Diboll, Texas              |  |                 | 150 | 
|Particleboard                    |  | Hope, Arkansas             |  |                 | 200 | 
|Particleboard(1)(2)              |  | Mt. Jewett, Pennsylvania   |  |                 | 200 | 
|Gypsum Wallboard                 |  | West Memphis, Arkansas     |  |                 | 440 | 
|Gypsum Wallboard                 |  | Fletcher, Oklahoma         |  |                 | 460 | 
|Gypsum Wallboard*                |  | McQueeney, Texas           |  |                 | 400 | 
|Gypsum Wallboard*                |  | Cumberland City, Tennessee |  |                 | 700 | 
|Medium Density Fiberboard        |  | Pembroke, Ontario, Canada  |  |                 | 135 | 
|Medium Density Fiberboard*       |  | El Dorado, Arkansas        |  |                 | 150 | 
|Medium Density
    Fiberboard(1) |  | Mt. Jewett, Pennsylvania   |  |                 | 120 | 






|  |                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------
|* | The table shows the full capacity of this facility that is owned
    by a joint venture in which we own a 50 percent interest.



|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(1) | Leased facilities.                                                                        
|   
|(2) | Due to poor demand, we indefinitely curtailed production at this
    facility during 2003.

Timber and Timberland*


(In acres)


|                         |  |  |           | 
|------------------------ |  |  | --------- | 
|Pine Plantations         |  |  | 1,292,822 | 
|Natural Pine             |  |  | 78,147    | 
|Hardwood                 |  |  | 115,513   | 
|Special Use/Non-Forested |  |  | 550,859   | 
|                         |  |  |          
|Total                    |  |  | 2,037,341 | 
|                         |  |  |          






|  |                                                     
|- | ----------------------------------------------------
|* | Includes approximately 230,000 acres of leased land.









13



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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

General




Antitrust Litigation


Winoff Industries, Inc. v. Stone
Container Corporation,




Bogalusa Litigation






14



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Other




Environmental











|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



15



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PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities

Market Information




|               |  |             |       |  |             |   |       |           |  |   |      |   |  |     |       |  |           |   |       |  |  |   |      | 
|-------------- |  | ----------- | ----- |  | ----------- | - | ----- | --------- |  | - | ---- | - |  | --- | ----- |  | --------- | - | ----- |  |  | - | ---- | 
|               |  | 2004        |       |  | 2003        |  
|               |  |             |       |  |             |  
|               |  | Price Range |       |  | Price Range |  
|               |  |             |       |  |             |  
|               |  | High        |       |  | Low         |   |       | Dividends |  |   | High |   |  | Low |       |  | Dividends |  
|               |  |             |       |  |             |   |       |           |  |   |      |   |  |     |       |  |           |  
|First Quarter  |  | $           | 66.49 |  |             | $ | 57.60 |           |  | $ | 0.36 |   |  | $   | 49.17 |  |           | $ | 36.86 |  |  | $ | 0.34 | 
|Second Quarter |  | $           | 69.40 |  |             | $ | 59.52 |           |  | $ | 0.36 |   |  | $   | 48.06 |  |           | $ | 37.06 |  |  | $ | 0.34 | 
|Third Quarter  |  | $           | 70.02 |  |             | $ | 64.36 |           |  | $ | 0.36 |   |  | $   | 52.50 |  |           | $ | 42.11 |  |  | $ | 0.34 | 
|Fourth Quarter |  | $           | 69.18 |  |             | $ | 57.25 |           |  | $ | 1.36 | * |  | $   | 62.86 |  |           | $ | 47.89 |  |  | $ | 0.34 | 
|For the Year   |  | $           | 70.02 |  |             | $ | 57.25 |           |  | $ | 2.44 |   |  | $   | 62.86 |  |           | $ | 36.86 |  |  | $ | 1.36 | 






|  |                                                                         
|- | ------------------------------------------------------------------------
|* | Includes special dividend of $1.00 per share paid
    December 15, 2004.



Shareholders




Dividend Policy




Issuer Purchases of Equity Securities




Other


Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters


16



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |        |  
|---------------------------------------------------------------- | ------------------------------------------- | --------------------------------------- | ----- | ------ | ------- | - | ----- | ------- | - | - | ------- | ------ | - | ---- | ----- | ------ | - | - | ----- | ------ | -
|                                                                 |                                             | For the Year                            |      
|                                                                 |                                             |                                         |      
|                                                                 |                                             | 2004                                    |       |        | 2003(a) |   |       | 2002(b) |   |   | 2001(b) |        |   | 2000 |      
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|                                                                 |                                             | (Dollars in millions, except per share) |      
|Revenues:                                                        |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |       
|                                                                 | Corrugated packaging                        |                                         | $     | 2,736  |         |   | $     | 2,700   |   |   | $       | 2,587  |   |      | $     | 2,082  |   |   | $     | 2,092  |  
|                                                                 | Forest products                             |                                         |       | 971    |         |   |       | 801     |   |   |         | 787    |   |      |       | 726    |   |   |       | 836    |  
|                                                                 | Financial services                          |                                         |       | 1,043  |         |   |       | 1,152   |   |   |         | 1,144  |   |      |       | 1,297  |   |   |       | 1,308  |  
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|Total revenues                                                   |                                             | $                                       | 4,750 |        |         | $ | 4,653 |         |   | $ | 4,518   |        |   | $    | 4,105 |        |   | $ | 4,236 |       
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|Segment Operating Income:                                        |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |       
|                                                                 | Corrugated packaging                        |                                         | $     | 105    |         |   | $     | 11      |   |   | $       | 78     |   |      | $     | 107    |   |   | $     | 207    |  
|                                                                 | Forest products                             |                                         |       | 215    |         |   |       | 67      |   |   |         | 49     |   |      |       | 13     |   |   |       | 77     |  
|                                                                 | Financial services                          |                                         |       | 207    |         |   |       | 186     |   |   |         | 171    |   |      |       | 184    |   |   |       | 189    |  
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|Segment operating
    income(c)                                  |                                             |                                         | 527   |        |         |   | 264   |         |   |   | 298     |        |   |      | 304   |        |   |   | 473   |       
|Expenses not allocated to segments                               |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |       
|                                                                 | General and administrative                  |                                         |       | (93    | )       |   |       | (80     | ) |   |         | (34    | ) |      |       | (30    | ) |   |       | (33    | )
|                                                                 | Other operating income
    (expense)(d)     |                                         |       | (76    | )       |   |       | (138    | ) |   |         | (13    | ) |      |       | 1      |   |   |       | (15    | )
|                                                                 | Other non-operating income
    (expense)(d) |                                         |       |       |         |   |       | (8      | ) |   |         | (11    | ) |      |       |       |   |   |       |       |  
|                                                                 | Parent company interest                     |                                         |       | (125   | )       |   |       | (135    | ) |   |         | (133   | ) |      |       | (98    | ) |   |       | (105   | )
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|Income (loss) before taxes                                       |                                             |                                         | 233   |        |         |   | (97   | )       |   |   | 107     |        |   |      | 177   |        |   |   | 320   |       
|Income
    (taxes) benefit(e)                                    |                                             |                                         | (71   | )      |         |   | 194   |         |   |   | (42     | )      |   |      | (66   | )      |   |   | (125  | )     
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|Income from continuing operations                                |                                             |                                         | 162   |        |         |   | 97    |         |   |   | 65      |        |   |      | 111   |        |   |   | 195   |       
|Discontinued
    operations(f)                                   |                                             |                                         | 3     |        |         |   |      |         |   |   | (1      | )      |   |      |      |        |   |   |      |       
|Effect of accounting
    change(g)                               |                                             |                                         |      |        |         |   | (1    | )       |   |   | (11     | )      |   |      | (2    | )      |   |   |      |       
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|Net income                                                       |                                             | $                                       | 165   |        |         | $ | 96    |         |   | $ | 53      |        |   | $    | 109   |        |   | $ | 195   |       
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|Diluted earnings per share:                                      |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |       
|                                                                 | Income from continuing operations           |                                         | $     | 2.87   |         |   | $     | 1.78    |   |   | $       | 1.25   |   |      | $     | 2.26   |   |   | $     | 3.83   |  
|                                                                 | Discontinued operations                     |                                         |       | 0.05   |         |   |       |        |   |   |         | (0.02  | ) |      |       |       |   |   |       |       |  
|                                                                 | Effect of accounting change                 |                                         |       |       |         |   |       | (0.01   | ) |   |         | (0.21  | ) |      |       | (0.04  | ) |   |       |       |  
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|Net income                                                       |                                             | $                                       | 2.92  |        |         | $ | 1.77  |         |   |   | 1.02    |        |   |      | 2.22  |        |   | $ | 3.83  |       
|                                                                 |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |      
|Dividends per common
    share(h)                                |                                             | $                                       | 2.44  |        |         | $ | 1.36  |         |   | $ | 1.28    |        |   | $    | 1.28  |        |   | $ | 1.28  |       
|Average diluted shares outstanding                               |                                             |                                         | 56.2  |        |         |   | 54.2  |         |   |   | 52.4    |        |   |      | 49.3  |        |   |   | 50.9  |       
|Common shares outstanding at year-end                            |                                             |                                         | 56.1  |        |         |   | 54.6  |         |   |   | 53.8    |        |   |      | 49.3  |        |   |   | 49.2  |       
|Depreciation and amortization:                                   |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |       
|                                                                 | Parent
    company(c)                       |                                         | $     | 223    |         |   | $     | 238     |   |   | $       | 224    |   |      | $     | 188    |   |   | $     | 201    |  
|                                                                 | Financial services                          |                                         |       | 31     |         |   |       | 32      |   |   |         | 36     |   |      |       | 40     |   |   |       | 30     |  
|Capital expenditures:                                            |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |       
|                                                                 | Parent company                              |                                         | $     | 223    |         |   | $     | 137     |   |   | $       | 112    |   |      | $     | 184    |   |   | $     | 223    |  
|                                                                 | Financial services                          |                                         |       | 41     |         |   |       | 33      |   |   |         | 16     |   |      |       | 26     |   |   |       | 34     |  
|At Year-End                                                      |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |       
|                                                                 | Total Assets:                               |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |        |  
|                                                                 | Parent company                              |                                         | $     | 4,875  |         |   | $     | 4,826   |   |   | $       | 4,971  |   |      | $     | 4,121  |   |   | $     | 4,011  |  
|                                                                 | Financial services                          |                                         |       | 16,450 |         |   |       | 17,661  |   |   |         | 18,016 |   |      |       | 15,738 |   |   |       | 15,324 |  
|Long-term debt:                                                  |                                             |                                         |       |        |         |   |       |         |   |   |         |        |   |      |       |        |   |   |       |       
|                                                                 | Parent company                              |                                         | $     | 1,485  |         |   | $     | 1,611   |   |   | $       | 1,883  |   |      | $     | 1,339  |   |   | $     | 1,381  |  
|                                                                 | Financial services                          |                                         |       | 2,868  |         |   |       | 3,408   |   |   |         | 3,322  |   |      |       | 992    |   |   |       | 222    |  
|Preferred stock issued by subsidiaries                           |                                             | $                                       | 305   |        |         | $ | 305   |         |   | $ | 305     |        |   | $    | 305   |        |   | $ | 305   |       
|Shareholders equity                                             |                                             | $                                       | 2,092 |        |         | $ | 1,968 |         |   | $ | 1,949   |        |   | $    | 1,896 |        |   | $ | 1,833 |       
|Ratio of total debt to total capitalization  parent
    company |                                             |                                         | 42%   |        |         |   | 45%   |         |   |   | 49%     |        |   |      | 41%   |        |   |   | 43    | %     



| |                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Throughout Selected Financial Data and Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations, we refer to parent company financial information,
    which includes only Temple-Inland and our manufacturing
    subsidiaries with our financial services subsidiaries reported
    on the equity method.

17



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|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The 2003 year, which ended on January 3, 2004, had
    53 weeks. The extra week did not have a material effect on
    earnings or financial position. As a result of the consolidation
    of our administrative functions and adoption of a shared
    services concept, beginning 2004, we changed the way we allocate
    cost to the business segments. The effect of this change was to
    increase segment operating income and to increase unallocated
    expenses by a like amount. The year 2003 amounts have been
    reclassified to reflect this change as follows:

|                           |                      |                   |      |     |                   |   |     |              |  |   |      |     | 
|-------------------------- | -------------------- | ----------------- | ---- | --- | ----------------- | - | --- | ------------ |  | - | ---- | --- | 
|                           |                      | For the Year 2003 |     
|                           |                      |                   |     
|                           |                      | Originally        |      |     |                   |   | As  |             
|                           |                      | Reported          |      |     | Reclassifications |   |     | Reclassified | 
|                           |                      |                   |      |     |                   |   |     |              | 
|                           |                      | (In millions)     |     
|Segment operating income   |                      |                   |      |     |                   |   |     |              |  |   |      |    
|                           | Corrugated packaging |                   | $    | (14 | )                 |   | $   | 25           |  |   | $    | 11  | 
|                           | Forest products      |                   |      | 57  |                   |   |     | 10           |  |   |      | 67  | 
|                           | Financial services   |                   |      | 186 |                   |   |     |             |  |   |      | 186 | 
|                           |                      |                   |      |     |                   |   |     |              | 
|Segment operating income   |                      |                   | 229  |     |                   |   | 35  |              |  |   | 264  |    
|Unallocated expenses       |                      |                   | (326 | )   |                   |   | (35 | )            |  |   | (361 | )  
|                           |                      |                   |      |     |                   |   |     |              | 
|Income (loss) before taxes |                      | $                 | (97  | )   |                   | $ |    |              |  | $ | (97  | )  
|                           |                      |                   |      |     |                   |   |     |              | 



| |                                                        
| | -------------------------------------------------------
| | It was not practical to reclassify years prior to 2003.



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | In 2002, we acquired Gaylord Container Corporation (March), a
    box plant in Puerto Rico (March), certain assets of Mack
    Packaging Group, Inc. (May), and Fibre Innovations LLC
    (November). Also in May 2002, we sold 4.1 million shares of
    common stock, $345 million of Upper
    DECSSM
    units, and $500 million of Senior Notes due 2012. In the
    aggregate, these transactions significantly increased the assets
    and operations of our corrugated packaging segment and changed
    our capital structure. Unaudited pro forma information for 2002
    assuming these acquisitions and related financing transactions
    had occurred at the beginning of 2002 follows: total revenues
    $4,461 million, income from continuing operations
    $54 million, and income from continuing operations, per
    diluted share $1.03. We derived this pro forma information by
    adjusting for the effects of the purchase price allocations and
    financing transactions described above and the reclassification
    of the discontinued operations. The pro forma information does
    not reflect the effects of capacity closures, cost savings or
    other synergies realized. These pro forma results are not
    necessarily an indication of what actually would have occurred
    if the acquisitions and financing transactions had been
    completed at the beginning of 2002 and are not intended to be
    indicative of future results.              
|   
|    |  | In 2001, we acquired the corrugated packaging operations of
    Chesapeake Corporation and Elgin Corrugated Box Company
    (May), and ComPro Packaging LLC (October). Unaudited pro
    forma results of operations, assuming these acquisitions had
    been effected as of the beginning of 2001, would not have been
    materially different from what we reported.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(c) |  | We changed the estimated useful lives of certain production
    equipment beginning 2001. As a result, segment operating income
    in 2001 includes a $27 million reduction in depreciation
    expense compared with 2000. Of this amount, $20 million
    applies to corrugated packaging and $7 million applies to
    forest products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(d) |  | Other operating income (expense) includes (i) in 2004,
    a $27 million charge associated with converting and
    production facility closures, an $11 million charge related
    to consolidation and supply chain initiatives, a
    $34 million charge associated with the repositioning of the
    mortgage origination and servicing activities, $1 million
    of income related to the collection of notes previously
    written-off, and $5 million of other; (ii) in 2003, a
    $48 million charge associated with consolidation and supply
    chain initiatives, a $41 million charge associated with
    production and converting facility closures, a $42 million
    charge associated with write-downs including specialty packaging
    operations and the sale of a facility lease, a $5 million
    charge associated with financial services workforce reductions,
    and $2 million of other charges; (iii) in 2002, a
    $6 million charge related to promissory notes previously
    sold with recourse in connection with the 1998 sale of our
    Argentine box plant, and a $7 million charge related to
    financial services severance and write-off of technology
    investments; (iv) in 2001, a $20 million gain from the
    sale of non-strategic timberland and $19 million in losses
    from the disposition of under-performing assets and other
    charges; and (v) in 2000, a $15 million loss from our
    decision to exit the fiber cement business.
|   
|    |  | Other non-operating income (expense) includes (i) in
    2004, a $2 million premium related to the early redemption
    of debt, offset by $2 million of interest and other income;
    (ii) in 2003, an $8 million charge associated with
    early redemption and refinancing of $150 million of
    8.25% Debentures; and (iii) in 2002, an
    $11 million write-off of unamortized financing fees in
    connection with the early repayment of a bridge financing
    facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(e) |  | Income taxes includes one-time tax benefits related to the
    resolution and settlement of prior years tax examinations
    (i) in 2004, $20 million and (ii) in 2003,
    $165 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(f) |  | Discontinued operations include in 2004, 2003, and 2002 the
    non-strategic operations obtained in the Gaylord acquisition
    including the retail bag business, which was sold in May 2002;
    the multi-wall bag business and kraft paper                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

18



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##### Table of Contents



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | mill, which were sold in January 2003; the chemical business;
    and in 2004, the resolution and settlement of environmental and
    other indemnifications we provided in the 1999 sale of the
    bleached paperboard operation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(g) |  | Effect of accounting change includes (i) in 2003, Statement
    of Financial Accounting Standards (SFAS) No. 143,
    Accounting for Asset Retirement Obligations, which
    resulted in an after tax charge of $1 million or
    $0.01 per share for the cumulative effect of adoption;
    (ii) in 2002, SFAS No. 142, Goodwill and Other
    Intangible Assets, which resulted in an after tax charge of
    $11 million or $0.22 per share; and (iii) in
    2001, SFAS No. 133, Accounting for Derivative
    Instruments and Hedging Activities, as amended, which
    resulted in an after tax charge of $2 million or
    $0.04 per diluted share. As a result of the adoption of
    SFAS No. 142 in 2002, year 2002 and thereafter amounts
    are not comparable to prior years due to the amortization of
    goodwill and trademarks in the prior years. In 2003, we also
    voluntarily adopted the prospective transition method of
    SFAS No. 148, Accounting for Stock-Based
    Compensation-Transition and Disclosure, an amendment of FASB
    Statement No. 123, which decreased 2003 net income
    by $1 million or $0.03 per share.
|   
|(h) |  | Includes a $1.00 per share special dividend in December
    2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Introduction




Results of Operations for the Years 2004, 2003 and 2002


Summary








| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focusing on corrugated packaging from an integrated platform,
    which eliminates downtime and lowers costs through improved
    asset utilization,                                                                    
|
| |  | maximizing the value of our timberland through accelerated fiber
    growth that is aligned with well-located converting operations
    and developing significant real estate opportunities on
    high-value land, and
|
| |  | realizing earnings and cash flow from financial services, which
    is a low-cost, low-risk provider of financial services.                                                                                             





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We closed five corrugated packaging converting facilities and
    sold our specialty packaging operations and our Clarion,
    Pennsylvania MDF facility to reduce costs and improve asset
    utilization. These actions affected over 800 employees.                                                                                                                                                                                                                                                                                                                                     
|
| |  | We are modifying and enhancing two of our linerboard mills to
    increase mill reliability and reduce reliance on natural gas as
    an energy source.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | We repositioned our mortgage origination activities and sold our
    third-party mortgage servicing portfolio to reduce costs and
    exposure to changing market conditions, including a slow-down in
    refinancing activity. While we will still originate mortgage
    loans for our own portfolio and, to a lesser extent, for sale to
    others, we will limit our product offerings and reposition our
    retail origination activities. These actions affected over
    1,500 employees and resulted in the sale or closure of over
    100 of our mortgage origination outlets.

19



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##### Table of Contents





|                                                    |  |                                 |       |  |      |   |       |      |  |   |       | 
|--------------------------------------------------- |  | ------------------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                                    |  | For the Year                    |      
|                                                    |  |                                 |      
|                                                    |  | 2004                            |       |  | 2003 |   |       | 2002 | 
|                                                    |  |                                 |       |  |      |   |       |      | 
|                                                    |  | (In millions, except per share) |      
|Consolidated revenues                               |  | $                               | 4,750 |  |      | $ | 4,653 |      |  | $ | 4,518 | 
|Income from continuing operations                   |  |                                 | 162   |  |      |   | 97    |      |  |   | 65    | 
|Income from continuing operations per diluted share |  |                                 | 2.87  |  |      |   | 1.78  |      |  |   | 1.25  | 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2004, we began to see the benefits in our manufacturing
    operations of our initiatives to lower cost and improve asset
    utilization and operating efficiencies. In addition, market
    demand strengthened, resulting in higher prices for most of our
    forest products, and prices for corrugated packaging began to
    improve in the second quarter of the year. Our financial
    services operations benefited from improved asset quality, which
    resulted in a recovery of previously provided provisions for
    loan losses. This was partially offset by declining mortgage
    origination activities. Actions taken to lower cost and improve
    asset utilization and operating efficiencies resulted in charges
    and expenses of $76 million, principally related to the
    converting and production facility closures and the
    repositioning of our mortgage origination activities and sale of
    our third-party mortgage servicing portfolio. We also recognized
    a one-time tax benefit of $20 million resulting from the
    settlement of prior years tax examinations.
|
| |  | In 2003, weak industry box demand and lower prices, continued
    excess capacity in most of our forest products, and higher
    energy and pension costs negatively affected our manufacturing
    revenues and earnings. The negative effect was partially offset
    by improvements in financial services earnings. Actions taken to
    lower cost and improve asset utilization and operating
    efficiencies resulted in charges and expenses of
    $138 million principally related to the sale or closure of
    under-performing assets and the consolidation of administrative
    functions. We also recognized a one-time tax benefit of
    $165 million resulting from the resolution and settlement
    of prior years tax examinations.                                                                                                                                                                                                                                                                                                                                                                
|
| |  | In 2002, anemic growth of the U.S. economy coupled with
    industry over-capacity for most forest products negatively
    affected our revenues and earnings. We grew our corrugated
    packaging operations by acquiring Gaylord, which we began
    consolidating in March, and we also acquired a box plant in
    Puerto Rico in March, certain assets of Mack Packaging Group,
    Inc. in May, and Fibre Innovations LLC in November. In May,
    we sold 4.1 million shares of common stock,
    $345 million of Upper
    DECSSM
    units, and $500 million of Senior Notes. In the aggregate,
    these acquisitions and financing transactions significantly
    increased the assets and operations of our corrugated packaging
    segment and changed our capital structure.                                                                                                                                                                                                                                                                                                                               

Business Segments






| |   |                      
| | - | ---------------------
| |  | Corrugated packaging,
|
| |  | Forest products, and 
|
| |  | Financial services.  



Corrugated Packaging




20



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|                         |  |               |       |  |      |   |       |      |  |   |       | 
|------------------------ |  | ------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                         |  | For the Year  |      
|                         |  |               |      
|                         |  | 2004          |       |  | 2003 |   |       | 2002 | 
|                         |  |               |       |  |      |   |       |      | 
|                         |  | (In millions) |      
|Revenues                 |  | $             | 2,736 |  |      | $ | 2,700 |      |  | $ | 2,587 | 
|Segment operating income |  |               | 105   |  |      |   | 11    |      |  |   | 78    | 





|                                        |  |                     |     |    |      |  |    |      |  |  |    |   
|--------------------------------------- |  | ------------------- | --- | -- | ---- |  | -- | ---- |  |  | -- | --
|                                        |  | Year over Year      |    
|                                        |  | Increase (Decrease) |    
|                                        |  |                     |    
|                                        |  | 2004                |     |    | 2003 |  |    | 2002 | 
|                                        |  |                     |     |    |      |  |    |      | 
|Corrugated packaging                    |  |                     |     |    |      |  |    |      |  |  |    |   
|Average prices                          |  |                     | 0   | %  |      |  | (1 | %)   |  |  | (5 | %)
|Shipments, average
    week(a)          |  |                     | 6   | %  |      |  | (1 | %)   |  |  | (2 | %)
|Industry shipments, average
    week(b) |  |                     | 3   | %  |      |  | 0  | %    |  |  | 0  | % 
|Linerboard                              |  |                     |     |    |      |  |    |      |  |  |    |   
|Average prices                          |  |                     | 11  | %  |      |  | (1 | %)   |  |  | (7 | %)
|Shipments,
    tons(a)                  |  |                     | (44 | %) |      |  | 17 | %    |  |  | (9 | %)






|    |                                                                        
|--- | -----------------------------------------------------------------------
|(a) | 2002 shipments are pro forma to reflect the acquisition of
    Gaylord.
|   
|(b) | Source: Fibre Box Association                                          









|                                |  |                     |    |   |      |   |     |      |  |   |     |  
|------------------------------- |  | ------------------- | -- | - | ---- | - | --- | ---- |  | - | --- | -
|                                |  | Year over Year      |   
|                                |  | Increase (Decrease) |   
|                                |  |                     |   
|                                |  | 2004                |    |   | 2003 |   |     | 2002 | 
|                                |  |                     |    |   |      |   |     |      | 
|                                |  | (In millions)       |   
|Wood fiber                      |  | $                   | (7 | ) |      | $ | 30  |      |  | $ | 63  |  
|Recycled fiber                  |  |                     | 27 |   |      |   | (11 | )    |  |   | 26  |  
|Energy, principally natural gas |  |                     | 7  |   |      |   | 51  |      |  |   | (32 | )
|Depreciation                    |  |                     | (8 | ) |      |   | 12  |      |  |   | 39  |  
|Pension and postretirement      |  |                     | 5  |   |      |   | 23  |      |  |   | 20  |  



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|                                                                                                       |  |              |     |   |      |  |     |      |  |  |     |  
|------------------------------------------------------------------------------------------------------ |  | ------------ | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                                                                                       |  | For the Year |    
|                                                                                                       |  |              |    
|                                                                                                       |  | 2004         |     |   | 2003 |  |     | 2002 | 
|                                                                                                       |  |              |     |   |      |  |     |      | 
|Number of converting facilities (at year-end)                                                          |  |              | 69  |   |      |  | 74  |      |  |  | 77  |  
|Mill capacity, in million tons                                                                         |  |              | 3.4 |   |      |  | 3.3 |      |  |  | 3.3 |  
|Mill production, in million tons                                                                       |  |              | 3.3 |   |      |  | 3.2 |      |  |  | 3.1 |  
|Percent mill production used internally                                                                |  |              | 90  | % |      |  | 82  | %    |  |  | 84  | %
|Percent of total fiber requirements sourced from recycled fiber                                        |  |              | 36  | % |      |  | 34  | %    |  |  | 42  | %
|Corrugating medium purchases from our Premier Boxboard Limited
    LLC joint venture, in thousand tons |  |              | 100 |   |      |  | 157 |      |  |  | 169 |  

Forest Products






|                         |  |               |     |  |      |   |     |      |  |   |     | 
|------------------------ |  | ------------- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                         |  | For the Year  |    
|                         |  |               |    
|                         |  | 2004          |     |  | 2003 |   |     | 2002 | 
|                         |  |               |     |  |      |   |     |      | 
|                         |  | (In millions) |    
|Revenues                 |  | $             | 971 |  |      | $ | 801 |      |  | $ | 787 | 
|Segment operating income |  |               | 215 |  |      |   | 67  |      |  |   | 49  | 



|               |                |                     |  |     |      |  |  |      |   |  |  |      |  
|-------------- | -------------- | ------------------- |  | --- | ---- |  |  | ---- | - |  |  | ---- | -
|               |                | Year over Year      | 
|               |                | Increase (Decrease) | 
|               |                |                     | 
|               |                | 2004                |  |     | 2003 |  |  | 2002 |  
|               |                |                     |  |     |      |  |  |      |  
|Lumber:        |                |                     |  |     |      |  |  |      |   |  |  |     
|               | Average prices |                     |  | 16% |      |  |  | 3%   |   |  |  | (6%  | )
|               | Shipments      |                     |  | 7%  |      |  |  | 13%  |   |  |  | 5%   |  
|Particleboard: |                |                     |  |     |      |  |  |      |   |  |  |     
|               | Average prices |                     |  | 28% |      |  |  | (3%  | ) |  |  | (13% | )
|               | Shipments      |                     |  | 0%  |      |  |  | (8%  | ) |  |  | 12%  |  
|Gypsum:        |                |                     |  |     |      |  |  |      |   |  |  |     
|               | Average prices |                     |  | 26% |      |  |  | 2%   |   |  |  | 25%  |  
|               | Shipments      |                     |  | 19% |      |  |  | (5%  | ) |  |  | 16%  |  
|MDF:           |                |                     |  |     |      |  |  |      |   |  |  |     
|               | Average prices |                     |  | 15% |      |  |  | (4%  | ) |  |  | 3%   |  
|               | Shipments      |                     |  | 3%  |      |  |  | (20% | ) |  |  | 11%  |  



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|                 |                                             |                       |   |       |      |  |   |       |  |  |   |       | 
|---------------- | ------------------------------------------- | --------------------- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                 |                                             | Year                  |  
|                 |                                             |                       |  
|                 |                                             | 2004                  |   |       | 2003 |  |   | 2002  | 
|                 |                                             |                       |   |       |      |  |   |       | 
|                 |                                             | (Dollars in millions) |  
|High-value land: |                                             |                       |   |       |      |  |   |       |  |  |   |      
|                 | Acres sold                                  |                       |   | 2,919 |      |  |   | 2,436 |  |  |   | 5,846 | 
|                 | Profit included in segment operating income |                       | $ | 19    |      |  | $ | 12    |  |  | $ | 16    | 



|                                |  |                     |    |   |      |   |     |      |  |   |     |  
|------------------------------- |  | ------------------- | -- | - | ---- | - | --- | ---- |  | - | --- | -
|                                |  | Year over Year      |   
|                                |  | Increase (Decrease) |   
|                                |  |                     |   
|                                |  | 2004                |    |   | 2003 |   |     | 2002 | 
|                                |  |                     |    |   |      |   |     |      | 
|                                |  | (In millions)       |   
|Wood fiber                      |  | $                   | 37 |   |      | $ | (19 | )    |  | $ | 9   |  
|Energy, principally natural gas |  |                     | 5  |   |      |   | 7   |      |  |   | (12 | )
|Pension and postretirement      |  |                     | (1 | ) |      |   | 3   |      |  |   | 4   |  





|                                                                                       |           |              |    |     |      |  |    |      |     |  |    |     |     | 
|-------------------------------------------------------------------------------------- | --------- | ------------ | -- | --- | ---- |  | -- | ---- | --- |  | -- | --- | --- | 
|                                                                                       |           | For the Year |   
|                                                                                       |           |              |   
|                                                                                       |           | 2004         |    |     | 2003 |  |    | 2002 |    
|                                                                                       |           |              |    |     |      |  |    |      |    
|Timber harvest, in million tons:                                                       |           |              |    |     |      |  |    |      |     |  |    |    
|                                                                                       | Sawtimber |              |    | 2.5 |      |  |    | 2.4  |     |  |    | 2.4 |    
|                                                                                       | Pulpwood  |              |    | 3.4 |      |  |    | 4.1  |     |  |    | 3.8 |    
|                                                                                       |           |              |    |     |      |  |    |      |    
|                                                                                       |           | Total        |    |     | 5.9  |  |    |      | 6.5 |  |    |     | 6.2 | 
|                                                                                       |           |              |    |     |      |  |    |      |    
|Number of converting and manufacturing facilities (at year-end)                        |           |              | 18 |     |      |  | 19 |      |     |  | 19 |    
|Average operating rates for all product lines:                                         |           |              |    |     |      |  |    |      |     |  |    |    
|                                                                                       | High      |              |    | 91  | %    |  |    | 86   | %   |  |    | 93  | %  
|                                                                                       | Low       |              |    | 62  | %    |  |    | 60   | %   |  |    | 74  | %  
|Average operating rates for all product lines excluding sold or
    closed facilities: |           |              |    |     |      |  |    |      |     |  |    |    
|                                                                                       | High      |              |    | 95  | %    |  |    | 93   | %   |  |    | 93  | %  
|                                                                                       | Low       |              |    | 85  | %    |  |    | 72   | %   |  |    | 74  | %  



Financial Services




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|                         |  |               |     |  |      |   |     |      |  |   |     | 
|------------------------ |  | ------------- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                         |  | For the Year  |    
|                         |  |               |    
|                         |  | 2004          |     |  | 2003 |   |     | 2002 | 
|                         |  |               |     |  |      |   |     |      | 
|                         |  | (In millions) |    
|Net interest income      |  | $             | 401 |  |      | $ | 377 |      |  | $ | 374 | 
|Segment operating income |  |               | 207 |  |      |   | 186 |      |  |   | 171 | 





| |                                                    
| | ---------------------------------------------------
| | Net Interest Income and Earning Assets and Deposits







|                             |                      |                       |        |  |        |  |      |         |   |   |        |  |  |         |      |      |        |   |        |  |  |  |      |      |  
|---------------------------- | -------------------- | --------------------- | ------ |  | ------ |  | ---- | ------- | - | - | ------ |  |  | ------- | ---- | ---- | ------ | - | ------ |  |  |  | ---- | ---- | -
|                             |                      | For the Year          |       
|                             |                      |                       |       
|                             |                      | 2004                  |        |  | 2003   |  |      | 2002    |  
|                             |                      |                       |        |  |        |  |      |         |  
|                             |                      | Average               |        |  | Yield/ |  |      | Average |   |   | Yield/ |  |  | Average |      |      | Yield/ |  
|                             |                      | Balance               |        |  | Rate   |  |      | Balance |   |   | Rate   |  |  | Balance |      |      | Rate   |  
|                             |                      |                       |        |  |        |  |      |         |   |   |        |  |  |         |      |      |        |  
|                             |                      | (Dollars in millions) |       
|Earning assets               |                      | $                     | 15,995 |  |        |  | 4.49 | %       |   | $ | 16,853 |  |  |         | 4.32 | %    |        | $ | 15,746 |  |  |  | 4.92 | %   
|Interest-bearing liabilities |                      |                       | 15,099 |  |        |  | 2.10 | %       |   |   | 15,370 |  |  |         | 2.29 | %    |        |   | 14,205 |  |  |  | 2.82 | %   
|                             |                      |                       |        |  |        |  |      |         |   |   |        |  |  |         |      |      |        |  
|                             | Interest rate spread |                       |        |  |        |  |      | 2.39    | % |   |        |  |  |         |      | 2.03 | %      |   |        |  |  |  |      | 2.10 | %

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|                                                             |                      |               |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------------------------------ | -------------------- | ------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                             |                      | At Year-End   |       
|                                                             |                      |               |       
|                                                             |                      | 2004          |        |        | 2003 |   |        | 2002   | 
|                                                             |                      |               |        |        |      |   |        |        | 
|                                                             |                      | (In millions) |       
|Residential housing assets (loans and securities)            |                      | $             | 12,389 |        |      | $ | 13,492 |        |  | $ | 12,783 |       
|Other earning assets                                         |                      |               | 3,015  |        |      |   | 3,010  |        |  |   | 4,185  |       
|                                                             |                      |               |        |        |      |   |        |        | 
|                                                             | Total earning assets |               | $      | 15,404 |      |   | $      | 16,502 |  |   | $      | 16,968 | 
|                                                             |                      |               |        |        |      |   |        |        | 
|Residential housing assets as a percentage of earning assets |                      |               | 80     | %      |      |   | 82     | %      |  |   | 75     | %     
|Transaction accounts                                         |                      | $             | 5,137  |        |      | $ | 5,115  |        |  | $ | 3,945  |       
|Certificates of deposit                                      |                      |               | 3,827  |        |      |   | 3,583  |        |  |   | 5,258  |       
|                                                             |                      |               |        |        |      |   |        |        | 
|                                                             | Total deposits       |               | $      | 8,964  |      |   | $      | 8,698  |  |   | $      | 9,203  | 
|                                                             |                      |               |        |        |      |   |        |        | 





Asset Quality and Allowance for Loan Losses




|                                                    |                       |                       |      |    |      |   |      |      |  |   |      |     | 
|--------------------------------------------------- | --------------------- | --------------------- | ---- | -- | ---- | - | ---- | ---- |  | - | ---- | --- | 
|                                                    |                       | At Year-End           |     
|                                                    |                       |                       |     
|                                                    |                       | 2004                  |      |    | 2003 |   |      | 2002 | 
|                                                    |                       |                       |      |    |      |   |      |      | 
|                                                    |                       | (Dollars in millions) |     
|Non-performing loans                                |                       | $                     | 50   |    |      | $ | 65   |      |  | $ | 126  |    
|Restructured operating lease assets                 |                       |                       | 37   |    |      |   | 40   |      |  |   |     |    
|Foreclosed real estate                              |                       |                       | 4    |    |      |   | 26   |      |  |   | 6    |    
|                                                    |                       |                       |      |    |      |   |      |      | 
|                                                    | Non-performing assets |                       | $    | 91 |      |   | $    | 131  |  |   | $    | 132 | 
|                                                    |                       |                       |      |    |      |   |      |      | 
|Non-performing loans as a percentage of total loans |                       |                       | 0.51 | %  |      |   | 0.71 | %    |  |   | 1.28 | %  
|Non-performing assets ratio                         |                       |                       | 0.93 | %  |      |   | 1.42 | %    |  |   | 1.34 | %  
|Allowance for loan losses/ non-performing loans     |                       |                       | 170  | %  |      |   | 172  | %    |  |   | 105  | %  
|Allowance for loan losses/ total loans              |                       |                       | 0.88 | %  |      |   | 1.22 | %    |  |   | 1.34 | %  





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| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | conditions affecting borrower liquidity and collateral values
    for impaired loans,                                                        
|
| |  | risk characteristics for groups of loans that are not considered
    individually impaired but we believe have probable potential
    losses,
|
| |  | risk characteristics for homogeneous pools of loans, and                                                                                     
|
| |  | other risk factors that we believe are not apparent in
    historical information.                                                           



|                                                             |                                          |                       |      |     |      |   |      |      |   |   |      |     |  
|------------------------------------------------------------ | ---------------------------------------- | --------------------- | ---- | --- | ---- | - | ---- | ---- | - | - | ---- | --- | -
|                                                             |                                          | For the Year          |     
|                                                             |                                          |                       |     
|                                                             |                                          | 2004                  |      |     | 2003 |   |      | 2002 |  
|                                                             |                                          |                       |      |     |      |   |      |      |  
|                                                             |                                          | (Dollars in millions) |     
|Balance at beginning of year                                 |                                          | $                     | 111  |     |      | $ | 132  |      |   | $ | 139  |    
|                                                             | Net charge-offs                          |                       |      | (7  | )    |   |      | (64  | ) |   |      | (47 | )
|                                                             | Provision (credit) for loan losses       |                       |      | (12 | )    |   |      | 43   |   |   |      | 40  |  
|                                                             | Transfer to reserve for loan commitments |                       |      | (7  | )    |   |      |     |   |   |      |    |  
|                                                             |                                          |                       |      |     |      |   |      |      |  
|Balance at end of year                                       |                                          | $                     | 85   |     |      | $ | 111  |      |   | $ | 132  |    
|                                                             |                                          |                       |      |     |      |   |      |      |  
|Net charge-offs as a percentage of average loans outstanding |                                          |                       | 0.07 | %   |      |   | 0.66 | %    |   |   | 0.48 | %  







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Repositioning of Mortgage Origination Activities and Sale of
Third-Party Mortgage Servicing






Non-Interest Income and Non-Interest Expenses




|                    |                                              |                     |   |      |      |  |   |      |  |  |   |    |  
|------------------- | -------------------------------------------- | ------------------- | - | ---- | ---- |  | - | ---- |  |  | - | -- | -
|                    |                                              | Year over Year      |  
|                    |                                              | Increase (Decrease) |  
|                    |                                              |                     |  
|                    |                                              | 2004                |   |      | 2003 |  |   | 2002 | 
|                    |                                              |                     |   |      |      |  |   |      | 
|                    |                                              | (In millions)       |  
|Noninterest income: |                                              |                     |   |      |      |  |   |      |  |  |   |   
|                    | Loan origination and sale of loans           |                     | $ | (128 | )    |  | $ | 58   |  |  | $ | 80 |  
|                    | Servicing rights amortization and impairment |                     |   | (19  | )    |  |   |     |  |  |   | 13 |  
|                    | Real estate operations                       |                     |   | 4    |      |  |   | 15   |  |  |   | (9 | )



|                     |                           |                     |   |     |      |  |   |      |  |  |   |    | 
|-------------------- | ------------------------- | ------------------- | - | --- | ---- |  | - | ---- |  |  | - | -- | 
|                     |                           | Year over Year      |  
|                     |                           | Increase (Decrease) |  
|                     |                           |                     |  
|                     |                           | 2004                |   |     | 2003 |  |   | 2002 | 
|                     |                           |                     |   |     |      |  |   |      | 
|                     |                           | (In millions)       |  
|Noninterest expense: |                           |                     |   |     |      |  |   |      |  |  |   |   
|                     | Compensation and benefits |                     | $ | (57 | )    |  | $ | 25   |  |  | $ | 54 | 
|                     | Real estate operations    |                     |   | (10 | )    |  |   | 9    |  |  |   | 1  | 



27



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##### Table of Contents







|                                                 |  |                       |       |   |      |   |        |      |  |   |       |  
|------------------------------------------------ |  | --------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                 |  | For the Year          |      
|                                                 |  |                       |      
|                                                 |  | 2004                  |       |   | 2003 |   |        | 2002 | 
|                                                 |  |                       |       |   |      |   |        |      | 
|                                                 |  | (Dollars in millions) |      
|Loans originated and retained                    |  | $                     | 1,617 |   |      | $ | 2,089  |      |  | $ | 1,253 |  
|Loans originated for sale to third parties       |  | $                     | 5,227 |   |      | $ | 10,813 |      |  | $ | 9,503 |  
|Gains on loan sales as a percent of originations |  |                       | 2.04  | % |      |   | 2.08   | %    |  |   | 1.94  | %
|Value of mortgage servicing rights retained      |  | $                     | 19    |   |      | $ | 44     |      |  | $ | 43    |  



Statistical Data


Expenses Not Allocated to Segments










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2004, $42 million, including an $11 million charge
    associated with consolidation of administrative functions and
    supply chain initiatives, $27 million related to closure or
    sale of converting facilities and non-strategic assets and
    $4 million of other charges. Of these amounts,
    $19 million applies to corrugated packaging,
    $12 million to forest products, and $11 million is
    unallocated. In addition, financial services recognized a
    $34 million charge related to the repositioning of the
    mortgage origination activities and the third-party mortgage
    servicing portfolio.
|
| |  | In 2003, $133 million, including a $48 million charge
    associated with consolidation of administrative functions and
    supply chain initiatives, $83 million related to the
    closure or sale of converting and production facilities and
    non-strategic assets and $2 million of other charges. Of
    these amounts, $70 million applies to corrugated packaging,
    $24 million to forest products and $39 million is
    unallocated. In addition, financial services recognized a
    $5 million charge associated with workforce reductions.                                                                       
|
| |  | In 2002, $6 million related to the repurchase of notes sold
    with recourse, which applies to corrugated packaging. In
    addition, financial services recognized a $7 million charge
    related to severance and write-off of technology investments.                                                                                                                                                                                                                                                                                                                                                                          



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Income Taxes








Average Shares Outstanding








Capital Resources and Liquidity for the Year 2004




Sources and Uses of Cash




29



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| |                                        
| | ---------------------------------------
| | Parent Company Sources and Uses of Cash

|                                    |                                                          |                                         |      |      |      |   |      |      |      |   |        |      |      |  
|----------------------------------- | -------------------------------------------------------- | --------------------------------------- | ---- | ---- | ---- | - | ---- | ---- | ---- | - | ------ | ---- | ---- | -
|                                    |                                                          | For the Year                            |     
|                                    |                                                          |                                         |     
|                                    |                                                          | 2004                                    |      |      | 2003 |   |      | 2002 |     
|                                    |                                                          |                                         |      |      |      |   |      |      |     
|                                    |                                                          | (In millions)                           |     
|We received cash from               |                                                          |                                         |      |      |      |   |      |      |      |   |        |     
|                                    | Operations                                               |                                         | $    | 439  |      |   | $    | 225  |      |   | $      | 240  |     
|                                    | Dividends from financial
    services(a)                 |                                         |      | 105  |      |   |      | 166  |      |   |        | 125  |     
|                                    | Working capital changes                                  |                                         |      | (128 | )    |   |      | 25   |      |   |        | 22   |     
|                                    |                                                          |                                         |      |      |      |   |      |      |     
|                                    |                                                          | From operations                         |      |      | 416  |   |      |      | 416  |   |        |      | 387  |  
|                                    | Sale of non-strategic assets                             |                                         |      | 66   |      |   |      | 69   |      |   |        | 39   |     
|                                    | Exercise of options and in 2002 the sale of common stock |                                         |      | 62   |      |   |      | 13   |      |   |        | 219  |     
|                                    | Borrowings for acquisitions                              |                                         |      |     |      |   |      |     |      |   |        | 841  |     
|                                    |                                                          |                                         |      |      |      |   |      |      |     
|Total sources                       |                                                          |                                         | 544  |      |      |   | 498  |      |      |   | 1,486  |     
|We used cash to                     |                                                          |                                         |      |      |      |   |      |      |      |   |        |     
|                                    | Reduce debt and other obligations                        |                                         |      | (191 | )    |   |      | (276 | )    |   |        | (643 | )   
|                                    | Pay dividends to shareholders                            |                                         |      | (136 | )    |   |      | (73  | )    |   |        | (67  | )   
|                                    | Reinvest in the business through                         |                                         |      |      |      |   |      |      |      |   |        |      |     
|                                    |                                                          | Capital expenditures                    |      |      | (223 | ) |      |      | (137 | ) |        |      | (112 | )
|                                    |                                                          | Joint ventures and in 2002 acquisitions |      |      | (5   | ) |      |      | (9   | ) |        |      | (650 | )
|                                    |                                                          |                                         |      |      |      |   |      |      |     
|Total uses                          |                                                          |                                         | (555 | )    |      |   | (495 | )    |      |   | (1,472 | )   
|                                    |                                                          |                                         |      |      |      |   |      |      |     
|Change in cash and cash equivalents |                                                          | $                                       | (11  | )    |      | $ | 3    |      |      | $ | 14     |     






|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(a) | Dividends we receive from financial services are eliminated in
    the consolidated statements of cash flows.











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| |                                            
| | -------------------------------------------
| | Financial Services Sources and Uses of Cash

|                                    |                                                            |                                                  |      |      |      |   |      |      |     |   |      |       |        |  
|----------------------------------- | ---------------------------------------------------------- | ------------------------------------------------ | ---- | ---- | ---- | - | ---- | ---- | --- | - | ---- | ----- | ------ | -
|                                    |                                                            | For the Year                                     |     
|                                    |                                                            |                                                  |     
|                                    |                                                            | 2004                                             |      |      | 2003 |   |      | 2002 |    
|                                    |                                                            |                                                  |      |      |      |   |      |      |    
|                                    |                                                            | (In millions)                                    |     
|We received cash from               |                                                            |                                                  |      |      |      |   |      |      |     |   |      |      
|                                    | Operations                                                 |                                                  | $    | 161  |      |   | $    | 266  |     |   | $    | 297   |       
|                                    | Changes in loans held for sale, and other                  |                                                  |      | (12  | )    |   |      | 394  |     |   |      | (296  | )     
|                                    |                                                            |                                                  |      |      |      |   |      |      |    
|                                    |                                                            | From operations                                  |      |      | 149  |   |      |      | 660 |   |      |       | 1      |  
|                                    | Sale of non-strategic assets and mortgage servicing rights |                                                  |      | 14   |      |   |      |     |     |   |      | 36    |       
|                                    |                                                            |                                                  |      |      |      |   |      |      |    
|Total sources                       |                                                            |                                                  | 163  |      |      |   | 660  |      |     |   | 37   |      
|We used cash to                     |                                                            |                                                  |      |      |      |   |      |      |     |   |      |      
|                                    | Pay dividends to the parent
    company(a)                 |                                                  |      | (105 | )    |   |      | (166 | )   |   |      | (125  | )     
|                                    | Change in deposits and borrowings                          |                                                  |      | (707 | )    |   |      | (449 | )   |   |      | 1,546 |       
|                                    | Reinvest in the business through                           |                                                  |      |      |      |   |      |      |     |   |      |       |       
|                                    |                                                            | Loans and securities, net of payments            |      |      | 461  |   |      |      | (99 | ) |      |       | (1,957 | )
|                                    |                                                            | Capital expenditure, acquisitions and other uses |      |      | 172  |   |      |      | (5  | ) |      |       | 350    |  
|                                    |                                                            |                                                  |      |      |      |   |      |      |    
|Total uses                          |                                                            |                                                  | (179 | )    |      |   | (719 | )    |     |   | (186 | )    
|                                    |                                                            |                                                  |      |      |      |   |      |      |    
|Change in cash and cash equivalents |                                                            | $                                                | (16  | )    |      | $ | (59  | )    |     | $ | (149 | )    






|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(a) | Dividends we pay to the parent company are eliminated in the
    consolidated statements of cash flows.







Liquidity and Contractual Obligations




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|                                                            |                                      |                                  |       |        |        |   |       |        |        |   |        |       |       |            |     |     |       |   |     |      |     | 
|----------------------------------------------------------- | ------------------------------------ | -------------------------------- | ----- | ------ | ------ | - | ----- | ------ | ------ | - | ------ | ----- | ----- | ---------- | --- | --- | ----- | - | --- | ---- | --- | 
|                                                            |                                      | Payments Due or Expiring by Year |      
|                                                            |                                      |                                  |      
|                                                            |                                      | Total                            |       |        | 2005   |   |       | 2006-7 |        |   | 2008-9 |       |       | Thereafter |    
|                                                            |                                      |                                  |       |        |        |   |       |        |        |   |        |       |       |            |    
|                                                            |                                      | (In millions)                    |      
|Parent Company                                              |                                      |                                  |       |        |        |   |       |        |        |   |        |       |       |            |     |     |       |   |     |     
|Long-term debt                                              |                                      | $                                | 1,488 |        |        | $ | 41    |        |        | $ | 541    |       |       | $          | 332 |     |       | $ | 574 |     
|Contractual interest payments on long-term debt             |                                      |                                  | 81    |        |        |   | 2     |        |        |   | 29     |       |       |            | 7   |     |       |   | 43  |     
|Capital lease obligations                                   |                                      |                                  | 543   |        |        |   | 15    |        |        |   | 30     |       |       |            | 30  |     |       |   | 468 |     
|                                                            | Less, related municipal bonds we own |                                  |       | (543   | )      |   |       | (15    | )      |   |        | (30   | )     |            |     | (30 | )     |   |     | (468 | )  
|Operating leases                                            |                                      |                                  | 293   |        |        |   | 39    |        |        |   | 58     |       |       |            | 44  |     |       |   | 152 |     
|Purchase obligations                                        |                                      |                                  | 272   |        |        |   | 54    |        |        |   | 104    |       |       |            | 99  |     |       |   | 15  |     
|Other long-term liabilities                                 |                                      |                                  | 6     |        |        |   | 1     |        |        |   | 1      |       |       |            | 1   |     |       |   | 3   |     
|                                                            |                                      |                                  |       |        |        |   |       |        |        |   |        |       |       |            |    
|                                                            | Total parent company                 |                                  | $     | 2,140  |        |   | $     | 137    |        |   | $      | 733   |       |            | $   | 483 |       |   | $   | 787  |    
|                                                            |                                      |                                  |       |        |        |   |       |        |        |   |        |       |       |            |    
|Financial Services                                          |                                      |                                  |       |        |        |   |       |        |        |   |        |       |       |            |     |     |       |   |     |     
|Transaction and savings deposit accounts                    |                                      | $                                | 5,137 |        |        | $ | 5,137 |        |        | $ |       |       |       | $          |    |     |       | $ |    |     
|Certificates of deposit                                     |                                      |                                  | 3,827 |        |        |   | 2,142 |        |        |   | 1,353  |       |       |            | 330 |     |       |   | 2   |     
|FHLB borrowings, repurchase agreements and other borrowings |                                      |                                  | 5,710 |        |        |   | 3,587 |        |        |   | 1,651  |       |       |            | 372 |     |       |   | 100 |     
|Preferred stock issued by subsidiaries                      |                                      |                                  | 305   |        |        |   |      |        |        |   | 305    |       |       |            |    |     |       |   |    |     
|Contractual interest                                        |                                      |                                  | 423   |        |        |   | 177   |        |        |   | 170    |       |       |            | 45  |     |       |   | 31  |     
|Operating leases                                            |                                      |                                  | 69    |        |        |   | 14    |        |        |   | 21     |       |       |            | 16  |     |       |   | 18  |     
|                                                            |                                      |                                  |       |        |        |   |       |        |        |   |        |       |       |            |    
|                                                            | Total financial services             |                                  | $     | 15,471 |        |   | $     | 11,057 |        |   | $      | 3,500 |       |            | $   | 763 |       |   | $   | 151  |    
|                                                            |                                      |                                  |       |        |        |   |       |        |        |   |        |       |       |            |    
|                                                            |                                      | Total consolidated               |       | $      | 17,611 |   |       | $      | 11,194 |   |        | $     | 4,233 |            |     | $   | 1,246 |   |     | $    | 938 | 
|                                                            |                                      |                                  |       |        |        |   |       |        |        |   |        |       |       |            |    



| |                                                     
| | ----------------------------------------------------
| | Parent Company Liquidity and Contractual Obligations









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Pension, Postretirement Medical and Health Care Matters






| |                                                         
| | --------------------------------------------------------
| | Financial Services Liquidity and Contractual Obligations



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Off-Balance Sheet Arrangements




| |               
| | --------------
| | Parent Company



|                                           |       |                  |     |     |      |   |    |        |  |   |        |    |  |            |    |    |  |   |    |    | 
|------------------------------------------ | ----- | ---------------- | --- | --- | ---- | - | -- | ------ |  | - | ------ | -- |  | ---------- | -- | -- |  | - | -- | -- | 
|                                           |       | Expiring by Year |    
|                                           |       |                  |    
|                                           |       | Total            |     |     | 2005 |   |    | 2006-7 |  |   | 2008-9 |    |  | Thereafter |   
|                                           |       |                  |     |     |      |   |    |        |  |   |        |    |  |            |   
|                                           |       | (In millions)    |    
|Joint venture guarantees                   |       | $                | 108 |     |      | $ | 28 |        |  | $ | 15     |    |  | $          | 15 |    |  | $ | 50 |   
|Performance bonds and recourse obligations |       |                  | 105 |     |      |   | 74 |        |  |   | 26     |    |  |            | 5  |    |  |   |   |   
|                                           |       |                  |     |     |      |   |    |        |  |   |        |    |  |            |   
|                                           | Total |                  | $   | 213 |      |   | $  | 102    |  |   | $      | 41 |  |            | $  | 20 |  |   | $  | 50 | 
|                                           |       |                  |     |     |      |   |    |        |  |   |        |    |  |            |   









| |                   
| | ------------------
| | Financial Services



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|                                     |       |                  |       |       |      |   |       |        |  |   |        |       |  |            |     |       |  |   |    |    | 
|------------------------------------ | ----- | ---------------- | ----- | ----- | ---- | - | ----- | ------ |  | - | ------ | ----- |  | ---------- | --- | ----- |  | - | -- | -- | 
|                                     |       | Expiring by Year |      
|                                     |       |                  |      
|                                     |       | Total            |       |       | 2005 |   |       | 2006-7 |  |   | 2008-9 |       |  | Thereafter |    
|                                     |       |                  |       |       |      |   |       |        |  |   |        |       |  |            |    
|                                     |       | (In millions)    |      
|Single-family mortgage loans         |       | $                | 290   |       |      | $ | 290   |        |  | $ |       |       |  | $          |    |       |  | $ |   |   
|Unused lines of credit               |       |                  | 1,907 |       |      |   | 410   |        |  |   | 658    |       |  |            | 771 |       |  |   | 68 |   
|Unfunded portion of loan commitments |       |                  | 3,048 |       |      |   | 1,973 |        |  |   | 974    |       |  |            | 101 |       |  |   |   |   
|Other loan commitments               |       |                  | 579   |       |      |   | 144   |        |  |   | 231    |       |  |            | 195 |       |  |   | 9  |   
|Letters of credit                    |       |                  | 370   |       |      |   | 158   |        |  |   | 69     |       |  |            | 135 |       |  |   | 8  |   
|                                     |       |                  |       |       |      |   |       |        |  |   |        |       |  |            |    
|                                     | Total |                  | $     | 6,194 |      |   | $     | 2,975  |  |   | $      | 1,932 |  |            | $   | 1,202 |  |   | $  | 85 | 
|                                     |       |                  |       |       |      |   |       |        |  |   |        |       |  |            |    

Capital Adequacy and Other Regulatory Matters






|                    |                      |               |   |        |      |  |   |        | 
|------------------- | -------------------- | ------------- | - | ------ | ---- |  | - | ------ | 
|                    |                      | At Year-End   |  
|                    |                      |               |  
|                    |                      | 2004          |   |        | 2003 | 
|                    |                      |               |   |        |      | 
|                    |                      | (In millions) |  
|Balance sheet data: |                      |               |   |        |      |  |   |       
|                    | Total assets         |               | $ | 16,065 |      |  | $ | 17,247 | 
|                    | Total deposits       |               |   | 8,964  |      |  |   | 8,698  | 
|                    | Shareholders equity |               |   | 997    |      |  |   | 999    | 

|                           |                    |        |  |            |         |  |                       |                    |   |  |  |       |  
|-------------------------- | ------------------ | ------ |  | ---------- | ------- |  | --------------------- | ------------------ | - |  |  | ----- | -
|                           |                    |        |  | Regulatory |         |  | For Categorization as |                   
|                           |                    | Actual |  |            | Minimum |  |                       | Well Capitalized |  
|                           |                    |        |  |            |         |  |                       |                    |  
|Regulatory capital ratios: |                    |        |  |            |         |  |                       |                    |   |  |  |      
|                           | Tangible capital   |        |  | 6.89       | %       |  |                       | 2.00               | % |  |  | N/A   |  
|                           | Leverage capital   |        |  | 6.89       | %       |  |                       | 4.00               | % |  |  | 5.00  | %
|                           | Risk-based capital |        |  | 10.83      | %       |  |                       | 8.00               | % |  |  | 10.00 | %





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Accounting Policies




| |                              
| | -----------------------------
| | Critical Accounting Estimates





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Measuring assets for impairment requires estimating intentions
    as to holding periods, future operating cash flows and residual
    values of the assets under review. Changes in our intentions,
    market conditions or operating performance could require us to
    revise the impairment charges we previously provided.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The expected long-term rate of return on pension plan assets is
    an important assumption in determining pension expense. In
    selecting that rate, currently 8.50 percent, consideration
    is given to both historical returns and future returns over the
    next quarter century. The actual rate of return on plan assets
    for the last ten years was 10.33 percent. Differences
    between actual and expected returns will affect future pension
    expense. For example, a 50 basis point change in the
    estimated expected rate of return would affect annual pension
    costs by $4 million. In addition, a 50 basis point
    change in the discount rate would affect the funded status by
    $74 million and annual pension costs by $7 million.
|
| |  | Allowances for loan losses are based on historical experiences
    and evaluations of future cash flows and collateral values and
    are subject to regulatory scrutiny. Changes in general economic
    conditions or loan specific circumstances will inevitably change
    those evaluations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Measuring for impairment and amortizing mortgage servicing
    rights is largely dependent on our assumptions about the speed
    at which loans are repaid and market rates of return. Changes in
    interest rates affect both of these variables. As a result of
    the sale of our third-party mortgage servicing portfolio,
    beginning in 2005, accounting for mortgage servicing rights will
    no longer be considered a critical accounting policy.                                                                                                                                                                                                                                                                                                            



| |                                      
| | -------------------------------------
| | New Accounting Pronouncements Adopted



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| |          
| | ---------
| | Year 2004



| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Financial Accounting Standards Board (FASB) Staff Position,
    No. 106-2, Accounting and Disclosure Requirements
    Related to the Medicare Prescription Drug, Improvement and
    Modernization Act of 2003. This staff position provided
    guidance on accounting for the effects of this act on
    postretirement plans that provide prescription drug benefits.                                
|
| |  | FASB Interpretation No. 46 (revised December 2003),
    Consolidation of Variable Interest Entities an interpretation
    of ARB No. 51. This interpretation provides guidance
    for determining whether an entity is a variable interest entity
    and which beneficiary of the variable interest entity, if any,
    should consolidate the variable interest entity (the primary
    beneficiary).
|
| |  | Securities and Exchange Commission Staff Accounting
    Bulletin No. 105, Application of Accounting Principle to
    Loan Commitments. This bulletin applies to loan
    commitments issued after March 2004 and accounted for as
    derivative instruments and it precludes the recognition of an
    asset at the inception of the loan commitment.                                                  



| |          
| | ---------
| | Year 2003



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SFAS No. 148, Accounting for Stock-Based
    Compensation-Transition and Disclosure, an amendment of FASB
    Statement No. 123. We voluntarily began expensing stock
    options beginning with options granted in 2003. The effect of
    expensing stock options granted in 2003 was to reduce
    2003 net income by $1 million or $0.03 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | SFAS No. 143, Accounting for Asset Retirement
    Obligations. This statement requires the recognition of
    legal obligations associated with the retirement of long-lived
    assets at their fair value and to allocate that fair value to
    expense over the useful life of the asset. The effect of
    adopting this statement was to increase property, plant and
    equipment by $3 million, recognize an asset retirement
    obligation liability of $4 million, and reduce
    2003 net income by $1 million or $0.01 per share
    for the cumulative effect of adoption.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | SFAS No. 150, Accounting for Certain Financial
    Instruments with Characteristics of both Liabilities and
    Equity. This statement requires classifying and measuring as
    liabilities certain financial instruments that embody
    obligations of the issuer and have characteristics of both
    liabilities and equity. Provisions of this statement addressing
    the accounting for certain mandatorily redeemable
    non-controlling interests have been deferred indefinitely
    pending further FASB action. The deferred provisions would
    principally affect the way we account for minority interests in
    partnerships we control; the classification of such interests as
    liabilities, which we presently do; and accounting for changes
    in the fair value of the minority interest by a charge to
    earnings, which we currently do not do. While the effect of the
    deferred provisions would be dependent on the changes in the
    fair value of the partnerships net assets, it is possible
    that the future effects could be significant. Because the
    minority interests are not readily marketable, it is difficult
    to determine their fair value; however, we believe the
    difference between the carrying value of the minority interests
    and their estimated fair value was not significant at year-end
    2004 and 2003.
|
| |  | SFAS No. 132 (revised 2003), Employers
    Disclosures about Pensions and Other Postretirement
    Benefits. This statement provides for the disclosure of
    additional information about pension and postretirement plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| |          
| | ---------
| | Year 2002



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SFAS No. 142, Goodwill and Other Intangible
    Assets. This statement provided new guidance for goodwill
    and other indefinitely lived assets including precluding the
    amortization of goodwill. The effect of adopting this statement
    was to reduce 2002 net income by $11 million or
    $0.22 per diluted share for an $18 million goodwill
    impairment associated with corrugated packaging pre-2001
    acquisitions.

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| |                                  
| | ---------------------------------
| | Pending Accounting Pronouncements

Inventory Cost, an amendment of ARB
No. 43, Chapter 4 Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29 Share Based Payment


Stock-Based Compensation




| |                                                                  
| | -----------------------------------------------------------------
| | Change in Method of Accounting for Inventories Beginning
    2005





|          |  |                                 |     |               |                       |   |    |                   |               |   |             |  |  |               |     |  |             |   |      |  |  |   |      | 
|--------- |  | ------------------------------- | --- | ------------- | --------------------- | - | -- | ----------------- | ------------- | - | ----------- |  |  | ------------- | --- |  | ----------- | - | ---- |  |  | - | ---- | 
|          |  | Corrugated Packaging            |     |               | Income From           |   |    |                  
|          |  | Segment Operating Income        |     |               | Continuing Operations |   |    | Per Diluted Share |              
|          |  |                                 |     |               |                       |   |    |                   |              
|          |  |                                 |     | Retrospective |                       |   |    |                   | Retrospective |   |             |  |  | Retrospective |    
|          |  | As Reported                     |     |               | Application           |   |    | As Reported       |               |   | Application |  |  | As Reported   |     |  | Application |  
|          |  |                                 |     |               |                       |   |    |                   |               |   |             |  |  |               |     |  |             |  
|          |  | (In millions, except per share) |    
|Year 2004 |  | $                               | 105 |               |                       | $ | 96 |                   |               | $ | 162         |  |  | $             | 157 |  |             | $ | 2.87 |  |  | $ | 2.78 | 
|Year 2003 |  |                                 | 11  |               |                       |   | 18 |                   |               |   | 97          |  |  |               | 102 |  |             |   | 1.78 |  |  |   | 1.87 | 
|Year 2002 |  |                                 | 78  |               |                       |   | 85 |                   |               |   | 65          |  |  |               | 69  |  |             |   | 1.25 |  |  |   | 1.33 | 

Pension, Postretirement Medical and Health Care Matters






38



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Energy and the Effects of Inflation






Environmental Protection








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##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The first phase of MACT I covered the Hazardous Air Pollutant
    (HAP) emissions from Low Volume High Concentration Sources
    and pulp mill foul condensate streams at three containerboard
    mills. Compliance was required by April 2002, and we spent
    $15 million to meet the requirements of this rule.
|
| |  | The second phase of MACT I covered HAP emissions from High
    Volume Low Concentration sources at three containerboard mills.
    Compliance is required by April 2006, and we estimate we will
    spend $7 million to meet these requirements.                                                                   







Litigation Matters




Antitrust Litigation






Bogalusa Litigation






40



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##### Table of Contents



Other Litigation




Statistical and Other Data




| |               
| | --------------
| | Parent Company



|                                               |  |                       |       |  |      |   |       |      |  |   |       | 
|---------------------------------------------- |  | --------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                               |  | For the Year          |      
|                                               |  |                       |      
|                                               |  | 2004                  |       |  | 2003 |   |       | 2002 | 
|                                               |  |                       |       |  |      |   |       |      | 
|                                               |  | (Dollars in millions) |      
|Revenues                                       |  |                       |       |  |      |   |       |      |  |   |       | 
|Corrugated Packaging                           |  |                       |       |  |      |   |       |      |  |   |       | 
|Corrugated packaging                           |  | $                     | 2,625 |  |      | $ | 2,509 |      |  | $ | 2,422 | 
|Linerboard                                     |  |                       | 111   |  |      |   | 191   |      |  |   | 165   | 
|                                               |  |                       |       |  |      |   |       |      | 
|Total                                          |  | $                     | 2,736 |  |      | $ | 2,700 |      |  | $ | 2,587 | 
|                                               |  |                       |       |  |      |   |       |      | 
|Forest Products                                |  |                       |       |  |      |   |       |      |  |   |       | 
|Pine lumber                                    |  | $                     | 338   |  |      | $ | 267   |      |  | $ | 227   | 
|Particleboard                                  |  |                       | 185   |  |      |   | 153   |      |  |   | 172   | 
|Medium density fiberboard                      |  |                       | 110   |  |      |   | 93    |      |  |   | 116   | 
|Gypsum wallboard                               |  |                       | 110   |  |      |   | 75    |      |  |   | 77    | 
|Fiberboard                                     |  |                       | 77    |  |      |   | 71    |      |  |   | 64    | 
|Other                                          |  |                       | 151   |  |      |   | 142   |      |  |   | 131   | 
|                                               |  |                       |       |  |      |   |       |      | 
|Total                                          |  | $                     | 971   |  |      | $ | 801   |      |  | $ | 787   | 
|                                               |  |                       |       |  |      |   |       |      | 
|Unit sales                                     |  |                       |       |  |      |   |       |      |  |   |       | 
|Corrugated Packaging                           |  |                       |       |  |      |   |       |      |  |   |       | 
|Corrugated packaging, thousands of tons        |  |                       | 3,366 |  |      |   | 3,206 |      |  |   | 3,028 | 
|Linerboard, thousands of tons                  |  |                       | 320   |  |      |   | 574   |      |  |   | 492   | 
|                                               |  |                       |       |  |      |   |       |      | 
|Total, thousands of tons                       |  |                       | 3,686 |  |      |   | 3,780 |      |  |   | 3,520 | 
|                                               |  |                       |       |  |      |   |       |      | 
|Forest Products                                |  |                       |       |  |      |   |       |      |  |   |       | 
|Pine lumber, million board feet                |  |                       | 926   |  |      |   | 863   |      |  |   | 764   | 
|Particleboard, million square feet             |  |                       | 600   |  |      |   | 598   |      |  |   | 653   | 
|Medium density fiberboard, million square feet |  |                       | 235   |  |      |   | 228   |      |  |   | 285   | 
|Gypsum wallboard, million square feet          |  |                       | 766   |  |      |   | 643   |      |  |   | 679   | 
|Fiberboard, million square feet                |  |                       | 407   |  |      |   | 434   |      |  |   | 388   | 



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##### Table of Contents



Financial Services




|                              |                     |              |      |       |      |  |      |       |   |  |      |       |  
|----------------------------- | ------------------- | ------------ | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                              |                     | For the Year |     
|                              |                     |              |     
|                              |                     | 2004         |      |       | 2003 |  |      | 2002  |  
|                              |                     |              |      |       |      |  |      |       |  
|Ratio information             |                     |              |      |       |      |  |      |       |   |  |      |      
|Return on assets              |                     |              |      |       |      |  |      |       |   |  |      |      
|                              | Before
    tax(a)   |              |      | 1.21  | %    |  |      | 1.03  | % |  |      | 1.02  | %
|                              | After
    tax(c)(g) |              |      | 0.63  | %    |  |      | 0.64  | % |  |      | 0.97  | %
|Return on equity              |                     |              |      |       |      |  |      |       |   |  |      |      
|                              | Before
    tax(b)   |              |      | 18.21 | %    |  |      | 15.90 | % |  |      | 14.90 | %
|                              | After
    tax(d)(g) |              |      | 9.57  | %    |  |      | 9.91  | % |  |      | 14.17 | %
|Dividend payout
    ratio(e)  |                     |              | 96   | %     |      |  | 143  | %     |   |  | 77   | %    
|Equity to assets
    ratio(f) |                     |              | 6.62 | %     |      |  | 6.50 | %     |   |  | 6.83 | %    






|    |                                                         
|--- | --------------------------------------------------------
|(a) | Segment operating income divided by average total assets
|   
|(b) | Segment operating income divided by average equity      



|    |                                           
|--- | ------------------------------------------
|(c) | Net income divided by average total assets



|    |                                     
|--- | ------------------------------------
|(d) | Net income divided by average equity



|    |                                                           
|--- | ----------------------------------------------------------
|(e) | Dividends paid to the parent company divided by net income
|   
|(f) | Average equity divided by average assets                  



|    |                                                                                    
|--- | -----------------------------------------------------------------------------------
|(g) | 2004 and 2003 reflects amended tax allocation agreement with the
    parent company

42



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|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |        |        |        |   |     |     |  |  |      |      |   | 
|------------------------------------------- | ---------------------------------- | --------------------- | ------ | ------ | -------- | - | ------ | ---- |  | ------- | ------- | ---- | - | -------- | ------ | ------ | ------ | ------- | --- | ------- |  |  | -------- | ---- | - | ---- | ------ | ------ | ------ | - | --- | --- |  |  | ---- | ---- | - | 
|                                            |                                    | For the Year          |       
|                                            |                                    |                       |       
|                                            |                                    | 2004                  |        |        | 2003     |   |        | 2002 | 
|                                            |                                    |                       |        |        |          |   |        |      | 
|                                            |                                    | Average               |        |        |          |   | Yield/ |      |  | Average |         |      |   |          | Yield/ |        |        | Average |     |         |  |  | Yield/   |     
|                                            |                                    | Balance               |        |        | Interest |   |        | Rate |  |         | Balance |      |   | Interest |        |        | Rate   |         |     | Balance |  |  | Interest |      |   | Rate |       
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|                                            |                                    | (Dollars in millions) |       
|ASSETS                                      |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |        |        |        |   |     |     |  |  |      |     
|Cash equivalents                            |                                    | $                     | 167    |        |          | $ | 3      |      |  |         | 1.50    | %    |   | $        | 162    |        |        | $       | 3   |         |  |  | 1.60     | %    |   | $    | 152    |        |        | $ | 3   |     |  |  | 2.20 | %   
|Securities                                  |                                    |                       | 5,706  |        |          |   | 222    |      |  |         | 3.89    | %    |   |          | 6,024  |        |        |         | 218 |         |  |  | 3.63     | %    |   |      | 4,740  |        |        |   | 197 |     |  |  | 4.16 | %   
|Loans(a)(b)                                 |                                    |                       | 9,504  |        |          |   | 460    |      |  |         | 4.84    | %    |   |          | 9,625  |        |        |         | 453 |         |  |  | 4.71     | %    |   |      | 9,868  |        |        |   | 517 |     |  |  | 5.24 | %   
|Loans held for sale                         |                                    |                       | 618    |        |          |   | 33     |      |  |         | 5.33    | %    |   |          | 1,042  |        |        |         | 54  |         |  |  | 5.18     | %    |   |      | 986    |        |        |   | 57  |     |  |  | 5.75 | %   
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|                                            | Total earning assets               |                       |        | 15,995 |          |   | $      | 718  |  |         |         | 4.49 | % |          |        | 16,853 |        |         | $   | 728     |  |  |          | 4.32 | % |      |        | 15,746 |        |   | $   | 774 |  |  |      | 4.92 | %
|Other assets                                |                                    |                       | 1,189  |        |          |   |        |      |  |         |         |      |   |          | 1,196  |        |        |         |     |         |  |  |          |      |   |      | 1,031  |        |        |   |     |     |  |  |      |     
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|                                            |                                    | Total assets          |        | $      | 17,184   |   |        |      |  |         |         |      |   |          |        | $      | 18,049 |         |     |         |  |  |          |      |   |      |        | $      | 16,777 |   |     |     |  |  |      |      |   | 
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|                                           
|LIABILITIES AND EQUITY                     
|Deposits:                                   |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |        |        |        |   |     |     |  |  |      |     
|Transaction                                 |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |        |        |        |   |     |     |  |  |      |     
|                                            | Interest-bearing demand            |                       | $      | 4,466  |          |   | $      | 51   |  |         |         | 1.13 | % |          | $      | 4,038  |        |         | $   | 46      |  |  |          | 1.13 | % |      | $      | 2,809  |        |   | $   | 34  |  |  |      | 1.22 | %
|                                            | Savings deposits                   |                       |        | 247    |          |   |        | 2    |  |         |         | 0.72 | % |          |        | 238    |        |         |     | 2       |  |  |          | 0.86 | % |      |        | 208    |        |   |     | 3   |  |  |      | 1.26 | %
|Time (certificates of deposit)              |                                    |                       | 3,579  |        |          |   | 89     |      |  |         | 2.51    | %    |   |          | 4,488  |        |        |         | 134 |         |  |  | 2.99     | %    |   |      | 5,382  |        |        |   | 202 |     |  |  | 3.75 | %   
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|                                            | Total deposits                     |                       |        | 8,292  |          |   |        | 142  |  |         |         | 1.71 | % |          |        | 8,764  |        |         |     | 182     |  |  |          | 2.08 | % |      |        | 8,399  |        |   |     | 239 |  |  |      | 2.85 | %
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|Federal Home Loan                           |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |        |        |        |   |     |     |  |  |      |     
|                                            | Bank borrowings                    |                       |        | 5,128  |          |   |        | 138  |  |         |         | 2.69 | % |          |        | 3,685  |        |         |     | 119     |  |  |          | 3.23 | % |      |        | 3,202  |        |   |     | 100 |  |  |      | 3.14 | %
|Securities sold under repurchase agreements |                                    |                       | 1,155  |        |          |   | 15     |      |  |         | 1.31    | %    |   |          | 2,415  |        |        |         | 29  |         |  |  | 1.22     | %    |   |      | 2,070  |        |        |   | 36  |     |  |  | 1.75 | %   
|Other debt                                  |                                    |                       | 217    |        |          |   | 10     |      |  |         | 4.76    | %    |   |          | 199    |        |        |         | 10  |         |  |  | 4.86     | %    |   |      | 227    |        |        |   | 12  |     |  |  | 5.20 | %   
|Preferred stock issued by subsidiaries      |                                    |                       | 307    |        |          |   | 12     |      |  |         | 3.87    | %    |   |          | 307    |        |        |         | 11  |         |  |  | 3.67     | %    |   |      | 307    |        |        |   | 13  |     |  |  | 4.23 | %   
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|                                            | Total other borrowings             |                       |        | 6,807  |          |   |        | 175  |  |         |         | 2.57 | % |          |        | 6,606  |        |         |     | 169     |  |  |          | 2.56 | % |      |        | 5,806  |        |   |     | 161 |  |  |      | 2.78 | %
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|                                            | Total interest-bearing liabilities |                       |        | 15,099 |          |   | $      | 317  |  |         |         | 2.10 | % |          |        | 15,370 |        |         | $   | 351     |  |  |          | 2.29 | % |      |        | 14,205 |        |   | $   | 400 |  |  |      | 2.82 | %
|Other liabilities                           |                                    |                       | 947    |        |          |   |        |      |  |         |         |      |   |          | 1,506  |        |        |         |     |         |  |  |          |      |   |      | 1,427  |        |        |   |     |     |  |  |      |     
|Shareholders equity                        |                                    |                       | 1,138  |        |          |   |        |      |  |         |         |      |   |          | 1,173  |        |        |         |     |         |  |  |          |      |   |      | 1,145  |        |        |   |     |     |  |  |      |     
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|Total liabilities and equity                |                                    | $                     | 17,184 |        |          |   |        |      |  |         |         |      |   | $        | 18,049 |        |        |         |     |         |  |  |          |      |   | $    | 16,777 |        |        |   |     |     |  |  |      |     
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       
|                                            | Interest rate spread               |                       |        |        |          |   |        |      |  |         |         | 2.39 | % |          |        |        |        |         |     |         |  |  |          | 2.03 | % |      |        |        |        |   |     |     |  |  |      | 2.10 | %
|                                            | Net interest income/yield          |                       |        |        |          |   | $      | 401  |  |         |         | 2.50 | % |          |        |        |        |         | $   | 377     |  |  |          | 2.24 | % |      |        |        |        |   | $   | 374 |  |  |      | 2.38 | %
|                                            |                                    |                       |        |        |          |   |        |      |  |         |         |      |   |          |        |        |        |         |     |         |  |  |          |      |   |      |       




(a)


(b)


43



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|                                            |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |   |     |     |     |   |     |     |     |  
|------------------------------------------- | --------------------------------------- | -------------------------- | --- | --- | -------------------------- | - | --- | ----- | --- | - | ------ | --- | --- | ---- | --- | --- | ----- | - | --- | --- | --- | - | --- | --- | --- | -
|                                            |                                         | 2004 Compared with 2003    |     |     | 2003 Compared with 2002    |  
|                                            |                                         | Increase (Decrease) Due To |     |     | Increase (Decrease) Due To |  
|                                            |                                         |                            |     |     |                            |  
|                                            |                                         | Volume                     |     |     | Rate                       |   |     | Total |     |   | Volume |     |     | Rate |     |     | Total |  
|                                            |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |  
|                                            |                                         | (In millions)              |    
|Interest income:                            |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |   |     |     |     |   |     |    
|Cash equivalents                            |                                         | $                          |    |     |                            | $ |    |       |     | $ |       |     |     | $    |    |     |       | $ | (1  | )   |     | $ | (1  | )  
|Securities                                  |                                         |                            | (12 | )   |                            |   | 16  |       |     |   | 4      |     |     |      | 49  |     |       |   | (28 | )   |     |   | 21  |    
|Loans                                       |                                         |                            | (6  | )   |                            |   | 13  |       |     |   | 7      |     |     |      | (13 | )   |       |   | (51 | )   |     |   | (64 | )  
|Loans held for sale                         |                                         |                            | (22 | )   |                            |   | 1   |       |     |   | (21    | )   |     |      | 5   |     |       |   | (7  | )   |     |   | (2  | )  
|                                            |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |  
|                                            |                                         | Total interest income      |     |     | (40                        | ) |     |       | 30  |   |        |     | (10 | )    |     |     | 41    |   |     |     | (87 | ) |     |     | (46 | )
|Interest expense:                           |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |   |     |     |     |   |     |    
|Deposits:                                   |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |   |     |     |     |   |     |    
|                                            | Transaction                             |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |   |     |     |     |   |     |     |    
|                                            |                                         | Interest-bearing demand    |     |     | 5                          |   |     |       |    |   |        |     | 5   |      |     |     | 14    |   |     |     | (3  | ) |     |     | 11  |  
|                                            |                                         | Savings deposits           |     |     |                           |   |     |       |    |   |        |     |    |      |     |     |      |   |     |     | (1  | ) |     |     | (1  | )
|                                            | Time deposits (certificates of deposit) |                            |     | (25 | )                          |   |     | (20   | )   |   |        | (45 | )   |      |     | (30 | )     |   |     | (37 | )   |   |     | (67 | )  
|                                            |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |  
|                                            |                                         | Total interest on deposits |     |     | (20                        | ) |     |       | (20 | ) |        |     | (40 | )    |     |     | (16   | ) |     |     | (41 | ) |     |     | (57 | )
|Borrowings from FHLB                        |                                         |                            | 41  |     |                            |   | (22 | )     |     |   | 19     |     |     |      | 15  |     |       |   | 3   |     |     |   | 18  |    
|Securities sold under repurchase agreements |                                         |                            | (16 | )   |                            |   | 2   |       |     |   | (14    | )   |     |      | 5   |     |       |   | (12 | )   |     |   | (7  | )  
|Other debt                                  |                                         |                            |    |     |                            |   |    |       |     |   |       |     |     |      | (1  | )   |       |   | (1  | )   |     |   | (2  | )  
|Preferred stock issued by subsidiaries      |                                         |                            |    |     |                            |   | 1   |       |     |   | 1      |     |     |      |    |     |       |   | (1  | )   |     |   | (1  | )  
|                                            |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |  
|                                            |                                         | Total interest expense     |     |     | 5                          |   |     |       | (39 | ) |        |     | (34 | )    |     |     | 3     |   |     |     | (52 | ) |     |     | (49 | )
|                                            |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |  
|Net interest income                         |                                         | $                          | (45 | )   |                            | $ | 69  |       |     | $ | 24     |     |     | $    | 38  |     |       | $ | (35 | )   |     | $ | 3   |    
|                                            |                                         |                            |     |     |                            |   |     |       |     |   |        |     |     |      |     |     |       |  



|                                 |                           |               |       |       |      |   |       |       |  |   |       |       |  |      |       |       |  |   |       |        | 
|-------------------------------- | ------------------------- | ------------- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ------ | 
|                                 |                           | At Year-End   |      
|                                 |                           |               |      
|                                 |                           | 2004          |       |       | 2003 |   |       | 2002  |  |   | 2001  |       |  | 2000 |      
|                                 |                           |               |       |       |      |   |       |       |  |   |       |       |  |      |      
|                                 |                           | (In millions) |      
|Single-family mortgage           |                           | $             | 3,560 |       |      | $ | 3,255 |       |  | $ | 2,470 |       |  | $    | 1,987 |       |  | $ | 2,959 |       
|Single-family mortgage warehouse |                           |               | 580   |       |      |   | 387   |       |  |   | 522   |       |  |      | 547   |       |  |   | 343   |       
|Single-family construction       |                           |               | 1,303 |       |      |   | 889   |       |  |   | 1,004 |       |  |      | 991   |       |  |   | 978   |       
|Multifamily and senior housing   |                           |               | 1,454 |       |      |   | 1,769 |       |  |   | 1,858 |       |  |      | 1,927 |       |  |   | 1,901 |       
|                                 |                           |               |       |       |      |   |       |       |  |   |       |       |  |      |      
|                                 | Total residential housing |               |       | 6,897 |      |   |       | 6,300 |  |   |       | 5,854 |  |      |       | 5,452 |  |   |       | 6,181  | 
|Commercial real estate           |                           |               | 709   |       |      |   | 1,015 |       |  |   | 1,891 |       |  |      | 2,502 |       |  |   | 2,605 |       
|Commercial and business          |                           |               | 746   |       |      |   | 585   |       |  |   | 740   |       |  |      | 819   |       |  |   | 763   |       
|Energy lending                   |                           |               | 717   |       |      |   | 562   |       |  |   | 420   |       |  |      | 116   |       |  |   |      |       
|Asset-based lending and leasing  |                           |               | 428   |       |      |   | 499   |       |  |   | 696   |       |  |      | 842   |       |  |   | 476   |       
|Consumer and other               |                           |               | 206   |       |      |   | 176   |       |  |   | 199   |       |  |      | 255   |       |  |   | 487   |       
|                                 |                           |               |       |       |      |   |       |       |  |   |       |       |  |      |      
|                                 | Total loans               |               |       | 9,703 |      |   |       | 9,137 |  |   |       | 9,800 |  |      |       | 9,986 |  |   |       | 10,512 | 
|Less allowance for loan losses   |                           |               | (85   | )     |      |   | (111  | )     |  |   | (132  | )     |  |      | (139  | )     |  |   | (118  | )     
|                                 |                           |               |       |       |      |   |       |       |  |   |       |       |  |      |      
|                                 | Loans receivable, net     |               | $     | 9,618 |      |   | $     | 9,026 |  |   | $     | 9,668 |  |      | $     | 9,847 |  |   | $     | 10,394 | 
|                                 |                           |               |       |       |      |   |       |       |  |   |       |       |  |      |      

44



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|                                |       |               |        |                 |                |   |                 |          |        |             |         |       |  |                |     |  |       |   |     |          |  |   |       |  |  |       |       |  |  |   |     |  |  |   |       |  | 
|------------------------------- | ----- | ------------- | ------ | --------------- | -------------- | - | --------------- | -------- | ------ | ----------- | ------- | ----- |  | -------------- | --- |  | ----- | - | --- | -------- |  | - | ----- |  |  | ----- | ----- |  |  | - | --- |  |  | - | ----- |  | 
|                                |       |               |        |                 |                |   |                 |          |        |             |         |       |  | Commercial and |     |  |      
|                                |       |               |        |                 |                |   |                 |          |        |             |         |       |  | Business,      |     |  |      
|                                |       |               |        |                 |                |   |                 |          |        |             |         |       |  | Energy, and    |     |  |      
|                                |       |               |        |                 |                |   |                 |          |        | Asset-Based |         |       | 
|                                |       |               |        | Multifamily and |                |   | Commercial Real |          |        | Lending and |         |       | 
|                                |       | Single-Family |        |                 | Senior Housing |   |                 | Estate   |        |             | Leasing |       |  |               
|                                |       |               |        |                 |                |   |                 |          |        |             |         |       |  |               
|                                |       | Variable      |        |                 | Fixed          |   |                 | Variable |        |             | Fixed   |       |  | Variable       |     |  | Fixed |   |     | Variable |  |   | Fixed |  |  |      
|                                |       | Rate          |        |                 | Rate           |   |                 | Rate     |        |             | Rate    |       |  | Rate           |     |  | Rate  |   |     | Rate     |  |   | Rate  |  |  | Total |      
|                                |       |               |        |                 |                |   |                 |          |        |             |         |       |  |                |     |  |       |   |     |          |  |   |       |  |  |       |      
|                                |       | (In millions) |       
|Due within one year             |       | $             | 932    |                 |                | $ | 31              |          |        | $           | 1,110   |       |  | $              |    |  |       | $ | 623 |          |  | $ |      |  |  | $     | 1,172 |  |  | $ | 43  |  |  | $ | 3,911 | 
|After one but within five years |       |               | 265    |                 |                |   | 75              |          |        |             | 169     |       |  |                | 46  |  |       |   | 77  |          |  |   | 3     |  |  |       | 518   |  |  |   | 68  |  |  |   | 1,221 | 
|After five years                |       |               |       |                 |                |   |                |          |        |             | 73      |       |  |                | 56  |  |       |   | 6   |          |  |   |      |  |  |       | 58    |  |  |   | 32  |  |  |   | 225   | 
|                                |       |               |        |                 |                |   |                 |          |        |             |         |       |  |                |     |  |       |   |     |          |  |   |       |  |  |       |      
|                                |       | $             | 1,197  |                 |                | $ | 106             |          |        | $           | 1,352   |       |  | $              | 102 |  |       | $ | 706 |          |  | $ | 3     |  |  | $     | 1,748 |  |  | $ | 143 |  |  |   |       | 
|                                |       |               |        |                 |                |   |                 |          |        |             |         |       |  |                |     |  |       |   |     |          |  |   |       |  |  |       |      
|                                | Total |               | $1,303 |                 | $1,454         |   | $709            |          | $1,891 |             | $       | 5,357 | 
|                                |       |               |        |                 |                |   |                 |          |        |             |        



|                                                             |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |     |  |     |     |     |  |     |     |  
|------------------------------------------------------------ | ------------ | -------------------------------- | ------------------------------- | - | ---- | --- | --- | ---- | --- | --- | ---- |  | --- | ---- | --- |  | --- | --- | --- |  | --- | --- | -
|                                                             |              | For the Year                     |                                
|                                                             |              |                                  |                                
|                                                             |              | 2004                             |                                 |   | 2003 |     |     | 2002 |     |     | 2001 |  |     | 2000 |    
|                                                             |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |    
|                                                             |              | (In millions)                    |                                
|Balance at beginning of year                                 |              | $                                | 111                             |   |      | $   | 132 |      |     | $   | 139  |  |     | $    | 118 |  |     | $   | 113 | 
|                                                             | Charge-offs: |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |     |  |     |     |     |  |    
|                                                             |              | Single-family mortgage           |                                 |   |     |     |     |      | (1  | )   |      |  |    |      |     |  |    |     |     |  |    |    
|                                                             |              | Single-family mortgage warehouse |                                 |   |     |     |     |      |    |     |      |  |    |      |     |  |    |     |     |  | (22 | )  
|                                                             |              | Multifamily and senior housing   |                                 |   | (3   | )   |     |      |    |     |      |  | (11 | )    |     |  |    |     |     |  |    |    
|                                                             |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |    
|                                                             |              |                                  | Total residential housing loans |   |      | (3  | )   |      |     | (1  | )    |  |     | (11  | )   |  |     |    |     |  |     | (22 | )
|                                                             |              | Commercial real estate           |                                 |   | (6   | )   |     |      | (11 | )   |      |  |    |      |     |  |    |     |     |  |    |    
|                                                             |              | Commercial and business          |                                 |   | (2   | )   |     |      | (2  | )   |      |  | (31 | )    |     |  | (18 | )   |     |  | (7  | )  
|                                                             |              | Asset-based lending and leasing  |                                 |   | (1   | )   |     |      | (57 | )   |      |  | (10 | )    |     |  | (10 | )   |     |  | (4  | )  
|                                                             |              | Consumer and other               |                                 |   | (3   | )   |     |      | (2  | )   |      |  | (2  | )    |     |  | (3  | )   |     |  | (4  | )  
|                                                             |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |    
|                                                             |              |                                  | Total charge-offs               |   |      | (15 | )   |      |     | (73 | )    |  |     | (54  | )   |  |     | (31 | )   |  |     | (37 | )
|Recoveries:                                                  |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |     |  |     |     |     | 
|                                                             |              | Single-family mortgage warehouse |                                 |   | 1    |     |     |      | 4   |     |      |  | 1   |      |     |  | 3   |     |     |  |    |    
|                                                             |              | Multifamily and senior housing   |                                 |   |     |     |     |      |    |     |      |  | 3   |      |     |  |    |     |     |  |    |    
|                                                             |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |    
|                                                             |              |                                  | Total residential housing loans |   |      | 1   |     |      |     | 4   |      |  |     | 4    |     |  |     | 3   |     |  |     |    |  
|                                                             |              | Commercial real estate           |                                 |   | 1    |     |     |      |    |     |      |  |    |      |     |  |    |     |     |  |    |    
|                                                             |              | Asset-based lending and leasing  |                                 |   | 5    |     |     |      | 5   |     |      |  | 2   |      |     |  |    |     |     |  |    |    
|                                                             |              | Consumer and other               |                                 |   | 1    |     |     |      |    |     |      |  | 1   |      |     |  | 1   |     |     |  | 1   |    
|                                                             |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |    
|                                                             |              |                                  | Total recoveries                |   |      | 8   |     |      |     | 9   |      |  |     | 7    |     |  |     | 4   |     |  |     | 1   |  
|                                                             |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |    
|                                                             |              |                                  | Net charge-offs                 |   |      | (7  | )   |      |     | (64 | )    |  |     | (47  | )   |  |     | (27 | )   |  |     | (36 | )
|Provision for loan losses                                    |              |                                  | (12                             | ) |      |     | 43  |      |     |     | 40   |  |     |      | 46  |  |     |     | 39  | 
|Acquisitions and bulk purchases of loans, net of adjustments |              |                                  |                                |   |      |     |    |      |     |     |     |  |     |      | 2   |  |     |     | 2   | 
|Transfer to reserve for loan commitments                     |              |                                  | (7                              | ) |      |     |    |      |     |     |     |  |     |      |    |  |     |     |    | 
|                                                             |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |    
|Balance at end of year                                       |              | $                                | 85                              |   |      | $   | 111 |      |     | $   | 132  |  |     | $    | 139 |  |     | $   | 118 | 
|                                                             |              |                                  |                                 |   |      |     |     |      |     |     |      |  |     |      |    
|Nonaccrual loans                                             |              | $                                | 50                              |   |      | $   | 65  |      |     | $   | 126  |  |     | $    | 166 |  |     | $   | 65  | 
|Accruing loans past-due 90 days or more                      |              |                                  | 1                               |   |      |     | 3   |      |     |     | 7    |  |     |      |    |  |     |     | 6   | 

45



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|                                     |                   |                       |    |          |       |  |    |           |          |   |       |     |  |           |    |     |       |   |          |           |  |  |       |          |   |           |    |     |       |  |    |     |   |   |    |     |  |  |    |     |  
|------------------------------------ | ----------------- | --------------------- | -- | -------- | ----- |  | -- | --------- | -------- | - | ----- | --- |  | --------- | -- | --- | ----- | - | -------- | --------- |  |  | ----- | -------- | - | --------- | -- | --- | ----- |  | -- | --- | - | - | -- | --- |  |  | -- | --- | -
|                                     |                   | 2004                  |    |          | 2003  |  |    | 2002      |          |   | 2001  |     |  | 2000      |   
|                                     |                   |                       |    |          |       |  |    |           |          |   |       |     |  |           |   
|                                     |                   |                       |    | Category |       |  |    |           | Category |   |       |     |  | Category  |    |     |       |   | Category |           |  |  |       | Category |  
|                                     |                   |                       |    | as a %   |       |  |    |           | as a %   |   |       |     |  | as a %    |    |     |       |   | as a %   |           |  |  |       | as a %   |  
|                                     |                   |                       |    | of       |       |  |    |           | of       |   |       |     |  | of        |    |     |       |   | of       |           |  |  |       | of       |  
|                                     |                   |                       |    | Total    |       |  |    |           | Total    |   |       |     |  | Total     |    |     |       |   | Total    |           |  |  |       | Total    |  
|                                     |                   | Allowance             |    |          | Loans |  |    | Allowance |          |   | Loans |     |  | Allowance |    |     | Loans |   |          | Allowance |  |  | Loans |          |   | Allowance |    |     | Loans | 
|                                     |                   |                       |    |          |       |  |    |           |          |   |       |     |  |           |    |     |       |   |          |           |  |  |       |          |   |           |    |     |       | 
|                                     |                   | (Dollars in millions) |   
|Single-family mortgage               |                   | $                     | 8  |          |       |  | 37 | %         |          | $ | 7     |     |  |           | 36 | %   |       | $ | 7        |           |  |  | 26    | %        |   | $         | 8  |     |       |  | 20 | %   |   | $ | 13 |     |  |  | 28 | %  
|Single-family
    mortgage warehouse |                   |                       | 1  |          |       |  | 6  | %         |          |   | 1     |     |  |           | 4  | %   |       |   | 1        |           |  |  | 5     | %        |   |           | 3  |     |       |  | 5  | %   |   |   | 2  |     |  |  | 3  | %  
|Single-family construction           |                   |                       | 10 |          |       |  | 13 | %         |          |   | 6     |     |  |           | 10 | %   |       |   | 7        |           |  |  | 10    | %        |   |           | 6  |     |       |  | 10 | %   |   |   | 7  |     |  |  | 9  | %  
|Multifamily and
    senior housing   |                   |                       | 15 |          |       |  | 15 | %         |          |   | 28    |     |  |           | 19 | %   |       |   | 38       |           |  |  | 19    | %        |   |           | 42 |     |       |  | 19 | %   |   |   | 16 |     |  |  | 18 | %  
|                                     |                   |                       |    |          |       |  |    |           |          |   |       |     |  |           |    |     |       |   |          |           |  |  |       |          |   |           |    |     |       | 
|                                     | Total residential |                       |    | 34       |       |  |    | 71        | %        |   |       | 42  |  |           |    | 69  | %     |   |          | 53        |  |  |       | 60       | % |           |    | 59  |       |  |    | 54  | % |   |    | 38  |  |  |    | 58  | %
|Commercial real estate               |                   |                       | 8  |          |       |  | 7  | %         |          |   | 18    |     |  |           | 11 | %   |       |   | 18       |           |  |  | 19    | %        |   |           | 19 |     |       |  | 25 | %   |   |   | 22 |     |  |  | 25 | %  
|Commercial and business              |                   |                       | 7  |          |       |  | 8  | %         |          |   | 10    |     |  |           | 13 | %   |       |   | 12       |           |  |  | 12    | %        |   |           | 14 |     |       |  | 9  | %   |   |   | 25 |     |  |  | 7  | %  
|Energy lending                       |                   |                       | 3  |          |       |  | 7  | %         |          |   |      |     |  |           |   |     |       |   |         |           |  |  |      |          |   |           |   |     |       |  |   |     |   |   |   |     |  |  |   |    
|Asset-based lending
    and leasing  |                   |                       | 9  |          |       |  | 5  | %         |          |   | 9     |     |  |           | 5  | %   |       |   | 23       |           |  |  | 7     | %        |   |           | 21 |     |       |  | 9  | %   |   |   | 4  |     |  |  | 5  | %  
|Consumer and other                   |                   |                       | 1  |          |       |  | 2  | %         |          |   | 1     |     |  |           | 2  | %   |       |   | 2        |           |  |  | 2     | %        |   |           | 2  |     |       |  | 3  | %   |   |   | 3  |     |  |  | 5  | %  
|Not allocated                        |                   |                       | 23 |          |       |  |   |           |          |   | 31    |     |  |           |   |     |       |   | 24       |           |  |  |      |          |   |           | 24 |     |       |  |   |     |   |   | 26 |     |  |  |   |    
|                                     |                   |                       |    |          |       |  |    |           |          |   |       |     |  |           |    |     |       |   |          |           |  |  |       |          |   |           |    |     |       | 
|                                     | Total             |                       | $  | 85       |       |  |    | 100       | %        |   | $     | 111 |  |           |    | 100 | %     |   | $        | 132       |  |  |       | 100      | % |           | $  | 139 |       |  |    | 100 | % |   | $  | 118 |  |  |    | 100 | %
|                                     |                   |                       |    |          |       |  |    |           |          |   |       |     |  |           |    |     |       |   |          |           |  |  |       |          |   |           |    |     |       | 






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk

Interest Rate Risk




|               |  |                                            |   |  |                  |   |     |         |  |   |           |   |  |   |     |  
|-------------- |  | ------------------------------------------ | - |  | ---------------- | - | --- | ------- |  | - | --------- | - |  | - | --- | -
|               |  | Increase (Decrease) in Income Before Taxes |  
|               |  |                                            |  
|               |  | At Year-End 2004                           |   |  | At Year-End 2003 |  
|               |  |                                            |   |  |                  |  
|Change in      |  | Parent                                     |   |  | Financial        |   |     | Parent  |  |   | Financial |  
|Interest Rates |  | Company                                    |   |  | Services         |   |     | Company |  |   | Services  |  
|               |  |                                            |   |  |                  |   |     |         |  |   |           |  
|               |  | (In millions)                              |  
|+2%            |  | $                                          | 1 |  |                  | $ | (21 | )       |  | $ | (2        | ) |  | $ | 8   |  
|+1%            |  |                                            |  |  |                  |   | (1  | )       |  |   | (1        | ) |  |   | 28  |  
|-1%            |  |                                            |  |  |                  |   | (34 | )       |  |   | 1         |   |  |   | (20 | )







46



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Foreign Currency Risk




Commodity Price Risk









|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data






|                                                                           |                                                     |      |    |    | 
|-------------------------------------------------------------------------- | --------------------------------------------------- | ---- | -- | -- | 
|                                                                           |                                                     | Page |   
|                                                                           |                                                     |      |   
|Report of Independent Registered Public
    Accounting Firm                |                                                     |      | 48 |   
|Temple-Inland Inc. and Subsidiaries                                        |                                                     |      |    |   
|                                                                           | Consolidated Balance Sheet                          |      |    | 49 | 
|                                                                           | Consolidated Statements of Income                   |      |    | 51 | 
|                                                                           | Consolidated Statements of Cash Flows               |      |    | 52 | 
|                                                                           | Consolidated Statements of
    Shareholders Equity |      |    | 53 | 
|                                                                           | Notes to the Consolidated Financial
    Statements  |      |    | 54 | 
|Parent Company (Temple-Inland Inc. and our
    manufacturing subsidiaries) |                                                     |      |    |   
|                                                                           | Summarized Balance Sheets                           |      |    | 73 | 
|                                                                           | Summarized Statements of Income                     |      |    | 74 | 
|                                                                           | Summarized Statements of Cash Flow                  |      |    | 75 | 
|                                                                           | Notes to Summarized Financial Statements            |      |    | 76 | 
|Financial Services                                                         |                                                     |      |    |   
|                                                                           | Summarized Balance Sheets                           |      |    | 86 | 
|                                                                           | Summarized Statements of Income                     |      |    | 87 | 
|                                                                           | Summarized Statements of Cash Flow                  |      |    | 88 | 
|                                                                           | Notes to Summarized Financial Statements            |      |    | 89 | 



47



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of Temple-Inland
Inc.:


















48



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##### Table of Contents






TEMPLE-INLAND INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEET


|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |   |        |       |        |   |        | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | -------------------------- | ----- | --------- | ----- | - | ------------ | - | ------ | ----- | ------ | - | ------ | 
|                                     |                                                                                                                                               | At Year-End 2004                          |                           
|                                     |                                                                                                                                               |                                           |                           
|                                     |                                                                                                                                               | Parent                                    |                            |       | Financial |       |   |             
|                                     |                                                                                                                                               | Company                                   |                            |       | Services  |       |   | Consolidated |  
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |  
|                                     |                                                                                                                                               | (In millions)                             |                           
|ASSETS                               |                                                                                                                                               |                                           |                            |       |           |       |   |              |   |        |       |       
|                                     | Cash and cash equivalents                                                                                                                     |                                           | $                          | 9     |           |       | $ | 363          |   |        | $     | 372    |  
|                                     | Loans held for sale                                                                                                                           |                                           |                            |      |           |       |   | 510          |   |        |       | 510    |  
|                                     | Loans                                                                                                                                         |                                           |                            |      |           |       |   | 9,618        |   |        |       | 9,618  |  
|                                     | Securities available-for-sale                                                                                                                 |                                           |                            |      |           |       |   | 1,118        |   |        |       | 1,118  |  
|                                     | Securities held-to-maturity                                                                                                                   |                                           |                            |      |           |       |   | 3,864        |   |        |       | 3,864  |  
|                                     | Trade receivables                                                                                                                             |                                           |                            | 404   |           |       |   |             |   |        |       | 404    |  
|                                     | Inventories                                                                                                                                   |                                           |                            | 402   |           |       |   |             |   |        |       | 402    |  
|                                     | Timber and timberland                                                                                                                         |                                           |                            | 496   |           |       |   |             |   |        |       | 496    |  
|                                     | Property, premises, and equipment                                                                                                             |                                           |                            | 1,738 |           |       |   | 167          |   |        |       | 1,905  |  
|                                     | Goodwill                                                                                                                                      |                                           |                            | 236   |           |       |   | 152          |   |        |       | 388    |  
|                                     | Other assets                                                                                                                                  |                                           |                            | 469   |           |       |   | 658          |   |        |       | 1,042  |  
|                                     | Investment in financial services                                                                                                              |                                           |                            | 1,121 |           |       |   |             |   |        |       |       |  
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |  
|                                     |                                                                                                                                               |                                           | TOTAL ASSETS               |       | $         | 4,875 |   |              | $ | 16,450 |       |        | $ | 20,119 | 
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |  
|                                    
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                               |                                           |                            |       |           |       |   |              |   |        |       |       
|                                     | Deposits                                                                                                                                      |                                           | $                          |      |           |       | $ | 8,964        |   |        | $     | 8,964  |  
|                                     | Federal Home Loan Bank borrowings                                                                                                             |                                           |                            |      |           |       |   | 4,717        |   |        |       | 4,717  |  
|                                     | Securities sold under repurchase agreements                                                                                                   |                                           |                            |      |           |       |   | 787          |   |        |       | 787    |  
|                                     | Other liabilities                                                                                                                             |                                           |                            | 740   |           |       |   | 350          |   |        |       | 1,052  |  
|                                     | Long-term debt                                                                                                                                |                                           |                            | 1,485 |           |       |   | 206          |   |        |       | 1,691  |  
|                                     | Deferred income taxes                                                                                                                         |                                           |                            | 126   |           |       |   |             |   |        |       | 79     |  
|                                     | Pension liability                                                                                                                             |                                           |                            | 289   |           |       |   |             |   |        |       | 289    |  
|                                     | Postretirement benefits                                                                                                                       |                                           |                            | 143   |           |       |   |             |   |        |       | 143    |  
|                                     | Preferred stock issued by subsidiaries                                                                                                        |                                           |                            |      |           |       |   | 305          |   |        |       | 305    |  
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |  
|                                     |                                                                                                                                               |                                           | TOTAL LIABILITIES          |       |           | 2,783 |   |              |   | 15,329 |       |        |   | 18,027 | 
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |  
|SHAREHOLDERS EQUITY                 |                                                                                                                                               |                                           |                            |       |           |       |   |              |   |        |       |       
|                                     | Preferred stock  par value $1 per share:                                                                                                     |                                           |                            |       |           |       |   |              |   |        |       |        |  
|                                     |                                                                                                                                               | authorized 25,000,000 shares; none issued |                            |       |           |       |   |              |   |        |       |        |  |       
|                                     | Common stock  par value $1 per share: authorized
    200,000,000 shares; issued 61,389,552 shares,
    including shares held in the treasury |                                           |                            |       |           |       |   |              |   |        |       | 61     |  
|                                     | Additional paid-in capital                                                                                                                    |                                           |                            |       |           |       |   |              |   |        |       | 412    |  
|                                     | Accumulated other comprehensive loss                                                                                                          |                                           |                            |       |           |       |   |              |   |        |       | (192   | )
|                                     | Retained earnings                                                                                                                             |                                           |                            |       |           |       |   |              |   |        |       | 2,052  |  
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |  
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |   |        | 2,333 |       
|                                     | Cost of shares held in the treasury: 5,296,457 shares                                                                                         |                                           |                            |       |           |       |   |              |   |        |       | (241   | )
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |  
|                                     |                                                                                                                                               |                                           | TOTAL SHAREHOLDERS EQUITY |       |           |       |   |              |   |        |       |        |   | 2,092  | 
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |  
|                                     | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                    |                                           |                            |       |           |       |   |              |   |        | $     | 20,119 |  
|                                     |                                                                                                                                               |                                           |                            |       |           |       |   |              |  



49



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TEMPLE-INLAND INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET


|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |        |   |        |       |        | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | - | ----- | --------- |  | - | ------------ | ------ | - | ------ | ----- | ------ | 
|                                           |                                                                                                                                               | At Year-End 2003           |  
|                                           |                                                                                                                                               |                            |  
|                                           |                                                                                                                                               | Parent                     |   |       | Financial |  |   |             
|                                           |                                                                                                                                               | Company                    |   |       | Services  |  |   | Consolidated |       
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |       
|                                           |                                                                                                                                               | (In millions)              |  
|ASSETS                                     |                                                                                                                                               |                            |   |       |           |  |   |              |        |   |        |      
|                                           | Cash and cash equivalents                                                                                                                     |                            | $ | 20    |           |  | $ | 379          |        |   | $      | 399   |       
|                                           | Loans held for sale                                                                                                                           |                            |   |      |           |  |   | 551          |        |   |        | 551   |       
|                                           | Loans                                                                                                                                         |                            |   |      |           |  |   | 9,026        |        |   |        | 9,026 |       
|                                           | Securities available-for-sale                                                                                                                 |                            |   |      |           |  |   | 1,374        |        |   |        | 1,374 |       
|                                           | Securities held-to-maturity                                                                                                                   |                            |   |      |           |  |   | 5,267        |        |   |        | 5,267 |       
|                                           | Trade receivables                                                                                                                             |                            |   | 359   |           |  |   |             |        |   |        | 359   |       
|                                           | Inventories                                                                                                                                   |                            |   | 330   |           |  |   |             |        |   |        | 330   |       
|                                           | Timber and timberland                                                                                                                         |                            |   | 497   |           |  |   |             |        |   |        | 497   |       
|                                           | Property, premises, and equipment                                                                                                             |                            |   | 1,807 |           |  |   | 155          |        |   |        | 1,962 |       
|                                           | Goodwill                                                                                                                                      |                            |   | 237   |           |  |   | 147          |        |   |        | 384   |       
|                                           | Other assets                                                                                                                                  |                            |   | 453   |           |  |   | 762          |        |   |        | 1,182 |       
|                                           | Investment in financial services                                                                                                              |                            |   | 1,123 |           |  |   |             |        |   |        |      |       
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |       
|                                           |                                                                                                                                               | TOTAL ASSETS               |   | $     | 4,826     |  |   | $            | 17,661 |   |        | $     | 21,331 | 
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |       
|                                          
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                                                                                               |                            |   |       |           |  |   |              |        |   |        |      
|                                           | Deposits                                                                                                                                      |                            | $ |      |           |  | $ | 8,698        |        |   | $      | 8,698 |       
|                                           | Federal Home Loan Bank borrowings                                                                                                             |                            |   |      |           |  |   | 4,992        |        |   |        | 4,992 |       
|                                           | Securities sold under repurchase agreements                                                                                                   |                            |   |      |           |  |   | 1,327        |        |   |        | 1,327 |       
|                                           | Obligations to settle trade date securities                                                                                                   |                            |   |      |           |  |   | 567          |        |   |        | 567   |       
|                                           | Other liabilities                                                                                                                             |                            |   | 826   |           |  |   | 410          |        |   |        | 1,221 |       
|                                           | Long-term debt                                                                                                                                |                            |   | 1,611 |           |  |   | 239          |        |   |        | 1,850 |       
|                                           | Deferred income taxes                                                                                                                         |                            |   | 25    |           |  |   |             |        |   |        | 7     |       
|                                           | Pension liability                                                                                                                             |                            |   | 250   |           |  |   |             |        |   |        | 250   |       
|                                           | Postretirement benefits                                                                                                                       |                            |   | 146   |           |  |   |             |        |   |        | 146   |       
|                                           | Preferred stock issued by subsidiaries                                                                                                        |                            |   |      |           |  |   | 305          |        |   |        | 305   |       
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |       
|                                           |                                                                                                                                               | TOTAL LIABILITIES          |   |       | 2,858     |  |   |              | 16,538 |   |        |       | 19,363 | 
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |       
|SHAREHOLDERS EQUITY                       |                                                                                                                                               |                            |   |       |           |  |   |              |        |   |        |      
|                                           | Preferred stock  par value $1 per share:                                                                                                     |                            |   |       |           |  |   |              |        |   |        |       |       
|                                           | authorized 25,000,000 shares; none issued                                                                                                     |                            |   |       |           |  |   |              |        |   |        |      |       
|                                           | Common stock  par value $1 per share: authorized
    200,000,000 shares; issued 61,389,552 shares,
    including shares held in the treasury |                            |   |       |           |  |   |              |        |   |        | 61    |       
|                                           | Additional paid-in capital                                                                                                                    |                            |   |       |           |  |   |              |        |   |        | 377   |       
|                                           | Accumulated other comprehensive loss                                                                                                          |                            |   |       |           |  |   |              |        |   |        | (185  | )     
|                                           | Retained earnings                                                                                                                             |                            |   |       |           |  |   |              |        |   |        | 2,023 |       
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |       
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |        |   | 2,276  |      
|                                           | Cost of shares held in the treasury: 6,792,410 shares                                                                                         |                            |   |       |           |  |   |              |        |   |        | (308  | )     
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |       
|                                           |                                                                                                                                               | TOTAL SHAREHOLDERS EQUITY |   |       |           |  |   |              |        |   |        |       | 1,968  | 
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |       
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                               |                            |   |       |           |  |   |              |        | $ | 21,331 |      
|                                           |                                                                                                                                               |                            |   |       |           |  |   |              |       



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TEMPLE-INLAND INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME


|                                                      |                                      |                                   |       |               |      |   |       |       |       |   |       |       |       |  
|----------------------------------------------------- | ------------------------------------ | --------------------------------- | ----- | ------------- | ---- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | -
|                                                      |                                      | For the Year                      |      
|                                                      |                                      |                                   |      
|                                                      |                                      | 2004                              |       |               | 2003 |   |       | 2002  |      
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|                                                      |                                      |                                   |       | (In millions) |      |   |      
|REVENUES                                              |                                      |                                   |       |               |      |   |       |       |       |   |       |      
|                                                      | Manufacturing                        |                                   | $     | 3,707         |      |   | $     | 3,501 |       |   | $     | 3,374 |      
|                                                      | Financial services                   |                                   |       | 1,043         |      |   |       | 1,152 |       |   |       | 1,144 |      
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|                                                      |                                      |                                   | 4,750 |               |      |   | 4,653 |       |       |   | 4,518 |      
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|COSTS AND EXPENSES                                    |                                      |                                   |       |               |      |   |       |       |       |   |       |      
|                                                      | Manufacturing                        |                                   |       | 3,522         |      |   |       | 3,636 |       |   |       | 3,287 |      
|                                                      | Financial services                   |                                   |       | 870           |      |   |       | 971   |       |   |       | 980   |      
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|                                                      |                                      |                                   | 4,392 |               |      |   | 4,607 |       |       |   | 4,267 |      
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|OPERATING INCOME                                      |                                      |                                   | 358   |               |      |   | 46    |       |       |   | 251   |      
|                                                      | Parent company interest              |                                   |       | (125          | )    |   |       | (135  | )     |   |       | (133  | )    
|                                                      | Other non-operating income (expense) |                                   |       |              |      |   |       | (8    | )     |   |       | (11   | )    
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES |                                      |                                   | 233   |               |      |   | (97   | )     |       |   | 107   |      
|                                                      | Income tax (expense) benefit         |                                   |       | (71           | )    |   |       | 194   |       |   |       | (42   | )    
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|INCOME FROM CONTINUING OPERATIONS                     |                                      |                                   | 162   |               |      |   | 97    |       |       |   | 65    |      
|                                                      | Discontinued operations              |                                   |       | 3             |      |   |       |      |       |   |       | (1    | )    
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|INCOME BEFORE ACCOUNTING CHANGE                       |                                      |                                   | 165   |               |      |   | 97    |       |       |   | 64    |      
|                                                      | Effect of accounting change          |                                   |       |              |      |   |       | (1    | )     |   |       | (11   | )    
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|NET INCOME                                            |                                      | $                                 | 165   |               |      | $ | 96    |       |       | $ | 53    |      
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|EARNINGS PER SHARE                                    |                                      |                                   |       |               |      |   |       |       |       |   |       |      
|                                                      | Basic:                               |                                   |       |               |      |   |       |       |       |   |       |       |      
|                                                      |                                      | Income from continuing operations |       | $             | 2.90 |   |       | $     | 1.78  |   |       | $     | 1.25  |  
|                                                      |                                      | Discontinued operations           |       |               | 0.05 |   |       |       |      |   |       |       | (0.02 | )
|                                                      |                                      | Effect of accounting change       |       |               |     |   |       |       | (0.01 | ) |       |       | (0.21 | )
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|                                                      |                                      | Net income                        |       | $             | 2.95 |   |       | $     | 1.77  |   |       | $     | 1.02  |  
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|                                                      | Diluted:                             |                                   |       |               |      |   |       |       |       |   |       |       |      
|                                                      |                                      | Income from continuing operations |       | $             | 2.87 |   |       | $     | 1.78  |   |       | $     | 1.25  |  
|                                                      |                                      | Discontinued operations           |       |               | 0.05 |   |       |       |      |   |       |       | (0.02 | )
|                                                      |                                      | Effect of accounting change       |       |               |     |   |       |       | (0.01 | ) |       |       | (0.21 | )
|                                                      |                                      |                                   |       |               |      |   |       |       |      
|                                                      |                                      | Net income                        |       | $             | 2.92 |   |       | $     | 1.77  |   |       | $     | 1.02  |  
|                                                      |                                      |                                   |       |               |      |   |       |       |      



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TEMPLE-INLAND INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                       |                                                                                         |                                                     |      |        |        |   |      |        |         |   |        |        |         |  
|-------------------------------------- | --------------------------------------------------------------------------------------- | --------------------------------------------------- | ---- | ------ | ------ | - | ---- | ------ | ------- | - | ------ | ------ | ------- | -
|                                       |                                                                                         | For the Year                                        |     
|                                       |                                                                                         |                                                     |     
|                                       |                                                                                         | 2004                                                |      |        | 2003   |   |      | 2002   |        
|                                       |                                                                                         |                                                     |      |        |        |   |      |        |        
|                                       |                                                                                         | (In millions)                                       |     
|CASH PROVIDED BY (USED FOR) OPERATIONS |                                                                                         |                                                     |      |        |        |   |      |        |         |   |        |       
|                                       | Net income                                                                              |                                                     | $    | 165    |        |   | $    | 96     |         |   | $      | 53     |        
|                                       | Adjustments:                                                                            |                                                     |      |        |        |   |      |        |         |   |        |        |        
|                                       |                                                                                         | Depreciation and amortization                       |      |        | 254    |   |      |        | 270     |   |        |        | 260     |  
|                                       |                                                                                         | Amortization and accretion of financial instruments |      |        | 58     |   |      |        | 82      |   |        |        | 60      |  
|                                       |                                                                                         | Provision for loan losses                           |      |        | (12    | ) |      |        | 43      |   |        |        | 40      |  
|                                       |                                                                                         | Deferred taxes (benefit)                            |      |        | 58     |   |      |        | (155    | ) |        |        | 33      |  
|                                       |                                                                                         | Other non-cash charges and credits, net             |      |        | 26     |   |      |        | 71      |   |        |        | 17      |  
|                                       |                                                                                         | Net assets of discontinued operations               |      |        | (24    | ) |      |        | (5      | ) |        |        | 15      |  
|                                       |                                                                                         | Cumulative effect of accounting change              |      |        |       |   |      |        | 1       |   |        |        | 11      |  
|                                       |                                                                                         | Other                                               |      |        | 67     |   |      |        | 58      |   |        |        | 19      |  
|                                       | Changes in:                                                                             |                                                     |      |        |        |   |      |        |         |   |        |        |        
|                                       |                                                                                         | Receivables                                         |      |        | (45    | ) |      |        | (8      | ) |        |        | 41      |  
|                                       |                                                                                         | Inventories                                         |      |        | (77    | ) |      |        | 12      |   |        |        | (2      | )
|                                       |                                                                                         | Accounts payable and accrued expenses               |      |        |       |   |      |        | 30      |   |        |        | (41     | )
|                                       |                                                                                         | Loans held for sale, originations                   |      |        | (6,898 | ) |      |        | (12,955 | ) |        |        | (10,799 | )
|                                       |                                                                                         | Loans held for sale, sales                          |      |        | 6,920  |   |      |        | 13,447  |   |        |        | 10,626  |  
|                                       |                                                                                         | Collections on loans serviced for others, net       |      |        | (32    | ) |      |        | (77     | ) |        |        | (70     | )
|                                       |                                                                                         |                                                     |      |        |        |   |      |        |        
|                                       |                                                                                         |                                                     | 460  |        |        |   | 910  |        |         |   | 263    |       
|                                       |                                                                                         |                                                     |      |        |        |   |      |        |        
|CASH PROVIDED BY (USED FOR) INVESTING  |                                                                                         |                                                     |      |        |        |   |      |        |         |   |        |       
|                                       | Capital expenditures                                                                    |                                                     |      | (264   | )      |   |      | (170   | )       |   |        | (128   | )      
|                                       | Sale of non-strategic assets and operations                                             |                                                     |      | 66     |        |   |      | 69     |         |   |        | 39     |        
|                                       | Securities available-for-sale, net                                                      |                                                     |      | 251    |        |   |      | 545    |         |   |        | 739    |        
|                                       | Securities held-to-maturity, net                                                        |                                                     |      | 817    |        |   |      | (1,164 | )       |   |        | (2,781 | )      
|                                       | Loans originated or acquired, net of principal collected                                |                                                     |      | (644   | )      |   |      | 453    |         |   |        | 67     |        
|                                       | Proceeds from sale of loans and mortgage servicing rights                               |                                                     |      | 37     |        |   |      | 67     |         |   |        | 54     |        
|                                       | Branch acquisitions                                                                     |                                                     |      | 148    |        |   |      |       |         |   |        | 364    |        
|                                       | Acquisitions, net of cash acquired, and joint ventures                                  |                                                     |      | (20    | )      |   |      | (10    | )       |   |        | (631   | )      
|                                       | Other                                                                                   |                                                     |      | 93     |        |   |      | 35     |         |   |        | 10     |        
|                                       |                                                                                         |                                                     |      |        |        |   |      |        |        
|                                       |                                                                                         |                                                     | 484  |        |        |   | (175 | )      |         |   | (2,267 | )     
|                                       |                                                                                         |                                                     |      |        |        |   |      |        |        
|CASH PROVIDED BY (USED FOR) FINANCING  |                                                                                         |                                                     |      |        |        |   |      |        |         |   |        |       
|                                       | Deposits, net                                                                           |                                                     |      | 113    |        |   |      | (500   | )       |   |        | (277   | )      
|                                       | Additions to debt                                                                       |                                                     |      | 375    |        |   |      | 978    |         |   |        | 2,948  |        
|                                       | Payments of debt                                                                        |                                                     |      | (1,014 | )      |   |      | (1,201 | )       |   |        | (975   | )      
|                                       | Repurchase agreements and short-term borrowings, net                                    |                                                     |      | (308   | )      |   |      | (2     | )       |   |        | (612   | )      
|                                       | Cash dividends paid to shareholders                                                     |                                                     |      | (136   | )      |   |      | (73    | )       |   |        | (67    | )      
|                                       | Bridge financing facility                                                               |                                                     |      |       |        |   |      |       |         |   |        | 880    |        
|                                       | Payment of bridge financing facility                                                    |                                                     |      |       |        |   |      |       |         |   |        | (880   | )      
|                                       | Payment of Gaylord assumed debt                                                         |                                                     |      |       |        |   |      |       |         |   |        | (285   | )      
|                                       | Sale of common stock, Upper
    DECSSM,
    senior notes, and exercise of stock options |                                                     |      | 62     |        |   |      | 13     |         |   |        | 1,060  |        
|                                       | Purchase of deposits                                                                    |                                                     |      |       |        |   |      |       |         |   |        | 104    |        
|                                       | Other                                                                                   |                                                     |      | (63    | )      |   |      | (6     | )       |   |        | (27    | )      
|                                       |                                                                                         |                                                     |      |        |        |   |      |        |        
|                                       |                                                                                         |                                                     | (971 | )      |        |   | (791 | )      |         |   | 1,869  |       
|                                       |                                                                                         |                                                     |      |        |        |   |      |        |        
|                                       | Net increase (decrease) in cash and cash equivalents                                    |                                                     |      | (27    | )      |   |      | (56    | )       |   |        | (135   | )      
|                                       | Cash and cash equivalents at beginning of year                                          |                                                     |      | 399    |        |   |      | 455    |         |   |        | 590    |        
|                                       |                                                                                         |                                                     |      |        |        |   |      |        |        
|                                       | Cash and cash equivalents at end of year                                                |                                                     | $    | 372    |        |   | $    | 399    |         |   | $      | 455    |        
|                                       |                                                                                         |                                                     |      |        |        |   |      |        |        



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TEMPLE-INLAND INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |   |      |   |  |   |       |      |  
|------------------------------------------------------------- | --------------------------------------- | ------------- | -- | - | ------- | ------------- | --- | ------ |  | - | -------- | ---- | - | -------- | ----- | --- | ----- | - | ---- | - |  | - | ----- | ---- | -
|                                                              |                                         |               |    |   |         | Accumulated   |     |        |  |   |          |      |  
|                                                              |                                         |               |    |   |         | Other         |     |        |  |   |          |      |  
|                                                              |                                         |               |    |   |         | Comprehensive |     |        |  |   |          |      |  
|                                                              |                                         | Common        |    |   | Paid-In |               |     | Income |  |   | Retained |      |   | Treasury |       |     |      
|                                                              |                                         | Stock         |    |   | Capital |               |     | (Loss) |  |   | Earnings |      |   | Stock    |       |     | Total |  
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|                                                              |                                         | (In millions) |   
|Balance at year-end 2001                                      |                                         | $             | 61 |   |         | $             | 367 |        |  | $ | (1       | )    |   | $        | 2,014 |     |       | $ | (545 | ) |  | $ | 1,896 |     
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Comprehensive income, net of tax:                             |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |   |      |   |  |   |       |     
|                                                              | Net income                              |               |    |  |         |               |     |       |  |   |          |     |   |          |       | 53  |       |   |      |  |  |   |       | 53   |  
|                                                              | Unrealized gains on securities          |               |    |  |         |               |     |       |  |   |          | (1   | ) |          |       |    |       |   |      |  |  |   |       | (1   | )
|                                                              | Minimum pension liability               |               |    |  |         |               |     |       |  |   |          | (123 | ) |          |       |    |       |   |      |  |  |   |       | (123 | )
|                                                              | Foreign currency translation adjustment |               |    |  |         |               |     |       |  |   |          | (8   | ) |          |       |    |       |   |      |  |  |   |       | (8   | )
|                                                              | Derivative financial instruments        |               |    |  |         |               |     |       |  |   |          | (3   | ) |          |       |    |       |   |      |  |  |   |       | (3   | )
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Comprehensive loss for the year 2002                          |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |   |      |   |  |   | (82   | )   
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Dividends paid on common stock  $1.28 per share              |                                         |               |   |   |         |               |    |        |  |   |         |      |   |          | (67   | )   |       |   |     |   |  |   | (67   | )   
|Stock issued for cash, 4,140,000 shares                       |                                         |               |   |   |         |               | 27  |        |  |   |         |      |   |          |      |     |       |   | 188  |   |  |   | 215   |     
|Fees related to sale of Upper
    DECSSMand stock             |                                         |               |   |   |         |               | (20 | )      |  |   |         |      |   |          |      |     |       |   |     |   |  |   | (20   | )   
|Present value of equity purchase contract adjustment payments |                                         |               |   |   |         |               | (10 | )      |  |   |         |      |   |          |      |     |       |   |     |   |  |   | (10   | )   
|Stock-based compensation  238,958 shares                     |                                         |               |   |   |         |               | 3   |        |  |   |         |      |   |          |      |     |       |   | 10   |   |  |   | 13    |     
|Exercise of stock options  68,151 shares                     |                                         |               |   |   |         |               | 1   |        |  |   |         |      |   |          |      |     |       |   | 3    |   |  |   | 4     |     
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Balance at year-end 2002                                      |                                         | $             | 61 |   |         | $             | 368 |        |  | $ | (136     | )    |   | $        | 2,000 |     |       | $ | (344 | ) |  | $ | 1,949 |     
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Comprehensive income, net of tax:                             |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |   |      |   |  |   |       |     
|                                                              | Net income                              |               |    |  |         |               |     |       |  |   |          |     |   |          |       | 96  |       |   |      |  |  |   |       | 96   |  
|                                                              | Unrealized gains on securities          |               |    |  |         |               |     |       |  |   |          | (5   | ) |          |       |    |       |   |      |  |  |   |       | (5   | )
|                                                              | Minimum pension liability               |               |    |  |         |               |     |       |  |   |          | (38  | ) |          |       |    |       |   |      |  |  |   |       | (38  | )
|                                                              | Foreign currency translation adjustment |               |    |  |         |               |     |       |  |   |          | (6   | ) |          |       |    |       |   |      |  |  |   |       | (6   | )
|                                                              | Derivative financial instruments        |               |    |  |         |               |     |       |  |   |          |     |   |          |       |    |       |   |      |  |  |   |       |     |  
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Comprehensive income for the year 2003                        |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |   |      |   |  |   | 47    |     
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Dividends paid on common stock  $1.36 per share              |                                         |               |   |   |         |               |    |        |  |   |         |      |   |          | (73   | )   |       |   |     |   |  |   | (73   | )   
|Stock-based compensation  526,511 shares                     |                                         |               |   |   |         |               | 6   |        |  |   |         |      |   |          |      |     |       |   | 24   |   |  |   | 30    |     
|Exercise of stock options  264,372 shares                    |                                         |               |   |   |         |               | 1   |        |  |   |         |      |   |          |      |     |       |   | 12   |   |  |   | 13    |     
|Reclassification of deferred compensation                     |                                         |               |   |   |         |               | 2   |        |  |   |         |      |   |          |      |     |       |   |     |   |  |   | 2     |     
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Balance at year-end 2003                                      |                                         | $             | 61 |   |         | $             | 377 |        |  | $ | (185     | )    |   | $        | 2,023 |     |       | $ | (308 | ) |  | $ | 1,968 |     
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Comprehensive income, net of tax:                             |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |   |      |   |  |   |       |     
|                                                              | Net income                              |               |    |  |         |               |     |       |  |   |          |     |   |          |       | 165 |       |   |      |  |  |   |       | 165  |  
|                                                              | Unrealized gains on securities          |               |    |  |         |               |     |       |  |   |          | (5   | ) |          |       |    |       |   |      |  |  |   |       | (5   | )
|                                                              | Minimum pension liability               |               |    |  |         |               |     |       |  |   |          | (5   | ) |          |       |    |       |   |      |  |  |   |       | (5   | )
|                                                              | Foreign currency translation adjustment |               |    |  |         |               |     |       |  |   |          |     |   |          |       |    |       |   |      |  |  |   |       |     |  
|                                                              | Derivative financial instruments        |               |    |  |         |               |     |       |  |   |          | 3    |   |          |       |    |       |   |      |  |  |   |       | 3    |  
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Comprehensive income for the year 2004                        |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |   |      |   |  |   | 158   |     
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Dividends paid on common stock  $2.44 per share              |                                         |               |   |   |         |               |    |        |  |   |         |      |   |          | (136  | )   |       |   |     |   |  |   | (136  | )   
|Stock-based compensation  316,169 shares                     |                                         |               |   |   |         |               | 21  |        |  |   |         |      |   |          |      |     |       |   | 14   |   |  |   | 35    |     
|Exercise of stock options  1,179,784 shares                  |                                         |               |   |   |         |               | 9   |        |  |   |         |      |   |          |      |     |       |   | 53   |   |  |   | 62    |     
|Tax benefit from exercise of stock options                    |                                         |               |   |   |         |               | 5   |        |  |   |         |      |   |          |      |     |       |   |     |   |  |   | 5     |     
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  
|Balance at year-end 2004                                      |                                         | $             | 61 |   |         | $             | 412 |        |  | $ | (192     | )    |   | $        | 2,052 |     |       | $ | (241 | ) |  | $ | 2,092 |     
|                                                              |                                         |               |    |   |         |               |     |        |  |   |          |      |   |          |       |     |       |  



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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS







|         |                                           
|-------- | ------------------------------------------
|Note 1  | Summary of Significant Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation















| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                     
| | --------------------
| | Capitalized Software



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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |            
| | -----------
| | Derivatives







| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |         
| | --------
| | Goodwill

Goodwill and Other Intangible Assets




| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets

Accounting for the Impairment or Disposal of Long-Lived
Assets






| |             
| | ------------
| | Income Taxes



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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                         
| | ------------------------
| | Stock-Based Compensation



Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment
of FASB Statement No. 123




|                                                                                                                                                |                      |               |     |      |      |   |     |      |  |   |     |      | 
|----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------- | --- | ---- | ---- | - | --- | ---- |  | - | --- | ---- | 
|                                                                                                                                                |                      | For the Year  |    
|                                                                                                                                                |                      |               |    
|                                                                                                                                                |                      | 2004          |     |      | 2003 |   |     | 2002 | 
|                                                                                                                                                |                      |               |     |      |      |   |     |      | 
|                                                                                                                                                |                      | (In millions) |    
|Net income, as reported                                                                                                                         |                      | $             | 165 |      |      | $ | 96  |      |  | $ | 53  |     
|Add: Stock-based compensation expense, net of related tax
    effects, included in the determination of reported net income                     |                      |               | 20  |      |      |   | 21  |      |  |   | 8   |     
|Deduct: Total stock-based compensation expense, net of related
    tax effects, determined under the fair value based method for
    all awards |                      |               | (27 | )    |      |   | (31 | )    |  |   | (16 | )   
|                                                                                                                                                |                      |               |     |      |      |   |     |      | 
|Pro forma net income                                                                                                                            |                      | $             | 158 |      |      | $ | 86  |      |  | $ | 45  |     
|                                                                                                                                                |                      |               |     |      |      |   |     |      | 
|Earnings per share:                                                                                                                             |                      |               |     |      |      |   |     |      |  |   |     |     
|                                                                                                                                                | Basic, as reported   |               | $   | 2.95 |      |   | $   | 1.77 |  |   | $   | 1.02 | 
|                                                                                                                                                | Basic, pro forma     |               | $   | 2.84 |      |   | $   | 1.59 |  |   | $   | 0.86 | 
|                                                                                                                                                | Diluted, as reported |               | $   | 2.92 |      |   | $   | 1.77 |  |   | $   | 1.02 | 
|                                                                                                                                                | Diluted, pro forma   |               | $   | 2.81 |      |   | $   | 1.59 |  |   | $   | 0.86 | 



|                                |  |              |           |   |      |  |           |      |  |  |           |  
|------------------------------- |  | ------------ | --------- | - | ---- |  | --------- | ---- |  |  | --------- | -
|                                |  | For the Year |          
|                                |  |              |          
|                                |  | 2004         |           |   | 2003 |  |           | 2002 | 
|                                |  |              |           |   |      |  |           |      | 
|Expected dividend yield         |  |              | 2.9       | % |      |  | 2.5       | %    |  |  | 2.5       | %
|Expected stock price volatility |  |              | 28.8      | % |      |  | 29.3      | %    |  |  | 29.3      | %
|Risk-free interest rate         |  |              | 4.4       | % |      |  | 3.9       | %    |  |  | 3.8       | %
|Expected life of options        |  |              | 8.0 years |   |      |  | 8.0 years |      |  |  | 8.0 years |  



Pending Accounting Pronouncements




| |                             
| | ----------------------------
| | Asset Retirement Obligations

Accounting for Asset Retirement Obligations


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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |           
| | ----------
| | Guarantees

Guarantors Accounting and Disclosure
Requirements, Including Indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements No. 5, 57
and 107 and rescission of FASB Interpretation
No. 34




| |                                   
| | ----------------------------------
| | Liabilities and Equity Instruments

Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity




| |                                           
| | ------------------------------------------
| | Pensions and Other Postretirement Benefits

Employers Disclosure about Pensions and
Other Postretirement Benefits an amendment of FASB Statements
No. 87, 88 and 106




| |                           
| | --------------------------
| | Variable Interest Entities

Consolidation of
Variable Interest Entities and Interpretation of
ARB No. 51




| |                                  
| | ---------------------------------
| | Pending Accounting Pronouncements

Inventory
Cost, an amendment of ARB No. 43, Chapter 4 Exchanges of Nonmonetary Assets, an amendment of
APB Opinion No. 29 Share Based
Payment


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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Stock-Based Compensation




|         |              
|-------- | -------------
|Note 2  | Capital Stock



SM SM




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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                                    
|-------- | -----------------------------------
|Note 3  | Fair Value of Financial Instruments



|                                    |  |               |       |   |       |   |       |          |  |   |       |   |  |   |       |  
|----------------------------------- |  | ------------- | ----- | - | ----- | - | ----- | -------- |  | - | ----- | - |  | - | ----- | -
|                                    |  | At Year-End   |      
|                                    |  |               |      
|                                    |  | 2004          |       |   | 2003  |  
|                                    |  |               |       |   |       |  
|                                    |  | Carrying      |       |   | Fair  |   |       | Carrying |  |   | Fair  |  
|                                    |  | Value         |       |   | Value |   |       | Value    |  |   | Value |  
|                                    |  |               |       |   |       |   |       |          |  |   |       |  
|                                    |  | (In millions) |      
|Financial assets                    |  |               |       |   |       |   |       |          |  |   |       |   |  |   |       |  
|Loans receivable                    |  | $             | 9,618 |   |       | $ | 9,629 |          |  | $ | 9,026 |   |  | $ | 9,067 |  
|Securities held-to-maturity         |  |               | 3,864 |   |       |   | 3,865 |          |  |   | 5,267 |   |  |   | 5,305 |  
|Financial liabilities               |  |               |       |   |       |   |       |          |  |   |       |   |  |   |       |  
|Deposits                            |  | $             | 8,964 |   |       | $ | 8,962 |          |  | $ | 8,698 |   |  | $ | 8,734 |  
|FHLB borrowings                     |  |               | 4,717 |   |       |   | 4,719 |          |  |   | 4,992 |   |  |   | 5,072 |  
|Fixed-rate long-term debt           |  |               | 1,437 |   |       |   | 1,646 |          |  |   | 1,584 |   |  |   | 1,734 |  
|Other off-balance sheet instruments |  |               |       |   |       |   |       |          |  |   |       |   |  |   |       |  
|Commitments to extend credit        |  | $             | (7    | ) |       | $ | (7    | )        |  | $ | (6    | ) |  | $ | (6    | )







|         |                
|-------- | ---------------
|Note 4  | Taxes on Income



|                                     |                 |               |    |    |      |   |      |      |   |   |    |    | 
|------------------------------------ | --------------- | ------------- | -- | -- | ---- | - | ---- | ---- | - | - | -- | -- | 
|                                     |                 | For the Year  |   
|                                     |                 |               |   
|                                     |                 | 2004          |    |    | 2003 |   |      | 2002 |  
|                                     |                 |               |    |    |      |   |      |      |  
|                                     |                 | (In millions) |   
|Current tax provision:               |                 |               |    |    |      |   |      |      |   |   |    |   
|                                     | U.S. Federal    |               | $  | 6  |      |   | $    | (46  | ) |   | $  | 1  | 
|                                     | State and other |               |    | 9  |      |   |      | 7    |   |   |    | 8  | 
|                                     |                 |               |    |    |      |   |      |      |  
|                                     |                 |               | 15 |    |      |   | (39  | )    |   |   | 9  |   
|                                     |                 |               |    |    |      |   |      |      |  
|Deferred tax provision:              |                 |               |    |    |      |   |      |      |   |   |    |   
|                                     | U.S. Federal    |               |    | 55 |      |   |      | (152 | ) |   |    | 32 | 
|                                     | State and other |               |    | 1  |      |   |      | (3   | ) |   |    | 1  | 
|                                     |                 |               |    |    |      |   |      |      |  
|                                     |                 |               | 56 |    |      |   | (155 | )    |   |   | 33 |   
|                                     |                 |               |    |    |      |   |      |      |  
|(Benefit) provision for income taxes |                 | $             | 71 |    |      | $ | (194 | )    |   | $ | 42 |   
|                                     |                 |               |    |    |      |   |      |      |  
|Income taxes paid (refunded), net    |                 | $             | 1  |    |      | $ | (39  | )    |   | $ | 19 |   
|                                     |                 |               |    |    |      |   |      |      |  



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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                   |          |               |     |     |      |   |     |      |   |   |     |     | 
|------------------ | -------- | ------------- | --- | --- | ---- | - | --- | ---- | - | - | --- | --- | 
|                   |          | For the Year  |    
|                   |          |               |    
|                   |          | 2004          |     |     | 2003 |   |     | 2002 |  
|                   |          |               |     |     |      |   |     |      |  
|                   |          | (In millions) |    
|Earnings (losses): |          |               |     |     |      |   |     |      |   |   |     |    
|                   | U.S.     |               | $   | 224 |      |   | $   | (95  | ) |   | $   | 101 | 
|                   | Non-U.S. |               |     | 9   |      |   |     | (2   | ) |   |     | 6   | 
|                   |          |               |     |     |      |   |     |      |  
|Total              |          | $             | 233 |     |      | $ | (97 | )    |   | $ | 107 |    
|                   |          |               |     |     |      |   |     |      |  



|                                                         |  |              |    |   |      |  |      |      |  |  |    |  
|-------------------------------------------------------- |  | ------------ | -- | - | ---- |  | ---- | ---- |  |  | -- | -
|                                                         |  | For the Year |   
|                                                         |  |              |   
|                                                         |  | 2004         |    |   | 2003 |  |      | 2002 | 
|                                                         |  |              |    |   |      |  |      |      | 
|Taxes (benefit) on income at statutory rate              |  |              | 35 | % |      |  | (35  | )%   |  |  | 35 | %
|State, net of federal benefit                            |  |              | 3  |   |      |  |     |      |  |  | 5  |  
|Foreign                                                  |  |              | 1  |   |      |  | 3    |      |  |  | (2 | )
|Other                                                    |  |              |   |   |      |  | 2    |      |  |  | 1  |  
|                                                         |  |              |    |   |      |  |      |      | 
|                                                         |  |              | 39 | % |      |  | (30  | )%   |  |  | 39 | %
|Resolution and settlement of prior year tax examinations |  |              | (8 | ) |      |  | (170 | )    |  |  |   |  
|                                                         |  |              |    |   |      |  |      |      | 
|Effective tax rate (benefit) expense                     |  |              | 31 | % |      |  | (200 | )%   |  |  | 39 | %
|                                                         |  |              |    |   |      |  |      |      | 

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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                           |                                                    |                                |    |     |      |   |   |     |     | 
|-------------------------- | -------------------------------------------------- | ------------------------------ | -- | --- | ---- | - | - | --- | --- | 
|                           |                                                    | At Year-End                    |   
|                           |                                                    |                                |   
|                           |                                                    | 2004                           |    |     | 2003 |  
|                           |                                                    |                                |    |     |      |  
|                           |                                                    | (In                            |   
|                           |                                                    | millions)                      |   
|Deferred Tax Liabilities:  |                                                    |                                |    |     |      |   |   |    
|                           | Property, equipment and intangible assets          |                                | $  | 337 |      |   | $ | 293 |    
|                           | Timber and timberland                              |                                |    | 32  |      |   |   | 36  |    
|                           | Asset leasing                                      |                                |    | 18  |      |   |   | 23  |    
|                           | Mortgage servicing rights                          |                                |    |    |      |   |   | 11  |    
|                           | U.S. taxes on unremitted foreign earnings          |                                |    | 10  |      |   |   | 7   |    
|                           | Other                                              |                                |    | 28  |      |   |   | 27  |    
|                           |                                                    |                                |    |     |      |  
|                           |                                                    | Total deferred tax liabilities |    |     | 425  |   |   |     | 397 | 
|                           |                                                    |                                |    |     |      |  
|Deferred Tax Assets:       |                                                    |                                |    |     |      |   |   |    
|                           | Alternative minimum tax credits                    |                                |    | 46  |      |   |   | 92  |    
|                           | Foreign and state net operating loss carryforwards |                                |    | 43  |      |   |   | 43  |    
|                           | Pension and postretirement benefits                |                                |    | 158 |      |   |   | 142 |    
|                           | Employee benefits                                  |                                |    | 33  |      |   |   | 25  |    
|                           | Allowance for loan losses and bad debts            |                                |    | 37  |      |   |   | 43  |    
|                           | Accruals not deductible until paid                 |                                |    | 44  |      |   |   | 51  |    
|                           | Other                                              |                                |    | 31  |      |   |   | 39  |    
|                           |                                                    |                                |    |     |      |  
|                           | Gross deferred tax assets                          |                                |    | 392 |      |   |   | 435 |    
|                           | Less valuation allowance                           |                                |    | (46 | )    |   |   | (45 | )  
|                           |                                                    |                                |    |     |      |  
|                           |                                                    | Total deferred tax assets      |    |     | 346  |   |   |     | 390 | 
|                           |                                                    |                                |    |     |      |  
|Net Deferred Tax Liability |                                                    | $                              | 79 |     |      | $ | 7 |    
|                           |                                                    |                                |    |     |      |  









|         |                       
|-------- | ----------------------
|Note 5  | Employee Benefit Plans



|                       |  |               |    |  |      |   |    |      |  |   |    | 
|---------------------- |  | ------------- | -- |  | ---- | - | -- | ---- |  | - | -- | 
|                       |  | For the Year  |   
|                       |  |               |   
|                       |  | 2004          |    |  | 2003 |   |    | 2002 | 
|                       |  |               |    |  |      |   |    |      | 
|                       |  | (In millions) |   
|Defined contribution   |  | $             | 20 |  |      | $ | 21 |      |  | $ | 19 | 
|Defined benefit        |  |               | 50 |  |      |   | 43 |      |  |   | 9  | 
|Postretirement medical |  |               | 10 |  |      |   | 12 |      |  |   | 15 | 
|                       |  |               |    |  |      |   |    |      | 
|Total                  |  | $             | 80 |  |      | $ | 76 |      |  | $ | 43 | 
|                       |  |               |    |  |      |   |    |      | 

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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Obligations and Funded Status


|                                                  |  |              |       |               |                |   |       |      |  |   |      |   |  |   |      |  
|------------------------------------------------- |  | ------------ | ----- | ------------- | -------------- | - | ----- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                  |  | For the Year |      
|                                                  |  |              |      
|                                                  |  | Pension      |       |               | Postretirement |  
|                                                  |  | Benefits     |       |               | Benefits       |  
|                                                  |  |              |       |               |                |  
|                                                  |  | 2004         |       |               | 2003           |   |       | 2004 |  |   | 2003 |  
|                                                  |  |              |       |               |                |   |       |      |  |   |      |  
|                                                  |  |              |       | (In millions) |                |   |      
|Projected benefit obligation at beginning of year |  | $            | 1,143 |               |                | $ | 999   |      |  | $ | 152  |   |  | $ | 154  |  
|Service cost                                      |  |              | 24    |               |                |   | 23    |      |  |   | 2    |   |  |   | 3    |  
|Interest cost                                     |  |              | 71    |               |                |   | 66    |      |  |   | 9    |   |  |   | 10   |  
|Plan amendments                                   |  |              |      |               |                |   |      |      |  |   |     |   |  |   |     |  
|Prior service costs                               |  |              |      |               |                |   |      |      |  |   | 2    |   |  |   |     |  
|Medicare act                                      |  |              |      |               |                |   |      |      |  |   | (9   | ) |  |   |     |  
|Actuarial (gain) loss                             |  |              | 58    |               |                |   | 107   |      |  |   | 4    |   |  |   | (3   | )
|Benefits paid by the plan                         |  |              | (59   | )             |                |   | (55   | )    |  |   | (17  | ) |  |   | (16  | )
|Participant contributions                         |  |              |      |               |                |   |      |      |  |   | 3    |   |  |   | 3    |  
|Special termination benefits                      |  |              |      |               |                |   | 3     |      |  |   |     |   |  |   | 1    |  
|                                                  |  |              |       |               |                |   |       |      |  |   |      |  
|Projected benefit obligation at end of year       |  |              | 1,237 |               |                |   | 1,143 |      |  |   | 146  |   |  |   | 152  |  
|                                                  |  |              |       |               |                |   |       |      |  |   |      |  
|Fair value of plan assets at beginning of year    |  |              | 847   |               |                |   | 771   |      |  |   |     |   |  |   |     |  
|Actual return                                     |  |              | 92    |               |                |   | 129   |      |  |   |     |   |  |   |     |  
|Benefits paid by the plan                         |  |              | (59   | )             |                |   | (55   | )    |  |   | (17  | ) |  |   | (16  | )
|Contributions we made                             |  |              | 2     |               |                |   | 2     |      |  |   | 14   |   |  |   | 13   |  
|Participant contributions                         |  |              |      |               |                |   |      |      |  |   | 3    |   |  |   | 3    |  
|                                                  |  |              |       |               |                |   |       |      |  |   |      |  
|Fair value of plan assets at end of year          |  |              | 882   |               |                |   | 847   |      |  |   |     |   |  |   |     |  
|                                                  |  |              |       |               |                |   |       |      |  |   |      |  
|Funded status                                     |  |              | (355  | )             |                |   | (296  | )    |  |   | (146 | ) |  |   | (152 | )
|Contributions we made after the measurement date  |  |              | 15    |               |                |   |      |      |  |   | 3    |   |  |   | 4    |  
|Unrecognized net actuarial loss                   |  |              | 331   |               |                |   | 318   |      |  |   | 21   |   |  |   | 27   |  
|Unrecognized prior service costs                  |  |              | 20    |               |                |   | 21    |      |  |   | (21  | ) |  |   | (25  | )
|                                                  |  |              |       |               |                |   |       |      |  |   |      |  
|Net amount recognized in the balance sheet        |  | $            | 11    |               |                | $ | 43    |      |  | $ | (143 | ) |  | $ | (146 | )
|                                                  |  |              |       |               |                |   |       |      |  |   |      |  



|                                       |  |             |      |               |                |   |      |      |  |   |      |   |  |   |      |  
|-------------------------------------- |  | ----------- | ---- | ------------- | -------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                       |  | At Year-End |     
|                                       |  |             |     
|                                       |  | Pension     |      |               | Postretirement |  
|                                       |  | Benefits    |      |               | Benefits       |  
|                                       |  |             |      |               |                |  
|                                       |  | 2004        |      |               | 2003           |   |      | 2004 |  |   | 2003 |  
|                                       |  |             |      |               |                |   |      |      |  |   |      |  
|                                       |  |             |      | (In millions) |                |   |     
|Pension liability                      |  | $           | (289 | )             |                | $ | (250 | )    |  | $ | (143 | ) |  | $ | (146 | )
|Intangible asset                       |  |             | 19   |               |                |   | 21   |      |  |   |     |   |  |   |     |  
|Accumulated other comprehensive income |  |             | 281  |               |                |   | 272  |      |  |   |     |   |  |   |     |  
|                                       |  |             |      |               |                |   |      |      |  |   |      |  
|Net amount recognized                  |  | $           | 11   |               |                | $ | 43   |      |  | $ | (143 | ) |  | $ | (146 | )
|                                       |  |             |      |               |                |   |      |      |  |   |      |  

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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |  |               |       |  |      |   |       | 
|------------------------------ |  | ------------- | ----- |  | ---- | - | ----- | 
|                               |  | At Year-End   |      
|                               |  |               |      
|                               |  | 2004          |       |  | 2003 |  
|                               |  |               |       |  |      |  
|                               |  | (In millions) |      
|Projected benefit obligation   |  | $             | 1,237 |  |      | $ | 1,143 | 
|Accumulated benefit obligation |  |               | 1,186 |  |      |   | 1,097 | 
|Fair value of plan assets      |  |               | 882   |  |      |   | 847   | 



Components of Net Periodic Benefit Cost


|                                                  |  |                  |     |                |          |           |     |      |  |   |      |   |  |      |    |   |      |   |    |   |  |   |    |  
|------------------------------------------------- |  | ---------------- | --- | -------------- | -------- | --------- | --- | ---- |  | - | ---- | - |  | ---- | -- | - | ---- | - | -- | - |  | - | -- | -
|                                                  |  | For the Year     |    
|                                                  |  |                  |    
|                                                  |  |                  |     | Postretirement |         
|                                                  |  | Pension Benefits |     |                | Benefits |          
|                                                  |  |                  |     |                |          |          
|                                                  |  | 2004             |     |                | 2003     |           |     | 2002 |  |   | 2004 |   |  | 2003 |    |   | 2002 |  
|                                                  |  |                  |     |                |          |           |     |      |  |   |      |   |  |      |    |   |      |  
|                                                  |  |                  |     |                |          | (In       |     |      |  |   |     
|                                                  |  |                  |     |                |          | millions) |     |      |  |   |     
|Service costs  benefits earned during the period |  | $                | 24  |                |          | $         | 23  |      |  | $ | 21   |   |  | $    | 2  |   |      | $ | 3  |   |  | $ | 4  |  
|Interest cost on projected benefit obligation     |  |                  | 71  |                |          |           | 66  |      |  |   | 59   |   |  |      | 9  |   |      |   | 10 |   |  |   | 11 |  
|Expected return on plan assets                    |  |                  | (69 | )              |          |           | (63 | )    |  |   | (74  | ) |  |      |   |   |      |   |   |   |  |   |   |  
|Amortization of prior service costs               |  |                  | 2   |                |          |           | 2   |      |  |   | 1    |   |  |      | (3 | ) |      |   | (3 | ) |  |   | (1 | )
|Amortization of actuarial net loss                |  |                  | 22  |                |          |           | 15  |      |  |   | 2    |   |  |      | 2  |   |      |   | 2  |   |  |   | 1  |  
|                                                  |  |                  |     |                |          |           |     |      |  |   |      |   |  |      |    |   |      |  
|Net periodic benefit cost                         |  | $                | 50  |                |          | $         | 43  |      |  | $ | 9    |   |  | $    | 10 |   |      | $ | 12 |   |  | $ | 15 |  
|                                                  |  |                  |     |                |          |           |     |      |  |   |      |   |  |      |    |   |      |  



Additional Information


|                                                                                             |  |                  |   |                |          |           |    |      |  |   |      |  |      |   |      |  |  |   |   |  |  |   |   | 
|-------------------------------------------------------------------------------------------- |  | ---------------- | - | -------------- | -------- | --------- | -- | ---- |  | - | ---- |  | ---- | - | ---- |  |  | - | - |  |  | - | - | 
|                                                                                             |  | For the Year    
|                                                                                             |  |                 
|                                                                                             |  |                  |   | Postretirement
|                                                                                             |  | Pension Benefits |   |                | Benefits
|                                                                                             |  |                  |   |                |         
|                                                                                             |  | 2004             |   |                | 2003     |           |    | 2002 |  |   | 2004 |  | 2003 |   | 2002
|                                                                                             |  |                  |   |                |          |           |    |      |  |   |      |  |      |   |     
|                                                                                             |  |                  |   |                |          | (In       |    |      |  |  
|                                                                                             |  |                  |   |                |          | millions) |    |      |  |  
|Increase in minimum liability included as a pre-tax change to
    other comprehensive income |  | $                | 9 |                |          | $         | 62 |      |  | $ | 201  |  |      | $ |     |  |  | $ |  |  |  | $ |  | 

Assumptions




|                              |  |          |     |   |                |  |       |      |  |  |      |   |  |  |       |  
|----------------------------- |  | -------- | --- | - | -------------- |  | ----- | ---- |  |  | ---- | - |  |  | ----- | -
|                              |  | Pension  |     |   | Postretirement | 
|                              |  | Benefits |     |   | Benefits       | 
|                              |  |          |     |   |                | 
|                              |  | 2004     |     |   | 2003           |  |       | 2004 |  |  | 2003 |  
|                              |  |          |     |   |                |  |       |      |  |  |      |  
|Discount rate                 |  |          | 6.0 | % |                |  | 6.375 | %    |  |  | 6.0  | % |  |  | 6.375 | %
|Rate of compensation increase |  |          | 3.7 | % |                |  | 3.40  | %    |  |  |     |   |  |  |      |  

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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |  |                  |       |                |          |  |      |      |  |  |      |   |  |      |       |   |      |  |      |   |  |  |      |  
|------------------------------ |  | ---------------- | ----- | -------------- | -------- |  | ---- | ---- |  |  | ---- | - |  | ---- | ----- | - | ---- |  | ---- | - |  |  | ---- | -
|                               |  |                  |       | Postretirement |         
|                               |  | Pension Benefits |       |                | Benefits | 
|                               |  |                  |       |                |          | 
|                               |  | 2004             |       |                | 2003     |  |      | 2002 |  |  | 2004 |   |  | 2003 |       |   | 2002 | 
|                               |  |                  |       |                |          |  |      |      |  |  |      |   |  |      |       |   |      | 
|Discount rate                  |  |                  | 6.375 | %              |          |  | 6.75 | %    |  |  | 7.50 | % |  |      | 6.375 | % |      |  | 6.75 | % |  |  | 7.50 | %
|Expected return on plan assets |  |                  | 8.50  | %              |          |  | 8.50 | %    |  |  | 9.00 | % |  |      |      |   |      |  |     |   |  |  |     |  
|Rate of compensation increase  |  |                  | 3.40  | %              |          |  | 3.50 | %    |  |  | 4.25 | % |  |      |      |   |      |  |     |   |  |  |     |  







|                                                                                  |  |         |      |   |      |  |      |  
|--------------------------------------------------------------------------------- |  | ------- | ---- | - | ---- |  | ---- | -
|                                                                                  |  | For the |     
|                                                                                  |  | Year    |     
|                                                                                  |  |         |     
|                                                                                  |  | 2004    |      |   | 2003 | 
|                                                                                  |  |         |      |   |      | 
|Health care trend rate assumed for the next year                                  |  |         | 10.0 | % |      |  | 10.0 | %
|Rate to which the cost trend rate is assumed to decline
    (ultimate trend rate) |  |         | 4.5  | % |      |  | 4.5  | %
|Year that the rate reaches the ultimate trend rate                                |  |         | 2011 |   |      |  | 2008 |  



|                                            |  |                |    |  |                |   |     |  
|------------------------------------------- |  | -------------- | -- |  | -------------- | - | --- | -
|                                            |  | 1 Percentage   |    |  | 1 Percentage   |  
|                                            |  | Point Increase |    |  | Point Decrease |  
|                                            |  |                |    |  |                |  
|                                            |  | (In millions)  |   
|Total service and interest cost components  |  | $              | 1  |  |                | $ | (1  | )
|Postretirement projected benefit obligation |  | $              | 12 |  |                | $ | (10 | )

Plan Assets




|                |                   |             |  |            |          |  |  |      |     |   |  |    |     |  
|--------------- | ----------------- | ----------- |  | ---------- | -------- |  |  | ---- | --- | - |  | -- | --- | -
|                |                   |             |  | Percentage |         
|                |                   |             |  | of Plan    |         
|                |                   |             |  | Assets at  |         
|                |                   | Range of    |  |            | Year-End | 
|                |                   | Target      |  |            |          | 
|                |                   | Allocations |  |            | 2004     |  |  | 2003 |    
|                |                   |             |  |            |          |  |  |      |    
|Asset category: |                   |             |  |            |          |  |  |      |     |   |  |   
|                | Equity securities |             |  | 50-61      | %        |  |  | 61   | %   |   |  | 61 | %  
|                | Debt securities   |             |  | 30-34      | %        |  |  | 32   |     |   |  | 33 |    
|                | Real estate       |             |  | 0-5        | %        |  |  | 1    |     |   |  | 1  |    
|                | Other             |             |  | 0-5        | %        |  |  | 6    |     |   |  | 5  |    
|                |                   |             |  |            |          |  |  |      |    
|                |                   | Total       |  |            |          |  |  |      | 100 | % |  |    | 100 | %
|                |                   |             |  |            |          |  |  |      |    

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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








Cash Flows






|          |  |               |     |  |                |   |    | 
|--------- |  | ------------- | --- |  | -------------- | - | -- | 
|          |  | Pension       |     |  | Postretirement |  
|          |  | Benefits      |     |  | Benefits       |  
|          |  |               |     |  |                |  
|          |  | (In millions) |    
|2005      |  | $             | 64  |  |                | $ | 15 | 
|2006      |  |               | 68  |  |                |   | 14 | 
|2007      |  |               | 71  |  |                |   | 12 | 
|2008      |  |               | 75  |  |                |   | 11 | 
|2009      |  |               | 78  |  |                |   | 11 | 
|2010-2014 |  |               | 436 |  |                |   | 55 | 

Note 6  Stock-Based Compensation








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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                              |           |                       |       |                  |                |   |    |         |                  |  |                |      |   |                  |    |    |                |  |       |       |   |   |    |    | 
|----------------------------- | --------- | --------------------- | ----- | ---------------- | -------------- | - | -- | ------- | ---------------- |  | -------------- | ---- | - | ---------------- | -- | -- | -------------- |  | ----- | ----- | - | - | -- | -- | 
|                              |           | For the Year          |      
|                              |           |                       |      
|                              |           | 2004                  |       |                  | 2003           |   |    | 2002    |                 
|                              |           |                       |       |                  |                |   |    |         |                 
|                              |           |                       |       | Weighted Average |                |   |    |         | Weighted Average |  |                |      |   | Weighted Average |   
|                              |           | Options               |       |                  | Exercise Price |   |    | Options |                  |  | Exercise Price |      |   | Options          |    |    | Exercise Price | 
|                              |           |                       |       |                  |                |   |    |         |                  |  |                |      |   |                  |    |    |                | 
|                              |           | (Shares in thousands) |      
|Outstanding beginning of year |           |                       | 4,715 |                  |                | $ | 52 |         |                  |  | 4,335          |      |   | $                | 54 |    |                |  | 3,584 |       |   | $ | 53 |   
|                              | Granted   |                       |       | 539              |                |   |    | 60      |                  |  |                | 970  |   |                  |    | 44 |                |  |       | 1,009 |   |   |    | 55 | 
|                              | Exercised |                       |       | (1,217           | )              |   |    | 53      |                  |  |                | (306 | ) |                  |    | 50 |                |  |       | (76   | ) |   |    | 50 | 
|                              | Forfeited |                       |       | (124             | )              |   |    | 38      |                  |  |                | (284 | ) |                  |    | 49 |                |  |       | (182  | ) |   |    | 54 | 
|                              |           |                       |       |                  |                |   |    |         |                  |  |                |      |   |                  |    |    |                | 
|Outstanding end of year       |           |                       | 3,913 |                  |                |   | 53 |         |                  |  | 4,715          |      |   |                  | 52 |    |                |  | 4,335 |       |   |   | 54 |   
|                              |           |                       |       |                  |                |   |    |         |                  |  |                |      |   |                  |    |    |                | 
|Options exercisable           |           |                       | 1,757 |                  |                |   | 54 |         |                  |  | 2,025          |      |   |                  | 54 |    |                |  | 1,567 |       |   |   | 52 |   
|                              |           |                       |       |                  |                |   |    |         |                  |  |                |      |   |                  |    |    |                | 



Note 7  Earnings Per Share




|                                                     |                                                       |               |   |      |      |  |   |      |    |  |   |      |    | 
|---------------------------------------------------- | ----------------------------------------------------- | ------------- | - | ---- | ---- |  | - | ---- | -- |  | - | ---- | -- | 
|                                                     |                                                       | For the Year  |  
|                                                     |                                                       |               |  
|                                                     |                                                       | 2004          |   |      | 2003 |  |   | 2002 |   
|                                                     |                                                       |               |   |      |      |  |   |      |   
|                                                     |                                                       | (In millions) |  
|Numerators for basic and diluted earnings per share: |                                                       |               |   |      |      |  |   |      |    |  |   |     
|                                                     | Income from continuing operations                     |               | $ | 162  |      |  | $ | 97   |    |  | $ | 65   |   
|                                                     | Discontinued operations                               |               |   | 3    |      |  |   |     |    |  |   | (1   | ) 
|                                                     | Effect of accounting change                           |               |   |     |      |  |   | (1   | )  |  |   | (11  | ) 
|                                                     |                                                       |               |   |      |      |  |   |      |   
|                                                     |                                                       | Net income    |   | $    | 165  |  |   | $    | 96 |  |   | $    | 53 | 
|                                                     |                                                       |               |   |      |      |  |   |      |   
|Denominators for earnings per share:                 |                                                       |               |   |      |      |  |   |      |    |  |   |     
|                                                     | Weighted average shares outstanding  basic           |               |   | 55.7 |      |  |   | 54.2 |    |  |   | 52.4 |   
|                                                     | Dilutive effect of equity purchase contracts (Note 2) |               |   |     |      |  |   |     |    |  |   |     |   
|                                                     | Dilutive effect of stock options (Note 6)             |               |   | 0.5  |      |  |   |     |    |  |   |     |   
|                                                     |                                                       |               |   |      |      |  |   |      |   
|                                                     | Weighted average shares outstanding  diluted         |               |   | 56.2 |      |  |   | 54.2 |    |  |   | 52.4 |   
|                                                     |                                                       |               |   |      |      |  |   |      |   



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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 8  Accumulated Other Comprehensive
Income (Loss)




|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |    |    |    |   |      |      |      |  
|------------------------ | ------------------------- | ------------------- | -- | -- | --------- | - | ------- | ----------- | ---- | - | ----------- | -- | -- | ----- | -- | -- | -- | - | ---- | ---- | ---- | -
|                         |                           | Unrealized          |    |    |           |   |         |             |      |   |            
|                         |                           | Gains (Losses)      |    |    |           |   | Foreign |             |      |   |             |   
|                         |                           | on Available-       |    |    | Minimum   |   |         | Currency    |      |   |             |    |   
|                         |                           | For-Sale            |    |    | Pension   |   |         | Translation |      |   | Derivative  |    |    |      
|                         |                           | Securities          |    |    | Liability |   |         | Adjustment  |      |   | Instruments |    |    | Total |   
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   
|                         |                           | (In millions)       |   
|Balance at year-end 2001 |                           | $                   | 17 |    |           | $ | (5      | )           |      | $ | (13         | )  |    | $     |   |    |    | $ | (1   | )   
|                         | Changes during the year   |                     |    | (1 | )         |   |         | (201        | )    |   |             | (8 | )  |       |    | (6 | )  |   |      | (216 | )   
|                         | Deferred taxes on changes |                     |    |   |           |   |         | 78          |      |   |             |   |    |       |    | 3  |    |   |      | 81   |     
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   
|                         |                           | Net change for 2002 |    |    | (1        | ) |         |             | (123 | ) |             |    | (8 | )     |    |    | (3 | ) |      |      | (135 | )
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   
|Balance at year-end 2002 |                           | $                   | 16 |    |           | $ | (128    | )           |      | $ | (21         | )  |    | $     | (3 | )  |    | $ | (136 | )   
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   
|                         | Changes during the year   |                     |    | (9 | )         |   |         | (62         | )    |   |             | (5 | )  |       |    |   |    |   |      | (76  | )   
|                         | Deferred taxes on changes |                     |    | 3  |           |   |         | 24          |      |   |             |   |    |       |    |   |    |   |      | 27   |     
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   
|                         |                           | Net change for 2003 |    |    | (6        | ) |         |             | (38  | ) |             |    | (5 | )     |    |    |   |   |      |      | (49  | )
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   
|Balance at year-end 2003 |                           | $                   | 10 |    |           | $ | (166    | )           |      | $ | (26         | )  |    | $     | (3 | )  |    | $ | (185 | )   
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   
|                         | Changes during the year   |                     |    | (8 | )         |   |         | (9          | )    |   |             |   |    |       |    | 6  |    |   |      | (11  | )   
|                         | Deferred taxes on changes |                     |    | 3  |           |   |         | 4           |      |   |             |   |    |       |    | (3 | )  |   |      | 4    |     
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   
|                         |                           | Net change for 2004 |    |    | (5        | ) |         |             | (5   | ) |             |    |   |       |    |    | 3  |   |      |      | (7   | )
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   
|Balance at year-end 2004 |                           | $                   | 5  |    |           | $ | (171    | )           |      | $ | (26         | )  |    | $     |   |    |    | $ | (192 | )   
|                         |                           |                     |    |    |           |   |         |             |      |   |             |    |    |       |   

Note 9  Contingencies




Note 10  Segment Information






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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                         |  |               |       |  |          |   |       |             |  |   |              |  |  |       |      |      |  |   |        |  
|-------------------------------------------------------- |  | ------------- | ----- |  | -------- | - | ----- | ----------- |  | - | ------------ |  |  | ----- | ---- | ---- |  | - | ------ | -
|                                                         |  |               |       |  |          |   |       | Unallocated |  |   |             
|                                                         |  | Corrugated    |       |  | Forest   |   |       | Financial   |  |   | Expenses and |  |  |      
|                                                         |  | Packaging     |       |  | Products |   |       | Services    |  |   | Eliminations |  |  | Total |     
|                                                         |  |               |       |  |          |   |       |             |  |   |              |  |  |       |     
|                                                         |  | (In millions) |      
|For the year or at year-end 2004:                        |  |               |       |  |          |   |       |             |  |   |              |  |  |       |      |      |  |   |        |  
|Revenues from external customers                         |  | $             | 2,736 |  |          | $ | 971   |             |  | $ | 1,043        |  |  | $     |     |      |  | $ | 4,750  |  
|Depreciation and amortization                            |  |               | 159   |  |          |   | 55    |             |  |   | 31           |  |  |       | 9    |      |  |   | 254    |  
|Income (loss) before taxes                               |  |               | 105   |  |          |   | 215   |             |  |   | 207          |  |  |       | (294 | )(a) |  |   | 233    |  
|Financial services, net interest income                  |  |               |      |  |          |   |      |             |  |   | 401          |  |  |       |     |      |  |   | 401    |  
|Total assets                                             |  |               | 2,434 |  |          |   | 1,008 |             |  |   | 16,450       |  |  |       | 227  |      |  |   | 20,119 |  
|Investment in equity method investees and joint ventures |  |               | 13    |  |          |   | 33    |             |  |   | 63           |  |  |       |     |      |  |   | 109    |  
|Capital expenditures                                     |  |               | 146   |  |          |   | 47    |             |  |   | 41           |  |  |       | 30   |      |  |   | 264    |  
|Goodwill                                                 |  |               | 236   |  |          |   |      |             |  |   | 152          |  |  |       |     |      |  |   | 388    |  
|                                                         |  |              
|For the year or at year-end 2003:                        |  |               |       |  |          |   |       |             |  |   |              |  |  |       |      |      |  |   |        |  
|Revenues from external customers                         |  | $             | 2,700 |  |          | $ | 801   |             |  | $ | 1,152        |  |  | $     |     |      |  | $ | 4,653  |  
|Depreciation and amortization                            |  |               | 167   |  |          |   | 64    |             |  |   | 32           |  |  |       | 7    |      |  |   | 270    |  
|Income (loss) before
    taxes(d)                        |  |               | 11    |  |          |   | 67    |             |  |   | 186          |  |  |       | (361 | )(b) |  |   | (97    | )
|Financial services, net interest income                  |  |               |      |  |          |   |      |             |  |   | 377          |  |  |       |     |      |  |   | 377    |  
|Total assets                                             |  |               | 2,339 |  |          |   | 1,035 |             |  |   | 17,661       |  |  |       | 296  |      |  |   | 21,331 |  
|Investment in equity method investees and joint ventures |  |               | 7     |  |          |   | 30    |             |  |   | 52           |  |  |       |     |      |  |   | 89     |  
|Capital expenditures                                     |  |               | 96    |  |          |   | 35    |             |  |   | 33           |  |  |       | 6    |      |  |   | 170    |  
|Goodwill                                                 |  |               | 237   |  |          |   |      |             |  |   | 147          |  |  |       |     |      |  |   | 384    |  
|                                                         |  |              
|For the year or at year-end 2002:                        |  |               |       |  |          |   |       |             |  |   |              |  |  |       |      |      |  |   |        |  
|Revenues from external customers                         |  | $             | 2,587 |  |          | $ | 787   |             |  | $ | 1,144        |  |  | $     |     |      |  | $ | 4,518  |  
|Depreciation and amortization                            |  |               | 155   |  |          |   | 63    |             |  |   | 36           |  |  |       | 6    |      |  |   | 260    |  
|Income (loss) before taxes                               |  |               | 78    |  |          |   | 49    |             |  |   | 171          |  |  |       | (191 | )(c) |  |   | 107    |  
|Financial services, net interest income                  |  |               |      |  |          |   |      |             |  |   | 374          |  |  |       |     |      |  |   | 374    |  
|Total assets                                             |  |               | 2,526 |  |          |   | 1,132 |             |  |   | 18,016       |  |  |       | 288  |      |  |   | 21,962 |  
|Investment in equity method investees and joint ventures |  |               | 3     |  |          |   | 32    |             |  |   | 29           |  |  |       |     |      |  |   | 64     |  
|Capital expenditures                                     |  |               | 70    |  |          |   | 36    |             |  |   | 16           |  |  |       | 6    |      |  |   | 128    |  
|Goodwill                                                 |  |               | 249   |  |          |   |      |             |  |   | 148          |  |  |       |     |      |  |   | 397    |  
|                                                         |  |              






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | 2004 includes other operating (income) expenses of
    $76 million, which consists of $23 million related to
    converting and production facility closures, $4 million
    related to losses on sales of assets, $11 million related
    to consolidation and supply chain initiatives, $1 million
    of income related to the collection of notes previously
    written-off, and $5 million of other, and $34 million
    associated with the repositioning of the mortgage origination
    and servicing activities. Of these amounts, $19 million
    applies to corrugated packaging, $12 million to forest
    products, $34 million to financial services and
    $11 million is unallocated.
|   
|(b) |  | 2003 includes other operating (income) expenses of
    $138 million, which consists of $41 million related to
    converting and production facility closures, $46 million
    related to losses on sales of assets and $51 million
    related to consolidation and supply chain initiatives. Of these
    amounts, $70 million applies to corrugated packaging,
    $24 million to forest products, $5 million to
    financial services and $39 million is unallocated.                                                                                                                                                                                                                             
|   
|(c) |  | 2002 includes other operating income (expenses) of
    $13 million, of which $7 million is related to
    severance and write-off of technology investments, which applies
    to financial services, and $6 million related to the
    repurchase of notes sold with recourse, which applies to
    corrugated packaging.                                                                                                                                                                                                                                                                                                                                                                             

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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) |  | As a result of the consolidation of our administrative functions
    and adoption of a shared services concept, beginning first
    quarter 2004, we changed the way we allocate cost to the
    business segments. The effect of this change was to increase
    segment operating income and to increase unallocated expenses by
    a like amount. Year 2003 amounts have been reclassified to
    reflect this change as follows:

|                     |                          |                   |      |     |                   |   |     |              |  |   |      |     | 
|-------------------- | ------------------------ | ----------------- | ---- | --- | ----------------- | - | --- | ------------ |  | - | ---- | --- | 
|                     |                          | For the Year 2003 |     
|                     |                          |                   |     
|                     |                          | Originally        |      |     |                   |   | As  |             
|                     |                          | Reported          |      |     | Reclassifications |   |     | Reclassified | 
|                     |                          |                   |      |     |                   |   |     |              | 
|                     |                          | (In millions)     |     
|Corrugated packaging |                          | $                 | (14  | )   |                   | $ | 25  |              |  | $ | 11   |    
|Forest products      |                          |                   | 57   |     |                   |   | 10  |              |  |   | 67   |    
|Financial services   |                          |                   | 186  |     |                   |   |    |              |  |   | 186  |    
|                     |                          |                   |      |     |                   |   |     |              | 
|                     | Segment operating income |                   |      | 229 |                   |   |     | 35           |  |   |      | 264 | 
|Unallocated expenses |                          |                   | (326 | )   |                   |   | (35 | )            |  |   | (361 | )  
|                     |                          |                   |      |     |                   |   |     |              | 
|Operating income     |                          | $                 | (97  | )   |                   | $ |    |              |  | $ | (97  | )  
|                     |                          |                   |      |     |                   |   |     |              | 





|                                  |               |               |   |       |      |  |   |       |  |  |   |       | 
|--------------------------------- | ------------- | ------------- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                  |               | For the Year  |  
|                                  |               |               |  
|Geographic Information            |               | 2004          |   |       | 2003 |  |   | 2002  | 
|                                  |               |               |   |       |      |  |   |       | 
|                                  |               | (In millions) |  
|Revenues from external customers: |               |               |   |       |      |  |   |       |  |  |   |      
|                                  | United States |               | $ | 4,572 |      |  | $ | 4,502 |  |  | $ | 4,363 | 
|                                  | Mexico        |               |   | 126   |      |  |   | 112   |  |  |   | 118   | 
|                                  | Canada        |               |   | 52    |      |  |   | 39    |  |  |   | 37    | 
|                                  |               |               |   |       |      |  |   |       | 
|                                  | Total         |               | $ | 4,750 |      |  | $ | 4,653 |  |  | $ | 4,518 | 
|                                  |               |               |   |       |      |  |   |       | 

|                        |               |               |   |       |      |  |   |       |  |  |   |       | 
|----------------------- | ------------- | ------------- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                        |               | At Year-End   |  
|                        |               |               |  
|                        |               | 2004          |   |       | 2003 |  |   | 2002  | 
|                        |               |               |   |       |      |  |   |       | 
|                        |               | (In millions) |  
|Property and Equipment: |               |               |   |       |      |  |   |       |  |  |   |      
|                        | United States |               | $ | 1,810 |      |  | $ | 1,864 |  |  | $ | 2,020 | 
|                        | Mexico        |               |   | 39    |      |  |   | 40    |  |  |   | 46    | 
|                        | Canada        |               |   | 56    |      |  |   | 58    |  |  |   | 60    | 
|                        |               |               |   |       |      |  |   |       | 
|                        | Total         |               | $ | 1,905 |      |  | $ | 1,962 |  |  | $ | 2,126 | 
|                        |               |               |   |       |      |  |   |       | 

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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 11  Summary of Quarterly Results of
Operations (Unaudited)




|                                       |  |                                 |       |     |         |   |       |         |  |   |         |     |  |   |       |    
|-------------------------------------- |  | ------------------------------- | ----- | --- | ------- | - | ----- | ------- |  | - | ------- | --- |  | - | ----- | ---
|                                       |  | First                           |       |     | Second  |   |       | Third   |  |   | Fourth  |    
|                                       |  | Quarter                         |       |     | Quarter |   |       | Quarter |  |   | Quarter |    
|                                       |  |                                 |       |     |         |   |       |         |  |   |         |    
|                                       |  | (In millions, except per share) |      
|2004                                   |  |                                 |       |     |         |   |       |         |  |   |         |     |  |   |       |    
|Total revenues                         |  | $                               | 1,148 |     |         | $ | 1,218 |         |  | $ | 1,194   |     |  | $ | 1,190 |    
|Manufacturing net revenues             |  |                                 | 893   |     |         |   | 940   |         |  |   | 955     |     |  |   | 919   |    
|Manufacturing gross profit             |  |                                 | 88    |     |         |   | 128   |         |  |   | 143     |     |  |   | 111   |    
|Financial services income before taxes |  |                                 | 53    |     |         |   | 59    |         |  |   | 16      |     |  |   | 45    |    
|Income from continuing operations      |  | $                               | 13    | (a) |         | $ | 55    | (b)     |  | $ | 40      | (c) |  | $ | 54    | (d)
|Discontinued operations                |  |                                 |      |     |         |   | 1     |         |  |   | 1       |     |  |   | 1     |    
|Effect of accounting change            |  |                                 |      |     |         |   |      |         |  |   |        |     |  |   |      |    
|                                       |  |                                 |       |     |         |   |       |         |  |   |         |    
|Net income                             |  | $                               | 13    |     |         | $ | 56    |         |  | $ | 41      |     |  | $ | 55    |    
|                                       |  |                                 |       |     |         |   |       |         |  |   |         |    
|Earnings per Share:                    |  |                                 |       |     |         |   |       |         |  |   |         |     |  |   |       |    
|Basic:                                 |  |                                 |       |     |         |   |       |         |  |   |         |     |  |   |       |    
|Income from continuing operations      |  | $                               | 0.24  |     |         | $ | 0.99  |         |  | $ | 0.71    |     |  | $ | 0.96  |    
|Discontinued operations                |  |                                 |      |     |         |   | 0.01  |         |  |   | 0.02    |     |  |   | 0.02  |    
|Effect of accounting change            |  |                                 |      |     |         |   |      |         |  |   |        |     |  |   |      |    
|                                       |  |                                 |       |     |         |   |       |         |  |   |         |    
|Net income                             |  | $                               | 0.24  |     |         | $ | 1.00  |         |  | $ | 0.73    |     |  | $ | 0.98  |    
|                                       |  |                                 |       |     |         |   |       |         |  |   |         |    
|Diluted:                               |  |                                 |       |     |         |   |       |         |  |   |         |     |  |   |       |    
|Income from continuing operations      |  | $                               | 0.24  |     |         | $ | 0.98  |         |  | $ | 0.71    |     |  | $ | 0.94  |    
|Discontinued operations                |  |                                 |      |     |         |   | 0.01  |         |  |   | 0.02    |     |  |   | 0.02  |    
|Effect of accounting change            |  |                                 |      |     |         |   |      |         |  |   |        |     |  |   |      |    
|                                       |  |                                 |       |     |         |   |       |         |  |   |         |    
|Net income                             |  | $                               | 0.24  |     |         | $ | 0.99  |         |  | $ | 0.73    |     |  | $ | 0.96  |    
|                                       |  |                                 |       |     |         |   |       |         |  |   |         |    






|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes a $14 million charge associated with converting
    and production facility closures and a $5 million charge
    related to consolidation and supply chain initiatives.                         
|   
|(b) | Includes a $3 million charge associated with converting and
    production facility closures, a $1 million charge related
    to consolidation and supply chain initiatives, and
    $1 million of other.



|    |                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | Includes a $4 million charge associated with converting and
    production facility closures, a $1 million charge related
    to consolidation and supply chain initiatives, income of
    $1 million related to the collection of notes previously
    written-off, and a $21 million charge associated with the
    repositioning of the mortgage origination and servicing
    activities.



|    |                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | Includes a $6 million charge associated with converting and
    production facility closures, a $4 million charge related
    to consolidation and supply chain initiatives, $4 million
    of other, and a $13 million charge associated with the
    repositioning of the mortgage origination and servicing
    activities.

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TEMPLE-INLAND INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                         |  |                                 |       |       |         |   |       |         |  |   |         |       |  |   |       |      
|---------------------------------------- |  | ------------------------------- | ----- | ----- | ------- | - | ----- | ------- |  | - | ------- | ----- |  | - | ----- | -----
|                                         |  | First                           |       |       | Fourth  |   |       | Second  |  |   | Third   |      
|                                         |  | Quarter                         |       |       | Quarter |   |       | Quarter |  |   | Quarter |      
|                                         |  |                                 |       |       |         |   |       |         |  |   |         |      
|                                         |  | (In millions, except per share) |      
|2003(a)                                  |  |                                 |       |       |         |   |       |         |  |   |         |       |  |   |       |      
|Total revenues                           |  | $                               | 1,135 |       |         | $ | 1,182 |         |  | $ | 1,170   |       |  | $ | 1,166 |      
|Manufacturing net revenues               |  |                                 | 847   |       |         |   | 877   |         |  |   | 878     |       |  |   | 899   |      
|Manufacturing gross profit               |  |                                 | 42    |       |         |   | 64    |         |  |   | 75      |       |  |   | 78    |      
|Financial services income before taxes   |  |                                 | 39    |       |         |   | 42    |         |  |   | 48      |       |  |   | 52    |      
|                                        
|Income (loss) from continuing operations |  | $                               | (17   | ) (b) |         | $ | 155   | (c)     |  | $ | (3      | ) (d) |  | $ | (38   | ) (e)
|Discontinued operations                  |  |                                 |      |       |         |   | 1     |         |  |   |        |       |  |   | (1    | )    
|Effect of accounting change              |  |                                 | (1    | )     |         |   |      |         |  |   |        |       |  |   |      |      
|                                         |  |                                 |       |       |         |   |       |         |  |   |         |      
|Net income (loss)                        |  | $                               | (18   | )     |         | $ | 156   |         |  | $ | (3      | )     |  | $ | (39   | )    
|                                         |  |                                 |       |       |         |   |       |         |  |   |         |      
|Earnings per
    Share(f):               |  |                                 |       |       |         |   |       |         |  |   |         |       |  |   |       |      
|Basic:                                   |  |                                 |       |       |         |   |       |         |  |   |         |       |  |   |       |      
|Income (loss) from continuing operations |  | $                               | (0.31 | )     |         | $ | 2.86  |         |  | $ | (0.06   | )     |  | $ | (0.70 | )    
|Discontinued operations                  |  |                                 |      |       |         |   | 0.01  |         |  |   |        |       |  |   | (0.01 | )    
|Effect of accounting change              |  |                                 | (0.01 | )     |         |   |      |         |  |   |        |       |  |   |      |      
|                                         |  |                                 |       |       |         |   |       |         |  |   |         |      
|Net income (loss)                        |  | $                               | (0.32 | )     |         | $ | 2.87  |         |  | $ | (0.06   | )     |  | $ | (0.71 | )    
|                                         |  |                                 |       |       |         |   |       |         |  |   |         |      
|Diluted:                                 |  |                                 |       |       |         |   |       |         |  |   |         |       |  |   |       |      
|Income (loss) from continuing operations |  | $                               | (0.31 | )     |         | $ | 2.86  |         |  | $ | (0.06   | )     |  | $ | (0.70 | )    
|Discontinued operations                  |  |                                 |      |       |         |   | 0.01  |         |  |   |        |       |  |   | (0.01 | )    
|Effect of accounting change              |  |                                 | (0.01 | )     |         |   |      |         |  |   |        |       |  |   |      |      
|                                         |  |                                 |       |       |         |   |       |         |  |   |         |      
|Net income (loss)                        |  | $                               | (0.32 | )     |         | $ | 2.87  |         |  | $ | (0.06   | )     |  | $ | (0.71 | )    
|                                         |  |                                 |       |       |         |   |       |         |  |   |         |      






|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | 2003 includes 53 weeks.                                                                                                                                                        
|   
|(b) | Includes a $3 million charge associated with the
    consolidation and supply chain initiatives and $6 million
    associated with production and converting facility closures.



|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | Includes a $23 million charge associated with the
    consolidation and supply chain initiatives, $1 million
    associated with production and converting facility closures, and
    before tax gain of $1 million related to other, and a
    one-time tax benefit of $165 million.



|    |                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | Includes a $13 million charge associated with the
    consolidation and supply chain initiatives and $3 million
    associated with production and converting facility closures and
    an $8 million charge associated with early redemption and
    refinancing of $150 million of 8.25% debentures.



|    |                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(e) | Includes a $12 million charge associated with the
    consolidation and supply chain initiatives, $31 million
    associated with production and converting facility closures,
    $42 million related to the sale of non-strategic assets,
    and $5 million related to other.
|   
|(f) | Earnings per share per quarter does not equal earnings per share
    for the year due to the use of average shares outstanding to
    compute these amounts.                                                                                                                    

Note 12  Subsequent Events




72



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##### Table of Contents






PARENT COMPANY (TEMPLE-INLAND INC.)





SUMMARIZED BALANCE SHEETS


|                                           |                                                                   |                                    |       |        |       |   |       |        |       | 
|------------------------------------------ | ----------------------------------------------------------------- | ---------------------------------- | ----- | ------ | ----- | - | ----- | ------ | ----- | 
|                                           |                                                                   | At Year-End                        |      
|                                           |                                                                   |                                    |      
|                                           |                                                                   | 2004                               |       |        | 2003  |  
|                                           |                                                                   |                                    |       |        |       |  
|                                           |                                                                   | (In millions)                      |      
|ASSETS                                     |                                                                   |                                    |       |        |       |   |       |       
|Current Assets                             |                                                                   |                                    |       |        |       |   |       |       
|                                           | Cash and cash equivalents                                         |                                    | $     | 9      |       |   | $     | 20     |      
|                                           | Trade receivables, less allowances of $16 in 2004 and $14 in 2003 |                                    |       | 404    |       |   |       | 359    |      
|                                           | Inventories:                                                      |                                    |       |        |       |   |       |        |      
|                                           |                                                                   | Work in process and finished goods |       |        | 101   |   |       |        | 83    | 
|                                           |                                                                   | Raw materials and supplies         |       |        | 301   |   |       |        | 247   | 
|                                           |                                                                   |                                    |       |        |       |  
|                                           |                                                                   | Total inventories                  |       |        | 402   |   |       |        | 330   | 
|                                           |                                                                   |                                    |       |        |       |  
|                                           | Prepaid expenses and other                                        |                                    |       | 98     |       |   |       | 69     |      
|                                           |                                                                   |                                    |       |        |       |  
|                                           |                                                                   | Total current assets               |       |        | 913   |   |       |        | 778   | 
|Investment in Financial Services           |                                                                   |                                    | 1,121 |        |       |   | 1,123 |       
|Timber and Timberland                      |                                                                   |                                    | 496   |        |       |   | 497   |       
|Property and Equipment                     |                                                                   |                                    |       |        |       |   |       |       
|                                           | Land and buildings                                                |                                    |       | 589    |       |   |       | 600    |      
|                                           | Machinery and equipment                                           |                                    |       | 3,375  |       |   |       | 3,333  |      
|                                           | Construction in progress                                          |                                    |       | 86     |       |   |       | 59     |      
|                                           | Less allowances for depreciation                                  |                                    |       | (2,312 | )     |   |       | (2,185 | )    
|                                           |                                                                   |                                    |       |        |       |  
|                                           |                                                                   | Total property and equipment       |       |        | 1,738 |   |       |        | 1,807 | 
|Goodwill                                   |                                                                   |                                    | 236   |        |       |   | 237   |       
|Assets Held for Sale                       |                                                                   |                                    | 34    |        |       |   | 50    |       
|Other Assets                               |                                                                   |                                    | 337   |        |       |   | 334   |       
|                                           |                                                                   |                                    |       |        |       |  
|TOTAL ASSETS                               |                                                                   | $                                  | 4,875 |        |       | $ | 4,826 |       
|                                           |                                                                   |                                    |       |        |       |  
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                   |                                    |       |        |       |   |       |       
|Current Liabilities                        |                                                                   |                                    |       |        |       |   |       |       
|                                           | Accounts payable                                                  |                                    | $     | 220    |       |   | $     | 218    |      
|                                           | Accrued employee compensation and benefits                        |                                    |       | 93     |       |   |       | 72     |      
|                                           | Accrued interest                                                  |                                    |       | 24     |       |   |       | 27     |      
|                                           | Accrued property taxes                                            |                                    |       | 21     |       |   |       | 23     |      
|                                           | Other accrued expenses                                            |                                    |       | 145    |       |   |       | 141    |      
|                                           | Liabilities of discontinued operations                            |                                    |       | 7      |       |   |       | 22     |      
|                                           | Current portion of long-term debt                                 |                                    |       | 3      |       |   |       | 4      |      
|                                           |                                                                   |                                    |       |        |       |  
|                                           |                                                                   | Total current liabilities          |       |        | 513   |   |       |        | 507   | 
|Long-Term Debt                             |                                                                   |                                    | 1,485 |        |       |   | 1,611 |       
|Deferred Income Taxes                      |                                                                   |                                    | 126   |        |       |   | 25    |       
|Pension Liability                          |                                                                   |                                    | 289   |        |       |   | 250   |       
|Postretirement Benefits                    |                                                                   |                                    | 143   |        |       |   | 146   |       
|Other Long-Term Liabilities                |                                                                   |                                    | 227   |        |       |   | 319   |       
|                                           |                                                                   |                                    |       |        |       |  
|                                           |                                                                   | Total liabilities                  |       |        | 2,783 |   |       |        | 2,858 | 
|Shareholders Equity                       |                                                                   |                                    | 2,092 |        |       |   | 1,968 |       
|                                           |                                                                   |                                    |       |        |       |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                                                                   | $                                  | 4,875 |        |       | $ | 4,826 |       
|                                           |                                                                   |                                    |       |        |       |  



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PARENT COMPANY (TEMPLE-INLAND INC.)





SUMMARIZED STATEMENTS OF INCOME


|                                                      |                                      |               |       |       |      |   |       |       |   |   |       |       |  
|----------------------------------------------------- | ------------------------------------ | ------------- | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                                                      |                                      | For the Year  |      
|                                                      |                                      |               |      
|                                                      |                                      | 2004          |       |       | 2003 |   |       | 2002  |  
|                                                      |                                      |               |       |       |      |   |       |       |  
|                                                      |                                      | (In millions) |      
|NET REVENUES                                          |                                      | $             | 3,707 |       |      | $ | 3,501 |       |   | $ | 3,374 |      
|                                                      |                                      |               |       |       |      |   |       |       |  
|COSTS AND EXPENSES                                    |                                      |               |       |       |      |   |       |       |   |   |       |      
|                                                      | Cost of sales                        |               |       | 3,237 |      |   |       | 3,242 |   |   |       | 3,022 |  
|                                                      | Selling                              |               |       | 104   |      |   |       | 116   |   |   |       | 113   |  
|                                                      | General and administrative           |               |       | 167   |      |   |       | 151   |   |   |       | 146   |  
|                                                      | Other operating (income) expense     |               |       | 14    |      |   |       | 127   |   |   |       | 6     |  
|                                                      |                                      |               |       |       |      |   |       |       |  
|                                                      |                                      |               | 3,522 |       |      |   | 3,636 |       |   |   | 3,287 |      
|                                                      |                                      |               |       |       |      |   |       |       |  
|                                                      |                                      |               | 185   |       |      |   | (135  | )     |   |   | 87    |      
|FINANCIAL SERVICES EARNINGS                           |                                      |               | 173   |       |      |   | 181   |       |   |   | 164   |      
|                                                      |                                      |               |       |       |      |   |       |       |  
|OPERATING INCOME                                      |                                      |               | 358   |       |      |   | 46    |       |   |   | 251   |      
|                                                      | Interest expense                     |               |       | (125  | )    |   |       | (135  | ) |   |       | (133  | )
|                                                      | Other non-operating income (expense) |               |       |      |      |   |       | (8    | ) |   |       | (11   | )
|                                                      |                                      |               |       |       |      |   |       |       |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES |                                      |               | 233   |       |      |   | (97   | )     |   |   | 107   |      
|                                                      | Income tax (expense) benefit         |               |       | (71   | )    |   |       | 194   |   |   |       | (42   | )
|                                                      |                                      |               |       |       |      |   |       |       |  
|INCOME FROM CONTINUING OPERATIONS                     |                                      |               | 162   |       |      |   | 97    |       |   |   | 65    |      
|                                                      | Discontinued operations              |               |       | 3     |      |   |       |      |   |   |       | (1    | )
|                                                      |                                      |               |       |       |      |   |       |       |  
|INCOME BEFORE ACCOUNTING CHANGE                       |                                      |               | 165   |       |      |   | 97    |       |   |   | 64    |      
|                                                      | Effect of accounting change          |               |       |      |      |   |       | (1    | ) |   |       | (11   | )
|                                                      |                                      |               |       |       |      |   |       |       |  
|NET INCOME                                            |                                      | $             | 165   |       |      | $ | 96    |       |   | $ | 53    |      
|                                                      |                                      |               |       |       |      |   |       |       |  



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PARENT COMPANY (TEMPLE-INLAND INC.)





SUMMARIZED STATEMENTS OF CASH FLOWS


|                                                     |                                                        |               |      |      |      |   |      |      |   |   |      |      |  
|---------------------------------------------------- | ------------------------------------------------------ | ------------- | ---- | ---- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                                                     |                                                        | For the Year  |     
|                                                     |                                                        |               |     
|                                                     |                                                        | 2004          |      |      | 2003 |   |      | 2002 |  
|                                                     |                                                        |               |      |      |      |   |      |      |  
|                                                     |                                                        | (In millions) |     
|CASH PROVIDED BY (USED FOR) OPERATIONS               |                                                        |               |      |      |      |   |      |      |   |   |      |     
|Net income                                           |                                                        | $             | 165  |      |      | $ | 96   |      |   | $ | 53   |     
|Adjustments:                                         |                                                        |               |      |      |      |   |      |      |   |   |      |     
|                                                     | Depreciation and amortization                          |               |      | 223  |      |   |      | 238  |   |   |      | 224  |  
|                                                     | Non-cash stock based compensation                      |               |      | 35   |      |   |      | 30   |   |   |      | 13   |  
|                                                     | Non-cash pension and postretirement expense            |               |      | 60   |      |   |      | 55   |   |   |      | 24   |  
|                                                     | Cash contribution to pension and postretirement plans  |               |      | (30  | )    |   |      | (16  | ) |   |      | (17  | )
|                                                     | Deferred income taxes (benefit)                        |               |      | 83   |      |   |      | (148 | ) |   |      | 34   |  
|                                                     | Net earnings of financial services                     |               |      | (109 | )    |   |      | (116 | ) |   |      | (162 | )
|                                                     | Dividends from financial services                      |               |      | 105  |      |   |      | 166  |   |   |      | 125  |  
|                                                     | Earnings of joint ventures                             |               |      | (28  | )    |   |      | (6   | ) |   |      |     |  
|                                                     | Dividends from joint ventures                          |               |      | 20   |      |   |      | 8    |   |   |      | 11   |  
|                                                     | Other non-cash charges (credits)                       |               |      | 26   |      |   |      | 71   |   |   |      | 17   |  
|                                                     | Net assets of discontinued operations                  |               |      | (24  | )    |   |      | (5   | ) |   |      | 15   |  
|                                                     | Cumulative effect of accounting change                 |               |      |     |      |   |      | 1    |   |   |      | 11   |  
|                                                     | Other                                                  |               |      | 18   |      |   |      | 17   |   |   |      | 17   |  
|Changes in:                                          |                                                        |               |      |      |      |   |      |      |   |   |      |     
|                                                     | Receivables                                            |               |      | (45  | )    |   |      | (8   | ) |   |      | 41   |  
|                                                     | Inventories                                            |               |      | (77  | )    |   |      | 12   |   |   |      | (2   | )
|                                                     | Prepaid expenses and other                             |               |      | (6   | )    |   |      | (9   | ) |   |      | 24   |  
|                                                     | Accounts payable and accrued expenses                  |               |      |     |      |   |      | 30   |   |   |      | (41  | )
|                                                     |                                                        |               |      |      |      |   |      |      |  
|                                                     |                                                        |               | 416  |      |      |   | 416  |      |   |   | 387  |     
|                                                     |                                                        |               |      |      |      |   |      |      |  
|CASH PROVIDED BY (USED FOR) INVESTING                |                                                        |               |      |      |      |   |      |      |   |   |      |     
|                                                     | Capital expenditures                                   |               |      | (223 | )    |   |      | (137 | ) |   |      | (112 | )
|                                                     | Sales of non-strategic assets and operations           |               |      | 66   |      |   |      | 69   |   |   |      | 39   |  
|                                                     | Acquisitions, net of cash acquired, and joint ventures |               |      | (5   | )    |   |      | (9   | ) |   |      | (625 | )
|                                                     |                                                        |               |      |      |      |   |      |      |  
|                                                     |                                                        |               | (162 | )    |      |   | (77  | )    |   |   | (698 | )   
|                                                     |                                                        |               |      |      |      |   |      |      |  
|CASH PROVIDED BY (USED FOR) FINANCING                |                                                        |               |      |      |      |   |      |      |   |   |      |     
|                                                     | Payments of debt                                       |               |      | (148 | )    |   |      | (282 | ) |   |      | (362 | )
|                                                     | Cash dividends paid to shareholders                    |               |      | (136 | )    |   |      | (73  | ) |   |      | (67  | )
|                                                     | Sale of common stock in 2002 and exercise of options   |               |      | 62   |      |   |      | 13   |   |   |      | 219  |  
|                                                     | Sale of Upper
    DECSSM                               |               |      |     |      |   |      |     |   |   |      | 345  |  
|                                                     | Sale of senior notes                                   |               |      |     |      |   |      |     |   |   |      | 496  |  
|                                                     | Bridge financing facility                              |               |      |     |      |   |      |     |   |   |      | 880  |  
|                                                     | Payment of bridge financing facility                   |               |      |     |      |   |      |     |   |   |      | (880 | )
|                                                     | Payment of assumed Gaylord bank debt                   |               |      |     |      |   |      |     |   |   |      | (285 | )
|                                                     | Other additions to debt                                |               |      | 21   |      |   |      | 6    |   |   |      | 4    |  
|                                                     | Payments of other long-term liabilities                |               |      | (64  | )    |   |      |     |   |   |      |     |  
|                                                     | Other                                                  |               |      |     |      |   |      |     |   |   |      | (25  | )
|                                                     |                                                        |               |      |      |      |   |      |      |  
|                                                     |                                                        |               | (265 | )    |      |   | (336 | )    |   |   | 325  |     
|                                                     |                                                        |               |      |      |      |   |      |      |  
|Net increase (decrease) in cash and cash equivalents |                                                        |               | (11  | )    |      |   | 3    |      |   |   | 14   |     
|Cash and cash equivalents at beginning of year       |                                                        |               | 20   |      |      |   | 17   |      |   |   | 3    |     
|                                                     |                                                        |               |      |      |      |   |      |      |  
|Cash and cash equivalents at end of year             |                                                        | $             | 9    |      |      | $ | 20   |      |   | $ | 17   |     
|                                                     |                                                        |               |      |      |      |   |      |      |  



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PARENT COMPANY (TEMPLE-INLAND INC.)





NOTES TO SUMMARIZED FINANCIAL STATEMENTS


Note A  Summary of Significant Accounting
Policies




| |                      
| | ---------------------
| | Basis of Presentation





| |            
| | -----------
| | Inventories







|          |  |                                 |     |  |                       |   |    |                   |  |   |               |  |  |          |     |  |               |   |      |  |  |   |      | 
|--------- |  | ------------------------------- | --- |  | --------------------- | - | -- | ----------------- |  | - | ------------- |  |  | -------- | --- |  | ------------- | - | ---- |  |  | - | ---- | 
|          |  | Corrugated Packaging            |     |  | Income From           |   |    |                  
|          |  | Segment Operating Income        |     |  | Continuing Operations |   |    | Per Diluted Share | 
|          |  |                                 |     |  |                       |   |    |                   | 
|          |  | As                              |     |  | Retrospective         |   |    | As                |  |   | Retrospective |  |  | As       |     |  | Retrospective |  
|          |  | Reported                        |     |  | Application           |   |    | Reported          |  |   | Application   |  |  | Reported |     |  | Application   |  
|          |  |                                 |     |  |                       |   |    |                   |  |   |               |  |  |          |     |  |               |  
|          |  | (In millions, except per share) |    
|Year 2004 |  | $                               | 105 |  |                       | $ | 96 |                   |  | $ | 162           |  |  | $        | 157 |  |               | $ | 2.87 |  |  | $ | 2.78 | 
|Year 2003 |  |                                 | 11  |  |                       |   | 18 |                   |  |   | 97            |  |  |          | 102 |  |               |   | 1.78 |  |  |   | 1.87 | 
|Year 2002 |  |                                 | 78  |  |                       |   | 85 |                   |  |   | 65            |  |  |          | 69  |  |               |   | 1.25 |  |  |   | 1.33 | 



| |                       
| | ----------------------
| | Property and Equipment



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PARENT COMPANY (TEMPLE-INLAND INC.)


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)




|                           |                            |              |                 |                 |             |   |       |     | 
|-------------------------- | -------------------------- | ------------ | --------------- | --------------- | ----------- | - | ----- | --- | 
|                           |                            |              |                 | Carrying        |            
|                           |                            |              |                 | Value           |            
|                           |                            | Estimated    |                 |                 | At Year-End |  
|Classification             |                            | Useful Lives |                 |                 | 2004        |  
|                           |                            |              |                 |                 |             |  
|                           |                            |              |                 | (In millions)   |            
|Land                       |                            |              |                 |                 |             | $ | 64    |    
|Buildings                  |                            |              | 15 to 40  years |                 |             |   | 304   |    
|Machinery and equipment:   |                            |              |                 |                 |             |   |       |    
|                           | Paper machines             |              |                 | 22 years        |             |   |       | 388 | 
|                           | Mill equipment             |              |                 | 5 to 25 years   |             |   |       | 85  | 
|                           | Converting equipment       |              |                 | 5 to 15 years   |             |   |       | 766 | 
|                           | Other production equipment |              |                 | 10 to 25  years |             |   |       | 92  | 
|Transportation equipment   |                            |              | 3 to 15 years   |                 |             |   | 5     |    
|Office and other equipment |                            |              | 2 to 10 years   |                 |             |   | 34    |    
|                           |                            |              |                 |                 |             |  
|                           |                            |              |                 |                 |             | $ | 1,738 |    
|                           |                            |              |                 |                 |             |  





| |                      
| | ---------------------
| | Timber and Timberland









| |                          
| | -------------------------
| | Environmental Liabilities



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PARENT COMPANY (TEMPLE-INLAND INC.)


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)








| |        
| | -------
| | Revenue





Note B  Long-Term Debt




|                                                                                                                              |  |               |       |   |      |   |       |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----- | - | ---- | - | ----- | -
|                                                                                                                              |  | At Year-End   |      
|                                                                                                                              |  |               |      
|                                                                                                                              |  | 2004          |       |   | 2003 |  
|                                                                                                                              |  |               |       |   |      |  
|                                                                                                                              |  | (In millions) |      
|Borrowings under bank credit agreements  average
    interest rate of 4.38% in 2004 and 2.73% in 2003                        |  | $             | 14    |   |      | $ |      |  
|Accounts receivable securitization facility, due
    2007  average interest rate of 1.35% in 2004 and
    1.20% in 2003      |  |               | 16    |   |      |   | 1     |  
|8.13% to 8.38% Notes, payable in 2006                                                                                         |  |               | 100   |   |      |   | 100   |  
|6.42% Senior notes associated with Upper
    DECSSM,
    payable in 2007  interest rate reset in February 2005
    at 5.003% |  |               | 345   |   |      |   | 345   |  
|6.75% Notes, payable in 2009                                                                                                  |  |               | 300   |   |      |   | 300   |  
|7.88% Senior notes, payable in 2012                                                                                           |  |               | 497   |   |      |   | 497   |  
|7.25% Notes, payable in 2004                                                                                                  |  |               |      |   |      |   | 100   |  
|Senior subordinated and senior notes, payable 2007 through
    2008  interest rates ranging from 9.38% to 9.88%              |  |               |      |   |      |   | 44    |  
|Revenue bonds, payable 2007 through 2024  average
    interest rate of 5.40% in 2004 and 3.80% in 2003                       |  |               | 119   |   |      |   | 121   |  
|Other indebtedness due through 2011  average interest
    rate of 7.12% in 2004 and 8.17% in 2003                            |  |               | 97    |   |      |   | 107   |  
|                                                                                                                              |  |               |       |   |      |  
|                                                                                                                              |  |               | 1,488 |   |      |   | 1,615 |  
|Less current portion of long-term debt                                                                                        |  |               | (3    | ) |      |   | (4    | )
|                                                                                                                              |  |               |       |   |      |  
|                                                                                                                              |  | $             | 1,485 |   |      | $ | 1,611 |  
|                                                                                                                              |  |               |       |   |      |  





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PARENT COMPANY (TEMPLE-INLAND INC.)


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)












Note C  Joint Ventures






|                                  |                                     |             |     |     |      |   |     |     |  
|--------------------------------- | ----------------------------------- | ----------- | --- | --- | ---- | - | --- | --- | -
|                                  |                                     | At Year-End |    
|                                  |                                     |             |    
|                                  |                                     | 2004        |     |     | 2003 |  
|                                  |                                     |             |     |     |      |  
|                                  |                                     | (In         |    
|                                  |                                     | millions)   |    
|Current assets                    |                                     | $           | 60  |     |      | $ | 46  |    
|Total assets                      |                                     |             | 352 |     |      |   | 375 |    
|Current
    liabilities(a)        |                                     |             | 87  |     |      |   | 27  |    
|Long-term debt                    |                                     |             | 108 |     |      |   | 205 |    
|Equity                            |                                     |             | 158 |     |      |   | 143 |    
|Our investment in joint ventures: |                                     |             |     |     |      |   |     |    
|                                  | 50% share in joint ventures equity |             | $   | 79  |      |   | $   | 72  |  
|                                  | Unamortized basis difference        |             |     | (37 | )    |   |     | (40 | )
|                                  | Other                               |             |     | 3   |      |   |     | 3   |  
|                                  |                                     |             |     |     |      |  
|                                  | Investment in joint ventures        |             | $   | 45  |      |   | $   | 35  |  
|                                  |                                     |             |     |     |      |  






|    |  |                                                                  
|--- |  | -----------------------------------------------------------------
|(a) |  | Includes in 2004 $56.2 million of current maturities of
    debt.

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PARENT COMPANY (TEMPLE-INLAND INC.)


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)


|                               |                                             |               |     |    |      |   |     |      |  |   |     |    |  
|------------------------------ | ------------------------------------------- | ------------- | --- | -- | ---- | - | --- | ---- |  | - | --- | -- | -
|                               |                                             | For the Year  |    
|                               |                                             |               |    
|                               |                                             | 2004          |     |    | 2003 |   |     | 2002 | 
|                               |                                             |               |     |    |      |   |     |      | 
|                               |                                             | (In millions) |    
|Net revenues                   |                                             | $             | 325 |    |      | $ | 242 |      |  | $ | 207 |   
|Operating income               |                                             |               | 61  |    |      |   | 18  |      |  |   | 1   |   
|Earnings (loss)                |                                             |               | 51  |    |      |   | 7   |      |  |   | (11 | ) 
|Our equity in earnings (loss): |                                             |               |     |    |      |   |     |      |  |   |     |   
|                               | 50% share of earnings (loss)                |               | $   | 26 |      |   | $   | 4    |  |   | $   | (6 | )
|                               | Amortization of basis difference            |               |     | 2  |      |   |     | 2    |  |   |     | 6  |  
|                               |                                             |               |     |    |      |   |     |      | 
|                               | Equity in earnings (loss) of joint ventures |               | $   | 28 |      |   | $   | 6    |  |   | $   |   |  
|                               |                                             |               |     |    |      |   |     |      | 







Note D  Acquisitions




sm




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PARENT COMPANY (TEMPLE-INLAND INC.)


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)




|                    |                                                      |                   |              |     |     |       | 
|------------------- | ---------------------------------------------------- | ----------------- | ------------ | --- | --- | ----- | 
|Assets acquired     |                                                      |                   |              |    
|                    | Current assets                                       |                   | $            | 190 |    
|                    | Property and equipment                               |                   |              | 559 |    
|                    | Assets of discontinued operations                    |                   |              | 142 |    
|                    | Other assets                                         |                   |              | 27  |    
|                    | Goodwill                                             |                   |              | 201 |    
|                    |                                                      |                   |             
|                    |                                                      |                   | Total Assets |     | $   | 1,119 | 
|                    |                                                      |                   |             
|Liabilities assumed |                                                      |                   |              |    
|                    | Current liabilities                                  |                   | $            | 135 |    
|                    | Liabilities of discontinued operations               |                   |              | 18  |    
|                    | Bank debt                                            |                   |              | 285 |    
|                    | Senior and subordinated notes and other secured debt |                   |              | 68  |    
|                    | Other long-term liabilities                          |                   |              | 14  |    
|                    |                                                      |                   |             
|                    |                                                      | Total Liabilities |              | $   | 520 |      
|                    |                                                      |                   |             
|Net assets acquired |                                                      | $                 | 599          |    
|                    |                                                      |                   |             







Note E  Assets Held for Sale




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PARENT COMPANY (TEMPLE-INLAND INC.)


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)




|                            |  |             |    |  |      |   |    | 
|--------------------------- |  | ----------- | -- |  | ---- | - | -- | 
|                            |  | At Year-End |   
|                            |  |             |   
|                            |  | 2004        |    |  | 2003 |  
|                            |  |             |    |  |      |  
|                            |  | (In         |   
|                            |  | millions)   |   
|Working capital             |  | $           | 2  |  |      | $ | 6  | 
|Property and equipment      |  |             | 13 |  |      |   | 17 | 
|Other long-term obligations |  |             |   |  |      |   | 18 | 





Note F  Other Operating (Income) Expense


|                                                                                             |  |               |     |   |      |   |     |      |  |   |   | 
|-------------------------------------------------------------------------------------------- |  | ------------- | --- | - | ---- | - | --- | ---- |  | - | - | 
|                                                                                             |  | For the Year  |    
|                                                                                             |  |               |    
|                                                                                             |  | 2004          |     |   | 2003 |   |     | 2002 | 
|                                                                                             |  |               |     |   |      |   |     |      | 
|                                                                                             |  | (In millions) |    
|Expenses associated with consolidation of administrative
    functions                       |  | $             | 11  |   |      | $ | 48  |      |  | $ |  | 
|Loss on closure of production and converting facilities and sale
    of non-strategic assets |  |               | 27  |   |      |   | 83  |      |  |   |  | 
|Equity in earnings of joint ventures                                                         |  |               | (28 | ) |      |   | (6  | )    |  |   |  | 
|Collection of notes that were previously written-off                                         |  |               | (1  | ) |      |   |    |      |  |   |  | 
|Other                                                                                        |  |               | 5   |   |      |   | 2   |      |  |   | 6 | 
|                                                                                             |  |               |     |   |      |   |     |      | 
|                                                                                             |  | $             | 14  |   |      | $ | 127 |      |  | $ | 6 | 
|                                                                                             |  |               |     |   |      |   |     |      | 







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NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)






|                                  |       |               |    |    |           |   |      |          |  |        |      |     |   |   |    |    | 
|--------------------------------- | ----- | ------------- | -- | -- | --------- | - | ---- | -------- |  | ------ | ---- | --- | - | - | -- | -- | 
|                                  |       | Beginning     |    |    |           |   | Cash |          |  | End of |     
|                                  |       | of Year       |    |    | Additions |   |      | Payments |  |        | Year |    
|                                  |       |               |    |    |           |   |      |          |  |        |      |    
|                                  |       | (In millions) |   
|Year 2004                         |       |               |    |    |           |   |      |          |  |        |      |     |   |   |    |   
|Involuntary employee terminations |       | $             | 9  |    |           | $ | 9    |          |  | $      | (16  | )   |   | $ | 2  |   
|Contract termination penalties    |       |               | 6  |    |           |   |     |          |  |        |     |     |   |   | 6  |   
|Environmental compliance          |       |               | 11 |    |           |   |     |          |  |        | (3   | )   |   |   | 8  |   
|Demolition                        |       |               | 11 |    |           |   |     |          |  |        | (3   | )   |   |   | 8  |   
|                                  |       |               |    |    |           |   |      |          |  |        |      |    
|                                  | Total |               | $  | 37 |           |   | $    | 9        |  |        | $    | (22 | ) |   | $  | 24 | 
|                                  |       |               |    |    |           |   |      |          |  |        |      |    
|Year 2003                         |       |               |    |    |           |   |      |          |  |        |      |     |   |   |    |   
|Involuntary employee terminations |       | $             | 1  |    |           | $ | 17   |          |  | $      | (9   | )   |   | $ | 9  |   
|Contract termination penalties    |       |               | 6  |    |           |   |     |          |  |        |     |     |   |   | 6  |   
|Environmental compliance          |       |               | 13 |    |           |   |     |          |  |        | (2   | )   |   |   | 11 |   
|Demolition                        |       |               | 13 |    |           |   |     |          |  |        | (2   | )   |   |   | 11 |   
|                                  |       |               |    |    |           |   |      |          |  |        |      |    
|                                  | Total |               | $  | 33 |           |   | $    | 17       |  |        | $    | (13 | ) |   | $  | 37 | 
|                                  |       |               |    |    |           |   |      |          |  |        |      |    

Note G  Commitments and Contingencies






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PARENT COMPANY (TEMPLE-INLAND INC.)


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)












Note H  Derivative Instruments and Variable
Interest Entities










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PARENT COMPANY (TEMPLE-INLAND INC.)


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)




Note I  Other Information




85



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FINANCIAL SERVICES





SUMMARIZED BALANCE SHEETS


|                                                                       |  |               |        |  |      |   |        | 
|---------------------------------------------------------------------- |  | ------------- | ------ |  | ---- | - | ------ | 
|                                                                       |  | At Year-End   |       
|                                                                       |  |               |       
|                                                                       |  | 2004          |        |  | 2003 |  
|                                                                       |  |               |        |  |      |  
|                                                                       |  | (In millions) |       
|ASSETS                                                                
|                                                                      
|Cash and cash equivalents                                              |  | $             | 363    |  |      | $ | 379    | 
|Loans held for sale                                                    |  |               | 510    |  |      |   | 551    | 
|Loans, net of allowance for losses of $85 in 2004 and $111 in
    2003 |  |               | 9,618  |  |      |   | 9,026  | 
|Securities available-for-sale                                          |  |               | 1,118  |  |      |   | 1,374  | 
|Securities held-to-maturity                                            |  |               | 3,864  |  |      |   | 5,267  | 
|Real estate                                                            |  |               | 253    |  |      |   | 295    | 
|Premises and equipment, net                                            |  |               | 167    |  |      |   | 155    | 
|Accounts, notes and accrued interest receivable                        |  |               | 170    |  |      |   | 138    | 
|Goodwill                                                               |  |               | 152    |  |      |   | 147    | 
|Mortgage servicing rights                                              |  |               |       |  |      |   | 89     | 
|Other assets                                                           |  |               | 235    |  |      |   | 240    | 
|                                                                       |  |               |        |  |      |  
|TOTAL ASSETS                                                           |  | $             | 16,450 |  |      | $ | 17,661 | 
|                                                                       |  |               |        |  |      |  
|                                                                      
|LIABILITIES                                                           
|Deposits                                                               |  | $             | 8,964  |  |      | $ | 8,698  | 
|Federal Home Loan Bank borrowings                                      |  |               | 4,717  |  |      |   | 4,992  | 
|Securities sold under repurchase agreements                            |  |               | 787    |  |      |   | 1,327  | 
|Obligations to settle trade date securities                            |  |               |       |  |      |   | 567    | 
|Other liabilities                                                      |  |               | 350    |  |      |   | 410    | 
|Other borrowings                                                       |  |               | 206    |  |      |   | 239    | 
|Preferred stock issued by subsidiaries                                 |  |               | 305    |  |      |   | 305    | 
|                                                                       |  |               |        |  |      |  
|TOTAL LIABILITIES                                                      |  |               | 15,329 |  |      |   | 16,538 | 
|                                                                       |  |               |        |  |      |  
|SHAREHOLDERS EQUITY                                                   |  |               | 1,121  |  |      |   | 1,123  | 
|                                                                       |  |               |        |  |      |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                             |  | $             | 16,450 |  |      | $ | 17,661 | 
|                                                                       |  |               |        |  |      |  



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FINANCIAL SERVICES





SUMMARIZED STATEMENTS OF INCOME


|                                                    |                                                    |                           |     |     |      |   |     |      |     |   |     |     |     | 
|--------------------------------------------------- | -------------------------------------------------- | ------------------------- | --- | --- | ---- | - | --- | ---- | --- | - | --- | --- | --- | 
|                                                    |                                                    | For the Year              |    
|                                                    |                                                    |                           |    
|                                                    |                                                    | 2004                      |     |     | 2003 |   |     | 2002 |    
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|                                                    |                                                    | (In millions)             |    
|Interest Income                                     |                                                    |                           |     |     |      |   |     |      |     |   |     |    
|                                                    | Loans and loans held for sale                      |                           | $   | 493 |      |   | $   | 507  |     |   | $   | 574 |    
|                                                    | Securities available-for-sale                      |                           |     | 57  |      |   |     | 69   |     |   |     | 105 |    
|                                                    | Securities held-to-maturity                        |                           |     | 165 |      |   |     | 149  |     |   |     | 92  |    
|                                                    | Other earning assets                               |                           |     | 3   |      |   |     | 3    |     |   |     | 3   |    
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|                                                    |                                                    | Total interest income     |     |     | 718  |   |     |      | 728 |   |     |     | 774 | 
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|Interest Expense                                    |                                                    |                           |     |     |      |   |     |      |     |   |     |    
|                                                    | Deposits                                           |                           |     | 142 |      |   |     | 182  |     |   |     | 239 |    
|                                                    | Borrowed funds                                     |                           |     | 175 |      |   |     | 169  |     |   |     | 161 |    
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|                                                    |                                                    | Total interest expense    |     |     | 317  |   |     |      | 351 |   |     |     | 400 | 
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|Net Interest Income                                 |                                                    |                           | 401 |     |      |   | 377 |      |     |   | 374 |    
|                                                    | (Provision) credit for loan losses                 |                           |     | 12  |      |   |     | (43  | )   |   |     | (40 | )  
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|Net Interest Income After Provision For Loan Losses |                                                    |                           | 413 |     |      |   | 334 |      |     |   | 334 |    
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|Noninterest Income                                  |                                                    |                           |     |     |      |   |     |      |     |   |     |    
|                                                    | Loan servicing fees                                |                           |     | 31  |      |   |     | 32   |     |   |     | 42  |    
|                                                    | Amortization and impairment of servicing rights    |                           |     | (40 | )    |   |     | (59  | )   |   |     | (59 | )  
|                                                    | Loan origination and sale of loans                 |                           |     | 140 |      |   |     | 268  |     |   |     | 210 |    
|                                                    | Real estate operations                             |                           |     | 59  |      |   |     | 55   |     |   |     | 40  |    
|                                                    | Insurance commissions and fees                     |                           |     | 47  |      |   |     | 43   |     |   |     | 51  |    
|                                                    | Service charges on deposits                        |                           |     | 42  |      |   |     | 35   |     |   |     | 30  |    
|                                                    | Operating lease income                             |                           |     | 10  |      |   |     | 11   |     |   |     | 10  |    
|                                                    | Other                                              |                           |     | 36  |      |   |     | 39   |     |   |     | 46  |    
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|                                                    |                                                    | Total noninterest income  |     |     | 325  |   |     |      | 424 |   |     |     | 370 | 
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|Noninterest Expense                                 |                                                    |                           |     |     |      |   |     |      |     |   |     |    
|                                                    | Compensation and benefits                          |                           |     | 269 |      |   |     | 326  |     |   |     | 301 |    
|                                                    | Loan servicing and origination                     |                           |     | 13  |      |   |     | 15   |     |   |     | 40  |    
|                                                    | Real estate operations, other than compensation    |                           |     | 31  |      |   |     | 41   |     |   |     | 32  |    
|                                                    | Insurance operations, other than compensation      |                           |     | 6   |      |   |     | 6    |     |   |     | 7   |    
|                                                    | Occupancy                                          |                           |     | 31  |      |   |     | 32   |     |   |     | 33  |    
|                                                    | Data processing                                    |                           |     | 19  |      |   |     | 27   |     |   |     | 18  |    
|                                                    | Charges related to asset impairments and severance |                           |     | 34  |      |   |     | 5    |     |   |     | 7   |    
|                                                    | Other                                              |                           |     | 162 |      |   |     | 125  |     |   |     | 102 |    
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|                                                    |                                                    | Total noninterest expense |     |     | 565  |   |     |      | 577 |   |     |     | 540 | 
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|Income Before Taxes                                 |                                                    |                           | 173 |     |      |   | 181 |      |     |   | 164 |    
|                                                    | Income tax (expense)                               |                           |     | (64 | )    |   |     | (65  | )   |   |     | (2  | )  
|                                                    |                                                    |                           |     |     |      |   |     |      |    
|Net Income                                          |                                                    | $                         | 109 |     |      | $ | 116 |      |     | $ | 162 |    
|                                                    |                                                    |                           |     |     |      |   |     |      |    



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FINANCIAL SERVICES





SUMMARIZED STATEMENTS OF CASH FLOWS


|                                                     |                                                                        |                                                     |      |       |        |   |      |        |         |   |        |        |         |  
|---------------------------------------------------- | ---------------------------------------------------------------------- | --------------------------------------------------- | ---- | ----- | ------ | - | ---- | ------ | ------- | - | ------ | ------ | ------- | -
|                                                     |                                                                        | For the Year                                        |     
|                                                     |                                                                        |                                                     |     
|                                                     |                                                                        | 2004                                                |      |       | 2003   |   |      | 2002   |        
|                                                     |                                                                        |                                                     |      |       |        |   |      |        |        
|                                                     |                                                                        | (In millions)                                       |     
|CASH PROVIDED BY (USED FOR) OPERATIONS               |                                                                        |                                                     |      |       |        |   |      |        |         |   |        |       
|                                                     | Net income                                                             |                                                     | $    | 109   |        |   | $    | 116    |         |   | $      | 162    |        
|                                                     | Adjustments:                                                           |                                                     |      |       |        |   |      |        |         |   |        |        |        
|                                                     |                                                                        | Depreciation                                        |      |       | 23     |   |      |        | 24      |   |        |        | 26      |  
|                                                     |                                                                        | Depreciation of leased assets                       |      |       | 8      |   |      |        | 8       |   |        |        | 10      |  
|                                                     |                                                                        | Amortization and impairment of servicing rights     |      |       | 40     |   |      |        | 59      |   |        |        | 59      |  
|                                                     |                                                                        | Provision for loan losses                           |      |       | (12    | ) |      |        | 43      |   |        |        | 40      |  
|                                                     |                                                                        | Amortization and accretion of financial instruments |      |       | 18     |   |      |        | 23      |   |        |        | 1       |  
|                                                     |                                                                        | Deferred income taxes                               |      |       | (25    | ) |      |        | (7      | ) |        |        | (1      | )
|                                                     | Changes in:                                                            |                                                     |      |       |        |   |      |        |         |   |        |        |        
|                                                     |                                                                        | Loans held for sale, originations                   |      |       | (6,898 | ) |      |        | (12,955 | ) |        |        | (10,799 | )
|                                                     |                                                                        | Loans held for sale, sales                          |      |       | 6,920  |   |      |        | 13,447  |   |        |        | 10,626  |  
|                                                     |                                                                        | Collections on loans serviced for others, net       |      |       | (32    | ) |      |        | (77     | ) |        |        | (70     | )
|                                                     |                                                                        | Other                                               |      |       | (2     | ) |      |        | (21     | ) |        |        | (53     | )
|                                                     |                                                                        |                                                     |      |       |        |   |      |        |        
|                                                     |                                                                        |                                                     | 149  |       |        |   | 660  |        |         |   | 1      |       
|                                                     |                                                                        |                                                     |      |       |        |   |      |        |        
|CASH PROVIDED BY (USED FOR) INVESTING                |                                                                        |                                                     |      |       |        |   |      |        |         |   |        |       
|                                                     | Purchases of securities available-for-sale                             |                                                     |      | (34   | )      |   |      | (41    | )       |   |        | (22    | )      
|                                                     | Principal payments and maturities of securities
    available-for-sale |                                                     |      | 285   |        |   |      | 586    |         |   |        | 761    |        
|                                                     | Purchases of securities held-to-maturity                               |                                                     |      | (910  | )      |   |      | (3,278 | )       |   |        | (3,290 | )      
|                                                     | Principal payments and maturities of securities held-to-maturity       |                                                     |      | 1,727 |        |   |      | 2,114  |         |   |        | 509    |        
|                                                     | Loans originated or acquired, net of collections                       |                                                     |      | (644  | )      |   |      | 453    |         |   |        | 67     |        
|                                                     | Sale of mortgage servicing rights                                      |                                                     |      | 14    |        |   |      |       |         |   |        | 36     |        
|                                                     | Sales of loans                                                         |                                                     |      | 37    |        |   |      | 67     |         |   |        | 18     |        
|                                                     | Acquisitions, net of cash acquired                                     |                                                     |      | (15   | )      |   |      | (1     | )       |   |        | (6     | )      
|                                                     | Branch acquisitions                                                    |                                                     |      | 148   |        |   |      |       |         |   |        | 364    |        
|                                                     | Capital expenditures                                                   |                                                     |      | (41   | )      |   |      | (33    | )       |   |        | (16    | )      
|                                                     | Other                                                                  |                                                     |      | 79    |        |   |      | 35     |         |   |        | 10     |        
|                                                     |                                                                        |                                                     |      |       |        |   |      |        |        
|                                                     |                                                                        |                                                     | 646  |       |        |   | (98  | )      |         |   | (1,569 | )     
|                                                     |                                                                        |                                                     |      |       |        |   |      |        |        
|CASH PROVIDED BY (USED FOR) FINANCING                |                                                                        |                                                     |      |       |        |   |      |        |         |   |        |       
|                                                     | Net increase (decrease) in deposits                                    |                                                     |      | 113   |        |   |      | (500   | )       |   |        | (277   | )      
|                                                     | Purchase of deposits                                                   |                                                     |      |      |        |   |      |       |         |   |        | 104    |        
|                                                     | Repurchase agreements and short-term borrowings, net                   |                                                     |      | (308  | )      |   |      | (2     | )       |   |        | (612   | )      
|                                                     | Additions to debt and long-term FHLB borrowings                        |                                                     |      | 354   |        |   |      | 972    |         |   |        | 2,944  |        
|                                                     | Payments of debt and long-term FHLB borrowings                         |                                                     |      | (866  | )      |   |      | (919   | )       |   |        | (613   | )      
|                                                     | Dividends paid to parent company                                       |                                                     |      | (105  | )      |   |      | (166   | )       |   |        | (125   | )      
|                                                     | Other                                                                  |                                                     |      | 1     |        |   |      | (6     | )       |   |        | (2     | )      
|                                                     |                                                                        |                                                     |      |       |        |   |      |        |        
|                                                     |                                                                        |                                                     | (811 | )     |        |   | (621 | )      |         |   | 1,419  |       
|                                                     |                                                                        |                                                     |      |       |        |   |      |        |        
|Net increase (decrease) in cash and cash equivalents |                                                                        |                                                     | (16  | )     |        |   | (59  | )      |         |   | (149   | )     
|Cash and cash equivalents at beginning of year       |                                                                        |                                                     | 379  |       |        |   | 438  |        |         |   | 587    |       
|                                                     |                                                                        |                                                     |      |       |        |   |      |        |        
|Cash and cash equivalents at end of year             |                                                                        | $                                                   | 363  |       |        | $ | 379  |        |         | $ | 438    |       
|                                                     |                                                                        |                                                     |      |       |        |   |      |        |        
|Interest paid                                        |                                                                        | $                                                   | 305  |       |        | $ | 348  |        |         | $ | 378    |       



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FINANCIAL SERVICES





NOTES TO SUMMARIZED FINANCIAL STATEMENTS


Note A  Summary of Significant Accounting
Policies




| |                      
| | ---------------------
| | Basis of Presentation





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                    
| | -------------------
| | Loans Held for Sale





| |      
| | -----
| | Loans





| |                          
| | -------------------------
| | Allowance for Loan Losses







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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)










| |                  
| | -----------------
| | Foreclosed Assets





| |           
| | ----------
| | Securities







| |                                            
| | -------------------------------------------
| | Transfers and Servicing of Financial Assets



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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)








| |            
| | -----------
| | Real Estate





| |                       
| | ----------------------
| | Premises and Equipment





| |                        
| | -----------------------
| | Other Intangible Assets





| |                                            
| | -------------------------------------------
| | Securities Sold Under Repurchase Agreements





| |                          
| | -------------------------
| | Other Revenue Recognition







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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)




| |             
| | ------------
| | Income Taxes





Note B  Acquisitions and Intangible Assets












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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)


Note C  Loans




|                                 |                   |               |       |       |      |   |       |       | 
|-------------------------------- | ----------------- | ------------- | ----- | ----- | ---- | - | ----- | ----- | 
|                                 |                   | At Year-End   |      
|                                 |                   |               |      
|                                 |                   | 2004          |       |       | 2003 |  
|                                 |                   |               |       |       |      |  
|                                 |                   | (In millions) |      
|Single-family mortgage           |                   | $             | 3,560 |       |      | $ | 3,255 |      
|Single-family mortgage warehouse |                   |               | 580   |       |      |   | 387   |      
|Single-family construction       |                   |               | 1,303 |       |      |   | 889   |      
|Multifamily and senior housing   |                   |               | 1,454 |       |      |   | 1,769 |      
|                                 |                   |               |       |       |      |  
|                                 | Total residential |               |       | 6,897 |      |   |       | 6,300 | 
|Commercial real estate           |                   |               | 709   |       |      |   | 1,015 |      
|Commercial and business          |                   |               | 746   |       |      |   | 585   |      
|Energy lending                   |                   |               | 717   |       |      |   | 562   |      
|Asset-based lending and leasing  |                   |               | 428   |       |      |   | 499   |      
|Consumer and other               |                   |               | 206   |       |      |   | 176   |      
|                                 |                   |               |       |       |      |  
|                                 | Total loans       |               |       | 9,703 |      |   |       | 9,137 | 
|Less allowance for loan losses   |                   |               | (85   | )     |      |   | (111  | )    
|                                 |                   |               |       |       |      |  
|                                 | Loans, net        |               | $     | 9,618 |      |   | $     | 9,026 | 
|                                 |                   |               |       |       |      |  











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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)






|                                                 |  |               |     |   |      |   |     |      |  |   |     |  
|------------------------------------------------ |  | ------------- | --- | - | ---- | - | --- | ---- |  | - | --- | -
|                                                 |  | For the Year  |    
|                                                 |  |               |    
|                                                 |  | 2004          |     |   | 2003 |   |     | 2002 | 
|                                                 |  |               |     |   |      |   |     |      | 
|                                                 |  | (In millions) |    
|Balance, beginning of year                       |  | $             | 111 |   |      | $ | 132 |      |  | $ | 139 |  
|Provision (credit) for loan losses               |  |               | (12 | ) |      |   | 43  |      |  |   | 40  |  
|Charge-offs                                      |  |               | (15 | ) |      |   | (73 | )    |  |   | (54 | )
|Recoveries                                       |  |               | 8   |   |      |   | 9   |      |  |   | 7   |  
|Transfer of reserve for loan-related commitments |  |               | (7  | ) |      |   |    |      |  |   |    |  
|                                                 |  |               |     |   |      |   |     |      | 
|Balance, end of year                             |  | $             | 85  |   |      | $ | 111 |      |  | $ | 132 |  
|                                                 |  |               |     |   |      |   |     |      | 





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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)


Note D  Securities




|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |   | 
|--------------------------------------------------------- | -------------------------------------- | --------------------- | ----- | ----- | ---------- | - | ----- | ---------- |  | - | ----- | --- | - | -------- | ----- | ----- |  |  | ---- | - | 
|                                                          |                                        |                       |       | Gross |            |   | Gross |            |  |   |       |    
|                                                          |                                        | Amortized             |       |       | Unrealized |   |       | Unrealized |  |   | Fair  |     |   | Year-End |      
|                                                          |                                        | Cost                  |       |       | Gains      |   |       | (Losses)   |  |   | Value |     |   | Yield    |      
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|                                                          |                                        | (Dollars in millions) |      
|At year-end 2004                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|Available for sale                                        |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|Mortgage-backed securities:                               |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|                                                          | U.S. Government                        |                       | $     | 28    |            |   | $     | 1          |  |   | $     |    |   |          | $     | 29    |  |  |      |   | 
|                                                          | U.S. Government Sponsored Enterprises  |                       |       | 789   |            |   |       | 11         |  |   |       | (5  | ) |          |       | 795   |  |  |      |   | 
|                                                          | Private issuer pass-through securities |                       |       | 11    |            |   |       |           |  |   |       |    |   |          |       | 11    |  |  |      |   | 
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|                                                          |                                        |                       | 828   |       |            |   | 12    |            |  |   | (5    | )   |   |          | 835   |       |  |  | 3.99 | %
|Corporate debt securities                                 |                                        |                       | 2     |       |            |   |      |            |  |   |      |     |   |          | 2     |       |  |  | 5.91 | %
|Equity securities, primarily Federal Home Loan Bank stock |                                        |                       | 281   |       |            |   |      |            |  |   |      |     |   |          | 281   |       |  |  | 1.88 | %
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|                                                          |                                        | $                     | 1,111 |       |            | $ | 12    |            |  | $ | (5    | )   |   | $        | 1,118 |       |  |  |      |  
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|Held-to-maturity                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|Mortgage-backed securities:                               |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|                                                          | U.S. Government                        |                       | $     | 166   |            |   | $     |           |  |   | $     | (1  | ) |          | $     | 165   |  |  |      |   | 
|                                                          | U.S. Government Sponsored Enterprises  |                       |       | 3,289 |            |   |       | 20         |  |   |       | (12 | ) |          |       | 3,297 |  |  |      |   | 
|                                                          | Private issuer pass-through securities |                       |       | 409   |            |   |       |           |  |   |       | (6  | ) |          |       | 403   |  |  |      |   | 
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|                                                          |                                        | $                     | 3,864 |       |            | $ | 20    |            |  | $ | (19   | )   |   | $        | 3,865 |       |  |  | 4.12 | %
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|At year-end 2003                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|Available for sale                                        |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|Mortgage-backed securities:                               |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|                                                          | U.S. Government                        |                       | $     | 44    |            |   | $     | 1          |  |   | $     |    |   |          | $     | 45    |  |  |      |   | 
|                                                          | U.S. Government Sponsored Enterprises  |                       |       | 1,054 |            |   |       | 18         |  |   |       | (4  | ) |          |       | 1,068 |  |  |      |   | 
|                                                          | Private issuer pass-through securities |                       |       | 16    |            |   |       |           |  |   |       |    |   |          |       | 16    |  |  |      |   | 
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|                                                          |                                        |                       | 1,114 |       |            |   | 19    |            |  |   | (4    | )   |   |          | 1,129 |       |  |  | 3.98 | %
|Corporate debt securities                                 |                                        |                       | 3     |       |            |   |      |            |  |   |      |     |   |          | 3     |       |  |  | 5.90 | %
|Equity securities, primarily Federal Home Loan Bank stock |                                        |                       | 242   |       |            |   |      |            |  |   |      |     |   |          | 242   |       |  |  | 2.02 | %
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|                                                          |                                        | $                     | 1,359 |       |            | $ | 19    |            |  | $ | (4    | )   |   | $        | 1,374 |       |  |  |      |  
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|Held-to-maturity                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|Mortgage-backed securities:                               |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |       |       |  |  |      |  
|                                                          | U.S. Government                        |                       | $     | 108   |            |   | $     |           |  |   | $     | (1  | ) |          | $     | 107   |  |  |      |   | 
|                                                          | U.S. Government Sponsored Enterprises  |                       |       | 4,787 |            |   |       | 46         |  |   |       | (7  | ) |          |       | 4,826 |  |  |      |   | 
|                                                          | Private issuer pass-through securities |                       |       | 372   |            |   |       | 1          |  |   |       | (1  | ) |          |       | 372   |  |  |      |   | 
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      
|                                                          |                                        | $                     | 5,267 |       |            | $ | 47    |            |  | $ | (9    | )   |   | $        | 5,305 |       |  |  | 3.95 | %
|                                                          |                                        |                       |       |       |            |   |       |            |  |   |       |     |   |          |      



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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)










|                            |                                        |               |       |       |                   |   |     |       |       |   |            |     |  |   |     |    |  
|--------------------------- | -------------------------------------- | ------------- | ----- | ----- | ----------------- | - | --- | ----- | ----- | - | ---------- | --- |  | - | --- | -- | -
|                            |                                        | Less Than     |       |       |                  
|                            |                                        | 12 Months     |       |       | 12 Months or More |  
|                            |                                        |               |       |       |                   |  
|                            |                                        |               |       | Gross |                   |   |     |       | Gross |  
|                            |                                        | Fair          |       |       | Unrealized        |   |     | Fair  |       |   | Unrealized |    
|                            |                                        | Value         |       |       | (Losses)          |   |     | Value |       |   | (Losses)   |    
|                            |                                        |               |       |       |                   |   |     |       |       |   |            |    
|                            |                                        | (In millions) |      
|Available for sale          |                                        |               |       |       |                   |   |     |       |       |   |            |     |  |   |     |   
|Mortgage-backed securities: |                                        |               |       |       |                   |   |     |       |       |   |            |     |  |   |     |   
|                            | U.S. Government                        |               | $     | 5     |                   |   | $   |      |       |   | $          |    |  |   | $   |   |  
|                            | U.S. Government Sponsored Enterprises  |               |       | 104   |                   |   |     |      |       |   |            | 228 |  |   |     | (5 | )
|                            | Private issuer pass-through securities |               |       | 3     |                   |   |     |      |       |   |            | 4   |  |   |     |   |  
|                            |                                        |               |       |       |                   |   |     |       |       |   |            |    
|                            |                                        | $             | 112   |       |                   | $ |    |       |       | $ | 232        |     |  | $ | (5  | ) 
|                            |                                        |               |       |       |                   |   |     |       |       |   |            |    
|Held-to-maturity            |                                        |               |       |       |                   |   |     |       |       |   |            |     |  |   |     |   
|Mortgage-backed securities: |                                        |               |       |       |                   |   |     |       |       |   |            |     |  |   |     |   
|                            | U.S. Government                        |               | $     | 77    |                   |   | $   |      |       |   | $          | 39  |  |   | $   | (1 | )
|                            | U.S. Government Sponsored Enterprises  |               |       | 1,113 |                   |   |     | (9    | )     |   |            | 169 |  |   |     | (3 | )
|                            | Private issuer pass-through securities |               |       | 310   |                   |   |     | (3    | )     |   |            | 78  |  |   |     | (3 | )
|                            |                                        |               |       |       |                   |   |     |       |       |   |            |    
|                            |                                        | $             | 1,500 |       |                   | $ | (12 | )     |       | $ | 286        |     |  | $ | (7  | ) 
|                            |                                        |               |       |       |                   |   |     |       |       |   |            |    
|                            |                                        | $             | 1,612 |       |                   | $ | (12 | )     |       | $ | 518        |     |  | $ | (12 | ) 
|                            |                                        |               |       |       |                   |   |     |       |       |   |            |    





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The unrealized losses are, in general, a result of changes in
    market interest rates. The securities are guaranteed directly or
    indirectly by the U.S. Government or U.S. Government
    Sponsored Enterprises, or are senior-tranche mortgage-backed
    securities considered investment grade quality by third-party
    rating agencies. We do not believe any of these unrealized
    losses are related to credit or other concerns about the
    collectibility of contractual amounts due.
|
| |  | The mortgage-backed securities cannot be settled in such a way
    that we would not recover substantially all of our recorded
    investment. The securities can, in general, be prepaid, but we
    do not have significant purchase premiums on the securities and
    we have no specific plans to sell these mortgage-backed
    securities.                                                                                                                                                        

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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)


Note E  Real Estate




|                                          |  |             |     |   |      |   |     |  
|----------------------------------------- |  | ----------- | --- | - | ---- | - | --- | -
|                                          |  | At Year-End |    
|                                          |  |             |    
|                                          |  | 2004        |     |   | 2003 |  
|                                          |  |             |     |   |      |  
|                                          |  | (In         |    
|                                          |  | millions)   |    
|Real estate held for development and sale |  | $           | 231 |   |      | $ | 238 |  
|Income producing properties               |  |             | 46  |   |      |   | 60  |  
|Foreclosed real estate                    |  |             | 4   |   |      |   | 24  |  
|                                          |  |             |     |   |      |  
|                                          |  |             | 281 |   |      |   | 322 |  
|Accumulated depreciation                  |  |             | (21 | ) |      |   | (23 | )
|Valuation allowance                       |  |             | (7  | ) |      |   | (4  | )
|                                          |  |             |     |   |      |  
|Real estate, net                          |  | $           | 253 |   |      | $ | 295 |  
|                                          |  |             |     |   |      |  



|                               |                                 |                            |     |    |      |   |     |    |    | 
|------------------------------ | ------------------------------- | -------------------------- | --- | -- | ---- | - | --- | -- | -- | 
|                               |                                 | At Year-End                |    
|                               |                                 |                            |    
|                               |                                 | 2004                       |     |    | 2003 |  
|                               |                                 |                            |     |    |      |  
|                               |                                 | (In                        |    
|                               |                                 | millions)                  |    
|Real estate                    |                                 | $                          | 319 |    |      | $ | 192 |   
|Total assets                   |                                 |                            | 378 |    |      |   | 207 |   
|Debt                           |                                 |                            | 188 |    |      |   | 104 |   
|Total liabilities              |                                 |                            | 203 |    |      |   | 109 |   
|Equity                         |                                 |                            | 175 |    |      |   | 98  |   
|Our investment in partnerships |                                 |                            |     |    |      |   |     |   
|                               | Our share of partnership equity |                            |     | 61 |      |   |     | 50 |   
|                               | Subordinated debt               |                            |     | 2  |      |   |     | 2  |   
|                               |                                 |                            |     |    |      |  
|                               |                                 | Investment in partnerships |     | $  | 63   |   |     | $  | 52 | 
|                               |                                 |                            |     |    |      |  

|                       |  |               |    |  |      |   |    |      |  |   |    | 
|---------------------- |  | ------------- | -- |  | ---- | - | -- | ---- |  | - | -- | 
|                       |  | For the Year  |   
|                       |  |               |   
|                       |  | 2004          |    |  | 2003 |   |    | 2002 | 
|                       |  |               |    |  |      |   |    |      | 
|                       |  | (In millions) |   
|Revenues               |  | $             | 56 |  |      | $ | 40 |      |  | $ | 69 | 
|Earnings               |  |               | 42 |  |      |   | 15 |      |  |   | 20 | 
|Our equity in earnings |  |               | 12 |  |      |   | 8  |      |  |   | 7  | 



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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)


Note F  Premises and Equipment




|                                               |  |               |  |               |      |   |      |   |      |  
|---------------------------------------------- |  | ------------- |  | ------------- | ---- | - | ---- | - | ---- | -
|                                               |  |               |  | At Year-End   |     
|                                               |  | Estimated     |  |               |     
|Classification                                 |  | Useful Lives  |  | 2004          |      |   | 2003 |  
|                                               |  |               |  |               |      |   |      |  
|                                               |  |               |  | (In millions) |     
|Land                                           |  |               |  | $             | 37   |   |      | $ | 25   |  
|Buildings                                      |  | 10 - 40 years |  |               | 131  |   |      |   | 118  |  
|Leasehold improvements                         |  | 5 - 20 years  |  |               | 23   |   |      |   | 24   |  
|Furniture, fixtures and equipment              |  | 3 - 10 years  |  |               | 98   |   |      |   | 103  |  
|                                               |  |               |  |               |      |   |      |  
|                                               |  |               |  |               | 289  |   |      |   | 270  |  
|Less accumulated depreciation and amortization |  |               |  |               | (122 | ) |      |   | (115 | )
|                                               |  |               |  |               |      |   |      |  
|                                               |  |               |  | $             | 167  |   |      | $ | 155  |  
|                                               |  |               |  |               |      |   |      |  



Note G  Deposits




|                           |  |                       |       |  |        |   |         |      |  |  |        |  |  |   |       | 
|-------------------------- |  | --------------------- | ----- |  | ------ | - | ------- | ---- |  |  | ------ |  |  | - | ----- | 
|                           |  | At Year-End           |      
|                           |  |                       |      
|                           |  | 2004                  |       |  | 2003   |  
|                           |  |                       |       |  |        |  
|                           |  | Average               |       |  |        |   | Average |      |  | 
|                           |  | Stated                |       |  |        |   | Stated  |      |  | 
|                           |  | Rate                  |       |  | Amount |   |         | Rate |  |  | Amount | 
|                           |  |                       |       |  |        |   |         |      |  |  |        | 
|                           |  | (Dollars in millions) |      
|Noninterest-bearing demand |  |                       | N/A   |  |        | $ | 519     |      |  |  | N/A    |  |  | $ | 443   | 
|Interest-bearing demand    |  |                       | 0.98% |  |        |   | 4,377   |      |  |  | 1.17%  |  |  |   | 4,424 | 
|Savings deposits           |  |                       | 0.68% |  |        |   | 241     |      |  |  | 0.68%  |  |  |   | 248   | 
|Certificates of deposit    |  |                       | 2.56% |  |        |   | 3,827   |      |  |  | 2.25%  |  |  |   | 3,583 | 
|                           |  |                       |       |  |        |   |         |      |  |  |        | 
|                           |  |                       |       |  |        | $ | 8,964   |      |  |  |        |  |  | $ | 8,698 | 
|                           |  |                       |       |  |        |   |         |      |  |  |        | 



|                         |  |               |       |  |           |   |     |       |  |   |       | 
|------------------------ |  | ------------- | ----- |  | --------- | - | --- | ----- |  | - | ----- | 
|                         |  | $100,000 Or   |       |  | Less Than |   |     |      
|                         |  | More          |       |  | $100,000  |   |     | Total | 
|                         |  |               |       |  |           |   |     |       | 
|                         |  | (In millions) |      
|3 months or less         |  | $             | 452   |  |           | $ | 3   |       |  | $ | 455   | 
|Over 3 through 6 months  |  |               | 755   |  |           |   | 3   |       |  |   | 758   | 
|Over 6 through 12 months |  |               | 912   |  |           |   | 16  |       |  |   | 928   | 
|Over 12 months           |  |               | 1,555 |  |           |   | 131 |       |  |   | 1,686 | 
|                         |  |               |       |  |           |   |     |       | 
|                         |  | $             | 3,674 |  |           | $ | 153 |       |  | $ | 3,827 | 
|                         |  |               |       |  |           |   |     |       | 



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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)


Note H  Borrowings






|                            |                                |                       |   |       |      |  |   |       |   |  |   |       |  
|--------------------------- | ------------------------------ | --------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                            |                                | 2004                  |   |       | 2003 |  |   | 2002  |  
|                            |                                |                       |   |       |      |  |   |       |  
|                            |                                | (Dollars in millions) |  
|Short-term FHLB Borrowings: |                                |                       |   |       |      |  |   |       |   |  |   |      
|At year-end:                |                                |                       |   |       |      |  |   |       |   |  |   |      
|                            | Balance                        |                       | $ | 2,055 |      |  | $ | 1,823 |   |  | $ | 245   |  
|                            | Weighted average interest rate |                       |   | 2.1   | %    |  |   | 1.0   | % |  |   | 1.3   | %
|For the year:               |                                |                       |   |       |      |  |   |       |   |  |   |      
|                            | Average daily balance          |                       | $ | 2,161 |      |  | $ | 858   |   |  | $ | 1,380 |  
|                            | Maximum month-end balance      |                       | $ | 2,908 |      |  | $ | 1,871 |   |  | $ | 2,405 |  
|                            | Weighted average interest rate |                       |   | 1.4   | %    |  |   | 1.2   | % |  |   | 1.8   | %
|Long-term FHLB Borrowings:  |                                |                       |   |       |      |  |   |       |   |  |   |      
|At year-end:                |                                |                       |   |       |      |  |   |       |   |  |   |      
|                            | Balance                        |                       | $ | 2,662 |      |  | $ | 3,169 |   |  | $ | 3,141 |  
|                            | Weighted average interest rate |                       |   | 3.7   | %    |  |   | 3.6   | % |  |   | 3.9   | %
|Repurchase Agreements:      |                                |                       |   |       |      |  |   |       |   |  |   |      
|At year-end:                |                                |                       |   |       |      |  |   |       |   |  |   |      
|                            | Balance                        |                       | $ | 787   |      |  | $ | 1,327 |   |  | $ | 2,907 |  
|                            | Weighted average interest rate |                       |   | 2.3   | %    |  |   | 1.1   | % |  |   | 1.4   | %
|For the year:               |                                |                       |   |       |      |  |   |       |   |  |   |      
|                            | Average daily balance          |                       | $ | 1,155 |      |  | $ | 2,415 |   |  | $ | 2,071 |  
|                            | Maximum month-end balance      |                       | $ | 1,621 |      |  | $ | 3,060 |   |  | $ | 2,907 |  
|                            | Weighted average interest rate |                       |   | 1.3   | %    |  |   | 1.2   | % |  |   | 1.8   | %





|                                                                                                                |  |             |     |  |      |   |     | 
|--------------------------------------------------------------------------------------------------------------- |  | ----------- | --- |  | ---- | - | --- | 
|                                                                                                                |  | At Year-End |    
|                                                                                                                |  |             |    
|                                                                                                                |  | 2004        |     |  | 2003 |  
|                                                                                                                |  |             |     |  |      |  
|                                                                                                                |  | (In         |    
|                                                                                                                |  | millions)   |    
|Senior bank credit facility  average rate of 3.94% in
    2004 and 4.21% in 2003, payable in 2006              |  | $           | 65  |  |      | $ | 65  | 
|Subordinated debentures  average rate of 4.63% in
    2004 and 4.26% in 2003, payable in 2013 through 2014     |  |             | 100 |  |      |   | 100 | 
|Other indebtedness due through 2014 at interest rates from 5.00%
    to 9.50%, secured primarily by real estate |  |             | 41  |  |      |   | 74  | 
|                                                                                                                |  |             |     |  |      |  
|                                                                                                                |  | $           | 206 |  |      | $ | 239 | 
|                                                                                                                |  |             |     |  |      |  



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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)




|                      |       |                                 |       |       |      |   |       |       |  |   |      |     |  |      |     |     |      |   |     |            |  |   |    |     |  |   |     |     | 
|--------------------- | ----- | ------------------------------- | ----- | ----- | ---- | - | ----- | ----- |  | - | ---- | --- |  | ---- | --- | --- | ---- | - | --- | ---------- |  | - | -- | --- |  | - | --- | --- | 
|                      |       | Payment Due or Expiring by Year |      
|                      |       |                                 |      
|                      |       | Total                           |       |       | 2005 |   |       | 2006  |  |   | 2007 |     |  | 2008 |     |     | 2009 |   |     | Thereafter | 
|                      |       |                                 |       |       |      |   |       |       |  |   |      |     |  |      |     |     |      |   |     |            | 
|                      |       | (In millions)                   |      
|FHLB borrowings       |       | $                               | 4,717 |       |      | $ | 2,793 |       |  | $ | 620  |     |  | $    | 955 |     |      | $ | 250 |            |  | $ | 99 |     |  | $ |    |    
|Repurchase agreements |       |                                 | 787   |       |      |   | 787   |       |  |   |     |     |  |      |    |     |      |   |    |            |  |   |   |     |  |   |    |    
|Other borrowings      |       |                                 | 206   |       |      |   | 7     |       |  |   | 72   |     |  |      | 4   |     |      |   | 20  |            |  |   | 3  |     |  |   | 100 |    
|                      |       |                                 |       |       |      |   |       |       |  |   |      |     |  |      |     |     |      |   |     |            | 
|                      | Total |                                 | $     | 5,710 |      |   | $     | 3,587 |  |   | $    | 692 |  |      | $   | 959 |      |   | $   | 270        |  |   | $  | 102 |  |   | $   | 100 | 
|                      |       |                                 |       |       |      |   |       |       |  |   |      |     |  |      |     |     |      |   |     |            | 

Note I  Preferred Stock Issued by
Subsidiaries






Note J  Mortgage Loan Servicing




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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)




|                           |                      |                     |     |     |      |   |     |      |     |   |     |     |     |  
|-------------------------- | -------------------- | ------------------- | --- | --- | ---- | - | --- | ---- | --- | - | --- | --- | --- | -
|                           |                      | For the Year        |    
|                           |                      |                     |    
|                           |                      | 2004                |     |     | 2003 |   |     | 2002 |    
|                           |                      |                     |     |     |      |   |     |      |    
|                           |                      | (In millions)       |    
|Balance, beginning of year |                      | $                   | 100 |     |      | $ | 120 |      |     | $ | 162 |    
|                           | Additions            |                     |     | 19  |      |   |     | 44   |     |   |     | 43  |    
|                           | Amortization expense |                     |     | (28 | )    |   |     | (63  | )   |   |     | (50 | )  
|                           | Sales                |                     |     | (91 | )    |   |     | (1   | )   |   |     | (35 | )  
|                           |                      |                     |     |     |      |   |     |      |    
|                           |                      |                     |    |     |      |   | 100 |      |     |   | 120 |    
|                           |                      | Valuation allowance |     |     |     |   |     |      | (11 | ) |     |     | (15 | )
|                           |                      |                     |     |     |      |   |     |      |    
|Balance, end of year       |                      | $                   |    |     |      | $ | 89  |      |     | $ | 105 |    
|                           |                      |                     |     |     |      |   |     |      |    



Note K  Derivative Instruments




Note L  Noninterest Expense




|                                          |  |               |    |  |      |   |   |      |  |   |   | 
|----------------------------------------- |  | ------------- | -- |  | ---- | - | - | ---- |  | - | - | 
|                                          |  | For the Year  |   
|                                          |  |               |   
|                                          |  | 2004          |    |  | 2003 |   |   | 2002 | 
|                                          |  |               |    |  |      |   |   |      | 
|                                          |  | (In millions) |   
|Severance                                 |  | $             | 9  |  |      | $ | 4 |      |  | $ | 3 | 
|Loss on closure of origination facilities |  |               | 11 |  |      |   |  |      |  |   |  | 
|Loss on sale of mortgage servicing rights |  |               | 11 |  |      |   |  |      |  |   |  | 
|Other                                     |  |               | 3  |  |      |   | 1 |      |  |   | 4 | 
|                                          |  |               |    |  |      |   |   |      | 
|                                          |  | $             | 34 |  |      | $ | 5 |      |  | $ | 7 | 
|                                          |  |               |    |  |      |   |   |      | 



101



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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)






|                                  |       |               |   |           |  |      |          |    |        |      |    |    |   |   |   |    | 
|--------------------------------- | ----- | ------------- | - | --------- |  | ---- | -------- | -- | ------ | ---- | -- | -- | - | - | - | -- | 
|                                  |       | Beginning     |   |           |  | Cash |          |    | End of |     
|                                  |       | of Year       |   | Additions |  |      | Payments |    |        | Year |   
|                                  |       |               |   |           |  |      |          |    |        |      |   
|                                  |       | (In millions) |  
|Year 2004                         |       |               |   |           |  |      |          |    |        |      |    |    |   |   |   |   
|Involuntary employee terminations |       | $             |  |           |  | $    | 9        |    |        | $    | (6 | )  |   | $ | 3 |   
|Contract termination penalties    |       |               |  |           |  |      | 2        |    |        |      |   |    |   |   | 2 |   
|Other                             |       |               |  |           |  |      | 8        |    |        |      | (2 | )  |   |   | 6 |   
|                                  |       |               |   |           |  |      |          |    |        |      |    |   
|                                  | Total |               | $ |          |  |      | $        | 19 |        |      | $  | (8 | ) |   | $ | 11 | 
|                                  |       |               |   |           |  |      |          |    |        |      |    |   



|                                  |  |               |     |  |      |   |     |      |  |   |     | 
|--------------------------------- |  | ------------- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                  |  | For the Year  |    
|                                  |  |               |    
|                                  |  | 2004          |     |  | 2003 |   |     | 2002 | 
|                                  |  |               |     |  |      |   |     |      | 
|                                  |  | (In millions) |    
|Furniture, fixtures and equipment |  | $             | 22  |  |      | $ | 22  |      |  | $ | 16  | 
|Leased equipment depreciation     |  |               | 8   |  |      |   | 8   |      |  |   | 10  | 
|Advertising and promotional       |  |               | 22  |  |      |   | 19  |      |  |   | 12  | 
|Travel and other employee         |  |               | 11  |  |      |   | 13  |      |  |   | 11  | 
|Professional services             |  |               | 21  |  |      |   | 14  |      |  |   | 10  | 
|Other                             |  |               | 78  |  |      |   | 49  |      |  |   | 43  | 
|                                  |  |               |     |  |      |   |     |      | 
|Other noninterest expense         |  | $             | 162 |  |      | $ | 125 |      |  | $ | 102 | 
|                                  |  |               |     |  |      |   |     |      | 

Note M  Capital Adequacy and Other Regulatory
Matters






102



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FINANCIAL SERVICES


NOTES TO SUMMARIZED FINANCIAL
STATEMENTS  (Continued)




|                                                                              |  |                       |       |          |              |             |              |                    |  |       |  |        |  |         |  |        
|----------------------------------------------------------------------------- |  | --------------------- | ----- | -------- | ------------ | ----------- | ------------ | ------------------ |  | ----- |  | ------ |  | ------- |  | -------
|                                                                              |  |                       |       |          |              | For Capital |              | For Categorization
|                                                                              |  |                       |       | Adequacy |              | As Well   
|                                                                              |  | Actual                |       |          | Requirements |             | Capitalized
|                                                                              |  |                       |       |          |              |             |             
|                                                                              |  | Amount                |       |          | Ratio        |             |              | Amount             |  | Ratio |  | Amount |  | Ratio  
|                                                                              |  |                       |       |          |              |             |              |                    |  |       |  |        |  |        
|                                                                              |  | (Dollars in millions)
|At year-end 2004:                                                             |  |                       |       |          |              |             |              |                    |  |       |  |        |  |         |  |        
|Total Risk-Based Ratio (Risk-based capital/ Total risk-weighted
    assets)   |  | $                     | 1,219 |          |              |             | 10.83%       |                    |  | 3$901 |  | 38.00% |  | 3$1,126 |  | 310.00%
|Tier 1 (Core) Risk-Based Ratio (Core capital/ Total
    risk-weighted assets) |  | $                     | 1,096 |          |              |             | 9.74%        |                    |  | 3$450 |  | 34.00% |  | 3$675   |  | 36.00% 
|Tier 1 (Core) Leverage Ratio (Core capital/ Adjusted
    tangible assets)     |  | $                     | 1,096 |          |              |             | 6.89%        |                    |  | 3$636 |  | 34.00% |  | 3$795   |  | 35.00% 
|Tangible Ratio (Tangible equity/ Tangible assets)                             |  | $                     | 1,096 |          |              |             | 6.89%        |                    |  | 3$318 |  | 32.00% |  | N/A     |  | N/A    
|At year-end 2003:                                                             |  |                       |       |          |              |             |              |                    |  |       |  |        |  |         |  |        
|Total Risk-Based Ratio (Risk-based capital/ Total risk-weighted
    assets)   |  | $                     | 1,225 |          |              |             | 11.13%       |                    |  | 3$881 |  | 38.00% |  | 3$1,101 |  | 310.00%
|Tier 1 (Core) Risk-Based Ratio (Core capital/ Total
    risk-weighted assets) |  | $                     | 1,078 |          |              |             | 9.80%        |                    |  | 3$440 |  | 34.00% |  | 3$660   |  | 36.00% 
|Tier 1 (Core) Leverage Ratio (Core capital/ Adjusted
    tangible assets)     |  | $                     | 1,078 |          |              |             | 6.31%        |                    |  | 3$683 |  | 34.00% |  | 3$854   |  | 35.00% 
|Tangible Ratio (Tangible equity/ Tangible assets)                             |  | $                     | 1,078 |          |              |             | 6.31%        |                    |  | 3$342 |  | 32.00% |  | N/A     |  | N/A    



103



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures









Managements Annual Report on Internal Control over
Financial Reporting




Internal
Control  Integrated Framework






Attestation Report of the Independent Registered Public
Accounting Firm








104



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105



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|         |                  
|-------- | -----------------
|Item 9B. | Other Information





| |                   
| | ------------------
| | 2005 Base Salaries



|                       |  |                                          |  |          |        |        |           |   |         | 
|---------------------- |  | ---------------------------------------- |  | -------- | ------ | ------ | --------- | - | ------- | 
|                       |  |                                          |  |          |        | Salary |          
|                       |  |                                          |  | Salary   |        |        | Increased |  
|Officer                |  | Title                                    |  | Increase |        |        | to:       |  
|                       |  |                                          |  |          |        |        |           |  
|Kenneth M. Jastrow, II |  | Chairman and CEO                         |  | $        | 25,000 |        |           | $ | 925,000 | 
|M. Richard Warner      |  | President                                |  |          |       |        |           |   |        | 
|Jack C. Sweeny         |  | Group Vice President, Forests            |  | $        | 25,000 |        |           | $ | 375,000 | 
|Kenneth R. Dubuque     |  | Group Vice President, Financial Services |  | $        | 25,000 |        |           | $ | 425,000 | 
|Randall D. Levy        |  | Chief Financial Officer                  |  |          |       |        |           |   |        | 



| |             
| | ------------
| | 2004 Bonuses



|                       |  |                                          |  |            |          | 
|---------------------- |  | ---------------------------------------- |  | ---------- | -------- | 
|Officer                |  | Title                                    |  | 2004 Bonus |         
|                       |  |                                          |  |            |         
|Kenneth M. Jastrow, II |  | Chairman and CEO                         |  | $          | 800,000* | 
|M. Richard Warner      |  | President                                |  | $          | 400,000  | 
|Jack C. Sweeny         |  | Group Vice President, Forests            |  | $          | 475,000  | 
|Kenneth R. Dubuque     |  | Group Vice President, Financial Services |  | $          | 550,000* | 
|Randall D. Levy        |  | Chief Financial Officer                  |  | $          | 275,000  | 



|  |                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------
|* | 100% of their bonuses was deferred under the Companys
    phantom stock plan and will be paid in stock at retirement.



| |                    
| | -------------------
| | 2005 Bonus Formulas





106



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| |                      
| | ---------------------
| | Director Compensation






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



|                       |  |     |    |            |           |  |      |                      |  |                                                                                                    
|---------------------- |  | --- | -- | ---------- | --------- |  | ---- | -------------------- |  | ---------------------------------------------------------------------------------------------------
|                       |  |     |    | Year First |           |  |     
|                       |  |     |    | Elected to |           |  |     
|Name                   |  | Age |    |            | the Board |  |      | Principal Occupation
|                       |  |     |    |            |           |  |      |                     
|Kenneth M. Jastrow, II |  |     | 57 |            |           |  | 1998 |                      |  | Chairman and Chief Executive Officer of Temple-Inland Inc.                                         
|Afsaneh M. Beschloss   |  |     | 49 |            |           |  | 2002 |                      |  | President and Chief Executive Officer of The Rock Creek Group                                      
|Dr. Donald M. Carlton  |  |     | 67 |            |           |  | 2003 |                      |  | Former President and Chief Executive Officer of Radian
    International LLC                       
|Cassandra C. Carr      |  |     | 60 |            |           |  | 2004 |                      |  | Senior Advisor, Public Strategies, Inc.                                                            
|E. Linn Draper, Jr.    |  |     | 63 |            |           |  | 2004 |                      |  | Former Chairman, President and Chief Executive Officer of
    American Electric Power Company, Inc.
|James T. Hackett       |  |     | 51 |            |           |  | 2000 |                      |  | President and Chief Executive Officer of Anadarko Petroleum
    Corporation                        
|Jeffrey M. Heller      |  |     | 65 |            |           |  | 2004 |                      |  | President and Chief Operating Officer of Electronic Data
    Systems, Inc.                         
|James A. Johnson       |  |     | 61 |            |           |  | 2000 |                      |  | Vice Chairman of Perseus LLC                                                                       
|W. Allen Reed          |  |     | 57 |            |           |  | 2000 |                      |  | President and Chief Executive Officer of General Motors Asset
    Management Corporation           
|Arthur Temple III      |  |     | 63 |            |           |  | 1983 |                      |  | Chairman of the Board of First Bank & Trust, East Texas
    and the T.L.L. Temple Foundation       
|Larry E. Temple        |  |     | 69 |            |           |  | 1991 |                      |  | Attorney-at-law                                                                                    








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation



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|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters

Securities Authorized for Issuance Under Equity Compensation
Plans




|                                                           |  |                         |            |  |                      |                      |       |                         |  |  |           | 
|---------------------------------------------------------- |  | ----------------------- | ---------- |  | -------------------- | -------------------- | ----- | ----------------------- |  |  | --------- | 
|                                                           |  |                         |            |  |                      | Number of Securities |      
|                                                           |  |                         |            |  |                      | Remaining Available  |      
|                                                           |  |                         |            |  |                      | for Future Issuance  |      
|                                                           |  | Number of Securities    |            |  | Weighted-Average     |                      |       | Under Equity            | 
|                                                           |  | to be Issued Upon       |            |  | Exercise Price of    |                      |       | Compensation Plans      | 
|                                                           |  | Exercise of Outstanding |            |  | Outstanding Options, |                      |       | (Excluding Securities   | 
|                                                           |  | Options, Warrants and   |            |  | Warrants and         |                      |       | Reflected in Column(a)) | 
|Plan Category                                              |  | Rights(a)               |            |  | Rights(b)            |                      |       | (c)(1)                  | 
|                                                           |  |                         |            |  |                      |                      |       |                         | 
|Equity compensation plans approved by security holders     |  |                         | 4,400,221* |  |                      | $                    | 53.39 |                         |  |  | 1,953,029 | 
|Equity compensation plans not approved by security holders |  |                         | None       |  |                      |                      | None  |                         |  |  | None      | 
|Total                                                      |  |                         | 4,400,221* |  |                      | $                    | 53.39 |                         |  |  | 1,953,029 | 

Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123


Share
based payment









|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accounting Fees and Services






PART IV







|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K



Financial Statements




Financial Statement Schedule




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Exhibits


|        |    |      |  |   |         |                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ---- |  | - | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |   |        
|Number  |    |      |  |   | Exhibit
|        |    |      |  |   |        
|        | 3  | .01  |  |  |         | Certificate of Incorporation of the Company(1), as amended
    effective May  4, 1987(2), as amended effective
    May 4, 1990(3)                                                                                                                                                                                                                   
|        | 3  | .02  |  |  |         | By-laws of the Company as amended and restated May 2, 2002
    (12)                                                                                                                                                                                                                                                                                 
|        | 4  | .01  |  |  |         | Form of Specimen Common Stock Certificate of the Company(4)                                                                                                                                                                                                                                                                                         
|        | 4  | .02  |  |  |         | Indenture dated as of September 1, 1986, between the
    Registrant and Chemical Bank, as Trustee(5), as amended by First
    Supplemental Indenture dated as of April 15, 1988, as
    amended by Second Supplemental Indenture dated as of
    December 27, 1990(8), and as amended by Third Supplemental
    Indenture dated as of May 9, 1991(9)
|        | 4  | .03  |  |  |         | Form of Fixed-rate Medium Term Note, Series D, of the
    Company(10)                                                                                                                                                                                                                                                                               
|        | 4  | .04  |  |  |         | Form of Floating-rate Medium Term Note, Series D, of the
    Company(10)                                                                                                                                                                                                                                                                            
|        | 4  | .05  |  |  |         | Certificate of Designation, Preferences and Rights of
    Series A Junior Participating Preferred Stock, dated
    February 16, 1989(6)                                                                                                                                                                                                             
|        | 4  | .06  |  |  |         | Rights Agreement, dated February 20, 1999, between the
    Company and Equiserve Trust Company, N.A. (f/k/a First
    Chicago Trust Company of New York), as Rights Agent(7)                                                                                                                                                                        
|        | 4  | .07  |  |  |         | Form of Fixed-rate Medium Term Note, Series F, of the
    Company(14)                                                                                                                                                                                                                                                                               
|        | 4  | .08  |  |  |         | Form of Floating-rate Medium Term Note, Series F, of the
    Company(14)                                                                                                                                                                                                                                                                            
|        | 4  | .09  |  |  |         | Form of 7.50% Upper
    DECSSMof the Company(20)                                                                                                                                                                                                                                                                                                    
|        | 4  | .10  |  |  |         | Form of 6.42% Senior Note due 2007 of the Company(20)                                                                                                                                                                                                                                                                                               
|        | 4  | .11  |  |  |         | Form of 7.875% Senior Notes due 2012 of the Company(21)                                                                                                                                                                                                                                                                                             
|        | 10 | .01* |  |  |         | Temple-Inland Inc. 1993 Stock Option Plan(11)                                                                                                                                                                                                                                                                                                       
|        | 10 | .02* |  |  |         | Temple-Inland Inc. 1997 Stock Option Plan(13), as amended
    May 7, 1999(15)                                                                                                                                                                                                                                                                       
|        | 10 | .03* |  |  |         | Temple-Inland Inc. 1997 Restricted Stock Plan(13)                                                                                                                                                                                                                                                                                                   
|        | 10 | .04* |  |  |         | Employment Agreement and Change in Control Agreement dated
    June 1, 2003, between the Company and J. Patrick
    Maley III(22)                                                                                                                                                                                                                   
|        | 10 | .05* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and Kenneth M. Jastrow, II(17), as amended on
    February 11, 2005(26)                                                                                                                                                                                                  
|        | 10 | .06* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and Bart J. Doney(17)                                                                                                                                                                                                                                                    
|        | 10 | .07* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and Kenneth R. Dubuque(17)                                                                                                                                                                                                                                               
|        | 10 | .08* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and Jack C. Sweeny(17)                                                                                                                                                                                                                                                   
|        | 10 | .09* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and M. Richard Warner(17)                                                                                                                                                                                                                                                
|        | 10 | .10* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and Randall D. Levy(17)                                                                                                                                                                                                                                                  
|        | 10 | .11* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and Louis R. Brill(17)                                                                                                                                                                                                                                                   
|        | 10 | .12* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and Scott Smith(17)                                                                                                                                                                                                                                                      
|        | 10 | .13* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and Doyle R. Simons(17)                                                                                                                                                                                                                                                  
|        | 10 | .14* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and David W. Turpin(17)                                                                                                                                                                                                                                                  
|        | 10 | .15* |  |  |         | Change in Control Agreement dated October 2, 2000, between
    the Company and Leslie K. ONeal(17)                                                                                                                                                                                                                                                 
|        | 10 | .16* |  |  |         | Temple-Inland Inc. 2001 Stock Incentive Plan(16)                                                                                                                                                                                                                                                                                                    
|        | 10 | .17* |  |  |         | Temple-Inland Inc. Stock Deferral and Payment Plan (as amended
    and restated effective February 2, 2001(16)                                                                                                                                                                                                                                      

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|        |    |      |  |   |         |                                                                                                                                                                   
|------- | -- | ---- |  | - | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |   |        
|Number  |    |      |  |   | Exhibit
|        |    |      |  |   |        
|        | 10 | .18* |  |  |         | Temple-Inland Inc. Directors Fee Deferral Plan(16)                                                                                                               
|        | 10 | .19* |  |  |         | Temple-Inland Inc. Supplemental Executive Retirement
    Plan(18)                                                                                                 
|        | 10 | .20  |  |  |         | Agreement and Plan of Merger, dated January 21, 2002, among
    the Company, Temple-Inland Acquisition Corporation, and Gaylord
    Container Corporation(19)     
|        | 10 | .21* |  |  |         | Change in Control Agreement dated November 1, 2002, between
    the Company and J. Bradley Johnston(23)                                                           
|        | 10 | .22* |  |  |         | Temple-Inland Inc. 2003 Stock Incentive Plan(24)                                                                                                                  
|        | 10 | .23* |  |  |         | Form of Nonqualified Stock Option Agreement issued pursuant to
    the Temple-Inland Inc. 2003 Stock Incentive Plan(25)                                           
|        | 10 | .24* |  |  |         | Form of Performance Stock Units Agreement issued pursuant to the
    Temple-Inland Inc. 2003 Stock Incentive Plan(25)                                             
|        | 10 | .25* |  |  |         | Form of Restricted Stock Unit Agreement issued pursuant to the
    Temple-Inland Inc. 2003 Stock Incentive Plan(25)                                               
|        | 10 | .26* |  |  |         | Form of Nonqualified Stock Option Agreement for Non-Employee
    Directors issued pursuant to the Temple-Inland Inc. 2003 Stock
    Incentive Plan(25)            
|        | 10 | .27* |  |  |         | Employment Agreement between the company and Kenneth M.
    Jastrow, II, dated February 11, 2005(26)                                                              
|        | 21 |      |  |  |         | Subsidiaries of the Company(27)                                                                                                                                   
|        | 23 |      |  |  |         | Consent of Ernst & Young LLP(27)                                                                                                                                  
|        | 31 | .1   |  |  |         | Certification of Chief Executive Officer pursuant to Exchange
    Act rule 13a-14(a), as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002(27)
|        | 31 | .2   |  |  |         | Certification of Chief Financial Officer pursuant to Exchange
    Act rule 13a-14(a), as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002(27)
|        | 32 | .1   |  |  |         | Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002(27)     
|        | 32 | .2   |  |  |         | Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002(27)     






| |   |                                                         
| | - | --------------------------------------------------------
| | * | Management contract or compensatory plan or arrangement.



| |     |                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to Registration Statement
    No. 2-87570 on Form S-1 filed by the Company with the
    Commission.                                   
|
| | (2) | Incorporated by reference to Post-effective Amendment No. 2
    to Registration Statement No. 2-88202 on Form S-8
    filed by the Company with the Commission. 
|
| | (3) | Incorporated by reference to Post-Effective Amendment No. 1
    to Registration Statement No. 33-25650 on Form S-8
    filed by the Company with the Commission.
|
| | (4) | Incorporated by reference to Registration Statement
    No. 33-27286 on Form S-8 filed by the Company with the
    Commission.                                  
|
| | (5) | Incorporated by reference to Registration Statement
    No. 33-8362 on Form S-1 filed by the Company with the
    Commission.                                   
|
| | (6) | Incorporated by reference to the Companys Form 10-K
    for the year ended December 31, 1988.                                                                  
|
| | (7) | Incorporated by reference to the Companys Registration
    Statement on Form 8A filed with the Commission on
    February 19, 1999.                            
|
| | (8) | Incorporated by reference to the Companys Form 8-K
    filed with the Commission on December 27, 1990.                                                         
|
| | (9) | Incorporated by reference to Registration Statement
    No. 33-40003 on Form S-3 filed by the Company with the
    Commission.                                  

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|     |                                                                                                                                                                                                           
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Registration Statement
    No. 33-43978 on Form S-3 filed by the Company with the
    Commission.                                                                            
|    
|(11) | Incorporated by reference to the Companys Definitive Proxy
    Statement in connection with the Annual Meeting of Shareholders
    held May 6, 1994, and filed with the Commission on
    March 21, 1994.
|    
|(12) | Incorporated by reference to the Companys Form 10-Q
    for the quarter ended September 28, 2002.                                                                                                        
|    
|(13) | Incorporated by reference to the Companys Definitive Proxy
    Statement in connection with the Annual Meeting of Shareholders
    held May 2, 1997, and filed with the Commission on
    March 17, 1997.
|    
|(14) | Incorporated by reference to the Companys Form 8-K
    filed with the Commission on June 2, 1998.                                                                                                        
|    
|(15) | Incorporated by reference to the Companys Definitive Proxy
    Statement in connection with the Annual Meeting of Shareholders
    held May 7, 1999, and filed with the Commission on
    March 26, 1999 
|    
|(16) | Incorporated by reference to the Companys Definitive Proxy
    Statement in connection with the Annual Meeting of Shareholders
    held May 4, 2001, and filed with the Commission on
    March 23, 2001 
|    
|(17) | Incorporated by reference to the Companys Form 10-K
    for the year ended December 30, 2000.                                                                                                            
|    
|(18) | Incorporated by reference to the Companys Form 10-Q
    for the quarter ended June 30, 2001.                                                                                                             
|    
|(19) | Incorporated by reference to the Schedule TO filed by the
    Company on January 22, 2002, in connection with the
    proposed acquisition of Gaylord Container Corporation.                              
|    
|(20) | Incorporated by reference to exhibit 4.2 to the
    Companys Form 8-K filed with the Commission on
    May 3, 2002.                                                                                      
|    
|(21) | Incorporated by reference to exhibit 4.1 to the
    Companys Form 8-K filed with the Commission on
    May 3, 2002.                                                                                      
|    
|(22) | Incorporated by reference to the Companys Form 10-Q
    for the quarter ended September 28, 2003.                                                                                                        
|    
|(23) | Incorporated by reference to the Companys Form 10-K
    for the year ended December 28, 2002.                                                                                                            
|    
|(24) | Incorporated by reference to Appendix A of the
    Companys Proxy Statement dated March 31, 2003, and
    prepared in connection with the annual meeting of stockholders
    held May 2, 2003.           
|    
|(25) | Incorporated by reference to the Companys Form 10-K
    for the year ended January 3, 2004.                                                                                                              
|    
|(26) | Incorporated by reference to the Companys Current Report
    on Form 8-K dated February 11, 2005.                                                                                                        
|    
|(27) | Filed herewith.                                                                                                                                                                                           







| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Current Report on Form 8-K dated October 5,
    2004 reporting under Item 7.01 charges from repositioning
    our mortgage activities.                                                                            
|
| | 2. Current Report on Form 8-K dated October 25,
    2004 reporting under Item 2.02 the Companys earnings
    for the quarter ended October 2, 2004.                                                                 
|
| | 3. Current Report on Form 8-K dated October 26,
    2004 reporting under Item 7.01 the presentation materials
    of our CEO used in a conference call to discuss earnings for the
    quarter ended October 2, 2004.
|
| | 4. Current Report on Form 8-K dated November 5,
    2004 reporting under Item 8.01 a special dividend in the
    amount of $1.00 per share paid on December 15, 2004.                                                
|
| | 5. Current Report on Form 8-K dated November 8,
    2004 reporting under Item 8.01 that J. Patrick
    Maley III was named Executive Vice President, Paper.                                                          
|
| | 6. Current Report on Form 8-K dated December 22,
    2004 reporting under Item 7.01 that Guaranty Bank and
    entered into a Consent Order with the OTS.                                                            

111



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##### Table of Contents



SIGNATURES






| |                   
| | ------------------
| | Temple-Inland Inc.
| | (Registrant)      



| |     |                               
| | --- | ------------------------------
| | By: | /s/ Kenneth M.
    Jastrow, II

| |                          
| | -------------------------
| |                          
| | Kenneth M. Jastrow, II   
| | Chairman of the Board and
| | Chief Executive Officer  





|                                                         |  |                                                                  |  |               |  | 
|-------------------------------------------------------- |  | ---------------------------------------------------------------- |  | ------------- |  | 
|Signature                                                |  | Capacity                                                         |  | Date         
|                                                         |  |                                                                  |  |              
|                                                        
|/s/ Kenneth M.
    Jastrow, IIKenneth
    M. Jastrow, II |  | Director, Chairman of the Board,
    and Chief Executive Officer |  | March 9, 2005
|                                                        
|/s/ Randall D. LevyRandall
    D. Levy                   |  | Chief Financial Officer                                          |  | March 9, 2005
|                                                        
|/s/ Louis R. BrillLouis
    R. Brill                     |  | Vice President and
    Chief Accounting Officer                  |  | March 9, 2005
|                                                        
|/s/ Afsaneh M.
    BeschlossAfsaneh
    M. Beschloss     |  | Director                                                         |  | March 9, 2005
|                                                        
|/s/ Donald M. CarltonDonald
    M. Carlton               |  | Director                                                         |  | March 9, 2005
|                                                        
|/s/ Cassandra C. CarrCassandra
    C. Carr               |  | Director                                                         |  | March 9, 2005
|                                                        
|/s/ E. Linn
    Draper, Jr.E.
    Linn Draper, Jr.       |  | Director                                                         |  | March 9, 2005
|                                                        
|/s/ James T. HackettJames
    T. Hackett                 |  | Director                                                         |  | March 9, 2005
|                                                        
|/s/ Jeffrey M. HellerJeffrey
    M. Heller               |  | Director                                                         |  | March 9, 2005
|                                                        
|/s/ James A. JohnsonJames
    A. Johnson                 |  | Director                                                         |  | March 9, 2005
|                                                        
|/s/ W. Allen ReedW.
    Allen Reed                       |  | Director                                                         |  | March 9, 2005
|                                                        
|/s/ Arthur
    Temple IIIArthur
    Temple III           |  | Director                                                         |  | March 9, 2005
|                                                        
|/s/ Larry E. TempleLarry
    E. Temple                   |  | Director                                                         |  | March 9, 2005

112



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##### Table of Contents



Index to Exhibits Exhibit
    
    
    
    Description
    
    Page21
    
    
    
    
    Subsidiaries of the Company23
    
    
    
    
    Consent of Ernst & Young LLP31.1
    
    
    
    
    Certification of Chief Executive Officer
pursuant to Exchange Act Rule 13a-14(a),
as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    
    
    
    Certification of Chief Financial Officer
pursuant to Exchange Act Rule 13a-14(a),
as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    
    
    
    Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    
    
    
    Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 Note: The Index to Exhibits lists only the Exhibits filed with this Annual Report on Form
10-K. For a complete list of Exhibits, including Exhibits incorporated by reference, please see
Item 15.