##### 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 December 31,
    2005
|                                               
|or                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10239

PLUM CREEK TIMBER COMPANY, INC.

(Exact name of registrant as specified in its
charter)


|                                   |  |                                   
|---------------------------------- |  | ----------------------------------
|                                  
|                                  
|                                  
|                                  
|Organized in the State of Delaware |  | I.R.S. Employer Identification No.
|                                   |  | 91-1912863                        

999 Third Avenue, Suite 4300

Seattle, Washington 98104-4096


Telephone: (206) 467-3600


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

|                                        |  |                                     
|--------------------------------------- |  | ------------------------------------
|Title of Each Class                     |  | Name of Exchange on Which Registered
|                                        |  |                                     
|Common Stock, par value $0.01 per share |  | New York Stock Exchange             
|                                        |  | Pacific Exchange                    

Securities registered pursuant to Section 12(g) of the
Act: None

Indicate by a check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.     Yes þ          No o

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.     Yes o          No þ

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 (§229.405
of this chapter) 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 a large
accelerated filer, an accelerated filer, or a non-accelerated
filer.

þ o o


Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
Yes o          No þ

The aggregate market value of the voting common stock held by
non-affiliates based on the closing sales price on June 30,
2005, was $6,649,724,301. For this calculation, all executive
officers, directors and stockholders owning more than 5% of the
outstanding common stock have been deemed affiliates. Such
determination should not be deemed an admission that such
executive officers, directors and stockholders are, in fact,
affiliates of the registrant.

The number of outstanding shares of the registrants common
stock as of February 21, 2006, was 184,318,974.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by
reference and the Part of the Form 10-K (e.g., Part I,
Part II, etc.) into which the document is incorporated:

Portions of the Proxy Statement for registrants 2006
Annual Meeting of Shareholders to be held on May 3, 2006,
are incorporated by reference into Part III of this Annual
Report on Form 10-K.



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##### 










PLUM CREEK TIMBER COMPANY, INC.

ANNUAL REPORT ON FORM 10-K


For the Fiscal Year Ended December 31, 2005

TABLE OF CONTENTS

|                  |  |                                                                                                                      |     |  |                                     |  |  |    | 
|----------------- |  | -------------------------------------------------------------------------------------------------------------------- | --- |  | ----------------------------------- |  |  | -- | 
|PART I           
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|Item 1.           |  | Business                                                                                                             |     |  | 1                                   | 
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|Item 1A.          |  | Risk Factors                                                                                                         |     |  | 11                                  | 
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|Item 1B.          |  | Unresolved Staff Comments                                                                                            |     |  | 16                                  | 
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|Item 2.           |  | Properties                                                                                                           |     |  | 16                                  | 
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|Item 3.           |  | Legal Proceedings                                                                                                    |     |  | 16                                  | 
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|Item 4.           |  | Submission of Matters to a
    Vote of Security Holders                                                              |     |  | 16                                  | 
|PART II          
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|Item 5.           |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |     |  | 18                                  | 
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|Item 6.           |  | Selected Financial Data                                                                                              |     |  | 19                                  | 
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|Item 7.           |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |     |  | 21                                  | 
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|Item 7A.          |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                       |     |  | 41                                  | 
|Item 8.           |  | Financial Statements and
    Supplementary Data                                                                      |     |  |                                     | 
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|                  |  |                                                                                                                      |     |  | PLUM CREEK TIMBER COMPANY,
    INC. |  |  | 42 | 
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|                  |  |                                                                                                                      |     |  | PLUM CREEK TIMBERLANDS,
    L.P.    |  |  | 73 | 
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|Item 9.           |  | Changes in and Disagreements
    With Accountants on Accounting and Financial Disclosure                             |     |  | 102                                 | 
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|Item 9A.          |  | Controls and Procedures                                                                                              |     |  | 102                                 | 
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|Item 9B.          |  | Other Information                                                                                                    |     |  | 102                                 | 
|PART III         
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|Item 10.          |  | Directors and Executive
    Officers of the Registrant                                                               |     |  | 102                                 | 
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|Item 11.          |  | Executive Compensation                                                                                               |     |  | 103                                 | 
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|Item 12.          |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |     |  | 103                                 | 
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|Item 13.          |  | Certain Relationships and
    Related Transactions                                                                   |     |  | 103                                 | 
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|Item 14.          |  | Principal Accounting Fees
    and Services                                                                           |     |  | 103                                 | 
|PART IV          
|                 
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|Item 15.          |  | Exhibits, Financial
    Statement Schedules                                                                          |     |  | 103                                 | 
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|                 
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|Index to Exhibits |  |                                                                                                                      | 104 | 
|EXHIBIT 10.23    
|EXHIBIT 12.1     
|EXHIBIT 21       
|EXHIBIT 23.1     
|EXHIBIT 31.1     
|EXHIBIT 31.2     
|EXHIBIT 32.1     
|EXHIBIT 32.2     





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##### Table of Contents



PART I/ITEM 1





PART I

When we refer to we, us,
our, the company or Plum
Creek, we mean Plum Creek Timber Company, Inc. and its
consolidated subsidiaries. References in Items 1 through 7
to Notes to Financial Statements refer to the Notes to the
Consolidated Financial Statements of Plum Creek Timber Company,
Inc. included in Item 8 of this form.






|        |         
|------- | --------
|ITEM 1. | BUSINESS

Certain Corporate Governance and Other Available
Information

The company maintains a code of ethics entitled
the Plum Creek Code of Conduct,which applies to each
director and to all of the companys employees including
the principal executive officer, the principal financial officer
and the principal accounting officer. In addition, each
committee of the companys board of directors is governed
by a charter. The Plum Creek Code of Conductand the
governing charters of the Audit, Compensation, and Corporate
Governance and Nominating committees, along with the
companys Corporate Governance Guidelines, can be found in
the Corporate Governance section of the
companys website accessible to the public at
www.plumcreek.com. To find this section, click on the
Investors link and then the Corporate
Governance link. The company will post any amendments to,
or waivers from, its Code of Conduct(to the extent
applicable to any director or any of the companys
executive officers, including the chief executive officer,
principal financial officer or principal accounting officer) at
this location on its website. In addition to these documents,
the companys annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
reports concerning transactions in the companys stock by
directors and certain officers of the company, and any
amendments to those reports, can also be found on our website by
first clicking the Investors link, then the
Earnings/ Financial Publications link and finally
the SEC Filings link. Copies of any of these
documents may be obtained free of charge through our website, by
contacting the companys Investor Relations Department at
999 Third Avenue, Suite 4300, Seattle, Washington 98104, or
by calling (206) 467-3600.


Stock Exchange Listing Compliance and SEC Certifications

On June 1, 2005, Rick R. Holley, as
President and Chief Executive Officer of the company, submitted
an unqualified certification to each of the New York Stock
Exchange and the Pacific Exchange stating that, as of that date,
he was not aware of any violation by the company of the New York
Stock Exchange Corporate Governance Listing Standards or the
Pacific Exchange Corporate Governance Standards, respectively.
Additionally, Mr. Holley and William R. Brown, as Executive
Vice President and Chief Financial Officer of the company, have
each made the certifications required by Sections 302 and
906 of the Sarbanes-Oxley Act of 2002, as amended, which are
filed as exhibits 31.1, 31.2, 32.1 and 32.2, respectively,
to this Annual Report on Form 10-K for the year ended
December 31, 2005.


Industry Overview

GENERAL


The timber industry provides raw material and
conducts resource management activities for the paper and forest
products industry, including the planting, fertilizing,
thinning, and harvesting of trees and the marketing of logs.
Logs are marketed and sold either as sawlogs to lumber and other
wood products manufacturers or as pulplogs to pulp and paper
manufacturers or producers of oriented strand board (OSB). The
timber industry possesses several unique characteristics that
distinguish it from the broader paper and forest products
industry, which we believe makes timber an attractive asset
class, including the following:

Renewable
Resource.Timber is a growing and
renewable resource that, when properly managed, increases in
volume and value as it grows over time. Larger diameter trees
command a higher price than smaller trees because they may be
converted to higher value end-use products such as lumber and
plywood.

Predictable and Improving Growth
Rates.Predictable biological
growth is an attractive feature of timberland assets because it
contributes to predictable, long-term harvest planning. The
development and application of intensive forest management
practices continue to improve biological growth rates.

Harvest
Flexibility.Timberland owners
have some flexibility to increase their harvests when prices are
high and decrease their harvests when prices are low, allowing
timberland owners to maximize the long-term value of their
growing resource base.





ONE




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##### Table of Contents



PART I/ITEM 1


Historical Price
Appreciation.Due to growing
demand combined with limitations on supply caused by, among
other factors, environmental restrictions and urban sprawl,
prices for softwood timber have exhibited a compound annual
growth rate of approximately 4% from 1982 through 2005.

SUPPLY AND DEMAND DYNAMICS

There are five primary end-markets for most of
the timber harvested in the United States: products used in new
housing construction; products used in the repair and remodeling
of existing housing; products for industrial uses; raw material
for the manufacture of pulp and paper; and logs for export.

Supply.Timber
supply can fluctuate based upon a variety of factors. The supply
of timber is limited, to some extent, by the availability of
timberlands. The availability of timberlands, in turn, is
limited by several factors, including government restrictions
relating to environmental regulation and land use, alternate
uses such as agriculture, and expansion of population centers.
The large amounts of capital and long time required to create
new timberlands also limits timber supply.

Over the long-term, timber supply increases when
modern forestry techniques increase productivity of timberlands
and when some marginal agriculture lands revert to timberlands
or are planted to forests for conservation purposes. In certain
regional markets, log supply can expand when log imports
increase relative to log exports.

Demand.The
demand for timber is directly related to the underlying demand
for pulp and paper products, lumber, panel and other wood
related products. The demand for pulp and paper is largely
driven by population growth and per-capita income levels. The
demand for lumber and manufactured wood products is affected
primarily by the level of new residential construction activity
and repair and remodeling activity, which, in turn, is impacted
by changes in general economic and demographic factors,
including population, interest rates for home mortgages and
construction loans. The demand for United States timber is
impacted by the amounts of lumber and other wood products that
are imported into the United States. A significant factor
determining the volume of wood products shipped into the United
States by foreign producers is currency valuation shifts as well
as tariffs and quotas.

Our Business

We are the largest private timberland owner in
the United States, with 8.2 million acres of timberlands
located in 18 states. Our timberlands are well diversified,
not only geographically, but also by species mix and age
distribution. Growth rates vary depending on species, location,
age and forestry practices. We manage our timberlands in two
business segments: the Northern Resources Segment, consisting of
timberlands primarily in Maine, Michigan, Montana, New
Hampshire, Oregon, Washington, West Virginia and Wisconsin; and
the Southern Resources Segment, consisting of timberlands
primarily in Alabama, Arkansas, Florida, Georgia, Louisiana,
Mississippi, North Carolina, Oklahoma, South Carolina and Texas.
In addition, our Other Segment includes our natural resource
businesses that focus on opportunities relating to mineral
extraction, natural gas production and communication and
transportation rights of way resulting from our extensive
property ownership. The Real Estate Segment comprises our sales
of higher and better use timberlands and sales of non-strategic
timberlands, some of which are sold through our taxable REIT
subsidiaries. Our Real Estate Segment includes development of
certain properties, internally and through joint ventures, which
is conducted through our taxable REIT subsidiaries.

Our Manufactured Products Segment, also conducted
through our taxable REIT subsidiaries, includes four lumber
mills, two plywood plants, two medium density fiberboard
(MDF) facilities, and two lumber remanufacturing
facilities. These facilities, strategically located near our
timberlands in Montana, convert logs to lumber, plywood and
other wood products, and convert chips, sawdust and wood
shavings to MDF. The Manufactured Products Segment also has
established a network of nation-wide field inventory points
where inventory is held for customers at either independent
public warehouses or on consignment at customer distribution
centers.

OUR VALUE GROWTH STRATEGY

We seek to maximize the value of our assets by
harvesting trees or selling land only when they have achieved
optimal economic value. Our value growth strategy is guided by
specific operating objectives, including maximizing the value of
our current timberlands through intensive forest management and
optimizing our resource base through acquisitions and
divestitures, and practicing environmentally responsible
resource stewardship. Our value growth strategy includes the
following key elements:

Focus on Maximizing the Value of Our Resource
Base Through Intensive Management of Our
Timberlands.We view our core
timber resource base as a renewable asset with substantial
inherent value. We seek to manage our





TWO




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##### Table of Contents



PART I/ITEM 1


timberlands in a manner that optimizes the
balance among current cash flows, the biological growth of our
timber and prudent environmental management. Our management
approach employs advanced forest management practices, including
the use of a computerized timber inventory system, thinning and
fertilization, and the development and use of genetically
improved seedlings. Tree growth rates vary by region because of
differences in weather, climate and soil conditions.
Newly-planted seedlings take 20 to 30 years to reach
harvest maturity in the Southern United States, 45 to
60 years in the Northwestern United States, 45 to
70 years in the Northeastern United States and 70 to
90 years in inland regions of the Western United States,
depending on the desired product.


Pursue Acquisitions of High-Quality
Timberlands.The United States
timber market is highly fragmented. We believe that there will
continue to be numerous timberland acquisition opportunities due
to the desire among some paper and forest product companies to
sell their timberland assets and the difficulties faced by some
small timberland owners in efficiently managing their
timberlands. We believe we are well positioned to compete for
high-quality timberlands because:



|  |                                                                                                                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are an attractive strategic partner for
    integrated forest products companies seeking to sell their
    timberlands because we do not compete with their pulp or paper
    manufacturing operations and we are willing to enter into
    long-term supply agreements;               
| 
| | We can structure acquisitions on a tax-efficient
    basis through the issuance of common stock, limited partnership
    interests in our operating partnership, or installment notes,
    giving sellers the ability to defer some or all of the taxes
    otherwise payable upon a sale;
| 
| | The geographic reach of our operations enhances
    our awareness of new acquisition opportunities and our knowledge
    of environmental concerns, market dynamics, timber productivity
    and other factors important in valuing timberlands and
    operations in each region;        
| 
| | Our reputation for prudent environmental
    management makes us attractive to sellers concerned with
    continued environmentally responsible forest management; and                                                                                                                    
| 
| | We maintain a conservative capital structure,
    which provides the flexibility to ensure ready access to capital.                                                                                                                                                                       

Our disciplined acquisition strategy has allowed
us to expand and diversify our timberland holdings, as well as
increase our cash flow. Since 1989, we have increased our timber
holdings from 1.4 million acres to approximately
8.2 million acres at December 31, 2005. These
acquisitions have enhanced our operating flexibility and reduced
our exposure to regional timber market fluctuations. Our
strategy is to continue to make strategic acquisitions that are
accretive to cash flow.

Realize the Value of Selected Properties
Through Sale or Exchange.At the
same time that we pursue timberland acquisitions, we continually
review our timberland portfolio to identify properties that are
no longer strategic to our long-term timberland operations or
that may have higher and better uses other than as commercial
timberlands. We estimate that included in the companys
approximately 8.2 million acres of timberlands are about
1.3 million acres of higher and better use timberlands,
which are expected to be sold and/or developed over the next
15 years for residential, recreational or conservation
purposes. In addition, the company has approximately
530,000 acres of non-strategic timberlands, which are
expected to be sold over the next five years. In the meantime,
these timberlands continue to be used productively in our
business of growing and selling timber. Included within the
1.3 million acres of higher and better use timberlands are
approximately 225,000 acres that will be developed by the
companys taxable REIT subsidiaries. Projects developed
internally by the company will generally be low-intensity
development limited to activities associated with obtaining
entitlements and investing in infrastructure such as roads and
utilities. Larger and more complicated projects, such as
destination resorts and master planned communities, will be
developed through joint venture agreements with leading land
developers. Our real estate development business is conducted
through our wholly-owned taxable REIT subsidiaries.

We may sell or exchange timberlands that have
high environmental or other public values and reinvest in
timberlands that are more suitable for commercial timber
management. In addition, we may sell conservation easements that
limit development rights, but ensure that the timberlands will
be maintained as a working forest in perpetuity. We may also
sell or exchange less strategic timberlands to other forest
products companies or non-industrial investors.

Capture the Value of Non-timber Resources on
Our Properties.As part of our
resources business, we focus on realizing the maximum value
potential of our extensive property ownership, including
opportunities relating to mineral extraction. Our strategy
involves forming strategic alliances with industry specific
leaders to identify and pursue such opportunities.





THREE




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##### Table of Contents



PART I/ITEM 1


Practice Responsible Environmental
Forestry.We believe that
environmentally sound management practices contribute to our
growth in value by providing greater predictability in the
management of our assets. We follow the principles of the
Sustainable Forestry
Initiative®
program (SFISM) which are aimed at the
sound management of all natural resources, including soils, air,
watersheds, fisheries and wildlife habitats. These principles
are reflected in our habitat planning efforts, which have led to
the implementation of five major habitat conservation agreements
under which we manage approximately 1.9 million acres of
our timberlands. Our forestry practices on all of our
timberlands have been independently audited and certified by
PricewaterhouseCoopers LLP under the SFISM program.
Our manufacturing practices follow a set of internally developed
environmental principles. See Federal and State
Regulations below.

ACQUISITIONS AND DISPOSITIONS

The table below summarizes significant
acquisitions and dispositions by Plum Creek (dollars in
millions):

|             |                |       |   |         |  |       |   |         |  |  |   |         | 
|------------ | -------------- | ----- | - | ------- |  | ----- | - | ------- |  |  | - | ------- | 
|             |                | 2005A |   | 2004B   |  | 2003C
|            
|            
|            
|            
|Acquisitions |                |       |   |         |  |       |   |         |  |  |   |        
|             | Purchase Price |       | $ | 501     |  |       | $ | 66      |  |  | $ | 162     | 
|             | Acres          |       |   | 754,000 |  |       |   | 78,000  |  |  |   | 139,000 | 
|            
|            
|            
|            
|Dispositions |                |       |   |         |  |       |   |         |  |  |   |        
|             | Acres          |       |   | 232,000 |  |       |   | 375,000 |  |  |   | 125,000 | 
|            
|            



|  |                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | Acquired timberlands primarily consist of
    650,000 acres located in Northern Michigan,
    52,000 acres located in Arkansas, and 50,000 acres
    located in Florida. Dispositions included 63,000 acres
    located in the Northern Resources Segment and 169,000 acres
    in the Southern Resources Segment.



|  |                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | Acquired timberlands are located primarily in
    Arkansas and Maine. Dispositions comprised of 310,000 acres
    located in the Northern Resources Segment and 67,000 acres
    in the Southern Resources Segment.                                              
| 
|C | Acquired timberlands consisted primarily of
    139,000 acres located in South Carolina, Arkansas and New
    Hampshire. Dispositions included 78,000 acres located in
    the Northern Resources Segment and 47,000 acres in the
    Southern Resources Segment.

On October 6, 2001, six former subsidiaries
of Georgia-Pacific Corporation (Georgia-Pacific),
collectively referred to as The Timber Company,
merged with and into Plum Creek (The Timber Company
Merger). The Timber Company held all of the assets and
liabilities attributed to Georgia-Pacifics timber and
timberland business. In the merger, we acquired approximately
3.9 million acres of primarily pine forests in the southern
regions of the United States, 287,000 acres of primarily
Douglas-fir forests in Oregon and 542,000 acres of mixed
hardwood forests in the Appalachian and northeastern regions of
the United States for a purchase price of approximately
$3.4 billion.

Segment Information

Certain financial information for each business
segment is included in Note 14 of the Notes to Financial
Statements and is incorporated herein by reference.

NORTHERN RESOURCES SEGMENT

As of December 31, 2005, the Northern
Resources Segment encompassed 3.9 million acres of
timberlands in Maine, Michigan, Montana, New Hampshire, Oregon,
Washington, West Virginia and Wisconsin, and contained an
estimated 135 million tons (45 million cunits) of
standing timber. Consistent with industry practices in the
North, Plum Creeks estimated inventory of standing timber
includes deductions for visible and hidden defect. Furthermore,
Plum Creeks estimated inventory includes volumes in
environmentally sensitive areas, where we defer harvest until
conditions permit the removal of trees without adversely
affecting the environment.

Logs harvested in the Northern Resources Segment
are sold predominately to domestic mills. Competitors in the
domestic log market include the United States Forest Service,
the Bureau of Land Management, the Bureau of Indian Affairs, the
British Columbia Ministry of Forests, and numerous private
individuals, domestic and foreign industrial timberland owners,
and state agencies located in the regions in which we operate.
In the Northern Resources Segment, domestic wood and fiber
consuming facilities tend to purchase raw materials within a
200-mile radius due to transportation costs. Competitive factors
within a market area generally will include price, species and
grade, quality, proximity to wood consuming facilities and the
ability to consistently meet customer requirements. We compete
based on price and on our reputation as a stable and consistent
supplier of well-merchandised, high-quality logs.



FOUR




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##### Table of Contents



PART I/ITEM 1


With the purchase of approximately
650,000 acres of timberlands from Escanaba Timber LLC in
November 2005, Plum Creek acquired an existing long-term fiber
supply agreement with Escanaba Paper Company. The agreement
stipulates that Plum Creek will supply both hardwood and
softwood pulpwood to Escanaba Paper Company through
December 31, 2016 at prevailing market prices. The
agreement can be mutually extended for an additional three years.

In 2003, we renewed a sourcing agreement with
Stimson Lumber Company to supply logs to Stimsons Montana
mills, based upon prevailing market prices, over a three-year
period ending at December 31, 2006. We have an agreement
with Roseburg Forest Products to supply its Oregon mills with
logs, based upon prevailing market prices, expiring
December 31, 2007. We had a fiber supply agreement with
Stora Enso North America Corporation to supply pulpwood at
prevailing market prices, which expired December 31, 2005.
We also have a long-term agreement to supply pulpwood fiber to
Sappi Ltd.s paper facility in Skowhegan, Maine, at
prevailing market prices. The fiber supply agreement ends in
2023 and may be extended up to an additional 15 years at
the option of Sappi Ltd. We also are committed to supply
pulpwood and wood chips based on negotiated prices that are
reflective of prevailing market levels, to Smurfit Stone
Container Corporation under a long-term supply agreement, which
expires on February 28, 2006. In addition to the Northern
Resources Segment, our Manufactured Products Segment is also
committed under this long-term supply agreement to provide
residual wood chips from our log conversion operations to
Smurfit Stone based on negotiated prices that are reflective of
prevailing market levels. The long-term supply agreements may
restrict our ability to sell timberlands in certain areas within
our Northern Resources Segment.

During 2005, approximately 25% of the timber
harvested in our Northern Resources Segment was sold pursuant to
a supply agreement. We expect this percentage to be
approximately 20% during 2006.

SOUTHERN RESOURCES SEGMENT

As of December 31, 2005, the Southern
Resources Segment consisted of 4.3 million acres of
timberlands (including approximately 320,000 acres of
leased land) located in the states of Alabama, Arkansas,
Florida, Georgia, Louisiana, Mississippi, North Carolina,
Oklahoma, South Carolina and Texas, and contained an estimated
156 million tons (44 million cunits) of standing
timber. Consistent with industry practices in the South, Plum
Creeks estimated inventory of standing timber includes
deductions for visible defect. Furthermore, Plum Creeks
estimated inventory includes volume in environmentally sensitive
areas, where we defer harvest until conditions permit the
removal of trees without adversely affecting the environment.

Logs in the Southern Resources Segment are sold
to third party mills producing a wide array of forest products,
including manufacturers of lumber, plywood, oriented strand
board, and pulp and paper products. We compete with numerous
private and industrial timberland owners, as well as federal and
state agencies, across the Southern United States. Due to
transportation costs, domestic wood and fiber consuming
facilities in the Southern Resources Segment tend to purchase
raw material within a 100-mile radius. Competitive factors
within our Southern Resources Segment include price, species,
grade, quality, proximity to wood consuming facilities and the
ability to consistently meet customer requirements. We compete
based on our reputation as a stable and consistent supplier of
well-merchandised, high-quality logs, and on price.

In connection with The Timber Company Merger, our
Southern Resources Segment entered into a long-term agreement to
sell timber to Georgia-Pacific at prevailing market prices. The
supply agreement expires in 2010 subject to an automatic 10-year
renewal period, unless either party delivers a timely
termination notice. We also have a long-term agreement to supply
logs to West Fraser (South) Inc. at prevailing market prices.
The supply agreement expires in 2015 and may be renewed for
five-year periods thereafter upon mutual consent of both
parties. Additionally, we also are committed to supply pulp logs
to Graphic Packaging Corporation at prices that are based upon
prevailing market prices under a long-term supply agreement. The
supply agreement ends in 2016 and can be extended up to an
additional 10 years by either party. The long-term supply
agreements may restrict our ability to sell timberlands in
certain areas within our Southern Resources Segment.

During 2005, approximately 25% of the timber
harvested in our Southern Resources Segment was sold pursuant to
a supply agreement. We expect this percentage to be
approximately the same during 2006.

REAL ESTATE SEGMENT

We estimate that included in our approximately
8.2 million acres of timberlands are approximately
1.3 million acres of higher and better use timberlands and
about 530,000 acres of non-strategic timberlands. The
higher and better use timberlands are expected to be sold over
the next 15 years for residential, recreational or
conservation purposes. The



FIVE




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PART I/ITEM 1


non-strategic timberlands are expected to be sold
over the next five years. Until the properties are sold, they
will continue to be used productively in our business of growing
and selling timber.


Included within the 1.3 million acres of
higher and better use timberlands are approximately
225,000 acres that may be developed by the company.
Projects developed internally by the company will generally be
low-intensity development limited to activities associated with
obtaining entitlements and investing in infrastructure, such as
roads and utilities. Larger and more complicated projects, such
as destination resorts and master planned communities, will be
developed through joint venture agreements with leading land
developers. Our real estate development business is conducted
through our wholly-owned taxable REIT subsidiaries.

We have identified 123,000 acres with an
estimated 110 properties, that we expect to develop internally
over the next 15 years. At December 31, 2005, we have
ten internal development properties, or 5,900 acres
entitled and an additional 18 properties, or 23,000 acres
in the planning process. Listed below is a summary as of
December 31, 2005 of our ten entitled or developed
properties to be sold:

|                |  |            |      |             |  |       |       |                 |  |  |     |  |  |   |        | 
|--------------- |  | ---------- | ---- | ----------- |  | ----- | ----- | --------------- |  |  | --- |  |  | - | ------ | 
|Location        |  | Year Sales |      |             |  | Acres |       | Average Selling
|(County, State) |  | Begin      |      | Total Acres |  | Sold  |       | Price Per Acre 
|               
|               
|               
|               
|Lake, MT        |  |            | 2006 |             |  |       | 466   |                 |  |  |    |  |  |   |       | 
|Flathead, MT    |  |            | 2006 |             |  |       | 521   |                 |  |  |    |  |  |   |       | 
|Lake, MT        |  |            | 2006 |             |  |       | 140   |                 |  |  |    |  |  |   |       | 
|Newton, GA      |  |            | 2006 |             |  |       | 413   |                 |  |  |    |  |  |   |       | 
|Butts, GA       |  |            | 2006 |             |  |       | 305   |                 |  |  |    |  |  |   |       | 
|Langdale, WI    |  |            | 2006 |             |  |       | 618   |                 |  |  |    |  |  |   |       | 
|King, WA        |  |            | 2006 |             |  |       | 1,900 |                 |  |  |    |  |  |   |       | 
|Volusia, FL     |  |            | 2007 |             |  |       | 1,445 |                 |  |  |    |  |  |   |       | 
|Piscataquis, ME |  |            | 2002 |             |  |       | 450   |                 |  |  | 386 |  |  | $ | 16,231 | 
|Oneida, WI      |  |            | 2005 |             |  |       | 47    |                 |  |  | 16  |  |  | $ | 11,250 | 
|                |  |            |      |             |  |       |       |                 |  | 
|                |  |            |      |             |  |       | 6,305 |                 |  |  | 402 |  |  |   |        | 
|               
|               

The company estimates that approximately
102,000 acres will be developed through joint venture
agreements over the next 15 to 20 years. At
December 31, 2005, we have entered into three joint venture
agreements with land developers for two projects in northeast
Florida and one in southeast Georgia. The three ventures cover
approximately 6,700 acres. We are the minority partner in
each of these joint ventures. Our involvement in these joint
ventures is limited to selling and/or contributing land and
exercising certain approval rights. Our development partner is
responsible for managing all of the development activities and
providing for the related capital. We expect these joint
ventures will each take from five to ten years to complete with
respect to development activities and sales. We do not expect
any significant revenues from these joint ventures during 2006.

We compete with numerous sellers of entitled and
unentitled land in hundreds of local markets.

MANUFACTURED PRODUCTS SEGMENT

Lumber.We
produce a diverse line of softwood lumber products, including
common, select and edge-glued boards, studs and finger-jointed
studs. Lumber products manufactured in our two studmills, two
random-length board mills, and remanufacturing facility in
western Montana, along with our remanufacturing facility in
Idaho, are targeted to domestic lumber retailers, such as retail
home centers, for use in repair and remodeling projects. These
products are also sold to stocking distributors for use in home
construction.

Competition in our lumber markets is based on
price and quality and, to a lesser extent, the ability to meet
delivery requirements on a consistent long-term basis and to
provide specialized customer service. We compete in domestic
lumber markets with many United States, Canadian and European
producers. In the past few years, Canadian lumber producers have
increased their penetration into the United States market due to
their lower wood fiber costs. Competition from European lumber
producers varies from year to year and is significantly impacted
by changes in currency exchange rates and ocean freight rates.
The lumber market is also subject to competition from substitute
products, such as products made from engineered wood composites,
fiber/cement composites, plastics and steel.

Our lumber and plywood mills produce residual
wood chips, sawdust and planer shavings as by-products of the
conversion of logs into finished products. The wood chips are
sold to regional paper and pulp mills or used in our



SIX




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PART I/ITEM 1


MDF facilities, which also consume the sawdust
and shavings. A substantial portion of our residual wood chip
production is sold to Smurfit Stone Container Corporation under
a long-term supply agreement based on negotiated prices that are
reflective of prevailing market levels, which expires on
February 28, 2006.


Plywood.Our
two plywood plants in western Montana produce high-grade
softwood plywood that we sell primarily into domestic
specialized industrial markets, including boat, recreational
vehicle, transportation and concrete forming applications. Our
plywood products are generally of higher quality than commodity
construction grade products and generally command higher prices
in these specialty markets. While some plywood products are sold
directly to large industrial customers, the majority is sold via
stocking wholesale distributors. We also export about 6% of our
plywood to Canada. See Lumber above for a
discussion of residual wood chips.

Competition within the plywood market is based
primarily on price and quality and, to a lesser extent, the
ability to offer a full line of products and meet delivery
requirements on a consistent, long-term basis. The domestic
plywood market is characterized by numerous large and small
producers and is also subject to competition from oriented
strand board, a less expensive substitute wood product used
primarily in commodity construction markets. Oriented strand
board continues to capture an increasing percentage of the North
American structural panel market due to its low cost. Oriented
strand board has now captured over 60% of the structural panel
market, and this percentage is expected to increase over the
next several years as additional oriented strand board plants
are built or existing facilities are expanded. This trend has
forced closure of marginal plywood capacity over the past
several years. To improve operating performance, some commodity
plywood manufacturers have refocused their products toward the
specialty plywood market, resulting in increased competition in
the markets we serve. Recently, competition from imported South
American plywood has also impacted the high-grade sanded plywood
market. We expect to remain competitive due to our strong
customer base, extensive experience in industrial markets,
supply of superior quality timber, and reputation for
high-quality products.

Medium Density
Fiberboard.Our MDF facilities in
western Montana supplies high-quality MDF to a wide range of
customers throughout North America. Some of the more common uses
for our MDF include furniture and cabinet components,
architectural moldings, doors, store fixtures, core material for
hardwood plywood, commercial wall paneling and substrate for
laminate flooring. Our MDF facilities have a combined capacity
of approximately 260 million square feet. In 2005, both
lines operated near full production capability yielding a
combined output of approximately 255 million square feet.

Outside North America, the MDF industry has
undergone dramatic growth in terms of productive capacity and
demand for its products. Manufacturers compete on a global scale
on the basis of price, quality, service and the availability of
specialty products. Additionally, MDF is a ready substitute for
solid wood, hardboard and plywood in specific applications.
Competition in the North American MDF industry has continued to
intensify due to imports from New Zealand, Asia and South
America. In addition, the continuing shift of end product
production to offshore manufacturing, as has been seen with
certain types of furniture from China and moldings from South
America, continues to negatively impact the North American MDF
industry.

OTHER SEGMENTNATURAL RESOURCES

We focus on realizing the maximum value potential
of our extensive property ownership, including opportunities
relating to mineral extraction, natural gas production and
communication and transportation rights of way. This segment
represents a diverse array of natural resource products and
markets subject to widely varying forms and levels of
competition. Our strategy involves forming strategic alliances
with industry specific leaders to identify and pursue such
opportunities. We currently receive royalty revenue from the
extraction of oil, gas, and minerals from some of our
timberlands.

During the second quarter of 2004, the company
sold its working interest in a joint operating agreement related
to the development of coalbed methane gas to Geomet, Inc. for
$27 million. The agreement provides for contingent
additional sales proceeds of up to $3 million payable in
2008. In the fourth quarter of 2004, we sold certain subsurface
property rights (primarily coal reserves, excluding coalbed
methane, oil and gas reserves) in Buchanan County, Virginia.
During 2005, the remainder of the companys coal reserves
was sold. For the year ended December 31, 2005, we received
sales proceeds of $21 million and, after deducting our book
basis of $1 million, recorded a gain of $20 million.
For the year ended December 31, 2004, we received sales
proceeds of $23 million and, after deducting our book basis
of $0.1 million, recorded a gain of $23 million.



SEVEN




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PART I/ITEM 1


We continue to evaluate a wide variety of
non-timber natural resource opportunities, and we expect to
continue to negotiate royalty arrangements, leases, joint
ventures, and asset sales to capture the maximum value for all
of our non-timber natural resource assets.

Timber Resource Management and Environmental Stewardship

RESOURCE MANAGEMENT


We view our timberlands as assets with
substantial inherent value. We strive to manage them in an
economically prudent and environmentally responsible manner to
enhance their value. We seek to enhance value by improving the
productivity of our forests, controlling harvesting costs, and
sorting and merchandising logs to obtain their highest value.

We use different management techniques in each of
our regions, employing a variety of the most cost effective
silvicultural methods available. We expect timber growth rates
on our timberlands to continue to improve over time as a result
of genetic advances in seedlings, intensive forest management
practices such as thinning and fertilization, and the increasing
proportion of our timberlands that are converted from natural
forests to actively managed plantations. Technology and forest
management advances have increased growth rates and shortened
harvest cycles. We believe our focus on intensive management
practices will enhance forest productivity and increase the
value of our timberlands over time.

Value can be enhanced on younger timber stands
through thinning operations. Value increases as trees grow and
add wood volume. Thinning a timber stand enables the healthier
and potentially more valuable trees to grow more rapidly. As
trees grow larger, they can be used in higher value applications
such as high-grade lumber, plywood, and furniture. We also
consider the impact of forest management activities on
properties with potentially higher and better uses other than
long-term timber production, and modify silviculture and harvest
plans accordingly.

Intensive silvicultural applications, including
the use of genetically improved seedlings, early and
mid-rotation applications of fertilizers and chemicals to
control plant competition, and pre-commercial thinning, will
continue to enhance the growth and value of our timberlands.
These projects improve not only the growth of the forests, but
enhance the quality of the wood grown, reduce future harvesting
costs, and shorten the length of harvest rotations.

It is our policy to ensure that every acre
harvested is promptly reforested. Based on the geographic and
climatic conditions of the harvest site, harvested areas may be
regenerated naturally by leaving mature trees to reseed the
area. Natural regeneration methods are used on a substantial
portion of our timberlands in the Northern Resources Segment. In
the Southern Resources Segment, substantially all reforestation
is done by planting.

Forests are subject to a number of natural
hazards, including damage by fire, hurricanes, insects and
disease. Severe weather conditions and other natural disasters
can also reduce the productivity of timberlands and disrupt the
harvesting and delivery of forest products. While damage from
natural causes is typically localized and would normally affect
only a small portion of our timberlands at any one time, these
hazards are unpredictable and losses might not be so limited.
The size and diversity of our timberlands, together with our
intensive forest management, should help to minimize these
risks. Consistent with the practices of other large timber
companies, we do not maintain insurance against loss to standing
timber on our timberlands due to natural disasters, but we do
maintain insurance for loss of already harvested logs due to
fire and other occurrences. During 2005, a loss of
$2 million was recorded as a result of hurricane damage.
During 2003, a loss of $4 million was recorded as a result
of forest fires on approximately 45,000 acres of our
timberlands in Montana.

ENVIRONMENTAL STEWARDSHIP

We practice environmentally responsible resource
management. We adhere to the philosophy that environmentally
sound management practices contribute to the companys
growth in value by providing greater predictability in the
management of its natural resource assets. We follow the
principles and objectives of the Sustainable Forestry
Initiative®
program (SFISM), which sets forth a
comprehensive approach to responsible forest stewardship. Our
forestry practices on all of our timberlands have been
independently audited and certified by
PricewaterhouseCoopers LLP under the SFISM
program. The SFISM program principles, which can be
found on the companys website at www.plumcreek.com,
are designed to ensure that forest management is integrated with
the conservation of soil, air and water resources, wildlife and
fish habitat, and aesthetics.

Consistent with these principles, we have
actively engaged in habitat conservation planning. We currently
manage 1.9 million acres under five habitat conservation
agreements. The habitats of hundreds of species are protected by
these agreements, including 15 species listed as threatened
under the Endangered Species Act. These conservation



EIGHT




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##### Table of Contents



PART I/ITEM 1


agreements include: the Central Cascades Habitat
Conservation Plan, which provides habitat protection for
315 species and impacts 0.1 million acres of our
timberlands in Washington State; the Swan Valley Grizzly Bear
Agreement, which covers 0.1 million acres of our
timberlands in western Montana; the Native Fish Habitat
Conservation Plan, which provides for habitat protection of
9 species of native trout and salmon on 1.3 million
acres of our land in Montana; the Red-Cockaded Woodpecker
Habitat Conservation Plan, which covers 0.3 million acres
of our timberlands in Arkansas and Louisiana; and the Karner
Blue Butterfly Habitat Conservation Plan, which extends to
0.1 million acres of our timberlands in Wisconsin where the
Karner Blue Butterfly is found. In addition to these completed
conservation agreements, we are in the process of negotiating an
agreement with the U.S. Fish and Wildlife Service pursuant
to which we will conserve additional habitat for the
red-cockaded woodpecker on other portions of our Southern
ownership not covered by our Red-Cockaded Woodpecker Habitat
Conservation Plan. We expect this agreement to cover
0.6 million acres.


Raw Materials

Our lumber and plywood facilities obtain
approximately two-thirds of their logs from our Montana
timberlands. Our timberlands currently supply high-quality logs
and preferred timber species to our lumber and plywood
facilities, although future harvest levels on our Montana
timberlands are expected to decline. Furthermore, over time the
average log size is expected to decline due to evolving harvest
and growth patterns.

Our lumber and plywood facilities have purchased
and will continue to source stumpage and logs from external
suppliers, including the United States Forest Service, Bureau of
Indian Affairs, and state and private timberland owners. We
expect to increase purchases of stumpage and logs from external
sources as harvest levels on our Montana timberlands decline.
The geographic area from which our lumber and plywood facilities
obtain logs may expand or contract from year to year as the cost
of logs and value of manufactured products fluctuates. (For
further discussion of other timber supply issues see
Federal and State Regulations below.) Our MDF
facilities have a consistent supply of chips, sawdust and wood
shavings from internal and external sources. Competition for
such wood fiber, however, will intensify as harvest levels
decline. Both MDF and plywood use large quantities of resins,
which are procured from a reliable supplier. Our two lumber
remanufacturing facilities (the Montana finger-joint stud plant
and the Idaho pine board plant) obtain about 35-45% and 10-20%,
respectively, of their lumber raw materials from Plum Creek
sawmills, with the remainder being procured from third party
suppliers.

Competition

Markets for manufactured forest products are
highly competitive in terms of price and quality. Some of our
manufactured forest products competitors have substantially
greater financial and operating resources. In addition, wood
products are subject to increasing competition from a variety of
substitutes, including non-wood and engineered wood products as
well as import competition from other worldwide suppliers. We
believe we can compete effectively because of our extensive
private timber inventory, our reputation for environmentally
responsible forestry, which has positioned us to meet regulatory
challenges on a cost-effective basis, our reputation as a
dependable, long-term supplier of quality products, our
innovative approach to providing high-quality, value-added
products to various retail and industrial niche markets and the
integration of our timberlands with efficient manufacturing
processes.

Seasonal Effects

Log sales volumes from our Northern Resources
Segment are typically at their lowest point in the second
quarter of each year when warming weather thaws and softens
roadbeds, thus restricting access to logging sites. Log sales
volumes from our Southern Resources Segment are generally at
their lowest point during the first quarter of each year, as
winter rains limit operations.

Demand for manufactured products is generally
lower in the winter quarter when activity in construction
markets is slower, and higher in the spring, summer and fall
quarters when construction increases. Working capital varies
with seasonal fluctuations.

Federal and State Regulations

GENERAL ENVIRONMENTAL REGULATION


Our operations are subject to federal, state and
local environmental laws and regulations, including laws
relating to water, air, solid waste and hazardous substances and
the requirements of the Federal Occupational Safety and Health
Act and comparable state statutes relating to the health and
safety of our employees. Although we believe that we are in
material compliance with these requirements, there can be no
assurance that we will not incur significant costs,



NINE




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##### Table of Contents



PART I/ITEM 1


civil and criminal penalties, and liabilities,
including those relating to claims for damages to property or
natural resources, resulting from our operations. We maintain
environmental and safety compliance programs and conduct regular
internal and independent third-party audits of our facilities
and timberlands to monitor compliance with these laws and
regulations.


ENDANGERED SPECIES

The Endangered Species Act protects species
threatened with possible extinction. A number of species
indigenous to our timberlands have been listed as threatened or
endangered or have been proposed for one or the other status
under the Endangered Species Act. As a result, our activities in
or adjacent to the habitat of these species may be subject to
restrictions on the harvesting of timber and the construction
and use of roads.

We have received incidental take permits and
similar authorizations pursuant to the Central Cascades Habitat
Conservation Plan, the Native Fish Habitat Conservation Plan,
the Swan Valley Grizzly Bear Agreement, the Red-Cockaded
Woodpecker Habitat Conservation Plan, and the Karner Blue
Butterfly Habitat Conservation Plan from the U.S. Fish and
Wildlife Service (and from National Marine Fisheries Service, in
the case of anadromous species) that in total cover our forest
management on 1.6 million acres in the Northern Resources
Segment and 0.3 million acres in the Southern Resources
Segment. As required by the Endangered Species Act, we prepared
habitat conservation plans that will govern our management
activities on the timberlands covered by the plans in these
regions during their respective terms. The habitat conservation
plans require us to maintain certain levels of wildlife and fish
habitat, and to take numerous other mitigation measures,
including the protection of riparian areas. In consideration for
this mitigation, we are authorized to conduct forestry practices
that are consistent with the plans, even though they may have an
adverse impact on the listed species covered by the plans.

We are currently in the process of negotiating an
agreement with the Fish and Wildlife Service to address the
presence on or near some of our Southern properties of
red-cockaded woodpeckers, listed as endangered under the
Endangered Species Act. Under the proposed agreement, which
would cover approximately 0.6 million acres outside of the
recently implemented Red-Cockaded Woodpecker Habitat
Conservation Plan, we would agree to concentrate our
red-cockaded woodpecker management in a designated conservation
area, enabling the birds to have much improved chances for
long-term survival. In exchange, we would ultimately gain
increased flexibility to manage our surrounding timberlands for
commercial timber production.

Although the habitat conservation plans and the
grizzly bear agreement have been implemented and are functioning
as expected, there can be no assurance that they will remain in
force or be sufficient to protect us against subsequent
amendments of the Endangered Species Act. And while we expect
that the new agreement for red-cockaded woodpeckers will help us
effectively manage the presence of that species on our Southern
timberlands, there can be no assurance that an agreement will be
reached. Nor can there be any assurance that the habitat
conservation plans, the grizzly bear agreement and the safe
harbor agreement, individually or collectively, will be
sufficient to protect us against the listing of additional
species, or against changes to other applicable laws and
regulations. Any of these changes could materially and adversely
affect our operations.

CLEAN WATER

The Clean Water Act and comparable state laws,
regulations and best management practices programs protect water
quality. As a result, our resource management activities
adjacent to rivers and streams as well as the point source
discharges from our manufacturing facilities are subject to
strict regulation. Most silvicultural activities are defined by
regulation to be non-point sources and thus do not
require federal permits from the Environmental Protection
Agency, but rather are subject to state regulation and best
management practices programs. Recent litigation in numerous
courts, however, has challenged this silvicultural exemption
under the Clean Water Act. Accordingly, there can be no
assurance that our forest management activities will not be
subject to increased regulation under the Clean Water Act in the
future.

At this time, we believe that federal and state
laws and regulations related to the protection of endangered
species and clean water will not have a material adverse effect
on our financial position, results of operations or liquidity.
We anticipate, however, that increasingly strict laws and
regulations relating to the environment, natural resources and
forestry operations, as well as increased social concern over
environmental issues, may result in additional restrictions on
us leading to increased costs, additional capital expenditures
and reduced operating flexibility. We believe that our
experience provides us a relative competitive advantage in
managing environmental risks.



TEN




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##### Table of Contents



PART I/ITEM 1A


In connection with the October 6, 2001
merger with The Timber Company, Plum Creek agreed to indemnify
Georgia-Pacific for substantially all of the liabilities
attributed to The Timber Company. During 2003, Georgia-Pacific
provided Plum Creek with information about the existence of mine
tailings and approximately 4.5 billion gallons of acidic
surface water on approximately 90 acres in Hot Spring
County, Arkansas, on former Georgia-Pacific properties. Barite
mining and related activities were conducted on the site between
1939 and 1981 in part by lessees of an entity that was acquired
by Georgia-Pacific. The site is currently being investigated and
no remediation plan has yet been approved. No amounts have been
accrued for this potential liability. Furthermore, to the extent
Plum Creek is required to indemnify Georgia-Pacific for its
share of the remediation costs, Plum Creek may be able to
recover a portion of its cost from Georgia-Pacifics
insurance policy, or indemnity obligations of the various
lessees that conducted mining operations on the property, or
both.

TIMBERLANDS

Our forest practices are and will in the future
be subject to specialized statutes and regulations in the states
where we operate. Many of these states have enacted laws that
regulate forestry operations, such as growing, harvesting and
processing activities on timberlands. Among other requirements,
these laws impose some reforestation obligations on the owners
of timberlands. Several states require prior notification before
beginning harvesting activities. A number of states require a
regulatory review taking from 15 to 30 days or more prior
to harvesting, depending upon the environmental and other
sensitivities of the proposed activity. Other state laws and
regulations control the following activities: slash burning and
harvesting during fire hazard periods; activities that affect
water courses or are in proximity to inland shorelines; and
activities that affect water quality, and some grading and road
construction activities.

Encumbrances

Under the terms of our debt agreements, we have
agreed not to pledge, assign or transfer timberlands, except
under limited circumstances. The holders of our $25 million
face value 11.125% First Mortgage Notes due 2007 have a first
mortgage lien on a significant portion of our lumber, plywood
and MDF facilities.

The title to our timberlands does not always
include the related hard rock mineral interests or oil and gas
rights. Title to the timberlands is subject to presently
existing easements, rights of way, flowage and flooding rights,
servitudes, hunting and other leases, licenses and permits, none
of which materially adversely affect the value of the
timberlands or materially restrict the harvesting of timber or
other operations.

Employees

We currently have approximately 800 salaried
and 1,300 non-union hourly employees. We believe that our
employee relations are good. Our wage scale and benefits are
generally competitive with other forest products companies. The
planting of seedlings and the harvesting and delivery of logs
are conducted by independent contractors who are not our
employees.






|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS

BUSINESS AND OPERATING RISKS

The Cyclical Nature of Our Business Could
Adversely Affect Our Results of Operations

Our results of operations are affected by the
cyclical nature of the forest products industry. Historical
prices for logs and manufactured wood products have been
volatile, and we, like other participants in the forest products
industry, have limited direct influence over the time and extent
of price changes for logs and wood products. The demand for logs
and wood products is affected primarily by the level of new
residential construction activity and, to a lesser extent,
repair and remodeling activity and other industrial uses. The
demand for logs is also affected by the demand for wood chips in
the pulp and paper markets. These activities are, in turn,
subject to fluctuations due to, among other factors:



|  |                                                               
|- | --------------------------------------------------------------
| | changes in domestic and international economic
    conditions;
| 
| | interest rates;                                               
| 
| | population growth and changing
    demographics; and          
| 
| | seasonal weather cycles (e.g., dry summers,
    wet winters). 

Decreases in the level of residential
construction activity generally reduce demand for logs and wood
products. This results in lower revenues, profits and cash
flows. In addition, industry-wide increases in the supply of
logs and wood



ELEVEN




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##### Table of Contents



PART I/ITEM 1A


products during favorable price environments can
also lead to downward pressure on prices. Timber owners
generally increase production volumes for logs and wood products
during favorable price environments. Such increased production,
however, when coupled with even modest declines in demand for
these products in general, could lead to oversupply and lower
prices.


Our results of operations may also be subject to
global economic changes as global supplies of wood fiber shift
in response to changing economic conditions. Changes in global
economic conditions that could affect our results of operations
include, but are not limited to, new timber supply sources and
changes in currency exchange rates, foreign and domestic
interest rates and foreign and domestic trade policies.

In addition, changes in our ability to sell or
exchange non-strategic timberlands and timberland properties
that have higher and better uses at attractive prices, or
changes that adversely affect our ability to execute on certain
real estate development activities conducted through our taxable
REIT subsidiaries, could have a significant effect on our
results of operations.

The following factors, among others, may
adversely affect the timing and amount of our income generated
by our land sales or our real estate development activities:



|  |                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | general economic conditions;                                                                                                                                                                                          
| 
| | availability of funding for governmental
    agencies, developers, conservation organizations, individuals
    and others to purchase our timberlands for conservation,
    recreation, residential or other purposes;
| 
| | local real estate market conditions, such as
    oversupply of, or reduced demand for, properties sharing the
    same or similar characteristics as those in our portfolio;                                          
| 
| | competition from other sellers of land and real
    estate developers;                                                                                                                                                
| 
| | weather conditions or natural disasters having an
    adverse effect on our properties;                                                                                                                               
| 
| | relative illiquidity of real estate investments;                                                                                                                                                                      
| 
| | changes in interest rates;                                                                                                                                                                                            
| 
| | impact of federal, state and local land use and
    environmental protection laws;                                                                                                                                    
| 
| | changes in laws, regulations or the regulatory
    environment affecting tax, real estate and zoning; or                                                                                                              
| 
| | our ability to obtain all land use entitlements
    and other permits necessary for our development activities.                                                                                                       

The Forest Products Industry is Highly
Competitive

The forest products industry is highly
competitive in terms of price and quality. Wood products are
subject to increasing competition from a variety of substitute
products, including non-wood and engineered wood products. For
example, plywood markets are subject to competition from
oriented strand board, and U.S. lumber and log markets are
subject to competition from other worldwide suppliers.

Historically, Canada has been a significant
source of lumber for the U.S. market, particularly in the
new home construction market. This source of lumber was
constrained in April 1996 when a five-year lumber trade
agreement between the U.S. and Canada went into effect. The
trade agreement was intended to limit the volume of Canadian
lumber exported into the U.S. through the assessment of an
export tariff on annual lumber exports to the U.S. in
excess of certain levels from the four major producing Canadian
provinces.

The trade agreement expired in March 2001, and
soon thereafter a U.S. industry coalition, of which Plum
Creek is a member, submitted anti-dumping and countervailing
duty petitions to the International Trade Commission and the
U.S. Department of Commerce. In March 2002, the Department
of Commerce rendered a final determination in favor of the
U.S. industry coalition and set a 19.3% countervailing duty
on Canadian lumber imports and an anti-dumping duty on all
non-investigated Canadian exporters averaging 9.7% (representing
the weighted average of the anti-dumping rates imposed on the
investigated Canadian exporters). The Department of Commerce
decreased these duties in April 2002 to 18.8% and 8.4%,
respectively, and in December 2004, it decreased them again to
16.4% and 3.8%, respectively. In December 2005, the
countervailing duty rate was reduced to 8.7% and the
anti-dumping duty was reduced to 2.1% for a combined duty of
10.8%. Due to strong demand for lumber in the U.S. and favorable
lumber prices, the duties have not thus far had the effect of
decreasing Canadian lumber imports share of the
U.S. market. It is uncertain whether Canadas share of
the U.S. market would be adversely affected by import
duties in times of weaker domestic demand for lumber.



TWELVE




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##### Table of Contents



PART I/ITEM 1A


The future of the U.S.-imposed import duties on
Canadian lumber remains uncertain. While the WTO and NAFTA
appeal boards have issued rulings on Canadian challenges to the
duties that affirm the U.S. position regarding a Canadian
subsidy on stumpage, the rulings also included provisions for
re-examining the calculation and level of the duties. In
September 2005, the NAFTA panel remanded to the Department of
Commerce its subsidy calculation upon which the duties are based
with instructions to make a de minimus calculation.
In response, the Department of Commerce issued a subsidy
calculation of 0.8% in November 2005, which could result in the
elimination of the countervailing duty by as early as September
2006. The U.S. industry coalition has challenged the
Department of Commerce subsidy calculation to a NAFTA panel. If
the calculation is ultimately upheld, it is possible that the
countervailing duty could be eliminated entirely.

In addition, the NAFTA panel has ruled that the
International Trade Commissions determination of injury to
U.S. industry from Canadian lumber imports, which is the
basis for imposing the duties, was not supported with
substantial evidence. The commission unsuccessfully appealed
this decision, and as a result, was directed to issue a no
injury opinion. The NAFTA decision was then unsuccessfully
appealed to an Extraordinary Challenge Committee under the NAFTA
dispute resolution process. Presently, the U.S. industry
coalition has initiated a constitutional challenge to a portion
of the NAFTA dispute resolution process. The ruling on this
challenge could have a material impact on the outcome of this
dispute.

The U.S. and representatives of the Canadian
government continue, from time to time, to pursue a settlement
agreement. However, there can be no assurance that an agreement
will be reached, or that the terms of any such final agreement
would be favorable to the U.S. lumber industrys
interests. Likewise, there can be no assurance that the ultimate
legal resolution of this dispute will be on terms favorable to
the U.S. industrys interest. Therefore, other factors
remaining unchanged, any downward pressure on domestic lumber
and log prices caused by Canadian imports could continue or
increase, particularly during periods of weak lumber demand.

Our Cash Dividends are Not Guaranteed and May
Fluctuate

We have elected to be taxed as a REIT under
sections 856-860 of the United States Internal Revenue Code
of 1986, as amended. Generally, REITs are required to distribute
90% of their taxable income. However, REITs are required to
distribute only their ordinary taxable income and not their net
capital gains income. Accordingly, we do not believe that we are
required to distribute material amounts of cash given that
substantially all our taxable income is treated as capital gains
income. To the extent capital gains income is not distributed to
shareholders, a REIT would be subject to a 35% Federal corporate
income tax, and applicable state income taxes, on the
undistributed capital gain income. In addition, the shareholders
would be required to report their share of the retained capital
gains income on their respective income tax returns, but would
receive a refundable tax credit for their share of the tax paid
at the corporate level.

Our Board of Directors, in its sole discretion,
determines the amount of the quarterly dividends (including the
determination of whether to retain net capital gains income) to
be provided to our stockholders based on consideration of a
number of factors including, but not limited to, our results of
operations, cash flow and capital requirements, economic
conditions, tax considerations, borrowing capacity and other
factors, including debt covenant restrictions that may impose
limitations on cash payments, future acquisitions and
divestitures, harvest levels, changes in the price and demand
for our products and general market demand for timberlands
including those timberland properties that have higher and
better uses. Consequently, our dividend levels may fluctuate.

We May Be Unsuccessful in Carrying Out Our
Acquisition Strategy

We intend to pursue acquisitions of strategic
timberland properties. As with any investment, our future
acquisitions, if any, may not perform in accordance with our
expectations. In addition, we anticipate financing such
acquisitions through cash from operations, borrowings under our
unsecured credit facilities, proceeds from equity or debt
offerings (including offerings of limited partnership units by
our operating partnership) or proceeds from asset dispositions,
or any combination thereof. Our inability to finance future
acquisitions on favorable terms or the failure of any
acquisitions to conform to our expectations, could adversely
affect our results of operations.

We Depend on External Sources of Capital for
Future Growth

Our ability to finance growth is dependent to a
significant degree on external sources of capital. Our ability
to access such capital on favorable terms could be hampered by a
number of factors, many of which are outside of our control,
including, without limitation, a decline in general market
conditions, increases in interest rates, an unfavorable market
perception of our growth potential, a decrease in our current or
estimated future earnings or a decrease in the



THIRTEEN




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##### Table of Contents



PART I/ITEM 1A


market price of our common stock. In addition,
our ability to access additional capital may also be limited by
the terms of our existing indebtedness, which, among other
things, restricts our incurrence of debt and the payment of
dividends. Any of these factors, individually or in combination,
could prevent us from being able to obtain the capital we
require on terms that are acceptable to us, and the failure to
obtain necessary capital could materially adversely affect our
future growth.


Our Ability to Harvest Timber May Be Subject
to Limitations Which Could Adversely Affect Our
Operations

Weather conditions, timber growth cycles, access
limitations, availability of contract loggers, and regulatory
requirements associated with the protection of wildlife and
water resources may restrict harvesting of timberlands as may
other factors, including damage by fire, insect infestation,
disease, prolonged drought and other natural disasters. Although
damage from such natural causes usually is localized and affects
only a limited percentage of the timber, there can be no
assurance that any damage affecting our timberlands will in fact
be so limited. As is common in the forest products industry, we
do not maintain insurance coverage with respect to damage to our
timberlands.

Our revenues, net income and cash flow from our
operations are dependent to a significant extent on the pricing
of our products and our continued ability to harvest timber at
adequate levels. In addition, the terms of our long-term debt
agreements and line of credit limit our ability to fund
dividends to stockholders by accelerating the harvest of
significant amounts of timber.

Our Timberlands and Manufacturing Facilities
Are Subject to Federal and State Environmental
Regulations

We are subject to regulation under, among other
laws, the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental
Response Compensation and Liability Act of 1980, the National
Environmental Policy Act, and the Endangered Species Act, as
well as comparable state laws and regulations. Violations of
various statutory and regulatory programs that apply to our
operations could result in civil penalties, remediation
expenses, potential injunctions, cease and desist orders and
criminal penalties.

We engage in the following activities that are
subject to regulation:



|  |                                                                                                
|- | -----------------------------------------------------------------------------------------------
| | forestry activities, including harvesting,
    planting and road building, use and maintenance;
| 
| | the generation of air emissions;                                                               
| 
| | the discharge of industrial wastewater and storm
    water; and                                
| 
| | the generation and disposal of both hazardous and
    non-hazardous wastes.                    

Laws and regulations protecting the environment
have generally become more stringent in recent years and could
become more stringent in the future. Some environmental statutes
impose strict liability, rendering a person liable for
environmental damage without regard to the persons
negligence or fault. These laws or future legislation or
administrative or judicial action with respect to protection of
the environment may adversely affect our business.

The Endangered Species Act and comparable state
laws protect species threatened with possible extinction. A
number of species on our timberlands have been and in the future
may be protected under these laws. Protection of threatened and
endangered species may include restrictions on timber
harvesting, road building and other forest practices on private,
federal and state land containing the affected species.

STOCK OWNERSHIP

Provisions in Our Certificate of Incorporation
and Delaware Law May Prevent a Change in Control

Some provisions of our certificate of
incorporation may discourage a third party from seeking to gain
control of us. For example, the ownership limitations described
in our certificate of incorporation could have the effect of
delaying, deferring, or limiting a change of control in which
holders of our common stock might receive a premium for their
shares over the then prevailing market price. The following is a
summary of provisions of our certificate of incorporation that
may have this effect.

Ownership
Limit.In order for us to
maintain our qualification as a REIT, not more than 50% of the
value of our outstanding shares of capital stock may be owned,
directly or indirectly, by five or fewer individuals, as defined
in the Internal Revenue Code. For the purpose of preserving our
REIT qualification, our certificate of incorporation prohibits
ownership, either directly or under the applicable attribution
rules of the Internal Revenue Code, of more than 5% of the
lesser of the total number of shares of our common stock
outstanding or the value of the outstanding shares of our common
stock by any stockholder other than by some designated persons
agreed to by us or as set



FOURTEEN




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##### Table of Contents



PART I/ITEM 1A


forth in our certificate of incorporation (the
Ownership Limit). The Ownership Limit may have the
effect of discouraging an acquisition of control of us without
the approval of our Board of Directors.


The Ownership Limit in our certificate of
incorporation also restricts the transfer of our common stock.
For example, any transfer of our equity is null and void if the
transfer would:



|  |                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------
| | result in any person owning, directly or
    indirectly, equity in excess of the Ownership Limit;                        
| 
| | result in our equity being owned, directly or
    indirectly, by fewer than 100 persons;                                 
| 
| | result in us being closely held (as
    defined in the Internal Revenue Code);                                         
| 
| | result in us failing to qualify as a
    domestically controlled REIT (as defined in the
    Internal Revenue Code); or
| 
| | otherwise cause us to fail to qualify as a REIT.                                                                         

Preferred
Stock.Our certificate of
incorporation authorizes our Board of Directors to issue up to
75 million shares of preferred stock. Upon issuance, our
Board of Directors will establish the preferences and rights for
this preferred stock. These preferences and rights may include
the right to elect additional directors. The issuance of
preferred stock could have the effect of delaying or preventing
a change in control of us even if a change in control were in
our stockholders best interests.

Section 203 of the Delaware General
Corporation Law.Section 203
of the Delaware General Corporation Law generally prohibits us
from engaging in business transactions with a person or entity
that owns 15% or more of our voting stock for a period of three
years following the time such person or entity became an
interested stockholder unless, prior to such time,
our Board of Directors approved either the business combination
or the transaction which resulted in such person or entity
becoming an interested stockholder. A business transaction may
include mergers, asset sales and other transactions resulting in
financial benefit to the person or entity that owns 15% or more
of our voting stock.

TAX RISKS

If We Fail to Qualify as a REIT, We Would Be
Subject to Tax at Corporate Rates and Would Not Be Able to
Deduct Dividends to Stockholders When Computing Our Taxable
Income

If in any taxable year we fail to qualify as a
REIT:



|  |                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | we would be subject to federal and state income
    tax on our taxable income at regular corporate rates;                                                                                                              
| 
| | we would not be allowed to deduct dividends to
    stockholders in computing our taxable income; and                                                                                                                   
| 
| | unless we were entitled to relief under the
    Internal Revenue Code, we would also be disqualified from
    treatment as a REIT for the four taxable years following the
    year during which we lost qualification.

If we fail to qualify as a REIT, we might need
to borrow funds or liquidate some investments in order to pay
the additional tax liability. Accordingly, funds available for
investment or dividends to our stockholders would be reduced for
each of the years involved.

Qualification as a REIT involves the application
of highly technical and complex provisions of the Internal
Revenue Code to our operations and the determination of various
factual matters and circumstances not entirely within our
control. There are only limited judicial or administrative
interpretations of these provisions. Although we operate in a
manner consistent with the REIT qualification rules, we cannot
assure you that we are or will remain so qualified.

In addition, federal and state tax laws are
constantly under review by persons involved in the legislative
process, the Internal Revenue Service, the United States
Department of the Treasury, and state taxing authorities.
Changes to the tax law could adversely affect our stockholders.
We cannot predict with certainty whether, when, in what forms,
or with what effective dates, the tax laws applicable to us or
our stockholders may be changed.

If We Failed to Distribute the Earnings and
Profits of The Timber Company, We Would Be Subject to Adverse
Tax Consequences

In connection with The Timber Companys
October 6, 2001, merger with Plum Creek, we were required
by January 31, 2002, to distribute the earnings and profits
acquired from the six entities that comprised The Timber
Company. We believe that the accelerated payment of our fourth
quarter dividend for 2001, which we paid on December 28,
2001, was sufficient to distribute these earnings and profits.
If we failed to distribute an amount equal to these earnings and
profits, we might be subject to adverse tax consequences. We
expect that, even if the earnings and profits were subsequently
adjusted upward by the Internal Revenue Service, the amount we
distributed exceeded



FIFTEEN




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##### Table of Contents



PART I/ITEM 4


such earnings and profits. Nevertheless, such an
adjustment may give rise to the imposition of the 4% excise tax
on the excess income required to be distributed over the amounts
treated as distributed after application of the earnings and
profits rule.


Certain of Our Business Activities are
Potentially Subject to Prohibited Transactions Tax or
Corporate-Level Income Tax

Under the Internal Revenue Code, REITs must
generally engage in the ownership and management of income
producing real estate. For Plum Creek, this generally includes
owning and managing a timberland portfolio for the production
and sale of standing timber. Accordingly, the manufacture and
sale by us of wood products, the harvesting and sale of logs,
and the development and/or sale of certain timberlands are
conducted through one or more of our taxable REIT subsidiaries
(TRSs) because such activities could generate
non-qualifying REIT income and could constitute prohibited
transactions. Prohibited transactions are defined by the
Internal Revenue Code to be sales or other dispositions of
property to customers in the ordinary course of a trade or
business. By conducting our business in this manner we believe
that we satisfy the REIT requirements of the Internal Revenue
Code and are not subject to the 100% tax that could be imposed
if a REIT were to conduct a prohibited transaction. We may not
always be successful, however, in limiting such activities to
our TRSs. Therefore, we could be subject to the 100% prohibited
transactions tax if such instances were to occur. The net income
of our TRSs is subject to corporate-level income tax.




ITEM 1B. UNRESOLVED STAFF COMMENTS

None.






|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

We believe that our timberlands and manufacturing
facilities are suitable and adequate for current operations. The
manufacturing facilities are owned and are maintained through
on-going capital investments, regular maintenance and equipment
upgrades. The majority of the manufacturing facilities are
modern facilities. During 2005, our lumber, plywood and MDF
manufacturing facilities produced at planned capacity levels and
there were no significant idle times at the facilities at any
time during the year. See Item 1. Business for
discussion of the location and description of properties and
encumbrances related to properties.






|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

There is no individual pending or threatened
litigation involving the company that we believe would have a
material adverse effect on the companys financial
position, results of operations or liquidity. However, see
Note 13 of the Notes to Financial Statements.






|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.



SIXTEEN




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##### Table of Contents



PART I/ITEM 4


Executive Officers of the Registrant

Executive officers are elected annually at the
first quarterly meeting of the Board of Directors following the
annual meeting of stockholders.

|                     |  |     |    |         |  |                                                              |  |  |      | 
|-------------------- |  | --- | -- | ------- |  | ------------------------------------------------------------ |  |  | ---- | 
|                     |  |     |    |         |  | OFFICER                                                     
|NAME                 |  | AGE |    | OFFICEK |  | SINCE                                                       
|                    
|                    
|                    
|                    
|Rick R. HolleyA      |  |     | 54 |         |  | President and Chief Executive Officer                        |  |  | 1989 | 
|William R. BrownB    |  |     | 54 |         |  | Executive Vice President and Chief Financial
    Officer     |  |  | 1995 | 
|Thomas M. LindquistC |  |     | 45 |         |  | Executive Vice President                                     |  |  | 2001 | 
|James A. KraftD      |  |     | 50 |         |  | Senior Vice President, General Counsel and
    Secretary     |  |  | 1989 | 
|Larry D. NeilsonE    |  |     | 46 |         |  | Senior Vice President, Planning and Business
    Development |  |  | 2005 | 
|David A. BrownF      |  |     | 51 |         |  | Vice President, Chief Accounting Officer                     |  |  | 2002 | 
|Barbara L. CroweG    |  |     | 54 |         |  | Vice President, Human Resources                              |  |  | 1997 | 
|Joan K. FitzmauriceH |  |     | 48 |         |  | Vice President, Audit and Financial Services                 |  |  | 2002 | 
|David W. LambertI    |  |     | 45 |         |  | Vice President, Business Development                         |  |  | 2002 | 
|Laura B. SmithJ      |  |     | 38 |         |  | Treasurer                                                    |  |  | 2006 | 
|                    
|                    



|  |                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | Served since January 1994 as President and Chief
    Executive Officer. Mr. Holley was Vice President and Chief
    Financial Officer from April 1989 to December 1993.



|  |                                                                                                                                                                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | Served since May 1999 as Executive Vice President
    and Chief Financial Officer. Mr. Brown was Vice President,
    Strategic Business Development from January 1998 to May 1999,
    Vice President, Resource Management from February 1995 to
    January 1998, and Director, Planning from August 1990 to
    February 1995.
| 
|C | Served since December 2001 as Executive Vice
    President. Mr. Lindquist was Executive Vice President of
    Global Sales and Corporate Alliances for Trammell Crow Company
    serving from June 1986 to December 2001.                                                                                                       



|  |                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D | Served since January 2002 as Senior Vice
    President, General Counsel and Secretary. Mr. Kraft was
    Vice President, General Counsel and Secretary from April 1996 to
    January 2002, Vice President, Law from January 1994 to April
    1996 and Vice President, Law and Corporate Affairs from April
    1989 to December 1993.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|E | Served since October 2005 as Senior Vice
    President, Planning and Business Development. Mr. Neilson
    was Vice President, Real Estate from August 2002 to October
    2005. Prior to joining Plum Creek, Mr. Neilson served in
    the capacities of General Manager, Corporate Services and
    Worldwide Real Estate & Facilities from April 2000 to
    July 2001 and General Manager, Worldwide Real Estate &
    Facilities from May 1998 to April 2000 at Microsoft.
| 
|F | Served since February 2006 as Vice President,
    Chief Accounting Officer. Mr. Brown was Vice President,
    Controller (Chief Accounting Officer) from March 2004 to
    February 2006, Vice President, Controller from January 2002 to
    March 2004, Controller from November 1994 to January 2002 and
    Director of Planning from July 1994 to November 1994.                                                                                                          



|  |                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|G | Served since April 1997 as Vice President, Human
    Resources.                                                                                                                                                                                                                                      
| 
|H | Served since June 2002 as Vice President, Audit
    and Financial Services. Ms. Fitzmaurice was a Partner with
    PricewaterhouseCoopers LLP from 1997 through 2001.                                                                                                                                
| 
|I | Served since January 2006 as Vice President,
    Business Development. Mr. Lambert was Vice President,
    Treasurer from January 2002 to January 2006, Director of
    Planning, Treasurer from June 1998 to January 2002 and Director
    of Finance and Treasurer from November 1994 to June 1998.



|  |                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|J | Served since January 2006 as Treasurer.
    Ms. Smith was Director of Planning from October 2003 to
    January 2006. Ms. Smith was Vice President and Business
    Unit Manager for Goldman, Sachs & Co., serving from
    January 2001 to October 2003.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|K | Since July 1, 1999, Ms. Crowe and
    Messrs. Holley, Brown, Brown, Kraft and Lambert have served
    in their indicated capacities for Plum Creek Timber Company,
    Inc. Prior to the July 1, 1999 REIT conversion, the listed
    individuals served in their indicated capacities of the general
    partner of Plum Creek Timber Company, L.P. or the predecessor of
    the general partner. There are no family relationships among
    them.





SEVENTEEN




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##### Table of Contents



PART II/ITEM 5





PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

Plum Creek Timber Company, Inc.s common
stock is traded on the New York Stock Exchange and the Pacific
Exchange. As of February 21, 2006, there were 20,547
stockholders of record of 184,318,974 outstanding shares.

Trading price data, as reported on the New York
Stock Exchange Composite Tape, and declared cash dividend
information for the years ended December 31, 2005 and
2004, are as follows:

|     |                         |             |   |             |  |             |   |             |  |  |   |       |  |  |   |       | 
|---- | ----------------------- | ----------- | - | ----------- |  | ----------- | - | ----------- |  |  | - | ----- |  |  | - | ----- | 
|     |                         | 1st Quarter |   | 2nd Quarter |  | 3rd Quarter |   | 4th Quarter
|    
|    
|    
|    
|2005 |                         |             |   |             |  |             |   |             |  |  |   |       |  |  |   |      
|     | High                    |             | $ | 39.35       |  |             | $ | 37.40       |  |  | $ | 39.14 |  |  | $ | 39.63 | 
|     | Low                     |             |   | 34.56       |  |             |   | 33.40       |  |  |   | 34.52 |  |  |   | 34.03 | 
|     | Cash Dividend per Share |             | $ | 0.38        |  |             | $ | 0.38        |  |  | $ | 0.38  |  |  | $ | 0.38  | 
|    
|    
|    
|    
|2004 |                         |             |   |             |  |             |   |             |  |  |   |       |  |  |   |      
|     | High                    |             | $ | 32.77       |  |             | $ | 33.35       |  |  | $ | 35.05 |  |  | $ | 39.45 | 
|     | Low                     |             |   | 28.60       |  |             |   | 27.30       |  |  |   | 30.44 |  |  |   | 34.21 | 
|     | Cash Dividend per Share |             | $ | 0.35        |  |             | $ | 0.35        |  |  | $ | 0.36  |  |  | $ | 0.36  | 
|    
|    

Future dividends will be determined by our Board
of Directors, in its sole discretion, based on consideration of
a number of factors including, but not limited to, our results
of operations, cash flow and capital requirements, economic
conditions, tax considerations, debt covenant restrictions that
may impose limitations on our ability to make cash payments,
borrowing capacity, changes in the prices of and demand for our
products, and changes in our ability to sell or exchange
timberlands at attractive prices. Other factors that our Board
of Directors considers include the appropriate timing of timber
harvests, acquisition and divestiture opportunities, stock
repurchases, debt repayment and other means by which the company
delivers value to our stockholders. See Notes 6 and 7 of
the Notes to Financial Statements for the restrictions under our
debt agreements to pay dividends.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes options and other
rights outstanding under Plum Creeks equity based
compensation plans as of December 31, 2005:

|                                                                 |  |                  |           |                  |  |                  |       |  |  |  |           | 
|---------------------------------------------------------------- |  | ---------------- | --------- | ---------------- |  | ---------------- | ----- |  |  |  | --------- | 
|                                                                 |  | Securities to be |           |                  |  | Securities      
|                                                                 |  | issued upon      |           | Weighted-average |  | available for   
|Plan category                                                    |  | exerciseA        |           | exercise priceB  |  | future issuanceC
|                                                                
|                                                                
|                                                                
|                                                                
|Equity compensation plans approved by security
    holders       |  |                  | 1,910,553 |                  |  | $                | 29.70 |  |  |  | 9,577,948 | 
|Equity compensation plans not approved by
    security holders D |  |                  |          |                  |  |                  |      |  |  |  |          | 
|                                                                
|                                                                



|  |                                                                                  
|- | ---------------------------------------------------------------------------------
|A | Number of securities to be issued upon exercise
    of outstanding stock options.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | Weighted-average exercise price of outstanding
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| 
|C | Number of securities remaining available for
    future issuance under equity compensation plans, excluding
    securities reflected in column (A). Represents shares
    available for future issuance under the Stock Incentive Plan.
    See Note 11 of the Notes to Financial Statements for a
    description of the various stock-based grants that may be issued
    under the Stock Incentive Plan. At December 31, 2005,
    2.8 million shares of the 12.4 million shares
    available for issuance under Plum Creeks Stock Incentive
    Plan have been used for the grant of non- qualified stock
    options, the grant of restricted stock, the payment of earned
    value management awards and earned dividend equivalent rights.
    The number of shares to be issued in connection with dividend
    equivalents and value management awards is not determinable
    until the end of their respective performance periods.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D | As of December 31, 2005, there are 391,577
    outstanding options to acquire Plum Creek common stock that were
    issued originally under the Georgia-Pacific long-term incentive
    plans as options to acquire Georgia-Pacifics Timber
    Company stock. These stock options have a weighted average
    exercise price of $15.83 per common share and were assumed
    by the company in connection with The Timber Company Merger.
    Although the companys stockholders did not separately
    approve the assumption of these stock options, the stockholders
    did approve each of The Timber Company Merger and the related
    merger agreement (and all of the transactions contemplated by
    the merger agreement, including the companys assumption of
    the stock options). No additional Plum Creek stock options may
    be granted under the Georgia-Pacific long-term incentive plans
    as a result of The Timber Company Merger. See Note 11 of
    the Notes to Financial Statements.



EIGHTEEN




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##### Table of Contents



PART II/ITEM 6







|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

Prior to October 5, 2001, Georgia-Pacific
Corporation (Georgia-Pacific) had two classes of
common stock intended to reflect separately the performance of
Georgia-Pacifics manufacturing (Georgia-Pacific
Group) and timber businesses (The Timber
Company). The Timber Company represented the separate
group of businesses whose results were tracked by
Georgia-Pacifics Timber Company stock (Timber
Company Stock) and was engaged primarily in the growing
and selling of timber on the approximately 4.7 million
acres of timberlands that Georgia-Pacific owned or leased.

On October 5, 2001, Georgia-Pacific redeemed
all of the outstanding shares of Timber Company Stock, or
82.3 million shares. In connection with the redemption,
each outstanding share of Timber Company Stock was exchanged for
one unit, or a Unit, that represented one
outstanding share of common stock of each of
Georgia-Pacifics former subsidiaries
(Subsidiaries), which collectively held all of the
assets and liabilities attributed to The Timber Company. On
October 6, 2001, holders of the Units received
1.37 shares of Plum Creek common stock for each Unit,
totaling 112.7 million shares. Therefore,
112.7 million shares have been applied retroactively in
computing basic earnings per share for all periods prior to the
merger. Diluted earnings per share include the dilutive effect
of 3.8 million outstanding options using the treasury stock
method at the converted exercise prices ranging from $15.29 to
$18.34 per share.

The Timber Company Merger was accounted for as a
reverse acquisition, with The Timber Company being
treated as the acquirer for accounting and financial reporting
purposes. As a consequence, the historical financial statements
of The Timber Company became the financial statements of Plum
Creek effective as of October 6, 2001. The financial data
for the year ended December 31, 2001, includes the
operating results of The Timber Company up until the date of the
merger and the operating results of the merged company for the
remainder of the year.

As a consequence of The Timber Company Merger,
which involved merging a taxable entity into a nontaxable
entity, a tax benefit of $216 million was recognized in the
fourth quarter of 2001. This tax benefit represented the
elimination of a deferred tax liability associated with
temporary differences related primarily to timberlands that are
not expected to be disposed of in transactions subject to
built-in gains tax during a ten-year period following the
merger. Subsequent to The Timber Company Merger, Plum Creek
conducts most of its activities through various wholly owned
operating partnerships. The activities of the operating
partnerships consist primarily of sales of timber under
pay-as-cut contracts, and the income from such sales is not
subject to corporate income tax. See Note 4 of the Notes to
Financial Statements.



NINETEEN




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##### Table of Contents



PART II/ITEM 6


FINANCIAL HIGHLIGHTS

The following table summarizes selected financial
highlights for the five most recent fiscal years(dollars
in millions, except per share amounts):

|                                       |                                               |         |       |       |      |       |       |       |      |       |       |       |      |   |       |       |      |   |      |       |      | 
|-------------------------------------- | --------------------------------------------- | ------- | ----- | ----- | ---- | ----- | ----- | ----- | ---- | ----- | ----- | ----- | ---- | - | ----- | ----- | ---- | - | ---- | ----- | ---- | 
|                                       |                                               | 2005A   |       | 2004A |      | 2003A |       | 2002A |      | 2001B
|                                      
|                                      
|                                      
|                                      
|Revenues                               |                                               | $       | 1,576 |       |      | $     | 1,528 |       |      | $     | 1,196 |       |      | $ | 1,137 |       |      | $ | 598  |      
|Operating Income                       |                                               |         | 448   |       |      |       | 477   |       |      |       | 303   |       |      |   | 338   |       |      |   | 250  |      
|Net Interest Expense                   |                                               |         | 109   |       |      |       | 111   |       |      |       | 117   |       |      |   | 103   |       |      |   | 54   |      
|Income before Income Taxes             |                                               |         | 339   |       |      |       | 366   |       |      |       | 186   |       |      |   | 235   |       |      |   | 196  |      
|Benefit (Provision) for Income Taxes   |                                               |         | (8    | )     |      |       | (27   | )     |      |       | 6     |       |      |   | (2    | )     |      |   | 142  |      
|Income from Continuing Operations      |                                               |         | 331   |       |      |       | 339   |       |      |       | 192   |       |      |   | 233   |       |      |   | 338  |      
|Gain on Sale of Properties, net of tax |                                               |         | 23    |       |      |       | 23    |       |      |       |      |       |      |   |      |       |      |   |     |      
|Net Income                             |                                               |         | 354   |       |      |       | 362   |       |      |       | 192   |       |      |   | 233   |       |      |   | 338  |      
|Non-Cash Items                         |                                               |         |       |       |      |       |       |       |      |       |       |       |      |   |       |       |      |   |      |      
|                                       | Depreciation, Depletion and
    AmortizationC |         |       | 113   |      |       |       | 114   |      |       |       | 108   |      |   |       | 106   |      |   |      | 55    |     
|                                       | Basis of Real Estate Sold                     |         |       | 124   |      |       |       | 134   |      |       |       | 66    |      |   |       | 28    |      |   |      | 18    |     
|Balance Sheet Items                    |                                               |         |       |       |      |       |       |       |      |       |       |       |      |   |       |       |      |   |      |      
|                                       | Total Assets                                  |         |       | 4,812 |      |       |       | 4,378 |      |       |       | 4,411 |      |   |       | 4,299 |      |   |      | 4,129 |     
|                                       | Total Debt, including Timber Obligations      |         |       | 2,241 |      |       |       | 1,897 |      |       |       | 2,076 |      |   |       | 1,884 |      |   |      | 1,701 |     
|Earnings per Share                     |                                               |         |       |       |      |       |       |       |      |       |       |       |      |   |       |       |      |   |      |      
|                                       | Income from Continuing Operations             |         |       |       |      |       |       |       |      |       |       |       |      |   |       |       |      |   |      |       |     
|                                       |                                               | Basic   |       | $     | 1.80 |       |       | $     | 1.85 |       |       | $     | 1.05 |   |       | $     | 1.26 |   |      | $     | 2.61 | 
|                                       |                                               | Diluted |       | $     | 1.79 |       |       | $     | 1.84 |       |       | $     | 1.04 |   |       | $     | 1.26 |   |      | $     | 2.58 | 
|                                       | Net Income                                    |         |       |       |      |       |       |       |      |       |       |       |      |   |       |       |      |   |      |       |     
|                                       |                                               | Basic   |       | $     | 1.92 |       |       | $     | 1.97 |       |       | $     | 1.05 |   |       | $     | 1.26 |   |      | $     | 2.61 | 
|                                       |                                               | Diluted |       | $     | 1.92 |       |       | $     | 1.97 |       |       | $     | 1.04 |   |       | $     | 1.26 |   |      | $     | 2.58 | 
|Dividend Declared per ShareD           |                                               | $       | 1.52  |       |      | $     | 1.42  |       |      | $     | 1.40  |       |      | $ | 1.49  |       |      | $ | 1.14 |      
|Harvest Volume (in million tons)       |                                               |         | 19.2  |       |      |       | 18.6  |       |      |       | 19.0  |       |      |   | 19.3  |       |      |   | 13.9 |      
|                                      
|                                      



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | During 2005, Plum Creek acquired approximately
    754,000 acres of timberlands for $501 million.
    Timberland dispositions during 2005 were approximately
    232,000 acres. During 2004, Plum Creek acquired
    approximately 78,000 acres of timberlands for
    $66 million and disposed of approximately
    375,000 acres. During 2003, the company acquired
    139,000 acres of timberlands for $162 million and
    disposed of 125,000 acres. During 2002, the company
    acquired 307,000 acres of timberlands for $141 million
    and sold 37,000 acres.



|  |                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | As a consequence of The Timber Company Merger, a
    tax benefit of $216 million was recognized in 2001.                                                               
| 
|C | Includes a $2 million loss in 2005 from
    hurricane damage, a $9 million lumber mill impairment loss
    in 2004 and $4 million loss related to forest fires in 2003.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D | Since The Timber Company was not a separate legal
    entity but rather an operating division of Georgia-Pacific, The
    Timber Company common stock, the only equity issued with respect
    to The Timber Company, represented a class of
    Georgia-Pacifics common stock. The Timber Company common
    stock paid a quarterly dividend of $0.25 per share.
    Subsequent to The Timber Company Merger, Plum Creek paid
    dividends of $0.57 per share on November 30, 2001, and
    again on December 28, 2001. The December 28, 2001,
    dividend represents the acceleration of our fourth quarter 2001
    dividend that normally would have been paid in February 2002.



TWENTY




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##### Table of Contents



PART II/ITEM 7





ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statement

This Report contains forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995.
Some of the forward-looking statements can be identified by the
use of forward-looking words such as believes,
expects, may, will,
should, seeks,
approximately, intends,
plans, estimates, projects,
strategy, or anticipates, or the
negative of those words or other comparable terminology.
Forward-looking statements involve inherent risks and
uncertainties. A number of important factors could cause actual
results to differ materially from those described in the
forward-looking statements, including those factors described in
Risk Factors under Item 1A in this
Form 10-K. Some factors include changes in governmental,
legislative and environmental restrictions, catastrophic losses
from fires, floods, windstorms, earthquakes, volcanic eruptions,
insect infestations or diseases, as well as changes in economic
conditions and competition in our domestic and export markets
and other factors described from time to time in our filings
with the Securities and Exchange Commission. In addition,
factors that could cause our actual results to differ from those
contemplated by our projected, forecasted, estimated or budgeted
results as reflected in forward-looking statements relating to
our operations and business include, but are not limited to:



|  |                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the failure to meet our expectations with respect
    to our likely future performance;                                                                             
| 
| | an unanticipated reduction in the demand for
    timber products and/or an unanticipated increase in supply of
    timber products;                                 
| 
| | an unanticipated reduction in demand for higher
    and better use timberlands or non-strategic timberlands;                                                        
| 
| | our failure to make strategic acquisitions or to
    integrate any such acquisitions effectively or, conversely, our
    failure to make strategic divestitures; and
| 
| | our failure to qualify as a real estate
    investment trust, or REIT.                                                                                              

It is likely that if one or more of the risks
materializes, or if one or more assumptions prove to be
incorrect, the current expectations of Plum Creek and its
management will not be realized. Forward-looking statements
speak only as of the date made, and neither Plum Creek nor its
management undertakes any obligation to update or revise any
forward-looking statements.

Overview

OPERATING PERFORMANCE


Operating income decreased by $29 million,
or 6%, to $448 million in 2005. This decrease was due
primarily to lower income from our Manufactured Products
Segment. Operating income for our Manufactured Products Segment
decreased by $28 million, or 48%, to $30 million in
2005. This decrease was due primarily to lower lumber and
plywood prices and higher manufacturing costs. Despite record
high housing starts in 2005, lumber and plywood prices declined
due to increased supply (increased production in the United
States and higher imports). Manufacturing costs increased due
primarily to higher costs for logs and energy. During 2004, we
recorded a $9 million impairment loss related to one of our
lumber mills.

Operating income in our Northern Resources
Segment increased by $2 million to $102 million. This
increase was due primarily to a 3% increase in sawlog prices and
a 3% increase in harvest volume, largely offset by higher
log & haul cost. Operating income in our Southern
Resources Segment increased by $14 million, or 7%, to
$221 million. This increase was due primarily to a 4%
increase in harvest volume and a 3% increase in sawlog prices,
partially offset by higher log & haul cost. Operating
income from our Real Estate Segment decreased by
$12 million, or 8%, to $140 million. This decrease was
due primarily to fewer acres sold in 2005 compared to 2004.

Our 2005 operating income was significantly
impacted by rising energy costs. The increase in energy costs
has resulted in higher costs associated with logging our
timberlands, hauling our logs to customers and running our
manufacturing facilities. The higher energy costs decreased our
operating income in our Southern Resources Segment by
$10 million, in our Northern Resources Segment by
$9 million and in our Manufactured Products Segment by
$5 million.

Our 2005 earnings were also impacted by a
$23 million gain on sale of properties, net of tax,
primarily related to the sale of our remaining coal reserves
(see Note 3 of the Notes to Financial Statements) and a
$5 million tax benefit related to the remeasurement of our
deferred income tax liability (see Note 4 of Notes to
Financial Statements).



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##### Table of Contents



PART II/ITEM 7


During the fourth quarter of 2005, we acquired
650,000 acres of timberland in Michigan for
$345 million. This acquisition was financed partially by
the issuance of $300 million senior notes due 2015. As a
result of this acquisition and the related financing, we expect
operating income in our Northern Resources Segment to increase
between $10 million and $15 million and we expect
interest expense to increase by $14 million.

KEY ECONOMIC FACTORS IMPACTING OUR BUSINESS

Our operating performance is impacted primarily
by the supply and demand for logs and wood products in the
United States. The short-term supply of logs is impacted
primarily by weather and the level of harvesting activities. The
demand for logs in the United States is impacted by housing
starts, repair and remodeling activities and the amount of
imported lumber, primarily from Canada. Housing starts are
impacted primarily by interest rates. Mortgage interest rates
continued at historically low levels during 2005 (averaging 6.1%
for the year based on a 30-year fixed-rate conventional loan),
which contributed to U.S. housing starts of approximately
2.06 million units during 2005, their highest level in the
last 25 years. However, the number of housing starts is
expected to decline during 2006. Thirty-year fixed-rate interest
rates have generally been increasing in recent months and are
expected to reach 6.5% by the end of 2006. Additionally, the
number of houses and condominiums on the market at
December 31, 2005 has increased by 26% over the prior year.

During 2005, the demand for sawlogs remained
strong due to increased lumber and plywood production.
Additionally during 2005, the demand for wood products remained
strong due to the strength in both housing starts and repair and
remodel activity. However, lumber and plywood prices decreased
during 2005 from their record high prices in 2004 as a result of
increased supply. The supply of lumber in the
U.S. increased by approximately 5% during 2005 due
primarily to the construction of new mills and increased imports
from Canada.

Currency exchange rates, tariffs and quotas,
availability and cost of transportation, and the relative cost
of manufacturing wood products impact imports of lumber and
other wood products into the United States. Canadian imports
into the U.S. capture a significant share (approximately
33%) of the U.S. lumber market. A U.S. industry
coalition believes the Canadian government, which owns most of
the timberlands in Canada, provides unfair subsidies by selling
timber at below market prices. Prior to 2002, a trade agreement
with Canada limited imports of lumber into the United States.
Since May 2002, the U.S. has imposed duties on Canadian
imports. During most of 2005, duties were imposed at
approximately 20%. However, recently the duties have been
lowered to approximately 11%, and there is the potential they
could be substantially eliminated in the near future. (See
U.S.-Canada Softwood Lumber Agreement under this
Item).

REAL ESTATE SALES AND DEVELOPMENT PROPERTIES

We estimate that included in our approximately
8.2 million acres of timberlands are approximately
1.3 million acres of higher and better use timberlands and
about 530,000 acres of non-strategic timberlands. The
higher and better use timberlands are expected to be sold over
the next 15 years for residential, recreational or
conservation purposes. The non-strategic timberlands are
expected to be sold over the next five years. Included within
the 1.3 million acres of higher and better use timberlands
are approximately 225,000 acres that will be developed
either internally or through joint ventures.

We made significant progress in our land
development business during 2005. We have identified
123,000 acres with an estimated 110 properties, that we
expect to develop internally over the next 15 years. At
December 31, 2005, we have ten internal development
properties entitled and an additional 18 in the planning
process. Revenue from sales of development properties was
$3 million during 2005. We expect to continue to be in the
start-up phase of this business during 2006, and as a result,
revenue from sales of development properties is expected to
range between $10 million and $25 million, plus
revenues of approximately $40 million from the sale of one
large project. Our real estate development business is conducted
through our wholly-owned taxable REIT subsidiaries.

Additionally, we have identified
102,000 acres that we expect to develop through joint
ventures. During 2005, we entered into three joint venture
agreements covering approximately 6,700 acres. We are the
minority partner in each of these joint ventures, and our
involvement is limited to selling and/or contributing land and
exercising certain approval rights. We expect to enter into
additional joint venture agreements during 2006. We do not
expect any material revenues from these joint venture agreements
during 2006 or 2007.

HARVEST LEVELS

The volume of trees we harvest each year and the
percentage of sawlogs and pulpwood included in our annual
harvest also impact our operating performance. During 2005, we
harvested a total of 19.2 million tons compared to



TWENTY-TWO




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##### Table of Contents



PART II/ITEM 7


a total of 18.6 million tons during 2004. We
expect to harvest approximately 20 million tons during
2006. The increase in the 2006 harvest is due to the acquisition
of timberlands in Michigan. For the Southern Resources Segment,
we expect total tons harvested during 2006 to be approximately
the same as 2005. However, during 2005 we substantially
completed the conversion of numerous natural stands to
plantations in order to improve growth rates. Therefore, we
anticipate that the percentage of large-diameter sawlogs that we
will harvest during 2006 compared to 2005 will decrease and the
percentage of small-diameter sawlogs and pulpwood that we will
harvest will increase. (See Results of Operations, 2005
Compared to 2004, Southern Resources Segment, under this
Item.) Future harvest levels may vary from historic levels to
take advantage of favorable prices or due to factors outside of
our control, such as weather and fires. Future harvest levels
may also be impacted by our sale of timberlands and the extent
to which proceeds are reinvested in core timberlands.


Critical Accounting Policies

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. Actual results may differ from these estimates
under different assumptions or conditions.

We believe that the following critical accounting
policies affect our most significant judgments and estimates
used in preparation of our consolidated financial statements:

REVENUE RECOGNITION

Timber sales revenues are recognized when legal
ownership and the risk of loss transfer to the purchaser and the
quantity sold is determinable. The company sells timber under
delivered log agreements and sales of standing timber (or
stumpage) using pay-as cut contracts and lump-sum
sale agreements.


(1) Delivered Log Sales. Under a
delivered log sale agreement, the seller harvests the tree and
delivers it to the buyer. Revenue is recognized when the log is
delivered as risk of loss and title transfer to the buyer. With
delivered log sales, the seller incurs the cost of logging and
hauling.

(2) Pay-as-Cut Contracts. Pay-as-cut
contracts are agreements which the buyer agrees to harvest all
of the trees on a tract of land for an agreed upon price for
each type of tree over the term of the contract (usually 12 to
18 months). In some cases an advance is received in
connection with pay-as-cut contracts, and in other cases the
buyer agrees to harvest only certain trees on a tract of land.
Under pay-as-cut contracts, the buyer is responsible for all
logging and hauling costs. Revenue is recognized when the trees
are harvested, as title and risk of loss has transferred to the
buyer. Total revenue recognized under a pay-as-cut contract is a
function of the total volume of wood removed multiplied by the
agreed upon per unit price for each type of tree on a tract of
land.

(3) Lump-sum Sale Agreements. Under a
lump-sum sale agreement, the buyer and seller agree to a
lump-sum price for all the timber available for harvest on a
tract of land. Generally the lump-sum price is paid when the
contract is signed. Title to the timber and risk of loss
transfers to the buyer as the timber is cut. Therefore, revenue
is recognized based on the amount of timber actually harvested,
compared to total timber available to be harvested on a tract of
land over the term of the contract (usually 12 to
18 months). Under a lump-sum sale, the buyer is responsible
for all logging and hauling costs. Lump-sum sales are generally
marketed and sold to the highest bidder. Bids are typically
based on a timber cruise, which is an estimate of the total
volume of timber on a tract of land broken down by the various
types of trees (such as softwood sawlogs, hardwood pulpwood,
etc.). Total revenue recognized under a lump-sum sale contract
is the amount of the highest bid, and is not dependent upon the
volume or type of trees actually harvested.

Since revenue is recognized under a lump-sum sale
agreement as the trees are cut, an estimate of how much revenue
to recognize each month is made based on how much volume has
been removed compared to the total volume available for harvest
on a tract of land according to the timber cruise. We generally
receive weekly information from the buyer regarding how much
volume has been removed. Additionally, we gather information by
observing the tract to estimate the percentage of original
timber harvested. In most cases, the total volume harvested from
a tract of land is different than the volume estimated in the
timber cruise. If the total volume removed is greater than the
cruise-estimated volume, we will stop recognizing revenue once
the total revenue recognized is equal to total lump-sum contract
price. No revenue will be recognized for volumes harvested in
excess of the cruise-estimated volume. If the total volume
removed is less than the cruise-estimated volume, an adjustment
will be recorded in the month in which



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##### Table of Contents



PART II/ITEM 7


we learn of the difference. The adjustment is an
increase in revenue equal to the difference between the total
revenue recognized to date and the total lump-sum contract
price. Finally, for our larger lump-sum contracts, which cover
multiple tracts, we adjust revenues at the end of each
accounting period for any known trends in the tracts that have
been completely harvested. For lump-sum contracts completed
during the past twelve quarters, our largest quarterly
adjustment to record the difference between estimated lump-sum
revenues and actual revenues has been $0.4 million.


The following table summarizes amounts recognized
under each method from sales to external customers in the
companys financial statements for the years ended
December 31(in millions):

|               |                     |      |   |      |  |  |   |     | 
|-------------- | ------------------- | ---- | - | ---- |  |  | - | --- | 
|               |                     | 2005 |   | 2004
|              
|              
|              
|              
|Revenues from: |                     |      |   |      |  |  |   |    
|               | Delivered log sales |      | $ | 626  |  |  | $ | 563 | 
|               | Pay-as-cut sales    |      | $ | 61   |  |  | $ | 53  | 
|               | Lump-sum sales      |      | $ | 47   |  |  | $ | 47  | 
|              
|              

Substantially all of our timber sales in the
Northern Resources Segment are under delivered log sale
agreements. In our Southern Resources Segment, a substantial
portion of our timber sales consists of either pay-as-cut
contracts or lump-sum sales. Under both pay-as-cut contracts and
lump-sum sales, the buyer is responsible for the logging and
hauling costs. Therefore, operating profit as a percentage of
revenue is significantly higher in our Southern Resources
Segment.

Real Estate Sales

We estimate that included in the companys
approximately 8.2 million acres of timberlands are about
1.3 million acres of higher and better use timberlands,
which are expected to be sold and/or developed over the next
15 years for residential, recreational or conservation
purposes. In addition, the company has approximately
530,000 acres of non-strategic timberlands, which are
expected to be sold over the next five years. In the meantime,
these timberlands continue to be used productively in our
business of growing and selling timber. The timing of real
estate sales, however, is a function of many factors, including
the availability of government and not-for-profit funding, the
general state of the economy, the ability to get entitlements,
the plans of adjacent landowners, our expectation of future
price appreciation and the timing of harvesting activities. As a
result, the timing of our real estate sales may materially
impact our reported operating income and net income.

During 2005, the Real Estate Segment reported an
operating profit percentage of approximately 48%. We estimate
our Real Estate Segments annual operating profit
percentage could range from 35% to 70% of revenues. Operating
profit percentages vary significantly and depend upon the mix of
real estate sales. The operating profit percentage depends on
the nature of the interest sold and how much the market value of
the property has risen over its book value. For example, the
sale of conservation easements will have an operating profit
percentage of close to 100% because no book basis is allocated
to this type of revenue. Sales of recently acquired properties
will generally have relatively lower operating profit
percentages while sales of properties held for a long time will
tend to have relatively higher operating profit percentages.
Sales of timberlands owned by Plum Creek prior to The Timber
Company Merger, which, for accounting purposes, were deemed
acquired as of the merger date, will thus have lower operating
profit percentages since these properties were recorded at
appraised value as of October 2001.

In connection with major timberland acquisitions
we are generally not able to identify our future real estate
sales. However, while our purchase price allocation and related
appraisals reflected greater values for real estate which may be
sold in the future for uses which have a higher value than
timber production, we are generally not able to identify
specific properties. Therefore, in connection with our purchase
price allocation for timberland acquisitions, the greater values
for real estate are allocated proportionately among all the
acres acquired, except when we can specifically identify
properties. In general, however, timberlands are acquired
primarily for long-term use in our timber operations and
specific properties cannot be identified in advance because
their value is dependent upon numerous factors, most of which
are not known at the acquisition date, including current and
future zoning restrictions, current and future environmental
restrictions, future changes in demographics, future changes in
the economy, current and future plans of adjacent landowners,
and current and future funding of government and not-for-profit
conservation and recreation programs. We believe that current
and future results of operations could be materially different
under different purchase price allocation assumptions, and
generally, when we acquire properties,



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##### Table of Contents



PART II/ITEM 7


we do not have the ability, with any level of
precision, to estimate which of the acquired properties will
someday sell for more than their underlying timber production
value.


IMPAIRMENT OF LONG-LIVED ASSETS

In general, the company evaluates its ability to
recover its net investment in long-lived assets in accordance
with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 requires recognition of an impairment
loss in connection with long-lived assets used in a business
when the carrying value (net book value) of such assets exceeds
the estimated future undiscounted cash flows attributable to
such assets over their expected useful life. Impairment losses
are measured by the extent to which the carrying value of a
group of assets exceeds the fair value of such assets at a given
point in time. When the fair values of the assets are not
available, the company estimates the fair values by using the
discounted expected future cash flows attributable to the
assets. The cash flows are discounted at the risk-free rates of
interest. Future cash flow estimates are based on
probability-weighted projections for a range of possible
outcomes. Furthermore, SFAS No. 144 requires
recognition of an impairment loss in connection with long-lived
assets held for sale when the carrying value of such assets
exceeds an amount equal to their fair value less selling costs.

The company has grown substantially through
acquisitions in recent years. A large portion of the carrying
value of the companys Timber and Timberlands, and
Property, Plant and Equipment represents amounts of the purchase
price of recent acquisitions allocated to those assets. The
allocation of the purchase price in a business combination is
highly subjective. Management is required to estimate the fair
values of acquired assets and liabilities as of the acquisition
date. Subsequent to the original allocation, these assets are
tested for impairment whenever events or changes in
circumstances indicate that the carrying value of the assets may
not be recoverable through future operations.
SFAS No. 144 requires that long-lived assets be
grouped and evaluated for impairment at the lowest level for
which there are independent cash flows. The company tracks cash
flows for its 8.2 million acres of timberlands by grouping
them into eight geographic areas in the Northern Resources
Segment and nine geographic areas in the Southern Resources
Segment. Additionally, the company tracks cash flows for each of
its ten manufacturing facilities.

(1) Timber and Timberlands Used in Our
Business. SFAS No. 144 provides that for assets
used in a business, an impairment loss is recorded only when the
carrying value of such assets is not recoverable through future
operations. The recoverability test is based on undiscounted
future cash flows over the expected life of the assets. The
company uses one harvest cycle (which ranges between 20 and
90 years) for evaluating the recoverability of its timber
and timberlands. As a result of the inherently long life of
timber and timberlands, the company does not expect to incur an
impairment loss in the future for the timber and timberlands
used in its business.

(2) Timber and Timberlands Held for
Sale. SFAS No. 144 provides that an impairment
loss is recognized for long-lived assets held for sale when the
carrying value of such asset exceeds an amount equal to its fair
value less selling costs. An asset is generally considered to be
held for sale when we have committed to a plan to sell the
asset, the asset is available for immediate sale in its present
condition, we have initiated an active program to locate a
buyer, and the sale is expected to close within one year. During
2005, the above criteria were met by a number of our timberland
properties, and we recognized impairment losses of
$1 million. Similarly, we recognized impairment losses of
$21 million in 2004 and $14 million during 2003 in
connection with timberlands held for sale. See Note 3 of
the Notes to Financial Statements. We expect to continue to sell
or exchange non-strategic timberlands to other forest products
companies or non-industrial investors, and it is probable that
we will recognize, in accordance with SFAS No. 144,
additional impairment losses in the future in connection with
sales of non-strategic timberlands.

In accordance with SFAS No. 144, an
impairment loss is generally not recorded until management has
concluded that it is probable (i.e., likely) that timberlands
will be sold within the next 12 months. For many properties
that are currently being actively marketed, it is difficult to
conclude whether they will be sold within one year and at what
price. Nevertheless, management performs a probability
assessment for all properties that are being actively marketed
and records an impairment loss (to the extent the
propertys book basis exceeds its estimated fair value net
of selling cost) in the quarter in which management has
concluded it is likely the property will be sold within
12 months based on its best estimate of fair value.

(3) Property, Plant and Equipment. The
carrying value of Property, Plant and Equipment represents
primarily the net book value of our ten manufacturing
facilities. Each manufacturing facility is tested for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable through future
operations. The estimated future cash flows over the remaining
useful live of a manufacturing facility is highly subjective and
is dependent upon estimates for future product pricing, raw
material costs, volumes of product sold,



TWENTY-FIVE




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##### Table of Contents



PART II/ITEM 7


and residual value of the facility. During the
fourth quarter of 2004, we recognized an impairment loss of
$9 million in connection with one of our lumber mills due
to a declining supply of logs. The availability of logs in close
proximity to our mills has been declining and is expected to
decline further in the future. We currently estimate that the
carrying value for our other nine manufacturing facilities is
recoverable through future operations and that our estimate of
future cash flows is reasonable. However, if wood product prices
were to decline and remain weak for an extended period of time,
or if log or raw material availability declines more than
expected, the company may be required to record an impairment
loss for one or more of its manufacturing facilities in a future
period.


DEPLETION

Depletion, or costs attributed to timber
harvested, is recorded as trees are harvested. Depletion rates
for each region are adjusted at least annually. Depletion rates
are computed by dividing (A) the sum of (1) the
original cost of the timber less previously recorded depletion
plus (2) estimated future silviculture costs, including the
impact of inflation, that are expected to be incurred over the
next harvest cycle, by (B) the total timber volume that is
estimated to be harvested over the harvest cycle. The harvest
cycle can be as short as 20 years in the South to as long
as 90 years in the North. The estimate of future
silviculture costs is limited to the expenditures that are
expected to impact growth rates over the harvest cycle. The
depletion rate calculations do not include an estimate for
either future reforestation costs associated with a stands
final harvest or future volume in connection with the replanting
of a stand subsequent to its final harvest.

The following table summarizes depletion expense
recognized in the companys financial statements, key
assumptions and sensitivities to changes in assumptions for the
years ended December 31(dollars in millions, except
per ton amounts):

|                                                              |                                                                            |                                                      |                            |      |     |     |   |      |     |     | 
|------------------------------------------------------------- | -------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------- | ---- | --- | --- | - | ---- | --- | --- | 
|                                                              |                                                                            | 2005                                                 |                            | 2004
|                                                             
|                                                             
|                                                             
|                                                             
|Depletion Expense                                             |                                                                            |                                                      |                            |      |     |     |   |     
|                                                              | Northern Resources Segment                                                 |                                                      | $                          | 20   |     |     | $ | 20   |    
|                                                              | Southern Resources SegmentA                                                |                                                      |                            | 51   |     |     |   | 46   |    
|                                                              |                                                                            |                                                     
|                                                              | Total depletion expense                                                    |                                                      | $                          | 71   |     |     | $ | 66   |    
|                                                              |                                                                            |                                                     
|                                                              |                                                                            |                                                     
|Average Depletion Rates (per ton)                             |                                                                            |                                                      |                            |      |     |     |   |     
|                                                              | Northern Resources Segment                                                 |                                                      | $                          | 3.65 |     |     | $ | 3.78 |    
|                                                              | Southern Resources Segment                                                 |                                                      | $                          | 3.75 |     |     | $ | 3.47 |    
|Assumptions Used to Determine the Average
    Depletion Rates |                                                                            |                                                      |                            |      |     |     |   |     
|                                                              | Estimated future silviculture costs, including
    the impact of inflation |                                                      |                            |      |     |     |   |      |    
|                                                              |                                                                            | Northern Resources Segment                           |                            | $    | 57  |     |   | $    | 53  |    
|                                                              |                                                                            | Southern Resources SegmentB                          |                            | $    | 407 |     |   | $    | 381 |    
|                                                              | Estimated future volume (in million tons)                                  |                                                      |                            |      |     |     |   |      |    
|                                                              |                                                                            | Northern Resources SegmentC                          |                            |      | 329 |     |   |      | 281 |    
|                                                              |                                                                            | Southern Resources Segment                           |                            |      | 452 |     |   |      | 456 |    
|Sensitivity of Results to Changes in Key
    Assumptions      |                                                                            |                                                      |                            |      |     |     |   |     
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Increase in depletion expense for a 10%:                                   |                                                      |                            |      |     |     |   |      |    
|                                                              |                                                                            | Increase in estimated future silviculture
    costsD |                            |      |     |     |   |      |     |    
|                                                              |                                                                            |                                                      | Northern Resources Segment |      | $   | 0.1 |   |      | $   | 0.1 | 
|                                                              |                                                                            |                                                      | Southern Resources Segment |      | $   | 1.2 |   |      | $   | 1.0 | 
|                                                              |                                                                            | Decrease in estimated future volumeE                 |                            |      |     |     |   |      |     |    
|                                                              |                                                                            |                                                      | Northern Resources Segment |      | $   | 2.2 |   |      | $   | 2.2 | 
|                                                              |                                                                            |                                                      | Southern Resources Segment |      | $   | 5.7 |   |      | $   | 5.1 | 
|                                                             
|                                                             



|  |                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | Depletion expense for 2005 includes a
    $2 million loss, representing the book basis of timber
    volume destroyed as a result of severe winds from Hurricane
    Katrina.



|  |                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|B | Reflects an increase in our estimates of future
    costs associated with fertilization treatments due to higher
    chemical and application costs.
| 
|C | Increase in estimated future volumes is due to
    the 2005 acquisition of timberlands in Michigan.                                                 



|  |                                             
|- | --------------------------------------------
|D | Assumes future timber volumes do not change.



|  |                                                 
|- | ------------------------------------------------
|E | Assumes future silviculture costs do not change.



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PART II/ITEM 7


Significant estimates and judgments are required
to determine both future silviculture costs and the volume of
timber available for harvest over the harvest cycle. Some of the
factors impacting the estimates are changes in weather patterns,
inflation rates, the cost of fertilizers and chemicals, the cost
of capital, the actual and estimated increase in growth rates
from fertilizer applications, the relative price of sawlogs and
pulpwood, the actual and expected real price appreciation of
timber, the scientific advancement in seedling and growing
technology, and changes in harvest cycles.

The company has invested in technology that
enables it to predict its current standing inventory of trees,
future growth rates, and the benefits of scientific advancements
in connection with seedlings, planting techniques and fertilizer
applications. Therefore, while estimates with respect to
depletion computations will be revised at least annually, we do
not expect the depletion rates will change materially from year
to year.

DEFERRED INCOME TAXES

Plum Creek has elected to be taxed as a REIT
under sections 856-860 of the United States Internal Revenue
Code. A REIT is generally not subject to corporate-level income
tax if it distributes 100% of its taxable income to shareholders
and satisfies other organizational and operational requirements
as set forth in the Internal Revenue Code. If a company fails to
qualify as a REIT in any taxable year, it will be subject to
federal income taxes at regular corporate rates (including any
applicable alternative minimum tax) and may not be able to
qualify as a REIT for four subsequent taxable years.

As a consequence of the October 6, 2001
merger with The Timber Company, which involved merging a taxable
entity into a nontaxable entity, Plum Creek will generally be
subject to corporate-level tax (built-in gains tax) if the
company makes a taxable disposition of certain property acquired
in the merger with The Timber Company within the ten-year period
following the merger date. The built-in-gains tax applies to
gains from such asset sales to the extent that the fair value of
the property exceeds its tax basis at the merger date.
Built-in-gains tax is generally not payable on dispositions of
property to the extent the proceeds from such dispositions are
reinvested in qualifying like-kind replacement property. The
built-in gains tax does not apply to income generated from the
harvesting and sale of timber.

In connection with our merger with The Timber
Company, we wrote-off all of The Timber Companys deferred
income tax liability related to timber and timberlands except
for $11 million. The $11 million deferred income tax
liability relates to the book-tax basis difference of timber and
timberlands that were expected to be sold, and subject to, the
built-in gains tax during the ten-year period ending
October 6, 2011. During the period October 6, 2001 to
December 31, 2005, the $11 million deferred income tax
liability was reduced by $1 million in connection with
sales of timberlands subject to the built-in gains tax.

Based on projected timberland sales subject to
the built-in gains tax for the period December 31, 2005 to
October 6, 2011, and our ability to successfully reinvest
proceeds in like-kind properties, we estimate we need a deferred
tax liability of $5 million. As a result, we reduced the
deferred tax liability associated with expected sales of
timberlands subject to the built-in gains tax from
$10 million to $5 million and correspondingly recorded
a deferred tax benefit of $5 million during 2005. See
Note 4 of the Notes to Financial Statements.

It is likely that actual timberland sales subject
to the built-in gains tax over the ten-year period will be
greater than, or less than, our current projection. An
adjustment to earnings will be required in the period in which
it is determined that timberland sales subject to the built-in
gains tax will be greater than, or less than, our current
projection.

LONG-TERM INCENTIVE PLANS

Plum Creek has a stockholder approved Stock
Incentive Plan that provides for the award of non-qualified
stock options, restricted stock and restricted stock units,
dividend equivalents and value management awards. See
Note 11 of the Notes to Financial Statements.

The company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment(SFAS No. 123(R)) effective
January 1, 2006. See Note 1 of the Notes to Financial
Statements. Prior to January 1, 2006, the company used the
fair value method of accounting for its stock-based
compensation. (The company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, effective
January 1, 2002.) Therefore, the company does not expect
the expense for stock options, restricted stock and restricted
stock units to be materially different under
SFAS No. 123(R) than the expense it recognized under
SFAS No. 123. During 2005, the company recognized in
the aggregate stock-based compensation expense of
$3.4 million for stock options and restricted stock. There
were no outstanding restricted stock units during 2005.



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##### Table of Contents



PART II/ITEM 7


In addition to stock options and restricted
stock, the company also grants dividend equivalents and value
management awards, a portion of which may be payable in the
companys stock. Grants of both dividend equivalents and
value management awards represent awards that are classified and
accounted for as liabilities under SFAS No. 123(R). As
a result, the expense recognized over the performance period for
both dividend equivalents and value management awards will equal
the fair value of an award as of the last day of the performance
period times the number of awards that are earned. Furthermore,
SFAS No. 123(R) requires the quarterly expense
recognized during the performance period to be based on the fair
value of dividend equivalents and value management awards as of
the end of the most recent quarter. The company does not expect
the total expense recognized over the performance period for
dividend equivalents and value management awards computed in
accordance with SFAS No. 123(R) to be materially
different than the total expense currently computed under
SFAS No. 123. However, as a result of the requirement
under SFAS No. 123(R) to base the quarterly expense on
the current fair value of dividend equivalent and value
management awards, the quarterly and annual expense recognized
under SFAS No. 123(R) could be materially different
than the quarterly and annual expense we recognized under
SFAS No. 123. During 2005, the company recognized in
the aggregate stock-based compensation expense of
$5.3 million for dividend equivalents and value management
awards.

In connection with the adoption of
SFAS No. 123(R), the company expects to recognize
during the first quarter of 2006, a $2 million, net of tax,
increase to earnings as a cumulative effect of an accounting
change. The benefit is based on the difference between the fair
values of outstanding dividend equivalent and value management
awards as of January 1, 2006, and our accrued liability for
dividend equivalent and value management awards at
December 31, 2005.

After adjusting for the cumulative effect of an
accounting change, our accrued stock-based compensation
liability for dividend equivalent and value management awards is
$9 million. The $9 million accrued liability at
January 1, 2006 is based on the current fair value of the
outstanding awards times the percentage of months worked during
the performance period. The fair value of the outstanding awards
is impacted by our performance compared to several peer groups,
the maximum value of an award, and the vested portion of
dividend equivalents. The liability at January 1, 2006
could range between $6 million and $16 million based
on the possible fair values of all outstanding awards. Beginning
with the first quarter of 2006, any change in our accrual as a
result of the change in an awards fair value will be fully
reflected in the current quarters operating income.

PENSIONS

Plum Creek provides pension benefits under
defined benefit pension plans that cover substantially all of
our employees. See Note 10 of the Notes to Financial
Statements. We maintain a qualified defined benefit pension plan
and several supplemental (non-qualified) defined benefit pension
plans. Participants benefits generally vest after five
years of service. The cash balance benefits for salaried
employees is determined based primarily on certain percentages
of compensation, age, years of service and interest accrued
based on the 30-year treasury bond rate. Furthermore, employees
of the company on September 1, 2000, earn benefits based on
the greater of the cash balance formula or a monthly pension
benefit that is principally based on highest monthly average
earnings during any consecutive sixty-month out of the last
120-month period and the number of years of service credit. The
benefits of hourly employees are generally based on a fixed
amount per year of service.

Plum Creeks contributions to its qualified
pension plan vary from year to year, but the company has made at
least the minimum contributions required by law in each year.
Furthermore, we intend to fund our qualified pension plan
annually such that the fair value of plan assets equals or
exceeds the actuarially computed accumulated benefit obligation
(ABO, the approximate actuarially computed current
pension obligation if the plan was discontinued). The company
has the same funding policy for the non-qualified plans.
However, assets related to the non-qualified plans are held in a
grantor trust and are subject to the claims of creditors.



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##### Table of Contents



PART II/ITEM 7


The computation of the companys benefit
obligation, pension cost and accrued pension liability under
accounting principles generally accepted in the United States of
America requires us to make certain assumptions involving
primarily the following (weighted-average rates):

|                                                                        |                                               |      |  |      |   |  |  |      |  
|----------------------------------------------------------------------- | --------------------------------------------- | ---- |  | ---- | - |  |  | ---- | -
|                                                                        |                                               | 2005 |  | 2004
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Assumptions Used to Determine the Benefit
    Obligation at December 31 |                                               |      |  |      |   |  |  |     
|                                                                        | Discount rateA                                |      |  | 5.75 | % |  |  | 5.75 | %
|                                                                        | Rate of compensation increaseC                |      |  | 3.7  | % |  |  | 3.7  | %
|Assumptions Used to Determine Net Periodic
    Benefit Cost             |                                               |      |  |      |   |  |  |     
|                                                                        | Discount rate                                 |      |  | 5.75 | % |  |  | 6.25 | %
|                                                                        | Expected long-term return on plan
    assetsB |      |  | 7.75 | % |  |  | 7.75 | %
|                                                                        | Rate of compensation increaseC                |      |  | 3.7  | % |  |  | 3.7  | %
|                                                                       
|                                                                       



|  |                                                                                                                                                                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | The December 31, 2005, discount rate was
    determined by the resulting yield of a hypothetical bond
    portfolio at December 31, 2005, matched to the expected
    benefit payments under the plans. Bonds selected for this
    portfolio had a Moodys or Standard & Poors
    credit rating of AA or better as of
    December 31, 2005.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | The expected long-term rate of return on plan
    assets assumption is based on the current level of expected
    returns on risk free investments (primarily government bonds),
    the historical level of the risk premium associated with the
    other asset classes in which the portfolio is invested and the
    expectations for future returns on each asset class. The
    expected return for each asset class is weighted based on the
    target asset allocation to develop the expected long-term rate
    of return on plan assets assumption for the portfolio.
| 
|C | The assumed rate of increase of future
    compensation levels represents our long-term estimate of such
    increases on the basis of the composition of plan participants,
    past results and market expectations.                                                                                                                                                                                                                                                                                                                                                           

Other key assumptions used in the estimate
include primarily those underlying the mortality table, and
expected long-term rates for inflation, retirement and
withdrawals, all of which are based on plan experience and
standard actuarial methods but which are nevertheless subject to
uncertainty.

It is likely that the actual return on plan
assets and the outcome of other uncertain variables will differ
from those used in estimating our pension costs and pension
obligation reflected in our consolidated financial statements
and notes thereto. Furthermore, the company may, from time to
time, adjust the asset allocation, which may have an impact on
the long-term rate of return on plan assets.

The following table summarizes key financial
measures and sensitivities to changes in assumption for the
years ended December 31(in millions):

|                                          |                                                                                                                          |                                                         |   |      |     |  |   |     |     | 
|----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------- | - | ---- | --- |  | - | --- | --- | 
|                                          |                                                                                                                          | 2005                                                    |   | 2004
|                                         
|                                         
|                                         
|                                         
|Key Financial Measures                    |                                                                                                                          |                                                         |   |      |     |  |   |    
|                                          | Pension expense                                                                                                          |                                                         | $ | 9    |     |  | $ | 7   |    
|                                          | Cash pension plan contributions 
    qualified plan                                                                     |                                                         |   | 9    |     |  |   | 9   |    
|                                          | Cash grantor trust funding 
    supplemental plans                                                                      |                                                         |   | 2    |     |  |   | 1   |    
|                                          | Unfunded accrued pension cost                                                                                            |                                                         |   | 14   |     |  |   | 14  |    
|Sensitivity to Changes in Key Assumptions |                                                                                                                          |                                                         |   |      |     |  |   |    
|                                         
|                                         
|                                         
|                                         
|                                          | Increase in pension expense for every
    0.25 percentage point:                                                         |                                                         |   |      |     |  |   |     |    
|                                          |                                                                                                                          | decrease in long-term rate of return on plan
    assets |   | $    | 0.2 |  |   | $   | 0.2 | 
|                                          |                                                                                                                          | decrease in weighted average discount rate              |   |      | 0.7 |  |   |     | 0.7 | 
|                                          |                                                                                                                          | increase in rate of increase in compensation
    levels |   |      | 0.2 |  |   |     | 0.1 | 
|                                          | Increase in qualified pension funding for every
    0.25 percentage point
    decrease in weighted average discount rate |                                                         | $ | 3.7  |     |  | $ | 3.7 |    
|                                         
|                                         

Assuming an average long-term rate of return on
plan assets of 7.75%, a weighted average discount rate of 5.75%
for 2006 and 6.00% for 2007 and beyond, and a 3.70% rate of
increase in compensation levels, we project that our annual
pension expense for 2006 through 2008 will be comparable to the
$9 million annual pension expense in 2005. Over the same
time period, the annual cash funding required under our present
funding policy and current funding rules for the qualified
pension plan is expected to be approximately $3 million
during 2006 increasing to approximately $7 million by 2009.



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##### Table of Contents



PART II/ITEM 7


Off-Balance Sheet Arrangements, Contractual Obligations,
Contingent Liabilities and Commitments

The consolidated financial statements of the
company reflect all of the operations and assets and liabilities
of the company. During 2005, the company entered into three
joint venture agreements with land developers covering
approximately 6,700 acres. We are the minority partner in
each of these joint ventures, and our involvement is limited to
selling and/or contributing land and exercising certain approval
rights. The company has no other relationships with
unconsolidated entities or financial partnership, such as
entities referred to as structured finance or special purpose
entities. Consequently, the company has no off-balance sheet
debt.

During the fourth quarter of 2005, we entered
into two treasury-lock arrangements to secure current long-term
interest rates in connection with our issuance of
$300 million of senior notes due 2015. See Note 6 of
the Notes to Financial Statements. These hedging transactions
were settled for a net amount of less than $0.1 million.
The company is not a party to any other derivative transactions.

The following table summarizes our contractual
obligations at December 31, 2005 (in millions):

|                              |  |       |       |                       |  |           |     |           |  |         |     |  |  |   |     |  |  |   |       | 
|----------------------------- |  | ----- | ----- | --------------------- |  | --------- | --- | --------- |  | ------- | --- |  |  | - | --- |  |  | - | ----- | 
|                              |  |       |       |                      
|                              |  |       |       | Payment due by period
|                              |  |       |       |                      
|                              |  |       |       | Less than             |  |           |     | More than
|Contractual Obligations       |  | Total |       | 1 Year                |  | 1-3 Years |     | 3-5 Years |  | 5 Years
|                             
|                             
|                             
|                             
|Long-term debtA               |  | $     | 2,846 |                       |  | $         | 329 |           |  | $       | 469 |  |  | $ | 902 |  |  | $ | 1,146 | 
|Operating lease obligations   |  |       | 26    |                       |  |           | 4   |           |  |         | 7   |  |  |   | 5   |  |  |   | 10    | 
|Timber obligations            |  |       | 11    |                       |  |           | 1   |           |  |         | 2   |  |  |   | 2   |  |  |   | 6     | 
|Long-term incentive plans     |  |       | 12    |                       |  |           | 3   |           |  |         | 8   |  |  |   | 1   |  |  |   |      | 
|Purchase ObligationsB         |  |       | 43    |                       |  |           | 31  |           |  |         | 12  |  |  |   |    |  |  |   |      | 
|Other Long-Term LiabilitiesC  |  |       |      |                       |  |           |    |           |  |         |    |  |  |   |    |  |  |   |      | 
|                              |  |       |       |                       |  |           |     |           |  |         |     |  |  |   |     |  |  |   |       | 
|Total Contractual Obligations |  | $     | 2,938 |                       |  | $         | 368 |           |  | $       | 498 |  |  | $ | 910 |  |  | $ | 1,162 | 
|                             
|                             



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | In addition to principal, Long-term debt includes
    related interest obligations based on the coupon or stated
    interest rate for our fixed rate debt of $118 million (Less
    than one year), $196 million (1-3 years),
    $149 million (3-5 years), and $153 million (More
    than 5 years). Also, short-term variable rate debt interest
    of $1 million is included in 2006 and is based on the
    actual interest rate as of December 31, 2005. As we expect
    borrowings outstanding under our line of credit to vary, only
    repayment of principal is included. Interest expense related to
    our line of credit was $5 million in 2005.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | Purchase obligations are comprised primarily of
    $15 million for raw materials for our MDF facilities,
    $11 million for third-party logs for our plywood and
    sawmill facilities, $4 million for real estate development,
    and $3 million for reforestation and silviculture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
|C | We have not included any amounts for our other
    long-term liabilities, as we cannot estimate when we will be
    obligated to satisfy these liabilities. At December 31,
    2005, other long-term liabilities include workers
    compensation of $8 million, deferred compensation
    obligations of $8 million and non-qualified pension
    obligations of $17 million. We expect to fund approximately
    $2 million for workers compensation payments in 2006.
    We have made contributions to our qualified pension plan such
    that the fair value of the pension plan assets at
    December 31, 2005, exceeds the actuarially computed
    accumulated benefit obligation. As a result of this funding
    level, there are no qualified pension-funding obligations at
    December 31, 2005. We have two grantor trusts, which hold
    assets associated with our deferred compensation obligations and
    non-qualified pension obligations. At December 31, 2005,
    the fair value of assets in one of our grantor trusts is
    approximately equal to our deferred compensation obligation of
    $8 million. Additionally, at December 31, 2005, the
    fair value of assets in the other grantor trust of
    $18 million exceeded the actuarially computed accumulated
    benefit obligation for our non-qualified pension plans of
    $17 million. Assets in our grantor trusts have been
    reserved for the above obligations. However, grantor trust
    assets are subject to the claims of creditors in the event of
    bankruptcy. See Notes 8 and 10 of the Notes to Financial
    Statements.

Events and Trends Affecting Operating Results

HARVEST PLANS


We determine our annual roundwood (sawlogs and
pulpwood, including stumpage sales) harvesting plans based on a
number of factors. At the stand level, ranging in size from 10
to 200 acres, we consider the age, size, density, health
and economic maturity of the timber. A stand is a contiguous
block of trees of a similar age, species mix and silvicultural
regime. At the forest level, ranging in size from 105,000 to
770,000 acres, we consider the long-term sustainability and
environmental impact of certain levels of harvesting, certain
external conditions such as supply agreements, and the level of
demand for wood within the region. A forest is a broad
administrative unit, made up of a large number of stands.
Harvest scheduling is the technical approach using
computer modeling that considers all



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PART II/ITEM 7


of the above factors along with forest growth
rates and financial assumptions to project future harvest plans
for a number of years forward.


Actual harvest levels may vary from planned
levels due to log demand, sales prices, the availability of
timber from other sources, the level of timberland sales and
acquisitions, the availability of legal access, abnormal weather
conditions, fires and other factors that may be outside of our
control. We believe that our harvest plans are sufficiently
flexible to permit modification in response to short-term
fluctuations in the markets for logs. Furthermore, future
harvest levels may be impacted by both our planned sales of
non-strategic and higher and better use timberlands. The impact
will depend on the level and extent we are able to reinvest
proceeds in productive timberlands and the stocking levels and
age class distribution of any newly acquired timberlands.

Harvest levels in the Northern Resources Segment
were 5.4 million tons (66% sawlogs and 34% pulpwood) during
2005 and 5.2 million tons (67% sawlogs and 33% pulpwood)
during 2004. Harvest levels in the Northern Resources Segment in
2006 are expected to increase by approximately 16% over 2005 and
are expected to be 62% sawlogs and 38% pulpwood. The primarily
reason for this increase and change in mix is due to our
acquisition of 650,000 acres of timberlands in Michigan
during the fourth quarter of 2005.

Harvest levels in the Southern Resources Segment
were 13.8 million tons (51% sawlogs and 49% pulpwood)
during 2005 and 13.3 million tons (50% sawlogs and 50%
pulpwood) during 2004. Harvest levels in the Southern Resources
Segment in 2006 are expected to increase by approximately 1%
over 2005 and are expected to be 50% sawlogs and 50% pulpwood.

U.S.CANADA SOFTWOOD LUMBER AGREEMENT

Historically, Canada has been a significant
source of lumber for the U.S. market, particularly in the
new home construction market. This source of lumber was
constrained in April 1996 when a five-year lumber trade
agreement between the U.S. and Canada went into effect. The
trade agreement was intended to limit the volume of Canadian
lumber exported into the U.S. through the assessment of an
export tariff on annual lumber exports to the U.S. in
excess of certain levels from the four major producing Canadian
provinces.

The trade agreement expired in March 2001, and
soon thereafter a U.S. industry coalition, of which Plum
Creek is a member, submitted anti-dumping and countervailing
duty petitions to the International Trade Commission and the
U.S. Department of Commerce. In March 2002, the Department
of Commerce rendered a final determination in favor of the
U.S. industry coalition and set a 19.3% countervailing duty
on Canadian lumber imports and an anti-dumping duty on all
non-investigated Canadian exporters averaging 9.7% (representing
the weighted average of the anti-dumping rates imposed on the
investigated Canadian exporters). The Department of Commerce
decreased these duties in April 2002 to 18.8% and 8.4%,
respectively, and in December 2004, it decreased them again to
16.4% and 3.8%, respectively. In December 2005, the
countervailing duty rate was reduced to 8.7% and the
anti-dumping duty was reduced to 2.1%, for a combined duty of
10.8%. Due to strong demand for lumber in the U.S. and favorable
lumber prices, the duties have not thus far had the effect of
decreasing Canadian lumber imports share of the
U.S. market. It is uncertain whether Canadas share of
the U.S. market would be adversely affected by import
duties in times of weaker domestic demand for lumber.

The future of the U.S.-imposed import duties on
Canadian lumber remains uncertain. While the WTO and NAFTA
appeal boards have issued rulings on Canadian challenges to the
duties that affirmed the U.S. position regarding a Canadian
subsidy on stumpage, the rulings also included provisions for
re-examining the calculation and level of the duties. In
September 2005, the NAFTA panel remanded to the Department of
Commerce its subsidy calculation upon which duties are based
with instructions to make a de minimus calculation.
In response, the Department of Commerce issued a subsidy
calculation of 0.8% in November 2005, which could result in the
elimination of countervailing duty by as early as September
2006. The U.S. industry coalition has challenged the
Department of Commerce subsidy calculation to a NAFTA panel. If
the calculation is ultimately upheld, it is possible that the
countervailing duty could be eliminated entirely.

In addition, the NAFTA panel has ruled that the
International Trade Commissions determination of injury to
U.S. industry from Canadian lumber imports, which is the
basis for imposing the duties, was not supported with
substantial evidence. The commission unsuccessfully appealed
this decision, and as a result was directed to issue a no
injury opinion. The NAFTA decision was then unsuccessfully
appealed to an Extraordinary Challenge Committee under the NAFTA
dispute resolution process. Presently, the U.S. industry
coalition has initiated a constitutional challenge to a portion
of the NAFTA dispute resolution process. The ruling on this
challenge could have a material impact on the outcome of this
dispute.



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PART II/ITEM 7


The U.S. and representatives of the Canadian
government continue, from time to time, to pursue a settlement
agreement. However, there can be no assurance that an agreement
will be reached, or that the terms of any such final agreement
would be favorable to the U.S. lumber industrys
interests. Likewise, there can be no assurance that the ultimate
legal resolution of this dispute will be on terms favorable to
the U.S. industrys interest. Therefore, other factors
remaining unchanged, any downward pressure on domestic lumber
and log prices caused by Canadian imports could continue or
increase, particularly during periods of weak lumber demand.

COMPARABILITY OF FINANCIAL STATEMENT PERIODS

Acquisitions and
Divestitures.We have pursued and
expect to continue to pursue both the acquisition and
divestiture of timberlands to increase the value of our assets.
During 2005, we acquired 754,000 acres of timberlands,
located in Northern Michigan, Arkansas and Florida. During 2004,
we acquired 78,000 acres of timberlands located in Arkansas
and Maine. During 2003, we acquired 139,000 acres of
timberlands located primarily in South Carolina, Arkansas and
New Hampshire. We sold approximately 232,000 acres of
timberlands in 2005, 375,000 acres in 2004, and
125,000 acres in 2003. As a result of these timberland
acquisitions and dispositions, our ownership was
8.2 million acres at December 31, 2005,
7.8 million acres at December 31, 2004, and
8.1 million acres at December 31, 2003. Accordingly,
the comparability of periods covered by the companys
financial statements is, and in the future may be, affected by
the impact of timberland acquisitions and divestitures.

Results of Operations

The following table compares Operating Income
(Loss) by Segment for the years ended December 31 (in
millions):

|                               |  |      |     |      |  |      |     |   |  |   |     |  
|------------------------------ |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                               |  | 2005 |     | 2004 |  | 2003
|                              
|                              
|                              
|                              
|Northern Resources             |  | $    | 102 |      |  | $    | 100 |   |  | $ | 82  |  
|Southern Resources             |  |      | 221 |      |  |      | 207 |   |  |   | 216 |  
|Real Estate                    |  |      | 140 |      |  |      | 152 |   |  |   | 47  |  
|Manufactured Products          |  |      | 30  |      |  |      | 58  |   |  |   | (5  | )
|Other                          |  |      | 13  |      |  |      | 9   |   |  |   | 7   |  
|Gain on Sale of Other Assets   |  |      |    |      |  |      | 5   |   |  |   |    |  
|                               |  |     
|Total Segment Operating Income |  |      | 506 |      |  |      | 531 |   |  |   | 347 |  
|Other Costs & Eliminations     |  |      | (58 | )    |  |      | (54 | ) |  |   | (44 | )
|                               |  |     
|Operating Income               |  | $    | 448 |      |  | $    | 477 |   |  | $ | 303 |  
|                              
|                              

2005 COMPARED TO 2004

Northern Resources
Segment.Revenues increased by
$22 million, or 7%, to $347 million in 2005. This
increase was due primarily to higher harvest volume
($12 million) and higher product prices ($11 million).
The increase in volume is due primarily to harvesting on
timberlands acquired during the past several years, stronger log
demand due to new mills, and an increase of harvest levels in
certain markets to take advantage of favorable log prices.
Revenues in 2005 included $4 million from the harvesting of
85,000 tons associated with our acquisition of
650,000 acres of timberlands in Michigan during November of
2005.

Sawlog prices increased by 3% ($8 million)
due primarily to higher demand for logs as a result of increased
lumber production and a limited supply of logs. Pulpwood prices
increased by 8% ($5 million) due primarily to low log
inventories.

Northern Resources Segment operating income was
29% of its revenues for 2005 and 31% for 2004. Segment costs and
expenses increased by $20 million, or 9%, to
$245 million in 2005. This increase was primarily due to
higher per ton log and haul rates ($12 million) and higher
harvest volume. Log and haul cost on a per ton basis increased
by 7% due primarily to higher fuel costs. Segment expenses in
2005 included $3 million as a result of our harvesting on
recently acquired timberlands in Michigan.

For 2006, we expect harvest volumes to increase
approximately 16% to 6.3 million tons. This increase is due
primarily to the approximately 850,000 tons we expect to harvest
from our recently acquired timberlands in Michigan.



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PART II/ITEM 7


Southern Resources
Segment.Revenues increased by
$42 million, or 9%, to $501 million in 2005. This
increase was due primarily to a higher percentage of delivered
log sales compared to sales of standing timber
($19 million), higher harvest volume ($11 million) and
higher softwood sawlog prices ($7 million).

Revenues increased $19 million due to the
companys increased percentage of delivered log sales. A
portion of the increase in delivered log sales is by way of
decreasing the percentage of standing timber sales. Under its
delivered log sale agreements, the company is responsible for
log and haul costs. When standing timber is sold, the buyer
incurs the log and haul costs. The company sells logs on a
delivered basis when, in managements judgment, log
merchandising efforts will yield a premium over selling
stumpage. While revenues are higher when the company is
responsible for the logging and hauling of timber, a large
portion of that increase in revenue is to cover the related
increase in cost of sales. As a result, on delivered log sales
the company realizes lower operating income as a percentage of
revenue, even though operating income is generally improved.

Harvest volume increased due to favorable
harvesting conditions during most of 2005 and a planned increase
in harvest levels. The planned increase in harvest levels is the
result of an increased percentage of maturing timber on our
southern timberlands.

Softwood sawlog prices increased temporarily
during the first half of 2005 due primarily to a weather-related
shortage of logs. Several of our customers had low log
inventories at the end of 2004 due to wet weather during the
second half of 2004, and as a result, offered higher prices in
order to rebuild log decks.

Southern Resources Segment operating income was
44% of its revenues for 2005 and 45% for 2004. Southern
Resources Segment costs and expenses increased by
$28 million, or 11%, to $280 million in 2005. This
increase was due primarily to an increase in log and haul costs
as a result of a higher percentage of delivered log sales
compared to sales of standing timber, increased harvesting
volume, and higher fuel costs. The per ton rate increase for log
and haul costs, which increased costs and expenses by
$11 million, was due primarily to higher fuel costs.

In 2005, approximately 350,000 acres of our
timberlands in Mississippi were impacted by severe winds from
Hurricane Katrina. As a result, we recorded a $2 million
loss in 2005, which represents the book basis for approximately
600,000 tons of timber that was destroyed. Following Hurricane
Katrina, we began salvaging timber that was blown down but not
destroyed. For 2005, operating income was reduced by
$1 million due to higher logging costs from our salvage
operations. We expect to complete salvage operations during the
first quarter of 2006 and estimate additional logging costs
associated with our salvage operations to be approximately
$1 million.

During 2005, we harvested approximately
13.8 million tons of timber. We expect total tons harvested
during 2006 to be approximately the same. However, during 2005
we substantially completed the conversion of numerous natural
stands to plantations in order to improve growth rates.
Therefore, we anticipate that the percentage of large-diameter
sawlogs that we will harvest during 2006 compared to 2005 will
decrease and the percentage of small-diameter sawlogs and
pulpwood that we will harvest will increase. As a result of this
change in log mix, we expect revenues and operating income to
decrease between $10 million and $15 million.

Real Estate Segment

|                                    |  |       |         |            |  |          |     |       |  |            |        |          |  |  |         |  |  |   |     |  |  |   |        | 
|----------------------------------- |  | ----- | ------- | ---------- |  | -------- | --- | ----- |  | ---------- | ------ | -------- |  |  | ------- |  |  | - | --- |  |  | - | ------ | 
|                                    |  |       |         |           
|                                    |  | 2005  |         | 2004      
|                                    |  |       |         |           
|                                    |  | Acres |         | Revenues   |  | Revenue  |     | Acres |  | Revenue    |        | Revenue 
|Property                            |  | Sold  |         | (millions) |  | per Acre |     | Sold  |  | (millions) |        | per Acre
|                                   
|                                   
|                                   
|                                   
|Small Non-Strategic                 |  |       | 148,200 |            |  | $        | 160 |       |  | $          | 1,075  |          |  |  | 34,000  |  |  | $ | 42  |  |  | $ | 1,230  | 
|Large Non-Strategic                 |  |       | 40,000  |            |  |          | 31  |       |  |            | 780    |          |  |  | 255,000 |  |  |   | 133 |  |  |   | 520    | 
|Conservation                        |  |       | 22,600  |            |  |          | 26  |       |  |            | 1,150  |          |  |  | 65,000  |  |  |   | 73  |  |  |   | 1,125  | 
|Higher and Better Use/ Recreational |  |       | 21,000  |            |  |          | 59  |       |  |            | 2,820  |          |  |  | 21,100  |  |  |   | 52  |  |  |   | 2,450  | 
|Development Properties              |  |       | 200     |            |  |          | 3   |       |  |            | 14,500 |          |  |  | 50      |  |  |   | 3   |  |  |   | 61,000 | 
|Conservation Easements              |  |       | n/a     |            |  |          | 13  |       |  |            | 450    |          |  |  | n/a     |  |  |   |    |  |  |   |       | 
|                                    |  |       |         |            |  |          |     |       |  |            |        |         
|Total                               |  |       | 232,000 |            |  | $        | 292 |       |  |            |        |          |  |  | 375,150 |  |  | $ | 303 |  |  |   |        | 
|                                   
|                                   

Revenues decreased by $11 million to
$292 million in 2005. Excluding revenues from the large,
non-strategic timberland sales, revenues increased
$91 million to $261 million for 2005, compared to
$170 million for 2004. This increase is due primarily to an
increase in land sales activity as the company executes its
strategy of selling non-strategic timberlands. Large,
non-strategic timberland sales excluded, the sales of our
conservation and small non-



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PART II/ITEM 7


strategic timberlands accounted for approximately
90% of the acres sold during 2005 compared to 82% of the acres
sold during 2004. Higher and better use timberland sales
represented approximately 10% of the acres sold during 2005
compared to 18% of the acres sold during 2004.


Our land portfolio includes 6.4 million
acres of core timberlands, 530,000 acres of timberland
considered to be non-strategic, and 1.3 million acres of
timberlands with higher value for uses other than growing
timber. These 1.3 million acres with higher values are
further segmented into three categories: conservation
(500,000 acres); recreation and higher and better use
properties (550,000 acres); and those properties to be
developed (225,000 acres). The non-strategic timberlands
are expected to be sold as small tracts over the next five
years. The higher value properties, located throughout our
ownership, appeal to a variety of buyers and are expected to be
sold over the next 15 years. Until these properties are
sold, they will continue to be used productively in our business
of growing and selling timber. The timing of real estate sales,
however, is a function of many factors, including the
availability of government and not-for-profit funding, the
general state of the economy, the ability to get entitlements,
the plans of adjacent landowners, our expectation of future
price appreciation and the timing of harvesting activities. We
expect revenues from real estate sales during 2006 to range
between $280 and $300 million from the sale of 100,000 to
150,000 acres. We estimate these sales will consist of
45,000 to 60,000 non-strategic acres, up to
6,000 development acres and the remainder from the sales of
higher and better use and conservation acres.

Real Estate Segment operating income was 48% of
its revenues for 2005, compared to 50% for 2004. Real Estate
Segment costs and expenses increased by $1 million to
$152 million in 2005. This increase was due primarily to an
increase in land sales activity associated with small parcels of
non-strategic timberlands ($28 million, primarily land
basis) and an increase in costs associated with development
activities ($7 million), offset in part by a decrease in
large, non-strategic timberland sales ($34 million,
primarily land basis). Costs associated with our real estate
development activities increased to $10 million in 2005
compared to $3 million in 2004 due primarily to new costs
(e.g. investigatory, appraisals, feasibility studies,
environmental and engineering studies, market analysis)
associated with our expanding real estate development business.

Manufactured Products
Segment.Revenues decreased by
$14 million, or 3%, to $504 million in 2005. This
decrease was due primarily to lower lumber prices
($11 million), lower plywood prices ($9 million),
offset in part by higher MDF prices ($10 million). Despite
the highest level of U.S. housing starts since 1972
(U.S. housing starts during 2005 were 5.6% higher than
housing starts during 2004), lumber prices decreased by 7% due
primarily to increased lumber production and imports.
U.S. lumber production during the first eleven months of
2005 was 4% higher than the same period in 2004 due to start-up
of new mills and capacity expansions at existing mills.
Furthermore, lumber imports from Canada during the first eleven
months of 2005 increased by 2% over the same period in 2004, and
offshore imports (Europe and Latin America) increased by 28%,
due primarily to the strength of the U.S. economy and weak
foreign markets.

Plywood prices decreased by 7% due primarily to
the increase in North America structural panels (plywood and
oriented strand board) production capacity and offshore imports.
During 2005, North America structural panel production capacity
has increased by approximately one billion square feet, or
approximately 3% of the annual U.S. structural panel
consumption. During 2005, offshore imports (primarily Latin
America) increased 32% over 2004 amounts.

MDF prices increased 6% due primarily to improved
demand and a richer production mix. MDF demand has increased due
to strong housing starts and improved repair and remodeling
markets. During the first half of 2004, we resolved all of our
start-up issues associated with our new MDF thin-board line and,
as a result, have increased the percentage of higher-margin
products we produce.

Manufactured Products Segment operating income
was 6% of its revenues for 2005 and 11% for 2004. This decrease
was due primarily to lower lumber and plywood prices and higher
energy and raw material costs. Manufactured Products Segment
costs and expenses increased by $14 million, or 3%, to $474
million in 2005. This increase was due primarily to higher log
costs and higher energy prices. Log costs have increased due
primarily to a declining supply of logs in Montana and favorable
lumber and plywood prices. Energy costs, including the impact on
resin prices, have increased by $5 million over the prior
year.

Other Costs and Eliminations/ Gain on Sale of
Other Assets.Other Costs and
Eliminations (which consists of corporate overhead and
intercompany profit elimination) decreased operating income by
$58 million in 2005, compared to a decrease of
$54 million in 2004. This increase of $4 million was
due primarily to higher corporate overhead associated with
accounting and timber and timberland systems, and corporate
compliance. Corporate



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PART II/ITEM 7


overhead during 2006 is expected to increase by
an additional $5 million to $10 million as a result of
increased costs associated with strategic business development,
information technology and long-term incentive plans.


During 2004, we sold our working interest in our
coalbed methane gas joint operating agreement to Geomet, Inc.
for $27 million and recorded a gain of $5 million.

Interest Expense,
net.Net interest expense
decreased by $2 million to $109 million for 2005. This
decrease was due primarily to the replacement of high interest
rate debt with lower interest rate debt. We expect interest
expense for 2006 to increase by $14 million to
$123 million due primarily to the issuance of
$300 million senior notes due 2015 in connection with our
November 15, 2005 acquisition of timberland in Michigan.

Provision for Income
Taxes.The provision for income
taxes was $8 million for 2005 compared to $27 million
for 2004. This decrease of $19 million is due primarily to
a $28 million decline in the operating income of the
Manufacturing Products Segment (resulting in a lower tax expense
of $11 million), a $5 million remeasurement of our
Deferred Tax Liability, and the $5 million gain we
recognized during the second quarter of 2004 from the sale of
our coalbed methane gas working interest (resulting in a higher
tax expense in the prior year of $2 million).

Plum Creek has elected to be taxed as a REIT
under sections 856-860 of the United States Internal Revenue
Code, and as such, is generally not subject to corporate-level
income tax. However, the company conducts certain non-REIT
activities through various taxable REIT subsidiaries, which are
subject to corporate-level income tax. These activities include
our manufacturing operations, the harvesting and selling of
logs, and the development and/or sale of some of our higher and
better use lands. Furthermore, as we continue to expand our real
estate development business we expect a greater percentage of
our income will be subject to corporate-level income tax.

In addition to corporate-level income tax on
certain non-REIT activities conducted through various taxable
REIT subsidiaries, the company is subject to built-in gains tax
on certain property dispositions as a consequence of our
October 6, 2001 merger with The Timber Company. Our merger
with The Timber Company involved merging a taxable entity into a
nontaxable entity, and as a result, Plum Creek will generally be
subject to corporate-level income tax (built-in gains tax) if
the company makes a taxable disposition of certain property
acquired in the merger within the ten-year period following the
merger date. However, the tax is generally not payable to the
extent proceeds from such dispositions are reinvested in
qualifying like-kind replacement property.

During the fourth quarter of 2001, in connection
with our merger with The Timber Company, we wrote-off all of The
Timber Companys deferred income tax liability related to
timber and timberlands except for $11 million. The
$11 million deferred income tax liability relates to the
book-tax basis difference of timber and timberlands that were
expected to be sold, and subject to, the built-in gains tax
during the ten-year period ending October 6, 2011. During
the period October 6, 2001 to December 31, 2005, the
$11 million deferred income tax liability was reduced by
$1 million in connection with sales of timberlands subject
to the built-in gains tax.

In accordance with Statement of Financial
Accounting Standards No. 109, Accounting for
Income Taxes,we are required to remeasure the amount
of deferred income taxes needed in connection with expected
sales of timberlands subject to the built-in gains tax whenever
management has better information to make an estimate. Prior to
2005, the company was in the process of expanding its real
estate sales and believed it needed $11 million of deferred
income taxes for expected sales of timberlands subject to
built-in gains tax. During 2005, management revised its prior
projection of future sales as well as the extent to which future
sales proceeds could be successfully reinvested in like-kind
property. Based upon the revised projection, management
estimated that the company needed $5 million of deferred
incomes taxes associated with timberlands acquired in connection
with our 2001 merger with The Timber Company. This estimate was
based on projected timberland sales subject to the ability to
successfully reinvest proceeds in like-kind properties.
Therefore, during 2005, we reduced the related deferred tax
liability associated with expected sales of timberlands subject
to built-in gains tax from $10 million to $5 million
and correspondingly, recorded a deferred tax benefit of
$5 million. Since there is significant judgment in
estimating future sales subject to the built-in gains tax and
our ability to successfully reinvest proceeds in like-kind
property, these estimates may be revised during the remaining
built-in gains tax period. Any revised estimate may result in a
material adjustment to our deferred tax liability.

Gain on Sale of Properties, net of
tax.In December 2004, the
company sold certain subsurface property rights (primarily coal
reserves, excluding coalbed methane, oil and gas reserves) in
Buchanan County, Virginia. The net gain, after reducing the
proceeds for applicable book basis and income taxes, was
$23 million. During the first quarter of 2005, the company
sold its remaining coal reserves for a total gain of
$20 million, net of selling costs and



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PART II/ITEM 7


applicable income taxes. The company also sold
other industrial mineral assets during the fourth quarter 2005
for a total gain of $3 million, net of tax.


2004 COMPARED TO 2003

Northern Resources
Segment.Revenues increased by
$16 million, or 5%, to $325 million in 2004. This
increase was due primarily to higher sawlog prices
($27 million) and higher pulpwood prices ($9 million),
offset in part by lower sawlog sales volume ($23 million).
Sawlog prices increased by 12% due primarily to strong lumber
and plywood markets, good hardwood specialty demand, and a
limited supply of logs. Pulpwood prices increased by 17% due
primarily to a shortage of logging contractors and low mill
fiber inventories. Sawlog sales volume decreased by 9% due
primarily to a planned reduction in harvest levels.

Northern Resources Segment operating income was
31% of its revenues for 2004 and 27% for 2003. This increase was
due primarily to higher sawlog and pulpwood prices, offset in
part by higher log and haul costs. Segment costs and expenses
decreased by $2 million, or 1%, to $225 million in
2004. This decrease was due primarily to lower harvest volumes
($9 million) and as a result of no fire loss during 2004
compared to a $4 million fire loss in 2003, offset in part
by higher log and haul cost ($10 million). Log and haul
costs increased by 7% on a per ton basis due primarily to higher
fuel costs, longer hauling distances and a shortage of logging
contractors.

Southern Resources
Segment.Revenues increased by
$14 million, or 3%, to $459 million in 2004. This
increase was due primarily to a higher percentage of delivered
log sales compared to sales of standing timber. Under its
delivered log sale agreements, the company is responsible for
log and haul costs. When standing timber is sold, the buyer
incurs the log and haul costs. While revenues are higher when
the company is responsible for the logging and hauling of
timber, costs of sales generally increase by a similar amount.
As a result, the company realizes lower operating income as a
percentage of revenue, although operating income is not
generally affected. Despite strong lumber and plywood prices
during most of 2004, sawlog prices generally held steady due to
an abundant supply of logs.

Southern Resources Segment operating income was
45% of its revenues for 2004 and 49% for 2003. This decrease was
due primarily to the increased percentage of delivered log sales
and higher fuel costs. Southern Resources Segment costs and
expenses increased by $23 million, or 10%, to
$252 million in 2004. This increase was due primarily to an
increase in log and haul costs as a result of a higher
percentage of delivered log sales compared to sales of standing
timber and higher fuel costs.

Real Estate
Segment.Revenues increased by
$179 million to $303 million in 2004. This increase is
due primarily to an increase in land sales activity as the
company executes its strategy of selling higher and better use
timberlands and non-strategic timberlands. During 2004, we sold
approximately 255,000 acres of large, non-strategic
timberlands for $133 million compared to 29,000 acres
for $13 million in 2003. During 2004, we sold approximately
120,000 acres of higher and better use timberlands and
small parcels of non-strategic timberlands for $170 million
compared to 96,000 acres for $111 million in 2003.

Real Estate Segment operating income was 50% of
its revenues for 2004, compared to 38% for 2003. This increase
was due primarily to selling a higher percentage of low-basis
timberlands during 2004 compared to 2003. See Critical
Accounting Policies, Real Estate Sales under this Item.
Real Estate Segment costs and expenses increased by
$74 million to $151 million in 2004. This increase was
due primarily to large, non-strategic timberlands transactions
($42 million) and the increase in land sales activity
associated with higher and better use timberlands and small
parcels of non-strategic timberlands.

Manufactured Products
Segment.Revenues increased by
$121 million, or 30%, to $518 million in 2004. This
increase was due primarily to higher lumber prices
($41 million), higher plywood prices ($36 million) and
higher MDF sales volume ($24 million). Lumber prices
increased by 27% due primarily to exceptionally strong housing
starts during 2004 on top of 25-year record-high housing starts
during 2003, limited log availability and transportation issues.
Housing starts for 2004 were 6% higher than housing starts
during 2003. Log availability was limited during the first half
of 2004 as a result of severe forest fires in the Western United
States and Canada during the second half of 2003. Also favorably
impacting lumber prices were inventory shortages during most of
2004 as a result of rail transportation delays. However,
commodity lumber prices peaked in August and have since declined
by approximately 10%. Plywood prices increased by 33% due
primarily to near record-high structural panel (plywood and
oriented strand board) prices and strong industrial demand.
Structural panel prices were at near record-high levels during
the first six months of 2004 as a result of exceptionally strong
housing starts and low field inventories at the beginning of the
year. Wholesalers and distributors continued their just-in-time
buying pattern during 2003, and



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PART II/ITEM 7


as a result, field inventories were not
sufficient to meet exceptionally strong demand during the first
half of 2004. Industrial demand (boats, recreational vehicles,
trailers, etc.) has strengthened due to the improving
U.S. economy. However, commodity plywood prices peaked
during second quarter of 2004 and have since declined by
approximately 28%. MDF sales volume increased by 24% due
primarily to resolving all major start-up issues associated with
our new MDF thin-board line, which operated near its projected
design capacity during 2004.


Manufactured Products Segment operating income
was $58 million for 2004, compared to an operating loss of
$5 million for 2003. This $63 million improvement in
operating performance was due primarily to higher lumber and
plywood prices and higher MDF sales volume, offset in part by an
impairment loss of $9 million related to a lumber facility.
Manufactured Products Segment costs and expenses increased by
$58 million, or 14%, to $460 million in 2004. This
increase in costs was due primarily to higher MDF sales volume,
higher lumber raw material costs, and an impairment loss of
$9 million to write-down the manufacturing assets at a
lumber facility.

Other Costs and Eliminations/ Gain on Sale of
Other Assets.Other Costs and
Eliminations (which consists of corporate overhead and
intercompany profit elimination) decreased operating income by
$54 million in 2004, compared to a decrease of
$44 million in 2003. This difference of $10 million
was due primarily to an increase in corporate expenses.
Corporate expenses have increased due primarily to higher costs
for long-term incentive plans of $6 million (see
Note 11 of the Notes to Financial Statements) and higher
regulatory costs of $2 million.

Plum Creek had been a party to a joint operating
agreement with Geomet, Inc., a coalbed methane developer, with
whom the company jointly explored for and developed coalbed
methane gas found on certain of its timberlands in West Virginia
and Virginia. During the second quarter of 2004, the company
sold its working interest in the joint operating agreement to
Geomet, Inc. for $27 million and recorded a gain of
$5 million. Plum Creek retained its royalty interest in the
project.

Provision for Income
Taxes.The provision for income
taxes was a $27 million expense for 2004, compared to a
$6 million benefit for 2003. This change of
$33 million was due primarily to the $63 million
improvement in the operating performance for the Manufactured
Products Segment (resulting in a higher tax expense of
$25 million) and a $5 million gain on the sale of our
working interest in a joint operating agreement to Geomet, Inc.
(resulting in a higher tax expense of $2 million). Plum
Creek has elected to be taxed as a REIT under sections 856-860
of the United States Internal Revenue Code, and as such, is
generally not subject to corporate-level income tax. However,
the company conducts certain non-REIT activities through various
taxable REIT subsidiaries, which are subject to corporate-level
income tax. These activities include our manufacturing
operations, the harvesting and selling of logs, and sales of
some of our higher and better use timberlands. See Note 4
of the Notes to Financial Statements.

Gain on Sale of Properties, net of
tax.In December 2004, Plum Creek
sold certain subsurface property rights (primarily coal
reserves, excluding coalbed methane, oil and gas reserves) in
Buchanan County, Virginia. The company received proceeds of
$23 million in connection with the sale and the release of
certain legal claims, which the company believes comprised a
portion of the proceeds. However, the sale agreement did not
specify an allocation. The net gain from this sale and
settlement of certain legal claims, after reducing the proceeds
for applicable book basis and income taxes, was $23 million.

Financial Condition and Liquidity

Cash Flows from Operating
Activities.Net cash provided by
operating activities for the year ended December 31, 2005
totaled $516 million, compared to $582 million in
2004. The decrease of $66 million was due primarily to a
$28 million decrease in operating income from our
manufacturing facilities and a $24 million negative change
in working capital. The negative working capital change was due
primarily to an increase in like-kind exchange proceeds held in
escrow.

Net cash provided by operating activities for the
year ended December 31, 2004 totaled $582 million,
compared to $385 million for 2003. The increase of
$197 million was due primarily to a $179 million
increase in revenues from timberland sales (which included
$133 million of revenues from sales of large, non-strategic
timberlands, which was used to repay debt) and a
$63 million improvement in operating income from our
manufacturing facilities, offset in part by a $29 million
negative change in working capital. The negative working capital
change was due primarily to an increase in like-kind exchange
proceeds held in escrow and manufacturing inventories.

Debt
Financing.In August of 2004, the
company filed with the Securities and Exchange Commission a
shelf registration statement under which Plum Creek Timber
Company, Inc., from time to time, may offer and sell any
combination of preferred stock, common stock, debt securities,
depositary shares, warrants and guarantees up to a



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##### Table of Contents



PART II/ITEM 7


total amount of $400 million, and under
which Plum Creek Timberlands, L.P., the companys wholly
owned operating partnership, may from time to time, offer and
sell debt securities up to an additional total amount of
$400 million. At December 31, 2005, under the
companys shelf registration statement, $400 million
remained available for issuance of equity or debt securities at
Plum Creek Timber Company, Inc. and $100 million remained
available for issuance of debt securities at Plum Creek
Timberlands, L.P.


In November of 2005, Plum Creek Timberlands, L.P.
issued $300 million aggregate principal notes with a coupon
rate of 5.875% at a market price of 99.731% of the principal
amount. The notes, issued under the companys and Plum
Creek Timberlands, L.P.s shelf registration statement,
mature in 2015. The net proceeds of $297 million were used
primarily to acquire 650,000 acres of timberlands in
Michigan, valued at $345 million. The transaction was also
by funded by $87 million of like-kind exchange funds.

In May of 2005, the company entered into a
$50 million one-year term loan agreement to finance the
acquisition of approximately 35,000 acres of timberlands in
Florida. At December 31, 2005, the interest rate for the
term loan was 4.88%, which is based on LIBOR plus 0.5%. This
rate can change from LIBOR plus 0.4% to LIBOR plus 1.075%
depending on our financial results.

The company has a $650 million facility
revolving line of credit maturing on January 15, 2009. As
of December 31, 2005, the weighted-average interest rate
for the line of credit was 5.14%. The interest rate on the line
of credit is based on LIBOR plus 0.875% and includes facility
fees. This rate can range from LIBOR plus 0.75% to LIBOR plus
1.625% depending on our financial results. Subject to customary
covenants, the line of credit allows for borrowings from time to
time up to $650 million, including up to $50 million
of standby letters of credit. Borrowings on the line of credit
fluctuate daily, based on cash needs. As of December 31,
2005, we had $495 million of borrowings and $6 million
of standby letters of credit outstanding; $149 million
remained available for borrowing under our line of credit. As of
January 6, 2006, $398 million of the borrowings under
our line of credit was repaid.

The companys borrowing agreements contain
various restrictive covenants, including limitations on harvest
levels, sales of assets, the incurrence of indebtedness and
making restricted payments (such as payments of cash dividends
or stock repurchases). The borrowing agreements limit our
ability to make restricted payments based on available cash,
which is generally our net income (excluding gains on the sale
of capital assets) after adjusting for non-cash charges (such as
depreciation and depletion), changes in various reserves, less
capital expenditures and principal payments on indebtedness that
are not financed. Additionally, the amount of available cash may
be increased by the amount of proceeds from the sale of higher
and better use properties and, under certain circumstances, by
50% of the amount of net proceeds from the sale of other assets.
Furthermore, our line of credit requires that we maintain
certain interest coverage and maximum leverage ratios. The
company was in compliance with all of our borrowing agreement
covenants as of December 31, 2005.

The companys financial policy is to
maintain a balance sheet that provides the financial flexibility
to pursue our strategic objectives. In order to maintain this
financial flexibility, the companys objective is to
maintain its investment grade credit rating. This is reflected
in our moderate use of debt, good access to credit markets and
no material covenant restrictions in our debt agreements that
would prevent us from prudently using debt capital.

Capital
Expenditures.Capital
expenditures, excluding the acquisition of timberlands, for 2005
were $89 million, compared to $70 million in 2004 and
$84 million for 2003. During 2005, Plum Creek acquired
approximately 754,000 acres of timberlands located in
Northern Michigan, Arkansas and Florida for $501 million
with funds from tax-deferred exchange transactions, debt and
funds from operations. During 2004, Plum Creek acquired
approximately 78,000 acres of timberlands located primarily
in Arkansas and Maine for $66 million with funds from
operations and funds from tax-deferred exchange transactions.

Planned capital expenditures for 2006, excluding
the acquisition of timberlands, are expected to range between
$110 million and $120 million and include
approximately $73 million for our timberlands,
$26 million for land development investments, and
$13 million for our manufacturing facilities. The
timberland expenditures are primarily for reforestation and
other expenditures associated with the planting and growing of
trees. Of planned capital expenditures in 2006, approximately
50% are considered to be discretionary. Discretionary
expenditures consist primarily of silviculture investments and
land development investments. Other capital expenditures consist
primarily of reforestation and projects at our manufacturing
facilities to sustain operating activities or improve safety.

Equity.On
February 7, 2006, our Board of Directors declared a
dividend of $0.40 per share, or approximately
$74 million, which will be paid on March 3, 2006, to
stockholders of record on February 17, 2006. Future
dividends will be determined by our Board of Directors, in its
sole discretion, based on consideration of a number of factors



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##### Table of Contents



PART II/ITEM 7


including, but not limited to, our results of
operations, cash flow and capital requirements, economic
conditions, tax considerations, debt covenant restrictions that
may impose limitations on the companys ability to make
cash payments, borrowing capacity, changes in the prices of and
demand for Plum Creeks products, and changes in our
ability to sell timberlands at attractive prices. Other factors
that our Board of Directors considers include the appropriate
timing of timber harvests, acquisition and divestiture
opportunities, stock repurchases, debt repayment and other means
by which the company could deliver value to its stockholders.


In October of 2002, our Board of Directors
authorized the company to repurchase up to $200 million of
the companys common stock. As of December 31, 2005,
the company had repurchased approximately 2 million shares
of common stock for a total cost of $43 million at an
average price of $21.53 per share.

Future Cash
Requirements.Cash required to
meet our financial needs will be significant. We believe,
however, that cash on hand and cash flows from continuing
operations will be sufficient to fund planned capital
expenditures, and interest and principal payments on our
indebtedness for the next year. In 2006 and 2007, the company
has significant long-term debt principal payment requirements.
The company intends to refinance these principal payments at the
time of maturity with the use of a combination of short-term and
long-term borrowings, depending on interest rate and market
conditions. Management believes that the companys credit
ratings, asset base and historical financial performance will
allow these refinancings to be completed at attractive interest
rates.

Other Information

In December of 2004, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), which is a
revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R)
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS No. 123(R)
is similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
SFAS No. 123(R) must be adopted for fiscal years
beginning after June 15, 2005. Early adoption will be
permitted in periods in which financial statements have not yet
been issued. We adopted SFAS No. 123(R) on
January 1, 2006.

The company adopted the fair-value-based method
of accounting for share-based payments effective January 1,
2002, using the prospective method described in
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
Currently, the company uses the Black-Scholes-Merton formula to
estimate the value of stock options granted to employees and
expects to continue to use this acceptable option valuation
model upon the required adoption of SFAS No. 123(R) on
January 1, 2006. The company does not expect the expense
for stock options computed in accordance with
SFAS No. 123(R) to be materially different than the
expense currently computed under SFAS No. 123.

SFAS No. 123(R) also requires the
benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. While the
company cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees
exercise stock options), the amounts of operating cash flows
recognized in prior periods for such excess tax deductions were
immaterial.

In addition to stock options, the company also
grants restricted stock, and dividend equivalents and value
management awards, a portion of which may be payable in the
companys stock. Grants of both dividend equivalents and
value management awards represent awards that are classified and
accounted for as liabilities under SFAS No. 123(R). As
a result, the expense recognized over the performance period for
both dividend equivalents and value management awards will equal
the fair value of an award as of the last day of the performance
period times the number of awards that are earned. Furthermore,
SFAS No. 123(R) requires the quarterly expense
recognized during the performance period to be based on the fair
value of dividend equivalents and value management awards as of
the end of the most recent quarter. The company does not expect
the total expense recognized over the performance period for
dividend equivalents and value management awards computed in
accordance with SFAS No. 123(R) to be materially
different than the total expense currently computed under
SFAS No. 123. However, as a result of the requirement
under SFAS No. 123(R) to base the quarterly expense on
the current fair value of dividend equivalent and value
management awards, the quarterly and annual expense recognized
under SFAS No. 123(R) could be materially different
than the quarterly and annual expense we currently recognize
under SFAS No. 123.



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PART II/ITEM 7


SFAS No. 123(R) requires that the total
impact of adopting the standard be accounted for as a cumulative
effect of an accounting change, with the total impact shown on
the income statement net of tax. Based on the provisions of
SFAS No. 123(R), the company anticipates this
cumulative impact to be approximately a $2 million, net of
tax, increase to earnings for the quarter ended March 31,
2006. The cumulative effect adjustment is primarily a result of
changes in expense related to the fair value of the dividend
equivalent rights and value management awards.

In November 2004, the FASB issued
SFAS No. 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4(SFAS No. 151). SFAS No. 151
clarifies that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges
and requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production
facilities. The new Statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
Management does not expect that adoption of this standard will
have a material impact on the companys financial
condition, results of operations or cash flows.

In March 2005, the FASB issued Financial
Interpretation 47 (FIN 47), which finalized a
proposed interpretation of SFAS No. 143, Accounting
for Conditional Asset Retirement Obligations. The
interpretation addresses the issue of whether
SFAS No. 143 requires an entity to recognize a
liability for a legal obligation to perform asset retirement
when the asset retirement activities are conditional on a future
event, and if so, the timing and valuation of the recognition.
The decision reached by the FASB was that there are no instances
where a law or regulation obligates an entity to perform
retirement activities but then allows the entity to permanently
avoid settling the obligation. The adoption of FIN 47 is
effective for fiscal years ending after December 15, 2005.
The adoption of this standard did not have a material impact on
the companys financial condition, results of operations or
cash flows.

In December 2004, the FASB issued
SFAS No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29(SFAS No. 153). SFAS No. 153
is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets
exchanged. Opinion No. 29 provided an exception to its
basic measurement principle, fair value, for exchanges of
similar production assets. Under Opinion No. 29, an
exchange of a productive asset was based on the recorded amount
of the asset relinquished. The FASB eliminated this exception
and replaced it with an exception for exchanges of nonmonetary
assets that do not have commercial substance. The FASB believes
this Statement produces financial reporting that more faithfully
represents the economics of nonmonetary asset exchange
transactions. The new Statement is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of this standard did not have a
material impact on the companys financial condition,
results of operations or cash flows.



FORTY




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##### Table of Contents



PART II/ITEM 7A





ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Interest Rate Risk

Approximately $1.7 billion of the long-term
debt of the company bears interest at fixed rates, and therefore
the fair value of these instruments is affected by changes in
market interest rates. The following table presents contractual
principal cash flows based upon maturity dates of the
companys debt obligations and the related weighted-average
contractual interest rates by expected maturity dates for the
fixed rate debt (in millions):

|                    |                       |      |    |      |   |      |   |      |   |      |   |            |   |       |     |             |   |  |   |     |   |  |   |     |   |   |     |       |  |   |     |       | 
|------------------- | --------------------- | ---- | -- | ---- | - | ---- | - | ---- | - | ---- | - | ---------- | - | ----- | --- | ----------- | - |  | - | --- | - |  | - | --- | - | - | --- | ----- |  | - | --- | ----- | 
|                    |                       | 2006 |    | 2007 |   | 2008 |   | 2009 |   | 2010 |   | Thereafter |   | Total |     | Fair ValueA
|                   
|                   
|                   
|                   
|December 31, 2005   |                       |      |    |      |   |      |   |      |   |      |   |            |   |       |     |             |   |  |   |     |   |  |   |     |   |   |     |       |  |   |     |      
|Fixed rate debt     |                       |      |    |      |   |      |   |      |   |      |   |            |   |       |     |             |   |  |   |     |   |  |   |     |   |   |     |       |  |   |     |      
|                    | Principal dueB        |      | $  | 157  |   |      | $ | 123  |   |      | $ | 147        |   |       | $   | 200         |   |  | $ | 59  |   |  | $ | 994 |   |   | $   | 1,680 |  |   | $   | 1,776 | 
|                    | Average interest rate |      |    | 7.2  | % |      |   | 7.1  | % |      |   | 7.1        | % |       |     | 6.9         | % |  |   | 6.9 | % |  |   | 6.3 | % |   |     |       |  |   |     |       | 
|Variable rate debtC |                       | $    | 50 |      |   |      |   |      |   |      |   |            |   | $     | 495 |             |   |  |   |     |   |  |   |     |   | $ | 545 |       |  | $ | 545 |      
|                   
|                   

|                   |                       |      |   |      |   |      |   |      |   |      |   |            |   |       |    |             |   |   |     |     |   |  |   |     |   |   |     |       |  |   |     |       | 
|------------------ | --------------------- | ---- | - | ---- | - | ---- | - | ---- | - | ---- | - | ---------- | - | ----- | -- | ----------- | - | - | --- | --- | - |  | - | --- | - | - | --- | ----- |  | - | --- | ----- | 
|                   |                       | 2005 |   | 2006 |   | 2007 |   | 2008 |   | 2009 |   | Thereafter |   | Total |    | Fair ValueB
|                  
|                  
|                  
|                  
|December 31, 2004  |                       |      |   |      |   |      |   |      |   |      |   |            |   |       |    |             |   |   |     |     |   |  |   |     |   |   |     |       |  |   |     |      
|Fixed rate debt    |                       |      |   |      |   |      |   |      |   |      |   |            |   |       |    |             |   |   |     |     |   |  |   |     |   |   |     |       |  |   |     |      
|                   | Principal dueB        |      | $ | 27   |   |      | $ | 157  |   |      | $ | 123        |   |       | $  | 147         |   |   | $   | 200 |   |  | $ | 753 |   |   | $   | 1,407 |  |   | $   | 1,541 | 
|                   | Average interest rate |      |   | 7.5  | % |      |   | 7.5  | % |      |   | 7.4        | % |       |    | 7.5         | % |   |     | 7.3 | % |  |   | 7.1 | % |   |     |       |  |   |     |       | 
|Variable rate debt |                       |      |   |      |   |      |   |      |   |      |   |            |   | $     | 20 |             |   | $ | 448 |     |   |  |   |     |   | $ | 468 |       |  | $ | 468 |      
|                  
|                  



|  |                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | The increase in the fair value of our fixed rate
    debt compared to December 31, 2004 was due primarily to the
    issuance of $300 million in senior notes in November of
    2005, partially offset by generally higher interest rates at
    December 31, 2005 compared to 2004 and the repayment of
    $27 million of fixed rate borrowings during 2005.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | Excludes unamortized premium of $4 million
    at December 31, 2005 and $10 million at
    December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| 
|C | As of December 31, 2005, the
    weighted-average interest rate on the $495 million of
    borrowings under our $650 million revolving line of credit
    was 5.14%. The interest rate on the line of credit is based on
    LIBOR plus 0.875% and includes facility fees. This rate can
    range from LIBOR plus 0.75% to LIBOR plus 1.625% depending on
    our financial results. In April of 2005, Plum Creek retired its
    $20 million variable rate senior note bearing interest at
    3-month LIBOR plus 1.445% due in 2008 prior to its maturity
    using funds available under the companys revolving line of
    credit. The company also has a $50 million one-year term
    loan agreement due in May of 2006. As of December 31, 2005,
    the interest rate for the term loan was 4.88%, which is based on
    LIBOR plus 0.5%. This rate can range from LIBOR plus 0.4% to
    LIBOR plus 1.075% depending on our financial results.



FORTY-ONE




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##### Table of Contents



PART II/ITEM 8





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA

PLUM CREEK TIMBER COMPANY, INC.

CONSOLIDATED STATEMENTS OF INCOME


(in millions, except per share
amounts)


|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |       |       |     | 
|--------------------------------------------- | --------------------------------------------------- | ------------------------ | ------------------------ | -------- | ----- | -------- | --- | ----- | ----- | --- | --- | ----- | ----- | --- | 
|                                              |                                                     | DEC. 31,                 |                          | DEC. 31, |       | DEC. 31,
|YEAR ENDED                                    |                                                     | 2005                     |                          | 2004     |       | 2003    
|                                             
|                                             
|                                             
|                                             
|REVENUES:                                     |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|                                              | Timber                                              |                          | $                        | 764      |       |          | $   | 694   |       |     | $   | 664   |      
|                                              | Real Estate                                         |                          |                          | 292      |       |          |     | 303   |       |     |     | 124   |      
|                                              | Manufacturing                                       |                          |                          | 504      |       |          |     | 518   |       |     |     | 397   |      
|                                              | Other                                               |                          |                          | 16       |       |          |     | 13    |       |     |     | 11    |      
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|                                              |                                                     | Total Revenues           |                          |          | 1,576 |          |     |       | 1,528 |     |     |       | 1,196 |    
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|COSTS AND EXPENSES:                           |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|                                             
|                                             
|                                             
|                                             
|                                              | Cost of Goods Sold:                                 |                          |                          |          |       |          |     |       |       |     |     |       |      
|                                              |                                                     | Timber                   |                          |          | 418   |          |     |       | 368   |     |     |       | 345   |    
|                                              |                                                     | Real Estate              |                          |          | 152   |          |     |       | 149   |     |     |       | 77    |    
|                                              |                                                     | Manufacturing            |                          |          | 463   |          |     |       | 449   |     |     |       | 390   |    
|                                              |                                                     | Other                    |                          |          | 3     |          |     |       | 4     |     |     |       | 4     |    
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|                                              |                                                     |                          | Total Cost of Goods Sold |          |       | 1,036    |     |       |       | 970 |     |       |       | 816 | 
|                                              | Selling, General and Administrative                 |                          |                          | 92       |       |          |     | 86    |       |     |     | 77    |      
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|                                              |                                                     | Total Costs and Expenses |                          |          | 1,128 |          |     |       | 1,056 |     |     |       | 893   |    
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|Gain on Sale of Other Assets                  |                                                     |                          |                         |          |       |          | 5   |       |       |     |    |      
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|Operating Income                              |                                                     |                          | 448                      |          |       |          | 477 |       |       |     | 303 |      
|Interest Expense, net                         |                                                     |                          | 109                      |          |       |          | 111 |       |       |     | 117 |      
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|Income before Income Taxes                    |                                                     |                          | 339                      |          |       |          | 366 |       |       |     | 186 |      
|Benefit (Provision) for Income Taxes          |                                                     |                          | (8                       | )        |       |          | (27 | )     |       |     | 6   |      
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|Income from Continuing Operations             |                                                     |                          | 331                      |          |       |          | 339 |       |       |     | 192 |      
|Gain on Sale of Properties, net of tax        |                                                     |                          | 23                       |          |       |          | 23  |       |       |     |    |      
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|Net Income                                    |                                                     | $                        | 354                      |          |       | $        | 362 |       |       | $   | 192 |      
|                                              |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|PER SHARE AMOUNTS:                            |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|                                              | Income from Continuing OperationsBasic             |                          | $                        | 1.80     |       |          | $   | 1.85  |       |     | $   | 1.05  |      
|                                              | Income from Continuing OperationsDiluted           |                          | $                        | 1.79     |       |          | $   | 1.84  |       |     | $   | 1.04  |      
|                                             
|                                              | Net Income per ShareBasic                          |                          | $                        | 1.92     |       |          | $   | 1.97  |       |     | $   | 1.05  |      
|                                              | Net Income per ShareDiluted                        |                          | $                        | 1.92     |       |          | $   | 1.97  |       |     | $   | 1.04  |      
|                                             
|                                              | Dividends Declaredper Common Share
    Outstanding |                          | $                        | 1.52     |       |          | $   | 1.42  |       |     | $   | 1.40  |      
|Weighted Average Number of Shares Outstanding |                                                     |                          |                          |          |       |          |     |       |       |     |     |      
|                                              | Basic                                              |                          |                          | 184.0    |       |          |     | 183.4 |       |     |     | 183.3 |      
|                                              | Diluted                                            |                          |                          | 184.6    |       |          |     | 184.1 |       |     |     | 183.9 |      

See accompanying Notes to Consolidated
Financial Statements



FORTY-TWO




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##### Table of Contents



PART II/ITEM 8


PLUM CREEK TIMBER COMPANY, INC.

CONSOLIDATED BALANCE SHEETS


(in millions, except per share data)


|                                                                                                                                                             |                                            |          |       |          |  |  |       |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | -------- | ----- | -------- |  |  | ----- | ----- | 
|                                                                                                                                                             |                                            | DEC. 31, |       | DEC. 31,
|                                                                                                                                                             |                                            | 2005     |       | 2004    
|                                                                                                                                                            
|                                                                                                                                                            
|                                                                                                                                                            
|ASSETS                                                                                                                                                       |                                            |          |       |          |  |  |       |      
|                                                                                                                                                            
|                                                                                                                                                            
|                                                                                                                                                            
|                                                                                                                                                            
|Current Assets:                                                                                                                                              |                                            |          |       |          |  |  |       |      
|                                                                                                                                                             | Cash and Cash Equivalents                  |          | $     | 369      |  |  | $     | 347   | 
|                                                                                                                                                             | Restricted Advance from Customer           |          |       | 23       |  |  |       | 4     | 
|                                                                                                                                                             | Accounts Receivable                        |          |       | 44       |  |  |       | 40    | 
|                                                                                                                                                             | Like-Kind Exchange Funds Held in Escrow    |          |       | 30       |  |  |       | 11    | 
|                                                                                                                                                             | Inventories                                |          |       | 75       |  |  |       | 71    | 
|                                                                                                                                                             | Deferred Tax Asset                         |          |       | 17       |  |  |       | 10    | 
|                                                                                                                                                             | Other Current Assets                       |          |       | 16       |  |  |       | 16    | 
|                                                                                                                                                             |                                            |          |       |          |  |  |       |      
|                                                                                                                                                             |                                            |          | 574   |          |  |  | 499   |      
|                                                                                                                                                            
|Timber and TimberlandsNet                                                                                                                                   |                                            |          | 3,961 |          |  |  | 3,595 |      
|Property, Plant and EquipmentNet                                                                                                                            |                                            |          | 234   |          |  |  | 248   |      
|Investment in Grantor Trusts                                                                                                                                 |                                            |          | 26    |          |  |  | 29    |      
|Other Assets                                                                                                                                                 |                                            |          | 17    |          |  |  | 7     |      
|                                                                                                                                                             |                                            |          |       |          |  |  |       |      
|                                                                                                                                                             | Total Assets                               |          | $     | 4,812    |  |  | $     | 4,378 | 
|                                                                                                                                                             |                                            |          |       |          |  |  |       |      
|LIABILITIES                                                                                                                                                  |                                            |          |       |          |  |  |       |      
|                                                                                                                                                            
|                                                                                                                                                            
|                                                                                                                                                            
|                                                                                                                                                            
|Current Liabilities:                                                                                                                                         |                                            |          |       |          |  |  |       |      
|                                                                                                                                                             | Current Portion of Long-Term Debt          |          | $     | 161      |  |  | $     | 32    | 
|                                                                                                                                                             | Short-Term Debt                            |          |       | 50       |  |  |       |      | 
|                                                                                                                                                             | Accounts Payable                           |          |       | 45       |  |  |       | 41    | 
|                                                                                                                                                             | Interest Payable                           |          |       | 30       |  |  |       | 28    | 
|                                                                                                                                                             | Wages Payable                              |          |       | 25       |  |  |       | 25    | 
|                                                                                                                                                             | Taxes Payable                              |          |       | 18       |  |  |       | 22    | 
|                                                                                                                                                             | Deferred Revenue                           |          |       | 35       |  |  |       | 16    | 
|                                                                                                                                                             | Other Current Liabilities                  |          |       | 11       |  |  |       | 20    | 
|                                                                                                                                                             |                                            |          |       |          |  |  |       |      
|                                                                                                                                                             |                                            |          | 375   |          |  |  | 184   |      
|                                                                                                                                                            
|Long-Term Debt                                                                                                                                               |                                            |          | 1,524 |          |  |  | 1,405 |      
|Lines of Credit                                                                                                                                              |                                            |          | 495   |          |  |  | 448   |      
|Deferred Tax Liability                                                                                                                                       |                                            |          | 39    |          |  |  | 45    |      
|Other Liabilities                                                                                                                                            |                                            |          | 54    |          |  |  | 56    |      
|                                                                                                                                                             |                                            |          |       |          |  |  |       |      
|                                                                                                                                                             | Total Liabilities                          |          |       | 2,487    |  |  |       | 2,138 | 
|                                                                                                                                                             |                                            |          |       |          |  |  |       |      
|Commitments and Contingencies                                                                                                                                |                                            |          |       |          |  |  |       |      
|                                                                                                                                                            
|STOCKHOLDERS EQUITY                                                                                                                                         |                                            |          |       |          |  |  |       |      
|Preferred stock, $0.01 par value, authorized
    shares75.0, outstandingnone                                                                               |                                            |          |      |          |  |  |      |      
|Common stock, $0.01 par value, authorized
    shares300.6, issued (including Treasury Stock)186.2
    at December 31, 2005, and 185.7 at December 31, 2004 |                                            |          | 2     |          |  |  | 2     |      
|Additional Paid-In Capital                                                                                                                                   |                                            |          | 2,181 |          |  |  | 2,168 |      
|Retained Earnings                                                                                                                                            |                                            |          | 186   |          |  |  | 111   |      
|Treasury Stock, at cost, Common shares2.0                                                                                                                   |                                            |          | (44   | )        |  |  | (43   | )    
|Other Equity                                                                                                                                                 |                                            |          |      |          |  |  | 2     |      
|                                                                                                                                                             |                                            |          |       |          |  |  |       |      
|                                                                                                                                                             | Total Stockholders Equity                 |          |       | 2,325    |  |  |       | 2,240 | 
|                                                                                                                                                             |                                            |          |       |          |  |  |       |      
|                                                                                                                                                             | Total Liabilities and Stockholders Equity |          | $     | 4,812    |  |  | $     | 4,378 | 
|                                                                                                                                                             |                                            |          |       |          |  |  |       |      

See accompanying Notes to Consolidated
Financial Statements



FORTY-THREE




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##### Table of Contents



PART II/ITEM 8


PLUM CREEK TIMBER COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS


(in millions)


|                                                        |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |        |     |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- | -------- | --- | -------- | ---- | ------ | --- | - | ---- | ------ | --- | -
|                                                        |                                                                                       | DEC. 31,                                                                                                                                                                                   |      | DEC. 31, |     | DEC. 31,
|YEAR ENDED                                              |                                                                                       | 2005                                                                                                                                                                                       |      | 2004     |     | 2003    
|                                                       
|                                                       
|                                                       
|                                                       
|CASH FLOWS FROM OPERATING ACTIVITIES                    |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Net Income                                                                            |                                                                                                                                                                                            | $    | 354      |     |          | $    | 362    |     |   | $    | 192    |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Adjustments to Reconcile Net Income to Net Cash
    Provided By Operating Activities: |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |        |    
|                                                        |                                                                                       | Depreciation, Depletion and Amortization
    (Includes $2 Loss Related to Hurricane in 2005, $9 Lumber Mill
    Impairment Charge in 2004 and $4 Loss Related to Forest Fires in
    2003) |      |          | 113 |          |      |        | 114 |   |      |        | 108 |  
|                                                        |                                                                                       | Basis of Real Estate Sold (Includes Impairment
    Losses of $1 in 2005, $21 in 2004, and $14 in 2003)                                                                                     |      |          | 124 |          |      |        | 134 |   |      |        | 66  |  
|                                                        |                                                                                       | Deferred Income Taxes                                                                                                                                                                      |      |          | (13 | )        |      |        | 9   |   |      |        | (7  | )
|                                                        |                                                                                       | Gain on Sales of Properties and Other Assets                                                                                                                                               |      |          | (24 | )        |      |        | (28 | ) |      |        |    |  
|                                                        |                                                                                       | Working Capital Changes                                                                                                                                                                    |      |          | (36 | )        |      |        | (12 | ) |      |        | 17  |  
|                                                        |                                                                                       | Other                                                                                                                                                                                      |      |          | (2  | )        |      |        | 3   |   |      |        | 9   |  
|                                                        |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|Net Cash Provided By Operating Activities               |                                                                                       |                                                                                                                                                                                            | 516  |          |     |          | 582  |        |     |   | 385  |       
|                                                        |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|CASH FLOWS FROM INVESTING ACTIVITIES                    |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Capital Expenditures (Excluding Timberland
    Acquisitions)                          |                                                                                                                                                                                            |      | (89      | )   |          |      | (70    | )   |   |      | (84    | )  
|                                                        | Timberlands Acquired                                                                  |                                                                                                                                                                                            |      | (501     | )   |          |      | (66    | )   |   |      | (162   | )  
|                                                        | Proceeds from Sale of Other Assets and Properties                                     |                                                                                                                                                                                            |      | 29       |     |          |      | 46     |     |   |      |       |    
|                                                        | Other                                                                                 |                                                                                                                                                                                            |      | (2       | )   |          |      | (1     | )   |   |      | (1     | )  
|                                                        |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|Net Cash Used In Investing Activities                   |                                                                                       |                                                                                                                                                                                            | (563 | )        |     |          | (91  | )      |     |   | (247 | )     
|                                                        |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|CASH FLOWS FROM FINANCING ACTIVITIES                    |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Dividends                                                                             |                                                                                                                                                                                            |      | (279     | )   |          |      | (260   | )   |   |      | (257   | )  
|                                                        | Borrowings on Line of Credit                                                          |                                                                                                                                                                                            |      | 2,468    |     |          |      | 2,147  |     |   |      | 1,922  |    
|                                                        | Repayments on Line of Credit                                                          |                                                                                                                                                                                            |      | (2,421   | )   |          |      | (2,295 | )   |   |      | (1,997 | )  
|                                                        | Proceeds from Issuance of Short-Term Debt                                             |                                                                                                                                                                                            |      | 50       |     |          |      |       |     |   |      |       |    
|                                                        | Proceeds from Issuance of Long-Term Debt                                              |                                                                                                                                                                                            |      | 297      |     |          |      |       |     |   |      | 298    |    
|                                                        | Principal Payments and Retirement of Long-Term
    Debt                               |                                                                                                                                                                                            |      | (53      | )   |          |      | (33    | )   |   |      | (33    | )  
|                                                        | Proceeds from Stock Option Exercises                                                  |                                                                                                                                                                                            |      | 9        |     |          |      | 12     |     |   |      | 1      |    
|                                                        | Acquisitions of Treasury Stock                                                        |                                                                                                                                                                                            |      | (1       | )   |          |      |       |     |   |      | (43    | )  
|                                                        | Other                                                                                 |                                                                                                                                                                                            |      | (1       | )   |          |      |       |     |   |      |       |    
|                                                        |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|Net Cash Provided By (Used In) Financing
    Activities |                                                                                       |                                                                                                                                                                                            | 69   |          |     |          | (429 | )      |     |   | (109 | )     
|                                                        |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|Increase In Cash and Cash Equivalents                   |                                                                                       |                                                                                                                                                                                            | 22   |          |     |          | 62   |        |     |   | 29   |       
|                                                       
|                                                       
|                                                       
|                                                       
|Cash and Cash Equivalents:                              |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Beginning of Year                                                                     |                                                                                                                                                                                            |      | 347      |     |          |      | 285    |     |   |      | 256    |    
|                                                        |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | End of Year                                                                           |                                                                                                                                                                                            | $    | 369      |     |          | $    | 347    |     |   | $    | 285    |    
|                                                        |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|SUPPLEMENTARY CASH FLOW INFORMATION                     |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                       
|                                                       
|                                                       
|                                                       
|Cash Paid (Received) During the Year for:               |                                                                                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Interest                                                                              |                                                                                                                                                                                            | $    | 114      |     |          | $    | 115    |     |   | $    | 112    |    
|                                                        | Income TaxesNet                                                                      |                                                                                                                                                                                            | $    | 25       |     |          | $    | 11     |     |   | $    | (1     | )  

See accompanying Notes to Consolidated
Financial Statements



FORTY-FOUR




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##### Table of Contents



PART II/ITEM 8


PLUM CREEK TIMBER COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. ACCOUNTING POLICIES

General.Plum
Creek Timber Company, Inc. (Plum Creek, the
company, we, us, or
our), a Delaware Corporation, is a real estate
investment trust, or REIT, for federal income tax
purposes. At December 31, 2005, the company owned and
managed approximately 8.2 million acres of timberlands in
the Northwest, Southern and Northeast United States, and owned
and operated ten wood product conversion facilities in the
Northwest United States. Included in the 8.2 million acres
are about 1.3 million acres of higher and better use
timberlands, which are expected to be sold and/or developed over
the next 15 years for residential, recreational or
conservation purposes. In addition, the company has
approximately 530,000 acres of non-strategic timberlands,
which are expected to be sold over the next five years. In the
meantime, these timberlands continue to be used productively in
our business of growing and selling timber.

On October 6, 2001, six former subsidiaries
of Georgia-Pacific Corporation (Georgia-Pacific)
collectively referred to as The Timber Company,
merged with and into Plum Creek. The Timber Company held all of
the assets and liabilities attributed to Georgia-Pacifics
timber and timberland business. In the merger, Plum Creek
acquired approximately 3.9 million acres of primarily pine
forests in the southern regions of the United States,
287,000 acres of primarily Douglas-fir forests in Oregon
and 542,000 acres of mixed hardwood forests in the
Appalachian and northeastern regions of the United States for a
purchase price of approximately $3.4 billion.

Basis of
Presentation.The consolidated
financial statements of the company include the accounts of Plum
Creek Timber Company, Inc. and its subsidiaries. Intercompany
transactions and accounts have been eliminated in consolidation.
All transactions are denominated in United States dollars.

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

Business
Concentrations.Sales of the
companys products are dependent upon the economic
conditions of the housing, repair and remodeling, industrial,
and pulp and paper industries. Changes in these industries may
significantly affect managements estimates and the
companys performance.

Revenue
Recognition.Timber sales
revenues are recognized when legal ownership and the risk of
loss transfer to the purchaser and the quantity sold is
determinable. The company sells timber under delivered log
agreements as well as through sales of standing timber (or
stumpage). For delivered sales, revenue, including
amounts billed for shipping and handling, is recognized when the
log is delivered to the customer. Stumpage is sold using either
pay-as-cut or lump-sum sale agreements. First, under a
pay-as-cut contract, the purchaser acquires the right to harvest
specified timber on a tract, at an agreed-to price per unit. The
sale and any related advances are recognized as revenues as the
purchaser harvests the timber on the tract. Secondly, under a
lump-sum sale, the parties agree to a purchase price for all the
timber available for harvest on a tract of land. Generally the
purchase price is paid when the contract is signed. Title to the
timber and risk of loss transfers to the buyer as the timber is
cut. Therefore, revenue under a lump-sum sale is recognized each
month based on the timber harvested compared to total estimated
timber available to be harvested on a tract of land over the
term of the contract (usually 12 to 18 months). An
adjustment may be required at the completion of the contract to
the extent the actual timber harvested was different than the
estimate of timber available for harvest based on the timber
cruise.

Revenues generated from the sale of lumber,
plywood, medium density fiberboard (MDF) and related
by-products, primarily wood chips, and amounts billed for
shipping and handling, are recognized at the time of delivery.
Revenues generated from real estate sales include the sale of
higher and better use timberlands and non-strategic timberlands.
In some of these transactions, the company sold timberlands that
qualified for like-kind (tax-deferred) exchange treatment under
the Internal Revenue Code. Substantially all of these sales
involved a third party intermediary, whereby the third party
intermediary received proceeds related to the property sold and
then reinvested the proceeds in like-kind property. The proceeds
are recorded as revenues when the third party intermediary
receives them.

Revenue from real estate sales is recognized in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 66, Accounting for Sales of Real
Estate. For substantially all of our real estate sales, we
receive the



FORTY-FIVE




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##### Table of Contents









PART II/ITEM 8


entire consideration in cash at closing
(Cash Sales). Also at closing, the risks and rewards
of ownership transfer to the buyer and we do not have a
continuing involvement in any of our properties after they are
sold. We recognize revenue under the full accrual method for
Cash Sales of real estate when the sale is consummated (i.e., at
closing). On occasion we receive a portion of the real estate
sale consideration in the form of a note receivable. Such sales
represented less than 5% of our revenue from real estate sales
for each of the years in the three-year period ended
December 31, 2005. Under these circumstances, we use the
full accrual method of recognizing revenue if the buyers
initial and continuing investment is adequate; otherwise,
revenue is generally recognized under the cost recovery method
or deposit method, depending on the circumstances. Furthermore,
Plum Creek may occasionally sell timberlands to a single buyer
under a multi-period contract covering a series of prescheduled
closings and/or options. Under these multi-period contracts,
once title and risk of loss have transferred to the buyer for
individual properties, the properties sold cannot be returned
for a refund. However, deposits for future closings under
multi-period contracts may be refunded under certain
circumstances. The company treats each closing under a
multi-period arrangement as a separate sale and recognizes
revenue in accordance with Emerging Issues Task Force
(EITF) No. 00-21, Revenue Arrangements with
Multiple Deliverables. Broker commissions and closing costs
of our Real Estate Segment are included in cost of goods sold.


Cash and Cash
Equivalents.All highly liquid
investments purchased with an original maturity of three months
or less are considered to be cash equivalents. Substantially all
of the cash and cash equivalents are invested in money market
funds. The company periodically reviews the credit rating of the
financial institution where the money market funds are
maintained. Additionally, the company considers certain proceeds
held in escrow associated with like-kind exchanges as cash
equivalents. See Like-Kind Exchange Funds Held in
Escrow.

Restricted
Cash.The company has restricted
cash related to certain advances from a customer associated with
lump-sum timber sales. The company reports this cash as
Restricted Advance from Customer until the trees
associated with the lump-sum contract are harvested.

Accounts
Receivable.Accounts receivable
at December 31, 2005 and 2004, is presented net of an
allowance for doubtful accounts of $0.5 million. Accounts
are deemed past due based on payment terms. The allowance for
doubtful accounts represents managements estimate and is
based on historical losses, recent collection history, credit
ratings of individual customers and existing economic
conditions. Delinquent accounts are charged against the
allowance for doubtful accounts to the extent and at the time
they are deemed uncollectible.

Like-Kind Exchange Funds Held in
Escrow.Plum Creek enters into
like-kind (tax-deferred) exchange transactions to acquire and
sell assets, principally timberlands. These transactions include
both forward (timberlands sold, followed by reinvestment of
proceeds to acquire timberlands) and reverse (timberlands
purchased, followed by receipt of proceeds from timberland
sales) like-kind exchanges. The company uses a qualified escrow
account to facilitate like-kind exchange transactions. Funds
from forward like-kind exchange transactions are included as a
current asset under the description Like-Kind Exchange Funds
Held in Escrow because the funds are restricted from being used
until the funds are either successfully reinvested in timber and
timberlands or the exchange fails and the proceeds are
distributed to the company. Funds from reverse like-kind
exchange transactions are included in Cash and Cash Equivalents
because these funds are available upon demand, are not subject
to risk of loss and earn interest. At December 31, 2005,
$7 million of cash from reverse like-kind exchange
transactions was included in Cash and Cash Equivalents. At
December 31, 2004, we had no cash in our escrow account
from reverse like-kind exchange transactions.

Grantor
Trusts.The company has a grantor
trust that was established for deferred compensation and
deferred Plum Creek shares. See Note 8 of the Notes to
Financial Statements. Deferred compensation assets, which
include money market and mutual fund investments, are classified
as trading securities and are carried at market
value. Realized gains and losses and changes in unrealized gains
and losses and a corresponding amount of compensation expense
are recorded in the consolidated statement of income.

Certain deferred compensation obligations are
fixed in Plum Creeks own stock. Shares of Plum Creek stock
held by the companys grantor trust for deferred
compensation, as well as the underlying obligations, are
reported on the consolidated balance sheet at historic costs as
a component of Other Equity.

Furthermore, Plum Creek maintains another grantor
trust, which the company uses to fund its non-qualified pension
plan obligation. See Note 10 of the Notes to Financial
Statements. Money market and mutual fund investments held



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PART II/ITEM 8


by this trust are classified as available
for sale securities. The investments are carried at market
values on the companys balance sheet; realized gains and
losses are recognized in the consolidated statement of income;
changes in unrealized gains and losses are recorded as other
comprehensive income/loss as a component of Other Equity.


Inventories.Logs,
work-in-process and finished goods of the company are stated at
the lower of cost or market on the average cost method. Supplies
inventories are stated at cost. Costs for manufactured
inventories included raw materials, labor, supplies, energy,
depreciation and production overhead. Cost of log inventories
included timber depletion, stumpage, associated logging and
harvesting costs, road costs and production overhead.

Inventories, accounted for using the lower of
average cost or market, consisted of the following (in millions):

|                     |  |              |    |              |  |   |    | 
|-------------------- |  | ------------ | -- | ------------ |  | - | -- | 
|                     |  | December 31, |    | December 31,
|                     |  | 2005         |    | 2004        
|                    
|                    
|                    
|                    
|Raw materials (logs) |  | $            | 21 |              |  | $ | 24 | 
|Work-in-process      |  |              | 4  |              |  |   | 4  | 
|Finished goods       |  |              | 37 |              |  |   | 32 | 
|                     |  |             
|                     |  |              | 62 |              |  |   | 60 | 
|Supplies             |  |              | 13 |              |  |   | 11 | 
|                     |  |             
|Total                |  | $            | 75 |              |  | $ | 71 | 
|                    
|                    

Timber and
Timberlands.Timber and
timberlands, including logging roads, are stated at cost less
accumulated depletion for timber previously harvested and
accumulated road amortization. The company capitalizes timber
and timberland purchases and reforestation costs and other costs
associated with the planting and growing of timber, such as site
preparation, growing or purchases of seedlings, planting,
fertilization, herbicide application and the thinning of tree
stands to improve growth. Timber carrying costs, such as real
estate taxes, insect control, wildlife control, leases of
timberlands (other than lease payments for the purchase of
standing timber, in which case the payments are capitalized) and
forest management personnel salaries and fringe benefits, are
expensed as incurred. Costs of major roads are capitalized and
amortized over 30 years. Costs for roads that are built to
access multiple logging sites over numerous years are
capitalized and amortized over six years. Costs for roads built
to access a single logging site are expensed as incurred.

Costs attributable to timber harvested, or
depletion, are charged against income as trees are harvested.
Depletion rates are determined annually based on the
relationship between net carrying value of the timber plus
certain capitalizable silviculture costs expected to be incurred
over the harvest cycle and total timber volume estimated to be
available over the harvest cycle. The depletion rate
calculations do not include an estimate for either future
reforestation costs associated with a stands final harvest
or future volume in connection with the replanting of a stand
subsequent to its final harvest. Net carrying value of the
timber and timberlands is used to compute the gain or loss in
connection with timberland sales. There is no book basis
allocated to the sale of conservation easements.

Real Estate
Development.Costs associated
with a specific real estate project are capitalized once we
determine that the project is viable. Both external and internal
costs directly associated with the specific real estate project
are capitalized. We capitalize improvements and other
development costs, including interest costs and property taxes,
during the development period (capitalized interest and property
taxes were less than $1 million in 2005). General real
estate development costs not related to a specific project and
costs incurred before management has concluded that a project
will be successful (e.g. investigatory costs) are expensed as
incurred. For real estate projects with multiple parcels, we
determine the cost of the individual lots sold by allocating the
historical cost of the land, timber, development and common
construction costs on a relative sales value. Capitalized real
estate development costs included in Timber and Timberlands were
$14 million and $5 million at December 31, 2005
and 2004, respectively.

Property, Plant and
Equipment.Property, plant and
equipment are recorded at cost. Replacements of major units of
property are capitalized, and the replaced properties are
retired. Replacement of minor components of property and repair
and maintenance costs, are charged to expense as incurred.

All property, plant and equipment other than
manufacturing machinery (lumber, plywood and MDF) are
depreciated using the straight-line method over the estimated
useful lives of the related assets. Manufacturing machinery and



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PART II/ITEM 8


equipment are depreciated on a
units-of-production basis, which approximates a straight-line
basis. Useful lives are 25 years for land improvements, 20
to 45 years for buildings, and 3 to 20 years for
machinery and equipment. Leasehold improvements are depreciated
over the lease term or estimated useful life, whichever is
shorter. The cost and related accumulated depreciation of
property sold or retired are removed from the accounts and any
gain or loss is recorded.


Shipping and Handling
Costs.Costs incurred for
shipping timber and manufactured products are included in cost
of goods sold.

Stock-Based Compensation
Plans.At December 31, 2005,
the company had stock-based employee compensation plans, which
are described more fully in Note 11 of the Notes to
Financial Statements. The company expenses stock-based employee
compensation on a straight-line basis over the vesting period in
accordance with the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation. Under the prospective method adopted by the
company in 2002, stock-based employee compensation cost is
recognized using the fair value method for all employee awards
granted, modified, or settled on or after January 1, 2002.
Had the company used the fair value method of accounting for all
stock-based compensation, net income for 2005 would have been
the same, net income for 2004 would have been reduced by
$0.3 million, and net income for 2003 would have been
reduced by $0.5 million.

Stock-based employee compensation expense
included in reported income before income taxes was as follows
for the years ended December 31(in millions):

|                                                                                  |  |      |     |      |  |      |     |  |  |   |     | 
|--------------------------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                                                  |  | 2005 |     | 2004 |  | 2003
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Stock options                                                                     |  | $    | 1.9 |      |  | $    | 1.7 |  |  | $ | 0.9 | 
|Value management awards, dividend equivalents,
    and grants of restricted stock |  |      | 2.0 |      |  |      | 1.7 |  |  |   | 3.0 | 
|                                                                                  |  |     
|Total                                                                             |  | $    | 3.9 |      |  | $    | 3.4 |  |  | $ | 3.9 | 
|                                                                                 
|                                                                                 

Value management awards and dividend equivalents
are paid partially in stock and partially in cash, based on
payout elections made by recipients. The company recorded
expense of $4.8 million in 2005, $9.3 million in 2004,
and $2.6 million in 2003 for the estimated cash portion of
these awards. See Note 11 of the Notes to Financial
Statements.

Reclassifications.Certain
prior year amounts have been reclassified to conform to the 2005
presentation. The reclassifications had no impact on operating
income or net income. Capitalized costs related to real estate
development are included in Timber and Timberlands at
December 31, 2005. Previously, at December 31, 2004,
real estate development costs were included in Property, Plant
and Equipment. Accordingly, $5 million was reclassified at
December 31, 2004 from Property, Plant and Equipment to
Timber and Timberlands.

The company considers cash in its escrow account
from reverse like-kind exchange transactions to be Cash and Cash
Equivalents. At December 31, 2005, the company classified
$7 million in reverse like-kind exchange funds as Cash and
Cash Equivalents. Accordingly, $14 million was reclassified
at December 31, 2003 from Like-Kind Exchange Funds Held in
Escrow to Cash and Cash Equivalents. The reclassification
increased Net Cash Provided by Operating Activities for the year
ended December 31, 2003 by $14 million and decreased
Net Cash Provided by Operating Activities by $14 million
for the year ended December 31, 2004 in the Consolidated
Statements of Cash Flows.

NEW ACCOUNTING PRONOUNCEMENTS

In December of 2004, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), which is a
revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R)
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS No. 123(R)
is similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.



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PART II/ITEM 8


SFAS No. 123(R) must be adopted for
fiscal years beginning after June 15, 2005. Early adoption
will be permitted in periods in which financial statements have
not yet been issued. We adopted SFAS No. 123(R) on
January 1, 2006.


The company adopted the fair-value-based method
of accounting for share-based payments effective January 1,
2002, using the prospective method described in
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
Currently, the company uses the Black-Scholes-Merton formula to
estimate the value of stock options granted to employees and
expects to continue to use this acceptable option valuation
model upon the required adoption of SFAS No. 123(R) on
January 1, 2006. The company does not expect the expense
for stock options computed in accordance with
SFAS No. 123(R) to be materially different than the
expense currently computed under SFAS No. 123.

SFAS No. 123(R) also requires the
benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. While the
company cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees
exercise stock options), the amounts of operating cash flows
recognized in prior periods for such excess tax deductions were
immaterial.

In addition to stock options, the company also
grants restricted stock, and dividend equivalents and value
management awards, a portion of which may be payable in the
companys stock. Grants of both dividend equivalents and
value management awards represent awards that are classified and
accounted for as liabilities under SFAS No. 123(R). As
a result, the expense recognized over the performance period for
both dividend equivalents and value management awards will equal
the fair value of an award as of the last day of the performance
period times the number of awards that are earned. Furthermore,
SFAS No. 123(R) requires the quarterly expense
recognized during the performance period to be based on the fair
value of dividend equivalents and value management awards as of
the end of the most recent quarter. The company does not expect
the total expense recognized over the performance period for
dividend equivalents and value management awards computed in
accordance with SFAS No. 123(R) to be materially
different than the total expense currently computed under
SFAS No. 123. However, as a result of the requirement
under SFAS No. 123(R) to base the quarterly expense on
the current fair value of dividend equivalent and value
management awards, the quarterly and annual expense recognized
under SFAS No. 123(R) could be materially different
than the quarterly and annual expense we currently recognize
under SFAS No. 123.

SFAS No. 123(R) requires that the total
impact of adopting the standard be accounted for as a cumulative
effect of an accounting change, with the total impact shown on
the income statement net of tax. Based on the provisions of
SFAS No. 123(R), the company anticipates this
cumulative impact to be approximately a $2 million, net of
tax, increase to earnings for the quarter ended March 31,
2006. The cumulative effect adjustment is primarily a result of
changes in expense related to the fair value of the dividend
equivalent rights and value management awards.

In November 2004, the FASB issued
SFAS No. 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4(SFAS No. 151). SFAS No. 151
clarifies that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges
and requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production
facilities. The new Statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
Management does not expect that adoption of this standard will
have a material impact on the companys financial
condition, results of operations or cash flows.

In March 2005, the FASB issued Financial
Interpretation 47 (FIN 47), which finalized a
proposed interpretation of SFAS No. 143, Accounting
for Conditional Asset Retirement Obligations. The
interpretation addresses the issue of whether
SFAS No. 143 requires an entity to recognize a
liability for a legal obligation to perform asset retirement
when the asset retirement activities are conditional on a future
event, and if so, the timing and valuation of the recognition.
The decision reached by the FASB was that there are no instances
where a law or regulation obligates an entity to perform
retirement activities but then allows the entity to permanently
avoid settling the obligation. The adoption of FIN 47 is
effective for fiscal years ending after December 15, 2005.
The adoption of this standard did not have a material impact on
the companys financial condition, results of operations or
cash flows.

In December 2004, the FASB issued
SFAS No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29(SFAS No. 153). SFAS No. 153
is based on the principle that exchanges of nonmonetary assets



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PART II/ITEM 8


should be measured based on the fair value of the
assets exchanged. Opinion No. 29 provided an exception to
its basic measurement principle, fair value, for exchanges of
similar production assets. Under Opinion No. 29, an
exchange of a productive asset was based on the recorded amount
of the asset relinquished. The FASB eliminated this exception
and replaced it with an exception for exchanges of nonmonetary
assets that do not have commercial substance. The FASB believes
this Statement produces financial reporting that more faithfully
represents the economics of nonmonetary asset exchange
transactions. The new Statement is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of this standard did not have a
material impact on the companys financial condition,
results of operations or cash flows.




|        |                   
|------- | ------------------
|NOTE 2. | EARNINGS PER SHARE

The following table sets forth the reconciliation
of basic and diluted earnings per share for the years ended
December 31(in millions, except per share amounts):

|                                                                                                    |                                                    |      |       |      |  |      |       |      |  |   |       |      | 
|--------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- | ---- | 
|                                                                                                    |                                                    | 2005 |       | 2004 |  | 2003
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Income from Continuing Operations                                                                   |                                                    | $    | 331   |      |  | $    | 339   |      |  | $ | 192   |     
|Gain on Sale of Properties, net of tax                                                              |                                                    |      | 23    |      |  |      | 23    |      |  |   |      |     
|                                                                                                    |                                                    |     
|Net Income available to common stockholders                                                         |                                                    | $    | 354   |      |  | $    | 362   |      |  | $ | 192   |     
|                                                                                                    |                                                    |     
|                                                                                                    |                                                    |     
|Denominator for basic earnings per share                                                            |                                                    |      | 184.0 |      |  |      | 183.4 |      |  |   | 183.3 |     
|Effect of dilutive securitiesstock options                                                         |                                                    |      | 0.5   |      |  |      | 0.6   |      |  |   | 0.4   |     
|Effect of dilutive securitiesrestricted
    stock, dividend equivalents, and value management plan |                                                    |      | 0.1   |      |  |      | 0.1   |      |  |   | 0.2   |     
|                                                                                                    |                                                    |     
|Denominator for diluted earnings per
    share  adjusted for dilutive securities                   |                                                    |      | 184.6 |      |  |      | 184.1 |      |  |   | 183.9 |     
|                                                                                                    |                                                    |     
|                                                                                                    |                                                    |     
|Per share amounts                                                                                   |                                                    |      |       |      |  |      |       |      |  |   |       |     
|                                                                                                    | Income from Continuing OperationsBasic            |      | $     | 1.80 |  |      | $     | 1.85 |  |   | $     | 1.05 | 
|                                                                                                    | Income from Continuing OperationsDiluted          |      | $     | 1.79 |  |      | $     | 1.84 |  |   | $     | 1.04 | 
|                                                                                                   
|                                                                                                    | Gain on Sale of Properties, net of taxBasic       |      | $     | 0.12 |  |      | $     | 0.12 |  |   | $     |     | 
|                                                                                                    | Gain on Sale of Properties, net of
    taxDiluted |      | $     | 0.12 |  |      | $     | 0.12 |  |   | $     |     | 
|                                                                                                   
|                                                                                                    | Net IncomeBasic                                   |      | $     | 1.92 |  |      | $     | 1.97 |  |   | $     | 1.05 | 
|                                                                                                    | Net IncomeDiluted                                 |      | $     | 1.92 |  |      | $     | 1.97 |  |   | $     | 1.04 | 
|                                                                                                   
|                                                                                                   

Antidilutive options excluded for certain periods
from the computation of diluted earnings per share because the
options exercise prices were greater than the average
market price of the common shares were as follows for
the years ended December 31(shares in
millions):

|                        |  |                  |  |                  |  |                 
|----------------------- |  | ---------------- |  | ---------------- |  | ----------------
|                        |  | 2005             |  | 2004             |  | 2003            
|                       
|                       
|                       
|                       
|Number of options       |  | 0.4              |  | 0.5              |  | 1.0             
|Range of prices         |  | $32.28 to $37.61 |  | $29.70 to $36.13 |  | $21.91 to $30.70
|Expiration on or before |  | August 2015      |  | October 2014     |  | October 2013    
|                       
|                       



|        |                                                         
|------- | --------------------------------------------------------
|NOTE 3. | TIMBER AND TIMBERLANDS AND PROPERTY, PLANT AND EQUIPMENT

Timber and timberlands consisted of the following
(in millions):

|                             |  |              |       |              |  |   |       | 
|---------------------------- |  | ------------ | ----- | ------------ |  | - | ----- | 
|                             |  | December 31, |       | December 31,
|                             |  | 2005         |       | 2004        
|                            
|                            
|                            
|                            
|Timber and logging roadsnet |  | $            | 2,686 |              |  | $ | 2,367 | 
|Timberlands                  |  |              | 1,275 |              |  |   | 1,228 | 
|                             |  |              |       |              |  |   |       | 
|Timber and Timberlandsnet   |  | $            | 3,961 |              |  | $ | 3,595 | 
|                            
|                            



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PART II/ITEM 8


During 2005, Plum Creek acquired approximately
754,000 acres of timberlands located in Northern Michigan,
Arkansas and Florida for $501 million. These purchases were
financed primarily by using proceeds from the issuance of
publicly traded and private placement debt and funds from
tax-deferred exchanges, and have been accounted for as asset
acquisitions. Timberland dispositions during 2005 were
approximately 232,000 acres, of which 63,000 acres
were located in the Northern Resources Segment and
169,000 acres were located in the Southern Resources
Segment.

During 2004, Plum Creek acquired approximately
78,000 acres of timberlands located primarily in Arkansas
and Maine for $66 million. Timberland dispositions during
the same time period comprised approximately 375,000 acres
of which 308,000 were located in the Northern Resources Segment
and 67,000 in the Southern Resources Segment.

During 2004, the company sold certain subsurface
property rights (primarily coal reserves, excluding coalbed
methane, oil and gas reserves) in Buchanan County, Virginia.
During 2005, the remainder of the companys coal reserves
was sold. The sale of these properties is reflected in our
Consolidated Statements of Income as Gain on Sale of Properties,
net of tax. For the year ended December 31, 2005, we
received sales proceeds of $21 million and, after deducting
our book basis of $1 million, recorded a gain of
$20 million. For the year ended December 31, 2004, we
received sales proceeds of $23 million and, after deducting
our book basis of $0.1 million, recorded a gain of
$23 million. See Note 14 of the Notes to Financial
Statements.

The companys Real Estate Segment consists
of sales of higher and better use timberlands and sales of
non-strategic timberland. Occasionally, non-strategic
timberlands are sold at a loss. Each real estate sale is
evaluated for a potential impairment in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. During 2005, the company
recorded impairment losses of $1 million in connection with
the potential sale of non-strategic timberlands, which had a
book basis of $4 million. During 2004, the company recorded
impairment losses of $21 million in connection with the
potential sale of non-strategic timberlands, which had a book
basis of $45 million; substantially all of these properties
were sold during 2004. During 2003, the company recorded
impairment losses of $14 million in connection with the
potential sale of non-strategic timberlands, which had a book
basis of $50 million; approximately two-thirds of the
properties were sold during 2003. The impairment losses of
$1 million in 2005, $21 million in 2004, and
$14 million in 2003 are included in Cost of Goods Sold for
Real Estate in our Consolidated Statements of Income.

During 2005, the companys Southern
Resources Segment recognized a $2 million loss,
representing the book basis of the timber volume destroyed as a
result of severe winds from Hurricane Katrina on approximately
350,000 acres in Mississippi. During 2003, the
companys Northern Resources Segment recognized a
$4 million loss, representing the book basis of timber
volume destroyed as a result of forest fires on approximately
45,000 acres in Montana.

Property, plant and equipment consisted of the
following (in millions):

|                                  |  |              |      |              |  |   |      |  
|--------------------------------- |  | ------------ | ---- | ------------ |  | - | ---- | -
|                                  |  | December 31, |      | December 31,
|                                  |  | 2005         |      | 2004        
|                                 
|                                 
|                                 
|                                 
|Land, buildings and improvements  |  | $            | 84   |              |  | $ | 80   |  
|Machinery and equipment           |  |              | 285  |              |  |   | 277  |  
|                                  |  |             
|                                  |  |              | 369  |              |  |   | 357  |  
|Accumulated depreciation          |  |              | (135 | )            |  |   | (109 | )
|                                  |  |             
|Property, Plant and Equipmentnet |  | $            | 234  |              |  | $ | 248  |  
|                                 
|                                 

During the fourth quarter of 2004, the company
concluded it had excess production capacity at one of its mills;
and therefore, concluded that the mills long-lived assets
were impaired. The company recorded an impairment loss of
$9 million during the fourth quarter of 2004 by writing the
carrying value of the mills long-lived assets of
$14 million down to their estimated fair value of
$5 million. The impairment loss of $9 million is
reflected in the operating income of our Manufactured Products
Segment and included in Cost of Goods Sold for Manufacturing in
our Consolidated Statements of Income. The estimated fair value
was computed based on expected future cash flows discounted at
the risk-free rate of interest.

Plum Creek had been a party to a joint operating
agreement with Geomet, Inc., a coalbed methane developer, with
whom the company jointly explored for and developed coalbed
methane gas found on certain of Plum Creeks



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##### Table of Contents









PART II/ITEM 8


timberlands in West Virginia and Virginia. During
2004, the company sold its working interest in the joint
operating agreement to Geomet, Inc. See Note 14 of the
Notes to Financial Statements.




|        |             
|------- | ------------
|NOTE 4. | INCOME TAXES

Plum Creek has elected to be taxed as a REIT
under sections 856-860 of the United States Internal Revenue
Code. A REIT is generally not subject to corporate-level income
tax if it distributes 100% of its taxable income to shareholders
and satisfies other organizational and operational requirements
as set forth in the Internal Revenue Code. If a company fails to
qualify as a REIT in any taxable year, it will be subject to
federal income taxes at regular corporate rates (including any
applicable alternative minimum tax) and may not be able to
qualify as a REIT for four subsequent taxable years.

Plum Creek conducts its activities through
various wholly owned operating partnerships. The activities of
the operating partnerships consist primarily of sales of timber
under pay-as-cut contracts, and the income from such sales is
not subject to corporate income tax. The book basis of the
REITs assets and liabilities exceeds its tax basis by
approximately $1.9 billion at December 31, 2005. Plum
Creeks taxable REIT subsidiaries file a consolidated
federal income tax return.

As a consequence of the October 6, 2001
merger with The Timber Company, which involved merging a taxable
entity into a nontaxable entity, Plum Creek will generally be
subject to corporate-level tax (built-in gains tax) if the
company makes a taxable disposition of certain property acquired
in the merger with The Timber Company within the ten-year period
following the merger date. The built-in-gains tax applies to
gains from such asset sales to the extent that the fair value of
the property exceeds its tax basis at the merger date.
Built-in-gains tax is generally not payable on dispositions of
property to the extent the proceeds from such dispositions are
reinvested in qualifying like-kind replacement property. The
built-in gains tax does not apply to income generated from the
harvesting and sale of timber.

In connection with our merger with The Timber
Company, we wrote-off all of The Timber Companys deferred
income tax liability related to timber and timberlands except
for $11 million. The $11 million deferred income tax
liability relates to the book-tax basis difference of timber and
timberlands that were expected to be sold, and subject to, the
built-in gains tax during the ten-year period ending
October 6, 2011. During the period October 6, 2001 to
December 31, 2005, the $11 million deferred income tax
liability was reduced by $1 million in connection with
sales of timberlands subject to the built-in gains tax.

Based on projected timberland sales subject to
the built-in gains tax for the period December 31, 2005 to
October 6, 2011, and our ability to successfully reinvest
proceeds in like-kind properties, we estimate we need a deferred
tax liability of $5 million. Therefore, in accordance with
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, we remeasured the amount of
deferred income taxes needed in connection with expected sales
of timberlands subject to the built-in gains tax during the
period December 31, 2005 to October 6, 2011. As a
result, we reduced the deferred tax liability associated with
expected sales of timberlands subject to the built-in gains tax
from $10 million to $5 million and correspondingly
recorded a deferred tax benefit of $5 million during 2005.

Plum Creek conducts certain non-REIT activities
through various taxable REIT subsidiaries (subchapter
C corporations), which are subject to
corporate-level income tax. These activities include the
companys manufacturing operations, the harvesting and sale
of logs, and the development and/or sale of some of the
companys higher and better use timberlands.





FIFTY-TWO




---



##### Table of Contents









PART II/ITEM 8


The provision (benefit) for income taxes consists
of the following for the years ended December 31(in
millions):

|                                                                              |                                                                        |      |   |      |   |      |    |    |   |   |    |     |  
|----------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---- | - | ---- | - | ---- | -- | -- | - | - | -- | --- | -
|                                                                              |                                                                        | 2005 |   | 2004 |   | 2003
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Current income taxes:                                                         |                                                                        |      |   |      |   |      |    |    |   |   |    |    
|                                                                              | Federal                                                                |      | $ | 17   |   |      | $  | 15 |   |   | $  | 1   |  
|                                                                              | State                                                                  |      |   | 3    |   |      |    | 3  |   |   |    |    |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Deferred income taxes:                                                        |                                                                        |      |   |      |   |      |    |    |   |   |    |    
|                                                                              | Federal                                                                |      |   | (6   | ) |      |    | (7 | ) |   |    | 4   |  
|                                                                              | State                                                                  |      |   | (1   | ) |      |    | (1 | ) |   |    | (1  | )
|                                                                              | Benefit from remeasurement of built-in gain
    deferred tax liability |      |   | (5   | ) |      |    |   |   |   |    |    |  
|                                                                              | Utilization (benefit) of operating loss
    carryforwards              |      |   |     |   |      |    | 17 |   |   |    | (10 | )
|                                                                              |                                                                        |     
|Provision (benefit) for income taxes on income
    from continuing operations |                                                                        | $    | 8 |      |   | $    | 27 |    |   | $ | (6 | )  
|                                                                             
|                                                                             

The federal statutory income tax rate was 35%.
The income generated by the activities of the REIT is generally
not subject to federal and state income tax. The provision for
income taxes is reconciled as follows to the federal statutory
rate for the years ended December 31(in millions):

|                                                                                                               |  |      |      |      |  |      |      |   |  |   |     |  
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | --- | -
|                                                                                                               |  | 2005 |      | 2004 |  | 2003
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Provision for income taxes on income from
    continuing operations computed at the Federal statutory tax rate |  | $    | 119  |      |  | $    | 128  |   |  | $ | 65  |  
|REIT income not subject to Federal tax                                                                         |  |      | (101 | )    |  |      | (101 | ) |  |   | (68 | )
|State income taxes, net of Federal benefit                                                                     |  |      | 1    |      |  |      | 4    |   |  |   | (1  | )
|Benefit from remeasurement of built-in gains
    deferred tax liability                                        |  |      | (5   | )    |  |      |     |   |  |   |    |  
|Permanent book-tax differences                                                                                 |  |      | (6   | )    |  |      | (4   | ) |  |   | (2  | )
|                                                                                                               |  |     
|Provision (benefit) for income taxes on income
    from continuing operations                                  |  | $    | 8    |      |  | $    | 27   |   |  | $ | (6  | )
|                                                                                                              
|                                                                                                              

For the year ended December 31, 2005,
$8 million of income tax expense was allocated to Income
from Continuing Operations. For the year ended December 31,
2004, $27 million of income tax expense was allocated to
Income from Continuing Operations.

Deferred income taxes are provided for the
temporary differences between the financial reporting basis and
tax basis for the assets and liabilities of our various taxable
REIT subsidiaries and for the assets of the REITs
operating partnerships that are subject to built-in gains. The
components of net deferred income tax liabilities are as follows
(in millions):

|                                   |                             |              |     |              |   |   |     |     |  
|---------------------------------- | --------------------------- | ------------ | --- | ------------ | - | - | --- | --- | -
|                                   |                             | December 31, |     | December 31,
|                                   |                             | 2005         |     | 2004        
|                                  
|                                  
|                                  
|                                  
|Deferred income tax assets:        |                             |              |     |              |   |   |     |    
|                                   | Accrued compensation        |              | $   | 12           |   |   | $   | 13  |  
|                                   | Deferred revenue            |              |     | 9            |   |   |     | 2   |  
|                                   | Timber and timberlands      |              |     | 1            |   |   |     |    |  
|                                   | Other accruals and reserves |              |     | 8            |   |   |     | 7   |  
|                                   |                             |             
|                                   |                             |              | 30  |              |   |   | 22  |    
|                                   |                             |             
|Deferred income tax liabilities:   |                             |              |     |              |   |   |     |    
|                                   | Machinery and equipment     |              |     | (52          | ) |   |     | (54 | )
|                                   | Timber and timberlands      |              |     |             |   |   |     | (3  | )
|                                   |                             |             
|                                   |                             |              | (52 | )            |   |   | (57 | )  
|                                   |                             |             
|Deferred income tax liability, net |                             | $            | (22 | )            |   | $ | (35 | )  
|                                  
|                                  

Deferred income tax liabilities at
December 31, 2005 and 2004, are net of deferred tax assets
of $17 million and $10 million, respectively, included
in current assets. During 2004, the company utilized
$45 million of net operating





FIFTY-THREE




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##### Table of Contents









PART II/ITEM 8


loss carryforwards. The company had no net
operating loss carryforwards at December 31, 2005 or
December 31, 2004.


The company filed its federal income tax return
as part of Georgia-Pacifics consolidated income tax return
for all tax years through the date of the merger with The Timber
Company on October 6, 2001. Under the agreement governing
the terms of the merger with The Timber Company, the company
remains liable to Georgia-Pacific for any additional tax that
would result from audit adjustments by the Internal Revenue
Service (the Service) and by State and Local Taxing
Authorities. The Service has completed all examinations of
Georgia-Pacifics consolidated income tax returns through
2000. Georgia-Pacifics consolidated income tax return for
2001 is currently under examination. Additionally, the Service
has completed examinations of the federal income tax return of
Plum Creek Timber Company, Inc. and the consolidated federal
income tax return of the taxable REIT subsidiaries for the year
2001. Plum Creek has no open tax years prior to 2002.



|        |                 
|------- | ----------------
|NOTE 5. | REIT DISCLOSURES

Plum Creek has elected to be taxed as a REIT
under sections 856-860 of the United States Internal Revenue
Code. For the years 2005, 2004, and 2003, Plum Creek elected to
designate all taxable distributions as long-term capital gain
dividends. Accordingly, as of and for the years ended
December 31, 2005, 2004, and 2003, Plum Creek has
distributed all of its taxable income.

The table below summarizes the historical tax
character of distributions from the REIT to Plum Creek
shareholders for the years ended December 31 (amounts
per share):

|                              |                     |      |      |      |  |       |      |      |  |   |      |      | 
|----------------------------- | ------------------- | ---- | ---- | ---- |  | ----- | ---- | ---- |  | - | ---- | ---- | 
|                              |                     | 2005 |      | 2004 |  | 2003A
|                             
|                             
|                             
|                             
|Capital gain dividend         |                     | $    | 1.32 |      |  | $     | 1.27 |      |  | $ | 1.01 |     
|Non-taxable return of capital |                     |      | 0.20 |      |  |       | 0.15 |      |  |   | 0.39 |     
|                              |                     |     
|                              | Total distributions |      | $    | 1.52 |  |       | $    | 1.42 |  |   | $    | 1.40 | 
|                             
|                             



|  |                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | Approximately 65.75% of the 2003 capital gain
    dividend represents Post-May 5 Capital Gain Distribution and
    qualifies for the new 15% and 5% capital gains tax rates.





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##### Table of Contents









PART II/ITEM 8


NOTE 6. BORROWINGS

Long-term debt consists of the following (in
millions):

|                                                                                                                                                              |  |              |       |              |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ------------ |  | - | ----- | -
|                                                                                                                                                              |  | December 31, |       | December 31,
|                                                                                                                                                              |  | 2005         |       | 2004        
|                                                                                                                                                             
|                                                                                                                                                             
|                                                                                                                                                             
|                                                                                                                                                             
|Senior Notes due 2007, 11.125% plus unamortized
    premium of $1.5 at 12/31/05, effective rate of 6.19%                                                      |  | $            | 30    |              |  | $ | 46    |  
|First Mortgage Notes due 2007, 11.125% plus
    unamortized premium of $1.3 at 12/31/05, effective rate of 6.19%                                              |  |              | 27    |              |  |   | 41    |  
|Senior Notes due 2007, 5.31%                                                                                                                                  |  |              | 25    |              |  |   | 25    |  
|Senior Notes due 2009, 8.73% plus unamortized
    premium of $5.4 at 12/31/05, effective rate of 7.55%                                                        |  |              | 155   |              |  |   | 157   |  
|Senior Notes due 2011, mature serially 2007 to
    2011, 7.62% to 7.83%, plus unamortized premium of $1.0 at
    12/31/05, effective rates of 6.96% to 7.84%  |  |              | 173   |              |  |   | 173   |  
|Senior Notes due 2013, mature serially 2008 to
    2013, 4.96% to 6.18%                                                                                       |  |              | 280   |              |  |   | 280   |  
|Senior Notes due 2013, mature serially 2006 to
    2013, 6.96% to 7.76%, less unamortized discount of $4.9 at
    12/31/05, effective rates of 6.95% to 8.04% |  |              | 495   |              |  |   | 494   |  
|Senior Notes due 2015, 5.875% less unamortized
    discount of $0.8 at 12/31/05                                                                               |  |              | 299   |              |  |   |      |  
|Senior Notes due 2016, mature serially 2006 to
    2016, 7.74% to 8.05%, plus unamortized premium of $0.7 at
    12/31/05, effective rates of 6.96% to 8.04%  |  |              | 201   |              |  |   | 201   |  
|Senior Notes due 2008, 3.5% at 12/31/04, based on
    3-month LIBOR plus 1.445%, retired 2005                                                                 |  |              |      |              |  |   | 20    |  
|                                                                                                                                                              |  |             
|Total Long-term Debt                                                                                                                                          |  | $            | 1,685 |              |  | $ | 1,437 |  
|Less: Current Portion                                                                                                                                         |  |              | (161  | )            |  |   | (32   | )
|                                                                                                                                                              |  |             
|Long-term Portion                                                                                                                                             |  | $            | 1,524 |              |  | $ | 1,405 |  
|                                                                                                                                                             
|                                                                                                                                                             

The company has a $650 million facility
revolving line of credit maturing on January 15, 2009. As
of December 31, 2005, the weighted-average interest rate
for the line of credit was 5.14%. The interest rate on the line
of credit is based on LIBOR plus 0.875% and includes facility
fees. This rate can range from LIBOR plus 0.75% to LIBOR plus
1.625% depending on our financial results. Subject to customary
covenants, the line of credit allows for borrowings from time to
time up to $650 million, including up to $50 million
of standby letters of credit. Borrowings on the line of credit
fluctuate daily, based on cash needs. As of December 31,
2005, we had $495 million of borrowings and $6 million
of standby letters of credit outstanding; $149 million
remained available for borrowing under our line of credit. As of
December 31, 2004, we had $448 million of borrowings
and $6 million of standby letters of credit outstanding. As
of January 6, 2006, $398 million of the borrowings
under our line of credit was repaid.

In May of 2005, the company entered into a
$50 million one-year term loan agreement to finance the
acquisition of approximately 35,000 acres of Florida
timberlands. As of December 31, 2005, the interest rate for
the term loan was 4.88%, which is based on LIBOR plus 0.5%. This
rate can range from LIBOR plus 0.4% to LIBOR plus 1.075%
depending on our financial results.

In April of 2005, the company retired its
$20 million variable rate senior note bearing interest at
3-month LIBOR plus 1.445% due in 2008 prior to its maturity
using funds available under the companys revolving line of
credit. Furthermore, in June 2005, the company made principal
payments totaling $27 million on borrowings due under the
companys 1989 senior and first mortgage notes bearing
interest at 11.125%.

In August of 2004, the company filed with the
Securities and Exchange Commission a shelf registration
statement under which Plum Creek Timber Company, Inc., from time
to time, may offer and sell any combination of preferred stock,
common stock, debt securities, depositary shares, warrants and
guarantees up to a total amount of $400 million, and under
which Plum Creek Timberlands, L.P., the companys wholly
owned operating partnership (the Partnership), may
from time to time, offer and sell debt securities of up to an
additional total amount of $400 million. At
December 31, 2005, under the companys shelf
registration statement, $400 million remained





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##### Table of Contents









PART II/ITEM 8


available for issuance of equity or debt
securities at Plum Creek Timber Company, Inc. and
$100 million remained available for issuance of debt
securities at Plum Creek Timberlands, L.P.


In November of 2005, the Partnership, issued
$300 million aggregate principal amount of its senior notes
with a coupon rate of 5.875% at a market price of 99.731% of the
principal amount. The net proceeds of $297 million were
used primarily to purchase timberlands (see Note 3 of the
Notes to Financial Statements). The notes, issued under the
companys and the partnerships shelf registration
statement, mature in 2015. The Senior Notes due 2015 are fully
and unconditionally guaranteed by Plum Creek Timber Company, Inc.

The senior notes due 2015 are structurally
subordinated to all unsecured debt and liabilities of the
Partnerships subsidiaries, and junior in right of payment
to secured debt of the Partnerships subsidiaries to the
extent of the value of the assets secured by such debt. At
December 31, 2005, the total amount of unsecured debt and
liabilities of the Partnerships subsidiaries was
approximately $867 million, and the total amount of secured
debt of the Partnerships subsidiaries was approximately
$27 million, representing mortgage notes secured by certain
manufacturing assets. In the event of insolvency, bankruptcy,
liquidation, reorganization, dissolution, winding up of the
Partnerships business or other similar process, the assets
of the Partnerships subsidiaries will be available to pay
the amounts due on the senior notes due 2015 only after the
secured and unsecured indebtedness of the Partnerships
subsidiaries has been repaid in full.

The Senior Notes (excluding the Senior Notes due
2011 and the Senior Notes due 2015) and the First Mortgage Notes
are redeemable prior to maturity subject to a premium on
redemption, which is based upon interest rates of United States
Treasury securities having similar average maturities as these
notes. The premium that would have been due upon early
retirement approximated $148 million at December 31,
2005, and $178 million at December 31, 2004. The
Senior Notes are unsecured. The First Mortgage Notes are
collateralized by substantially all of the property, plant and
equipment of the lumber, plywood and MDF manufacturing
facilities. The Senior Notes due 2011 are not redeemable prior
to maturity.

The aggregate maturities on all debt agreements
and the line of credit are as follows as of December 31,
2005 (in millions):

|           |  |                 |       |                |  |       |     |  |  |   |       | 
|---------- |  | --------------- | ----- | -------------- |  | ----- | --- |  |  | - | ----- | 
|Maturity   |  | Debt Agreements |       | Line of Credit |  | Total
|          
|          
|          
|          
|2006       |  | $               | 211   |                |  | $     |    |  |  | $ | 211   | 
|2007       |  |                 | 125   |                |  |       |    |  |  |   | 125   | 
|2008       |  |                 | 148   |                |  |       |    |  |  |   | 148   | 
|2009       |  |                 | 200   |                |  |       | 495 |  |  |   | 695   | 
|2010       |  |                 | 58    |                |  |       |    |  |  |   | 58    | 
|Thereafter |  |                 | 993   |                |  |       |    |  |  |   | 993   | 
|           |  |                
|Total      |  | $               | 1,735 |                |  | $     | 495 |  |  | $ | 2,230 | 
|          
|          

The companys borrowing agreements contain
various restrictive covenants, including limitations on harvest
levels, sales of assets, the incurrence of indebtedness and
making restricted payments (such as payments of cash dividends
or stock repurchases). The borrowing agreements limit our
ability to make restricted payments (see Note 7 of the
Notes to Financial Statements) based on available cash, which is
generally our net income (excluding gains on the sale of capital
assets) after adjusting for non-cash charges (such as
depreciation and depletion), changes in various reserves, less
capital expenditures and principal payments on indebtedness that
are not financed. Additionally, the amount of available cash may
be increased by the amount of proceeds from the sale of higher
and better use properties and, under certain circumstances, by
50% of the amount of net proceeds from the sale of other assets.
Furthermore, our line of credit requires that we maintain
certain interest coverage and maximum leverage ratios. The
company was in compliance with all of our borrowing agreement
covenants as of December 31, 2005.

NOTE 7. RESTRICTED NET ASSETS

Plum Creek Timber Company, Inc. is the direct
parent company of the Partnership, and the indirect parent of
all the subsidiaries of our consolidated group. Plum Creek
Timber Company, Inc. has no assets or liabilities other than its
ownership interest in the Partnership and proceeds from stock
option exercises. Under the terms of our note





FIFTY-SIX




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##### Table of Contents









PART II/ITEM 8


agreements and line of credit (see Note 6 of
the Notes to Financial Statements), the Partnership is
restricted from transferring assets and funds in the form of
loans, advances or cash dividends to Plum Creek Timber Company,
Inc. Subject to certain restrictions, the Partnership can make
loans or advances to Plum Creek Timber Company, Inc. Based on
these provisions, the Partnership could distribute or advance
the cash on its balance sheet as of December 31, 2005, or
$369 million, all of which is considered unrestricted
assets. At December 31, 2005, the Partnership and its
consolidated subsidiaries had net assets of $2,326 million
of which $1,957 million were restricted from being
transferred by the Partnership to Plum Creek Timber Company, Inc.


Presented below is the condensed unconsolidated
financial information for Plum Creek Timber Company, Inc. as of
December 31, 2005 and 2004, and for each of the years in
the three-year period ended December 31, 2005. The
ownership of Plum Creek Timberlands, L.P. is presented using the
equity basis of accounting. Plum Creek Timber Company, Inc. does
not have any direct or indirect ownership interest in
unconsolidated subsidiaries or 50 percent or less owned
persons accounted for by the equity method of accounting.

Plum Creek Timber Company, Inc.

Condensed Unconsolidated Balance Sheet Data


(in millions)


|                                                                |                              |              |       |              |  |   |       |       | 
|--------------------------------------------------------------- | ---------------------------- | ------------ | ----- | ------------ |  | - | ----- | ----- | 
|                                                                |                              | December 31, |       | December 31,
|                                                                |                              | 2005         |       | 2004        
|                                                               
|                                                               
|                                                               
|                                                               
|Assets                                                          |                              |              |       |              |  |   |       |      
|Investment in Plum Creek Timberlands, L.P. and
    Subsidiaries |                              | $            | 2,326 |              |  | $ | 2,238 |      
|                                                                |                              |             
|                                                                | Total Assets                 |              | $     | 2,326        |  |   | $     | 2,238 | 
|                                                                |                              |             
|Liabilities                                                     |                              |              |       |              |  |   |       |      
|                                                                | Total Liabilities            |              | $     |             |  |   | $     |      | 
|                                                                |                              |             
|Commitments and Contingencies                                   |                              |              |       |              |  |   |       |      
|                                                               
|                                                               
|                                                               
|                                                               
|Stockholders Equity                                            |                              |              |       |              |  |   |       |      
|Common Stock                                                    |                              |              | 2     |              |  |   | 2     |      
|Additional Paid in Capital                                      |                              |              | 2,181 |              |  |   | 2,168 |      
|Retained Earnings and Other Equity                              |                              |              | 187   |              |  |   | 111   |      
|Treasury Stock, at cost                                         |                              |              | (44   | )            |  |   | (43   | )    
|                                                                |                              |             
|                                                                | Total Stockholders Equity   |              |       | 2,326        |  |   |       | 2,238 | 
|                                                                |                              |             
|                                                                | Total Liabilities and Equity |              | $     | 2,326        |  |   | $     | 2,238 | 
|                                                               
|                                                               

Plum Creek Timber Company, Inc.

Condensed Unconsolidated Statement of Income Data


(in millions)


|                                                         |            |              |     |              |  |              |     |     |  |   |     |     | 
|-------------------------------------------------------- | ---------- | ------------ | --- | ------------ |  | ------------ | --- | --- |  | - | --- | --- | 
|                                                         |            | December 31, |     | December 31, |  | December 31,
|Year Ended                                               |            | 2005         |     | 2004         |  | 2003        
|                                                        
|                                                        
|                                                        
|                                                        
|Equity in Net Income of Plum Creek Timberlands,
    L.P. |            | $            | 354 |              |  | $            | 362 |     |  | $ | 192 |    
|                                                         |            |             
|                                                         | Net Income |              | $   | 354          |  |              | $   | 362 |  |   | $   | 192 | 
|                                                        
|                                                        





FIFTY-SEVEN




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##### Table of Contents









PART II/ITEM 8


Plum Creek Timber Company, Inc.

Condensed Unconsolidated Statement of Cash Flows Data


(in millions)


|                                                        |                                                                                       |                                                          |   |              |      |              |   |      |      |   |   |      |      |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------------------- | - | ------------ | ---- | ------------ | - | ---- | ---- | - | - | ---- | ---- | -
|                                                        |                                                                                       | December 31,                                             |   | December 31, |      | December 31,
|Year Ended                                              |                                                                                       | 2005                                                     |   | 2004         |      | 2003        
|                                                       
|                                                       
|                                                       
|                                                       
|Cash Flows From Operating Activities:                   |                                                                                       |                                                          |   |              |      |              |   |      |      |   |   |     
|                                                        | Net Income                                                                            |                                                          | $ | 354          |      |              | $ | 362  |      |   | $ | 192  |     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Adjustments to Reconcile Net Income to Net Cash
    Provided By Operating Activities: |                                                          |   |              |      |              |   |      |      |   |   |      |     
|                                                        |                                                                                       | Equity in Net Income of Plum Creek Timberlands,
    L.P. |   |              | (354 | )            |   |      | (362 | ) |   |      | (192 | )
|                                                        |                                                                                       |                                                         
|Net Cash Provided By (Used In) Operating
    Activities |                                                                                       |                                                          |  |              |      |              |  |      |      |   |  |     
|                                                        |                                                                                       |                                                         
|Net Cash Provided By (Used In) Investing
    Activities |                                                                                       |                                                          |  |              |      |              |  |      |      |   |  |     
|                                                        |                                                                                       |                                                         
|                                                       
|                                                       
|                                                       
|                                                       
|Cash Flows From Financing Activities:                   |                                                                                       |                                                          |   |              |      |              |   |      |      |   |   |     
|                                                        | Cash Dividends                                                                        |                                                          |   | (279         | )    |              |   | (260 | )    |   |   | (257 | )   
|                                                        | Cash Distribution from Plum Creek Timberlands,
    L.P.                               |                                                          |   | 271          |      |              |   | 248  |      |   |   | 299  |     
|                                                        | Proceeds from Stock Option Exercises                                                  |                                                          |   | 9            |      |              |   | 12   |      |   |   | 1    |     
|                                                        | Acquisition of Treasury Stock                                                         |                                                          |   | (1           | )    |              |   |     |      |   |   | (43  | )   
|                                                        |                                                                                       |                                                         
|Net Cash Provided by (Used In) Financing
    Activities |                                                                                       |                                                          |  |              |      |              |  |      |      |   |  |     
|                                                        |                                                                                       |                                                         
|Increase In Cash and Cash Equivalents                   |                                                                                       |                                                          |  |              |      |              |  |      |      |   |  |     
|                                                       
|                                                       
|                                                       
|                                                       
|Cash and Cash Equivalents:                              |                                                                                       |                                                          |   |              |      |              |   |      |      |   |   |     
|                                                        | Beginning of Year                                                                     |                                                          |   |             |      |              |   |     |      |   |   |     |     
|                                                        |                                                                                       |                                                         
|                                                        | End of Year                                                                           |                                                          | $ |             |      |              | $ |     |      |   | $ |     |     
|                                                       
|                                                       

NOTE 8. FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents
and notes receivable approximate fair value due to the
short-term maturities of these instruments. The estimated fair
value of the companys debt was approximately
$2.32 billion and $2.01 billion at December 31,
2005 and 2004, respectively, and the carrying amount was
$2.23 billion and $1.89 billion at December 31,
2005 and 2004, respectively. The fair value of the
companys publicly-traded debt (i.e. Senior Notes due
2015) is estimated using market quotes; the fair value of the
remainder of the companys debt is estimated using current
interest rates for similar obligations with like maturities.

Certain investments in the grantor trusts relate
to the companys non-qualified pension plans and are
classified as available-for-sale securities. The company has
invested in various money market, debt and equity mutual funds.
The company plans to use these investments to fund its
non-qualified pension obligations. The fair value of these
investments was $18 million and $15 million at
December 31, 2005 and 2004, respectively. Unrealized
holding gains and losses are included as a component of
accumulated other comprehensive income, unless a permanent
impairment has occurred, which is then charged to expense.
Unrealized holding gains relating to mutual fund investments
were approximately $2 million at both December 31,
2005 and December 31, 2004. The company records changes in
unrealized holding gains in Other Comprehensive Income. Realized
gains and losses were less than $1 million in 2005, 2004,
and 2003. See Note 10 of the Notes to Financial Statements
for discussion of the companys Pension Plans.

Certain investments in the grantor trusts relate
to the companys deferred compensation plans and are
classified as trading securities. Deferred compensation amounts
are invested in various money market, debt and equity mutual
funds. The company plans to use these investments to fund
certain deferred compensation. The fair value of these
investments was $8 million and $14 million at
December 31, 2005 and 2004, respectively. Unrealized
holding gains related to mutual fund investments were
$1 million at December 31, 2005. The change in
unrealized holding gains or losses has been recognized in the
companys consolidated statement of income resulting in
losses of less than $1 million in 2005, and gains of
$1 million in 2004 and $2 million in 2003. Realized
gains and losses were less than





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##### Table of Contents









PART II/ITEM 8


$1 million in 2005, 2004, and 2003. Deferred
compensation obligations are included in Other Liabilities and
were $8 million and $14 million at December 31,
2005 and 2004, respectively.


NOTE 9. CAPITAL

At December 31, 2005, Plum Creek had the
following authorized capital of which only 184.2 million
shares of common stock were issued and outstanding:



|  |                                                                      
|- | ---------------------------------------------------------------------
| | 300,634,566 shares of common stock, par
    value $.01 per share;    
| 
| | 150,000,001 shares of excess stock, par
    value $.01 per share; and
| 
| | 75,000,000 shares of preferred stock, par
    value $.01 per share.  

The changes in the companys capital
accounts are as follows (in millions):

|                                               |  |              |       |         |  |          |   |          |  |          |       |        |  |        |      |   |  |   |    |   |  |   |     |   |  |   |       |  
|---------------------------------------------- |  | ------------ | ----- | ------- |  | -------- | - | -------- |  | -------- | ----- | ------ |  | ------ | ---- | - |  | - | -- | - |  | - | --- | - |  | - | ----- | -
|                                               |  |              |       |         |  |          |   |          |  |          |       |       
|                                               |  | Common Stock |       |         |  |          |   |          |  |          |       |       
|                                               |  |              |       | Paid-in |  | Retained |   | Other    |  | Treasury |       | Total 
|                                               |  | Shares       |       | Dollars |  | Capital  |   | Earnings |  | Equity   |       | StockB |  | Equity
|                                              
|                                              
|                                              
|January 1, 2003                                |  |              | 184.9 |         |  | $        | 2 |          |  | $        | 2,197 |        |  | $      | 23   |   |  | $ |   |   |  | $ |    |   |  | $ | 2,222 |  
|Net Income                                     |  |              |      |         |  |          |  |          |  |          |      |        |  |        | 192  |   |  |   |   |   |  |   |    |   |  |   | 192   |  
|Dividends                                      |  |              |      |         |  |          |  |          |  |          | (51   | )      |  |        | (206 | ) |  |   |   |   |  |   |    |   |  |   | (257  | )
|Stock Option Exercises                         |  |              | 0.1   |         |  |          |  |          |  |          | 1     |        |  |        |     |   |  |   |   |   |  |   |    |   |  |   | 1     |  
|Shares Issued under Stock Incentive
    PlansA |  |              | 0.1   |         |  |          |  |          |  |          | 2     |        |  |        |     |   |  |   |   |   |  |   |    |   |  |   | 2     |  
|Treasury Shares Acquired                       |  |              | (2.0  | )       |  |          |  |          |  |          |      |        |  |        |     |   |  |   |   |   |  |   | (43 | ) |  |   | (43   | )
|Other                                          |  |              |      |         |  |          |  |          |  |          | 1     |        |  |        |     |   |  |   | 1  |   |  |   |    |   |  |   | 2     |  
|                                               |  |             
|December 31, 2003                              |  |              | 183.1 |         |  |          | 2 |          |  |          | 2,150 |        |  |        | 9    |   |  |   | 1  |   |  |   | (43 | ) |  |   | 2,119 |  
|Net Income                                     |  |              |      |         |  |          |  |          |  |          |      |        |  |        | 362  |   |  |   |   |   |  |   |    |   |  |   | 362   |  
|Dividends                                      |  |              |      |         |  |          |  |          |  |          |      |        |  |        | (260 | ) |  |   |   |   |  |   |    |   |  |   | (260  | )
|Stock Option Exercises                         |  |              | 0.5   |         |  |          |  |          |  |          | 12    |        |  |        |     |   |  |   |   |   |  |   |    |   |  |   | 12    |  
|Tax Benefit from Stock Incentive Plan          |  |              |      |         |  |          |  |          |  |          | 1     |        |  |        |     |   |  |   |   |   |  |   |    |   |  |   | 1     |  
|Shares Issued under Stock Incentive
    PlansA |  |              | 0.1   |         |  |          |  |          |  |          | 3     |        |  |        |     |   |  |   | (1 | ) |  |   |    |   |  |   | 2     |  
|Other                                          |  |              |      |         |  |          |  |          |  |          | 2     |        |  |        |     |   |  |   | 2  |   |  |   |    |   |  |   | 4     |  
|                                               |  |             
|December 31, 2004                              |  |              | 183.7 |         |  |          | 2 |          |  |          | 2,168 |        |  |        | 111  |   |  |   | 2  |   |  |   | (43 | ) |  |   | 2,240 |  
|Net Income                                     |  |              |      |         |  |          |  |          |  |          |      |        |  |        | 354  |   |  |   |   |   |  |   |    |   |  |   | 354   |  
|Dividends                                      |  |              |      |         |  |          |  |          |  |          |      |        |  |        | (279 | ) |  |   |   |   |  |   |    |   |  |   | (279  | )
|Stock Option Exercises                         |  |              | 0.4   |         |  |          |  |          |  |          | 9     |        |  |        |     |   |  |   |   |   |  |   |    |   |  |   | 9     |  
|Tax Benefit from Stock Incentive Plan          |  |              |      |         |  |          |  |          |  |          | 1     |        |  |        |     |   |  |   |   |   |  |   |    |   |  |   | 1     |  
|Shares Issued under Stock Incentive
    PlansA |  |              | 0.1   |         |  |          |  |          |  |          | 3     |        |  |        |     |   |  |   | (2 | ) |  |   |    |   |  |   | 1     |  
|Other                                          |  |              |      |         |  |          |  |          |  |          |      |        |  |        |     |   |  |   |   |   |  |   | (1  | ) |  |   | (1    | )
|                                               |  |             
|December 31, 2005                              |  |              | 184.2 |         |  | $        | 2 |          |  | $        | 2,181 |        |  | $      | 186  |   |  | $ |   |   |  | $ | (44 | ) |  | $ | 2,325 |  
|                                              
|                                              



|  |                                                                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | During 2005, Plum Creek issued approximately
    32,000 shares of common stock as payment for Value
    Management Awards and Dividend Equivalents (see Note 11 of
    the Notes to the Financial Statements). In addition,
    approximately 56,000 shares of restricted stock was awarded
    under the terms of the companys Stock Incentive Plan.



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2004, Plum Creek issued approximately
    101,300 shares of common stock as payment for Value
    Management Awards. In addition, approximately 29,000 shares
    of restricted stock was awarded.
|
| | During 2003, Plum Creek issued approximately
    102,800 shares of common stock as payment for Value
    Management Awards. In addition, approximately 7,100 shares
    of restricted stock was awarded. 



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | The company has authority from its Board of
    Directors to repurchase up to $200 million of the
    companys common stock. As of December 31, 2005, the
    company had repurchased approximately 2 million shares of
    common stock for a total cost of $43 million at an average
    price of $21.53 per share. Additionally, during 2005 the
    company purchased approximately 29,000 shares for
    $1.1 million from a grantor trust in connection with a
    special one-time payout of deferred compensation under the
    American Jobs Creation Act of 2004. The shares of





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PART II/ITEM 8


| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | stock were sold by the grantor trust to the
    corporation in exchange for cash that was used to pay tax
    withholding associated with such payout.

During 2005, Plum Creek paid dividends of
approximately $279 million, or $1.52 per share.
Dividends of $0.38 per share were paid in March, June,
August and November 2005.

During 2004, Plum Creek paid dividends of
$260 million or $1.42 per share. Dividends of
$0.35 per share each were paid in February and May 2004.
Dividends of $0.36 per share each were paid in August and
November 2004.

During 2003, Plum Creek paid dividends of
$257 million or $1.40 per share. Dividends of
$0.35 per share were paid in February, May, August and
November 2003.

At December 31, 2005, there were
approximately 47,000 shares of Plum Creek common stock held
in a grantor trust to fund deferred incentive plan awards
compared to approximately 393,000 at December 31, 2004.
These shares were recorded at $1 million at
December 31, 2005, and $10 million at
December 31, 2004. The related liabilities at
December 31, 2005, and 2004 were $1 million and
$12 million, respectively. The above amounts are shown net
in the equity section of the consolidated balance sheet.
Additionally, the cost of restricted stock awards is recorded in
equity as deferred compensation and is amortized over the
restriction period. See Note 11 of the Notes to Financial
Statements.

NOTE 10. EMPLOYEE PENSION AND RETIREMENT PLANS

Pension
Plan.The company provides
defined benefit pension plans that cover substantially all
employees of the company. The company uses a December 31
measurement date for its pension plans. The following tables
provide a reconciliation of benefit obligations, plan assets,
and funded status of the plans for the years ended
December 31(in millions):

|                                                 |                                            |      |     |      |  |   |    |     | 
|------------------------------------------------ | ------------------------------------------ | ---- | --- | ---- |  | - | -- | --- | 
|                                                 |                                            | 2005 |     | 2004
|                                                
|                                                
|                                                
|                                                
|Change in benefit obligation                     |                                            |      |     |      |  |   |    |    
|Benefit obligation at beginning of period        |                                            | $    | 107 |      |  | $ | 95 |    
|Service cost                                     |                                            |      | 6   |      |  |   | 6  |    
|Interest cost                                    |                                            |      | 6   |      |  |   | 6  |    
|Actuarial loss                                   |                                            |      | 4   |      |  |   | 6  |    
|Benefits paid                                    |                                            |      | (7  | )    |  |   | (6 | )  
|                                                 |                                            |     
|                                                 | Benefit obligation at end of period        |      | $   | 116  |  |   | $  | 107 | 
|                                                 |                                            |     
|                                                 |                                            |     
|Change in plan assets                            |                                            |      |     |      |  |   |    |    
|Fair value of plan assets at beginning of period |                                            | $    | 75  |      |  | $ | 65 |    
|Actual return on plan assets                     |                                            |      | 5   |      |  |   | 7  |    
|Employer contributions                           |                                            |      | 9   |      |  |   | 9  |    
|Benefits paid                                    |                                            |      | (7  | )    |  |   | (6 | )  
|                                                 |                                            |     
|                                                 | Fair value of plan assets at end of period |      | $   | 82   |  |   | $  | 75  | 
|                                                
|                                                

The funded status is set forth in the following
table (in millions):

|                                |                               |              |     |              |   |   |     |     |  
|------------------------------- | ----------------------------- | ------------ | --- | ------------ | - | - | --- | --- | -
|                                |                               | December 31, |     | December 31,
|                                |                               | 2005         |     | 2004        
|                               
|                               
|                               
|Funded status                   |                               | $            | (35 | )            |   | $ | (32 | )  
|Unrecognized net actuarial loss |                               |              | 20  |              |   |   | 17  |    
|Unrecognized prior service cost |                               |              | 1   |              |   |   | 1   |    
|                                |                               |             
|                                | Unfunded accrued pension cost |              | $   | (14          | ) |   | $   | (14 | )
|                               
|                               

The unfunded accrued pension cost at
December 31, 2005, consists of accrued pension liability of
$17 million for the non-qualified pension plans and
$3 million of prepaid pension cost for the qualified
pension plan. The unfunded





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##### Table of Contents









PART II/ITEM 8


accrued pension cost at December 31, 2004,
consists of accrued pension liability of $15 million for
the non-qualified pension plans and $1 million of prepared
pension cost for the qualified pension plan.


The components of pension cost were as follows
for the years ended December 31 (in millions):

|                               |                    |      |    |      |  |      |    |   |  |   |    |   | 
|------------------------------ | ------------------ | ---- | -- | ---- |  | ---- | -- | - |  | - | -- | - | 
|                               |                    | 2005 |    | 2004 |  | 2003
|                              
|                              
|                              
|                              
|Service cost                   |                    | $    | 6  |      |  | $    | 6  |   |  | $ | 5  |  
|Interest cost                  |                    |      | 6  |      |  |      | 6  |   |  |   | 6  |  
|Expected return on plan assets |                    |      | (5 | )    |  |      | (5 | ) |  |   | (5 | )
|Recognized actuarial loss      |                    |      | 2  |      |  |      |   |   |  |   |   |  
|                               |                    |     
|                               | Total pension cost |      | $  | 9    |  |      | $  | 7 |  |   | $  | 6 | 
|                              
|                              

Most of the companys salaried and all
hourly employees who complete one year of service in which they
work at least 1,000 hours are eligible to participate in
the plan. Participants vest after five years of service. The
cash balance benefits for salaried employees is determined based
primarily on certain percentages of compensation, age, years of
service and interest accrued based on the 30-year treasury bond
rate. Participants who were employees of the company on
September 1, 2000, earn benefits based on the greater of
the cash balance formula or a monthly pension benefit that is
principally based on highest monthly average earnings during any
consecutive sixty-month out of 120-month period and the number
of years of service credit. The benefits of hourly employees are
generally based on a fixed amount per year of service.

The company maintains a qualified defined benefit
pension plan and two supplemental (non-qualified) defined
benefit pension plans. The companys contributions to these
plans vary from year to year. It is the companys policy to
fund the qualified plan annually such that the fair value of
plan assets equals or exceeds the actuarially computed
accumulated benefit obligation (the approximate actuarially
computed current pension obligation if the plan was
discontinued). At December 31, 2005, the fair value of plan
assets for the qualified plan was $82 million and its
related accumulated benefit obligation was $79 million. At
December 31, 2004, the fair value of plan assets for the
qualified plan was $75 million and its related accumulated
benefit obligation was $73 million.

The company has the same funding policy for the
non-qualified plans. However, assets related to the
non-qualified plans are held in a grantor trust and are subject
to the claims of creditors in the event of bankruptcy. As a
result, pension assets for the non-qualified plans are not
considered plan assets, and therefore, have not been netted
against our pension liability. Pension assets for the
non-qualified plans are included in Investment in Grantor
Trusts in our balance sheet, and the related pension
liability is included in Other Liabilities in our
balance sheet. At December 31, 2005 and 2004, the
accumulated benefit obligation for the non-qualified plans was
$17 million and $15 million, respectively. The fair
value of assets held in a grantor trust associated with the
non-qualified plans was $18 million at December 31,
2005, and $15 million at December 31, 2004.

As a result of the companys funding policy,
annual qualified pension contributions and grantor trust funding
are significantly impacted by investment returns and changes in
interest rates. Based on current interest rates and expected
investment returns, the company expects 2006 contributions to
the qualified pension plan to range between $3 million and
$8 million. Additionally, during 2006 the company expects
to contribute between $1 million and $3 million to its
grantor trust associated with the non-qualified plans.

The following table presents expected future
benefit payments projected based on the same assumptions used by
the company to measure the benefit obligation and estimate
future employee service (in millions):

|                  |  |                   |    | 
|----------------- |  | ----------------- | -- | 
|                  |  | Projected Benefit
|Year              |  | Payments         
|                 
|                 
|                 
|2006              |  | $                 | 8  | 
|2007              |  |                   | 11 | 
|2008              |  |                   | 11 | 
|2009              |  |                   | 11 | 
|2010              |  |                   | 11 | 
|2011 through 2015 |  |                   | 61 | 
|                 
|                 





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##### Table of Contents









PART II/ITEM 8


As of year-end, plan assets were allocated as
follows:

|                                                        |  |              |     |              |  |  |     |  
|------------------------------------------------------- |  | ------------ | --- | ------------ |  |  | --- | -
|                                                        |  | December 31, |     | December 31,
|                                                        |  | 2005         |     | 2004        
|                                                       
|                                                       
|                                                       
|                                                       
|Large Capitalization Domestic Equities                  |  |              | 30  | %            |  |  | 37  | %
|Small and Mid-Size Capitalization Domestic
    Equities |  |              | 11  | %            |  |  | 14  | %
|International Equities                                  |  |              | 14  | %            |  |  | 10  | %
|Fixed Income                                            |  |              | 32  | %            |  |  | 28  | %
|Hedge Funds                                             |  |              | 10  | %            |  |  | 10  | %
|Cash                                                    |  |              | 3   | %            |  |  | 1   | %
|                                                       
|Total                                                   |  |              | 100 | %            |  |  | 100 | %
|                                                       
|                                                       

It is the companys investment policy to
achieve maximum returns at a reasonable risk for pension assets
over a full market cycle. The company uses eight fund managers
to capture favorable returns in various asset classes and to
diversify risk. Target allocations for the various asset classes
are as follows:

|                                                        |  |  |            | 
|------------------------------------------------------- |  |  | ---------- | 
|                                                       
|                                                       
|Large Capitalization Domestic Equities                  |  |  | 25% to 37% | 
|Small and Mid-Size Capitalization Domestic
    Equities |  |  | 8% to 14%  | 
|International Equities                                  |  |  | 12% to 16% | 
|Fixed Income                                            |  |  | 31% to 37% | 
|Hedge Funds                                             |  |  | 8% to 12%  | 
|                                                       
|                                                       

Pension assets are analyzed at least quarterly
and rebalanced as needed to maintain the above target
allocations. To further reduce risk, fund managers are required
to invest in a diversified portfolio. No more than 5% of an
equity portfolio can be invested in a single company, and fund
managers are expected to be well diversified with respect to
industry and economic sectors. No more than 10% of a fixed
income portfolio can be invested in a single issuer (other than
U.S. treasuries). Equity investments are limited to common
stocks, common stock equivalents and preferred stock. Fixed
income investments are limited to U.S. treasuries, agencies
of the U.S. Government, domestic corporations,
municipalities, domestic banks, and other U.S. financial
institutions. Furthermore, hedge funds are used to reduce market
risk and generate absolute returns regardless of market
direction by employing limited use of derivative instruments,
selling securities short, and buying and selling futures and
options contracts.

Over a full market cycle, the investment goal for
large capitalization domestic equities and fixed income
investments is to exceed the applicable benchmark (e.g., S&P
500 Index) by one-half of one percent per annum, and the
investment goal for small and mid-size capitalization domestic
equities and international equities is to exceed the applicable
benchmark (e.g., Russell 2000 Value Index) by one percent. The
investment goals are net of related fees.

Weighted-average assumptions used to determine
benefit obligation:

|                              |  |              |      |              |  |  |      |  
|----------------------------- |  | ------------ | ---- | ------------ |  |  | ---- | -
|                              |  | December 31, |      | December 31,
|                              |  | 2005         |      | 2004        
|                             
|                             
|                             
|                             
|Discount rate                 |  |              | 5.75 | %            |  |  | 5.75 | %
|Rate of compensation increase |  |              | 3.7  | %            |  |  | 3.7  | %
|                             
|                             

Weighted-average assumptions used to determine
net periodic benefit cost for the years ended
December 31:

|                                         |  |      |      |      |  |  |      |  
|---------------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                                         |  | 2005 |      | 2004
|                                        
|                                        
|                                        
|                                        
|Discount rate                            |  |      | 5.75 | %    |  |  | 6.25 | %
|Expected long-term return on plan assets |  |      | 7.75 | %    |  |  | 7.75 | %
|Rate of compensation increase            |  |      | 3.7  | %    |  |  | 3.7  | %
|                                        
|                                        

To develop the expected long-term rate of return
on plan assets assumption, the company considered the current
level of expected returns on risk free investments (primarily
government bonds), the historical level of the risk premium





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##### Table of Contents









PART II/ITEM 8


associated with the other asset classes in which
the portfolio is invested and the expectations for future
returns on each asset class. The expected return for each asset
class was then weighted based on the target asset allocation to
develop the expected long-term rate of return on plan assets
assumption for the portfolio. This resulted in the selection of
the 7.75% assumption as of January 1, 2005 and 2004.


Thrift and Profit Sharing
Plan.The company sponsors an
employee thrift and profit sharing plan under
Section 401(k) of the Internal Revenue Code. This plan
covers substantially all full-time employees. The company
matches employee contributions of up to six percent of
compensation at rates ranging from 35 to 100 percent,
depending upon financial performance.

Amounts charged to expense relating to the
companys thrift and profit sharing plan were
$5 million each for 2005, 2004, and 2003. The employer
match for each of the three years was 100%.

Other Benefit
Plans.Certain executives and key
employees of the company participate in incentive benefit plans,
which provide for the granting of shares and/or cash bonuses
upon meeting performance objectives. See Note 11 of the
Notes to Financial Statements.

NOTE 11. STOCKBASED COMPENSATION PLANS

Plum Creek has a stockholder approved Stock
Incentive Plan that provides for the award of non-qualified
stock options, restricted stock and restricted stock units,
dividend equivalents and value management awards. Under Plum
Creeks Stock Incentive Plan, as amended in May 2004, there
are 12.4 million shares of common stock reserved and
eligible for issuance. At December 31, 2005,
2.8 million shares of the 12.4 million reserved shares
have been used and, therefore, 9.6 million shares remain
available for grants of non-qualified stock options, grants of
restricted stock and units, or payments of vested dividend
equivalents and value management awards. The number of shares to
be issued in connection with dividend equivalents and value
management awards is not determined until the end of their
respective performance periods.

In addition to the 12.4 million shares that
are eligible for issuance under Plum Creeks Stock
Incentive Plan, Plum Creek assumed 3.8 million Timber
Company Stock options in connection with the October 6,
2001, merger with The Timber Company that were converted to Plum
Creek stock options. At December 31, 2005, 0.4 million
options of the 3.8 million options remain issued and
outstanding.

Stock
Options.Under the plan,
non-qualified stock options may be granted to any officer,
director, employee, consultant or advisor of the company. Each
stock option granted allows the recipient the right to purchase
the companys common stock at the fair market value of the
companys common stock on the date of the grant. Generally,
the stock options have a ten-year term and vest over a four-year
period at a rate of 25% per year. Under the plan, the
exercise price of an option may not be reduced. See table below
for summary of stock options granted, exercised and forfeited.

Restricted Stock and Restricted Stock
Units.Under the plan, restricted
stock and restricted stock units of the company may be awarded
to certain directors, officers and employees of the company.
Restricted stock may not be sold, assigned, transferred, pledged
or otherwise disposed of for a period of time from the date on
which the restricted stock was granted. The recipients of
restricted stock generally have the rights of stockholders of
the company with respect to voting and receipt of dividends
during the restricted period. The recipients of restricted stock
units generally have the right to receive dividends during the
restricted period and at the expiration of the restriction
period the right to receive an equal number of shares of the
companys common stock. Termination of employment prior to
the end of the restricted period will generally require the
return of the restricted stock or restricted stock units to the
company. The company had 72,300 shares of restricted stock
outstanding under this plan as of December 31, 2005,
compared to 39,500 shares of restricted stock as of
December 31, 2004. The weighted average grant date fair
value of restricted stock awarded in 2005 was $36.99 per
share. No restricted stock units were outstanding at
December 31, 2005 or December 31, 2004.

Dividend
Equivalents.Under the plan,
dividend equivalents may be granted in connection with stock
options. Dividend equivalents represent the right to receive a
payment equal in value to the per-share dividend paid over a
five-year period by the company multiplied by the number of
unexercised stock options.

For awards granted in 2005 and 2004, each year
during the five-year performance period, a participant may be
eligible to earn a percentage of the companys current year
dividend plus a percentage of prior year unearned





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PART II/ITEM 8


dividends to the extent that the companys
total shareholder return on an annualized basis is at least 5.5%
at the end of any such year. The total shareholder return
computation consists of the companys stock price
appreciation plus dividends paid. The specific percentage to be
applied to any such earned dividends for a given year of the
performance period is contingent upon the companys
performance for that year measured against the performance of a
peer group of companies. Dividends are earned in whole or in
part based on a sliding scale. If the companys total
shareholder return is below the 50th percentile of the peer
group, then the percentage amount is zero. If the companys
total shareholder return is at or above the
75th percentile, the full amount of the dividend is earned.
If the companys relative performance is between the
50th and the 75th percentile, dividend equivalents are
valued based on a sliding scale between 50% and 100% of the
dividends paid during the year.


For awards granted prior to 2004, each year
during the respective five-year performance period, a
participant may earn an amount equal to the companys
current year dividend plus prior year unearned dividends to the
extent the companys total shareholder return on an
annualized basis equals or exceeds 13% for 15 trading days out
of any 30 trading day period in any given year.

Payments related to any earned dividend
equivalents are made at the end of the five-year performance
period. Unless otherwise specified by the participant, each
payment is paid in cash, except that any officer not in
compliance with the companys stock ownership guidelines is
required to receive up to half of the payment value in the
companys common stock. If a participant terminates
employment prior to the end of the five-year performance period,
a cash payment is made for any performance goals achieved in
connection with vested stock options through the last day of
employment. Payment related to unvested stock options and
performance goals achieved after termination of employment are
forfeited. At December 31, 2005, 2.0 million dividend
equivalents, net of forfeitures, granted to employees, officers
and directors of the company were outstanding compared to
1.7 million dividend equivalents outstanding at
December 31, 2004.

The five-year performance period for the 2001
grants ended on December 31, 2005. All dividends paid by
the company during the five-year performance period were earned
on the outstanding dividend equivalent rights. The awards were
paid in cash and stock totaling $3 million in January of
2006.

The five-year performance period for the 2000
grants ended on December 31, 2004. All dividends paid by
the company during the five-year performance period were earned
on the outstanding dividend equivalent rights. The awards were
paid in cash and stock totaling $3 million in January of
2005.

Value Management
Awards.Value management awards
granted subsequent to January 1, 2004, provide incentive
compensation to participants that is contingent upon company
performance over a three-year period measured against the
performance of a peer group consisting of forest products
companies, the S&P 500 Index and the Morgan Stanley REIT
Index over the same period. Awards granted in 2002 were based on
the companys performance measured against a peer group
consisting of forest product companies.

Value management awards are earned in whole or in
part based on a sliding scale. No value management award is
earned if the companys total shareholder return is below
the 50th percentile of the peer group. The full value
management award is earned if the companys total
shareholder return is above the 75th percentile. A unit has
a face value of $100. The value of an award between the
50th and 75th percentile is a sliding scale between 0%
and 200% of the face value. At the end of the performance
period, the awards will be paid in full to each participant.
Unless otherwise specified by the participant, each payment will
be paid in cash, except that any officer not in compliance with
the companys stock ownership guidelines is required to
receive up to half of the payment value in the companys
common stock. Generally, to be entitled to the payment, a
participant must be employed by the company on the last date of
the performance period.





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PART II/ITEM 8


Value management awards activity was as follows
for the years ended December 31 (number of units,
face value $100 per unit):

|                       |  |      |         |      |  |      |         |   |  |  |         |  
|---------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                       |  | 2005 |         | 2004 |  | 2003
|                      
|                      
|                      
|                      
|Balance at January 1   |  |      | 119,440 |      |  |      | 99,315  |   |  |  | 119,750 |  
|Grants                 |  |      | 45,645  |      |  |      | 43,050  |   |  |  | 2,000   |  
|Payments               |  |      | (76,480 | )    |  |      | (22,435 | ) |  |  | (22,435 | )
|Forfeitures            |  |      | (9,070  | )    |  |      | (490    | ) |  |  |        |  
|                       |  |     
|Balance at December 31 |  |      | 79,535  |      |  |      | 119,440 |   |  |  | 99,315  |  
|                      
|                      

Value management award payments were as follows
for the years ended December 31 (in millions except
share data):

|                    |  |      |        |      |  |      |         |  |  |   |         | 
|------------------- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                    |  | 2005 |        | 2004 |  | 2003
|                   
|                   
|                   
|                   
|Cash                |  | $    | 8      |      |  | $    | 2       |  |  | $ | 2       | 
|Common Stock Shares |  |      | 25,100 |      |  |      | 101,300 |  |  |   | 102,800 | 
|                   
|                   

The three-year performance period for the 2002
grants ended on December 31, 2004. Based on our performance
compared to the performance of our peer group, 76,480 units
(with a per unit value of $116 or $9 million in the
aggregate) vested on December 31, 2004. The awards were
paid in cash and stock in January of 2005. There were no value
management awards granted with a performance period ending
December 31, 2005.

Summary of Stock Option
Activity.Presented below is a
summary of Plum Creeks stock option plan activity
(includes the Timber Company stock options assumed and converted
in connection with the October 6, 2001, merger with The
Timber Company):

|                              |  |                     |           |                  |  |   |       | 
|----------------------------- |  | ------------------- | --------- | ---------------- |  | - | ----- | 
|                              |  |                    
|                              |  | Options Outstanding
|                              |  |                    
|                              |  |                     |           | Weighted average
|                              |  | Number of shares    |           | exercise price  
|                             
|                             
|                             
|                             
|Balance at January 1, 2003    |  |                     | 2,028,304 |                  |  | $ | 22.18 | 
|Options granted               |  |                     | 478,750   |                  |  |   | 21.99 | 
|Options exercised/surrendered |  |                     | (91,243   | )                |  |   | 16.35 | 
|Options cancelled/forfeited   |  |                     | (17,897   | )                |  |   | 25.07 | 
|                              |  |                    
|Balance at December 31, 2003  |  |                     | 2,397,914 |                  |  | $ | 22.34 | 
|Options granted               |  |                     | 526,500   |                  |  | $ | 30.94 | 
|Options exercised/surrendered |  |                     | (531,350  | )                |  |   | 22.44 | 
|Options cancelled/forfeited   |  |                     | (29,583   | )                |  |   | 18.33 | 
|                              |  |                    
|Balance at December 31, 2004  |  |                     | 2,363,481 |                  |  | $ | 24.28 | 
|Options granted               |  |                     | 476,250   |                  |  | $ | 37.49 | 
|Options exercised/surrendered |  |                     | (409,866  | )                |  |   | 20.99 | 
|Options cancelled/forfeited   |  |                     | (127,735  | )                |  |   | 28.95 | 
|                              |  |                    
|Balance at December 31, 2005  |  |                     | 2,302,130 |                  |  | $ | 27.34 | 
|                             
|                             





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PART II/ITEM 8


The following table summarizes the options
outstanding and exercisable:

|                  |  |                     |           |                     |  |                |           |        |  |                |       |  |  |  |           |  |  |   |       | 
|----------------- |  | ------------------- | --------- | ------------------- |  | -------------- | --------- | ------ |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                  |  |                     |           |                    
|                  |  | Options Outstanding |           | Options Exercisable
|                  |  |                     |           |                    
|                  |  |                     |           | Weighted            |  | Weighted       |           |        |  | Weighted      
|                  |  |                     |           | average             |  | average        |           |        |  | average       
|Range of prices   |  | Number              |           | remaining life      |  | exercise price |           | Number |  | exercise price
|                 
|                 
|                 
|                 
|December 31, 2003 |  |                     |           |                     |  |                |           |        |  |                |       |  |  |  |           |  |  |   |       | 
|$29.70  $30.70   |  |                     | 451,800   |                     |  |                | 8.1 years |        |  | $              | 29.72 |  |  |  | 112,950   |  |  | $ | 29.72 | 
|$24.35  $26.27   |  |                     | 628,549   |                     |  |                | 6.8 years |        |  | $              | 25.85 |  |  |  | 380,950   |  |  | $ | 25.81 | 
|$21.91  $23.97   |  |                     | 471,750   |                     |  |                | 9.1 years |        |  | $              | 21.94 |  |  |  | 1,250     |  |  | $ | 22.21 | 
|$16.94  $18.34   |  |                     | 236,500   |                     |  |                | 1.8 years |        |  | $              | 17.26 |  |  |  | 236,500   |  |  | $ | 17.26 | 
|$15.29  $16.42   |  |                     | 609,315   |                     |  |                | 2.7 years |        |  | $              | 15.53 |  |  |  | 609,315   |  |  | $ | 15.53 | 
|                 
|$15.29  $30.70   |  |                     | 2,397,914 |                     |  |                | 6.0 years |        |  | $              | 22.34 |  |  |  | 1,340,965 |  |  | $ | 19.96 | 
|                 
|                 
|December 31, 2004 |  |                     |           |                     |  |                |           |        |  |                |       |  |  |  |           |  |  |   |       | 
|$30.91  $36.13   |  |                     | 522,750   |                     |  |                | 9.1 years |        |  | $              | 30.96 |  |  |  | 51,000    |  |  | $ | 30.99 | 
|$29.70  $30.70   |  |                     | 415,674   |                     |  |                | 7.1 years |        |  | $              | 29.73 |  |  |  | 201,400   |  |  | $ | 29.73 | 
|$24.35  $26.27   |  |                     | 332,817   |                     |  |                | 6.2 years |        |  | $              | 26.03 |  |  |  | 257,692   |  |  | $ | 25.98 | 
|$21.91  $23.97   |  |                     | 456,150   |                     |  |                | 8.1 years |        |  | $              | 21.94 |  |  |  | 121,589   |  |  | $ | 21.94 | 
|$15.29  $18.34   |  |                     | 636,090   |                     |  |                | 1.6 years |        |  | $              | 16.01 |  |  |  | 636,090   |  |  | $ | 16.01 | 
|                 
|$15.29  $36.13   |  |                     | 2,363,481 |                     |  |                | 6.1 years |        |  | $              | 24.28 |  |  |  | 1,267,771 |  |  | $ | 21.39 | 
|                 
|                 
|December 31, 2005 |  |                     |           |                     |  |                |           |        |  |                |       |  |  |  |           |  |  |   |       | 
|                 
|                 
|                 
|                 
|$36.13  $37.61   |  |                     | 438,750   |                     |  |                | 9.1 years |        |  | $              | 37.48 |  |  |  | 750       |  |  | $ | 36.13 | 
|                 
|                 
|                 
|                 
|$30.91  $32.87   |  |                     | 473,812   |                     |  |                | 8.1 years |        |  | $              | 30.93 |  |  |  | 153,754   |  |  | $ | 30.95 | 
|                 
|                 
|                 
|                 
|$29.70  $30.70   |  |                     | 365,299   |                     |  |                | 6.1 years |        |  | $              | 29.73 |  |  |  | 269,912   |  |  | $ | 29.73 | 
|                 
|                 
|                 
|                 
|$24.35  $26.27   |  |                     | 225,192   |                     |  |                | 5.3 years |        |  | $              | 25.97 |  |  |  | 222,442   |  |  | $ | 25.97 | 
|                 
|                 
|                 
|                 
|$21.91  $23.97   |  |                     | 407,500   |                     |  |                | 7.1 years |        |  | $              | 21.94 |  |  |  | 207,628   |  |  | $ | 21.94 | 
|                 
|                 
|                 
|                 
|$15.29  $18.34   |  |                     | 391,577   |                     |  |                | 0.9 years |        |  | $              | 15.83 |  |  |  | 391,577   |  |  | $ | 15.83 | 
|                 
|$15.29  $37.61   |  |                     | 2,302,130 |                     |  |                | 6.3 years |        |  | $              | 27.34 |  |  |  | 1,246,063 |  |  | $ | 23.55 | 
|                 
|                 

Accounting for Stock-Based
Compensation.The company
expenses stock-based employee compensation in accordance with
the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Under the
prospective method adopted by the company in 2002, stock-based
employee compensation cost is recognized using the fair value
method for all employee awards granted, modified, or settled on
or after January 1, 2002. Total compensation expense for
the above stock-based compensation plans (including both awards
paid in stock and cash) was $9 million, $13 million,
and $7 million for the years ended December 31, 2005,
2004, and 2003, respectively. See Note 1 of the Notes to
Financial Statements.

The weighted-average measurement date fair values
were computed using the Black-Scholes option valuation model
with the following assumptions:

|                                                            |  |      |      |      |  |      |      |   |  |   |      |  
|----------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|Options Granted                                             |  | 2005 |      | 2004 |  | 2003
|                                                           
|                                                           
|                                                           
|                                                           
|Expected life in years                                      |  |      | 6    |      |  |      | 7    |   |  |   | 7    |  
|Risk-free interest rates                                    |  |      | 4.1  | %    |  |      | 3.7  | % |  |   | 3.5  | %
|Volatility                                                  |  |      | 24   | %    |  |      | 24   | % |  |   | 29   | %
|Dividend yield                                              |  |      | 4.1  | %    |  |      | 4.5  | % |  |   | 6.4  | %
|Weighted-average measurement date fair values per
    share |  | $    | 6.82 |      |  | $    | 5.13 |   |  | $ | 3.27 |  
|                                                           
|                                                           





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PART II/ITEM 8




|         |                                         
|-------- | ----------------------------------------
|NOTE 12. | DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Certain balance sheet accounts consisted of the
following (in millions):

|                              |                                  |              |    |              |  |   |    |    | 
|----------------------------- | -------------------------------- | ------------ | -- | ------------ |  | - | -- | -- | 
|                              |                                  | December 31, |    | December 31,
|                              |                                  | 2005         |    | 2004        
|                             
|                             
|                             
|                             
|Other Current Assets          |                                  |              |    |              |  |   |    |   
|                              | Prepaid expenses                 |              | $  | 11           |  |   | $  | 8  | 
|                              | Other                            |              |    | 5            |  |   |    | 8  | 
|                              |                                  |             
|                              |                                  | $            | 16 |              |  | $ | 16 |   
|                              |                                  |             
|                              |                                  |             
|Other Non-Current Assets      |                                  |              |    |              |  |   |    |   
|                              | Unamortized debt issue costs     |              | $  | 7            |  |   | $  | 6  | 
|                              | Deposits                         |              |    | 6            |  |   |    | 1  | 
|                              | Note receivable                  |              |    | 3            |  |   |    |   | 
|                              | Other                            |              |    | 1            |  |   |    |   | 
|                              |                                  |             
|                              |                                  | $            | 17 |              |  | $ | 7  |   
|                              |                                  |             
|                              |                                  |             
|Other Current Liabilities     |                                  |              |    |              |  |   |    |   
|                              | Long-term incentive compensation |              | $  | 3            |  |   | $  | 11 | 
|                              | Other                            |              |    | 8            |  |   |    | 9  | 
|                              |                                  |             
|                              |                                  | $            | 11 |              |  | $ | 20 |   
|                              |                                  |             
|                              |                                  |             
|Other Non-Current Liabilities |                                  |              |    |              |  |   |    |   
|                              | Long-term incentive compensation |              | $  | 9            |  |   | $  | 7  | 
|                              | Timber obligations               |              |    | 11           |  |   |    | 12 | 
|                              | Deferred compensation            |              |    | 8            |  |   |    | 14 | 
|                              | Unfunded accrued pension cost    |              |    | 17           |  |   |    | 15 | 
|                              | Other                            |              |    | 9            |  |   |    | 8  | 
|                              |                                  |             
|                              |                                  | $            | 54 |              |  | $ | 56 |   
|                             
|                             



|         |                              
|-------- | -----------------------------
|NOTE 13. | COMMITMENTS AND CONTINGENCIES

Contingencies.The
company is subject to regulations regarding forest and harvest
practices and is, from time to time, involved in various legal
proceedings, including environmental and regulatory matters,
incidental to its business. Moreover, the company is currently
in the early stages of several lawsuits related to property
damage caused by various sources, including fire and flooding
(Property Damage Litigations). The company believes
it is more likely than not that the Property Damage Litigations
will be resolved favorably. However, the final outcome of any
legal proceeding is subject to many variables and cannot be
predicted with any degree of certainty. The company believes
that there are meritorious defenses for these claims and is
vigorously defending these matters.

Environmental
Contingencies.In connection with
the October 6, 2001 merger with The Timber Company, Plum
Creek agreed to indemnify Georgia-Pacific for substantially all
of the liabilities attributed to The Timber Company. During
2003, Georgia-Pacific provided Plum Creek with information about
the existence of mine tailings and approximately
4.5 billion gallons of acidic surface water on
approximately 90 acres in Hot Spring County, Arkansas, on
former Georgia-Pacific properties (Arkansas Environmental
Issue). Barite mining and related activities were
conducted on the site between 1939 and 1981 in part by lessees
of an entity that was acquired by Georgia-Pacific. The site is
currently being investigated and no remediation plan has yet
been approved. No amounts have been accrued for this potential
liability. Furthermore, to the extent Plum Creek is required to
indemnify Georgia-Pacific for its share of the remediation
costs, Plum Creek may be able to recover a portion of its cost
from Georgia-Pacifics insurance policy, or indemnity
obligations of the various lessees that conducted mining
operations on the property, or both.





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PART II/ITEM 8


Unrecorded
Contingencies.The company
believes it will be successful in defending the Property Damage
Litigations and the Arkansas Environmental Issue. However, if
the company is not successful in defending these claims, we
believe the aggregate combined losses for the Property Damage
Litigations and Arkansas Environmental Issue would range between
$0 and $9 million. Other than the Property Damage
Litigations and the Arkansas Environmental Issue, management
currently believes that resolving pending legal proceedings
against the company, individually or in aggregate, will not have
a material adverse impact on our financial position or results
of operations. However, these matters are subject to inherent
uncertainties and managements view on these matters may
change in the future. Were an unfavorable final outcome in one
or multiple legal proceedings to occur, there exists the
possibility of a material adverse impact on our financial
position and the results of operations for the period in which
any unfavorable outcome becomes reasonably estimable.

Contractual
Obligations.The company has
contracted to source logs and supply fiber with customers under
long-term agreements at prevailing market rates. The agreements
range from one to 25 years with renewal options by either
party for periods ranging from five years to 15 additional
years. These agreements expire beginning in 2006 through 2023.

Lease
Commitments.The company leases
buildings and equipment under non-cancelable operating lease
agreements. Operating lease expense was $5 million in 2005,
$3 million in 2004 and $4 million in 2003. The company
leases certain timberlands in which the company acquired title
to the standing timber at the inception of the lease. The
following summarizes the future minimum operating lease payments
and obligations in connection with leasing timberlands at
December 31, 2005(in millions):

|           |  |                  |    |                    |  |   |    | 
|---------- |  | ---------------- | -- | ------------------ |  | - | -- | 
|           |  | Operating Leases |    | Timber Obligations
|          
|          
|          
|          
|2006       |  | $                | 4  |                    |  | $ | 1  | 
|2007       |  |                  | 4  |                    |  |   | 1  | 
|2008       |  |                  | 3  |                    |  |   | 1  | 
|2009       |  |                  | 3  |                    |  |   | 1  | 
|2010       |  |                  | 2  |                    |  |   | 1  | 
|Thereafter |  |                  | 10 |                    |  |   | 6  | 
|           |  |                 
|Total      |  | $                | 26 |                    |  | $ | 11 | 
|          
|          

NOTE 14. SEGMENT INFORMATION

The company is organized into nine business units
on the basis of both product line and geographic region. Each
business unit has a separate management team due to geographic
location, marketing strategies and/or production processes. In
applying SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, these business
units have been aggregated into five reportable segments based
on similar long-term economic characteristics. The
companys reportable segments are: (1) Northern
Resources, (2) Southern Resources, (3) Real Estate,
(4) Manufactured Products and (5) Other.

Northern Resources
Segment.The Northwest Resource
region and the Northeast Resource region are aggregated into the
Northern Resources Segment. The Northern Resources Segment
consists of timberlands located in Maine, Michigan, Montana, New
Hampshire, Oregon, Washington, West Virginia and Wisconsin. The
Northern Resources Segment grows timber for sale primarily in
domestic regional markets. Additionally, some logs are sold in
export markets, mainly Canada. The Northern Resources Segment
sells softwood and hardwood sawlogs and softwood and hardwood
pulpwood. Softwood sawlogs are sold to regional lumber and
plywood manufacturers. Logs harvested in Montana are sold mostly
to our lumber and plywood mills (which are part of the
Manufactured Products Segment). Hardwood sawlogs are sold
primarily to furniture manufacturers. Softwood and hardwood
pulpwood is sold to regional paper and packaging manufacturers.

Southern Resources
Segment.The Southwest Resource
region and the Southeast Resource region are aggregated into the
Southern Resources Segment. The Southern Resources Segment
consists of timberlands located in Alabama, Arkansas, Florida,
Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South
Carolina and Texas. The Southern Resources Segment grows timber
for sale in domestic regional markets. The Southern Resources
Segment





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PART II/ITEM 8


sells primarily softwood sawlogs and pulpwood.
Softwood sawlogs are sold to regional lumber and plywood
manufacturers. Softwood pulpwood is sold to regional paper and
packaging manufacturers. Additionally, the Southern Resources
Segment leases timberlands to third parties on an annual basis
for recreational purposes.


Real Estate
Segment.The Real Estate Segment
consists of sales of higher and better use timberlands and sales
of non-strategic timberlands. We estimate that included in our
approximately 8.2 million acres of timberlands are about
1.3 million acres of higher and better use timberlands,
which are expected to be sold and/or developed over the next
15 years for residential, recreational or conservation
purposes. In addition, the company has approximately
530,000 acres of non-strategic timberlands, which are
expected to be sold over the next five years. In the meantime,
these timberlands continue to be used productively in our
business of growing and selling timber. Included within the
1.3 million acres of higher and better use timberlands are
approximately 225,000 acres that will be developed by the
companys taxable REIT subsidiaries. Properties developed
internally by the company will generally be low-intensity
development limited to obtaining entitlements and investing in
infrastructures such as roads and utilities. Larger and more
complicated projects, such as destination resorts and master
planned communities, will be developed through joint venture
agreements with leading land developers.

Manufactured Products
Segment.The lumber, plywood and
MDF businesses are aggregated into the Manufactured Products
Segment. The Manufactured Products Segment consists of four
lumber mills, two plywood mills, two MDF facilities and one
lumber remanufacturing facility in Montana, and one lumber
remanufacturing facility in Idaho. The lumber facilities produce
boards, studs, and dimension lumber and the panel facilities
produce high-quality plywood and MDF panels. All of these
products are targeted to domestic lumber retailers, home
construction, and industrial customers, and to a lesser extent
for export primarily to Canada. Residual chips are sold to
regional pulp and paper manufacturers. Revenues from
manufactured products by product line were as follows for the
years ended December 31(in millions):

|        |  |      |     |      |  |      |     |  |  |   |     | 
|------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|        |  | 2005 |     | 2004 |  | 2003
|       
|       
|       
|       
|Lumber  |  | $    | 223 |      |  | $    | 235 |  |  | $ | 192 | 
|Plywood |  |      | 144 |      |  |      | 157 |  |  |   | 115 | 
|MDF     |  |      | 137 |      |  |      | 126 |  |  |   | 90  | 
|        |  |     
|Total   |  | $    | 504 |      |  | $    | 518 |  |  | $ | 397 | 
|       
|       

Other
Segment.The Other Segment
consists primarily of income associated with mineral extraction,
natural gas production and communication and transportation
rights of way. Mineral income consists of royalty revenue from
the extraction of oil and gas, natural aggregates and coal.

In the fourth quarter of 2004, Plum Creek sold
certain subsurface property rights (primarily coal reserves,
excluding coalbed methane, oil and gas reserves) in Buchanan
County, Virginia, to Consol Energy, Inc. The company received
proceeds of $23 million in connection with the sale and the
release of certain legal claims, which the company believes
comprised a portion of the proceeds. However, the sale agreement
did not specify an allocation. The net gain from this sale and
settlement of certain legal claims, after reducing the proceeds
for applicable income taxes, was $23 million. During the
first quarter of 2005, we sold our remaining coal reserves for
proceeds of $21 million. The net gain from this sale after
reducing the proceeds for our book basis and applicable income
tax, was $20 million. Prior to these sales, substantially
all of the coal reserves were subject to long-term mineral
leases. For each of the years ended December 31, 2004 and
2003, the Other Segment revenues and operating income included
approximately $1 million from royalties associated with the
mineral leases, and less than $1 million for the year ended
December 31, 2005. These gains have been reported in our
income statement as a separate line item below Income from
Continuing Operations.

Segment data includes external revenues,
intersegment revenues and operating income, as well as export
revenue and depreciation, depletion and amortization. The
company evaluates performance and allocates capital to the
segments based on operating income before interest, unallocated
corporate expenses and taxes. Asset information is not reported
by segment, as the company does not produce such information
internally.





SIXTY-NINE




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##### Table of Contents









PART II/ITEM 8


The table below presents information about
reported segments for the years ended December 31(in millions):

|                                         |  |            |     |            |  |         |     |              |  |        |     |        |  |   |     |   |  |   |    |  |  |   |       | 
|---------------------------------------- |  | ---------- | --- | ---------- |  | ------- | --- | ------------ |  | ------ | --- | ------ |  | - | --- | - |  | - | -- |  |  | - | ----- | 
|                                         |  | Northern   |     | Southern   |  | Real    |     | Manufactured |  |        |     |       
|                                         |  | ResourcesA |     | ResourcesB |  | EstateC |     | ProductsD    |  | OtherE |     | TotalF
|                                        
|                                        
|                                        
|2005                                     |  |            |     |            |  |         |     |              |  |        |     |        |  |   |     |   |  |   |    |  |  |   |       | 
|External revenues                        |  | $          | 263 |            |  | $       | 501 |              |  | $      | 292 |        |  | $ | 504 |   |  | $ | 16 |  |  | $ | 1,576 | 
|Intersegment revenues                    |  |            | 84  |            |  |         |    |              |  |        |    |        |  |   |    |   |  |   |   |  |  |   | 84    | 
|Export revenues                          |  |            | 1   |            |  |         |    |              |  |        |    |        |  |   | 22  |   |  |   |   |  |  |   | 23    | 
|Depreciation, depletion and amortization |  |            | 28  |            |  |         | 52  |              |  |        |    |        |  |   | 29  |   |  |   |   |  |  |   | 109   | 
|Operating income                         |  |            | 102 |            |  |         | 221 |              |  |        | 140 |        |  |   | 30  |   |  |   | 13 |  |  |   | 506   | 
|                                        
|2004                                     |  |            |     |            |  |         |     |              |  |        |     |        |  |   |     |   |  |   |    |  |  |   |       | 
|External revenues                        |  | $          | 235 |            |  | $       | 459 |              |  | $      | 303 |        |  | $ | 518 |   |  | $ | 13 |  |  | $ | 1,528 | 
|Intersegment revenues                    |  |            | 90  |            |  |         |    |              |  |        |    |        |  |   |    |   |  |   |   |  |  |   | 90    | 
|Export revenues                          |  |            | 22  |            |  |         |    |              |  |        |    |        |  |   | 22  |   |  |   |   |  |  |   | 44    | 
|Depreciation, depletion and amortization |  |            | 27  |            |  |         | 48  |              |  |        |    |        |  |   | 37  |   |  |   | 1  |  |  |   | 113   | 
|Operating income                         |  |            | 100 |            |  |         | 207 |              |  |        | 152 |        |  |   | 58  |   |  |   | 9  |  |  |   | 526   | 
|                                        
|2003                                     |  |            |     |            |  |         |     |              |  |        |     |        |  |   |     |   |  |   |    |  |  |   |       | 
|External revenues                        |  | $          | 219 |            |  | $       | 445 |              |  | $      | 124 |        |  | $ | 397 |   |  | $ | 11 |  |  | $ | 1,196 | 
|Intersegment revenues                    |  |            | 90  |            |  |         |    |              |  |        |    |        |  |   |    |   |  |   |   |  |  |   | 90    | 
|Export revenues                          |  |            | 22  |            |  |         |    |              |  |        |    |        |  |   | 14  |   |  |   |   |  |  |   | 36    | 
|Depreciation, depletion and amortization |  |            | 30  |            |  |         | 51  |              |  |        |    |        |  |   | 25  |   |  |   | 1  |  |  |   | 107   | 
|Operating income (loss)                  |  |            | 82  |            |  |         | 216 |              |  |        | 47  |        |  |   | (5  | ) |  |   | 7  |  |  |   | 347   | 
|                                        
|                                        



|  |                                                                                                                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | For the year ended December 31, 2003, the
    Northern Resources segment recorded a loss of $4 million
    related to forest fires, which is included in depreciation,
    depletion and amortization in the financial statements.



|  |                                                                                                                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | For the year ended December 31, 2005, the
    Southern Resources segment recorded a loss of $2 million
    related to hurricane damage, which is included in depreciation,
    depletion and amortization in the financial statements.                                                                              
| 
|C | The company recognized impairment losses on sales
    of timberlands expected to close within a twelve-month period of
    $1 million during 2005, $21 million during 2004, and
    $14 million during 2003. Impairments are recognized as part
    of cost of goods sold and reflected as part of operating income.



|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D | For the year ended December 31, 2004, the
    Manufactured Products segment recorded a $9 million lumber
    assets impairment loss, which is included in depreciation,
    depletion and amortization in the financial statements.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|E | Plum Creek had been a party to a joint operating
    agreement with Geomet, Inc., a coalbed methane developer, with
    whom the company had jointly explored for and developed coalbed
    methane gas found on certain of its timberlands in West Virginia
    and Virginia. During the second quarter of 2004, the company
    sold its working interest in the joint operating agreement to
    Geomet, Inc. for $27 million. The resulting gain of
    $5 million before income taxes is included in Gain on Sale
    of Other Assets in our operating income for 2004. The agreement
    provides for contingent additional sales proceeds of up to
    $3 million payable in 2008. The impact on operating income
    from our working interest in the joint operating agreement
    during the years ended December 31, 2004 and 2003, was less
    than $1 million annually.
| 
|F | Consolidated depreciation, depletion and
    amortization includes unallocated corporate depreciation of
    $4 million for 2005 and $1 million for both 2004 and
    2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

A reconciliation of total operating income to
income before income taxes is presented below for the years
ended December 31(in millions):

|                                         |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                         |  | 2005 |      | 2004 |  | 2003
|                                        
|                                        
|                                        
|                                        
|Total segment operating income           |  | $    | 506  |      |  | $    | 526  |   |  | $ | 347  |  
|Interest expense, net                    |  |      | (109 | )    |  |      | (111 | ) |  |   | (117 | )
|Corporate and other unallocated expenses |  |      | (58  | )    |  |      | (54  | ) |  |   | (44  | )
|Gain on sale of other assets             |  |      |     |      |  |      | 5    |   |  |   |     |  
|                                         |  |     
|Income before income taxes               |  | $    | 339  |      |  | $    | 366  |   |  | $ | 186  |  
|                                        
|                                        





SEVENTY




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##### Table of Contents









PART II/ITEM 8


Intersegment sales prices are determined at least
quarterly, based upon estimated market prices and terms in
effect at the time. Export revenues consist of log sales,
primarily to Japan and Canada, as well as manufactured product
sales primarily to Canada. The company does not hold any
long-lived foreign assets. Segment revenues from sales to a
single customer in excess of 10% of total revenues were as
follows for the years ended December 31(in
millions):

|                      |  |      |     |      |  |      |     |  |  |   |     | 
|--------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                      |  | 2005 |     | 2004 |  | 2003
|                     
|                     
|                     
|                     
|Northern Resources    |  | $    | 7   |      |  | $    | 8   |  |  | $ | 12  | 
|Southern Resources    |  |      | 193 |      |  |      | 144 |  |  |   | 136 | 
|Manufactured Products |  |      |    |      |  |      | 12  |  |  |   | 29  | 
|                      |  |     
|Total                 |  | $    | 200 |      |  | $    | 164 |  |  | $ | 177 | 
|                     
|                     

NOTE 15. SUBSEQUENT EVENTS

On February 7, 2006, our Board of Directors
authorized Plum Creek Timber Company, Inc. to make a dividend
distribution of $0.40 per share. Total dividends
approximated $74 million and will be paid on March 3,
2006, to stockholders of record on February 17, 2006.



|         |                                            
|-------- | -------------------------------------------
|NOTE 16. | UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

|                                        |  |              |      |             |  |             |      |              |  |   |      |  |  |   |      | 
|--------------------------------------- |  | ------------ | ---- | ----------- |  | ----------- | ---- | ------------ |  | - | ---- |  |  | - | ---- | 
|(in millions, except per share amounts) |  | 1st QuarterA |      | 2nd Quarter |  | 3rd Quarter |      | 4th QuarterB
|                                       
|                                       
|                                       
|                                       
|2005                                    |  |              |      |             |  |             |      |              |  |   |      |  |  |   |      | 
|Revenues                                |  | $            | 400  |             |  | $           | 358  |              |  | $ | 427  |  |  | $ | 391  | 
|Gross Profit                            |  |              | 155  |             |  |             | 126  |              |  |   | 140  |  |  |   | 119  | 
|Operating Income                        |  |              | 134  |             |  |             | 102  |              |  |   | 117  |  |  |   | 95   | 
|Net Income                              |  |              | 122  |             |  |             | 69   |              |  |   | 96   |  |  |   | 67   | 
|Net Income per ShareBasicC             |  | $            | 0.67 |             |  | $           | 0.37 |              |  | $ | 0.52 |  |  | $ | 0.36 | 
|Net Income per ShareDilutedC           |  | $            | 0.66 |             |  | $           | 0.37 |              |  | $ | 0.52 |  |  | $ | 0.36 | 
|                                       
|2004                                    |  |              |      |             |  |             |      |              |  |   |      |  |  |   |      | 
|Revenues                                |  | $            | 497  |             |  | $           | 341  |              |  | $ | 363  |  |  | $ | 327  | 
|Gross Profit                            |  |              | 209  |             |  |             | 111  |              |  |   | 137  |  |  |   | 101  | 
|Operating Income                        |  |              | 191  |             |  |             | 94   |              |  |   | 115  |  |  |   | 77   | 
|Net Income                              |  |              | 155  |             |  |             | 57   |              |  |   | 77   |  |  |   | 73   | 
|Net Income per ShareBasicC             |  | $            | 0.85 |             |  | $           | 0.31 |              |  | $ | 0.42 |  |  | $ | 0.40 | 
|Net Income per ShareDilutedC           |  | $            | 0.84 |             |  | $           | 0.31 |              |  | $ | 0.42 |  |  | $ | 0.40 | 
|                                       
|                                       



|  |                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | 2005 first quarter net income includes a
    $20 million, or $0.11 per basic and diluted share,
    Gain on Sale of Properties, net of tax, which was not included
    in Income from Continuing Operations.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | 2005 fourth quarter net income includes a
    $3 million, or $0.02 per basic and diluted share, Gain
    on Sale of Properties, net of tax. 2004 fourth quarter net
    income includes a $23 million, or $0.12 per basic and
    diluted share, Gain on Sale of Properties, net of tax. Neither
    the $3 million gain from 2005 nor the $23 million gain
    from 2004 were included in Income from Continuing Operations.
| 
|C | Net income per share is computed independently
    for each of the quarters presented. Therefore, the sum of the
    quarterly net income per share may not equal the total computed
    for the year.                                                                                                                                                                                                                       





SEVENTY-ONE




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##### Table of Contents



PART II/ITEM 8


PLUM CREEK TIMBER COMPANY, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Plum Creek Timber Company, Inc.


We have audited the accompanying consolidated
balance sheets of Plum Creek Timber Company, Inc. as of
December 31, 2005 and 2004, and the related consolidated
statements of income and cash flows for each of the three years
in the period ended December 31, 2005. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Plum Creek Timber Company,
Inc. at December 31, 2005 and 2004, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting
principles.

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Plum Creek Timber Company,
Inc.s internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our
report dated February 22, 2006 expressed an unqualified
opinion thereon.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Seattle, Washington

February 22, 2006






SEVENTY-TWO




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##### Table of Contents



PART II/ITEM 8





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(continued)

The following consolidated financial statements
relate to Plum Creek Timberlands, L.P., a Delaware Limited
Partnership and a wholly owned subsidiary of Plum Creek Timber
Company, Inc. These financial statements are provided pursuant
to Rule 3-10 of Regulation S-X in connection with the
shelf registration statement on Form S-3 filed in August of
2004 pursuant to which Plum Creek Timberlands, L.P. has
registered and from time to time may offer and sell up to
$400 million of its debt securities. As of
December 31, 2005, Plum Creek Timberlands, L.P. has sold
$300 million of debt securities.




PLUM CREEK TIMBERLANDS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

(in millions)


|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |     |       |     | 
|-------------------------------------- | ----------------------------------- | ------------------------ | ------------------------ | -------- | ----- | -------- | --- | --- | ----- | --- | --- | --- | ----- | --- | 
|                                       |                                     | DEC. 31,                 |                          | DEC. 31, |       | DEC. 31,
|YEAR ENDED                             |                                     | 2005                     |                          | 2004     |       | 2003    
|                                      
|                                      
|                                      
|                                      
|REVENUES:                              |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|                                       | Timber                              |                          | $                        | 764      |       |          | $   | 694 |       |     | $   | 664 |      
|                                       | Real Estate                         |                          |                          | 292      |       |          |     | 303 |       |     |     | 124 |      
|                                       | Manufacturing                       |                          |                          | 504      |       |          |     | 518 |       |     |     | 397 |      
|                                       | Other                               |                          |                          | 16       |       |          |     | 13  |       |     |     | 11  |      
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|                                       |                                     | Total Revenues           |                          |          | 1,576 |          |     |     | 1,528 |     |     |     | 1,196 |    
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|COSTS AND EXPENSES:                    |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|                                      
|                                      
|                                      
|                                      
|                                       | Cost of Goods Sold:                 |                          |                          |          |       |          |     |     |       |     |     |     |      
|                                       |                                     | Timber                   |                          |          | 418   |          |     |     | 368   |     |     |     | 345   |    
|                                       |                                     | Real Estate              |                          |          | 152   |          |     |     | 149   |     |     |     | 77    |    
|                                       |                                     | Manufacturing            |                          |          | 463   |          |     |     | 449   |     |     |     | 390   |    
|                                       |                                     | Other                    |                          |          | 3     |          |     |     | 4     |     |     |     | 4     |    
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|                                       |                                     |                          | Total Cost of Goods Sold |          |       | 1,036    |     |     |       | 970 |     |     |       | 816 | 
|                                       | Selling, General and Administrative |                          |                          | 92       |       |          |     | 86  |       |     |     | 77  |      
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|                                       |                                     | Total Costs and Expenses |                          |          | 1,128 |          |     |     | 1,056 |     |     |     | 893   |    
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|Gain on Sale of Other Assets           |                                     |                          |                         |          |       |          | 5   |     |       |     |    |    
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|Operating Income                       |                                     |                          | 448                      |          |       |          | 477 |     |       |     | 303 |    
|Interest Expense, net                  |                                     |                          | 109                      |          |       |          | 111 |     |       |     | 117 |    
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|Income before Income Taxes             |                                     |                          | 339                      |          |       |          | 366 |     |       |     | 186 |    
|Benefit (Provision) for Income Taxes   |                                     |                          | (8                       | )        |       |          | (27 | )   |       |     | 6   |    
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|Income from Continuing Operations      |                                     |                          | 331                      |          |       |          | 339 |     |       |     | 192 |    
|Gain on Sale of Properties, net of tax |                                     |                          | 23                       |          |       |          | 23  |     |       |     |    |    
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    
|Net Income                             |                                     | $                        | 354                      |          |       | $        | 362 |     |       | $   | 192 |    
|                                       |                                     |                          |                          |          |       |          |     |     |       |     |     |    

See accompanying Notes to Consolidated
Financial Statements





SEVENTY-THREE




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##### Table of Contents



PART II/ITEM 8


PLUM CREEK TIMBERLANDS, L.P.

CONSOLIDATED BALANCE SHEETS

(in millions)


|                                  |                                         |          |       |          |  |  |       |       | 
|--------------------------------- | --------------------------------------- | -------- | ----- | -------- |  |  | ----- | ----- | 
|                                  |                                         | DEC. 31, |       | DEC. 31,
|                                  |                                         | 2005     |       | 2004    
|                                 
|                                 
|                                 
|                                 
|ASSETS                            |                                         |          |       |          |  |  |       |      
|                                 
|                                 
|                                 
|                                 
|Current Assets:                   |                                         |          |       |          |  |  |       |      
|                                  | Cash and Cash Equivalents               |          | $     | 369      |  |  | $     | 347   | 
|                                  | Restricted Advance from Customer        |          |       | 23       |  |  |       | 4     | 
|                                  | Accounts Receivable                     |          |       | 44       |  |  |       | 40    | 
|                                  | Like-Kind Exchange Funds Held in Escrow |          |       | 30       |  |  |       | 11    | 
|                                  | Inventories                             |          |       | 75       |  |  |       | 71    | 
|                                  | Deferred Tax Asset                      |          |       | 17       |  |  |       | 10    | 
|                                  | Other Current Assets                    |          |       | 16       |  |  |       | 14    | 
|                                  |                                         |          |       |          |  |  |       |      
|                                  |                                         |          | 574   |          |  |  | 497   |      
|                                 
|Timber and TimberlandsNet        |                                         |          | 3,961 |          |  |  | 3,595 |      
|Property, Plant and EquipmentNet |                                         |          | 234   |          |  |  | 248   |      
|Investment in Grantor Trusts      |                                         |          | 27    |          |  |  | 41    |      
|Other Assets                      |                                         |          | 18    |          |  |  | 8     |      
|                                  |                                         |          |       |          |  |  |       |      
|                                  | Total Assets                            |          | $     | 4,814    |  |  | $     | 4,389 | 
|                                  |                                         |          |       |          |  |  |       |      
|                                 
|LIABILITIES                       |                                         |          |       |          |  |  |       |      
|                                 
|                                 
|                                 
|                                 
|Current Liabilities:              |                                         |          |       |          |  |  |       |      
|                                  | Current Portion of Long-Term Debt       |          | $     | 161      |  |  | $     | 32    | 
|                                  | Short-Term Debt                         |          |       | 50       |  |  |       |      | 
|                                  | Accounts Payable                        |          |       | 45       |  |  |       | 41    | 
|                                  | Interest Payable                        |          |       | 30       |  |  |       | 28    | 
|                                  | Wages Payable                           |          |       | 25       |  |  |       | 25    | 
|                                  | Taxes Payable                           |          |       | 18       |  |  |       | 22    | 
|                                  | Deferred Revenue                        |          |       | 35       |  |  |       | 16    | 
|                                  | Other Current Liabilities               |          |       | 11       |  |  |       | 20    | 
|                                  |                                         |          |       |          |  |  |       |      
|                                  |                                         |          | 375   |          |  |  | 184   |      
|                                 
|Long-Term Debt                    |                                         |          | 1,524 |          |  |  | 1,405 |      
|Lines of Credit                   |                                         |          | 495   |          |  |  | 448   |      
|Deferred Tax Liability            |                                         |          | 39    |          |  |  | 45    |      
|Other Liabilities                 |                                         |          | 55    |          |  |  | 69    |      
|                                  |                                         |          |       |          |  |  |       |      
|                                  | Total Liabilities                       |          |       | 2,488    |  |  |       | 2,151 | 
|                                 
|Commitments and Contingencies     |                                         |          |       |          |  |  |       |      
|                                 
|EQUITY                            |                                         |          |       |          |  |  |       |      
|                                  | Partners Capital                       |          |       | 2,326    |  |  |       | 2,238 | 
|                                  |                                         |          |       |          |  |  |       |      
|                                  | Total Liabilities and Partners Equity  |          | $     | 4,814    |  |  | $     | 4,389 | 
|                                  |                                         |          |       |          |  |  |       |      

See accompanying Notes to Consolidated
Financial Statements





SEVENTY-FOUR




---



##### Table of Contents



PART II/ITEM 8


PLUM CREEK TIMBERLANDS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS


(in millions)


|                                                        |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |        |     |  
|------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- | -------- | --- | -------- | ---- | ------ | --- | - | ---- | ------ | --- | -
|                                                        |                                                              | DEC. 31,                                                                                                                                                                                   |      | DEC. 31, |     | DEC. 31,
|YEAR ENDED                                              |                                                              | 2005                                                                                                                                                                                       |      | 2004     |     | 2003    
|                                                       
|                                                       
|                                                       
|                                                       
|CASH FLOWS FROM OPERATING ACTIVITIES                    |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Net Income                                                   |                                                                                                                                                                                            | $    | 354      |     |          | $    | 362    |     |   | $    | 192    |    
|                                                        | Adjustments to Reconcile Net Income to                       |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |        |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                              | Net Cash Provided By Operating Activities:                                                                                                                                                 |      |          |     |          |      |        |     |   |      |        |     |  
|                                                        |                                                              | Depreciation, Depletion and Amortization
    (Includes $2 Loss Related to Hurricane in 2005, $9 Lumber Mill
    Impairment Charge in 2004 and $4 Loss Related to Forest Fires in
    2003) |      |          | 113 |          |      |        | 114 |   |      |        | 108 |  
|                                                        |                                                              | Basis of Real Estate Sold (Includes Impairment
    Losses of $1 in 2005, $21 in 2004 and $14 in 2003)                                                                                      |      |          | 124 |          |      |        | 134 |   |      |        | 66  |  
|                                                        |                                                              | Deferred Income Taxes                                                                                                                                                                      |      |          | (13 | )        |      |        | 9   |   |      |        | (7  | )
|                                                        |                                                              | Gain on Sales of Other Assets and Properties                                                                                                                                               |      |          | (24 | )        |      |        | (28 | ) |      |        |    |  
|                                                        |                                                              | Working Capital Changes                                                                                                                                                                    |      |          | (36 | )        |      |        | (12 | ) |      |        | 17  |  
|                                                        |                                                              | Other                                                                                                                                                                                      |      |          | (2  | )        |      |        | 3   |   |      |        | 9   |  
|                                                        |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|NET CASH PROVIDED BY OPERATING ACTIVITIES               |                                                              |                                                                                                                                                                                            | 516  |          |     |          | 582  |        |     |   | 385  |       
|                                                        |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|Cash Flows From Investing Activities                    |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Capital Expenditures (Excluding Timberland
    Acquisitions) |                                                                                                                                                                                            |      | (89      | )   |          |      | (70    | )   |   |      | (84    | )  
|                                                        | Timberlands Acquired                                         |                                                                                                                                                                                            |      | (501     | )   |          |      | (66    | )   |   |      | (162   | )  
|                                                        | Proceeds from Sale of Other Assets and Properties            |                                                                                                                                                                                            |      | 29       |     |          |      | 46     |     |   |      |       |    
|                                                        | Other                                                        |                                                                                                                                                                                            |      | (2       | )   |          |      | (1     | )   |   |      | (1     | )  
|                                                        |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|Net Cash Used In Investing Activities                   |                                                              |                                                                                                                                                                                            | (563 | )        |     |          | (91  | )      |     |   | (247 | )     
|                                                        |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|CASH FLOWS FROM FINANCING ACTIVITIES                    |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Cash Distributions                                           |                                                                                                                                                                                            |      | (271     | )   |          |      | (248   | )   |   |      | (299   | )  
|                                                        | Borrowings on Line of Credit                                 |                                                                                                                                                                                            |      | 2,468    |     |          |      | 2,147  |     |   |      | 1,922  |    
|                                                        | Repayments on Line of Credit                                 |                                                                                                                                                                                            |      | (2,421   | )   |          |      | (2,295 | )   |   |      | (1,997 | )  
|                                                        | Proceeds from Issuance of Short-Term Debt                    |                                                                                                                                                                                            |      | 50       |     |          |      |       |     |   |      |       |    
|                                                        | Proceeds from Issuance of Long-Term Debt                     |                                                                                                                                                                                            |      | 297      |     |          |      |       |     |   |      | 298    |    
|                                                        | Principal Payments and Retirement of Long-Term
    Debt      |                                                                                                                                                                                            |      | (53      | )   |          |      | (33    | )   |   |      | (33    | )  
|                                                        | Other                                                        |                                                                                                                                                                                            |      | (1       | )   |          |      |       |     |   |      |       |    
|                                                        |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|Net Cash Provided By (Used In) Financing
    Activities |                                                              |                                                                                                                                                                                            | 69   |          |     |          | (429 | )      |     |   | (109 | )     
|                                                        |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|Increase In Cash and Cash Equivalents                   |                                                              |                                                                                                                                                                                            | 22   |          |     |          | 62   |        |     |   | 29   |       
|                                                       
|                                                       
|                                                       
|                                                       
|Cash and Cash Equivalents:                              |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Beginning of Year                                            |                                                                                                                                                                                            |      | 347      |     |          |      | 285    |     |   |      | 256    |    
|                                                        |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | End of Year                                                  |                                                                                                                                                                                            | $    | 369      |     |          | $    | 347    |     |   | $    | 285    |    
|                                                        |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|SUPPLEMENTARY CASH FLOW INFORMATION                     |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                       
|                                                       
|                                                       
|                                                       
|Cash Paid (Received) During the Year for:               |                                                              |                                                                                                                                                                                            |      |          |     |          |      |        |     |   |      |       
|                                                        | Interest                                                     |                                                                                                                                                                                            | $    | 114      |     |          | $    | 115    |     |   | $    | 112    |    
|                                                        | Income Taxes  Net                                           |                                                                                                                                                                                            | $    | 25       |     |          | $    | 11     |     |   | $    | (1     | )  

See accompanying Notes to Consolidated
Financial Statements





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##### Table of Contents



PART II/ITEM 8


PLUM CREEK TIMBERLANDS, L.P.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




|        |                    
|------- | -------------------
|NOTE 1. | ACCOUNTING POLICIES

General.Plum
Creek Timberlands, L.P. is a Delaware Limited Partnership and a
wholly owned subsidiary of Plum Creek Timber Company, Inc. Plum
Creek Timber Company, Inc. (Parent) is a Delaware
Corporation and real estate investment trust, or REIT.
References herein to the Operating Partnership,
we, us or our relate to Plum
Creek Timberlands, L.P. and all of its wholly owned consolidated
subsidiaries; references to Plum Creek relate to
Plum Creek Timber Company, Inc. and its wholly owned
subsidiaries.

At December 31, 2005, the Operating
Partnership owned and managed approximately 8.2 million
acres of timberlands in the Northwest, Southern and Northeast
United States, and owned and operated ten wood product
conversion facilities in the Northwest United States. Included
in the 8.2 million acres are about 1.3 million acres
of higher and better use timberlands, which are expected to be
sold and/or developed over the next 15 years for
residential, recreational or conservation purposes. In addition,
the Operating Partnership has approximately 530,000 acres
of non-strategic timberlands, which are expected to be sold over
the next five years. In the meantime, these timberlands continue
to be used productively in our business of growing and selling
timber.

On October 6, 2001, six former subsidiaries
of Georgia-Pacific Corporation (Georgia-Pacific)
collectively referred to as The Timber Company,
merged with and into Plum Creek. The Timber Company held all of
the assets and liabilities attributed to Georgia-Pacifics
timber and timberland business. In the merger, Plum Creek
acquired approximately 3.9 million acres of primarily pine
forests in the southern regions of the United States,
287,000 acres of primarily Douglas-fir forests in Oregon
and 542,000 acres of mixed hardwood forests in the
Appalachian and northeastern regions of the United States for a
purchase price of approximately $3.4 billion. Immediately
following the merger, all assets and liabilities acquired from
The Timber Company were transferred to the Operating Partnership.

Basis of
Presentation.The consolidated
financial statements of the Operating Partnership include the
accounts of Plum Creek Timberlands, L.P. and its subsidiaries.
The Operating Partnership is 100% owned by Plum Creek Timber
Company, Inc. Other than its investment in Plum Creek
Timberlands, L.P. and proceeds from stock option exercises, Plum
Creek Timber Company, Inc. has no independent assets,
liabilities or operations. Intercompany transactions and
accounts between Plum Creek Timberlands, L.P. and its
subsidiaries have been eliminated in consolidation. All
transactions are denominated in United States dollars.

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

Business
Concentrations.Sales of the
Operating Partnerships products are dependent upon the
economic conditions of the housing, repair and remodeling,
industrial, and pulp and paper industries. Changes in these
industries may significantly affect managements estimates
and the Operating Partnerships performance.

Revenue
Recognition.Timber sales
revenues are recognized when legal ownership and the risk of
loss transfer to the purchaser and the quantity sold is
determinable. The Operating Partnership sells timber under
delivered log agreements as well as through sales of standing
timber (or stumpage). For delivered sales, revenue,
including amounts billed for shipping and handling, is
recognized when the log is delivered to the customer. Stumpage
is sold using either pay-as-cut or lump-sum sale agreements.
First, under a pay-as-cut contract, the purchaser acquires the
right to harvest specified timber on a tract, at an agreed-to
price per unit. The sale and any related advances are recognized
as revenues as the purchaser harvests the timber on the tract.
Secondly, under a lump-sum sale, the parties agree to a purchase
price for all the timber available for harvest on a tract of
land. Generally the purchase price is paid when the contract is
signed. Title to the timber and risk of loss transfers to the
buyer as the timber is cut. Therefore, revenue under a lump-sum
sale is recognized each month based on the timber harvested
compared to total estimated timber available to be harvested on
a tract of land over the term of the contract (usually 12 to
18 months). An adjustment may be required at the completion
of the contract to the extent the actual timber harvested was
different than the estimate of timber available for harvest
based on the timber cruise.





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PART II/ITEM 8


Revenues generated from the sale of lumber,
plywood, medium density fiberboard (MDF) and related
by-products, primarily wood chips, and amounts billed for
shipping and handling, are recognized at the time of delivery.
Revenues generated from real estate sales include the sale of
higher and better use timberlands and non-strategic timberlands.
In some of these transactions, the Operating Partnership sold
timberlands that qualified for like-kind (tax-deferred) exchange
treatment under the Internal Revenue Code. Substantially all of
these sales involved a third party intermediary, whereby the
third party intermediary received proceeds related to the
property sold and then reinvested the proceeds in like-kind
property. The proceeds are recorded as revenues when the third
party intermediary receives them.

Revenue from real estate sales is recognized in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 66, Accounting for Sales of Real
Estate. For substantially all of the Operating
Partnerships real estate sales, we receive the entire
consideration in cash at closing (Cash Sales). Also
at closing, the risks and rewards of ownership transfer to the
buyer and we do not have a continuing involvement in any of our
properties after they are sold. The Operating Partnership
recognizes revenue under the full accrual method for Cash Sales
of real estate when the sale is consummated (i.e., at closing).
On occasion the Operating Partnership receives a portion of the
real estate sale consideration in the form of a note receivable.
Such sales represented less than 5% of our revenue from real
estate sales for each of the years in the three-year period
ended December 31, 2005. Under these circumstances, we use
the full accrual method of recognizing revenue if the
buyers initial and continuing investment is adequate;
otherwise, revenue is recognized under the cost recovery method.
Furthermore, the Operating Partnership may occasionally sell
timberlands to a single buyer under a multi-period contract
covering a series of prescheduled closings and/or options. Under
these multi-period contracts, once title and risk of loss have
transferred to the buyer for individual properties, the
properties sold cannot be returned for a refund. However,
deposits for future closings under multi-period contracts may be
refunded under certain circumstances. The Operating Partnership
treats each closing under a multi-period arrangement as a
separate sale and recognizes revenue in accordance with Emerging
Issues Task Force (EITF) No. 00-21, Revenue
Arrangements with Multiple Deliverables. Broker commissions
and closing costs of our Real Estate Segment are included in
cost of goods sold.

Cash and Cash
Equivalents.All highly liquid
investments purchased with an original maturity of three months
or less are considered to be cash equivalents. Substantially all
of the cash and cash equivalents are invested in money market
funds. The Operating Partnership periodically reviews the credit
rating of the financial institution where the money market funds
are maintained. Additionally, the Operating Partnership
considers certain proceeds held in escrow associated with
like-kind exchanges as cash equivalents. See Like-Kind
Exchange Funds Held in Escrow.

Restricted
Cash.The Operating Partnership
has restricted cash related to certain advances from a customer
associated with lump-sum timber sales. The Operating Partnership
reports this cash as Restricted Advance from
Customer until the trees associated with the lump-sum
contract are harvested.

Accounts
Receivable.Accounts receivable
at December 31, 2005 and 2004, is presented net of an
allowance for doubtful accounts of $0.5 million. Accounts
are deemed past due based on payment terms. The allowance for
doubtful accounts represents managements estimate and is
based on historical losses, recent collection history, credit
ratings of individual customers and existing economic
conditions. Delinquent accounts are charged against the
allowance for doubtful accounts to the extent and at the time
they are deemed uncollectible.

Like-Kind Exchange Funds Held in
Escrow.The Operating Partnership
enters into like-kind (tax-deferred) exchange transactions to
acquire and sell assets, principally timberlands. These
transactions include both forward (timberlands sold, followed by
reinvestment of proceeds to acquire timberlands) and reverse
(timberlands purchased, followed by receipt of proceeds from
timberland sales) like-kind exchanges. The Operating Partnership
uses a qualified escrow account to facilitate like-kind exchange
transactions. Funds from forward like-kind exchange transactions
are included as a current asset under the description Like-Kind
Exchange Funds Held in Escrow because the funds are restricted
from being used until the funds are either successfully
reinvested in timber and timberlands or the exchange fails and
the proceeds are distributed to the Operating Partnership. Funds
from reverse like-kind exchange transactions are included in
Cash and Cash Equivalents because these funds are available upon
demand, are not subject to risk of loss and earn interest. At
December 31, 2005, $7 million of cash from reverse
like-kind exchange transactions was included in Cash and Cash
Equivalents. At December 31, 2004, we had no cash in our
escrow account from reverse like-kind exchange transactions.





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##### Table of Contents









PART II/ITEM 8


Grantor
Trusts.The Operating Partnership
has a grantor trust that was established for deferred
compensation and deferred Plum Creek shares. See Note 5 of
the Notes to Financial Statements. Deferred compensation assets,
which include money market and mutual fund investments, are
classified as trading securities and are carried at
market value. Realized gains and losses and changes in
unrealized gains and losses and a corresponding amount of
compensation expense are recorded in the consolidated statement
of income.

Certain deferred compensation obligations are
fixed in shares of common stock of Plum Creek Timber Company,
Inc. At December 31, 2005 and 2004, the Operating
Partnerships grantor trusts held less than
0.1 million and 0.4 million shares, respectively, of
common stock of Plum Creek Timber Company, Inc. These shares, as
well as the underlying obligations, are reported on the
consolidated balance sheet at historic costs and included in
Investment in Grantor Trusts and Other Non-Current Liabilities,
respectively. See Note 5 of the Notes to Financial
Statements.

Furthermore, the Operating Partnership maintains
another grantor trust, which the Operating Partnership uses to
fund its non-qualified pension plan obligation. See Note 7
of the Notes to Financial Statements. Money market and mutual
fund investments held by this trust are classified as
available for sale securities. The investments are
carried at market values on the Operating Partnerships
balance sheet; realized gains and losses are recognized in the
consolidated statement of income; changes in unrealized gains
and losses are recorded as other comprehensive income/loss as a
component of Partners Capital.

Inventories.Logs,
work-in-process and finished goods of the Operating Partnership
are stated at the lower of cost or market on the average cost
method. Supplies inventories are stated at cost. Costs for
manufactured inventories included raw materials, labor,
supplies, energy, depreciation and production overhead. Cost of
log inventories included timber depletion, stumpage, associated
logging and harvesting costs, road costs and production overhead.

Inventories, accounted for using the lower of
average cost or market, consisted of the following (in millions):

|                     |  |              |    |              |  |   |    | 
|-------------------- |  | ------------ | -- | ------------ |  | - | -- | 
|                     |  | December 31, |    | December 31,
|                     |  | 2005         |    | 2004        
|                    
|                    
|                    
|                    
|Raw materials (logs) |  | $            | 21 |              |  | $ | 24 | 
|Work-in-process      |  |              | 4  |              |  |   | 4  | 
|Finished goods       |  |              | 37 |              |  |   | 32 | 
|                     |  |             
|                     |  |              | 62 |              |  |   | 60 | 
|Supplies             |  |              | 13 |              |  |   | 11 | 
|                     |  |             
|Total                |  | $            | 75 |              |  | $ | 71 | 
|                    
|                    

Timber and
Timberlands.Timber and
timberlands, including logging roads, are stated at cost less
accumulated depletion for timber previously harvested and
accumulated road amortization. The Operating Partnership
capitalizes timber and timberland purchases and reforestation
costs and other costs associated with the planting and growing
of timber, such as site preparation, growing or purchases of
seedlings, planting, fertilization, herbicide application and
the thinning of tree stands to improve growth. Timber carrying
costs, such as real estate taxes, insect control, wildlife
control, leases of timberlands (other than lease payments for
the purchase of standing timber, in which case the payments are
capitalized) and forest management personnel salaries and fringe
benefits, are expensed as incurred. Costs of major roads are
capitalized and amortized over 30 years. Costs for roads
that are built to access multiple logging sites over numerous
years are capitalized and amortized over six years. Costs for
roads built to access a single logging site are expensed as
incurred.

Costs attributable to timber harvested, or
depletion, are charged against income as trees are harvested.
Depletion rates are determined annually based on the
relationship between net carrying value of the timber plus
certain capitalizable silviculture costs expected to be incurred
over the harvest cycle and total timber volume estimated to be
available over the harvest cycle. The depletion rate
calculations do not include an estimate for either future
reforestation costs associated with a stands final harvest
or future volume in connection with the replanting of a stand
subsequent to its final harvest. Net carrying value of the
timber and timberlands is used to compute the gain or loss in
connection with timberland sales. There is no book basis
allocated to the sale of conservation easements.

Real Estate
Development.Costs associated
with a specific real estate project are capitalized once we
determine that the project is viable. Both external and internal
costs directly associated with the specific real estate project
are





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##### Table of Contents









PART II/ITEM 8


capitalized. We capitalize improvements and other
development costs, including interest costs and property taxes,
during the development period (capitalized interest and property
taxes were less than $1 million in 2005). General real
estate development costs not related to a specific project and
costs incurred before management has concluded that a project
will be successful (e.g. investigatory costs) are expensed as
incurred. For real estate projects with multiple parcels, we
determine the cost of the individual lots sold by allocating the
historical cost of the land, timber, development and common
construction costs on a relative sales value. Capitalized real
estate development costs included in Timber and Timberlands were
$14 million and $5 million at December 31, 2005
and 2004, respectively.


Property, Plant and
Equipment.Property, plant and
equipment are recorded at cost. Replacements of major units of
property are capitalized, and the replaced properties are
retired. Replacement of minor components of property and repair
and maintenance costs, are charged to expense as incurred.

All property, plant and equipment other than
manufacturing machinery (lumber, plywood and MDF) are
depreciated using the straight-line method over the estimated
useful lives of the related assets. Manufacturing machinery and
equipment are depreciated on a units-of-production basis, which
approximates a straight-line basis. Useful lives are
25 years for land improvements, 20 to 45 years for
buildings, and 3 to 20 years for machinery and equipment.
Leasehold improvements are depreciated over the lease term or
estimated useful life, whichever is shorter. The cost and
related accumulated depreciation of property sold or retired are
removed from the accounts and any gain or loss is recorded.

Shipping and Handling
Costs.Costs incurred for
shipping timber and manufactured products are included in cost
of goods sold.

Stock-Based Compensation
Plans.At December 31, 2005,
the Plum Creek had stock-based employee compensation plans,
which are described more fully in Note 8 of the Notes to
Financial Statements. The cost of these stock-based compensation
plans have been fully allocated to the Operating Partnership.
The Operating Partnership expenses stock-based employee
compensation on a straight-line basis over the vesting period in
accordance with the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation. Under the prospective method adopted by the
Operating Partnership in 2002, stock-based employee compensation
cost is recognized using the fair value method for all employee
awards granted, modified, or settled on or after January 1,
2002. Had the Operating Partnership used the fair value method
of accounting for all stock-based compensation, net income for
2005 would have been the same, net income for 2004 would have
been reduced by $0.3 million, and net income for 2003 would
have been reduced by $0.5 million.

Stock-based employee compensation expense
included in reported income before income taxes was as follows
for the years ended December 31(in millions):

|                                                                                  |  |      |     |      |  |      |     |  |  |   |     | 
|--------------------------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                                                  |  | 2005 |     | 2004 |  | 2003
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Stock options                                                                     |  | $    | 1.9 |      |  | $    | 1.7 |  |  | $ | 0.9 | 
|Value management awards, dividend equivalents,
    and grants of restricted stock |  |      | 2.0 |      |  |      | 1.7 |  |  |   | 3.0 | 
|                                                                                  |  |     
|Total                                                                             |  | $    | 3.9 |      |  | $    | 3.4 |  |  | $ | 3.9 | 
|                                                                                 
|                                                                                 

Value management awards and dividend equivalents
are paid partially in Plum Creek stock and partially in cash,
based on payout elections made by recipients. The Operating
Partnership recorded expense of $4.8 million in 2005,
$9.3 million in 2004, and $2.6 million in 2003 for the
estimated cash portion of these awards. See Note 8 of the
Notes to Financial Statements.

Reclassifications.Certain prior year amounts have been
reclassified to conform to the 2005 presentation. The
reclassifications had no impact on operating income or net
income. Capitalized costs related to real estate development are
included in Timber and Timberlands at December 31, 2005.
Previously, at December 31, 2004, real estate development
costs were included in Property, Plant and Equipment.
Accordingly, $5 million was reclassified at
December 31, 2004 from Property, Plant and Equipment to
Timber and Timberlands.

The Operating Partnership considers cash in its
escrow account from reverse like-kind exchange transactions to
be Cash and Cash Equivalents. At December 31, 2005, the
Operating Partnership classified $7 million in reverse
like-kind exchange funds as Cash and Cash Equivalents.
Accordingly, $14 million was reclassified at
December 31, 2003





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##### Table of Contents









PART II/ITEM 8


from Like-Kind Exchange Funds Held in Escrow to
Cash and Cash Equivalents. The reclassification increased Net
Cash Provided by Operating Activities for the year ended
December 31, 2003 by $14 million and decreased Net
Cash Provided by Operating Activities by $14 million for
the year ended December 31, 2004 in the Consolidated
Statements of Cash Flows.


NEW ACCOUNTING PRONOUNCEMENTS

In December of 2004, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), which is a
revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R)
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS No. 123(R)
is similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
SFAS No. 123(R) must be adopted for fiscal years
beginning after June 15, 2005. Early adoption will be
permitted in periods in which financial statements have not yet
been issued. We adopted SFAS No. 123(R) on
January 1, 2006.

The Operating Partnership adopted the
fair-value-based method of accounting for share-based payments
effective January 1, 2002, using the prospective method
described in SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure. Currently, the Operating Partnership uses the
Black-Scholes-Merton formula to estimate the value of stock
options granted to employees and expects to continue to use this
acceptable option valuation model upon the required adoption of
SFAS No. 123(R) on January 1, 2006. The Operating
Partnership does not expect the expense for stock options
computed in accordance with SFAS No. 123(R) to be
materially different than the expense currently computed under
SFAS No. 123.

SFAS No. 123(R) also requires the
benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. While the
Operating Partnership cannot estimate what those amounts will be
in the future (because they depend on, among other things, when
employees exercise stock options), the amounts of operating cash
flows recognized in prior periods for such excess tax deductions
were immaterial.

In addition to stock options, Plum Creek also
grants restricted stock, and dividend equivalents and value
management awards, a portion of which may be payable in the
common stock of Plum Creek Timber Company, Inc. Grants of both
dividend equivalents and value management awards represent
awards that are classified and accounted for as liabilities
under SFAS No. 123(R). As a result, the expense
recognized over the performance period for both dividend
equivalents and value management awards will equal the fair
value of an award as of the last day of the performance period
times the number of awards that are earned. Furthermore,
SFAS No. 123(R) requires the quarterly expense
recognized during the performance period to be based on the fair
value of dividend equivalents and value management awards as of
the end of the most recent quarter. The Operating Partnership
does not expect the total expense recognized over the
performance period for dividend equivalents and value management
awards computed in accordance with SFAS No. 123(R) to
be materially different than the total expense currently
computed under SFAS No. 123. However, as a result of
the requirement under SFAS No. 123(R) to base the
quarterly expense on the current fair value of dividend
equivalent and value management awards, the quarterly and annual
expense recognized under SFAS No. 123(R) could be
materially different than the quarterly and annual expense we
currently recognize under SFAS No. 123.

SFAS No. 123(R) requires that the total
impact of adopting the standard be accounted for as a cumulative
effect of an accounting change, with the total impact shown on
the income statement net of tax. Based on the provisions of
SFAS No. 123(R), the Operating Partnership anticipates
this cumulative impact to be approximately a $2 million,
net of tax, increase to earnings for the quarter ended
March 31, 2006. The cumulative effect adjustment is
primarily a result of changes in expense related to the fair
value of the dividend equivalent rights and value management
awards.

In November 2004, the FASB issued
SFAS No. 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4(SFAS No. 151). SFAS No. 151
clarifies that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges
and requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production
facilities. The new Statement is





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PART II/ITEM 8


effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does
not expect that adoption of this standard will have a material
impact on the Operating Partnerships financial condition,
results of operations or cash flows.


In March 2005, the FASB issued Financial
Interpretation 47 (FIN 47), which finalized a
proposed interpretation of SFAS No. 143, Accounting
for Conditional Asset Retirement Obligations. The
interpretation addresses the issue of whether
SFAS No. 143 requires an entity to recognize a
liability for a legal obligation to perform asset retirement
when the asset retirement activities are conditional on a future
event, and if so, the timing and valuation of the recognition.
The decision reached by the FASB was that there are no instances
where a law or regulation obligates an entity to perform
retirement activities but then allows the entity to permanently
avoid settling the obligation. The adoption of FIN 47 is
effective for fiscal years ending after December 15, 2005.
The adoption of this standard did not have a material impact on
the Operating Partnerships financial condition, results of
operations or cash flows.

In December 2004, the FASB issued
SFAS No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29(SFAS No. 153). SFAS No. 153
is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets
exchanged. Opinion No. 29 provided an exception to its
basic measurement principle, fair value, for exchanges of
similar production assets. Under Opinion No. 29, an
exchange of a productive asset was based on the recorded amount
of the asset relinquished. The FASB eliminated this exception
and replaced it with an exception for exchanges of nonmonetary
assets that do not have commercial substance. The FASB believes
this Statement produces financial reporting that more faithfully
represents the economics of nonmonetary asset exchange
transactions. The new Statement is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of this standard did not have a
material impact on the Operating Partnerships financial
condition, results of operations or cash flows.



|        |                                                         
|------- | --------------------------------------------------------
|NOTE 2. | TIMBER AND TIMBERLANDS AND PROPERTY, PLANT AND EQUIPMENT

Timber and timberlands consisted of the following
(in millions):

|                             |  |              |       |              |  |   |       | 
|---------------------------- |  | ------------ | ----- | ------------ |  | - | ----- | 
|                             |  | December 31, |       | December 31,
|                             |  | 2005         |       | 2004        
|                            
|                            
|                            
|                            
|Timber and logging roadsnet |  | $            | 2,686 |              |  | $ | 2,367 | 
|Timberlands                  |  |              | 1,275 |              |  |   | 1,228 | 
|                             |  |             
|Timber and Timberlandsnet   |  | $            | 3,961 |              |  | $ | 3,595 | 
|                            
|                            

During 2005, the Operating Partnership acquired
approximately 754,000 acres of timberlands located in
Northern Michigan, Arkansas and Florida for $501 million.
These purchases were financed primarily by using proceeds from
the issuance of publicly traded and private placement debt and
funds from tax-deferred exchanges, and have been accounted for
as asset acquisitions. Timberland dispositions during 2005 were
approximately 232,000 acres, of which 63,000 acres
were located in the Northern Resources Segment and
169,000 acres were located in the Southern Resources
Segment.

During 2004, the Operating Partnership acquired
approximately 78,000 acres of timberlands located primarily
in Arkansas and Maine for $66 million. Timberland
dispositions during the same time period comprised approximately
375,000 acres of which 308,000 were located in the Northern
Resources Segment and 67,000 in the Southern Resources Segment.

During 2004, the Operating Partnership sold
certain subsurface property rights (primarily coal reserves,
excluding coalbed methane, oil and gas reserves) in Buchanan
County, Virginia. During 2005, the remainder of the Operating
Partnerships coal reserves was sold. The sale of these
properties is reflected in our Consolidated Statements of Income
as Gain on Sale of Properties, net of tax. For the year ended
December 31, 2005, we received sales proceeds of
$21 million and, after deducting our book basis of
$1 million, recorded a gain of $20 million. For the
year ended December 31, 2004, we received sales proceeds of
$23 million and, after deducting our book basis of
$0.1 million, recorded a gain of $23 million. See
Note 12 of the Notes to Financial Statements.

The Operating Partnerships Real Estate
Segment consists of sales of higher and better use timberlands
and sales of non-strategic timberland. Occasionally,
non-strategic timberlands are sold at a loss. Each real estate
sale is evaluated





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PART II/ITEM 8


for a potential impairment in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. During 2005, the Operating
Partnership recorded impairment losses of $1 million in
connection with the potential sale of non-strategic timberlands,
which had a book basis of $4 million. During 2004, the
Operating Partnership recorded impairment losses of
$21 million in connection with the potential sale of
non-strategic timberlands, which had a book basis of
$45 million; substantially all of these properties were
sold during 2004. During 2003, the Operating Partnership
recorded impairment losses of $14 million in connection
with the potential sale of non-strategic timberlands, which had
a book basis of $50 million; approximately two-thirds of
the properties were sold during 2003. The impairment losses of
$1 million in 2005, $21 million in 2004, and
$14 million in 2003 are included in Cost of Goods Sold for
Real Estate in our Consolidated Statements of Income.


During 2005, the Operating Partnerships
Southern Resources Segment recognized a $2 million loss,
representing the book basis of the timber volume destroyed as a
result of severe winds from Hurricane Katrina on approximately
350,000 acres in Mississippi. During 2003, the Operating
Partnerships Northern Resources Segment recognized a
$4 million loss, representing the book basis of timber
volume destroyed as a result of forest fires on approximately
45,000 acres in Montana.

Property, plant and equipment consisted of the
following (in millions):

|                                  |  |              |      |              |  |   |      |  
|--------------------------------- |  | ------------ | ---- | ------------ |  | - | ---- | -
|                                  |  | December 31, |      | December 31,
|                                  |  | 2005         |      | 2004        
|                                 
|                                 
|                                 
|Land, buildings and improvements  |  | $            | 84   |              |  | $ | 80   |  
|Machinery and equipment           |  |              | 285  |              |  |   | 277  |  
|                                  |  |             
|                                  |  |              | 369  |              |  |   | 357  |  
|Accumulated depreciation          |  |              | (135 | )            |  |   | (109 | )
|                                  |  |             
|Property, Plant and Equipmentnet |  | $            | 234  |              |  | $ | 248  |  
|                                 
|                                 

During the fourth quarter of 2004, the Operating
Partnership concluded it had excess production capacity at one
of its mills; and therefore, concluded that the mills
long-lived assets were impaired. The Operating Partnership
recorded an impairment loss of $9 million during the fourth
quarter of 2004 by writing the carrying value of the mills
long-lived assets of $14 million down to their estimated
fair value of $5 million. The impairment loss of
$9 million is reflected in the operating income of our
Manufactured Products Segment and included in Cost of Goods Sold
for Manufacturing in our Consolidated Statements of Income. The
estimated fair value was computed based on expected future cash
flows discounted at the risk-free rate of interest.

The Operating Partnership had been a party to a
joint operating agreement with Geomet, Inc., a coalbed methane
developer, with whom the Operating Partnership jointly explored
for and developed coalbed methane gas found on certain of Plum
Creeks timberlands in West Virginia and Virginia. During
2004, the Operating Partnership sold its working interest in the
joint operating agreement to Geomet, Inc. See Note 12 of
the Notes to Financial Statements.



|        |             
|------- | ------------
|NOTE 3. | INCOME TAXES

Plum Creek Timberlands, L.P. is a limited
partnership and therefore, not subject to income tax. Plum Creek
Timberlands, L.P.s taxable income is allocated 100% to its
parent, Plum Creek Timber Company, Inc., which has elected to be
taxed as a REIT under sections 856-860 of the United States
Internal Revenue Code. A REIT is generally not subject to
corporate-level income tax if it distributes 100% of its taxable
income to shareholders and satisfies other organizational and
operational requirements as set forth in the Internal Revenue
Code. If a company fails to qualify as a REIT in any taxable
year, it will be subject to federal income taxes at regular
corporate rates (including any applicable alternative minimum
tax) and may not be able to qualify as a REIT for four
subsequent taxable years.

Plum Creek conducts its activities through
various wholly owned operating partnerships. The activities of
the Operating Partnership consist primarily of sales of timber
under pay-as-cut contracts, and the income from such sales is
not subject to corporate income tax. The book basis of the
Operating Partnerships assets and liabilities exceeds its
tax basis by approximately $1.9 billion at
December 31, 2005. Plum Creeks taxable REIT
subsidiaries file a consolidated federal income tax return.





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PART II/ITEM 8


The Operating Partnerships tax provision
includes all of the tax expense (benefit) associated with Plum
Creeks various taxable REIT subsidiaries, as well as any
tax expense (benefit) incurred by the REIT (e.g. built-in gains
tax).

As a consequence of the October 6, 2001
merger with The Timber Company, which involved merging a taxable
entity into a nontaxable entity, Plum Creek will generally be
subject to corporate-level tax (built-in gains tax) if the
company makes a taxable disposition of certain property acquired
in the merger with The Timber Company within the ten-year period
following the merger date. The built-in-gains tax applies to
gains from such asset sales to the extent that the fair value of
the property exceeds its tax basis at the merger date.
Built-in-gains tax is generally not payable on dispositions of
property to the extent the proceeds from such dispositions are
reinvested in qualifying like-kind replacement property. The
built-in gains tax does not apply to income generated from the
harvesting and sale of timber.

In connection with the merger with The Timber
Company, Plum Creek wrote-off all of The Timber Companys
deferred income tax liability related to timber and timberlands
except for $11 million. The $11 million deferred
income tax liability relates to the book-tax basis difference of
timber and timberlands that were expected to be sold, and
subject to, the built-in gains tax during the ten-year period
ending October 6, 2011. During the period October 6,
2001 to December 31, 2005, the $11 million deferred
income tax liability was reduced by $1 million in
connection with sales of timberlands subject to the built-in
gains tax.

Based on projected timberland sales subject to
the built-in gains tax for the period December 31, 2005 to
October 6, 2011, and the ability to successfully reinvest
proceeds in like-kind properties, Plum Creek estimates it needs
a deferred tax liability of $5 million. Therefore, in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, Plum Creek
remeasured the amount of deferred income taxes needed in
connection with expected sales of timberlands subject to the
built-in gains tax during the period December 31, 2005 to
October 6, 2011. As a result, Plum Creek reduced the
deferred tax liability associated with expected sales of
timberlands subject to the built-in gains tax from
$10 million to $5 million and correspondingly recorded
a deferred tax benefit of $5 million during 2005.

Plum Creek conducts certain non-REIT activities
through various taxable REIT subsidiaries (subchapter
C corporations), which are subject to
corporate-level income tax. These activities include the
Operating Partnerships manufacturing operations, the
harvesting and sale of logs, and the development and/or sale of
some of the Operating Partnerships higher and better use
timberlands.

The provision (benefit) for income taxes consists
of the following for the years ended December 31(in
millions):

|                                                                              |                                                                        |      |   |      |   |      |    |    |   |   |    |     |  
|----------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---- | - | ---- | - | ---- | -- | -- | - | - | -- | --- | -
|                                                                              |                                                                        | 2005 |   | 2004 |   | 2003
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Current income taxes:                                                         |                                                                        |      |   |      |   |      |    |    |   |   |    |    
|                                                                              | Federal                                                                |      | $ | 17   |   |      | $  | 15 |   |   | $  | 1   |  
|                                                                              | State                                                                  |      |   | 3    |   |      |    | 3  |   |   |    |    |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Deferred income taxes:                                                        |                                                                        |      |   |      |   |      |    |    |   |   |    |    
|                                                                              | Federal                                                                |      |   | (6   | ) |      |    | (7 | ) |   |    | 4   |  
|                                                                              | State                                                                  |      |   | (1   | ) |      |    | (1 | ) |   |    | (1  | )
|                                                                              | Benefit from remeasurement of built-in gain
    deferred tax liability |      |   | (5   | ) |      |    |   |   |   |    |    |  
|                                                                              | Utilization (benefit) of operating loss
    carryforwards              |      |   |     |   |      |    | 17 |   |   |    | (10 | )
|                                                                              |                                                                        |     
|Provision (benefit) for income taxes on income
    from continuing operations |                                                                        | $    | 8 |      |   | $    | 27 |    |   | $ | (6 | )  
|                                                                             
|                                                                             





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PART II/ITEM 8


The federal statutory income tax rate was 35%.
The income generated by the activities of the Operating
Partnership is generally not subject to federal and state income
tax. The provision for income taxes is reconciled as follows to
the federal statutory rate for the years ended
December 31(in millions):

|                                                                                                                   |  |      |      |      |  |      |      |   |  |   |     |  
|------------------------------------------------------------------------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | --- | -
|                                                                                                                   |  | 2005 |      | 2004 |  | 2003
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Provision for income taxes on income from
    continuing operations computed
    at the Federal statutory tax rate |  | $    | 119  |      |  | $    | 128  |   |  | $ | 65  |  
|Partnership income not subject to Federal tax                                                                      |  |      | (101 | )    |  |      | (101 | ) |  |   | (68 | )
|State income taxes, net of Federal benefit                                                                         |  |      | 1    |      |  |      | 4    |   |  |   | (1  | )
|Benefit from remeasurement of built-in gains
    deferred tax liability                                            |  |      | (5   | )    |  |      |     |   |  |   |    |  
|Permanent book-tax differences                                                                                     |  |      | (6   | )    |  |      | (4   | ) |  |   | (2  | )
|                                                                                                                   |  |     
|Provision (benefit) for income taxes on income
    from continuing operations                                      |  | $    | 8    |      |  | $    | 27   |   |  | $ | (6  | )
|                                                                                                                  
|                                                                                                                  

For the year ended December 31, 2005,
$8 million of income tax expense was allocated to Income
from Continuing Operations. For the year ended December 31,
2004, $27 million of income tax expense was allocated to
Income from Continuing Operations.

Deferred income taxes are provided for the
temporary differences between the financial reporting basis and
tax basis for the assets and liabilities of our various taxable
REIT subsidiaries and for the assets of the REITs
operating partnerships that are subject to built-in gains. The
components of net deferred income tax liabilities are as follows
(in millions):

|                                   |                             |              |     |              |   |   |     |     |  
|---------------------------------- | --------------------------- | ------------ | --- | ------------ | - | - | --- | --- | -
|                                   |                             | December 31, |     | December 31,
|                                   |                             | 2005         |     | 2004        
|                                  
|                                  
|                                  
|                                  
|Deferred income tax assets:        |                             |              |     |              |   |   |     |    
|                                   | Accrued compensation        |              | $   | 12           |   |   | $   | 13  |  
|                                   | Deferred revenue            |              |     | 9            |   |   |     | 2   |  
|                                   | Timber and timberlands      |              |     | 1            |   |   |     |    |  
|                                   | Other accruals and reserves |              |     | 8            |   |   |     | 7   |  
|                                   |                             |             
|                                   |                             |              | 30  |              |   |   | 22  |    
|                                   |                             |             
|Deferred income tax liabilities:   |                             |              |     |              |   |   |     |    
|                                   | Machinery and equipment     |              |     | (52          | ) |   |     | (54 | )
|                                   | Timber and timberlands      |              |     |             |   |   |     | (3  | )
|                                   |                             |             
|                                   |                             |              | (52 | )            |   |   | (57 | )  
|                                   |                             |             
|Deferred income tax liability, net |                             | $            | (22 | )            |   | $ | (35 | )  
|                                  
|                                  

Deferred income tax liabilities at
December 31, 2005 and 2004, are net of deferred tax assets
of $17 million and $10 million, respectively, included
in current assets. During 2004, the Plum Creek utilized
$45 million of net operating loss carryforwards. Plum Creek
had no net operating loss carryforwards at December 31,
2005 or December 31, 2004.

Plum Creek filed its federal income tax return as
part of Georgia-Pacifics consolidated income tax return
for all tax years through the date of the merger with The Timber
Company on October 6, 2001. Under the agreement governing
the terms of the merger with The Timber Company, Plum Creek
remains liable to Georgia-Pacific for any additional tax that
would result from audit adjustments by the Internal Revenue
Service (the Service) and by State and Local Taxing
Authorities. The Service has completed all examinations of
Georgia-Pacifics consolidated income tax returns through
2000. Georgia-Pacifics consolidated income tax return for
2001 is currently under examination. Additionally, the Service
has completed examinations of the federal income tax return of
Plum Creek Timber Company, Inc. and the consolidated federal
income tax return of the taxable REIT subsidiaries for the year
2001. Plum Creek has no open tax years prior to 2002.





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PART II/ITEM 8




|        |           
|------- | ----------
|NOTE 4. | BORROWINGS

Long-term debt consists of the following (in
millions):

|                                                                                                                                                              |  |              |       |              |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ------------ |  | - | ----- | -
|                                                                                                                                                              |  | December 31, |       | December 31,
|                                                                                                                                                              |  | 2005         |       | 2004        
|                                                                                                                                                             
|                                                                                                                                                             
|                                                                                                                                                             
|                                                                                                                                                             
|Senior Notes due 2007, 11.125% plus unamortized
    premium of $1.5 at 12/31/05, effective rate of 6.19%                                                      |  | $            | 30    |              |  | $ | 46    |  
|First Mortgage Notes due 2007, 11.125% plus
    unamortized premium of $1.3 at 12/31/05, effective rate of 6.19%                                              |  |              | 27    |              |  |   | 41    |  
|Senior Notes due 2007, 5.31%                                                                                                                                  |  |              | 25    |              |  |   | 25    |  
|Senior Notes due 2009, 8.73% plus unamortized
    premium of $5.4 at 12/31/05, effective rate of 7.55%                                                        |  |              | 155   |              |  |   | 157   |  
|Senior Notes due 2011, mature serially 2007 to
    2011, 7.62% to 7.83%, plus unamortized premium of $1.0 at
    12/31/05, effective rates of 6.96% to 7.84%  |  |              | 173   |              |  |   | 173   |  
|Senior Notes due 2013, mature serially 2008 to
    2013, 4.96% to 6.18%                                                                                       |  |              | 280   |              |  |   | 280   |  
|Senior Notes due 2013, mature serially 2006 to
    2013, 6.96% to 7.76%, less unamortized discount of $4.9 at
    12/31/05, effective rates of 6.95% to 8.04% |  |              | 495   |              |  |   | 494   |  
|Senior Notes due 2015, 5.875% less unamortized
    discount of $0.8 at 12/31/05                                                                               |  |              | 299   |              |  |   |      |  
|Senior Notes due 2016, mature serially 2006 to
    2016, 7.74% to 8.05%, plus unamortized premium of $0.7 at
    12/31/05, effective rates of 6.96% to 8.04%  |  |              | 201   |              |  |   | 201   |  
|Senior Notes due 2008, 3.5% at 12/31/04, based on
    3-month LIBOR plus 1.445%, retired 2005                                                                 |  |              |      |              |  |   | 20    |  
|                                                                                                                                                              |  |             
|Total Long-term Debt                                                                                                                                          |  | $            | 1,685 |              |  | $ | 1,437 |  
|Less: Current Portion                                                                                                                                         |  |              | (161  | )            |  |   | (32   | )
|                                                                                                                                                              |  |             
|Long-term Portion                                                                                                                                             |  | $            | 1,524 |              |  | $ | 1,405 |  
|                                                                                                                                                             
|                                                                                                                                                             

The Operating Partnership has a $650 million
facility revolving line of credit maturing on January 15,
2009. As of December 31, 2005, the weighted-average
interest rate for the line of credit was 5.14%. The interest
rate on the line of credit is based on LIBOR plus 0.875% and
includes facility fees. This rate can range from LIBOR plus
0.75% to LIBOR plus 1.625% depending on our financial results.
Subject to customary covenants, the line of credit allows for
borrowings from time to time up to $650 million, including
up to $50 million of standby letters of credit. Borrowings
on the line of credit fluctuate daily, based on cash needs. As
of December 31, 2005, we had $495 million of
borrowings and $6 million of standby letters of credit
outstanding; $149 million remained available for borrowing
under our line of credit. As of December 31, 2004, we had
$448 million of borrowings and $6 million of standby
letters of credit outstanding. As of January 6, 2006,
$398 million of the borrowings under our line of credit was
repaid.

In May of 2005, the Operating Partnership entered
into a $50 million one-year term loan agreement to finance
the acquisition of approximately 35,000 acres of Florida
timberlands. As of December 31, 2005, the interest rate for
the term loan was 4.88%, which is based on LIBOR plus 0.5%. This
rate can range from LIBOR plus 0.4% to LIBOR plus 1.075%
depending on our financial results.

In April of 2005, the Operating Partnership
retired its $20 million variable rate senior note bearing
interest at 3-month LIBOR plus 1.445% due in 2008 prior to its
maturity using funds available under the revolving line of
credit. Furthermore, in June 2005, the Operating Partnership
made principal payments totaling $27 million on borrowings
due under the 1989 senior and first mortgage notes bearing
interest at 11.125%.

In August of 2004, Plum Creek filed with the
Securities and Exchange Commission a shelf registration
statement under which the Operating Partnership, may from time
to time, offer and sell debt securities of up to a total amount
of $400 million. At December 31, 2005, under the
Operating Partnerships shelf registration statement,
$100 million remained available for issuance of debt
securities at Plum Creek Timberlands, L.P.

In November of 2005, the Operating Partnership
issued $300 million aggregate principal amount of its
senior notes with a coupon rate of 5.875% at a market price of
99.731% of the principal amount. The net proceeds of





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PART II/ITEM 8


$297 million were used primarily to purchase
timberlands (see Note 2 of the Notes to Financial
Statements). The notes, issued under the Operating
Partnerships shelf registration statement, mature in 2015.
The Senior Notes due 2015 are fully and unconditionally
guaranteed by Plum Creek.


The senior notes due 2015 are structurally
subordinated to all unsecured debt and liabilities of the
Operating Partnerships subsidiaries, and junior in right
of payment to secured debt of the Operating Partnerships
subsidiaries to the extent of the value of the assets secured by
such debt. At December 31, 2005, the total amount of
unsecured debt and liabilities of the Operating
Partnerships subsidiaries was approximately
$867 million, and the total amount of secured debt of the
Operating Partnerships subsidiaries was approximately
$27 million, representing mortgage notes secured by certain
manufacturing assets. In the event of insolvency, bankruptcy,
liquidation, reorganization, dissolution, winding up of the
Operating Partnerships business or other similar process,
the assets of the Operating Partnerships subsidiaries will
be available to pay the amounts due on the senior notes due 2015
only after the secured and unsecured indebtedness of the
Operating Partnerships subsidiaries has been repaid in
full.

The Senior Notes (excluding the Senior Notes due
2011 and the Senior Notes due 2015) and the First Mortgage Notes
are redeemable prior to maturity subject to a premium on
redemption, which is based upon interest rates of United States
Treasury securities having similar average maturities as these
notes. The premium that would have been due upon early
retirement approximated $148 million at December 31,
2005, and $178 million at December 31, 2004. The
Senior Notes are unsecured. The First Mortgage Notes are
collateralized by substantially all of the property, plant and
equipment of the lumber, plywood and MDF manufacturing
facilities. The Senior Notes due 2011 are not redeemable prior
to maturity.

The aggregate maturities on all debt agreements
and the line of credit are as follows as of December 31,
2005(in millions):

|           |  |                 |       |                |  |       |     |  |  |   |       | 
|---------- |  | --------------- | ----- | -------------- |  | ----- | --- |  |  | - | ----- | 
|Maturity   |  | Debt Agreements |       | Line of Credit |  | Total
|          
|          
|          
|          
|2006       |  | $               | 211   |                |  | $     |    |  |  | $ | 211   | 
|2007       |  |                 | 125   |                |  |       |    |  |  |   | 125   | 
|2008       |  |                 | 148   |                |  |       |    |  |  |   | 148   | 
|2009       |  |                 | 200   |                |  |       | 495 |  |  |   | 695   | 
|2010       |  |                 | 58    |                |  |       |    |  |  |   | 58    | 
|Thereafter |  |                 | 993   |                |  |       |    |  |  |   | 993   | 
|           |  |                
|Total      |  | $               | 1,735 |                |  | $     | 495 |  |  | $ | 2,230 | 
|          
|          

The Operating Partnerships borrowing
agreements contain various restrictive covenants, including
limitations on harvest levels, sales of assets, the incurrence
of indebtedness and making restricted payments (such as payments
of cash dividends or stock repurchases). The borrowing
agreements limit our ability to make restricted payments (see
Note 6 of the Notes to Financial Statements) based on
available cash, which is generally our net income (excluding
gains on the sale of capital assets) after adjusting for
non-cash charges (such as depreciation and depletion), changes
in various reserves, less capital expenditures and principal
payments on indebtedness that are not financed. Additionally,
the amount of available cash may be increased by the amount of
proceeds from the sale of higher and better use properties and,
under certain circumstances, by 50% of the amount of net
proceeds from the sale of other assets. Furthermore, our line of
credit requires that we maintain certain interest coverage and
maximum leverage ratios. The Operating Partnership was in
compliance with all of our borrowing agreement covenants as of
December 31, 2005.



|        |                      
|------- | ---------------------
|NOTE 5. | FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents
and notes receivable approximate fair value due to the
short-term maturities of these instruments. The estimated fair
value of the Operating Partnerships debt was approximately
$2.32 billion and $2.01 billion at December 31,
2005 and 2004, respectively, and the carrying amount was
$2.23 billion and $1.89 billion at December 31,
2005 and 2004, respectively. The fair value of the Operating
Partnerships publicly-traded debt (i.e. Senior Notes due
2015) is estimated using market quotes; the fair value of the
remainder of Operating Partnerships debt is estimated
using current interest rates for similar obligations with like
maturities.





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PART II/ITEM 8


Certain investments in the grantor trusts relate
to the Operating Partnerships non-qualified pension plans
and are classified as available-for-sale securities. The
Operating Partnership has invested in various money market, debt
and equity mutual funds. The Operating Partnership plans to use
these investments to fund its non-qualified pension obligations.
The fair value of these investments was $18 million and
$15 million at December 31, 2005 and 2004,
respectively. Unrealized holding gains and losses are included
as a component of accumulated other comprehensive income, unless
a permanent impairment has occurred, which is then charged to
expense. Unrealized holding gains relating to mutual fund
investments were approximately $2 million at both
December 31, 2005 and December 31, 2004. The Operating
Partnership records changes in unrealized holding gains in Other
Comprehensive Income. Realized gains and losses were less than
$1 million in 2005, 2004, and 2003. See Note 7 of the
Notes to Financial Statements for discussion of the Operating
Partnerships Pension Plans.

Certain investments in the grantor trusts relate
to the Operating Partnerships deferred compensation plans
and are classified as trading securities. Deferred compensation
amounts are invested in various money market, debt and equity
mutual funds. The Operating Partnership plans to use these
investments to fund certain deferred compensation. The fair
value of these investments was $9 million and
$26 million at December 31, 2005 and 2004,
respectively. Unrealized holding gains related to mutual fund
investments were $1 million at December 31, 2005. The
change in unrealized holding gains or losses has been recognized
in the Operating Partnerships consolidated statement of
income resulting in losses of less than $1 million in 2005,
and gains of $1 million in 2004 and $2 million in
2003. Realized gains and losses were less than $1 million
in 2005, 2004, and 2003. Deferred compensation obligations are
included in Other Liabilities and were $9 million and
$27 million at December 31, 2005 and 2004,
respectively.



|        |                  
|------- | -----------------
|NOTE 6. | PARTNERS CAPITAL

The changes in Partners Capital are as
follows for the years ended December 31 (in
millions):

|                                  |  |      |       |   |      |   |       |      |  |   |       |  
|--------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                  |  | 2005 |       |   | 2004 |   |       | 2003 | 
|                                 
|                                  | 
|                                 
|                                  | 
|Beginning of Period               |  | $    | 2,238 |   |      | $ | 2,119 |      |  | $ | 2,222 |  
|Net Income                        |  |      | 354   |   |      |   | 362   |      |  |   | 192   |  
|Distributions to Parent           |  |      | (271  | ) |      |   | (248  | )    |  |   | (299  | )
|Capital Contributions from Parent |  |      | 5     |   |      |   | 5     |      |  |   | 4     |  
|                                  |  |     
|End of Period                     |  | $    | 2,326 |   |      | $ | 2,238 |      |  | $ | 2,119 |  
|                                 
|                                 

Under the terms of our note agreements and line
of credit (see Note 4 of the Notes to Financial
Statements), the Operating Partnership is restricted from
transferring assets and funds in the form of loans, advances or
cash dividends to Plum Creek Timber Company, Inc. Subject to
certain restrictions, the Operating Partnership can make loans
or advances to Plum Creek Timber Company, Inc. Based on these
provisions, the Operating Partnership could distribute or
advance the cash on its balance sheet as of December 31,
2005, or $369 million, all of which is considered
unrestricted assets. At December 31, 2005, the Partnership
and its consolidated subsidiaries had net assets of
$2,326 million of which $1,957 million was restricted
from being transferred by the Operating Partnership to Plum
Creek Timber Company, Inc.



|        |                                      
|------- | -------------------------------------
|NOTE 7. | EMPLOYEE PENSION AND RETIREMENT PLANS

Pension
Plan.Plum Creek Timber Company,
Inc. sponsors a defined benefit pension plans that cover
substantially all employees of the Operating Partnership.
Therefore, all employee pension and retirement plan assets,
obligations and costs are allocated to the Operating
Partnership. The Operating Partnership uses a December 31
measurement





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##### Table of Contents









PART II/ITEM 8


date for its pension plans. The following tables
provide a reconciliation of benefit obligations, plan assets,
and funded status of the plans for the years ended
December 31(in millions):


|                                                 |                                                |      |     |     |      |   |    |     | 
|------------------------------------------------ | ---------------------------------------------- | ---- | --- | --- | ---- | - | -- | --- | 
|                                                 |                                                | 2005 |     |     | 2004 |  
|                                                
|                                                 |                                               
|                                                
|                                                 |                                               
|                                                
|                                                
|                                                
|                                                
|Change in benefit obligation                     |                                                |      |     |     |      |   |    |    
|Benefit obligation at beginning of period        |                                                | $    | 107 |     |      | $ | 95 |    
|Service cost                                     |                                                |      | 6   |     |      |   | 6  |    
|Interest cost                                    |                                                |      | 6   |     |      |   | 6  |    
|Actuarial loss                                   |                                                |      | 4   |     |      |   | 6  |    
|Benefits paid                                    |                                                |      | (7  | )   |      |   | (6 | )  
|                                                 |                                                |     
|                                                 | Benefit obligation at end of period            |      | $   | 116 |      |   | $  | 107 | 
|                                                 |                                                |     
|                                                 |                                                |     
|Change in plan assets                            |                                                |      |     |     |      |   |    |    
|Fair value of plan assets at beginning of period |                                                | $    | 75  |     |      | $ | 65 |    
|Actual return on plan assets                     |                                                |      | 5   |     |      |   | 7  |    
|Employer contributions                           |                                                |      | 9   |     |      |   | 9  |    
|Benefits paid                                    |                                                |      | (7  | )   |      |   | (6 | )  
|                                                 |                                                |     
|                                                 | Fair value of plan assets at end of
    period |      | $   | 82  |      |   | $  | 75  | 
|                                                
|                                                

The funded status is set forth in the following
table (in millions):

|                                |                               |              |     |              |   |   |     |     |  
|------------------------------- | ----------------------------- | ------------ | --- | ------------ | - | - | --- | --- | -
|                                |                               | December 31, |     | December 31,
|                                |                               | 2005         |     | 2004        
|                               
|                               
|                               
|                               
|Funded status                   |                               | $            | (35 | )            |   | $ | (32 | )  
|Unrecognized net actuarial loss |                               |              | 20  |              |   |   | 17  |    
|Unrecognized prior service cost |                               |              | 1   |              |   |   | 1   |    
|                                |                               |             
|                                | Unfunded accrued pension cost |              | $   | (14          | ) |   | $   | (14 | )
|                               
|                               

The unfunded accrued pension cost at
December 31, 2005, consists of accrued pension liability of
$17 million for the non-qualified pension plans and
$3 million of prepaid pension cost for the qualified
pension plan. The unfunded accrued pension cost at
December 31, 2004, consists of accrued pension liability of
$15 million for the non-qualified pension plans and
$1 million of prepared pension cost for the qualified
pension plan.

The components of pension cost were as follows
for the years ended December 31 (in millions):

|                               |                    |      |    |      |  |      |    |   |  |   |    |   | 
|------------------------------ | ------------------ | ---- | -- | ---- |  | ---- | -- | - |  | - | -- | - | 
|                               |                    | 2005 |    | 2004 |  | 2003
|                              
|                              
|                              
|                              
|Service cost                   |                    | $    | 6  |      |  | $    | 6  |   |  | $ | 5  |  
|Interest cost                  |                    |      | 6  |      |  |      | 6  |   |  |   | 6  |  
|Expected return on plan assets |                    |      | (5 | )    |  |      | (5 | ) |  |   | (5 | )
|Recognized actuarial loss      |                    |      | 2  |      |  |      |   |   |  |   |   |  
|                               |                    |     
|                               | Total pension cost |      | $  | 9    |  |      | $  | 7 |  |   | $  | 6 | 
|                              
|                              

Most of the Operating Partnerships salaried
and all hourly employees who complete one year of service in
which they work at least 1,000 hours are eligible to
participate in the plan. Participants vest after five years of
service. The cash balance benefits for salaried employees is
determined based primarily on certain percentages of
compensation, age, years of service and interest accrued based
on the 30-year treasury bond rate. Participants who were
employees of the Operating Partnership on September 1,
2000, earn benefits based on the greater of the cash balance
formula or a monthly pension benefit that is principally based
on highest monthly average earnings during any consecutive
sixty-month out of 120-month period and the number of years of
service credit. The benefits of hourly employees are generally
based on a fixed amount per year of service.





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##### Table of Contents









PART II/ITEM 8


The Operating Partnership maintains a qualified
defined benefit pension plan and two supplemental
(non-qualified) defined benefit pension plans. The Operating
Partnerships contributions to these plans vary from year
to year. It is the Operating Partnerships policy to fund
the qualified plan annually such that the fair value of plan
assets equals or exceeds the actuarially computed accumulated
benefit obligation (the approximate actuarially computed current
pension obligation if the plan was discontinued). At
December 31, 2005, the fair value of plan assets for the
qualified plan was $82 million and its related accumulated
benefit obligation was $79 million. At December 31,
2004, the fair value of plan assets for the qualified plan was
$75 million and its related accumulated benefit obligation
was $73 million.

The Operating Partnership has the same funding
policy for the non-qualified plans. However, assets related to
the non-qualified plans are held in a grantor trust and are
subject to the claims of creditors in the event of bankruptcy.
As a result, pension assets for the non-qualified plans are not
considered plan assets, and therefore, have not been netted
against our pension liability. Pension assets for the
non-qualified plans are included in Investment in Grantor
Trusts in our balance sheet, and the related pension
liability is included in Other Liabilities in our
balance sheet. At December 31, 2005 and 2004, the
accumulated benefit obligation for the non-qualified plans was
$17 million and $15 million, respectively. The fair
value of assets held in a grantor trust associated with the
non-qualified plans was $18 million at December 31,
2005, and $15 million at December 31, 2004.

As a result of the Operating Partnerships
funding policy, annual qualified pension contributions and
grantor trust funding are significantly impacted by investment
returns and changes in interest rates. Based on current interest
rates and expected investment returns, the Operating Partnership
expects 2006 contributions to the qualified pension plan to
range between $3 million and $8 million. Additionally,
during 2006 the Operating Partnership expects to contribute
between $1 million and $3 million to its grantor trust
associated with the non-qualified plans.

The following table presents expected future
benefit payments projected based on the same assumptions used by
the Operating Partnership to measure the benefit obligation and
estimate future employee service (in millions):

|                  |  |                   |    | 
|----------------- |  | ----------------- | -- | 
|                  |  | Projected benefit
|Year              |  | payments         
|                 
|                 
|                 
|                 
|2006              |  | $                 | 8  | 
|2007              |  |                   | 11 | 
|2008              |  |                   | 11 | 
|2009              |  |                   | 11 | 
|2010              |  |                   | 11 | 
|2011 through 2015 |  |                   | 61 | 
|                 
|                 

As of year-end, plan assets were allocated as
follows:

|                                                        |  |              |     |              |  |  |     |  
|------------------------------------------------------- |  | ------------ | --- | ------------ |  |  | --- | -
|                                                        |  | December 31, |     | December 31,
|                                                        |  | 2005         |     | 2004        
|                                                       
|                                                       
|                                                       
|                                                       
|Large Capitalization Domestic Equities                  |  |              | 30  | %            |  |  | 37  | %
|Small and Mid-Size Capitalization Domestic
    Equities |  |              | 11  | %            |  |  | 14  | %
|International Equities                                  |  |              | 14  | %            |  |  | 10  | %
|Fixed Income                                            |  |              | 32  | %            |  |  | 28  | %
|Hedge Funds                                             |  |              | 10  | %            |  |  | 10  | %
|Cash                                                    |  |              | 3   | %            |  |  | 1   | %
|                                                        |  |             
|Total                                                   |  |              | 100 | %            |  |  | 100 | %
|                                                       
|                                                       





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##### Table of Contents









PART II/ITEM 8


It is the Operating Partnerships investment
policy to achieve maximum returns at a reasonable risk for
pension assets over a full market cycle. The Operating
Partnership uses eight fund managers to capture favorable
returns in various asset classes and to diversify risk. Target
allocations for the various asset classes are as follows:

|                                                        |  |  |            | 
|------------------------------------------------------- |  |  | ---------- | 
|                                                       
|                                                       
|Large Capitalization Domestic Equities                  |  |  | 25% to 37% | 
|Small and Mid-Size Capitalization Domestic
    Equities |  |  | 8% to 14%  | 
|International Equities                                  |  |  | 12% to 16% | 
|Fixed Income                                            |  |  | 31% to 37% | 
|Hedge Funds                                             |  |  | 8% to 12%  | 
|                                                       
|                                                       

Pension assets are analyzed at least quarterly
and rebalanced as needed to maintain the above target
allocations. To further reduce risk, fund managers are required
to invest in a diversified portfolio. No more than 5% of an
equity portfolio can be invested in a single company, and fund
managers are expected to be well diversified with respect to
industry and economic sectors. No more than 10% of a fixed
income portfolio can be invested in a single issuer (other than
U.S. treasuries). Equity investments are limited to common
stocks, common stock equivalents and preferred stock. Fixed
income investments are limited to U.S. treasuries, agencies
of the U.S. Government, domestic corporations,
municipalities, domestic banks, and other U.S. financial
institutions. Furthermore, hedge funds are used to reduce market
risk and generate absolute returns regardless of market
direction by employing limited use of derivative instruments,
selling securities short, and buying and selling futures and
options contracts.

Over a full market cycle, the investment goal for
large capitalization domestic equities and fixed income
investments is to exceed the applicable benchmark (e.g., S&P
500 Index) by one-half of one percent per annum, and the
investment goal for small and mid-size capitalization domestic
equities and international equities is to exceed the applicable
benchmark (e.g., Russell 2000 Value Index) by one percent. The
investment goals are net of related fees.

Weighted-average assumptions used to determine
benefit obligation:

|                              |  |              |      |              |  |  |      |  
|----------------------------- |  | ------------ | ---- | ------------ |  |  | ---- | -
|                              |  | December 31, |      | December 31,
|                              |  | 2005         |      | 2004        
|                             
|                             
|                             
|                             
|Discount rate                 |  |              | 5.75 | %            |  |  | 5.75 | %
|Rate of compensation increase |  |              | 3.7  | %            |  |  | 3.7  | %
|                             
|                             

Weighted-average assumptions used to determine
net periodic benefit cost for the years ended
December 31:

|                                         |  |      |      |      |  |  |      |  
|---------------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                                         |  | 2005 |      | 2004
|                                        
|                                        
|                                        
|                                        
|Discount rate                            |  |      | 5.75 | %    |  |  | 6.25 | %
|Expected long-term return on plan assets |  |      | 7.75 | %    |  |  | 7.75 | %
|Rate of compensation increase            |  |      | 3.7  | %    |  |  | 3.7  | %
|                                        
|                                        

To develop the expected long-term rate of return
on plan assets assumption, the Operating Partnership considered
the current level of expected returns on risk free investments
(primarily government bonds), the historical level of the risk
premium associated with the other asset classes in which the
portfolio is invested and the expectations for future returns on
each asset class. The expected return for each asset class was
then weighted based on the target asset allocation to develop
the expected long-term rate of return on plan assets assumption
for the portfolio. This resulted in the selection of the 7.75%
assumption as of January 1, 2005 and 2004.

Thrift and Profit Sharing
Plan.The Operating Partnership
sponsors an employee thrift and profit sharing plan under
Section 401(k) of the Internal Revenue Code. This plan
covers substantially all full-time employees. The Operating
Partnership matches employee contributions of up to six percent
of compensation at rates ranging from 35 to 100 percent,
depending upon financial performance.

Amounts charged to expense relating to the
Operating Partnerships thrift and profit sharing plan were
$5 million each for 2005, 2004, and 2003. The employer
match for each of the three years was 100%.





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##### Table of Contents









PART II/ITEM 8


Other Benefit
Plans.Certain executives and key
employees of the Operating Partnership participate in incentive
benefit plans, which provide for the granting of shares of Plum
Creek and/or cash bonuses upon meeting performance objectives.
See Note 8 of the Notes to Financial Statements.



|        |                               
|------- | ------------------------------
|NOTE 8. | STOCK-BASED COMPENSATION PLANS

Plum Creek Timber Company, Inc. has a stockholder
approved Stock Incentive Plan that provides for the award of
non-qualified stock options, restricted stock and restricted
stock units, dividend equivalents and value management awards.
Certain executives and key employees of the Operating
Partnership are covered by this plan. As all of Plum
Creeks activities are conducted through the Operating
Partnership, all stock-based compensation expense is allocated
to the Operating Partnership. Proceeds from the exercise of Plum
Creek stock options are retained by Plum Creek Timber Company,
Inc.

Under Plum Creeks Stock Incentive Plan, as
amended in May 2004, there are 12.4 million shares of
common stock reserved and eligible for issuance. At
December 31, 2005, 2.8 million shares of the
12.4 million reserved shares have been used and, therefore,
9.6 million shares remain available for grants of
non-qualified stock options, grants of restricted stock and
units, or payments of vested dividend equivalents and value
management awards. The number of shares to be issued in
connection with dividend equivalents and value management awards
is not determined until the end of their respective performance
periods.

In addition to the 12.4 million shares that
are eligible for issuance under Plum Creeks Stock
Incentive Plan, Plum Creek assumed 3.8 million Timber
Company Stock options in connection with the October 6,
2001, merger with The Timber Company that were converted to Plum
Creek stock options. At December 31, 2005, 0.4 million
options of the 3.8 million options remain issued and
outstanding.

Stock
Options.Under the plan,
non-qualified stock options may be granted to any officer,
director, employee, consultant or advisor of the Operating
Partnership. Each stock option granted allows the recipient the
right to purchase Plum Creek Timber Company, Inc.s common
stock at the fair market value of Plum Creek Timber Company,
Inc.s common stock on the date of the grant. Generally,
the stock options have a ten-year term and vest over a four-year
period at a rate of 25% per year. Under the plan, the
exercise price of an option may not be reduced. See table below
for summary of stock options granted, exercised and forfeited.

Restricted Stock and Restricted Stock
Units.Under the plan, restricted
stock and restricted stock units of Plum Creek Timber Company,
Inc. may be awarded to certain directors, officers and employees
of the Operating Partnership. Restricted stock may not be sold,
assigned, transferred, pledged or otherwise disposed of for a
period of time from the date on which the restricted stock was
granted. The recipients of restricted stock generally have the
rights of stockholders of Plum Creek with respect to voting and
receipt of dividends during the restricted period. The
recipients of restricted stock units generally have the right to
receive dividends during the restricted period and at the
expiration of the restriction period the right to receive an
equal number of shares of Plum Creek Timber Company, Inc.s
common stock. Termination of employment prior to the end of the
restricted period will generally require the return of the
restricted stock or restricted stock units to Plum Creek. Plum
Creek had 72,300 shares of restricted stock outstanding
under this plan as of December 31, 2005, compared to
39,500 shares of restricted stock as of December 31,
2004. The weighted average grant date fair value of restricted
stock awarded in 2005 was $36.99 per share. No restricted
stock units were outstanding at December 31, 2005 or
December 31, 2004.

Dividend
Equivalents.Under the plan,
dividend equivalents may be granted in connection with stock
options. Dividend equivalents represent the right to receive a
payment equal in value to the per-share dividend paid over a
five-year period by Plum Creek multiplied by the number of
unexercised stock options.

For awards granted in 2005 and 2004, each year
during the five-year performance period, a participant may be
eligible to earn a percentage of Plum Creeks current year
dividend plus a percentage of prior year unearned dividends to
the extent that Plum Creeks total shareholder return on an
annualized basis is at least 5.5% at the end of any such year.
The total shareholder return computation consists of Plum
Creeks stock price appreciation plus dividends paid. The
specific percentage to be applied to any such earned dividends
for a given year of the performance period is contingent upon
Plum Creeks performance for that year measured against the
performance of a peer group of companies. Dividends are earned
in whole or in part based on a sliding scale. If Plum
Creeks total shareholder return is below the
50th percentile of the peer group, then the
percentage amount is zero. If Plum Creeks total shareholder





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##### Table of Contents









PART II/ITEM 8


return is at or above the
75th percentile, the full amount of the dividend
is earned. If Plum Creeks relative performance is between
the 50th and the
75th percentile, dividend equivalents are valued
based on a sliding scale between 50% and 100% of the dividends
paid during the year.


For awards granted prior to 2004, each year
during the respective five-year performance period, a
participant may earn an amount equal to Plum Creek Timber
Company, Inc.s current year dividend plus prior year
unearned dividends to the extent Plum Creeks total
shareholder return on an annualized basis equals or exceeds 13%
for 15 trading days out of any 30 trading day period in any
given year.

Payments related to any earned dividend
equivalents are made at the end of the five-year performance
period. Unless otherwise specified by the participant, each
payment is paid in cash, except that any officer not in
compliance with Plum Creeks stock ownership guidelines is
required to receive up to half of the payment value in Plum
Creeks common stock. If a participant terminates
employment prior to the end of the five-year performance period,
a cash payment is made for any performance goals achieved in
connection with vested stock options through the last day of
employment. Payment related to unvested stock options and
performance goals achieved after termination of employment are
forfeited. At December 31, 2005, 2.0 million dividend
equivalents, net of forfeitures, granted to employees, officers
and directors of the Operating Partnership were outstanding
compared to 1.7 million dividend equivalents outstanding at
December 31, 2004.

The five-year performance period for the 2001
grants ended on December 31, 2005. All dividends paid by
Plum Creek Timber Company, Inc. during the five-year performance
period were earned on the outstanding dividend equivalent
rights. The awards were paid in cash and stock totaling
$3 million in January of 2006.

The five-year performance period for the 2000
grants ended on December 31, 2004. All dividends paid by
Plum Creek Timber Company, Inc. during the five-year performance
period were earned on the outstanding dividend equivalent
rights. The awards were paid in cash and stock totaling
$3 million in January of 2005.

Value Management
Awards.Value management awards
granted subsequent to January 1, 2004, provide incentive
compensation to participants that is contingent upon company
performance over a three-year period measured against the
performance of a peer group consisting of forest products
companies, the S&P 500 Index and the Morgan Stanley REIT
Index over the same period. Awards granted in 2002 were based on
Plum Creeks performance measured against a peer group
consisting of forest product companies.

Value management awards are earned in whole or in
part based on a sliding scale. No value management award is
earned if Plum Creeks total shareholder return is below
the 50th percentile of the peer group. The full
value management award is earned if Plum Creeks total
shareholder return is above the 75th percentile.
A unit has a face value of $100. The value of an award between
the 50th and 75th percentile is
a sliding scale between 0% and 200% of the face value. At the
end of the performance period, the awards will be paid in full
to each participant. Unless otherwise specified by the
participant, each payment will be paid in cash, except that any
officer not in compliance with Plum Creeks stock ownership
guidelines is required to receive up to half of the payment
value in Plum Creeks common stock. Generally, to be
entitled to the payment, a participant must be employed by the
Operating Partnership on the last date of the performance period.

Value management awards activity was as follows
for the years ended December 31 (number of units,
face value $100 per unit):

|                       |  |      |         |      |  |      |         |   |  |  |         |  
|---------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                       |  | 2005 |         | 2004 |  | 2003
|                      
|                      
|                      
|                      
|Balance at January 1   |  |      | 119,440 |      |  |      | 99,315  |   |  |  | 119,750 |  
|Grants                 |  |      | 45,645  |      |  |      | 43,050  |   |  |  | 2,000   |  
|Payments               |  |      | (76,480 | )    |  |      | (22,435 | ) |  |  | (22,435 | )
|Forfeitures            |  |      | (9,070  | )    |  |      | (490    | ) |  |  |        |  
|                       |  |     
|Balance at December 31 |  |      | 79,535  |      |  |      | 119,440 |   |  |  | 99,315  |  
|                      
|                      





NINETY-TWO




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##### Table of Contents









PART II/ITEM 8


Value management award payments were as follows
for the years ended December 31 (in millions except
share data):

|                               |  |      |        |      |  |      |         |  |  |   |         | 
|------------------------------ |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                               |  | 2005 |        | 2004 |  | 2003
|                              
|                              
|                              
|                              
|Cash                           |  | $    | 8      |      |  | $    | 2       |  |  | $ | 2       | 
|Plum Creek Common Stock Shares |  |      | 25,100 |      |  |      | 101,300 |  |  |   | 102,800 | 
|                              
|                              

The three-year performance period for the 2002
grants ended on December 31, 2004. Based on our performance
compared to the performance of our peer group, 76,480 units
(with a per unit value of $116 or $9 million in the
aggregate) vested on December 31, 2004. The awards were
paid in cash and stock in January of 2005. There were no value
management awards granted with a performance period ending
December 31, 2005.

Summary of Stock Option
Activity.Presented below is a
summary of Plum Creeks stock option plan activity
(includes the Timber Company stock options assumed and converted
in connection with the October 6, 2001, merger with The
Timber Company):

|                              |  |                     |           |                  |  |   |       | 
|----------------------------- |  | ------------------- | --------- | ---------------- |  | - | ----- | 
|                              |  |                    
|                              |  | Options Outstanding
|                              |  |                    
|                              |  |                     |           | Weighted Average
|                              |  | Number of Shares    |           | Exercise Price  
|                             
|                             
|                             
|                             
|Balance at January 1, 2003    |  |                     | 2,028,304 |                  |  | $ | 22.18 | 
|Options granted               |  |                     | 478,750   |                  |  |   | 21.99 | 
|Options exercised/surrendered |  |                     | (91,243   | )                |  |   | 16.35 | 
|Options cancelled/forfeited   |  |                     | (17,897   | )                |  |   | 25.07 | 
|                              |  |                    
|Balance at December 31, 2003  |  |                     | 2,397,914 |                  |  | $ | 22.34 | 
|Options granted               |  |                     | 526,500   |                  |  | $ | 30.94 | 
|Options exercised/surrendered |  |                     | (531,350  | )                |  |   | 22.44 | 
|Options cancelled/forfeited   |  |                     | (29,583   | )                |  |   | 18.33 | 
|                              |  |                    
|Balance at December 31, 2004  |  |                     | 2,363,481 |                  |  | $ | 24.28 | 
|Options granted               |  |                     | 476,250   |                  |  | $ | 37.49 | 
|Options exercised/surrendered |  |                     | (409,866  | )                |  |   | 20.99 | 
|Options cancelled/forfeited   |  |                     | (127,735  | )                |  |   | 28.95 | 
|                              |  |                    
|Balance at December 31, 2005  |  |                     | 2,302,130 |                  |  | $ | 27.34 | 
|                             
|                             





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##### Table of Contents









PART II/ITEM 8


The following table summarizes the options
outstanding and exercisable:

|                  |  |                     |           |                     |  |                  |           |        |  |                  |       |  |  |  |           |  |  |   |       | 
|----------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | --------- | ------ |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                  |  |                     |           |                    
|                  |  | Options Outstanding |           | Options Exercisable
|                  |  |                     |           |                    
|                  |  |                     |           | Weighted Average    |  | Weighted Average |           |        |  | Weighted Average
|Range of prices   |  | Number              |           | Remaining Life      |  | Exercise Price   |           | Number |  | Exercise Price  
|                 
|                 
|                 
|                 
|December 31, 2003 |  |                     |           |                     |  |                  |           |        |  |                  |       |  |  |  |           |  |  |   |       | 
|$29.70  $30.70   |  |                     | 451,800   |                     |  |                  | 8.1 years |        |  | $                | 29.72 |  |  |  | 112,950   |  |  | $ | 29.72 | 
|$24.35  $26.27   |  |                     | 628,549   |                     |  |                  | 6.8 years |        |  | $                | 25.85 |  |  |  | 380,950   |  |  | $ | 25.81 | 
|$21.91  $23.97   |  |                     | 471,750   |                     |  |                  | 9.1 years |        |  | $                | 21.94 |  |  |  | 1,250     |  |  | $ | 22.21 | 
|$16.94  $18.34   |  |                     | 236,500   |                     |  |                  | 1.8 years |        |  | $                | 17.26 |  |  |  | 236,500   |  |  | $ | 17.26 | 
|$15.29  $16.42   |  |                     | 609,315   |                     |  |                  | 2.7 years |        |  | $                | 15.53 |  |  |  | 609,315   |  |  | $ | 15.53 | 
|                 
|$15.29  $30.70   |  |                     | 2,397,914 |                     |  |                  | 6.0 years |        |  | $                | 22.34 |  |  |  | 1,340,965 |  |  | $ | 19.96 | 
|                 
|                 
|December 31, 2004 |  |                     |           |                     |  |                  |           |        |  |                  |       |  |  |  |           |  |  |   |       | 
|$30.91  $36.13   |  |                     | 522,750   |                     |  |                  | 9.1 years |        |  | $                | 30.96 |  |  |  | 51,000    |  |  | $ | 30.99 | 
|$29.70  $30.70   |  |                     | 415,674   |                     |  |                  | 7.1 years |        |  | $                | 29.73 |  |  |  | 201,400   |  |  | $ | 29.73 | 
|$24.35  $26.27   |  |                     | 332,817   |                     |  |                  | 6.2 years |        |  | $                | 26.03 |  |  |  | 257,692   |  |  | $ | 25.98 | 
|$21.91  $23.97   |  |                     | 456,150   |                     |  |                  | 8.1 years |        |  | $                | 21.94 |  |  |  | 121,589   |  |  | $ | 21.94 | 
|$15.29  $18.34   |  |                     | 636,090   |                     |  |                  | 1.6 years |        |  | $                | 16.01 |  |  |  | 636,090   |  |  | $ | 16.01 | 
|                 
|$15.29  $36.13   |  |                     | 2,363,481 |                     |  |                  | 6.1 years |        |  | $                | 24.28 |  |  |  | 1,267,771 |  |  | $ | 21.39 | 
|                 
|                 
|December 31, 2005 |  |                     |           |                     |  |                  |           |        |  |                  |       |  |  |  |           |  |  |   |       | 
|                 
|                 
|                 
|                 
|$36.13  $37.61   |  |                     | 438,750   |                     |  |                  | 9.1 years |        |  | $                | 37.48 |  |  |  | 750       |  |  | $ | 36.13 | 
|                 
|                 
|                 
|                 
|$30.91  $32.87   |  |                     | 473,812   |                     |  |                  | 8.1 years |        |  | $                | 30.93 |  |  |  | 153,754   |  |  | $ | 30.95 | 
|                 
|                 
|                 
|                 
|$29.70  $30.70   |  |                     | 365,299   |                     |  |                  | 6.1 years |        |  | $                | 29.73 |  |  |  | 269,912   |  |  | $ | 29.73 | 
|                 
|                 
|                 
|                 
|$24.35  $26.27   |  |                     | 225,192   |                     |  |                  | 5.3 years |        |  | $                | 25.97 |  |  |  | 222,442   |  |  | $ | 25.97 | 
|                 
|                 
|                 
|                 
|$21.91  $23.97   |  |                     | 407,500   |                     |  |                  | 7.1 years |        |  | $                | 21.94 |  |  |  | 207,628   |  |  | $ | 21.94 | 
|                 
|                 
|                 
|                 
|$15.29  $18.34   |  |                     | 391,577   |                     |  |                  | 0.9 years |        |  | $                | 15.83 |  |  |  | 391,577   |  |  | $ | 15.83 | 
|                 
|$15.29  $37.61   |  |                     | 2,302,130 |                     |  |                  | 6.3 years |        |  | $                | 27.34 |  |  |  | 1,246,063 |  |  | $ | 23.55 | 
|                 
|                 

Accounting for Stock-Based
Compensation.The Operating
Partnership expenses stock-based employee compensation in
accordance with the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation. Under the prospective method adopted by Plum
Creek in 2002, stock-based employee compensation cost is
recognized using the fair value method for all employee awards
granted, modified, or settled on or after January 1, 2002.
Total compensation expense for the above stock-based
compensation plans (including both awards paid in stock and
cash) was $9 million, $13 million, and $7 million
for the years ended December 31, 2005, 2004, and 2003,
respectively. See Note 1 of the Notes to Financial
Statements.

The weighted-average measurement date fair values
were computed using the Black-Scholes option valuation model
with the following assumptions:

|                                                            |  |      |      |      |  |      |      |   |  |   |      |  
|----------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|Options Granted                                             |  | 2005 |      | 2004 |  | 2003
|                                                           
|                                                           
|                                                           
|                                                           
|Expected life in years                                      |  |      | 6    |      |  |      | 7    |   |  |   | 7    |  
|Risk-free interest rates                                    |  |      | 4.1  | %    |  |      | 3.7  | % |  |   | 3.5  | %
|Volatility                                                  |  |      | 24   | %    |  |      | 24   | % |  |   | 29   | %
|Dividend yield                                              |  |      | 4.1  | %    |  |      | 4.5  | % |  |   | 6.4  | %
|Weighted-average measurement date fair values per
    share |  | $    | 6.82 |      |  | $    | 5.13 |   |  | $ | 3.27 |  
|                                                           
|                                                           



|        |                           
|------- | --------------------------
|NOTE 9. | RELATED-PARTY TRANSACTIONS

Transactions with
Parent.The Operating
Partnerships Parent, Plum Creek Timber Company, Inc.,
provides pension plans and stock based and deferred compensation
plans that cover employees of the Operating Partnership





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##### Table of Contents









PART II/ITEM 8


(see Notes 7 and 8 of the Notes to Financial
Statements). All of Plum Creeks activities are conducted
through the Operating Partnership. Therefore, all pension and
stock-based compensation expense is allocated to the Operating
Partnership.




|         |                                         
|-------- | ----------------------------------------
|NOTE 10. | DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Certain balance sheet accounts consisted of the
following (in millions):

|                              |                                  |              |    |              |  |   |    |    | 
|----------------------------- | -------------------------------- | ------------ | -- | ------------ |  | - | -- | -- | 
|                              |                                  | December 31, |    | December 31,
|                              |                                  | 2005         |    | 2004        
|                             
|                             
|                             
|                             
|Other Current Assets          |                                  |              |    |              |  |   |    |   
|                              | Prepaid expenses                 |              | $  | 11           |  |   | $  | 8  | 
|                              | Other                            |              |    | 5            |  |   |    | 6  | 
|                              |                                  |             
|                              |                                  | $            | 16 |              |  | $ | 14 |   
|                              |                                  |             
|                              |                                  |             
|Other Non-Current Assets      |                                  |              |    |              |  |   |    |   
|                              | Unamortized debt issue costs     |              | $  | 7            |  |   | $  | 6  | 
|                              | Deposits                         |              |    | 6            |  |   |    | 1  | 
|                              | Note receivable                  |              |    | 3            |  |   |    |   | 
|                              | Other                            |              |    | 2            |  |   |    | 1  | 
|                              |                                  |             
|                              |                                  | $            | 18 |              |  | $ | 8  |   
|                              |                                  |             
|                              |                                  |             
|Other Current Liabilities     |                                  |              |    |              |  |   |    |   
|                              | Long-term incentive compensation |              | $  | 3            |  |   | $  | 11 | 
|                              | Other                            |              |    | 8            |  |   |    | 9  | 
|                              |                                  |             
|                              |                                  | $            | 11 |              |  | $ | 20 |   
|                              |                                  |             
|                              |                                  |             
|Other Non-Current Liabilities |                                  |              |    |              |  |   |    |   
|                              | Long-term incentive compensation |              | $  | 9            |  |   | $  | 7  | 
|                              | Timber obligations               |              |    | 11           |  |   |    | 12 | 
|                              | Deferred compensation            |              |    | 9            |  |   |    | 27 | 
|                              | Unfunded accrued pension cost    |              |    | 17           |  |   |    | 15 | 
|                              | Other                            |              |    | 9            |  |   |    | 8  | 
|                              |                                  |             
|                              |                                  | $            | 55 |              |  | $ | 69 |   
|                             
|                             



|         |                              
|-------- | -----------------------------
|NOTE 11. | COMMITMENTS AND CONTINGENCIES

Contingencies.The
Operating Partnership is subject to regulations regarding forest
and harvest practices and is, from time to time, involved in
various legal proceedings, including environmental and
regulatory matters, incidental to its business. Moreover, the
Operating Partnership is currently in the early stages of
several lawsuits related to property damage caused by various
sources, including fire and flooding (Property Damage
Litigations). The Operating Partnership believes it is
more likely than not that the Property Damage Litigations will
be resolved favorably. However, the final outcome of any legal
proceeding is subject to many variables and cannot be predicted
with any degree of certainty. The Operating Partnership believes
that there are meritorious defenses for these claims and is
vigorously defending these matters.

Environmental
Contingencies.In connection with
the October 6, 2001 merger with The Timber Company, Plum
Creek agreed to indemnify Georgia-Pacific for substantially all
of the liabilities attributed to The Timber Company. During
2003, Georgia-Pacific provided the Operating Partnership with
information about the existence of mine tailings and
approximately 4.5 billion gallons of acidic surface water
on approximately 90 acres in Hot Spring County, Arkansas,
on former Georgia-Pacific properties (Arkansas
Environmental Issue). Barite mining and related activities
were conducted on the site between 1939 and 1981 in part by
lessees of an entity that was acquired by Georgia-Pacific. The
site is currently being investigated and no remediation plan has
yet been approved. No amounts





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##### Table of Contents









PART II/ITEM 8


have been accrued for this potential liability.
Furthermore, to the extent the Operating Partnership is required
to indemnify Georgia-Pacific for its share of the remediation
costs, the Operating Partnership may be able to recover a
portion of its cost from Georgia-Pacifics insurance
policy, or indemnity obligations of the various lessees that
conducted mining operations on the property, or both.


Unrecorded
Contingencies.The Operating
Partnership believes it will be successful in defending the
Property Damage Litigations and the Arkansas Environmental
Issue. However, if the Operating Partnership is not successful
in defending these claims, we believe the aggregate combined
losses for the Property Damage Litigations and Arkansas
Environmental Issue would range between $0 and $9 million.
Other than the Property Damage Litigations and the Arkansas
Environmental Issue, management currently believes that
resolving pending legal proceedings against the Operating
Partnership, individually or in aggregate, will not have a
material adverse impact on our financial position or results of
operations. However, these matters are subject to inherent
uncertainties and managements view on these matters may
change in the future. Were an unfavorable final outcome in one
or multiple legal proceedings to occur, there exists the
possibility of a material adverse impact on our financial
position and the results of operations for the period in which
any unfavorable outcome becomes reasonably estimable.

Contractual
Obligations.The Operating
Partnership has contracted to source logs and supply fiber with
customers under long-term agreements at prevailing market rates.
The agreements range from one to 25 years with renewal
options by either party for periods ranging from five years to
15 additional years. These agreements expire beginning in 2006
through 2023.

Lease
Commitments.The Operating
Partnership leases buildings and equipment under non 
cancelable operating lease agreements. Operating lease expense
was $5 million in 2005, $3 million in 2004 and
$4 million in 2003. The Operating Partnership leases
certain timberlands in which the Operating Partnership acquired
title to the standing timber at the inception of the lease. The
following summarizes the future minimum operating lease payments
and obligations in connection with leasing timberlands at
December 31, 2005(in millions):

|           |  |                  |    |                    |  |   |    | 
|---------- |  | ---------------- | -- | ------------------ |  | - | -- | 
|           |  | Operating Leases |    | Timber Obligations
|          
|          
|          
|          
|2006       |  | $                | 4  |                    |  | $ | 1  | 
|2007       |  |                  | 4  |                    |  |   | 1  | 
|2008       |  |                  | 3  |                    |  |   | 1  | 
|2009       |  |                  | 3  |                    |  |   | 1  | 
|2010       |  |                  | 2  |                    |  |   | 1  | 
|Thereafter |  |                  | 10 |                    |  |   | 6  | 
|           |  |                 
|Total      |  | $                | 26 |                    |  | $ | 11 | 
|          
|          



|         |                    
|-------- | -------------------
|NOTE 12. | SEGMENT INFORMATION

The Operating Partnership is organized into nine
business units on the basis of both product line and geographic
region. Each business unit has a separate management team due to
geographic location, marketing strategies and/or production
processes. In applying SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information,
these business units have been aggregated into five reportable
segments based on similar long-term economic characteristics.
The Operating Partnerships reportable segments are:
(1) Northern Resources, (2) Southern Resources,
(3) Real Estate, (4) Manufactured Products and
(5) Other.

Northern Resources
Segment.The Northwest Resource
region and the Northeast Resource region are aggregated into the
Northern Resources Segment. The Northern Resources Segment
consists of timberlands located in Maine, Michigan, Montana, New
Hampshire, Oregon, Washington, West Virginia and Wisconsin. The
Northern Resources Segment grows timber for sale primarily in
domestic regional markets. Additionally, some logs are sold in
export markets, mainly Canada. The Northern Resources Segment
sells softwood and hardwood sawlogs and softwood and hardwood
pulpwood. Softwood sawlogs are sold to regional lumber and
plywood manufacturers. Logs harvested in Montana are sold mostly
to our lumber and plywood mills (which are part of the
Manufactured Products Segment). Hardwood sawlogs are sold
primarily to furniture manufacturers. Softwood and hardwood
pulpwood is sold to regional paper and packaging manufacturers.





NINETY-SIX




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##### Table of Contents









PART II/ITEM 8


Southern Resources
Segment.The Southwest Resource
region and the Southeast Resource region are aggregated into the
Southern Resources Segment. The Southern Resources Segment
consists of timberlands located in Alabama, Arkansas, Florida,
Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South
Carolina and Texas. The Southern Resources Segment grows timber
for sale in domestic regional markets. The Southern Resources
Segment sells primarily softwood sawlogs and pulpwood. Softwood
sawlogs are sold to regional lumber and plywood manufacturers.
Softwood pulpwood is sold to regional paper and packaging
manufacturers. Additionally, the Southern Resources Segment
leases timberlands to third parties on an annual basis for
recreational purposes.

Real Estate
Segment.The Real Estate Segment
consists of sales of higher and better use timberlands and sales
of non-strategic timberlands. We estimate that included in our
approximately 8.2 million acres of timberlands are about
1.3 million acres of higher and better use timberlands,
which are expected to be sold and/or developed over the next
15 years for residential, recreational or conservation
purposes. In addition, the Operating Partnership has
approximately 530,000 acres of non-strategic timberlands,
which are expected to be sold over the next five years. In the
meantime, these timberlands continue to be used productively in
our business of growing and selling timber. Included within the
1.3 million acres of higher and better use timberlands are
approximately 225,000 acres that will be developed by the
Operating Partnerships taxable REIT subsidiaries.
Properties developed internally by the Operating Partnership
will generally be low-intensity development limited to obtaining
entitlements and investing in infrastructures such as roads and
utilities. Larger and more complicated projects, such as
destination resorts and master planned communities, will be
developed through joint venture agreements with leading land
developers.

Manufactured Products
Segment.The lumber, plywood and MDF
businesses are aggregated into the Manufactured Products
Segment. The Manufactured Products Segment consists of four
lumber mills, two plywood mills, two MDF facilities and one
lumber remanufacturing facility in Montana, and one lumber
remanufacturing facility in Idaho. The lumber facilities produce
boards, studs, and dimension lumber and the panel facilities
produce high-quality plywood and MDF panels. All of these
products are targeted to domestic lumber retailers, home
construction, and industrial customers, and to a lesser extent
for export primarily to Canada. Residual chips are sold to
regional pulp and paper manufacturers. Revenues from
manufactured products by product line were as follows for the
years ended December 31(in millions):

|        |  |      |     |      |  |      |     |  |  |   |     | 
|------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|        |  | 2005 |     | 2004 |  | 2003
|       
|       
|       
|       
|Lumber  |  | $    | 223 |      |  | $    | 235 |  |  | $ | 192 | 
|Plywood |  |      | 144 |      |  |      | 157 |  |  |   | 115 | 
|MDF     |  |      | 137 |      |  |      | 126 |  |  |   | 90  | 
|        |  |     
|Total   |  | $    | 504 |      |  | $    | 518 |  |  | $ | 397 | 
|       
|       

Other
Segment.The Other Segment
consists primarily of income associated with mineral extraction,
natural gas production and communication and transportation
rights of way. Mineral income consists of royalty revenue from
the extraction of oil and gas, natural aggregates and coal.

In the fourth quarter of 2004, the Operating
Partnership sold certain subsurface property rights (primarily
coal reserves, excluding coalbed methane, oil and gas reserves)
in Buchanan County, Virginia, to Consol Energy, Inc. The
Operating Partnership received proceeds of $23 million in
connection with the sale and the release of certain legal
claims, which the Operating Partnership believes comprised a
portion of the proceeds. However, the sale agreement did not
specify an allocation. The net gain from this sale and
settlement of certain legal claims, after reducing the proceeds
for applicable income taxes, was $23 million. During the
first quarter of 2005, we sold our remaining coal reserves for
proceeds of $21 million. The net gain from this sale after
reducing the proceeds for our book basis and applicable income
tax, was $20 million. Prior to these sales, substantially
all of the coal reserves were subject to long-term mineral
leases. For each of the years ended December 31, 2004 and
2003, the Other Segment revenues and operating income included
approximately $1 million from royalties associated with the
mineral leases, and less than $1 million for the year ended
December 31, 2005. These gains have been reported in our
income statement as a separate line item below Income from
Continuing Operations.

Segment data includes external revenues,
intersegment revenues and operating income, as well as export
revenue and depreciation, depletion and amortization. The
Operating Partnership evaluates performance and allocates
capital to





NINETY-SEVEN




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##### Table of Contents









PART II/ITEM 8


the segments based on operating income before
interest, unallocated corporate expenses and taxes. Asset
information is not reported by segment, as Operating Partnership
does not produce such information internally.


The table below presents information about
reported segments for the years ended December 31(in millions):

|                                         |  |            |     |            |  |         |     |              |  |        |     |        |  |   |     |   |  |   |    |  |  |   |       | 
|---------------------------------------- |  | ---------- | --- | ---------- |  | ------- | --- | ------------ |  | ------ | --- | ------ |  | - | --- | - |  | - | -- |  |  | - | ----- | 
|                                         |  | Northern   |     | Southern   |  | Real    |     | Manufactured |  |        |     |       
|                                         |  | ResourcesA |     | ResourcesB |  | EstateC |     | ProductsD    |  | OtherE |     | TotalF
|                                        
|                                        
|                                        
|                                        
|2005                                     |  |            |     |            |  |         |     |              |  |        |     |        |  |   |     |   |  |   |    |  |  |   |       | 
|External revenues                        |  | $          | 263 |            |  | $       | 501 |              |  | $      | 292 |        |  | $ | 504 |   |  | $ | 16 |  |  | $ | 1,576 | 
|Intersegment revenues                    |  |            | 84  |            |  |         |    |              |  |        |    |        |  |   |    |   |  |   |   |  |  |   | 84    | 
|Export revenues                          |  |            | 1   |            |  |         |    |              |  |        |    |        |  |   | 22  |   |  |   |   |  |  |   | 23    | 
|Depreciation, depletion and amortization |  |            | 28  |            |  |         | 52  |              |  |        |    |        |  |   | 29  |   |  |   |   |  |  |   | 109   | 
|Operating income                         |  |            | 102 |            |  |         | 221 |              |  |        | 140 |        |  |   | 30  |   |  |   | 13 |  |  |   | 506   | 
|                                        
|2004                                     |  |            |     |            |  |         |     |              |  |        |     |        |  |   |     |   |  |   |    |  |  |   |       | 
|External revenues                        |  | $          | 235 |            |  | $       | 459 |              |  | $      | 303 |        |  | $ | 518 |   |  | $ | 13 |  |  | $ | 1,528 | 
|Intersegment revenues                    |  |            | 90  |            |  |         |    |              |  |        |    |        |  |   |    |   |  |   |   |  |  |   | 90    | 
|Export revenues                          |  |            | 22  |            |  |         |    |              |  |        |    |        |  |   | 22  |   |  |   |   |  |  |   | 44    | 
|Depreciation, depletion and amortization |  |            | 27  |            |  |         | 48  |              |  |        |    |        |  |   | 37  |   |  |   | 1  |  |  |   | 113   | 
|Operating income                         |  |            | 100 |            |  |         | 207 |              |  |        | 152 |        |  |   | 58  |   |  |   | 9  |  |  |   | 526   | 
|                                        
|2003                                     |  |            |     |            |  |         |     |              |  |        |     |        |  |   |     |   |  |   |    |  |  |   |       | 
|External revenues                        |  | $          | 219 |            |  | $       | 445 |              |  | $      | 124 |        |  | $ | 397 |   |  | $ | 11 |  |  | $ | 1,196 | 
|Intersegment revenues                    |  |            | 90  |            |  |         |    |              |  |        |    |        |  |   |    |   |  |   |   |  |  |   | 90    | 
|Export revenues                          |  |            | 22  |            |  |         |    |              |  |        |    |        |  |   | 14  |   |  |   |   |  |  |   | 36    | 
|Depreciation, depletion and amortization |  |            | 30  |            |  |         | 51  |              |  |        |    |        |  |   | 25  |   |  |   | 1  |  |  |   | 107   | 
|Operating income (loss)                  |  |            | 82  |            |  |         | 216 |              |  |        | 47  |        |  |   | (5  | ) |  |   | 7  |  |  |   | 347   | 
|                                        
|                                        



|  |                                                                                                                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | For the year ended December 31, 2003, the
    Northern Resources segment recorded a loss of $4 million
    related to forest fires, which is included in depreciation,
    depletion and amortization in the financial statements.



|  |                                                                                                                                                                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | For the year ended December 31, 2005, the
    Southern Resources segment recorded a loss of $2 million
    related to hurricane damage, which is included in depreciation,
    depletion and amortization in the financial statements.                                                                                                
| 
|C | The Operating Partnership recognized impairment
    losses on sales of timberlands expected to close within a
    twelve-month period of $1 million during 2005,
    $21 million during 2004, and $14 million during 2003.
    Impairments are recognized as part of cost of goods sold and
    reflected as part of operating income.



|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D | For the year ended December 31, 2004, the
    Manufactured Products segment recorded a $9 million lumber
    assets impairment loss, which is included in depreciation,
    depletion and amortization in the financial statements.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|E | The Operating Partnership had been a party to a
    joint operating agreement with Geomet, Inc., a coalbed methane
    developer, with whom the Operating Partnership had jointly
    explored for and developed coalbed methane gas found on certain
    of its timberlands in West Virginia and Virginia. During the
    second quarter of 2004, the Operating Partnership sold its
    working interest in the joint operating agreement to Geomet,
    Inc. for $27 million. The resulting gain of $5 million
    before income taxes is included in Gain on Sale of Other Assets
    in our operating income for 2004. The agreement provides for
    contingent additional sales proceeds of up to $3 million
    payable in 2008. The impact on operating income from our working
    interest in the joint operating agreement during the years ended
    December 31, 2004 and 2003, was less than $1 million
    annually.
| 
|F | Consolidated depreciation, depletion and
    amortization includes unallocated corporate depreciation of
    $4 million for 2005 and $1 million for both 2004 and
    2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         





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##### Table of Contents









PART II/ITEM 8


A reconciliation of total operating income to
income before income taxes is presented below for the years
ended December 31(in millions):

|                                         |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                         |  | 2005 |      | 2004 |  | 2003
|                                        
|                                        
|                                        
|                                        
|Total segment operating income           |  | $    | 506  |      |  | $    | 526  |   |  | $ | 347  |  
|Interest expense, net                    |  |      | (109 | )    |  |      | (111 | ) |  |   | (117 | )
|Corporate and other unallocated expenses |  |      | (58  | )    |  |      | (54  | ) |  |   | (44  | )
|Gain on sale of other assets             |  |      |     |      |  |      | 5    |   |  |   |     |  
|                                         |  |     
|Income before income taxes               |  | $    | 339  |      |  | $    | 366  |   |  | $ | 186  |  
|                                        
|                                        

Intersegment sales prices are determined at least
quarterly, based upon estimated market prices and terms in
effect at the time. Export revenues consist of log sales,
primarily to Japan and Canada, as well as manufactured product
sales primarily to Canada. The Operating Partnership does not
hold any long-lived foreign assets.

Segment revenues from sales to a single customer
in excess of 10% of total revenues were as follows for the
years ended December 31(in millions):

|                      |  |      |     |      |  |      |     |  |  |   |     | 
|--------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                      |  | 2005 |     | 2004 |  | 2003
|                     
|                     
|                     
|                     
|Northern Resources    |  | $    | 7   |      |  | $    | 8   |  |  | $ | 12  | 
|Southern Resources    |  |      | 193 |      |  |      | 144 |  |  |   | 136 | 
|Manufactured Products |  |      |    |      |  |      | 12  |  |  |   | 29  | 
|                      |  |     
|Total                 |  | $    | 200 |      |  | $    | 164 |  |  | $ | 177 | 
|                     
|                     

NOTE 13. UNAUDITED SELECTED QUARTERLY FINANCIAL
DATA

|                                        |  |              |     |             |  |             |     |              |  |   |     |  |  |   |     | 
|--------------------------------------- |  | ------------ | --- | ----------- |  | ----------- | --- | ------------ |  | - | --- |  |  | - | --- | 
|(in millions, except per share amounts) |  | 1st QuarterA |     | 2nd Quarter |  | 3rd Quarter |     | 4th QuarterB
|                                       
|                                       
|                                       
|                                       
|2005                                    |  |              |     |             |  |             |     |              |  |   |     |  |  |   |     | 
|Revenues                                |  | $            | 400 |             |  | $           | 358 |              |  | $ | 427 |  |  | $ | 391 | 
|Gross Profit                            |  |              | 155 |             |  |             | 126 |              |  |   | 140 |  |  |   | 119 | 
|Operating Income                        |  |              | 134 |             |  |             | 102 |              |  |   | 117 |  |  |   | 95  | 
|Net Income                              |  |              | 122 |             |  |             | 69  |              |  |   | 96  |  |  |   | 67  | 
|                                       
|2004                                    |  |              |     |             |  |             |     |              |  |   |     |  |  |   |     | 
|Revenues                                |  | $            | 497 |             |  | $           | 341 |              |  | $ | 363 |  |  | $ | 327 | 
|Gross Profit                            |  |              | 209 |             |  |             | 111 |              |  |   | 137 |  |  |   | 101 | 
|Operating Income                        |  |              | 191 |             |  |             | 94  |              |  |   | 115 |  |  |   | 77  | 
|Net Income                              |  |              | 155 |             |  |             | 57  |              |  |   | 77  |  |  |   | 73  | 
|                                       
|                                       



|  |                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|A | 2005 first quarter net income includes a
    $20 million Gain on Sale of Properties, net of tax, which
    was not included in Income from Continuing Operations.



|  |                                                                                                                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B | 2005 fourth quarter net income includes a
    $3 million Gain on Sale of Properties, net of tax. 2004
    fourth quarter net income includes a $23 million Gain on
    Sale of Properties, net of tax. Neither the $3 million gain
    from 2005 nor the $23 million gain from 2004 were included
    in Income from Continuing Operations.





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##### Table of Contents



PART II/ITEM 8





PLUM CREEK TIMBERLANDS, L.P.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Partners of



We have audited the accompanying consolidated
balance sheets of Plum Creek Timberlands, L.P. as of
December 31, 2005 and 2004, and the related consolidated
statements of income and cash flows for each of the three years
in the period ended December 31, 2005. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Plum Creek Timberlands, L.P.
at December 31, 2005 and 2004, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Seattle, Washington







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##### Table of Contents



PART II/ITEM 8





PLUM CREEK TIMBER COMPANY, INC. 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of



We have audited managements assessment,
included in the accompanying Management Report, that Plum Creek
Timber Company, Inc. maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Plum Creek Timber
Company, Inc.s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the companys internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.

A companys internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.

In our opinion, managements assessment that
Plum Creek Timber Company, Inc. maintained effective internal
control over financial reporting as of December 31, 2005,
is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Plum Creek Timber Company, Inc.
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on
the COSO criteria.

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Plum Creek
Timber Company, Inc. as of December 31, 2005 and 2004, and
the related consolidated statements of income and cash flows for
each of the three years in the period ended December 31,
2005 of Plum Creek Timber Company, Inc. and our report dated
February 22, 2006 expressed an unqualified opinion thereon.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Seattle, Washington







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##### Table of Contents



PART III/ITEM 10





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.




ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES


(a) Disclosure Controls and Procedures

The companys management, with the
participation of the companys Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the
companys disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this report. Based on that evaluation, the
companys management, including the Chief Executive Officer
and Chief Financial Officer, has concluded that the
companys disclosure controls and procedures were effective
as of the end of such period.

(b) Control over Financial Reporting

There have been no changes in the companys
internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) during the quarter
to which this report relates that have materially affected, or
are reasonably likely to materially affect, the companys
internal control over financial reporting.

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING

The management of Plum Creek Timber Company, Inc.
is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934, as amended). Our system of internal controls over
financial reporting was designed to provide a reasonable
assurance to the companys management and Board of
Directors regarding the preparation and fair presentation of the
financial statements for external purposes in accordance with
generally accepted accounting principles.

Plum Creek Timber Company, Inc.s
management, under the supervision of the Chief Executive Officer
and Chief Financial Officer, assessed the effectiveness of our
internal control over financial reporting as of
December 31, 2005. In making this assessment, we used the
framework included in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the criteria set forth in Internal
ControlIntegrated Framework, management concluded that
our internal control over financial reporting was effective as
of December 31, 2005.

Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risks that controls may become
inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.

Our managements assessment of the
effectiveness of our internal control over financial reporting
as of December 31, 2005, has been audited by
Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report, which is included
herein.




ITEM 9B. OTHER INFORMATION

None.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT

Information with respect to directors, executive
officers and 10% stockholders included in the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on
May 3, 2006, under the captions Board of Directors
and Corporate Governance, Proposal 1 Election
of Directors, and Section 16(a) Beneficial
Ownership Reporting Compliance, is incorporated herein by
reference. Information with respect to the companys code
of ethics and executive officers are presented in Part I of
this Form 10-K.





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##### Table of Contents



PART IV/ITEM 15





ITEM 11. EXECUTIVE COMPENSATION

Information with respect to executive
compensation included in the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 3, 2006,
under the caption Executive Compensation, is
incorporated herein by reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information with respect to security ownership of
certain beneficial owners and management included in the
definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 3, 2006, under the caption
Security Ownership of Certain Beneficial Owners and
Management, is incorporated herein by reference.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

Information with respect to certain relationships
and related transactions included in the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on
May 3, 2006, under the captions Related-Party
Transactions and Indebtedness of Management,
is incorporated herein by reference.




ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information with respect to principal accountant
fees and services included in the definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on May 3,
2006, under the caption Independent Auditors, is
incorporated herein by reference.




PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as a part of this report

(1) Financial Statements and
Supplementary Financial Information



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | The following consolidated financial statements
    of the company are included in Part II, Item 8 of this
    Form 10-K:

|                                                                                                                                                   |                                                             |     |    
|-------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | --- | ---
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|PLUM CREEK TIMBER COMPANY, INC.                                                                                                                    |                                                             |    
|                                                                                                                                                   | Consolidated Statements of Income                           |     | 42 
|                                                                                                                                                   | Consolidated Balance Sheets                                 |     | 43 
|                                                                                                                                                   | Consolidated Statements of Cash Flows                       |     | 44 
|                                                                                                                                                   | Notes to Consolidated Financial Statements                  |     | 45 
|                                                                                                                                                   | Report of Independent Registered Public
    Accounting Firm |     | 72 
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|PLUM CREEK TIMBERLANDS, L.P.                                                                                                                       |                                                             |    
|                                                                                                                                                   | Consolidated Statements of Income                           |     | 73 
|                                                                                                                                                   | Consolidated Balance Sheets                                 |     | 74 
|                                                                                                                                                   | Consolidated Statements of Cash Flows                       |     | 75 
|                                                                                                                                                   | Notes to Consolidated Financial Statements                  |     | 76 
|                                                                                                                                                   | Report of Independent Registered Public
    Accounting Firm |     | 100
|Report of Independent Registered Public
    Accounting Firm on Managements Assessment and Report on
    Internal Control over Financial Reporting |                                                             | 101
|Managements Assessment and Report on
    Internal Control over Financial Reporting                                                                |                                                             | 102

(2) Financial Statement Schedules



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All financial statement schedules have been
    omitted because they are not applicable, not material or the
    required information is shown in the consolidated financial
    statements or the notes thereto.

(3) List of Exhibits



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Each exhibit set forth below in the Index to
    Exhibits is filed as a part of this report. All exhibits not
    filed herewith are incorporated herein by reference to a prior
    filing as indicated. Exhibits designated by a positive sign
    (+) indicate management contracts or compensatory
    plans.





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##### Table of Contents



PART IV/ITEM 15





INDEX TO EXHIBITS

|            |   |                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | - | ----------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit     |   |                  
|Designation |   | Nature of Exhibit
|           
|           
|            | 2 | .1                |  | Amended and Restated Agreement and Plan of
    Conversion, dated as of July 17, 1998, by and among Plum
    Creek Timber Company, Inc., Plum Creek Timber Company, L.P. and
    Plum Creek Management Company, L.P. (Form S-4, Regis.
    No. 333-71371, filed January 28, 1999).                                                                                                                                                                                                                                                                                                                                                                                                              
|            | 2 | .2                |  | Agreement and Plan of Merger, dated as of
    July 17, 1998, by and among Plum Creek Timber Company,
    L.P., Plum Creek Acquisitions Partners, L.P. and Plum Creek
    Timber Company, Inc. (Form S-4, Regis. No. 333-71371,
    filed January 28, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 2 | .3                |  | Agreement and Plan of Merger, dated as of
    July 17, 1998, by and among Plum Creek Timber Company, Inc.
    and Plum Creek Management Company, L.P. (Form S-4, Regis.
    No. 333-71371, filed January 28, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | 2 | .4                |  | Agreement and Plan of Merger by and among
    Georgia-Pacific Corporation, North American Timber Corp., NPI
    Timber, Inc., GNN Timber, Inc., GPW Timber, Inc., LRFP Timber,
    Inc., NPC Timber, Inc. and Plum Creek Timber Company, Inc.
    (Form 8-K/A, File No. 1-10239, filed July 24,
    2000). Amendment No. 1 to the Agreement and Plan of Merger,
    dated as of June 12, 2001 (Form 8-K, File
    No. 1-10239, dated filed June 14, 2001).                                                                                                                                                                                                                                     
|            | 2 | .5                |  | Purchase and Sale Agreement by and among North
    American Timber Corp., Georgia-Pacific Corporation and Hawthorne
    Timber Company, LLC dated as of October 29, 1999.
    (Form 10-K, File No. 1-10239, for the year ended
    December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 2 | .6                |  | Purchase and Sale Agreement by and among Stora
    Enso North America Corp., as seller, and Plum Creek Timberlands,
    L.P. and other Plum Creek entities named herein, as purchasers,
    dated as of September 19, 2002 (Form 10-K, File
    No. 1-10239, for the year ended December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                            
|            | 2 | .7                |  | Form of Real Estate Sales Contract governing the
    terms of acquisition of three tracts of timberlands by and among
    Great Eastern Timber Company, LLC, as seller, and Plum Creek
    Timberlands, L.P. and other Plum Creek entities named herein, as
    purchasers, dated as of July 2, 2003 (Form 10-Q, File
    No. 1-10239, for the quarter ended June 30, 2003).                                                                                                                                                                                                                                                                                                                   
|            | 2 | .8                |  | Real Estate Purchase and Sale Agreement between
    Plum Creek Timberlands, L.P. and Soterra, LLC dated
    March 28, 2005 (Form 8-K, File No. 1-10232, filed
    on April 1, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 2 | .9                |  | Real Estate Purchase and Sale Agreement between
    Plum Creek Timberlands, L.P. and Escanaba Timber LLC, dated
    September 30, 2005 (Form 8-K, File No. 1-10232,
    filed on October 5, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 3 | .1                |  | Restated Certificate of Incorporation of Plum
    Creek Timber Company, Inc. (Form 10-Q, File
    No. 1-10239, for the quarter ended March 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 3 | .2                |  | Amended and Restated By-laws of Plum Creek Timber
    Company, Inc. (Form 10-Q, File No. 1-10239, for the
    quarter ended March 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 4 | .1                |  | Senior Note Agreement, dated as of
    October 9, 2001, governing terms of $55,000,000
    Series H due October 1, 2006, $75,000,000
    Series I due October 1, 2008, $295,000,000
    Series J due October 1, 2011, $75,000,000
    Series K due October 1, 2013. (Form 8-K File
    No. 1-10239, filed October 9, 2001). First Amendment
    to Senior Note Agreement dated as of December 19,
    2002, governing terms of $55,000,000 Series H due
    October 1, 2006, $75,000,000 Series I due
    October 1, 2008, $295,000,000 Series J due
    October 1, 2011, $75,000,000 Series K due
    October 1, 2013 (Form 10-K, File No. 1-10239, for
    the year ended December 31, 2002).
|            | 4 | .2                |  | Indenture (including Form of Note and Guarantee),
    dated as of November 14, 2005, by and among Plum Creek
    Timberlands, L.P., as issuer, Plum Creek Timber Company, Inc.,
    as guarantor, and U.S. Bank National Association, as
    trustee, governing the terms of 5.875% Senior Notes due
    2015 (Form 8-K, File No. 1-10239, filed
    November 14, 2005).                                                                                                                                                                                                                                                                                                                       
|            | 4 | .3                |  | Officers Certificate, dated
    November 14, 2005, establishing the terms and form of
    5.875% Senior Notes due 2015 (Form 8-K, File
    No. 1-10239, filed November 14, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 4 | .4                |  | The registrant agrees that it will furnish the
    Commission a copy of any of its debt instruments not listed
    herein upon request.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        





ONE HUNDRED FOUR




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##### Table of Contents



PART IV/ITEM 15


|            |    |                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | -- | ----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit     |    |                  
|Designation |    | Nature of Exhibit
|           
|           
|            | 10 | .1                |  | Credit Agreement, dated as of January 15,
    2004, among Plum Creek Timberlands, L.P., Bank of America, N.A.,
    as Administrative Agent, The Bank of Tokyo-Mitsubishi, Ltd.,
    Seattle Branch, as Syndication Agent, Suntrust Bank, The Bank of
    Nova Scotia, Northwest Farm Credit Services, PCA and
    Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.,
    Rabobank International, New York Branch, as
    Documentation Agents, Banc of America Securities LLC as Sole
    Lead Arranger and Sole Book Manager and the Other Financial
    Institutions Party Thereto. (Form 10-Q, File
    No. 1-10239, for the quarter ended March 31, 2004).
|            | 10 | .2                |  | Purchase Agreement, dated November 8, 2005,
    by and among Plum Creek Timberlands, L.P., Plum Creek Timber
    Company, Inc., and Banc of America Securities LLC and Goldman,
    Sachs & Co., as representatives of the several
    underwriters named therein (Form 8-K, File
    No. 1-10239, filed November 14, 2005).                                                                                                                                                                                                                                                                                                                                       
|            | 10 | .3                |  | Form of Primary Insurance Policy (Registration
    Statement on Form S-4, Registration No. 333-47708,
    filed July 13, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .4+               |  | Plum Creek Supplemental Benefits Plan
    (Form 10-K/A, Amendment No. 1, File No. 1-10239),
    for the year ended December 31, 1994). First Amendment to
    the Plum Creek Supplemental Benefits Plan. (Form 10-Q, File
    No. 1-10239, for the quarter ended September 30,
    1995). Second Amendment to the Plum Creek Supplemental Benefits
    Plan (Form 10-Q, File No. 1-10239, for the quarter
    ended June 30, 2003).                                                                                                                                                                                                                                
|            | 10 | .5+               |  | Plum Creek Timber Company, Inc. Deferral Plan
    (Form 8-K, File No. 1-10239, filed on June 24,
    2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 10 | .6+               |  | Director Deferral Election Form (Form 8-K,
    File No. 1-10239, filed on June 24, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 10 | .7+               |  | Executive Deferral Election Form (Form 8-K,
    File No. 1-10239, filed on June 24, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 10 | .8+               |  | Plum Creek Director Stock Ownership Plan
    (Form 8-K, File No. 1-10239, filed on June 24,
    2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10 | .9                |  | Tax Matters Agreement by and among Plum Creek
    Timber Company, Inc., Georgia-Pacific Corporation on behalf of
    itself and North American Timber, Corp, NPI Timber, Inc., GNN
    Timber, Inc., GPW Timber, Inc., LRFP Timber, Inc., and NPC
    Timber, Inc., dated as of June 12, 2001 (Registration
    Statement on Form S-4, Registration No. 333-47708,
    filed July 13, 2001).                                                                                                                                                                                                                                                                       
|            | 10 | .10+              |  | Plum Creek Timber Company, Inc. 2000 Stock
    Incentive Plan (Filed as an appendix to Plum Creeks
    definitive Proxy Statement on Schedule 14A, filed on
    March 31, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 10 | .11+              |  | Plum Creek Timber Company, Inc. Amended and
    Restated Stock Incentive Plan (Filed as an appendix to Plum
    Creeks definitive Proxy Statement on Schedule 14A, filed
    on March 29, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 10 | .12+              |  | Plum Creek Timber Company, Inc. Annual Incentive
    Plan (Form 10-K, File No. 1-10239, for the year ended
    December 31, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 10 | .13+              |  | Employment Contract between Plum Creek Timber
    Company, Inc. and Thomas M. Lindquist (Form 10-K, File
    No. 1-10239, for the year ended December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 10 | .14+              |  | Executive Agreement between Plum Creek Timber
    Company, Inc. and Thomas M. Lindquist (Form 10-K, File
    No. 1-10239, for the year ended December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 10 | .15+              |  | Form of Executive Stock Option, Dividend
    Equivalent Right and Value Management Award Agreement For Plan
    Years 2000, 2001, 2002 and 2003 (Form 10-K, File
    No. 1-10239, for the year ended December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 10 | .16+              |  | Form of Executive Stock Option, Dividend
    Equivalent Right and Value Management Award Agreement For Plan
    Year 2004 and 2005 (Form 10-Q, File No. 1-10239, for
    the quarter ended June 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 10 | .17+              |  | Form of Executive Stock Option, Restricted Stock
    Unit and Value Management Award Agreement For Plan Year 2006
    (Form 8-K, File No. 1-10239, filed on February 8,
    2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 10 | .18+              |  | Form of Director Stock Option and Dividend
    Equivalent Right Award Agreement For Plan Years 2002 and 2003
    (Form 10-K, File No. 1-10239, for the year ended
    December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 10 | .19+              |  | Form of Amendment to Director Stock Option and
    Dividend Equivalent Right Award Agreement Effective For Plan
    Years 2002 and 2003 (Form 8-K/A, File No. 1-10239,
    filed on September 2, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | 10 | .20+              |  | Form of Amended and Restated Director Stock
    Option and Dividend Equivalent Right Award Agreement For Plan
    Year 2004 (Form 8-K/A, File No. 1-10239, filed on
    September 2, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 10 | .21+              |  | Form of Director Stock Award Agreement For Plan
    Year 2005 (Form 8-K, File No. 1-10239, filed on
    February 15, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 10 | .22+              |  | Form of Director Stock Award Agreement For Plan
    Year 2006 (Form 8-K, File No. 1-10239, filed on
    February 8, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         





ONE HUNDRED FIVE




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##### Table of Contents



PART IV/ITEM 15


|            |    |                   |  |                                                                                                                                                                                                                                                                                                             
|----------- | -- | ----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit     |    |                  
|Designation |    | Nature of Exhibit
|           
|           
|            | 10 | .23+              |  | Summary of Current Director Compensation.                                                                                                                                                                                                                                                                   
|            | 10 | .24+              |  | Form of Director and Officer Indemnity Agreement
    (Form 10-K, File No. 1-10239, for the year ended
    December 31, 2004).                                                                                                                                                                               
|            | 12 | .1                |  | Computation of ratio of earnings to fixed charges
    and computation of ratio of earnings to combined fixed charges
    and preferred stock dividends.                                                                                                                                                     
|            | 21 |                   |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                             
|            | 23 | .1                |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                               
|            | 24 | .1                |  | Power of Attorney (Included on the signature page
    to this Annual Report on Form 10-K).                                                                                                                                                                                                                  
|            | 31 | .1                |  | Certification of Rick R. Holley, President and
    Chief Executive Officer, pursuant to Rules 13a-14(a) and
    15d-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                               
|            | 31 | .2                |  | Certification of William R. Brown, Executive Vice
    President and Chief Financial Officer, pursuant to
    Rules 13a-14(a) and 15d-14(a) of the Securities Exchange
    Act of 1934, as amended.                                                                                                          
|            | 32 | .1                |  | Certification of Rick R. Holley, President and
    Chief Executive Officer, pursuant to Rules 13a-14(b) and
    15d-14(b) of the Securities Exchange Act of 1934, as amended,
    and 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                     
|            | 32 | .2                |  | Certification of William R. Brown, Executive Vice
    President and Chief Financial Officer, pursuant to
    Rules 13a-14(b) and 15d-14(b) of the Securities Exchange
    Act of 1934, as amended, and 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.





ONE HUNDRED SIX




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##### Table of Contents



Signatures



Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                                
| | -------------------------------
| | PLUM CREEK TIMBER COMPANY, INC.
| | (Registrant)                   



| |     |                   
| | --- | ------------------
| | By: | /s/ RICK R. HOLLEY

| |                                      
| | -------------------------------------
| |                                      
| | Rick R. Holley                       
| | President and Chief Executive Officer

Power of Attorney



Each person whose signature to this Annual Report
on Form 10-K appears below hereby constitutes and appoints
Rick R. Holley, William R. Brown and James A. Kraft, and each of
them, as his or her true and lawful attorney-in-fact and agent,
with full power of substitution, to sign on his behalf
individually and in the capacity stated below and to perform any
acts necessary to be done in order to file any and all
amendments to this Annual Report on Form 10-K, and any and
all instruments or documents filed as part of or in connection
with this Annual Report on Form 10-K or any amendments
thereto, and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his
substitutes, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report on Form 10-K has
been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                                       |  |                                                          |  |                       |  | 
|-------------------------------------- |  | -------------------------------------------------------- |  | --------------------- |  | 
|                                      
|/s/ IAN B. DAVIDSONIan B. Davidson     |  | Director, Chairman of the Board                          |  | February 28, 2006Date
|                                      
|/s/ RICK R. HOLLEYRick R. Holley       |  | President and Chief Executive Officer, Director          |  | February 28, 2006Date
|                                      
|/s/ ROBIN JOSEPHSRobin Josephs         |  | Director                                                 |  | February 28, 2006Date
|                                      
|/s/ JOHN G. MCDONALDJohn G. McDonald   |  | Director                                                 |  | February 28, 2006Date
|                                      
|/s/ ROBERT B. MCLEODRobert B. McLeod   |  | Director                                                 |  | February 28, 2006Date
|                                      
|/s/ HAMID R. MOGHADAMHamid R. Moghadam |  | Director                                                 |  | February 28, 2006Date
|                                      
|/s/ JOHN H. SCULLYJohn H. Scully       |  | Director                                                 |  | February 28, 2006Date
|                                      
|/s/ STEPHEN C. TOBIASStephen C. Tobias |  | Director                                                 |  | February 28, 2006Date
|                                      
|/s/ CARL B. WEBBCarl B. Webb           |  | Director                                                 |  | February 28, 2006Date
|                                      
|/s/ WILLIAM R. BROWNWilliam R. Brown   |  | Executive Vice President and Chief Financial
    Officer |  | February 28, 2006Date
|                                      
|/s/ DAVID A. BROWNDavid A. Brown       |  | Vice President, Chief Accounting Officer                 |  | February 28, 2006Date





ONE HUNDRED SEVEN