**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-K

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 

**Forthe fiscal year ended December 31, 2004**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 

**Commissionfile number 1-10239**

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PLUM CREEK TIMBER COMPANY, INC.

(Exact name of registrantas specified in its charter)

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

 

**999 ThirdAvenue, Suite 4300Seattle, Washington 98104-4096Telephone:  (206) 467-3600**

Securities registeredpursuant 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** |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

Yes x    No o

Indicate by check mark ifdisclosure 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 informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. x

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).

Yes x    No o

The aggregate market valueof the voting common stock held by non-affiliates based on the closing salesprice on June 30, 2004, was $5,938,437,832. For this calculation, allexecutive officers, directors and stockholders owning more than 5% of theoutstanding common stock have been deemed affiliates. Such determination shouldnot be deemed an admission that such executive officers, directors andstockholders are, in fact, affiliates of the registrant.

The number of outstandingshares of the registrant’s common stock as of February 28,2005, was 183,805,877.

**DOCUMENTSINCORPORATED BY REFERENCE**

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

Portionsof the Proxy Statement for registrant’s 2005 Annual Meeting of Shareholders tobe held on May 11, 2005, are incorporated by reference into Part IIIof 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, 2004**

**TABLE OF CONTENTS**
| **PART I**   | ** ** | ** **                                                                                      | ** ** | ** ** |
|-------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------|
| Item 1.           |       | Business                                                                                        |       | 1          |
| Item 2.      |       | Properties                                                                                      |       | 12         |
| Item 3.           |       | Legal Proceedings                                                                               |       | 13         |
| Item  4.          |       | Submission of Matters to a  Vote of Security Holders                                            |       | 13         |
| **PART II**  |       |                                                                                            |       |       |
| Item  5.          |       | Market for Registrant’s  Common Equity and Related Stockholder Matters                     |       | 15         |
| Item  6.          |       | Selected Financial Data                                                                         |       | 16         |
| Item  7.          |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations     |       | 19         |
| Item 7A.     |       | Quantitative and Qualitative  Disclosures About Market Risk                                     |       | 45         |
| Item  8.          |       | Financial Statements and  Supplementary Data                                                    |       | 46         |
|              |       | PLUM CREEK TIMBER COMPANY, INC.                                                                 |       | 46         |
|              |       | PLUM CREEK TIMBERLANDS, L.P.                                                                    |       | 82         |
| Item  9.          |       | Changes in and Disagreements  With Accountants on Accounting and Financial Disclosure           |       | 116        |
| Item  9A.         |       | Controls and Procedures                                                                         |       | 116        |
| Item 9B.          |       | Other Information                                                                               |       | 117        |
| **PART III** |       |                                                                                            |       |       |
| Item  10.         |       | Directors and Executive  Officers of the Registrant                                             |       | 117        |
| Item  11.         |       | Executive Compensation                                                                          |       | 117        |
| Item  12.         |       | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters |       | 117        |
| Item  13.         |       | Certain Relationships and  Related Transactions                                                 |       | 117        |
| Item  14.         |       | Principal Accountant Fees  and Services                                                         |       | 117        |
| **PART IV**  |       |                                                                                            |       |       |
| Item  15.         |       | Exhibits, Financial  Statement Schedules, and Reports on Form 8-K                          |       | 118        |
| Index to Exhibits |       | 118                                                                                             |

 

 

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**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 theNotes to the Consolidated Financial Statements of Plum Creek Timber Company, Inc. included in Item 8 of this form.

**Item 1.        Business**

**AVAILABLE INFORMATION**

The company’s Internetwebsite is accessible to the public at *www.plumcreek.com.*Information about the company, including the company’s annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports are made available free of charge through ourInternet website as soon as reasonably practicable after such reports have beenfiled with, or furnished to, the United States Securities and ExchangeCommission.

**INDUSTRY OVERVIEW**

**General**

The timber industry provides raw material and conductsresource management activities for the paper and forest products industry,including the planting, fertilizing, thinning, and cutting of trees and themarketing of logs. Logs are marketed and sold either as sawlogs to lumber andother wood products manufacturers or as pulplogs to pulp and papermanufacturers. The timber industry possesses several unique characteristicsthat distinguish it from the broader paper and forest products industry, whichwe believe makes timber an attractive asset class, including the following:

***Renewable Resource.  ***Timberis a growing and renewable resource that, when properly managed, increases involume and value as it grows over time. Larger diameter trees command a higherprice than smaller trees because they may be converted to higher value end-useproducts such as lumber and plywood.

***Predictable and Improving GrowthRates.  ***Predictable biological growth is anattractive feature of timberland assets because it contributes to predictable,long-term harvest planning. The development and application of intensive forestmanagement practices continue to improve biological growth rates.

***Harvest Flexibility.  ***Timberlandowners have some flexibility to increase their harvests when prices are highand decrease their harvests when prices are low, allowing timberland owners tomaximize the long-term value of their growing resource base.

***Historical PriceAppreciation.  ***Due to growing demand combined withlimitations on supply caused by, among other factors, environmentalrestrictions and urban sprawl prices for softwood timber have exhibited acompound annual growth rate of approximately 4% from 1982 through 2004.

**Supply and Demand Dynamics**

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

***Supply.  ***Timbersupply can fluctuate based upon a variety of factors:

The supply of timber is limited, to some extent, bythe availability of timberlands. The availability of timberlands, in turn, islimited by several factors, including government restrictions relating toenvironmental regulation and land use, alternate uses such as agriculture, andexpansion of population 

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centers. The large amountsof capital and long time required to create new timberlands also limits timbersupply.

Over the long-term, timber supply increases whenmodern forestry techniques increase productivity of timberlands and when somemarginal agriculture lands revert to timberlands or are planted to forests forconservation purposes. In certain regional markets, log supply can expand when logimports increase relative to log exports.

***Demand.  ***Thedemand for timber is directly related to the underlying demand for pulp andpaper products, lumber, panel and other wood related products. The demand forpulp and paper is largely driven by population growth and per-capita incomelevels. The demand for lumber and manufactured wood products is affectedprimarily by the level of new residential construction activity and repair andremodeling activity, which, in turn, is impacted by changes in general economicand demographic factors, including interest rates for home mortgages andconstruction loans. The demand for United States timber is impacted by theamounts of lumber and other wood products that are imported into the UnitedStates. A significant factor determining the volume of wood products shippedinto the United States by foreign producers is currency valuation shifts aswell as tariffs and quotas.

**OUR BUSINESS**

We are one of the largest private timberland owners inthe United States, with 7.8 million acres of timberlands located in 19 states.Our timberlands are well diversified, not only geographically, but also byspecies mix and age distribution. Growth rates vary depending on species,location, age and forestry practices. We manage our timberlands in two businesssegments: the Northern Resources Segment, consisting of timberlands primarilyin Idaho, Maine, Michigan, Montana, New Hampshire, Oregon, Washington, WestVirginia and Wisconsin; and the Southern Resources Segment, consisting of timberlandsprimarily in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, NorthCarolina, Oklahoma, South Carolina and Texas. In addition, our Other Segmentincludes our natural resource businesses that focus on opportunities resultingfrom our extensive property ownership including opportunities relating tomineral extraction, natural gas production and communication and transportationrights of way. The Real Estate Segment comprises our sales of higher and betteruse timberlands and sales of non-strategic timberlands, some of which are soldthrough our taxable REIT subsidiaries.

Our Manufactured ProductsSegment, also conducted through our taxable REIT subsidiaries, includes fourlumber mills, two plywood plants, two medium density fiberboard (“MDF”) facilities,and two lumber remanufacturing facilities. These facilities, strategicallylocated near our timberlands in Montana and Idaho, convert logs to lumber,plywood and other wood products, and convert chips, sawdust and wood shavingsto MDF. The Manufactured Products Segment also has established a network ofnation-wide field inventory points where inventory is held for customers ateither independent public warehouses or on consignment at customer distributioncenters.

**Our Value Growth Strategy**

Our value growth strategy is guided by specificoperating objectives, including maximizing the value of our current timberlandsthrough intensive forest management and optimizing our resource base throughacquisitions and divestitures, and practicing environmentally responsibleresource stewardship. Our value growth strategy includes the following keyelements:

***Focus on Maximizing the Value ofOur Resource Base Through Intensive Management of Our Timberlands.  ***Weview our core timber resource base as a renewable asset with substantialinherent value. We seek to manage our timberlands in a manner that optimizesthe balance among current cash flows, the biological growth of our timber andprudent environmental management. Our management approach employs advancedforest management practices, including the use of a computerized timberinventory system, 

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thinning andfertilization, and the development and use of genetically improved seedlings.Tree growth rates vary from region to region because of differences in weather,climate and soil conditions. Newly-planted seedlings take 20 to 30 years toreach harvest maturity in the Southern United States, 45 to 60 years inthe Northwestern United States, 45 to 70 years in the Northeastern UnitedStates and 70 to 90 years in inland regions of the Western United States,depending on the desired product.

***Pursue Acquisitions of High-Quality Timberlands.  ***TheUnited States timber market is highly fragmented. We believe that there willcontinue to be numerous timberland acquisition opportunities due to the desireamong some paper and forest product companies to sell their timberland assetsand the difficulties faced by some small timberland owners in efficientlymanaging their timberlands. We believe we are well positioned to compete forhigh-quality timberlands because:

·       Weare an attractive strategic partner for integrated forest products companiesseeking to sell their timberlands because we do not compete with their pulp orpaper manufacturing operations and we are willing to enter into long-termsupply agreements;

·       Wecan structure acquisitions on a tax-efficient basis through the issuance ofcommon stock, limited partnership interests in our operating partnership, orinstallment notes, giving sellers the ability to defer some or all of the taxesotherwise payable upon a sale;

·       Thegeographic reach of our operations enhances our awareness of new acquisitionopportunities and our knowledge of environmental concerns, market dynamics,timber productivity and other factors important in valuing timberlands andoperations in each region;

·       Ourreputation for prudent environmental management makes us attractive to sellersconcerned with continued environmentally responsible forest management; and

·       Wemaintain a conservative capital structure, which provides the flexibility toensure ready access to capital.

Our disciplined acquisition strategy has allowed us toexpand and diversify our timberland holdings, as well as increase our cash flow.Since 1989, we have increased our timber holdings from 1.4 million acresto approximately 7.8 million acres at December 31, 2004. Theseacquisitions have enhanced our operating flexibility and reduced our exposureto regional timber market fluctuations. Our strategy is to continue to makestrategic acquisitions that are accretive to cash flow.

***Realize the Value of SelectedProperties Through Sale or Exchange.  ***At the sametime that we pursue timberland acquisitions, we continually review ourtimberland portfolio to identify properties that are no longer strategic to ourlong-term timberland operations or that may have higher and better uses otherthan as commercial timberlands. We estimate that included in the company’sapproximately 7.8 million acres of timberlands are about 1.3 millionacres of higher and better use timberlands and about 1.0 million acres ofnon-strategic timberlands. The higher and better use timberlands are expectedto be sold over the next 15 years for conservation, residential or recreationalpurposes. The non-strategic timberlands, which consist of large blocks as wellas smaller tracts, are expected to be sold over the next five to ten years. Inthe meantime, these timberlands continue to be used productively in ourbusiness of growing and selling timber. As part of our ongoing review, weevaluate properties based on a number of factors such as proximity topopulation centers and major transportation routes, and the presence of specialecological or geographic features.

We may sell or exchange timberlands that have highenvironmental or other public values and reinvest in timberlands that are moresuitable for commercial timber management. In addition, we may sellconservation easements that limit development rights, but ensure that thetimberlands will be maintained as a working forest in perpetuity. We may alsosell or exchange less strategic timberlands to other forest products companies ornon-industrial investors.

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***Capture the Value of Non-timberResources on Our Properties.  ***As part of ourresources business, we focus on realizing the maximum value potential of ourextensive property ownership, including opportunities relating to mineralextraction. Our strategy involves forming strategic alliances with industryspecific leaders to identify and pursue such opportunities.

***PracticeResponsible Environmental Forestry.  ***We believe thatenvironmentally sound management practices contribute to our growth in value byproviding greater predictability in the management of our assets. We follow theprinciples of the Sustainable Forestry Initiative® program (“SFISM”)which are aimed at the sound management of all natural resources, includingsoils, air, watersheds, fisheries and wildlife habitats. These principles arereflected in our habitat planning efforts, which have led to the implementationof five major habitat conservation agreements under which we manageapproximately 1.9 million acres of our timberlands. Our forestry practiceson all of our timberlands have been independently audited and certified byPricewaterhouseCoopers LLP under the SFISM program. Ourmanufacturing practices follow a set of internally developed environmentalprinciples. See “Federal and State Regulations” below.

**Acquisitions and Dispositions**

During 2004, Plum Creek acquired approximately 78,000acres of timberlands located primarily in Arkansas and Maine for$66 million. Timberland dispositions during the same time period comprisedapproximately 377,000 acres of which 310,000 were located in the Northernand 67,000 in the Southern United States. During 2003, timberland acquisitionsconsisted primarily of 139,000 acres located in South Carolina, Arkansas andNew Hampshire for $162 million. Timberland dispositions for the same timeperiod totaled 125,000 acres of which 78,000 were located in the Northernand 47,000 in the Southern United States. During 2002, we acquired 307,000acres of timberlands located primarily in Wisconsin for approximately $141million and sold 37,000 acres.

On October 6, 2001,six former subsidiaries of Georgia-Pacific Corporation (“Georgia-Pacific”),collectively referred to as “The Timber Company,” merged with and into PlumCreek (“The Timber Company Merger”). The Timber Company held all of the assetsand liabilities attributed to Georgia-Pacific’s timber and timberland business.In the merger, we acquired approximately 3.9 million acres of primarily pineforests in the southern regions of the United States, 287,000 acres ofprimarily Douglas-fir forests in Oregon and 542,000 acres of mixed hardwoodforests in the Appalachian and northeastern regions of the United States for apurchase price of approximately $3.4 billion.

**SEGMENT INFORMATION**

Certain financialinformation for each business segment is included in Note 14 of the Notes toFinancial Statements and is incorporated herein by reference.

**Northern Resources Segment**

As of December 31, 2004, the Northern ResourcesSegment encompassed 3.4 million acres of timberlands in Idaho, Maine, Michigan,Montana, New Hampshire, Oregon, Washington, West Virginia and Wisconsin, andcontained an estimated 121 million tons (41 million cunits) of standingtimber. Consistent with industry practices in the North, Plum Creek’s estimatedinventory of standing timber includes deductions for visible and hidden defect.Furthermore, Plum Creek’s estimated inventory includes volumes inenvironmentally sensitive areas, where we defer harvest until conditions permitthe removal of trees without adversely affecting the environment.

Logs harvested in the Northern Resources Segment aresold predominately to domestic mills. To a lesser extent, the company exportslogs to Canada and to other countries of the Pacific Rim. Competitors in thedomestic log market include the United States Forest Service, the Bureau ofLand Management, the 

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Bureau of Indian Affairs,the British Columbia Ministry of Forests, and numerous private individuals,domestic and foreign industrial timberland owners, and state agencies locatedin the regions in which we operate. Competitors in export log markets includenumerous private timberland owners in the United States, as well as companiesand state-controlled enterprises in Canada, Chile, New Zealand, and Russia, allof which have abundant timber resources. In the Northern Resources Segment,domestic wood and fiber consuming facilities tend to purchase raw materialswithin a 200-mile radius due to transportation costs. Competitive factorswithin a market area generally will include price, species and grade, quality,proximity to wood consuming facilities and the ability to consistently meetcustomer requirements. We compete based on our reputation as a stable andconsistent supplier of well-merchandised, high-quality logs, and on price.

In 2003, we renewed asourcing agreement with Stimson Lumber Company to supply logs to Stimson’sMontana mills, based upon prevailing market prices, over a three-year periodending at December 31, 2006. We have an agreement with Roseburg ForestProducts to supply its Oregon mills with logs, based upon prevailing market prices,expiring December 31, 2005. We have a pulpwood fiber supply agreement withStora Enso North America Corporation, which expires December 31, 2005,under which we supply specified quantities of fiber at prevailing market pricesto Stora’s paper mills. We also have a long-term agreement to supply pulpwoodfiber to Sappi Ltd.’s paper facility in Skowhegan, Maine, at prevailing marketprices. The fiber supply agreement ends in 2023 and may be extended up to anadditional 15 years at the option of Sappi Ltd. We also are committed to supplypulpwood, logs and wood chips, to Smurfit Stone Container Corporation under along-term supply agreement, which expires on February 26, 2006. Inaddition to the Northern Resources Segment, our Manufactured Products Segmentis also committed under this long-term supply agreement to provide residualwood chips from our log conversion operations to Smurfit Stone. The long-termsupply agreements may restrict our ability to sell timberlands in certain areaswithin our Northern Resources Segment.

**Southern Resources Segment**

As of December 31, 2004, the Southern ResourcesSegment consisted of 4.4 million acres of timberlands (including approximately320,000 acres of leased land) located in the states of Alabama, Arkansas,Florida, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, SouthCarolina and Texas, and contained an estimated 158 million tons(45 million cunits) of standing timber. Consistent with industry practicesin the South, Plum Creek’s estimated inventory of standing timber includesdeductions for visible defect. Furthermore, Plum Creek’s estimated inventoryincludes volume in environmentally sensitive areas, where we defer harvestuntil conditions permit the removal of trees without adversely affecting theenvironment.

Logs in the Southern Resources Segment are sold tothird party mills producing a wide array of forest products, includingmanufacturers of lumber, plywood, oriented strand board, and pulp and paperproducts. We compete with numerous private and industrial timberland owners, aswell as federal and state agencies, across the Southern United States. Due totransportation costs, domestic wood and fiber consuming facilities in theSouthern Resources Segment tend to purchase raw material within a 100-mileradius. Competitive factors within our Southern Resources Segment includeprice, species, grade, quality, proximity to wood consuming facilities and theability to consistently meet customer requirements. We compete based on ourreputation as a stable and consistent supplier of well-merchandised,high-quality logs, and on price.

In connection with TheTimber Company Merger, our Southern Resources Segment entered into a long-termagreement to sell timber to Georgia-Pacific at prevailing market prices. The supplyagreement expires in 2010 subject to an automatic 10-year renewal period,unless either party delivers a timely termination notice. We also have along-term agreement to supply logs to West Fraser (South) Inc. at prevailingmarket prices. The supply agreement expires in 2015 and may be renewed forfive-year periods 

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thereafterupon mutual consent of both parties. Additionally, we also are committed tosupply pulp logs to Graphic Packaging Corporation at prices that are based uponprevailing market prices under a long-term supply agreement. The supplyagreement ends in 2016 and can be extended up to an additional 10 years byeither party. We expect that our long-term supply agreements withGeorgia-Pacific, Graphic Packaging Corporation and West Fraser (South) Inc.will provide us with ongoing secure markets for a substantial portion of thewood fiber harvested from our Southern Resources Segment timberlands. Thelong-term supply agreements may restrict our ability to sell timberlands incertain areas within our Southern Resources Segment.

**Real Estate Segment**

We estimate that included in our approximately7.8 million acres of timberlands are about 1.3 million acres ofhigher and better use timberlands and about 1.0 million acres of non-strategictimberlands. The higher and better use timberlands are expected to be sold overthe next 15 years for conservation, residential or recreational purposes. Thenon-strategic timberlands, which consist of large blocks as well as smallertracts, are expected to be sold over the next five to ten years. In themeantime, these timberlands continue to be used productively in our business ofgrowing and selling timber.

From time to time, we transfer timberlands to whollyowned taxable REIT subsidiaries that may pursue various activities such asentitlement or zoning to prepare a property for an eventual sale.

We compete with numeroussellers of land in hundreds of local markets. Our sales tend to be tracts of10 acres or more, with many transactions in excess of 1,000 acres, andoccasional transactions exceeding 10,000 acres.

**Manufactured Products Segment**

***Lumber.  ***Weproduce a diverse line of softwood lumber products, including common, selectand edge-glued boards, studs and finger-jointed studs. Lumber productsmanufactured in our two studmills, two random-length board mills, andremanufacturing facility in western Montana, along with our remanufacturingfacility in Idaho, are targeted to domestic lumber retailers, such as retailhome centers, for use in repair and remodeling projects. These products arealso sold to stocking distributors for use in home construction.

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

Our lumber and plywood mills produce residual woodchips, sawdust and planer shavings as by-products of the conversion of logsinto finished products. The wood chips are sold to regional paper and pulpmills or used in our MDF facilities, which also consume the sawdust andshavings. A substantial portion of our residual wood chip production is sold toSmurfit Stone Container Corporation under a long-term supply agreement, whichexpires on February 28, 2006.

***Plywood.  ***Ourtwo plywood plants in western Montana produce high-grade softwood plywood thatwe sell primarily into domestic specialized industrial markets, including boat,recreational vehicle, transportation and concrete forming applications. Ourplywood products are generally of higher quality than commodity constructiongrade products and generally command higher prices in these specialty 

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markets. While someplywood products are sold directly to large industrial customers, the majorityis sold via stocking wholesale distributors. We also export about 5% of ourplywood to Canada. See “*Lumber*”above for a discussion of residual wood chips.

Competition within the plywood market is basedprimarily on price and quality and, to a lesser extent, the ability to offer afull line of products and meet delivery requirements on a consistent, long-termbasis. The domestic plywood market is characterized by numerous large and smallproducers and is also subject to competition from oriented strand board, a lessexpensive substitute wood product used primarily in commodity constructionmarkets. Oriented strand board continues to capture an increasing percentage ofthe North American structural panel market due to its low cost. Oriented strandboard has now captured over 59% of the structural panel market, and thispercentage is expected to increase over the next several years as additionaloriented strand board plants are built or existing facilities are expanded.This trend has forced closure of marginal plywood capacity over the pastseveral years. To improve operating performance, some commodity plywoodmanufacturers have refocused their products toward the specialty plywoodmarket, resulting in increased competition in the markets we serve. Recently,competition from imported South American plywood has also impacted thehigh-grade sanded plywood market. We expect to remain competitive due to ourstrong customer base, extensive experience in industrial markets, supply ofsuperior quality timber, and reputation for high-quality products.

***Medium Density Fiberboard.  ***OurMDF plant in western Montana supplies high-quality MDF to a wide range ofcustomers throughout North America. Some of the more common uses for our MDFinclude furniture and cabinet components, architectural moldings, doors, storefixtures, core material for hardwood plywood, commercial wall paneling andsubstrate for laminate flooring. Our MDF facility has two production lines witha combined capacity of approximately 250 million square feet. In 2004,both lines operated near full production capability yielding a combined outputof approximately 246 million square feet. Our thin-board production linecommenced operations in October of 2001. During the start-up phase,combined production approximated 198 million square feet of MDF during2003 and 178 million square feet during 2002.

Outside North America, theMDF industry has undergone dramatic growth in terms of productive capacity anddemand for its products. Manufacturers compete on a global scale on the basisof price, quality, service and the availability of specialty products. Additionally,MDF is a ready substitute for solid wood, hardboard and plywood in specificapplications. Competition in the North American MDF industry has continued tointensify due to imports from New Zealand, Asia and South America in spite ofthe U.S. dollar’s recent weakening. In addition, the continuing shift of endproduct production to offshore manufacturing, as has been seen with certaintypes of furniture from China and moldings from South America, continues tonegatively impact the North American MDF industry.

**Other Segment—Natural Resources**

As part of our natural resources business, we focus onrealizing the maximum value potential of our extensive property ownership,including opportunities relating to mineral extraction, natural gas productionand communication and transportation rights of way. This segment represents adiverse array of natural resource products and markets subject to widelyvarying forms and levels of competition. Our strategy involves forming strategicalliances with industry specific leaders to identify and pursue suchopportunities. We currently receive royalty revenue from the extraction of oil,gas, coal and minerals from some of our timberlands.

During the second quarter of 2004, the company soldits working interest in a joint operating agreement related to the developmentof coalbed methane gas to Geomet, Inc. for $27 million. The agreementprovides for contingent additional sales proceeds of up to $3 millionpayable in 2008. In the fourth quarter of 2004, we sold substantially all ofour subsurface property rights (primarily coal reserves, 

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excluding coal-bedmethane, oil and gas reserves) in Buchanan County, Virginia. In connection withthe sale, we received proceeds of $23 million. During thefirst quarter of 2005, we sold our remaining coal reservesfor approximately $21 million in proceeds.

We continue to evaluate awide variety of non-timber natural resource opportunities, and we expect tocontinue to negotiate royalty arrangements, leases, joint ventures, and assetsales to capture the maximum value for all of our non-timber natural resourceassets.

**TIMBERRESOURCE MANAGEMENT AND ENVIRONMENTAL STEWARDSHIP**

**Resource Management**

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

We use different management techniques in each of ourregions, employing a variety of the most cost effective silvicultural methodsavailable. We expect timber growth rates on our timberlands to continue toimprove over time as a result of genetic advances in seedlings, intensiveforest management practices such as thinning and fertilization, and theincreasing proportion of our timberlands that are converted from naturalforests to actively managed plantations. Technology and forest managementadvances have increased growth rates and shortened harvest cycles. We believeour focus on intensive management practices will enhance forest productivityand increase the value of our timberlands over time.

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

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

It is our policy to ensure that every acre harvestedis promptly reforested. Based on the geographic and climatic conditions of theharvest site, harvested areas may be regenerated naturally by leaving maturetrees to reseed the area. Natural regeneration methods are used on asubstantial portion of our timberlands in the Northern Resources Segment. Inthe Southern Resources Segment, substantially all reforestation is done byplanting.

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

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**Environmental Stewardship**

We practice environmentally responsible resourcemanagement. We adhere to the philosophy that environmentally sound managementpractices contribute to the company’s growth in value by providing greaterpredictability in the management of its natural resource assets. We follow theprinciples 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 auditedand certified by PricewaterhouseCoopers LLP under the SFISMprogram. The SFISM program principles, which can be found on thecompany’s website at *www.plumcreek.com,*are designed to ensure that forest management is integrated with theconservation of soil, air and water resources, wildlife and fish habitat, andaesthetics.

Consistent with theseprinciples, we have actively engaged in habitat conservation planning. Wecurrently 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 agreements include: the Central Cascades HabitatConservation Plan, which provides habitat protection for 315 species andimpacts 0.1 million acres of our timberlands in Washington State; the SwanValley Grizzly Bear Agreement, which covers 0.1 million acres of ourtimberlands in western Montana; the Native Fish Habitat Conservation Plan,which provides for habitat protection of 9 species of native trout andsalmon on 1.3 million acres of our land in Idaho and Montana; theRed-Cockaded Woodpecker Habitat Conservation Plan, which covers0.3 million acres of our timberlands in Arkansas and Louisiana; and theKarner Blue Butterfly Habitat Conservation Plan, which extends to0.1 million acres of our timberlands in Wisconsin. In addition to thesecompleted conservation agreements, we are in the process of negotiating a “safeharbor agreement” with the U.S. Fish and Wildlife Service pursuant to which wewill conserve additional habitat for the red-cockaded woodpecker on otherportions of our Southern ownership not covered by our Red-Cockaded WoodpeckerHabitat Conservation Plan. We expect the safe harbor agreement to cover0.6 million acres.

**RAW MATERIALS**

Our lumber and plywood facilities obtain approximatelytwo-thirds of their logs from our Montana timberlands.Our timberlandscurrently supplyhigh-quality logs and preferredtimber species to our lumber and plywood facilities, although future harvestlevels on our Montana timberlands are expected to decline. Furthermore, overtime the average log size is expected to decline due to evolving harvest andgrowth patterns.

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

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**COMPETITION**

Markets for manufacturedforest products are highly competitive in terms of price and quality. Some ofour manufactured forest products competitors have substantially greaterfinancial and operating resources. In addition, wood products are subject toincreasing competition from a variety of substitutes, including non-wood andengineered wood products as well as import competition from other worldwidesuppliers. We believe we can compete effectively because of our extensiveprivate timber inventory, our reputation for environmentally responsibleforestry, which has positioned us to meet regulatory challenges on acost-effective basis, our reputation as a dependable, long-term supplier ofquality products, our innovative approach to providing high-quality,value-added products to various retail and industrial niche markets and theintegration of our timberlands with efficient manufacturing processes.

**SEASONAL EFFECTS**

Log sales volumes from our Northern Resources Segmentare typically at their lowest point in the second quarter of each year whenwarming weather thaws and softens roadbeds, thus restricting access to loggingsites. Log sales volumes from our Southern Resources Segment are generally attheir lowest point during the first quarter of each year, as winter rains limitoperations.

Demand for manufacturedproducts is generally lower in the winter quarter when activity in constructionmarkets is slower, and higher in the spring, summer and fall quarters whenconstruction increases. Working capital varies with seasonal fluctuations.

**FEDERAL AND STATE REGULATIONS**

**General Environmental Regulation**

Our operations are subjectto federal, state and local environmental laws and regulations, including lawsrelating to water, air, solid waste and hazardous substances and therequirements of the Federal Occupational Safety and Health Act and comparablestate statutes relating to the health and safety of our employees. Although webelieve that we are in material compliance with these requirements, there can beno assurance that we will not incur significant costs, civil and criminalpenalties, and liabilities, including those relating to claims for damages toproperty or natural resources, resulting from our operations. We maintainenvironmental and safety compliance programs and conduct regular internal andindependent third-party audits of our facilities and timberlands to monitorcompliance with these laws and regulations.

**Endangered Species**

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

We have received incidental take permits and similarauthorizations pursuant to the Central Cascades Habitat Conservation Plan, theNative Fish Habitat Conservation Plan, the Swan Valley Grizzly Bear Agreement,the Red-Cockaded Woodpecker Habitat Conservation Plan, and the Karner BlueButterfly 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 theNorthern Resources Segment and 0.3 million acres in the Southern ResourcesSegment. As required by the Endangered Species Act, we prepared habitatconservation plans that will govern our management activities on thetimberlands covered by the plans in these regions during their respectiveterms. The habitat conservation plans require us to maintain certain levels ofwildlife and fish habitat, and to take 

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numerous other mitigationmeasures including the protection of riparian areas. In consideration for thismitigation, we are authorized to conduct forestry practices that are consistentwith the plans, even though they may have an adverse impact on the listedspecies covered by the plans.

We are currently in the process of negotiating a “safeharbor agreement” with the Fish and Wildlife Service to address the presence onor near some of our Southern properties of red-cockaded woodpeckers, listed asendangered under the Endangered Species Act. Under the proposed agreement,which would cover approximately 0.6 million acres outside of the recentlyimplemented Red-Cockaded Woodpecker Habitat Conservation Plan, we would agreeto maintain red-cockaded woodpecker habitat at or above baseline levels. Inexchange we would be free to manage our timberlands for commercial timberproduction within the area of the plan even if such activities mightincidentally impact red-cockaded woodpecker habitat.

Although the habitatconservation plans and the grizzly bear agreement have been implemented and arefunctioning as expected, there can be no assurance that they will remain inforce or be sufficient to protect us against subsequent amendments of theEndangered Species Act. And while we expect that the safe harbor agreement forred-cockaded woodpeckers will help us effectively manage the presence of thatspecies on our Southern timberlands, there can be no assurance that anagreement will be reached. Nor can there be any assurance that the habitatconservation plans, the grizzly bear agreement and the safe harbor agreement,individually or collectively, will be sufficient to protect us against thelisting of additional species, or against changes to other applicable laws andregulations. Any of these changes could materially and adversely affect ouroperations.

**Clean Water**

The Clean Water Act and comparable state laws,regulations and best management practices programs protect water quality. As aresult, our resource management activities adjacent to rivers and streams aswell as the point source discharges from our manufacturing facilities aresubject to strict regulation. Most silvicultural activities are defined byregulation to be “non-point sources” and thus do not require federal permitsfrom the Environmental Protection Agency, but rather are subject to stateregulation and best management practices programs. Recent litigation innumerous courts, however, has challenged this silvicultural exemption under theClean Water Act. Accordingly, there can be no assurance that our forestmanagement activities will not be subject to increased regulation under theClean Water Act in the future.

At this time, we believe that federal and state lawsand regulations related to the protection of endangered species and clean waterwill not have a material adverse effect on our financial position, results ofoperations or liquidity. We anticipate, however, that increasingly strict lawsand regulations relating to the environment, natural resources and forestryoperations, as well as increased social concern over environmental issues, mayresult in additional restrictions on us leading to increased costs, additionalcapital expenditures and reduced operating flexibility. We believe that ourexperience provides us a relative competitive advantage in managingenvironmental risks.

In connection with TheTimber Company Merger in 2001, Plum Creek agreed to indemnify Georgia-Pacificfor substantially all of the liabilities attributed to The Timber Company. Duringthe fourth quarter of 2003, Georgia-Pacific provided Plum Creek withinformation about the existence of mine tailings and approximately4.5 billion gallons of acidic surface water on approximately 90 acres inHot Spring County, Arkansas, on former Georgia-Pacific properties. Baritemining and related activities were conducted on the site between 1939 and 1981in part by lessees of an entity that was acquired by Georgia-Pacific. Theenvironmental issues associated with this site are currently being investigatedand no remediation plan has yet been approved. There is not sufficientinformation, therefore, to adequately assess the costs, if any, associated withthis matter or Georgia-Pacific’s degree of responsibility. No amounts have beenaccrued 

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for thispotential liability, as Plum Creek’s liability in this matter cannot bereasonably determined at this time. Furthermore, to the extent Plum Creek isrequired 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’sinsurance policy, or indemnity obligations of various lessees that conductedmining operations on the property, or both.

**Timberlands**

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

**ENCUMBRANCES**

Under the terms of our debt agreements, we have agreednot to pledge, assign or transfer timberlands, except under limited circumstances.The holders of our $38 million face value 11.125% First Mortgage Notes due 2007have a first mortgage lien on a significant portion of our lumber, plywood andMDF facilities.

The title to ourtimberlands does not always include the related hard rock mineral interests oroil and gas rights. Title to the timberlands is subject to presently existingeasements, rights of way, flowage and flooding rights, servitudes, hunting andother leases, licenses and permits, none of which materially adversely affectthe value of the timberlands or materially restrict the harvesting of timber orother operations.

**EMPLOYEES**

We currently haveapproximately 760 salaried and 1,230 non-union hourly employees. We believethat our employee relations are good. Our wage scale and benefits are generallycompetitive with other forest products companies. The planting of seedlings andthe harvesting and delivery of logs are conducted by independent contractorswho are not our employees.

**Item 2.        Properties**

We believe that our timberlandsand manufacturing facilities are suitable and adequate for current operations. Themanufacturing facilities are owned and are maintained through on-going capitalinvestments, regular maintenance and equipment upgrades. The majority of themanufacturing facilities are modern facilities. During 2004, our two MDFproduction lines operated near full production capability yielding a combinedoutput of approximately 246 million square feet of MDF. Our newlyconstructed thin-board production facility commenced operations in October of2001, increasing our overall MDF capacity by about 70%. Combined productionduring the start-up phase approximated 198 million square feet of MDFduring 2003 and 178 million square feet during 2002. During 2004, ourlumber and plywood manufacturing facilities produced near capacity takingadvantage of strong demand and near record product prices. See Item 1. “Business”for discussion of the location and description of properties and encumbrancesrelated to properties.

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**Item 3.        LegalProceedings**

There is no individualpending or threatened litigation involving the company that we believe wouldhave a material adverse effect on the company’s financial position, results ofoperations or liquidity. However, see Note 13 of the Notes to FinancialStatements.

**Item 4.        Submissionof Matters to a Vote of Security Holders**

None.

**EXECUTIVEOFFICERS OF THE REGISTRANT**

Executiveofficers are elected annually at the first quarterly meeting of the Board ofDirectors following the annual meeting of stockholders.
| **Name**                   | ** ** | ** ** | ** ** | **Age**                                               | ** ** | **Office**(J) | ** ** | **Officer  Since** |
|----------------------------|------------|------------|------------|-------------------------------------------------------|------------|---------------|------------|--------------------|
| Rick R. Holley**(A)**      |       | 53         |       | President and Chief  Executive Officer                |       | 1989          |
| William R. Brown**(B)**    |       | 53         |       | Executive Vice  President and Chief Financial Officer |       | 1995          |
| Michael J. Covey**(C)**    |       | 47         |       | Executive Vice  President                             |       | 1998          |
| Thomas M. Lindquist**(D)** |       | 44         |       | Executive Vice  President                             |       | 2001          |
| James A. Kraft**(E)**      |       | 49         |       | Senior Vice  President, General Counsel and Secretary |       | 1989          |
| David A. Brown**(F)**      |       | 50         |       | Vice President,  Controller                           |       | 2002          |
| Barbara L. Crowe**(G)**    |       | 53         |       | Vice President, Human  Resources                      |       | 1997          |
| Joan K. Fitzmaurice**(H)** |       | 47         |       | Vice President,  Audit and Financial Services         |       | 2002          |
| David W. Lambert**(I)**    |       | 44         |       | Vice President,  Treasurer                            |       | 2002          |

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**(A)****        **Servedsince January 1994 as President and Chief Executive Officer. Mr. Holleywas Vice President and Chief Financial Officer from April 1989 to December 1993.

**(B)****       **Servedsince May 1999 as Executive Vice President and Chief Financial Officer. Mr. Brownwas 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)****       **Servedsince August 2001 as Executive Vice President. Mr. Covey was SeniorVice President from August 2000 to August 2001, Vice President,Resources from January 1998 to August 2000, General Manager, RockyMountain Timberlands from August 1996 to January 1998, Director ofOperations, Rocky Mountain Region from June 1995 to August 1996, andPlant Manager, Ksanka Sawmill from August 1992 to June 1995.

**(D)****      **Servedsince December 2001 as Executive Vice President. Mr. Lindquist wasExecutive Vice President of Global Sales and Corporate Alliances for TrammellCrow Company serving from June 1986 to December 2001.

**(E)****       **Servedsince January 2002 as Senior Vice President, General Counsel andSecretary. Mr. Kraft was Vice President, General Counsel and Secretaryfrom April 1996 to January 2002, Vice President, Law from January 1994to April 1996 and Vice President, Law and Corporate Affairs from April 1989to December 1993.

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**(F)****        **Servedsince January 2002 as Vice President, Controller. Mr. Brown wasController from November 1994 to January 2002 and Director ofPlanning from July 1994 to November 1994.

**(G)****      **Servedsince April 1997 as Vice President, Human Resources.

**(H)****      **Servedsince June 2002 as Vice President, Audit and Financial Services. Ms. Fitzmauricewas a Partner with PricewaterhouseCoopers LLP from 1997 through 2001.

**(I)****           **Servedsince January 2002 as Vice President, Treasurer. Mr. Lambert wasDirector of Planning, Treasurer from June 1998 to January 2002 andDirector of Finance and Treasurer from November 1994 to June 1998.

**(J)****          **SinceJuly 1, 1999, Ms. Crowe and Messrs. Holley, Brown, Brown, Covey,Kraft and Lambert have served in their indicated capacities for Plum CreekTimber Company, Inc. Prior to the July 1, 1999 REIT conversion, thelisted individuals served in their indicated capacities of the general partnerof Plum Creek Timber Company, L.P. or the predecessor of the general partner.There are no family relationships among them.

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**PART II**

**Item 5.**                        Marketfor the Registrant’s Common Equity and Related Stockholder Matters

Plum Creek Timber Company, Inc.’s common stock istraded on the New York Stock Exchange and the Pacific Exchange. As of February 28,2005, there were approximately 21,441 stockholders of record of 183,805,877 outstanding shares.

Tradingprice data, as reported on the New York Stock Exchange Composite Tape, anddeclared cash dividend information for the **yearsended December 31, 2004 and 2003**, are as follows:
| ** **               | ** ** | **1st Qtr.** | ** ** | **2nd Qtr.** | ** ** | **3rd Qtr.** | ** ** | **4th Qtr.** | ** ** |
|--------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| **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** | ** ** |
| **2003**                 |       |              |       |              |       |              |       |              |       |
| High                     |       | $                 | 24.29      |              | $          | 27.30             |       | $                 | 27.47      |   | $ | 30.75 |   |
| Low                      |       | 20.88             |       | 21.50             |       | 24.83             |       | 25.28             |       |
| Cash Dividend per  Share |       | $                 | 0.35       |              | $          | 0.35              |       | $                 | 0.35       |   | $ | 0.35 |   |

 

Future dividends will bedetermined by our Board of Directors, in its sole discretion, based onconsideration of a number of factors including, but not limited to, our resultsof operations, cash flow and capital requirements, economic conditions, taxconsiderations, debt covenant restrictions that may impose limitations on ourability to make cash payments, borrowing capacity, changes in the prices of anddemand for our products, and changes in our ability to sell or exchangetimberlands at attractive prices. Other factors that our Board of Directorsconsiders include the appropriate timing of timber harvests, acquisition anddivestiture opportunities, stock repurchases, debt repayment and other means bywhich the company delivers value to our stockholders. See Notes 6 and 7 ofthe Notes to Financial Statements for the restrictions under our debtagreements to pay dividends.

**EquityCompensation Plan Information**

Thefollowing table summarizes options and other rights outstanding under PlumCreek’s equity based compensation plans **as ofDecember 31, 2004**:
| **Plan category**                                             | ** ** | ** ** | ** ** | **Securities to be  issued upon  exercise**(A) | ** ** | **Weighted-average  exercise price**(B) | ** ** | **Securities  available for  future issuance**(C) | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders            |       |       | 1,727,391  |                                                          |       |                                         | $          | 27.33                                                       |       |   |   | 10,034,335 |   |   |
| Equity compensation  plans not approved by security holders**(D)** |       |       | —     |                                                          |       |                                         | —     |                                                        |       |   | — |   |   |

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**(A)****        **Numberof securities to be issued upon exercise of outstanding stock options.

**(B)****       **Weighted-averageexercise price of outstanding options.

**(C)****       **Numberof securities remaining available for future issuance under equity compensationplans, excluding securities reflected in column **(A)**. Represents shares available for future issuance under theStock Incentive Plan. See Note 11 of the Notes to Financial Statements for adescription of the various stock-based grants that may be issued under theStock Incentive Plan. At December 31, 2004, 2.4 million shares of the12.4 million shares available for issuance under Plum Creek’s Stock IncentivePlan have been used for the grant of non-qualified stock options, the grant ofrestricted stock or 

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payment of vested valuemanagement awards. The number of shares to be issued in connection withdividend equivalents and value management awards is not determinable until theend of their respective performance periods.

**(D)****      **Asof December 31, 2004, there are 636,090 outstanding options to acquirePlum Creek common stock that were issued originally under the Georgia-Pacificlong-term incentive plans as options to acquire Georgia-Pacific’s TimberCompany stock. These stock options have a weighted average exercise price of$16.01 per common share and were assumed by the company in connection with TheTimber Company Merger. Although the company’s stockholders did not separatelyapprove the assumption of these stock options, the stockholders did approveeach of The Timber Company Merger and the related merger agreement (and all ofthe transactions contemplated by the merger agreement, including the company’sassumption of the stock options). No additional Plum Creek stock options may begranted under the Georgia-Pacific long-term incentive plans as a result of TheTimber Company Merger. See Note 11 of the Notes to Financial Statements.

Wemaintain a corporate governance page on our website that includes keyinformation about our corporate governance initiatives. That informationincludes our Corporate Governance Guidelines, Code of Ethics, and charters forour Audit, Compensation, and Corporate Governance and Nominating Committees.The corporate governance page can be found at *www.plumcreek.com*,by clicking on “Investors,” and then “Corporate Governance.” You also mayobtain copies of these policies and codes by contacting our Investor RelationsDepartment, 999 Third Avenue, Suite 4300, Seattle, Washington 98104, or bycalling (206) 467-3600.

**Item 6.**                        SelectedFinancial Data

Prior to October 5, 2001, Georgia-PacificCorporation (“Georgia-Pacific”) had two classes of common stock intended toreflect separately the performance of Georgia-Pacific’s manufacturing (“Georgia-PacificGroup”) and timber businesses (“The Timber Company”). The Timber Company representedthe separate group of businesses whose results were tracked by Georgia-Pacific’sTimber Company stock (“Timber Company Stock”) and was engaged primarily in thegrowing and selling of timber on the approximately 4.7 million acres oftimberlands that Georgia-Pacific owned or leased.

On October 5, 2001, Georgia-Pacific redeemed allof the outstanding shares of Timber Company Stock, or 82.3 million shares. Inconnection with the redemption, each outstanding share of Timber Company Stockwas exchanged for one unit, or a “Unit,” that represented one outstanding shareof common stock of each of Georgia-Pacific’s former subsidiaries (“Subsidiaries”),which collectively held all of the assets and liabilities attributed to TheTimber Company. On October 6, 2001, holders of the Units received1.37 shares of Plum Creek common stock for each Unit, totaling 112.7million shares. Therefore, 112.7 million shares have been appliedretroactively in computing basic earnings per share for all periods prior tothe merger. Diluted earnings per share include the dilutive effect of 3.8million outstanding options using the treasury stock method at the convertedexercise prices ranging from $15.29 to $18.34 per share.

The Timber Company Merger was accounted for as a “reverseacquisition,” with The Timber Company being treated as the acquirer foraccounting and financial reporting purposes. As a consequence, the historicalfinancial statements of The Timber Company became the financial statements ofPlum Creek effective as of October 6, 2001. The financial data for theyear ended December 31, 2001, includes the operating results of The TimberCompany up until the date of the merger and the operating results of the mergedcompany for the remainder of the year. The financial data for 2000 reflectsonly the data of The Timber Company.

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

**Financial Highlights**

Thefollowing table summarizes selected financial highlights for the **five most recent fiscal years**(dollars inmillions, except per share amounts):
| ** **                                      | ** ** | **2004**(A) | ** ** | **2003**(A) | ** ** | **2002**(A) | ** ** | **2001**(B) | ** ** | **2000** | ** ** |
|-------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|----------|------------|
| Revenues                                        | ** ** | **$**       | **1,528**  |        | $          | 1,196       |       | $           | 1,137      |     | $          | 598 |   | $ | 493 |   |
| Operating Income                                | ** ** | **477**     |       | 303         |       | 338         |       | 250         |       | 303      |       |
| Net Interest  Expense                           | ** ** | **111**     |       | 117         |       | 103         |       | 54          |       | 44       |       |
| Income before  Income Taxes                     | ** ** | **366**     |       | 186         |       | 235         |       | 196         |       | 259      |       |
| Benefit  (Provision) for Income Taxes           | ** ** | **(27**     | **)**      | 6           |       | (2          | )          | 142         |       | (97      | )          |
| Income from  Continuing Operations              | ** ** | **339**     |       | 192         |       | 233         |       | 338         |       | 162      |       |
| Gain on Sale of  Properties, net of tax         | ** ** | **23**      |       | —      |       | —      |       | —      |       | —   |       |
| Net Income                                      | ** ** | **362**     |       | 192         |       | 233         |       | 338         |       | 162      |       |
| Non-Cash Items                                  |       |        |       |        |       |        |       |        |       |     |       |
| Depreciation, Depletion and Amortization**(C)** | ** ** | **114**     |       | 108         |       | 106         |       | 55          |       | 27       |       |
| Basis of Real Estate Sold                       | ** ** | **134**     |       | 66          |       | 28          |       | 18          |       | 17       |       |
| Balance Sheet Items                             |       |        |       |        |       |        |       |        |       |     |       |
| Total Assets                                    | ** ** | **4,378**   |       | 4,407       |       | 4,294       |       | 4,129       |       | 1,619    |       |
| Total Debt, including Timber Obligations        | ** ** | **1,897**   |       | 2,076       |       | 1,884       |       | 1,701       |       | 1,009    |       |
| Earnings per Share                              |       |        |       |        |       |        |       |        |       |     |       |
| Income from Continuing Operations               |       |        |       |        |       |        |       |        |       |     |       |
| Basic                                           | ** ** | **$**       | **1.85**   |        | $          | 1.05        |       | $           | 1.26       |     | $          | 2.61 |   | $ | 1.44 |   |
| Diluted                                         | ** ** | **$**       | **1.84**   |        | $          | 1.04        |       | $           | 1.26       |     | $          | 2.58 |   | $ | 1.42 |   |
| Net Income                                      |       |        |       |        |       |        |       |        |       |     |       |
| Basic                                           | ** ** | **$**       | **1.97**   |        | $          | 1.05        |       | $           | 1.26       |     | $          | 2.61 |   | $ | 1.44 |   |
| Diluted                                         | ** ** | **$**       | **1.97**   |        | $          | 1.04        |       | $           | 1.26       |     | $          | 2.58 |   | $ | 1.42 |   |
| Dividend Declared per Share**(D)**              | ** ** | **$**       | **1.42**   |        | $          | 1.40        |       | $           | 1.49       |     | $          | 1.14 |   | — |   |
| Harvest Volume  (in million tons)               | ** ** | **18.6**    |       | 19.0        |       | 19.3        |       | 13.9        |       | 11.7     |       |

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**(A)****        **During2004, Plum Creek acquired approximately 78,000 acres of timberlands for$66 million. Timberland dispositions during the same time period comprisedapproximately 377,000 acres. During 2003, the company acquired 139,000acres of timberlands for $162 million and disposed of 125,000 acres. During2002, the company acquired 307,000 acres of timberlands for $141 millionand sold 37,000 acres.

**(B)****       **EffectiveJanuary 1, 2001, the company changed its accounting policy for timberreforestation costs by capitalizing certain costs incurred after a timber standhas been established, primarily silviculture costs, that were previouslyexpensed. Additionally, as a consequence of The Timber Company Merger, a taxbenefit of $216 million was recognized in 2001.

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**(C)****       **Includes$9 million lumber mill impairmentloss in 2004 and $4 million loss related to forest fires in 2003.

**(D)****      **SinceThe Timber Company was not a separate legal entity but rather an operatingdivision of Georgia-Pacific, The Timber Company common stock, the only equityissued with respect to The Timber Company, represented a class ofGeorgia-Pacific’s common stock. The Timber Company common stock paid aquarterly 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, andagain on December 28, 2001. The December 28, 2001, dividend represents theacceleration of our fourth quarter 2001 dividend that normally would have beenpaid in February 2002.

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**FORWARD-LOOKING STATEMENT**

This Reportcontains forward-looking statements within the meaning of the PrivateLitigation Reform Act of 1995. Some of the forward-looking statements can beidentified 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 othercomparable terminology. Forward-looking statements involve inherent risks anduncertainties. A number of important factors could cause actual results todiffer materially from those described in the forward-looking statements,including those factors described in “Risk Factors” immediately following thisItem 7. Some factors include changes in governmental, legislative andenvironmental restrictions, catastrophic losses from fires, floods, windstorms,earthquakes, volcanic eruptions, insect infestations or diseases, as well aschanges in economic conditions and competition in our domestic and exportmarkets and other factors described from time to time in our filings with theSecurities and Exchange Commission. In addition, factors that could cause ouractual results to differ from those contemplated by our projected, forecasted,estimated or budgeted results as reflected in forward-looking statementsrelating to our operations and business include, but are not limited to:

·       ourfailure to qualify as a real estate investment trust, or REIT, or our failureto achieve the expected competitive advantages of operating as a REIT; 

·       anunanticipated reduction in the demand for timber products and/or anunanticipated increase in the supply of timber products; 

·       anunanticipated reduction in demand for higher and better use timberlands ornon-strategic timberlands;

·       ourfailure to make strategic acquisitions or to integrate any such acquisitionseffectively or, conversely, our failure to make strategic divestitures; and 

·       thefailure to meet our expectations with respect to our likely future performance.

It is likely that if oneor more of the risks materializes, or if one or more assumptions prove to beincorrect, the current expectations of Plum Creek and its management will notbe realized. Forward-looking statements speak only as of the date made,and neither Plum Creek nor its management undertakes any obligation to updateor revise any forward-looking statements.

**OVERVIEW**

**Operating Performance**

Operating income increased by $174 million, or 57%, to$477 million in 2004. This increase of $174 million was due primarilyto higher real estate sales and record income from our manufacturing segment. Operatingincome from our Real Estate Segment increased by $105 million, or 223%, to $152 million.During 2003 we completed an evaluation of our timberlands and concluded thatapproximately two-thirds of the acres we own represents core timberlands,approximately one-sixth represents higher and better use timberlands andapproximately one-sixth represents non-strategic timberlands. During 2004 weinitiated a plan to sell the non-strategic timberlands over the next five toten years, as well as increase our higher and better use timberland sales. As aresult, we sold 377,000 acres of timberlands in 2004 compared to selling125,000 acres in 2003.

Operating income for our Manufactured Products Segmentwas $58 million in 2004 compared to an operating loss of $5 million in 2003. Thisincrease of $63 million was due primarily to exceptionally strong lumber andplywood prices as a result of record-high housing starts. Housing starts during2004 were 

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approximately 1.95 millionunits, which was a 5.7% increase over the 25-year record high housing startsreached during 2003.

Operating income in our Northern Resources Segmentincreased by $18 million, or 22%, to $100 million in 2004 compared to2003, and operating income in our Southern Resources Segment decreased by $9 million,or 4%, to $207 million in 2004 compared to 2003. The improved operatingperformance in our Northern Resources Segment is due primarily to the increaseddemand for sawlogs as a result of near record-high lumber and plywood prices. However,despite strong lumber and plywood prices, sawlog prices in our SouthernResources Segment generally held steady during 2004 due primarily to an amplesupply of logs. Throughout our southern timberland ownership there arethousands of small private timberland owners. These small private timberlandowners generally increase the number of logs they harvest whenever the demandfor logs improves, which tends to mitigate any upward price pressure on oursouthern sawlogs.

Our 2004 earnings werealso impacted by a $9 million ($5 million net of tax) impairment loss for one ofour lumber mills (see “Critical Accounting Policies, Impairment of Long-LivedAssets” under this Item), and a $23 million gain on sale of properties, net oftax, from the sale of some of our coal reserves (see Note 3 of the Notesto Financial Statements). During the first quarter of 2005, we soldthe remainder of our coal reserves forapproximately $21 million in proceeds.

**KeyEconomic Factors Impacting Our Business**

Our operating performance is impacted primarily by thesupply and demand for logs and wood products in the United States. Theshort-term supply of logs is impacted primarily by weather and the level ofharvesting activities. The demand for logs in the United States is impacted byhousing starts, repair and remodeling activities and the amount of importedlumber, primarily from Canada. Housing starts are impacted primarily byinterest rates. Mortgage interest rates continued at historically low levelsduring 2004 (averaging 6.0% for the year based on a 30-year fixed-rateconventional loan), which contributed to U.S. housing starts of approximately1.95 million units during 2004, their highest level in the past 25 years.

During 2004, the demand for sawlogs increased due tostrong lumber and plywood prices as a result of record-high housing starts. Inour Southern Resources Segment, the supply of sawlogs increased in response tothe increase in the demand for sawlogs. However, in our Northern ResourcesSegment, due to the extensive ownership of timberlands by governmental agenciesthere was only a limited increase in the supply of logs.

During 2004, the demand for wood products increaseddue to exceptionally strong housing starts and an improving U.S. economy. Thesupply of wood products in the United States is generally limited by the amountof installed production capacity (e.g., lumber mills) in North America, and toa lesser extent the level of offshore imported wood products. Lumber andplywood prices were at near record levels during much of 2004 due to thesignificant increase in demand and only a modest increase in the supply oflumber and plywood.

Imports of lumber and other wood products into theUnited States are impacted by currency exchange rates, tariffs and quotas,availability and cost of transportation, and the relative cost of manufacturingwood products. Canadian imports into the U.S. capture a significant share(approximately 35%) of the U.S. lumber market. A U.S. industry coalitionbelieves the Canadian government, which owns most of the timberlands in Canada,provides unfair subsidies by selling timber at below market prices. Prior to2002, a trade agreement with Canada limited imports of lumber into the UnitedStates. Since May 2002, the U.S. has imposed duties on Canadian imports. Atthe same time, the U.S. and Canada have been trying to reach a negotiatedsettlement, but to date no settlement has been reached.

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During 2004, the U.S.dollar depreciated against most other major currencies in the world. Despite aweaker U.S. dollar, imports of wood products into the United States from Canadaincreased due to extremely strong lumber and plywood prices, as well as anincrease in offshore imports.

**Core Timberlands**

We estimate that of our approximately 7.8 millionacres of timberlands about 70% (5.5 million acres) are highly productiveand strategically located near key customers and markets. We have alsoidentified approximately 17% (1.3 million acres) of our timberlands as havingvalues well in excess of timberland values (“higher and better use timberlands”).These properties are better suited for recreational, conservation ordevelopment purposes. Finally, we have identified approximately 13% (1.0million acres) of our timberlands as being non-strategic.

We expect to sell ourhigher and better use timberlands over the next 15 years. The non-strategictimberlands, which are made up of large parcels as well as smaller tracts, areexpected to be sold over the next five to ten years. In the meantime, thesetimberlands continue to be used productively in our business of growing andselling timber. The capital generated from the sale of timberlands will be usedfor a variety of purposes, which may include strategic acquisitions ofadditional core timberlands, investments in our business, payments ofdividends, repayments of debt and/or repurchases of our stock.

**Harvest Levels**

Our operating performanceis also impacted by the volume of trees we harvest each year and the percentageof sawlogs and pulpwood included in our annual harvest. During 2004, weharvested a total of 18.6 million tons compared to a total of19.0 million tons during 2003. We expect to harvest approximately 19.5million tons during 2005. We expect the percentage mix of sawlogs and pulpwoodincluded in our 2005 harvest to be comparable to the percentage mix weharvested during 2004. Future harvest levels may vary from historic levels totake advantage of favorable prices or due to factors outside of our controlsuch as weather and fires. Future harvest levels may also be impacted by oursale of timberlands and the extent to which proceeds are reinvested in coretimberlands.

**CRITICAL ACCOUNTING POLICIES**

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statementswhich have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. Actual results may differ from theseestimates under different assumptions or conditions.

We believe that thefollowing critical accounting policies affect our most significant judgmentsand estimates used in preparation of our consolidated financial statements:

**Revenue Recognition**

Timber sales revenues are recognized when legalownership and the risk of loss transfer to the purchaser and the quantity soldis determinable. The company sells timber under delivered log agreements andsales of standing timber (or “stumpage”) using pay-as cut contracts andlump-sum sale agreements.

***(1) DeliveredLog Sales.  ***Under a delivered log sale agreement,the seller harvests the tree and delivers it to the buyer. Revenue isrecognized when the log is delivered as risk of loss and title transfer to thebuyer. With delivered log sales, the seller incurs the cost of logging andhauling. For the last few days of an accounting period, there are typicallydelivered logs for which we have not received documentation 

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and therefore have notprocessed the transaction in our log accounting system. For these sales, weestimate the delivered log sale information and make an accrual for thesedeliveries along with an accrual for the costs of logging and hauling in theappropriate accounting period.

***(2) Pay-as-CutContracts.  ***Pay-as-cut contracts are agreementswhich the buyer agrees to harvest all of the trees on a tract of land for anagreed upon price for each type of tree over the term of the contract (usually12 to 18 months). In some cases an advance is received in connection withpay-as-cut contracts, and in other cases the buyer agrees to harvest onlycertain trees on a tract of land. Under pay-as-cut contracts, the buyer isresponsible for all logging and hauling costs. Revenue is recognized when thetrees are harvested, as title and risk of loss has transferred to the buyer. Alongwith their payment, the buyer furnishes us with supporting information for theamount of wood that has been removed. Total revenue recognized under apay-as-cut contract is a function of the total volume of wood removedmultiplied by the agreed upon per unit price for each of type of tree on atract of land. There is typically a lag between the time the tree is harvestedand the time the buyer pays us for the tree. At the end of each accountingperiod, we estimate the amounts harvested under pay-as-cut contacts and make anaccrual for the trees that have been cut but for which we have not receiveddocumentation.

***(3) Lump-sum sale agreements.  ***Under alump-sum sale agreement, the buyer and seller agree to a lump-sum price for allthe timber available for harvest on a tract of land. Generally the lump-sumprice is paid when the contract is signed. Title to the timber and risk of losstransfers to the buyer as the timber is cut. Therefore, revenue is recognizedbased on the amount of timber actually harvested, compared to total timberavailable 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 forall logging and hauling costs. Lump-sum sales are generally marketed and soldto the highest bidder. Bids are typically based on a timber cruise, which is an estimate of the total volume of timber ona tract of land broken down by the various types of trees (such as softwoodsawlogs, hardwood pulpwood, etc.). Total revenue recognized under alump-sum sale contract is the amount of the highest bid, and is not dependentupon the volume or type of trees actually harvested.

Since revenue is recognized under a lump-sum saleagreement as the trees are cut, an estimate of how much revenue to recognizeeach month is made based on how much volume has been removed compared to thetotal volume available for harvest on a tract of land according to the timbercruise. We generally receive weekly information from the buyer regarding howmuch volume has been removed. Additionally, we gather information by observingthe tract to estimate the percentage of original timber harvested. In mostcases, the total volume harvested from a tract of land is different than thevolume estimated in the timber cruise. If the total volume removed is greaterthan the cruise-estimated volume, we will stop recognizing revenue once thetotal revenue recognized is equal to total lump-sum contract price. No revenuewill be recognized for volumes harvested in excess of the cruise-estimatedvolume. If the total volume removed is less than the cruise-estimated volume,an adjustment will be recorded in the month in which we learn of thedifference. The adjustment is an increase in revenue equal to the differencebetween the total revenue recognized to date and the total lump-sum contractprice. Finally, for our larger lump-sum contracts, which cover multipletracts, we adjust revenues at the end of each accounting period for any knowntrends in the tracts that have been completely harvested. For lump-sumcontracts completed during the past twelve quarters, our largest quarterlyadjustment to record the difference between estimated lump-sum revenues andactual revenues has been $0.6 million.

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Thefollowing tables summarize amounts recognized under each method from sales toexternal customers in the company’s financial statements for the**yearsended December 31** (in millions):
| ** **          | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------|------------|------------|------------|----------|------------|
| Revenues from       |       |       |       |     |       |   |   |   |   |
| Delivered log sales | ** ** | ** ** | **$**      | **563**  |       |   |   | $ | 520 |   |   |
| Pay-as-cut sales    | ** ** | ** ** | **$**      | **53**   |       |   |   | $ | 66 |   |   |
| Lump-sum sales      | ** ** | ** ** | **$**      | **47**   |       |   |   | $ | 53 |   |   |

 
| ** **                                               | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Accrued revenues  for delivered and pay-as-cut log sales | ** ** | ** **                  | **$**      | **15**                      |       |   |   | $ | 33 |   |   |
| Deferred revenues for  lump-sum contracts                | ** ** | ** **                  | **$**      | **6**                       |       |   |   | $ | 4 |   |   |

 

We attempt to estimate accrued revenues at the end ofeach accounting period based on the best information available. We do notbelieve that there is a material difference between estimated accrued revenuesand actual revenues.

Substantially all of ourtimber sales in the Northern Resources Segment are under delivered log saleagreements. In our Southern Resources Segment, a substantial portion of ourtimber sales consists of either pay-as-cut contracts or lump-sum sales. Underboth pay-as-cut contracts and lump-sum sales, the buyer is responsible for thelogging and hauling costs. Therefore, operating profit as a percentage ofrevenue is significantly higher in our Southern Resources Segment.

***Real Estate Sales***

We estimate that included in the company’s7.8 million acres of timberlands are approximately 1.3 million acresof higher and better use timberlands and 1.0 million acres of non-strategictimberlands. The higher and better use timberlands are expected to be sold overthe next 15 years for conservation, residential or recreational purposes. Thenon-strategic timberlands, which consist of large blocks as well as smallertracts, are expected to be sold over the next five to ten years. In themeantime, these timberlands continue to be used productively in our business ofgrowing and selling timber. The timing of real estate sales, however, is afunction of many factors, including the availability of government andnot-for-profit funding, the general state of the economy, the plans of adjacentlandowners, our expectation of future price appreciation and the timing ofharvesting activities. As a result, the timing of our real estate sales maymaterially impact our reported operating income and net income.

During 2004, the Real Estate Segment reported anoperating profit percentage of approximately 50%. Our Real Estate Segment’sannual operating profit percentage can range from 35% to 75% of revenues. Operatingprofit percentages vary significantly and depend upon the mix of real estatesales. The operating profit percentage depends on the nature of the interestsold and how much the market value of the property has risen over its bookvalue. For example, the sale of conservation easements will have an operatingprofit percentage of close to 100% because no book basis is allocated to thistype of revenue. Sales of recently acquired properties will generally haverelatively lower operating profit percentages while sales of properties held fora long time will tend to have relatively higher operating profit percentages. Salesof timberlands owned by Plum Creek prior to The Timber Company Merger, which,for accounting purposes, were deemed acquired as of the merger date, will thushave low operating profit percentages since these properties were recorded atappraised value as of October 2001.

In connection with majortimberland acquisitions we are generally not able to identify our future realestate sales. However, while our purchase price allocation and relatedappraisals reflected greater values for real estate which may be sold in thefuture for uses which have a higher value than timber production, we aregenerally not able to identify specific properties. Therefore, in connectionwith our purchase price 

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allocationfor timberland acquisitions, the greater values for real estate are allocatedproportionately among all the acres acquired, except when we can specificallyidentified properties. In general, however, timberlands are acquired primarilyfor long-term use in our timber operations and specific properties cannot beidentified in advance because their value is dependent upon numerous factors,most of which are not known at the acquisition date, including current andfuture zoning restrictions, current and future environmental restrictions,future changes in demographics, future changes in the economy, current andfuture plans of adjacent landowners, and current and future funding ofgovernment and not-for-profit conservation and recreation programs. We believethat current and future results of operations could be materially differentunder different purchase price allocation assumptions, and generally, when weacquire properties, we do not have the ability, with any level of precision, toestimate which of the acquired properties will someday sell for more than theirunderlying timber production value.

**Impairment of Long-Lived Assets**

In general, the company evaluates its ability torecover its net investment in long-lived assets in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 144, Accounting for theImpairment or Disposal of Long-Lived Assets. SFAS No. 144 requiresrecognition of an impairment loss in connection with long-lived assets used ina business when the carrying value (net book value) of such assets exceeds theestimated future undiscounted cash flows attributable to such assets over theirexpected useful life. Impairment losses are measured by the extent to which thecarrying value of a group of assets exceeds the fair value of such assets at agiven point in time. When the fair values of the assets are not available, thecompany estimates the fair values by using the discounted expected future cashflows attributable to the assets. The cash flows are discounted at therisk-free rates of interest. Future cash flow estimates are based onprobability-weighted projections for a range of possible outcomes.  Furthermore, SFAS No. 144 requiresrecognition of an impairment loss in connection with long-lived assets held forsale when the carrying value of such assets exceeds an amount equal to theirfair value less selling costs.

The company has grown substantially throughacquisitions in recent years. A large portion of the carrying value of thecompany’s Timber and Timberlands, and Property, Plant and Equipment representsamounts of the purchase price of recent acquisitions allocated to those assets.The allocation of the purchase price in a business combination is highlysubjective. Management is required to estimate the fair values of acquiredassets and liabilities as of the acquisition date. Subsequent to the originalallocation, these assets are tested for impairment whenever events or changesin circumstances indicate that the carrying value of the assets may not berecoverable through future operations. SFAS No. 144 requires thatlong-lived assets be grouped and evaluated for impairment at the lowest levelfor which there are independent cash flows. The company tracks cash flows forits 7.8 million acres of timberlands by grouping them into seven geographicareas in the Northern Resources Segment and nine geographic areas in theSouthern Resources Segment. Additionally, the company tracks cash flows foreach of its ten manufacturing facilities.

***(1)  Timberand Timberlands Used in Our Business.  ***SFAS No. 144provides that for assets used in a business, an impairment loss is recordedonly when the carrying value of such assets is not recoverable through futureoperations. The recoverability test is based on undiscounted future cash flowsover the expected life of the assets. The company uses one harvest cycle (whichranges between 20 and 90 years) for evaluating the recoverability of its timberand 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 thetimber and timberlands used in its business.

***(2)  Timberand Timberlands Held for Sale.  ***SFAS No. 144provides that an impairment loss is recognized for long-lived assets held forsale when the carrying value of such asset exceeds an amount equal to its fairvalue less selling costs. An asset is generally considered to be held for salewhen we have committed to a plan to sell the asset, the asset is available forimmediate sale in its present condition, we 

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have initiated an activeprogram to locate a buyer, and the sale is expected to close within one year. During2004, the above criteria were met by a number of our timberland properties, andwe recognized impairment losses of $21 million. Similarly, we recognizedimpairment losses of $14 million during 2003 in connection with timberlandsheld for sale. See Note 3 of the Notes to Financial Statements. We expect tocontinue to sell or exchange non-strategic timberlands to other forest productscompanies or non-industrial investors, and it is probable that we willrecognize, in accordance with SFAS No. 144, additional impairment lossesin the future in connection with sales of non-strategic timberlands.

***(3)  Property, Plant and Equipment.  ***Thecarrying value of Property, Plant and Equipment represents primarily the netbook value of our ten manufacturing facilities. Each manufacturing facility istested for impairment whenever events or changes in circumstances indicate thatthe carrying amount may not be recoverable through future operations. Theestimated future cash flows over the remaining useful live of a manufacturingfacility is highly subjective and is dependent upon estimates for futureproduct pricing, raw material costs, volumes of product sold, and residualvalue of the facility. During the fourth quarter of 2004, we recognized animpairment loss of $9 million in connection with one of our lumber mills due toa declining supply of logs. The availability of logs in close proximity to ourmills has been declining and is expected to decline further in the future. Wecurrently estimate that the carrying value for our other nine manufacturingfacilities is recoverable through future operations and that our estimate offuture cash flows is reasonable. However, if wood product prices were todecline and remain weak for an extended period of time, or if log or rawmaterial availability declines more than expected, the company may be requiredto record an impairment loss for one or more of its manufacturing facilities ina future period.

**Depletion**

Depletion, or costs attributed to timber harvested, isrecorded as trees are harvested. Depletion rates for each region are adjustedat least annually. Depletion rates are computed by dividing (A) the sum of(1) the original cost of the timber less previously recorded depletionplus (2) estimated future silviculture costs, including the impact ofinflation, that are expected to be incurred over the next harvest cycle, by (B) thetotal 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 as90 years in the North. The estimate of future silviculture costs islimited to the expenditures that are expected to impact growth rates over theharvest cycle. The depletion rate calculations do not include an estimate foreither future reforestation costs associated with a stand’s final harvest orfuture volume in connection with the replanting of a stand subsequent to itsfinal harvest.

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Thefollowing table summarizes depletion expense recognized in the company’sfinancial statements, key assumptions and sensitivities to changes inassumptions for the**years ended December 31** (dollars inmillions, except per ton amounts):
| ** **                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Depletion Expense                                                       |       |     |       |     |       |
| Northern Resources Segment                                              | ** ** | **$**    | **20**     |     | $          | 23 |   |
| Southern Resources Segment                                              | ** ** | **46**   |       | 44       |       |
| Total depletion expense                                                 | ** ** | **$**    | **66**     |     | $          | 67 |   |
| Average Depletion Rates (per ton)                                       |       |     |       |     |       |
| Northern Resources Segment                                              | ** ** | **$**    | **3.78**   |     | $          | 4.16 |   |
| Southern Resources Segment                                              | ** ** | **$**    | **3.47**   |     | $          | 3.25 |   |
| Assumptions Used to Determine the Average Depletion  Rates              |       |     |       |     |       |
| Estimated future silviculture costs, including the  impact of inflation |       |     |       |     |       |
| Northern Resources Segment                                              | ** ** | **$**    | **53**     |     | $          | 58 |   |
| Southern Resources Segment**(A)**                                       | ** ** | **$**    | **381**    |     | $          | 330 |   |
| Estimated future volume (in million tons)                               |       |     |       |     |       |
| Northern Resources Segment                                              | ** ** | **281**  |       | 289      |       |
| Southern Resources Segment                                              | ** ** | **456**  |       | 441      |       |
| Sensitivity of 2004 Results to Changes in Key  Assumptions              |       |     |       |     |       |
| Increase in depletion expense for a 10%:                                |       |     |       |     |       |
| Increase in estimated future silviculture costs**(B)**                  |       |     |       |     |       |
| Northern Resources Segment                                              | ** ** | **$**    | **0.1**    |     |       |   |
| Southern Resources Segment                                              | ** ** | **$**    | **1.0**    |     |       |   |
| Decrease in estimated future volume**(C)**                              |       |     |       |     |       |
| Northern Resources Segment                                              | ** ** | **$**    | **2.2**    |     |       |   |
| Southern  Resources Segment                                             | ** ** | **$**    | **5.1**    |     |       |   |

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**(A)****        **Increasein future estimated silviculture costs is due, in part, to recent acquisitionsthat increased total estimated acres to receive silviculture treatments,primarily fertilization. The impact of this increase on our depletion rates waspartially offset by a corresponding increase in estimated future harvestvolumes related to these acquisitions. Additionally, for certain timber standswe estimated application of an additional fertilization treatment during theharvest cycle. This additional fertilization was estimated to reduce theharvest cycle length, rather than increase estimated future harvest volumes.

**(B)****       **Assumesfuture timber volumes do not change.

**(C)****       **Assumesfuture silviculture costs do not change.

Significant estimates andjudgments are required to determine both future silviculture costs and thevolume of timber available for harvest over the harvest cycle. Some of thefactors impacting the estimates are changes in weather patterns, inflationrates, the cost of fertilizers and chemicals, the cost of capital, the actualand estimated increase in growth rates from fertilizer applications, therelative price of sawlogs and pulpwood, the actual and expected real priceappreciation of timber, the scientific advancement in seedling and growingtechnology, and changes in harvest cycles.

The company has investedin technology that enables it to predict its current standing inventory oftrees, future growth rates, and the benefits of scientific advancements inconnection with seedlings, planting techniques and fertilizer applications.Therefore, while estimates with respect to depletion computations will berevised at least annually, we do not expect the depletion rates will changematerially from year to year.

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**Deferred IncomeTaxes**

Plum Creek has elected tobe taxed as a REIT under sections 856-860 of the United States Internal RevenueCode commencing July 1, 1999. A REIT is generally not subject tocorporate-level tax if it satisfies certain requirements. On October 6,2001, The Timber Company, consisting of a group of corporate entities, mergedwith and into Plum Creek. As a consequence of the merger of a taxable entityinto a nontaxable entity, the deferred tax liabilities of The Timber Companywere eliminated except for any expected transactions that would be subject tobuilt-in gains tax.

Plum Creek will generallybe subject to corporate-level tax (built-in gains tax) only if it makes ataxable disposition of certain property acquired in The Timber Company Mergerwithin the ten-year period following the merger date. The built-in gains taxonly applies to gains from such asset sales to the extent the fair value of theproperty exceeds its tax basis at the merger date. In accordance with SFAS No. 109,*Accounting for Income Taxes*, thecompany recorded a tax benefit of $216 million in the fourth quarter of2001 as a result of The Timber Company Merger. The benefit of $216 millionrepresents the elimination of the deferred tax liability associated withtemporary differences related primarily to timberlands that are not expected tobe disposed of in a transaction subject to built-in gains tax during a ten-yearperiod following the merger.

We estimate thatapproximately 5% of The Timber Company’s timberlands will be sold in one ormore taxable transactions over the ten-year period ending October 5, 2011.As a result, $11 million of deferred taxes related to timberlands were noteliminated during the fourth quarter of 2001. Timberland sales subject to thebuilt-in gains tax through December 31, 2004, reduced our deferred taxliability by $0.6 million. This amount was lower than originally estimatedbecause a significant portion of the proceeds from our timberland sales thatwould otherwise be subject to the built-in gains tax were reinvested in like-kindproperty. The built-in gains tax can generally be avoided to the extentproceeds are reinvested in like-kind property within the statutory time period.It is not possible to predict whether we will be able to identify suitablereplacement properties in the future in order to avoid the built-in gains tax. Itis likely that actual timberland sales over the ten-year built-in gain periodwill be greater than, or less than, 5%. An adjustment to earnings will berequired in the period in which it is determined that timberland sales subjectto the built-in gains tax will be greater than, or less than, 5%.

**Long-Term IncentivePlans**

Plum Creek has astockholder approved Stock Incentive Plan that provides for the award ofnon-qualified stock options, restricted stock and restricted stock units,dividend equivalents and value management awards. See Note 11 of the Notes toFinancial Statements. During 2004, the company recognized $13 million ofcompensation expense associated with its long-term incentive plans, of which$6 million related to value management awards.

Value management awardsprovide incentive compensation to participants that is contingent upon thecompany’s performance measured against the performance of a peer group over athree-year period. Value management awards are earned in whole or in part basedon a sliding scale. No value management award is earned if the company’s totalshareholder return is below the 50th percentile of the peer group. The fullvalue management award is earned if the company’s total shareholder return isabove the 75th percentile.

Plum Creek recognizescompensation expense for value management awards based on the expected value ofthe award upon vesting and accrues the related expense over the vesting period.The actual expense cannot be determined until the end of the three-yearperformance period. Furthermore, since the amount of the award, if any, isbased on Plum Creek’s relative performance compared to that of its peer group,it is possible to have significant changes to the estimated award value duringthe performance period. Compensation expense related to the value managementawards is adjusted in the quarter in which 

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therehas been a material change in the expected vested value of the awards. Therefore,it is possible that an adjustment to the value management award expense may bematerial to the result of operations for the quarter and the year in which theestimated vested benefit is revised.

The performance period forthe 2002 value management awards ended on December 31, 2004. Due to thecompany’s strong relative performance, awards valued at $9 million in theaggregate vested at December 31, 2004. The company recorded compensationexpense in connection with the 2002 grants of $5 million, $2 million, and $2 million for the yearsended December 31, 2004, 2003, and 2002, respectively.

During 2004, the companyrecorded compensation expense of $1 million in connection with the 2004 grantsof value management awards. The 2004 estimated expense was based on theassumption that the company would achieve target performance at the end of thethree-year performance period. If we had assumed maximum performance at the endof the performance period, the 2004 expense would have been $3 million.

**Pensions**

Plum Creek providespension benefits under defined benefit pension plans that cover substantiallyall of our employees. See Note 10 of the Notes to Financial Statements. Wemaintain a qualified defined benefit pension plan and several supplemental(non-qualified) defined benefit pension plans. Participants’ benefits generallyvest after five years of service. The cash balance benefits for salariedemployees is determined based primarily on certain percentages of compensation,age, years of service and interest accrued based on the 30-year treasury bondrate. Furthermore, employees of the company on September 1, 2000, earnbenefits based on the greater of the cash balance formula or a monthly pensionbenefit that is principally based on highest monthly average earnings duringany consecutive sixty-month out of the last 120-month period and the number ofyears of service credit. The benefits of hourly employees are generally basedon a fixed amount per year of service.

Plum Creek’s contributionsto its qualified pension plan vary from year to year, but the company has madeat least the minimum contributions required by law in each year. Furthermore,we intend to fund our qualified pension plan annually such that the fair valueof plan assets equals or exceeds the actuarially computed accumulated benefitobligation (“ABO,” the approximate actuarially computed current pensionobligation if the plan was discontinued). The company has the same fundingpolicy for the non-qualified plans. However, assets related to thenon-qualified plans are held in a grantor trust and are subject to the claimsof creditors.

Thecomputation of the company’s benefit obligation, pension cost and accruedpension liability under accounting principles generally accepted in the UnitedStates of America requires us to make certain assumptions involving primarilythe following (weighted-average rates):
| ** **                                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Assumptions Used  to Determine the Benefit Obligation at December 31 |       |     |       |     |       |
| Discount rate**(A)**                                                      | ** ** | **5.75** | **%**      | 6.25     | %          |
| Rate of compensation increase**(C)**                                      | ** ** | **3.70** | **%**      | 4.50     | %          |
| Assumptions Used to Determine Net Periodic Benefit  Cost                  |       |     |       |     |       |
| Discount rate                                                             | ** ** | **6.25** | **%**      | 6.75     | %          |
| Expected long-term return on plan assets**(B)**                           | ** ** | **7.75** | **%**      | 7.75     | %          |
| Rate of  compensation increase**(C)**                                     | ** ** | **3.70** | **%**      | 4.50     | %          |

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**(A)****        **TheDecember 31, 2004 discount rates were determined by the resulting yield ofa hypothetical bond portfolio at December 31, 2004, matched to theexpected benefit payments under the plans. Bonds selected for this portfoliohad a Moody’s or Standard & Poor’s credit rating of “AA” or better asof December 31, 2004.

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**(B)****       **Theexpected long-term rate of return on plan assets assumption is based on thecurrent level of expected returns on risk free investments (primarilygovernment bonds), the historical level of the risk premium associated with theother asset classes in which the portfolio is invested and the expectations forfuture returns on each asset class. The expected return for each asset class isweighted based on the target asset allocation to develop the expected long-termrate of return on plan assets assumption for the portfolio.

**(C)****       **Theassumed rate of increase of future compensation levels represents our long-termestimate of such increases on the basis of the composition of planparticipants, past results and market expectations.

Other key assumptions used in the estimate includeprimarily those underlying the mortality table, and expected long-term ratesfor inflation, retirement and withdrawals, all of which are based on planexperience and standard actuarial methods but which are nevertheless subject touncertainty.

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

Thefollowing table summarizes key financial measures and sensitivities tochanges in assumption for the **years ended December 31**(in millions):
| ** **                                                                                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Key Financial  Measures                                                                                            |       |     |       |     |       |
| Pension expense                                                                                                    | ** ** | **$**    | **7**      |     | $          | 6 |   |
| Cash pension plan contributions—qualified plan                                                                | ** ** | **9**    |       | 5        |       |
| Cash grantor trust funding—supplemental plans                                                                 | ** ** | **1**    |       | 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                                                                | ** ** | **$**    | **0.2**    |     |       |   |
| decrease in weighted average discount rate                                                                         | ** ** | **0.3**  |       |     |       |
| increase in rate of increase in compensation levels                                                                | ** ** | **0.1**  |       |     |       |
| Increase in  qualified pension funding for every 0.25 percentage point decrease in  weighted average discount rate | ** ** | **$**    | **3.7**    |     |       |   |
|                                                                                                                    |            |          |            |          |            |  |  |

 

Assuming an averagelong-term rate of return on plan assets of 7.75%, a weighted average discountrate of 5.75% and a 3.7% rate of increase in compensation levels, we projectthat our pension expense for 2005 through 2007 will be approximately $9 millionannually, compared to $7 million in 2004. Over the same time period, theannual cash funding required under our present funding policy for the qualifiedpension plan is expected to be approximately $3 million during 2005, increasingto approximately $6 million in 2008.

**OFF-BALANCESHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, CONTINGENT LIABILITIES ANDCOMMITMENTS**

The consolidated financial statements of the companyreflect all of the operations and assets and liabilities of the company. Thecompany has no relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities. Consequently, the company has no off-balance sheetdebt. Furthermore, except for certain interest rate hedging transactions in2002, discussed more fully in Note 9 of the Notes to Financial Statements, thecompany is not a party to any derivative transactions.

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Thefollowing table summarizes our contractual obligations at **December 31, 2004** (in millions):
| ** **                          | ** ** | ** ** | ** ** | **Payment due by period** | ** ** |
|-------------------------------------|------------|------------|------------|------------------------------------------|------------|
| **Contractual Obligations**    | ** ** | ** ** | ** ** | **Total**                                | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than   5 years** | ** ** |
| Long-term debt**(A)**               | ** ** | **$**      | **1,875**  | ** **                               |       | **$** | **27** | ** ** |   |   | **$** | **280** | ** ** |   |   | **$** | **815** | ** ** |   |   | **$** | **753** | ** ** |   |
| Operating lease  obligations        | ** ** | **12**     | ** ** |                                     | **3**      | ** ** |   |   | **4** | ** ** |   |   | **3** | ** ** |   |   | **2** | ** ** |   |
| Timber  obligations                 | ** ** | **12**     | ** ** |                                     | **1**      | ** ** |   |   | **2** | ** ** |   |   | **2** | ** ** |   |   | **7** | ** ** |   |
| Long-term  incentive plans          | ** ** | **18**     | ** ** |                                     | **11**     | ** ** |   |   | **5** | ** ** |   |   | **2** | ** ** |   |   | **—** | ** ** |   |
| Purchase  Obligations**(B)**        | ** ** | **37**     | ** ** |                                     | **26**     | ** ** |   |   | **8** | ** ** |   |   | **1** | ** ** |   |   | **2** | ** ** |   |
| Other Long-Term  Liabilities**(C)** | ** ** | **—** | ** ** |                                     | **—** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   |
| Total Contractual  Obligations      | ** ** | **$**      | **1,954**  | ** **                               |       | **$** | **68** | ** ** |   |   | **$** | **299** | ** ** |   |   | **$** | **823** | ** ** |   |   | **$** | **764** | ** ** |   |
|                                     |            |            |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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**(A)****        **Excludesunamortized premiums of $10 million at December 31, 2004.

**(B)****       **Purchaseobligations are comprised primarily of $12 million for raw materials forour MDF facilities, $12 million for third-party logs for our plywood andsawmill facilities, $6 million for reforestation and silviculture, and$4 million for real estate development and other activities.

**(C)****       **Wehave not included any amounts for our other long-term liabilities, as we cannotestimate when we will be obligated to satisfy these liabilities. At December 31,2004, other long-term liabilities include workers’ compensation of $7 million,deferred compensation obligations of $14 million and non-qualified pensionobligations of $15 million. During each of the past two years we have fundedapproximately $2 million for workers’ compensation payments and expected thesame in the near future. We have made contributions to our qualified pensionplan such that the fair value of the pension plan assets at December 31,2004, exceeds the actuarially computed accumulated benefit obligation. As aresult of this funding level, there are no qualified pension-fundingobligations at December 31, 2004. We have several grantor trusts, whichhold assets associated with our deferred compensation obligations andnon-qualified pension obligations. At December 31, 2004, the fair value ofassets in one of our grantor trust is approximately equal to our deferredcompensation obligation of $14 million. Additionally, at December 31,2004, the fair value of assets in another grantor trust is approximately equalto the actuarially computed accumulated benefit obligation for ournon-qualified pension plans of $15 million. Assets in our grantor trusts havebeen reserved for the above obligations. However, grantor trust assets aresubject to the claims of creditors in the event of bankruptcy. See Notes8 and 10 of the Notes to Financial Statements.

**EVENTSAND 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 acontiguous block of trees of a similar age, species mix and silviculturalregime. At the forest level, ranging in size from 105,000 to 770,000 acres, weconsider the long-term sustainability and environmental impact of certainlevels of harvesting, certain external conditions such as supply agreements,and the level of demand for wood within the region. A forest is a broadadministrative unit, made up of a large number of stands. “Harvest scheduling”is the technical approach using computer modeling that considers all of theabove factors along with forest growth rates and financial assumptions toproject future harvest plans for a number of years forward.

Actual harvest levels may vary from planned levels dueto log demand, sales prices, the availability of timber from other sources, thelevel of timberland sales and acquisitions, the availability of legal access,abnormal weather conditions, fires and other factors that may be outside of ourcontrol. We believe that 

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our harvest plans aresufficiently flexible to permit modification in response to short-termfluctuations in the markets for logs. Furthermore, future harvest levels may beimpacted by both our planned sales of non-strategic and higher and better usetimberlands. The impact will depend on the level and extent we are able toreinvest proceeds in productive timberlands and the stocking levels and ageclass distribution of any newly acquired timberlands.

Harvest levels in theNorthern Resources Segment were 5.2 million tons during 2004 and5.6 million tons during 2003. Harvest levels in the Northern ResourcesSegment in 2005 are expected to increase by approximately 2%. Harvest levels inthe Southern Resources Segment were 13.3 million tons during 2004 and 13.4million tons during 2003. Harvest levels in the Southern Resources Segment in2005 are expected to increase by approximately 7%.

**U.S.—CanadaSoftwood Lumber Agreement**

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

The trade agreement expired in March 2001, andsoon thereafter a U.S. industry coalition, of which Plum Creek is a member,submitted anti-dumping and countervailing duty petitions to the InternationalTrade Commission and the U.S. Department of Commerce. In March 2002, theDepartment of Commerce rendered a final determination in favor of the U.S.industry coalition and set a 19.3% countervailing duty on Canadian lumberimports and an anti-dumping duty on all non-investigated Canadian exportersaveraging 9.7% (representing the weighted average of the anti-dumping ratesimposed on the investigated Canadian exporters). The Department of Commerce decreasedthese duties in April 2002 to 18.8% and 8.4%, respectively. In May 2002,the International Trade Commission rendered a final determination that the U.S.industry was threatened with material injury from Canadian lumber imports.Following this determination, the Department of Commerce put into effect thecountervailing and anti-dumping duties in May 2002. Reports indicate,however, that the final duties have not had the effect of decreasing Canadianlumber imports’ share of the U.S. market.

The future of the U.S.-imposed import duties onCanadian lumber remains uncertain. Canada appealed both the anti-dumping dutyand the countervailing duty to the WTO and NAFTA appeal boards. Both the WTOand NAFTA issued initial rulings that affirmed the U.S. position that Canadianstumpage practices are, in fact, providing a subsidy to the Canadianindustry, and upheld the validity of antidumping duties imposed on mostCanadian producers. Both the WTO and NAFTA rulings also included provisions forre-examining the calculation and level of the countervailing and theanti-dumping duties. In its most recent administrative review ruling in December 2004,the Department of Commerce recalculated the countervailing duty rate to 16.4%and the anti dumping duty rate to 3.8%, for a combined duty of 20.2%.

On April 30, 2004, NAFTA ruled that theInternational Trade Commission’s determination of injury to U.S. industry fromCanadian lumber imports, which is the basis for imposing the duties, was notsupported with substantial evidence. The commission unsuccessfully appealedthis decision, and was directed to issue a “no injury” opinion, which wasrendered in September 2004. The U.S. Trade Representative responded bycalling for the formation of an Extraordinary Challenge Committee under theNAFTA dispute resolution process to evaluate the NAFTA panel’s injury decision.A panel was formed to hear the challenge, and arguments before the panel areexpected to take place in March of 2005, and no decision is expected fromthe panel before the end of April 2005.

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To avoid protractedlitigation, the U.S. and representatives of the Canadian government continue topursue a settlement agreement. However, there can be no assurance that anagreement will be reached, or that the terms of any such final agreement wouldbe favorable to the U.S. lumber industry’s interests. Therefore, other factorsremaining unchanged, the downward pressure on domestic lumber and log pricescaused by Canadian imports could continue or increase, particularly duringperiods of weak lumber demand.

**Comparabilityof Financial Statement Periods**

***Acquisitions and Divestitures.   ***We havepursued and expect to continue to pursue both the acquisition and divestitureof timberlands to increase the value of our assets. During 2004, we acquired78,000 acres of timberlands located in Arkansas and Maine. During 2003, weacquired 139,000 acres of timberlands located primarily in South Carolina,Arkansas and New Hampshire. During 2002, we purchased 307,000 acres oftimberlands located primarily in Wisconsin. We sold approximately 377,000 acresof timberlands in 2004, 125,000 in 2003, and 37,000 in 2002. As a result ofthese timberland acquisitions and dispositions, our ownership was 7.8 millionacres at December 31, 2004, 8.1 million acres at December 31,2003, and 8.0 million acres at December 31, 2002. Accordingly, thecomparability of periods covered by the company’s financial statements is, andin the future may be, affected by the impact of timberland acquisitions anddivestitures.

**RESULTS OF OPERATIONS**

Thefollowing table compares **Operating Income (Loss) bySegment** for the **years endedDecember 31** (in millions):
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Northern  Resources                  | ** ** | **$**    | **100**    |     | $          | 82       |       | $ | 80 |   |
| Southern  Resources                  | ** ** | **207**  |       | 216      |       | 227      |       |
| Real Estate                          | ** ** | **152**  |       | 47       |       | 64       |       |
| Manufactured  Products               | ** ** | **58**   |       | (5       | )          | 1        |       |
| Other                                | ** ** | **9**    |       | 7        |       | 7        |       |
| Gain on Sale of  Other Assets        | ** ** | **5**    |       | —   |       | —   |       |
| Total Segment  Operating Income      | ** ** | **531**  |       | 347      |       | 379      |       |
| Other  Costs & Eliminations | ** ** | **(54**  | **)**      | (44      | )          | (41      | )          |
| Operating Income                     | ** ** | **$**    | **477**    |     | $          | 303      |       | $ | 338 |   |

 

**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 highersawlog prices ($27 million) and higher pulpwood prices ($9 million), offset inpart by lower sawlog sales volume ($23 million). Sawlog prices increased by 12%due primarily to strong lumber and plywood markets, good hardwood specialtydemand, and a limited supply of logs. Pulpwood prices increased by 17% dueprimarily to a shortage of logging contractors and low mill fiber inventories. Sawlogsales volume decreased by 9% due primarily to a planned reduction in harvestlevels.

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

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***Southern Resources Segment.  ***Revenues increased by $14 million,or 3%, to $459 million in 2004. This increase was due primarily to ahigher percentage of delivered log sales compared to sales of standing timber. Underits delivered log sale agreements, the company is responsible for log and haulcosts. When standing timber is sold,the buyer incurs the log and haul costs. While revenues are higher when thecompany is responsible for the logging and hauling of timber, costs of salesgenerally increase by a similar amount. As a result, the company realizes loweroperating income as a percentage of revenue, although operating income is notgenerally affected. Despite strong lumber and plywood prices during most of2004, sawlog prices generally held steady due to an abundant supply of logs.

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

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

We estimate that included in the company’s7.8 million acres of timberlands are approximately 1.3 million acresof higher and better use timberlands and 1.0 million acres of non-strategictimberlands. The higher and better use timberlands are expected to be sold overthe next 15 years for conservation, residential or recreational purposes. Thenon-strategic timberlands, which consist of large blocks as well as smallertracts, are expected to be sold over the next five to ten years. In themeantime, these timberlands continue to be used productively in our business ofgrowing and selling timber. The timing of real estate sales, however, is afunction of many factors, including the availability of government andnot-for-profit funding, the general state of the economy, the plans of adjacentlandowners, our expectation of future price appreciation and the timing ofharvesting activities. We expect higher and better use timberland and smallparcel, non-strategic timberland revenues to increase 20% to 40% during 2005compared to 2004. The sale of large, non-strategic timberlands are difficult toforecast. As a result, the timing of our real estate sales may materiallyimpact our reported operating income and net income.

Real EstateSegment operating income was 50% of its revenues for 2004, compared to 38% for2003. This increase was due primarily to selling a higher percentage oflow-basis timberlands during 2004 compared to 2003. See “Critical AccountingPolicies, Real Estate Sales” under this Item. Real Estate Segment costs andexpenses increased by $74 million to $151 million in 2004. This increase wasdue primarily to large, non-strategic timberlands transactions ($42 million)and the increase in land sales activity associated with higher and better usetimberlands 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 higherlumber prices ($41 million), higher plywood prices ($36 million) andhigher MDF sales volume ($24 million). Lumber prices increased by 27% dueprimarily to exceptionally strong housing starts during 2004 on top of 25-yearrecord-high housing starts during 2003, limited log availability andtransportation issues. Housing starts for 2004 were 6% higher than housingstarts during 2003. Log availability was limited during the first half of 2004as a result of severe forest fires in the Western United States and Canadaduring the second half of 2003. Also favorably impacting lumber prices wereinventory shortages during most of 2004 as a result of rail transportationdelays. However, commodity lumber prices peaked in August and have sincedeclined by approximately 10%. Plywood prices increased by33% due primarily to near record-high structural panel (plywood and orientedstrand board) 

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prices and strong industrial demand. Structural panel prices wereat near record-high levels during the first six months of 2004 as a result ofexceptionally strong housing starts and low field inventories at the beginningof the year. Wholesalers and distributors continued their just-in-time buyingpattern during 2003, and as a result, field inventories were not sufficient tomeet exceptionally strong demand during the first half of 2004. Industrialdemand (boats, recreational vehicles, trailers, etc.) has strengthened due tothe improving U.S. economy. However, commodity plywood prices peaked duringsecond quarter of 2004 and have since declined by approximately 28%. MDF sales volume increased by24% due primarily to resolving all major start-up issues associated with ournew MDF thin-board line, which operated near its projected design capacityduring 2004.

ManufacturedProducts Segment operating income was $58 million for 2004, compared to anoperating loss of $5 million for 2003. This $63 million improvementin operating performance was due primarily to higher lumber and plywood pricesand higher MDF sales volume, offset in part by an impairment loss of$9 million related to a lumber facility. Manufactured Products Segmentcosts and expenses increased by $58 million, or 14%, to $460 million in2004. This increase in costs was due primarily to higher MDF sales volume,higher lumber raw material costs, and an impairment loss of $9 million towrite-down the manufacturing assets at a lumber facility.

***Other Costs and Eliminations /Gain on Sale of Other Assets.****  *OtherCosts and Eliminations (which consists of corporate overhead and intercompanyprofit 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. Corporateexpenses have increased due primarily to higher costs for long-term incentiveplans of $6 million (seeNote 11 of the Notes to Financial Statements) and higher regulatory costs of $2 million.

Since 2001, Plum Creek had been a party to a jointoperating agreement with Geomet, Inc., a coalbed methane developer, withwhom the company jointly explored for and developed coal bed methane gas foundon certain of its timberlands in West Virginia and Virginia. During the secondquarter of 2004, the company sold its working interest in the joint operatingagreement to Geomet, Inc. for $27 million and recorded a gain of $5million. Plum Creek retained its royalty interest in the project.

***Provision for Income Taxes.  ***The provision for income taxes wasa $27 million expense for 2004, compared to a $6 million benefit for2003. This change of $33 million was due primarily to the $63 millionimprovement in the operating performance for the Manufactured Products Segmentand a $5 million gain on the sale of our working interest in a jointoperating agreement to Geomet, Inc. Plum Creek has elected to be taxed asa 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 REITsubsidiaries, which are subject to corporate-level income tax. These activitiesinclude our manufacturing operations, the harvesting and selling of logs, andsales of some of our higher and better use timberlands. See Note 4 of theNotes to Financial Statements.

***Gain on Sale of Properties, netof tax*****.**   InDecember 2004, Plum Creek sold substantially all of its subsurfaceproperty rights (primarily coal reserves, excluding coal-bed methane, oil andgas reserves) in Buchanan County, Virginia. The company received proceeds of$23 million in connection with the sale and the release of certain legalclaims, which the company believes comprised a portion of the proceeds. However,the sale agreement did not specify an allocation. The net gain from this saleand settlement of certain legal claims, after reducing the proceeds forapplicable book basis and income taxes, was $23 million.

**2003 Compared to 2002**

***Northern Resources Segment.  ***Revenuesdecreased by $11 million, or 3%, to $309 million in 2003. This decrease was dueprimarily to a 12% decrease in softwood sawlog sales volume in Montana as aresult of 

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one of the worst fireseason in decades, offset in part by harvesting from timberlands in Wisconsinthat were acquired during December 2002. Sales volume from timberlands inWisconsin that were acquired in December 2002 increased revenues by $13million.

Northern Resources Segment operating income was 27% ofits revenues for 2003 and 25% for 2002. Costs and expenses decreased by$13 million, or 5%, to $227 million in 2003 due primarily to fire-relatedharvesting curtailments and lower depletion rates, offset in part by a $4million fire loss and by harvesting of timberlands in Wisconsin that wereacquired during December 2002. Costs associated with the timberlandoperations in Wisconsin that were acquired in December 2002 were $8million. We recorded a $4 million fire loss as a result of forest firesduring the third quarter of 2003 on approximately 45,000 acres in Montana. The$4 million loss represents the book basis of the timber volume destroyedby fire.

***Southern Resources Segment.  ***Revenuesincreased by $22 million, or 5%, to $445 million in 2003. This increase of $22million was due primarily to a higher percentage of delivered log sales($33 million) and a more valuable mix of logs ($7 million), offset inpart by lower softwood sawlog prices ($15 million) and lower harvest volumes($9 million).

Revenues increased by $33 million due to thecompany’s increased percentage of delivered log sales. The company increasedits percentage of delivered log sales by decreasing its percentage of sales ofstanding timber. Revenues increased by $7 million due to a greater percentageof high value logs in the 2003 sales mix than in the prior year. During 2002the weather was extremely dry which allowed us to increase our harvest oflow-value pulpwood.

Softwood sawlog prices decreased by 6% due primarilyto harvesting of smaller diameter logs and mill curtailments. The diameter ofsawlogs temporarily increased during 2001 and 2002 due to the increasedconversion of slow growing natural stands to faster growing plantation stands. Millscurtailed production during the first half of 2003 due to weak lumber prices.Sales volume decreased by 3% due to a planned reduction in harvest levels.

Southern Resources Segment operating income was 49% ofits revenues for 2003 and 54% for 2002. This decrease was due primarily tolower softwood sawlog prices and the increased percentage of delivered logsales. Southern Resources Segment costs and expenses increased by $33 million,or 17%, to $229 million. This increase was due primarily to an increase inlog and haul costs as a result of a higher percentage of delivered log salescompared to sales of standing timber.

***Real Estate Segment*.  **Revenuesincreased by $26 million, or 27%, to $124 million in 2003. This increase of $26million was due primarily to the sale of non-strategic timberlands and a highernumber of acres sold, offset in part by lower conservation easement sales. Duringthe second quarter of 2003 we sold 29,000 acres of non-strategictimberlands for $13 million. Additionally, we sold 96,000 acres of higherand better use timberlands during 2003 compared to sales of 38,000 acresduring 2002. Revenues from conservation easements decreased by $20 millioncompared to the prior year.

Real Estate Segment operating income was 38% of itsrevenues for 2003 and 65% for 2002. This decrease was due primarily to sales ofnon-strategic timberlands, fewer conservation easement sales and the recordingof a $5 million impairment loss. Real Estate Segment costs and expensesincreased by $43 million, or 126%, to $77 million in 2003. Thisincrease of $43 million is due primarily to the sale of non-strategictimberlands, fewer sales of conservation easements and a $5 million impairmentloss. During the second quarter of 2003, we sold 29,000 acres of non-strategictimberlands, which had a book basis of $22 million, for $13 million($9 million of the $22 million was recorded as an impairment loss duringthe first quarter of 2003). We sold more acres but fewer conservation easementsduring 2003. No book basis is charged to cost of goods sold for sales ofconservation easements. During the fourth quarter of 2003, we concluded that itwas probable that 28,000 acres of non-strategic timberlands would be soldduring 2004 in 

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which the book basisexceeds the fair value by $5 million. As a result, an impairment loss of$5 million was recorded.

***Manufactured Products Segment*.  **Revenuesincreased by $16 million, or 4%, to $397 million in 2003. This increase of $16million was due primarily to higher MDF sales volume ($14 million) and higherplywood prices ($10 million), offset in part by lower lumber prices ($8million). The MDF sales volume increased by 20 million square feet to 198million square feet, dueprimarily to our new thin-board line, which began operations during the fourthquarter of 2001 and was in a start-up phase during most of 2002. Plywood pricestemporarily skyrocketed during the second half of 2003 due to wholesalers anddistributors maintaining low structural panel inventories and housing startscontinuing at unanticipated record levels. Lumber prices decreased by 5% dueprimarily to an industry-wide excess supply of boards as a result of logsalvage operations from 2002 forest fires and excess production capacity forstuds and dimension lumber throughout North America.

Manufactured Products Segment operating loss was $5million during 2003 compared to $1 million of operating income during 2002. Thisdecrease in operating performance was due primarily to lower lumber prices andhigher MDF operating costs. Manufactured Products Segment costs and expensesincreased by $22 million, or 6%, to $402 million in 2003. This increase of $22million was due primarily to higher MDF production volume and higher MDF resinand maintenance costs.

***Other Costs and Eliminations*.  **OtherCosts and Eliminations (which consists of corporate overhead and intercompanyprofit elimination) decreased operating income by $44 million in 2003,compared to a decrease of $41 million in 2002. This change of $3 millionwas due primarily to higher corporate expenses.

***Interest Expense*.  **Netinterest expense increased by $14 million, or 14%, to $117 millionfor 2003. This increase was due primarily to a higher debt level as the resultof the acquisition of 307,000 acres of timberlands located in Wisconsinduring December 2002, the acquisition of 139,000 acres in threestates during the third and fourth quarters of 2003, and the purchase of2 million shares of treasury stock during the first quarter of 2003 for$43 million.

***Provision for Income Taxes*.  **Theprovision for income taxes was $6 million benefit for 2003 compared to $2million expense for 2002. This change of $8 million was due primarily to the $6million decline in operating performance for the Manufactured Products Segmentand lower sales of higher and better use timberlands through our taxable REITsubsidiaries during 2003. As a REIT, Plum Creek is generally not subject tocorporate income tax except for certain transactions that are subject tobuilt-in gains tax and certain non-REIT activities that are conducted throughtaxable REIT subsidiaries. See Note 4 of the Notes to Financial Statements.

**FINANCIAL CONDITION AND LIQUIDITY**

Net cash providedby operating activities for the year ended December 31, 2004, totaled$600 million, compared to $372 million in 2003. The increase of $228million was due primarily to a $179 million increase in revenues fromtimberland sales (which includes $133 million of revenues from sales oflarge, non-strategic timberlands, which was used to repay debt), and a $63 millionimprovement in operating income from our manufacturing facilities.

Net cash provided by operating activity increased by$3 million, to $372 million for 2003 compared to $369 million in 2002. Eventhough the cash provided by operating activity was stable, the Real EstateSegment’s contribution was higher in 2003 and the Resources and ManufacturedProducts Segments’ contributions were lower.

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In August of 2004, the company filed with theSecurities and Exchange Commission a shelf registration statement under whichthe company from time to time may offer and sell any combination of preferredstock, common stock, depositary shares, warrants and guarantees up to a totalamount of $400 million and under which Plum Creek Timberlands, L.P., thecompany’s wholly owned operating partnership, may from time to time offer andsell debt securities up to an additional total amount of $400 million. Asof December 31, 2004, the entire amounts for issuance of equity and debtsecurities remained available under the shelf registration statement.

In January of2004, the company refinanced its revolving line of credit with a new $650million facility maturing on January 15, 2009. As of December 31,2004, the interestrate for the new facility wasLIBOR plus 0.875%, which included facility fees. This rate can rangefrom LIBOR plus 0.75% to LIBOR plus 1.625% depending on our financial results. Subject to customary covenants, theline 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 theline of credit fluctuate daily,based on cash needs. As of December 31, 2004, we had $448 million of borrowings and $6 million ofstandby letters of credit outstanding; $196 million remained available forborrowing under our line of credit. As of January 7, 2005, $348 million ofthe borrowings under our line of credit was repaid.

Our borrowing agreements contain various restrictivecovenants, including limitations on harvest levels, sales of assets, the incurrenceof indebtedness and making restricted payments (such as payments of cashdividends or stock repurchases). Our borrowing agreements limit our ability tomake restricted payments based on available cash, which is generally our netincome (excluding gains on the sale of capital assets) after adjusting fornon-cash charges (such as depreciation and depletion), changes in variousreserves, less capital expenditures and principal payments on indebtedness thatare not financed. Additionally, the amount of available cash may be increasedby the amount of proceeds from the sale of higher and better use propertiesand, under certain circumstances, by 50% of the amount of net proceeds from thesale of other assets. Furthermore, our line of credit requires that we maintaincertain interest coverage and maximum leverage ratios. We were in compliancewith all of our borrowing agreement covenants as of December 31, 2004.

The company’s financial policy is to maintain abalance sheet that provides the financial flexibility to pursue our strategicobjectives. In order to maintain this financial flexibility, the company’sobjective is to maintain its investment grade credit rating. This is reflectedin our moderate use of debt, good access to credit markets and no materialcovenant restrictions in our debt agreements that would prevent us fromprudently using debt capital.

Cash required to meet our financial needs will besignificant. We believe, however, that cash on hand and cash flows fromcontinuing operations will be sufficient to fund planned capital expenditures,and interest and principal payments on our indebtedness for the next year. In2006 and 2007, the company has significant long-term debt principal paymentrequirements. The company intends to refinance these principal payments at thetime of maturity. The company, however, may not refinance the entire amount andmay use cash generated from operations for a portion of the principal payments.

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On February 10, 2005, our Board of Directorsdeclared a dividend of $0.38 per share, or approximately $70 million,which will be paid on March 8, 2005, to stockholders of record on February 22, 2005.Future dividends will be determined by our Board of Directors, in its solediscretion, based on consideration of a number of factors including, but notlimited to, our results of operations, cash flow and capital requirements,economic conditions, tax considerations, debt covenant restrictions that mayimpose limitations on the company’s ability to make cash payments, borrowingcapacity, changes in the prices of and demand for Plum Creek’s products, andchanges in our ability to sell timberlands at attractive prices. Other factorsthat our Board of Directors considers include the appropriate timing of timberharvests, acquisition and divestiture opportunities, stock repurchases, debtrepayment and other means by which the company could deliver value to itsstockholders.

In October of2002, our Board of Directors authorized the company to repurchase up to $200million of the company’s common stock. As of December 31, 2004, thecompany had repurchased approximately 2 million shares of common stock fora total cost of $43 million at an average price of $21.53 per share.

Capital expenditures,excluding the acquisition of timberlands, for 2004 were $70 million,compared to $84 million for 2003 and $91 million for 2002. During2004, Plum Creek acquired approximately 78,000 acres of timberlandslocated primarily in Arkansas and Maine for $66 million. The purchaseswere financed using available funds from operations and $56 million offunds from tax-deferred exchange transactions. During 2003, we acquired139,000 acres of timberlands for $162 million, financed primarilyusing $140 million funds from tax-deferred exchange transactions and borrowingsfrom our line of credit. Planned capital expenditures for 2005, excluding theacquisition of timberlands, are expected to range between $90 million and$100 million and include approximately $69 million for ourtimberlands, and $11 million for our manufacturing facilities. Thetimberland expenditures are primarily for reforestation and other expendituresassociated with the planting and growing of trees. Of planned capitalexpenditures in 2005, approximately 60% are considered to be discretionary and40% are considered maintenance expenditures. Discretionary expenditures consistprimarily of silviculture investments and to a lesser extent land developmentinvestments. Maintenance expenditures consist primarily of reforestation andprojects at our manufacturing facilities to sustain operating activities orimprove safety.

**OTHER INFORMATION**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123 (revised 2004), *Share-Based Payment*, which is a revisionof SFAS No. 123, *Accounting forStock-Based Compensation*. SFAS No. 123(R) supersedesAccounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and amends SFAS No. 95, *Statement ofCash Flows*. Generally, the approach in SFAS No. 123(R) issimilar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values. Proforma disclosure is no longer an alternative. SFAS No. 123(R) must beadopted no later than July 1, 2005. Early adoption will be permitted inperiods in which financial statements have not yet been issued. We expect toadopt SFAS No. 123(R) on July 1, 2005.

The company adopted the fair-value-based method ofaccounting for share-based payments effective January 1, 2002, using theprospective 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 thevalue of stock options granted to employees and expects to continue to use thisacceptable option valuation model upon the required adoption of SFAS No. 123(R) onJuly 1, 2005. SFAS No. 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required undercurrent literature. This requirement will reduce net operating cash flows andincrease net financing cash flows in 

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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 stockoptions), the amounts of operating cash flows recognized in prior periods forsuch excess tax deductions were immaterial. In addition to stock options, thecompany may also grant dividend equivalents and value management awards, aportion of which may be payable in the company’s stock. See Note 11 of theNotes to Financial Statements. The company is in the process of determining theeffect, if any, the adoption of SFAS No. 123(R) will have on thefinancial statements.

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

In December 2004, theFASB issued SFAS No. 153, *Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29*. SFAS No. 153is based on the principle that exchanges of nonmonetary assets should be measuredbased on the fair value of the assets exchanged. Opinion No. 29 providedan exception to its basic measurement principle, fair value, for exchanges ofsimilar production assets. Under Opinion No. 29, an exchange of aproductive asset was based on the recorded amount of the asset relinquished. TheFASB eliminated this exception and replaced it with an exception for exchangesof nonmonetary assets that do not have commercial substance. The FASB believesthis Statement produces financial reporting that more faithfully represents theeconomics of nonmonetary asset exchange transactions. The new Statement iseffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. Management does not expect that adoption of this standardwill have a material impact on the company’s financial condition, results ofoperations or cash flows.

**RISK FACTORS**

**Business and Operating Risks**

*The CyclicalNature of Our Business Could Adversely Affect Our Results of Operations*

Our results ofoperations 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 limiteddirect influence over the time and extent of price changes for logs and woodproducts. The demand for logs and wood products is affected primarily by thelevel of new residential construction activity and, to a lesser extent, repairand remodeling activity and other industrial uses. The demand for logs is alsoaffected by the demand for wood chips in the pulp and paper markets. Theseactivities are, in turn, subject to fluctuations due to, among other factors:

·       changesin domestic and international economic conditions;

·       interestrates;

·       populationgrowth and changing demographics; and

·       seasonalweather cycles (e.g., dry summers, wet winters).

Decreases in the level of residential constructionactivity generally reduce demand for logs and wood products. This results inlower revenues, profits and cash flows. In addition, industry-wide increases inthe supply of logs and wood products during favorable price environments canalso lead to downward pressure on prices. Timber owners generally increaseproduction volumes for logs and wood products during 

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favorable priceenvironments. Such increased production, however, when coupled with even modestdeclines in demand for these products in general, could lead to oversupply andlower prices.

Our results of operations may also be subject toglobal economic changes as global supplies of wood fiber shift in response tochanging economic conditions. Changes in global economic conditions that couldaffect our results of operations include, but are not limited to, new timbersupply sources and changes in currency exchange rates, foreign and domesticinterest rates and foreign and domestic trade policies.

In addition, changes in our ability to sell orexchange non-strategic timberlands and timberland properties that have higherand better uses at attractive prices could have a significant effect on ourresults of operations.

The followingfactors, among others, may adversely affect the timing and amount of our incomegenerated by our land sales:

·       generaleconomic conditions;

·       availabilityof funding for governmental agencies, developers, conservation organizations,individuals and others to purchase our timberlands for conservation,recreation, residential or other purposes;

·       localreal estate market conditions, such as oversupply of, or reduced demand for,properties sharing the same or similar characteristics as those in ourportfolio;

·       relativeilliquidity of real estate investments;

·       impactof federal, state and local land use and environmental protection laws; or

·       changes in tax, real estateand zoning laws.

*The ForestProducts Industry is Highly Competitive*

The forest products industry is highly competitive interms of price and quality. Wood products are subject to increasing competitionfrom a variety of substitute products, including non-wood and engineered woodproducts. For example, plywood markets are subject to competition from orientedstrand board, and U.S. lumber and log markets are subject to competition fromother worldwide suppliers.

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

The trade agreement expired in March 2001, andsoon thereafter a U.S. industry coalition, of which Plum Creek is a member,submitted anti-dumping and countervailing duty petitions to the InternationalTrade Commission and the U.S. Department of Commerce. In March 2002, theDepartment of Commerce rendered a final determination in favor of the U.S.industry coalition and set a 19.3% countervailing duty on Canadian lumberimports and an anti-dumping duty on all non-investigated Canadian exportersaveraging 9.7% (representing the weighted average of the anti-dumping ratesimposed on the investigated Canadian exporters). The Department of Commercedecreased these duties in April 2002 to 18.8% and 8.4%, respectively. In May 2002,the International Trade Commission rendered a final determination that the U.S.industry was threatened with material injury from Canadian lumber imports.Following this determination, the Department of Commerce put into effect thecountervailing and anti-dumping duties in May 2002. Reports indicate,however, that the final duties have not had the effect of decreasing Canadianlumber imports’ share of the U.S. market.

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The future of the U.S.-imposed import duties onCanadian lumber remains uncertain. Canada appealed both the anti-dumping dutyand the countervailing duty to the WTO and NAFTA appeal boards. Both the WTOand NAFTA issued initial rulings that affirmed the U.S. position that Canadianstumpage practices are, in fact, providing a subsidy to the Canadianindustry, and upheld the validity of antidumping duties imposed on mostCanadian producers. Both the WTO and NAFTA rulings also included provisions forre-examining the calculation and level of the countervailing and theanti-dumping duties. In its most recent administrative review ruling in December 2004,the Department of Commerce recalculated the countervailing duty rate to 16.4%and the anti dumping duty rate to 3.8%, for a combined duty of 20.2%.

On April 30, 2004, NAFTA ruled that theInternational Trade Commission’s determination of injury to U.S. industry from Canadianlumber imports, which is the basis for imposing the duties, was not supportedwith substantial evidence. The commission unsuccessfully appealed thisdecision, and was directed to issue a “no injury” opinion, which was renderedin September 2004. The U.S. Trade Representative responded by calling forthe formation of an Extraordinary Challenge Committee under the NAFTA disputeresolution process to evaluate the NAFTA panel’s injury decision. A panel wasformed to hear the challenge, and arguments before the panel are expected totake place in March of 2005, and no decision is expected from the panelbefore the end of April 2005.

To avoid protractedlitigation, the U.S. and representatives of the Canadian government continue topursue a settlement agreement. However, there can be no assurance that anagreement will be reached, or that the terms of any such final agreement wouldbe favorable to the U.S. lumber industry’s interests. Therefore, other factorsremaining unchanged, the downward pressure on domestic lumber and log pricescaused by Canadian imports could continue or increase, particularly duringperiods of weak lumber demand.

*Our Cash Dividendsare Not Guaranteed and May Fluctuate*

We have elected to be taxed as a REIT under sections 856-860 of theUnited States Internal Revenue Code of 1986, as amended. Generally, REITs arerequired to distribute 90% of their taxable income. However, REITs are requiredto distribute only their ordinary taxable income and not their net capitalgains income. Accordingly, we do not believe that we are required to distributematerial amounts of cash given that substantially all our taxable income istreated as capital gains income. Our Board of Directors, in its solediscretion, determines the amount of the quarterly dividends to be provided toour stockholders based on consideration of a number of factors including, butnot 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 cashpayments, future acquisitions and divestitures, harvest levels, changes in theprice and demand for our products and general market demand for timberlandsincluding those timberland properties that have higher and better uses.Consequently, our dividend levels may fluctuate.

*We May BeUnsuccessful in Carrying Out Our Acquisition Strategy*

We intend to pursueacquisitions of strategic timberland properties. As with any investment, ourfuture acquisitions, if any, may not perform in accordance with ourexpectations. In addition, we anticipate financing such acquisitions throughcash from operations, borrowings under our unsecured credit facilities,proceeds from equity or debt offerings (including offerings of limitedpartnership units by our operating partnership) or proceeds from assetdispositions, or any combination thereof. Our inability to finance futureacquisitions on favorable terms or the failure of any acquisitions to conformto our expectations, could adversely affect our results of operations.

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*We Depend onExternal Sources of Capital for Future Growth*

Our ability to financegrowth is dependent to a significant degree on external sources of capital. Ourability to access such capital on favorable terms could be hampered by a numberof factors, many of which are outside of our control, including, withoutlimitation, a decline in general market conditions, increases in interestrates, an unfavorable market perception of our growth potential, a decrease inour current or estimated future earnings or a decrease in the market price ofour common stock. In addition, our ability to access additional capital mayalso be limited by the terms of our existing indebtedness, which, among otherthings, restricts our incurrence of debt and the payment of dividends. Any ofthese factors, individually or in combination, could prevent us from being ableto obtain the capital we require on terms that are acceptable to us, and thefailure to obtain necessary capital could materially adversely affect ourfuture growth.

*Our Ability toHarvest Timber May Be Subject to Limitations Which Could Adversely AffectOur Operations*

Weather conditions, timber growth cycles, accesslimitations, availability of contract loggers, and regulatory requirementsassociated with the protection of wildlife and water resources may restrictharvesting 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 onlya limited percentage of the timber, there can be no assurance that any damageaffecting our timberlands will in fact be so limited. As is common in the forestproducts industry, we do not maintain insurance coverage with respect to damageto our timberlands.

Our revenues, net incomeand cash flow from our operations are dependent to a significant extent on thepricing of our products and our continued ability to harvest timber at adequatelevels. In addition, the terms of our long-term debt agreements and lines ofcredit limit our ability to fund dividends to stockholders by accelerating theharvest of significant amounts of timber.

*Our Timberlandsand Manufacturing Facilities Are Subject to Federal and State EnvironmentalRegulations*

We are subject to regulation under, among other laws,the Clean Air Act, the Clean Water Act, the Resource Conservation and RecoveryAct, the Comprehensive Environmental Response Compensation and Liability Act of1980, the National Environmental Policy Act, and the Endangered Species Act, aswell as comparable state laws and regulations. Violations of various statutoryand regulatory programs that apply to our operations could result in civilpenalties, remediation expenses, potential injunctions, cease and desist ordersand criminal penalties.

We engage in thefollowing activities that are subject to regulation:

·       forestryactivities, including harvesting, planting and road building, use andmaintenance;

·       thegeneration of air emissions;

·       thedischarge of industrial wastewater and storm water; and

·       thegeneration and disposal of both hazardous and non-hazardous wastes.

Laws and regulations protecting the environment havegenerally become more stringent in recent years and could become more stringentin the future. Some environmental statutes impose strict liability, rendering aperson liable for environmental damage without regard to the person’snegligence or fault. These laws or future legislation or administrative orjudicial action with respect to protection of the environment may adverselyaffect our business.

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

**Stock Ownership**

*Provisions in Our Certificate of Incorporation and Delaware Law May Preventa Change in Control*

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

*Ownership Limit**.  *Inorder for us to maintain our qualification as a REIT, not more than 50% of thevalue of our outstanding shares of capital stock may be owned, directly orindirectly, by five or fewer individuals, as defined in the Internal RevenueCode. For the purpose of preserving our REIT qualification, our certificate ofincorporation prohibits ownership, either directly or under the applicableattribution rules of the Internal Revenue Code, of more than 5% of thelesser of the total number of shares of our common stock outstanding or thevalue of the outstanding shares of our common stock by any stockholder otherthan by some designated persons agreed to by us or as set forth in ourcertificate of incorporation (the “Ownership Limit”). The Ownership Limit mayhave the effect of discouraging an acquisition of control of us without theapproval of our Board of Directors.

The Ownership Limitin our certificate of incorporation also restricts the transfer of our commonstock. For example, any transfer of our equity is null and void if the transferwould:

·       resultin any person owning, directly or indirectly, equity in excess of the OwnershipLimit;

·       resultin our equity being owned, directly or indirectly, by fewer than 100 persons;

·       resultin us being “closely held” (as defined in the Internal Revenue Code);

·       resultin us failing to qualify as a “domestically controlled REIT” (as defined in theInternal Revenue Code); or

·       otherwisecause us to fail to qualify as a REIT.

*Preferred Stock.  *Ourcertificate of incorporation authorizes our Board of Directors to issue up to75 million shares of preferred stock. Upon issuance, our Board ofDirectors will establish the preferences and rights for this preferred stock.These preferences and rights may include the right to elect additionaldirectors. The issuance of preferred stock could have the effect of delaying orpreventing a change in control of us even if a change in control were in ourstockholders’ best interests.

*Section 203of the Delaware General Corporation Law.  *Section 203 of the DelawareGeneral Corporation Law generally prohibits us from engaging in businesstransactions with a person or entity that owns 15% or more of our voting stockfor a period of three years following the time such person or entity became an “interestedstockholder” unless, prior to such time, our Board of Directors approved eitherthe business combination or the transaction which resulted in such person orentity becoming an interested stockholder. A business transaction may includemergers, asset sales and other transactions resulting in financial benefit tothe person or entity that owns 15% or more of our voting stock.

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**TaxRisks**

*If We Fail to Qualify as a REIT, We Would Be Subject to Tax atCorporate Rates and Would Not Be Able to Deduct Dividends to Stockholders WhenComputing Our Taxable Income*

If in any taxableyear we fail to qualify as a REIT:

·       wewould be subject to federal and state income tax on our taxable income atregular corporate rates of approximately 40%;

·       wewould not be allowed to deduct dividends to stockholders in computing ourtaxable income; and

·       unlesswe were entitled to relief under the Internal Revenue Code, we would also bedisqualified from treatment as a REIT for the four taxable years following theyear during which we lost qualification.

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

Qualification as a REIT involves the application ofhighly technical and complex provisions of the Internal Revenue Code to ouroperations and the determination of various factual matters and circumstancesnot entirely within our control. There are only limited judicial oradministrative interpretations of these provisions. Although we operate in amanner consistent with the REIT qualification rules, we cannot assure you thatwe are or will remain so qualified.

In addition, the rules dealingwith federal income taxation are constantly under review by persons involved inthe legislative process and by the Internal Revenue Service and the UnitedStates Department of the Treasury. Changes to the tax law could adversely affectour stockholders. We cannot predict with certainty whether, when, in whatforms, or with what effective dates, the tax laws applicable to us or ourstockholders may be changed.

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

In connection with TheTimber Company’s October 6, 2001,merger with Plum Creek, we were required by January 31, 2002, todistribute the earnings and profits acquired from the six entities thatcomprised The Timber Company. We believe that the accelerated payment of ourfourth quarter dividend for 2001, which we paid on December 28, 2001, wassufficient to distribute these earnings and profits. If we failed to distributean amount equal to these earnings and profits, we might be subject to adversetax consequences. We expect that, even if the earnings and profits weresubsequently adjusted upward by the Internal Revenue Service, the amount wedistributed exceeded such earnings and profits. Nevertheless, such anadjustment may give rise to the imposition of the 4% excise tax on the excessincome required to be distributed over the amounts treated as distributed afterapplication of the earnings and profits rule.

*Certain of Our Business Activities are Potentially Subject toProhibited Transactions Tax or Corporate Level Income Tax.*

REITs are generally intended to be passive entitiesand can thus only engage in those activities permitted by the Internal RevenueCode, which for Plum Creek generally include: owning and managing a timberland portfolio; growing timber; and the saleof standing timber. Accordingly, the manufacture and sale by us of woodproducts, certain types of timberlands sales and sales of logs are conductedthrough one or more of our taxable REIT subsidiaries (“TRSs”) because suchactivities could generate non-qualifying REIT income and could constitute “prohibitedtransactions.” Prohibited transactions are defined by the 

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Internal Revenue Code tobe sales or other dispositions of property to customers in the ordinary courseof a trade or business.

By conducting our businessin this manner we satisfy the REIT requirements of the Internal Revenue Codeand avoid the 100% tax that could be imposed if a REIT were to conduct aprohibited transaction. We may not always be successful, however, in limitingsuch activities to our TRSs. Therefore, we could be subject to the 100%prohibited transactions tax if such instances were to occur. The net income ofour TRSs is subject to corporate level income tax.

**Item 7A.**                Quantitative andQualitative Disclosure about Market Risk

Approximately$1.4 billion of the long-term debt of the company bears interest at fixedrates, and therefore the fair value of these instruments is affected by changesin market interest rates. The following table presents contractual principalcash flows based upon maturity dates of the company’s debt obligations and therelated weighted-average contractual interest rates by expected maturity datesfor the fixed rate debt (in millions):
| ** **                 | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | ** There-  after ** | ** ** | **Total**  | ** ** | **Fair   Value**(B)  | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------------------|------------|------------|------------|--------------------------------|------------|
| **December 31, 2004** |       |       |       |       |       |       |       |       |       |       |       |                          |       | ** ** |       |                           |       |   |   |   |   |
| Fixed rate debt            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                    | ** ** | ** ** | ** ** | ** **                     | ** ** |   |   |   |   |
| Principal due**(A)**       | ** ** | **$**      | **27**     | ** ** | **$**      | **157**    | ** ** | **$**      | **123**    | ** ** | **$**      | **147**                       | ** ** | **$**      | **200**    | ** **                     | ** ** | **$** | **753** | ** ** | ** ** | **$** | **1,407** | ** ** | ** ** | **$** | **1,541** |   |   |
| Avg. interest rate         | ** ** | **7.5**    | **%**      | **7.5**    | **%**      | **7.4**    | **%**      | **7.5**    | **%**      | **7.3**    | **%**      | ** **                    | **7.1**    | **%**      | ** ** | ** **                     | ** ** |   |   |   |   |
| Variable rate  debt**(C)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **$**      | **20**     | ** ** | **$**      | **448**                       | ** ** | ** ** | ** ** | ** **                     | ** ** | **$** | **468** | ** ** | ** ** | **$** | **468** |   |   |
|                            |            |            |            |            |            |            |            |            |            |            |            |                               |            |            |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | ** There-  after ** | ** ** | **Total** | ** ** | ** Fair  Value**(B)  | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|--------------------------------|------------|
| **December 31, 2003** |       |     |       |     |       |     |       |     |       |     |       |                          |       |      |       |                           |       |   |   |   |   |
| Fixed rate debt            |       |     |       |     |       |     |       |     |       |     |       |                          |       |      |       |                           |       |   |   |   |   |
| Principal due**(A)**       |       | $        | 27         |     | $          | 27       |       | $        | 157        |     | $          | 123                           |       | $         | 147        |                           |       | $ | 953 |   |   | $ | 1,434 |   |   | $ | 1,594 |   |   |
| Avg. interest rate         |       | 7.6      | %          | 7.5      | %          | 7.5      | %          | 7.4      | %          | 7.5      | %          |                          | 7.2        | %         |       |                           |       |   |   |   |   |
| Variable rate debt         |       |     |       |     |       |     |       |     |       | $        | 20         |                          |       | $         | 594        |                           |       | $ | 614 |   |   | $ | 614 |   |   |
|                            |            |          |            |          |            |          |            |          |            |          |            |                               |            |           |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**(A)****        **Excludesunamortized premium of $10 million at December 31, 2004, and$16 million at December 31, 2003.

**(B)****       **Thedecrease in the fair value of our fixed rate debt compared to 2003 was dueprimarily to an increase in market interest rates for long-term debt and therepayment of $27 million of borrowings during 2004.

**(C)****       **Asof December 31, 2004, the average interest rate on the $448 millionborrowings under our $650 million revolving line of credit maturing on January 15,2009, was based on LIBOR plus 0.875%, which included facility fees. This ratecan range from LIBOR plus 0.75% to LIBOR plus 1.625% depending on our financialresults. As of January 7, 2005, $348 million of variable rate debtwas repaid. The interest rate on the $20 million variable rate senior-noteborrowings due in 2008 is based on 3-month LIBOR plus 1.445%.

45

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**Item 8.   Financial Statements and SupplementaryData**

**PLUM CREEK TIMBER COMPANY, INC.**CONSOLIDATED STATEMENTS OF INCOME
| ** **                                           | ** ** | **Year Ended**                                                  | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **December 31,  2004**                                          | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
| ** **                                           | ** ** | **(In Millions, Except Per Share Amounts)** | ** ** |
| Revenues:                                            |       |                                                                 |       | ** ** |   |   |   |   |   |   |   |   |   |
| Timber                                               | ** ** | ** **                                                           | **$**      | **694** | ** ** |   |   | $ | 664 |   |   |   | $ | 649 |   |   |
| Real Estate                                          | ** ** | ** **                                                           | **303**    | ** ** |   |   | 124 |   |   |   | 98 |   |   |
| Manufacturing                                        | ** ** | ** **                                                           | **518**    | ** ** |   |   | 397 |   |   |   | 381 |   |   |
| Other                                                | ** ** | ** **                                                           | **13**     | ** ** |   |   | 11 |   |   |   | 9 |   |   |
| Total Revenues                                       | ** ** | ** **                                                           | **1,528**  | ** ** |   |   | 1,196 |   |   |   | 1,137 |   |   |
| Costs and  Expenses:                                 |       |                                                                 |       | ** ** |   |   |   |   |   |   |   |   |   |
| Cost of Goods  Sold:                                 |       |                                                                 |       | ** ** |   |   |   |   |   |   |   |   |   |
| Timber                                               | ** ** | ** **                                                           | **368**    | ** ** |   |   | 345 |   |   |   | 318 |   |   |
| Real Estate                                          | ** ** | ** **                                                           | **149**    | ** ** |   |   | 77 |   |   |   | 34 |   |   |
| Manufacturing                                        | ** ** | ** **                                                           | **449**    | ** ** |   |   | 390 |   |   |   | 370 |   |   |
| Other                                                | ** ** | ** **                                                           | **4**      | ** ** |   |   | 4 |   |   |   | 2 |   |   |
| Total Cost of Goods Sold                             | ** ** | ** **                                                           | **970**    | ** ** |   |   | 816 |   |   |   | 724 |   |   |
| Selling, General and Administrative                  | ** ** | ** **                                                           | **86**     | ** ** |   |   | 77 |   |   |   | 75 |   |   |
| Total Costs and Expenses                             | ** ** | ** **                                                           | **1,056**  | ** ** |   |   | 893 |   |   |   | 799 |   |   |
| Gain on Sale of Other Assets                         | ** ** | ** **                                                           | **5**      | ** ** |   |   | — |   |   |   | — |   |   |
| Operating Income                                     | ** ** | ** **                                                           | **477**    | ** ** |   |   | 303 |   |   |   | 338 |   |   |
| Interest Expense, net                                | ** ** | ** **                                                           | **111**    | ** ** |   |   | 117 |   |   |   | 103 |   |   |
| Income before Income Taxes                           | ** ** | ** **                                                           | **366**    | ** ** |   |   | 186 |   |   |   | 235 |   |   |
| Benefit (Provision) for Income Taxes                 | ** ** | ** **                                                           | **(27**    | **)** |   |   | 6 |   |   |   | (2 | ) |   |
| Income from Continuing Operations                    | ** ** | ** **                                                           | **339**    | ** ** |   |   | 192 |   |   |   | 233 |   |   |
| Gain on Sale of Properties, net of tax               | ** ** | ** **                                                           | **23**     | ** ** |   |   | — |   |   |   | — |   |   |
| Net Income                                           | ** ** | ** **                                                           | **$**      | **362** | ** ** |   |   | $ | 192 |   |   |   | $ | 233 |   |   |
| Per Share  Amounts:                                  |       |                                                                 |       | ** ** |   |   |   |   |   |   |   |   |   |
| Income from Continuing Operations—Basic         | ** ** | ** **                                                           | **$**      | **1.85** | ** ** |   |   | $ | 1.05 |   |   |   | $ | 1.26 |   |   |
| Income from Continuing Operations—Diluted       | ** ** | ** **                                                           | **$**      | **1.84** | ** ** |   |   | $ | 1.04 |   |   |   | $ | 1.26 |   |   |
| Net Income per Share—Basic                      | ** ** | ** **                                                           | **$**      | **1.97** | ** ** |   |   | $ | 1.05 |   |   |   | $ | 1.26 |   |   |
| Net Income per Share—Diluted                    | ** ** | ** **                                                           | **$**      | **1.97** | ** ** |   |   | $ | 1.04 |   |   |   | $ | 1.26 |   |   |
| Dividends Declared—per Common Share Outstanding | ** ** | ** **                                                           | **$**      | **1.42** | ** ** |   |   | $ | 1.40 |   |   |   | $ | 1.49 |   |   |
| Weighted Average  Number of Shares Outstanding       |       |                                                                 |       | ** ** |   |   |   |   |   |   |   |   |   |
| —Basic                                          | ** ** | ** **                                                           | **183.4**  | ** ** |   |   | 183.3 |   |   |   | 184.7 |   |   |
| —Diluted                                        | ** ** | ** **                                                           | **184.1**  | ** ** |   |   | 183.9 |   |   |   | 185.4 |   |   |

 

See accompanying Notes to Consolidated Financial Statements

46

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**PLUM CREEK TIMBERCOMPANY, INC.CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                 | ** ** | **December 31,  2004**                                       | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **(In Millions, Except Per Share Data)** | ** ** |
| **Assets**                                                                                                                                                                 |       |                                                              |       | ** **                  |       |   |   |   |   |
| Current Assets:                                                                                                                                                            |       |                                                              |       | ** **                  |       |   |   |   |   |
| Cash and Cash  Equivalents                                                                                                                                                 | ** ** | ** **                                                        | **$**      | **347**                     | ** ** |   |   | $ | 267 |   |   |
| Restricted Advance from Customer                                                                                                                                           | ** ** | ** **                                                        | **4**      | ** **                  |       |   | 3 |   |   |
| Accounts Receivable                                                                                                                                                        | ** ** | ** **                                                        | **40**     | ** **                  |       |   | 34 |   |   |
| Inventories                                                                                                                                                                | ** ** | ** **                                                        | **71**     | ** **                  |       |   | 54 |   |   |
| Deferred Tax Asset                                                                                                                                                         | ** ** | ** **                                                        | **10**     | ** **                  |       |   | 11 |   |   |
| Other Current Assets                                                                                                                                                       | ** ** | ** **                                                        | **27**     | ** **                  |       |   | 30 |   |   |
| ** **                                                                                                                                                                 |       | ** **                                                        | **499**    | ** **                  |       |   | 399 |   |   |
| Timber and  Timberlands—Net                                                                                                                                           | ** ** | ** **                                                        | **3,590**  | ** **                  |       |   | 3,674 |   |   |
| Property, Plant and  Equipment—Net                                                                                                                                    | ** ** | ** **                                                        | **253**    | ** **                  |       |   | 303 |   |   |
| Investment in Grantor  Trusts                                                                                                                                              | ** ** | ** **                                                        | **29**     | ** **                  |       |   | 26 |   |   |
| Other Assets                                                                                                                                                               | ** ** | ** **                                                        | **7**      | ** **                  |       |   | 5 |   |   |
| Total Assets                                                                                                                                                               | ** ** | ** **                                                        | **$**      | **4,378**                   | ** ** |   |   | $ | 4,407 |   |   |
| **Liabilities**                                                                                                                                                            |       |                                                              |       | ** **                  |       |   |   |   |   |
| Current Liabilities:                                                                                                                                                       |       |                                                              |       | ** **                  |       |   |   |   |   |
| Current Portion of  Long-Term Debt                                                                                                                                         | ** ** | ** **                                                        | **$**      | **32**                      | ** ** |   |   | $ | 33 |   |   |
| Accounts Payable                                                                                                                                                           | ** ** | ** **                                                        | **41**     | ** **                  |       |   | 34 |   |   |
| Interest Payable                                                                                                                                                           | ** ** | ** **                                                        | **28**     | ** **                  |       |   | 28 |   |   |
| Wages Payable                                                                                                                                                              | ** ** | ** **                                                        | **25**     | ** **                  |       |   | 23 |   |   |
| Taxes Payable                                                                                                                                                              | ** ** | ** **                                                        | **22**     | ** **                  |       |   | 15 |   |   |
| Deferred Revenue                                                                                                                                                           | ** ** | ** **                                                        | **16**     | ** **                  |       |   | 16 |   |   |
| Other Current  Liabilities                                                                                                                                                 | ** ** | ** **                                                        | **20**     | ** **                  |       |   | 13 |   |   |
| ** **                                                                                                                                                                 |       | ** **                                                        | **184**    | ** **                  |       |   | 162 |   |   |
| Long-Term Debt                                                                                                                                                             | ** ** | ** **                                                        | **1,405**  | ** **                  |       |   | 1,437 |   |   |
| Lines of Credit                                                                                                                                                            | ** ** | ** **                                                        | **448**    | ** **                  |       |   | 594 |   |   |
| Deferred Tax Liability                                                                                                                                                     | ** ** | ** **                                                        | **45**     | ** **                  |       |   | 37 |   |   |
| Other Liabilities                                                                                                                                                          | ** ** | ** **                                                        | **56**     | ** **                  |       |   | 58 |   |   |
| Total Liabilities                                                                                                                                                          | ** ** | ** **                                                        | **2,138**  | ** **                  |       |   | 2,288 |   |   |
| 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)—185.7 at December 31, 2004, and 185.1 at December 31, 2003 | ** ** | ** **                                                        | **2**      | ** **                  |       |   | 2 |   |   |
| Additional Paid-In  Capital                                                                                                                                                | ** ** | ** **                                                        | **2,168**  | ** **                  |       |   | 2,150 |   |   |
| Retained Earnings                                                                                                                                                          | ** ** | ** **                                                        | **111**    | ** **                  |       |   | 9 |   |   |
| Treasury Stock, at cost,  Common shares—2.0                                                                                                                           | ** ** | ** **                                                        | **(43**    | **)**                       |       |   | (43 | ) |   |
| Other Equity                                                                                                                                                               | ** ** | ** **                                                        | **2**      | ** **                  |       |   | 1 |   |   |
| Total Stockholders’  Equity                                                                                                                                           | ** ** | ** **                                                        | **2,240**  | ** **                  |       |   | 2,119 |   |   |
| Total Liabilities and Stockholders’ Equity                                                                                                                            | ** ** | ** **                                                        | **$**      | **4,378**                   | ** ** |   |   | $ | 4,407 |   |   |

 

See accompanying Notes to Consolidated Financial Statements

47

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**PLUM CREEK TIMBERCOMPANY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                                                                    | ** ** | **Year Ended**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                    | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
| ** **                                                                                                                                    | ** ** | **(In Millions)**      | ** ** |
| **Cash Flows From Operating  Activities**                                                                                                     |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Net Income                                                                                                                                    | ** ** | ** **                  | **$**      | **362** | ** ** |   |   | $ | 192 |   |   |   | $ | 233 |   |   |
| Adjustments to  Reconcile Net Income to Net Cash Provided By Operating Activities:                                                            |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Depreciation, Depletion and Amortization (Includes  $9 Lumber Impairment Loss in 2004 and $4 Loss Related to Forest  Fires in 2003) | ** ** | ** **                  | **114**    | ** ** |   |   | 108 |   |   |   | 106 |   |   |
| Basis of Real Estate Sold (Includes Impairment  Losses  of $21 in 2004 and $14 in 2003)                                                  | ** ** | ** **                  | **134**    | ** ** |   |   | 66 |   |   |   | 28 |   |   |
| Deferred Income Taxes                                                                                                                         | ** ** | ** **                  | **9**      | ** ** |   |   | (7 | ) |   |   | 1 |   |   |
| Gain on Sales of Other Assets and Properties                                                                                                  | ** ** | ** **                  | **(28**    | **)** |   |   | — |   |   |   | — |   |   |
| Working Capital Changes                                                                                                                       | ** ** | ** **                  | **6**      | ** ** |   |   | 4 |   |   |   | (7 | ) |   |
| Other                                                                                                                                         | ** ** | ** **                  | **3**      | ** ** |   |   | 9 |   |   |   | 8 |   |   |
| Net Cash Provided  By Operating Activities                                                                                                    | ** ** | ** **                  | **600**    | ** ** |   |   | 372 |   |   |   | 369 |   |   |
| **Cash  Flows From Investing Activities**                                                                                                     |       |                        | ** ** | ** ** |   |   | ** ** |   |   |   | ** ** |   |   |
| Property Additions (Excluding Timberland  Acquisitions)                                                                                       | ** ** | ** **                  | **(70**    | **)** |   |   | (84 | ) |   |   | (91 | ) |   |
| Timberlands Acquired (Including Tax-Deferred  Exchange Proceeds)                                                                              | ** ** | ** **                  | **(66**    | **)** |   |   | (162 | ) |   |   | (158 | ) |   |
| Proceeds from Sale of Other Assets and Properties                                                                                             | ** ** | ** **                  | **46**     | ** ** |   |   | — |   |   |   | — |   |   |
| Other                                                                                                                                         | ** ** | ** **                  | **(1**     | **)** |   |   | (1 | ) |   |   | (3 | ) |   |
| Net Cash Used In  Investing Activities                                                                                                        | ** ** | ** **                  | **(91**    | **)** |   |   | (247 | ) |   |   | (252 | ) |   |
| **Cash  Flows From Financing Activities**                                                                                                     |       |                        | ** ** | ** ** |   |   | ** ** |   |   |   | ** ** |   |   |
| Dividends                                                                                                                                     | ** ** | ** **                  | **(260**   | **)** |   |   | (257 | ) |   |   | (275 | ) |   |
| Borrowings of Long-term Debt                                                                                                                  | ** ** | ** **                  | **—** | ** ** |   |   | 298 |   |   |   | 25 |   |   |
| Retirement of Long-term Debt                                                                                                                  | ** ** | ** **                  | **(33**    | **)** |   |   | (33 | ) |   |   | (34 | ) |   |
| Borrowings on Lines of Credit                                                                                                                 | ** ** | ** **                  | **2,147**  | ** ** |   |   | 1,922 |   |   |   | 1,708 |   |   |
| Repayments on Lines of Credit                                                                                                                 | ** ** | ** **                  | **(2,295** | **)** |   |   | (1,997 | ) |   |   | (1,508 | ) |   |
| Proceeds from Stock Option Exercises                                                                                                          | ** ** | ** **                  | **12**     | ** ** |   |   | 1 |   |   |   | 18 |   |   |
| Acquisitions of Treasury Stock                                                                                                                | ** ** | ** **                  | **—** | ** ** |   |   | (43 | ) |   |   | — |   |   |
| Net Cash Used In  Financing Activities                                                                                                        | ** ** | ** **                  | **(429**   | **)** |   |   | (109 | ) |   |   | (66 | ) |   |
| Increase In Cash and Cash Equivalents                                                                                                         | ** ** | ** **                  | **80**     | ** ** | ** ** | ** ** | 16 |   |   |   | 51 | ** ** | ** ** |
| Cash and Cash  Equivalents:                                                                                                                   |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Beginning of Period                                                                                                                           | ** ** | ** **                  | **267**    | ** ** |   |   | 251 |   |   |   | 200 |   |   |
| End of Period                                                                                                                                 | ** ** | ** **                  | **$**      | **347** | ** ** |   |   | $ | 267 |   |   |   | $ | 251 |   |   |
| **Supplementary  Cash Flow Information**                                                                                                      |       |                        | ** ** | ** ** |   |   | ** ** |   |   |   | ** ** |   |   |
| Cash Paid  (Received) During the Year for:                                                                                                    |       |                        | ** ** | ** ** |   |   | ** ** |   |   |   | ** ** |   |   |
| Interest                                                                                                                                      | ** ** | ** **                  | **$**      | **115** | ** ** |   |   | $ | 112 |   |   |   | $ | 110 |   |   |
| Income Taxes—Net                                                                                                                         | ** ** | ** **                  | **$**      | **11** | ** ** |   |   | $ | (1 | ) |   |   | $ | 4 |   |   |

 

 

See accompanying Notes to Consolidated Financial Statements

48

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1.   Accounting Policies**

***General.  ***PlumCreek Timber Company, Inc. (“Plum Creek” or the “company”), a DelawareCorporation, is a real estate investment trust, or REIT, for federal income taxpurposes. At December 31, 2004, the company owned and managed approximately7.8 million acres of timberlands in the Northwest, Southern and NortheastUnited States, and owned and operated ten wood product conversion facilities inthe Northwest United States. Included in the 7.8 million acres are about1.3 million acres of higher and better use timberlands and about1.0 million acres of non-strategic timberlands. The higher and better usetimberlands are expected to be sold over the next 15 years for conservation,residential or recreational purposes. The non-strategic timberlands, whichconsist of large blocks as well as smaller tracts, are expected to be sold overthe next five to ten years. In the meantime, these timberlands continue to beused productively in our business of growing and selling timber.

On October 6, 2001, six former subsidiaries ofGeorgia-Pacific Corporation (“Georgia-Pacific”), collectively referred to as “TheTimber Company,” merged with and into Plum Creek. The Timber Company held allof the assets and liabilities attributed to Georgia-Pacific’s timber andtimberland business. In the merger, Plum Creek acquired approximately 3.9million acres of primarily pine forests in the southern regions of the UnitedStates, 287,000 acres of primarily Douglas-fir forests in Oregon and542,000 acres of mixed hardwood forests in the Appalachian andnortheastern regions of the United States for a purchase price of approximately$3.4 billion.

***Basis of Presentation.  ***Theconsolidated financial statements of the company include the accounts of PlumCreek Timber Company, Inc. and its subsidiaries. Intercompany transactionsand accounts have been eliminated in consolidation. All transactions aredenominated in United States dollars.

***Use of Estimates.  ***Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

***Business Concentrations.  ***Salesof the company’s products are dependent upon the economic conditions of thehousing, repair and remodeling, industrial, and pulp and paper industries.Changes in these industries may significantly affect management’s estimates andthe company’s performance.

***Revenue Recognition.  ***Timbersales revenues are recognized when legal ownership and the risk of losstransfer to the purchaser and the quantity sold is determinable. The companysells timber under delivered log agreements as well as through sales ofstanding timber (or “stumpage”). For delivered sales, revenue, includingamounts billed for shipping and handling, is recognized when the log isdelivered to the customer. Stumpage is sold using either pay-as-cut orlump-sum sale agreements. First, under a pay-as-cutcontract, thepurchaser acquires the right to harvest specified timber on a tract, at anagreed-to price per unit. The sale and any related advances are recognized asrevenues as the purchaser harvests the timber on the tract. Secondly, under a lump-sum sale, the parties agree to apurchase 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 thetimber 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 timberharvested compared to total estimated timber available to be harvested on atract of land over the term of the contract (usually 12 to 18 months). Anadjustment 

49

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

maybe required at the completion of the contract to the extent the actual timberharvested was different than the estimate of timber available for harvest basedon the timber cruise.

Revenues generated from the sale of lumber, plywood,medium density fiberboard (“MDF”) and related by-products, primarily woodchips, and amounts billed for shipping and handling, are recognized at the timeof delivery. Revenues generated from real estate sales include the sale ofhigher and better use timberlands and non-strategic timberlands. In some ofthese transactions, the company exchanged timberlands that qualified forlike-kind (tax-deferred) exchange treatment under the Internal Revenue Code.Substantially all of these exchanges involved a third party intermediary, wherebythe third party intermediary received proceeds related to the property disposedand then reinvested the proceeds in like-kind property. The proceeds arerecorded as revenues when the third party intermediary receives them.

Revenue from realestate sales is recognized in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 66, *Accountingfor Sales of Real Estate.*For substantially all of our real estatesales, we receive the entire consideration in cash at closing (“Cash Sales”). Alsoat closing, the risks and rewards of ownership transfer to the buyer and we donot 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 realestate when the sale is consummated (i.e., at closing). On occasion we receivea portion of the real estate sale consideration in the form of a notereceivable. Such sales represented less than 5% of our revenue from real estatesales for each of the years in the three-year period ended December 31,2004. Under these circumstances, we use the full accrual method of recognizingrevenue if the buyer’s initial and continuing investment is adequate;otherwise, revenue is recognized under the cost recovery method. Furthermore,Plum Creek may occasionally sell timberlands to a single buyer under amulti-period contract covering a series of prescheduled closings and/or options.Under these multi-period contracts, once title and risk of loss havetransferred to the buyer for individual properties, the properties sold cannotbe returned for a refund. However, deposits for future closings undermulti-period contracts may be refunded under certain circumstances. The companytreats each closing under a multi-period arrangement as a separate sale andrecognizes revenue in accordance with Emerging Issues Task Force (“EITF”) No. 00-21,*Revenue Arrangements with MultipleDeliverables.*Broker commissions and closing costs of our RealEstate Segment are included in cost of goods sold.

***Cash and Cash Equivalents.  ***Allhighly liquid investments purchased with an original maturity of three monthsor less are considered to be cash equivalents. Substantially all of the cashand cash equivalents are invested in money market funds. The companyperiodically reviews the credit rating of the financial institution where themoney market funds are maintained. The company has restricted cash related tocertain advances from a customer associated with lump-sum timber sales. Whenthe trees associated with these lump-sum contracts are harvested, the companymay access the cash.

Prior to 2004, checks outstanding at the end of theperiod were netted against our cash balance. For 2004, outstanding checks havebeen included in Accounts Payable. Prior year amounts have been reclassifiedfor comparable presentation. Included in Accounts Payable were outstandingchecks of $11 million and $7 million at December 31, 2004 and2003, respectively.

***Accounts Receivable*.  **Accountsreceivable at December 31, 2004 and 2003,is presented net of an allowance for doubtful accounts of $1 million.Accounts are deemed past due based on payment terms. The allowance for doubtfulaccounts represents management’s estimate and is based on historical losses,recent collection history, credit ratings of individual customers and existingeconomic conditions. 

50

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Delinquent accounts arecharged against the allowance for doubtful accounts to the extent and at thetime they are deemed uncollectible.

***Grantor Trusts*.  **Severalgrantor trusts have been established for deferred compensation and deferredPlum Creek shares. See Note 8 of the Notes to Financial Statements. Deferredcompensation 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 acorresponding amount of compensation expense are recorded in the consolidatedstatement of income.

Certain deferred compensation obligations are fixed inPlum Creek’s own stock. Shares of Plum Creek stock held by the company’sgrantor trusts as well as the underlying obligations are reported on theconsolidated balance sheet at historic costs as a component of Other Equity.

Furthermore, Plum Creek maintains a grantor trust,which the company uses to fund its non-qualified pension plan obligation. SeeNote 10 of the Notes to Financial Statements. Money market and mutual fundinvestments held by this trust are classified as “available for salesecurities.” The investments are carried at market values on the company’sbalance sheet; realized gains and losses are recognized in the consolidatedstatement of income; changes in unrealized gains and losses are recorded asother 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 ofcost or market on the average cost method. Supplies inventories are stated atcost. Costs for manufactured inventories included raw materials, labor,supplies, energy, depreciation and production overhead. Cost of log inventoriesincluded timber depletion, stumpage, associated logging and harvesting costs,road costs and production overhead.

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

Costs attributable to timber harvested, or depletion,are charged against income as trees are harvested. Depletion rates aredetermined annually based on the relationship between net carrying value of thetimber plus certain capitalizable silviculture costs expected to be incurredover the harvest cycle and total timber volume estimated to be available overthe harvest cycle. The depletion rate calculations do not include an estimatefor either future reforestation costs associated with a stand’s final harvestor future volume in connection with the replanting of a stand subsequent to itsfinal harvest. Net carrying value of the timber and timberlands is used tocompute the gain or loss in connection with timberland sales. There is no bookbasis allocated to the sale of conservation easements.

Plum Creek enters into like-kind (tax-deferred)exchange transactions to acquire and sell assets, principally timberlands.During 2004, the company acquired assets totaling $162 million under tax-deferred

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

exchange transactionscompared to $57 million during 2003 and $33 million during 2002. Also during2004, the company disposed of assets for consideration of $163 million undertax-deferred exchange transactions, compared to $53 million during 2003 and$36 million during 2002. The above amounts include both forward(timberlands sold, followedby reinvestment of proceeds to acquire timberlands) and reverse (timberlandspurchased, followedby receipt of proceeds from timberland sales) like-kind exchanges.

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

All property, plant and equipment other thanmanufacturing machinery (lumber, plywood and MDF) are depreciated using thestraight-line method over the estimated useful lives of the related assets.Manufacturing machinery and equipment are depreciated on a units-of-productionbasis, which approximates a straight-line basis. Useful lives are 25 years forland improvements, 20 to 45 years for buildings, and 3 to 20 years formachinery and equipment. Leasehold improvements are depreciated over the leaseterm or estimated useful life, whichever is shorter. The cost and relatedaccumulated depreciation of property sold or retired are removed from theaccounts and any gain or loss is recorded.

***Shipping and Handling Costs.  ***Costsincurred for shipping timber and manufactured products are included in cost ofgoods sold.

***Stock-Based Compensation Plans.  ***AtDecember 31, 2004, the company had stock-based employee compensationplans, which are described more fully in Note 11 of the Notes to FinancialStatements. The company expenses stock-based employee compensation on astraight-line basis over the vesting period in accordance with the fair valuerecognition provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*. Under the prospective method adoptedby the company in 2002, stock-based employee compensation cost is recognizedusing the fair value method for all employee awards granted, modified, orsettled on or after January 1, 2002. The company recognized stock-based compensationexpense of approximately $3 million during 2004, and approximately$4 million each during 2003 and 2002. Had the company used the fair valuemethod of accounting for all stock-based compensation, net income would havebeen reduced by $0.3 million for 2004, and $0.5 million each for 2003and 2002.

Stock-basedemployee compensation expense included in reported income before income taxeswas as follows for the **years ended December 31**(in millions):
| ** **                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Stock options                                                                  | ** ** | **$**    | **1.7**    |     | $          | 0.9      |       | $ | 0.4 |   |
| Value management  awards, dividend equivalents, and grants of restricted stock | ** ** | **1.7**  |       | 3.0      |       | 4.1      |       |
| Total                                                                          | ** ** | **$**    | **3.4**    |     | $          | 3.9      |       | $ | 4.5 |   |

 

Value management awards and dividend equivalents arepaid partially in stock and partially in cash, based on payout elections madeby recipients. The company recorded expense of $9.3 million in 2004,$2.6 million in 2003 and $3.3 million in 2002 for the estimated cashportion of these awards. See Note 11 of the Notes to Financial Statements.

***Reclassifications*.  **Certainprior year amounts have been reclassified to conform with the 2004presentation. The reclassifications had no impact on operating income or netincome. See Note 1 of the 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Notes to FinancialStatements, “Cash and Cash Equivalents,” for reclassification of outstandingchecks. See Note 10 of the Notes to Financial Statements for reclassificationof grantor trust assets.

***New Accounting Pronouncements.  ***InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123 (revised 2004), *Share-BasedPayment*, which is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*. SFASNo. 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*,and amends SFAS No. 95, *Statement ofCash Flows*. Generally, the approach in SFAS No. 123(R) issimilar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values. Proforma disclosure is no longer an alternative. SFAS No. 123(R) must beadopted no later than July 1, 2005. Early adoption will be permitted inperiods in which financial statements have not yet been issued. We expect toadopt SFAS No. 123(R) on July 1, 2005.

The company adopted the fair-value-based method ofaccounting for share-based payments effective January 1, 2002, using theprospective 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 thevalue of stock options granted to employees and expects to continue to use thisacceptable option valuation model upon the required adoption of SFAS No. 123(R) onJuly 1, 2005. SFAS No. 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required undercurrent literature. This requirement will reduce net operating cash flows andincrease net financing cash flows in periods after adoption. While the companycannot estimate what those amounts will be in the future (because they dependon, among other things, when employees exercise stock options), the amounts ofoperating cash flows recognized in prior periods for such excess tax deductionswere immaterial. In addition to stock options, the company may also grantdividend equivalents and value management awards, a portion of which may bepayable in the company’s stock. See Note 11 of the Notes to FinancialStatements. The company is in the process of determining the effect, if any,the adoption of SFAS No. 123(R) will have on the financialstatements.

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

In December 2004, theFASB issued SFAS No. 153, *Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29*. SFAS No. 153is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged. Opinion No. 29provided an exception to its basic measurement principle, fair value, forexchanges of similar production assets. Under Opinion No. 29, an exchangeof a productive asset was based on the recorded amount of the assetrelinquished. The FASB eliminated this exception and replaced it with anexception for exchanges of nonmonetary assets that do not have commercialsubstance. The FASB believes this Statement produces financial reporting thatmore faithfully represents the economics of nonmonetary asset exchangetransactions. The new Statement is effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

2005. Managementdoes not expect that adoption of this standard will have a material impact onthe company’s financial condition, results of operations or cash flows.

**Note 2.    Earnings Per Share**

Thefollowing table sets forth the reconciliation of basic and diluted earnings pershare for the **years ended December 31**(in millions, except per share amounts):
| ** **                                                                                             | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Income from  Continuing Operations                                                                     | ** ** | **$**     | **339**    |     | $          | 192      |       | $ | 233 |   |
| Gain on Sale of  Properties, net of tax                                                                | ** ** | **23**    |       | —   |       | —   |       |
| Net Income  allocable to common stockholders                                                           | ** ** | **$**     | **362**    |     | $          | 192      |       | $ | 233 |   |
| Denominator for basic earnings per share                                                               | ** ** | **183.4** |       | 183.3    |       | 184.7    |       |
| Effect of  dilutive securities—stock options                                                      | ** ** | **0.6**   |       | 0.4      |       | 0.5      |       |
| Effect of  dilutive securities—restricted stock, dividend equivalents, and value  management plan | ** ** | **0.1**   |       | 0.2      |       | 0.2      |       |
| Denominator for  diluted earnings per share—adjusted for dilutive securities                      | ** ** | **184.1** |       | 183.9    |       | 185.4    |       |
| Per share amounts                                                                                      |       |      |       |     |       |     |       |
| Income from Continuing Operations—Basic                                                           | ** ** | **$**     | **1.85**   |     | $          | 1.05     |       | $ | 1.26 |   |
| Income from Continuing Operations—Diluted                                                         | ** ** | **$**     | **1.84**   |     | $          | 1.04     |       | $ | 1.26 |   |
| Gain on Sale of Properties, net of tax—Basic                                                      | ** ** | **$**     | **0.12**   |     | $          | —   |       | $ | — |   |
| Gain on Sale of Properties, net of tax—Diluted                                                    | ** ** | **$**     | **0.12**   |     | $          | —   |       | $ | — |   |
| Net Income—Basic                                                                                  | ** ** | **$**     | **1.97**   |     | $          | 1.05     |       | $ | 1.26 |   |
| Net  Income—Diluted                                                                               | ** ** | **$**     | **1.97**   |     | $          | 1.04     |       | $ | 1.26 |   |

 

Antidilutiveoptions excluded for certain periods from the computation of diluted earningsper share because the options’ exercise prices were greater than the average marketprice of the common shares were as follows for the **years ended December 31** (shares in millions):
| ** **              | ** ** | **2004**              | ** **           | **2003**          | ** ** | **2002**        | ** ** |
|-------------------------|------------|-----------------------|----------------------|-------------------|------------|-----------------|------------|
| Number of options       |       | **0.5**               |                 | 1.0               |       | 0.4             |       |
| Range of prices         |       | **$**                 | **29.70  to $36.13** |              | $          | 21.91 to $30.70 |       | $ | 24.35 to $30.70 |   |
| Expiration on or before |       | **October 2014** |                 | October 2013 |       | December 2012   |       |
|                         |            |                       |                      |                   |            |                 |            |  |  |  |

 

**Note3.   Timber and Timberlands and Property, Plant and Equipment and Inventory**

Timberand timberlands consisted of the following (in millions): 
| ** **                         | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Timber and  logging roads—net | ** ** |                        | **$**      | **2,367**                   |       |   |   | $ | 2,404 |   |   |
| Timberlands                        | ** ** |                        | **1,223**  |                        |       |   | 1,270 |   |   |
| Timber and  Timberlands—net   | ** ** |                        | **$**      | **3,590**                   |       |   |   | $ | 3,674 |   |   |

 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

During 2004, Plum Creek acquired approximately 78,000acres of timberlands located primarily in Arkansas and Maine for$66 million. Timberland dispositions during the same time period comprisedapproximately 377,000 acres of which 310,000 were located in the Northernand 67,000 in the Southern United States. During 2003, timberland acquisitionsconsisted primarily of 139,000 acres located in South Carolina, Arkansas andNew Hampshire for $162 million. Timberland dispositions for the same timeperiod totaled 125,000 acres of which 78,000 were located in the Northernand 47,000 in the Southern United States.

In December 2004, Plum Creek sold substantiallyall of its subsurface property rights (primarily coal reserves, excludingcoal-bed methane, oil and gas reserves) in Buchanan County, Virginia, to ConsolEnergy, Inc. See Note 14 of the Notes to Financial Statements. Thebook basis of these property rights of $0.1 million was expensed upon saleand is reflected in our Consolidated Statements of Income for the year ended December 31,2004, as a deduction in Gain on Sale of Properties, net of tax.

The company’s Real Estate Segment consists of sales ofhigher and better use timberlands and sales of non-strategic timberland. Occasionally,non-strategic timberlands are sold at a loss. Each real estate sale isevaluated for a potential impairment in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*. During 2004, the company recorded impairmentlosses of $21 million in connection with the potential sale of non-strategictimberlands, which had a book basis of $45 million. Substantially all of theseproperties were sold during 2004. During 2003, the company recorded impairmentlosses of $14 million in connection with the potential sale of non-strategictimberlands, which had a book basis of $50 million. Approximately two-thirds ofthese properties were sold during 2003. The impairment losses of $21 million in2004 and $14 million in 2003 are included in Cost of Goods Sold for Real Estatein our Consolidated Statements of Income.

During 2003, the company’s Northern Resources Segmentrecognized a $4 million loss, representing the book basis of the timber volumedestroyed 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,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Land, buildings  and improvements       | ** ** |                        | **$**      | **80**                      | ** ** |   |   | $ | 81 |   |   |
| Machinery and  equipment                | ** ** |                        | **282**    | ** **                  |       |   | 304 |   |   |
| ** **                              |       |                        | **362**    | ** **                  |       |   | 385 |   |   |
| Accumulated  depreciation               | ** ** |                        | **(109**   | **)**                       |       |   | (82 | ) |   |
| Property, Plant and  Equipment—net | ** ** |                        | **$**      | **253**                     | ** ** |   |   | $ | 303 |   |   |

 

During the fourth quarter of 2004, the companycompleted an evaluation of its lumber business. In connection with theevaluation, the company concluded it had excess production capacity at one ofits mills; and therefore, concluded that the mill’s long-lived assets wereimpaired. The company recorded an impairment loss of $9 million during thefourth quarter 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 impairmentloss of $9 million is reflected in the operating income of our ManufacturedProducts Segment and included in Cost of Goods Sold for Manufacturing in ourConsolidated Statements of Income. The estimated fair value was computed basedon expected future cash flows discounted at the risk-free rate of interest.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Since 2001, Plum Creek had been a party to a jointoperating agreement with Geomet, Inc., a coalbed methane developer, withwhom the company jointly explored for and developed coalbed methane gas foundon certain of Plum Creek’s timberlands in West Virginia and Virginia. During2004, the company sold its working interest in the joint operating agreement toGeomet, Inc. See Note 14 of the Notes to Financial Statements. At December 31,2003, Property, Plant and Equipment—net included $22 million of capitalizedcosts associated with these coalbed methane exploration and developmentactivities.

Inventories,accounted for using the lower of average cost or market, consisted of thefollowing (in millions): 
| ** **            | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Raw materials  (logs) | ** ** |                        | **$**      | **24**                      |       |   |   | $ | 13 |   |   |
| Work-in-process       | ** ** |                        | **4**      |                        |       |   | 3 |   |   |
| Finished goods        | ** ** |                        | **32**     |                        |       |   | 29 |   |   |
|                  |       |                        | **60**     |                        |       |   | 45 |   |   |
| Supplies              | ** ** |                        | **11**     |                        |       |   | 9 |   |   |
| Total                 | ** ** |                        | **$**      | **71**                      |       |   |   | $ | 54 |   |   |

 

**Note 4.   Income Taxes**

Plum Creek has elected to be taxed as a REIT undersections 856-860 of the United States Internal Revenue Code. A REIT isgenerally not subject to corporate-level income tax if it satisfies certainrequirements as set forth in the Internal Revenue Code. Under these sections, aREIT is permitted to deduct dividends paid to stockholders in computing itstaxable income. See Note 5 of the Notes to Financial Statements. If a companyfails to qualify as a REIT in any taxable year, it will be subject to federalincome taxes at regular corporate rates (including any applicable alternativeminimum tax) and may not be able to qualify as a REIT for four subsequenttaxable years.

Plum Creek conducts its activities through variouswholly owned operating partnerships. The activities of the operatingpartnerships consist primarily of sales of timber under pay-as-cut contracts,and the income from such sales is not subject to corporate income tax. Inaddition, our various taxable REIT subsidiaries (subchapter “C” corporations)harvest and sell logs, purchase and sell timber under pay-as-cut contracts orlump-sum sales, conduct our manufacturing operations and sell some higher andbetter use timberlands.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The provision (benefit) forincome taxes consists of the following for the**years ended****December 31**(in millions):
|                                                                        |       |  2004  |   |  2003  |       |  2002  |   |
|-----------------------------------------------------------------------------|------------|------------------|--------|------------------|------------|------------------|--------|
| Current income taxes:                                                       |       |             |   | ** **       |       |             |   |   |   |   |   |
| Federal                                                                     | ** ** | ** **       | **$**  | **15**           | ** ** |             | $      | 1 |   |   | $ | 1 |   |   |
| State                                                                       | ** ** | ** **       | **3**  | ** **       |       | —           |   |   | — |   |   |
| Deferred income taxes:                                                      |       |             |   | ** **       |       |             |   |   |   |   |   |
| Federal                                                                     | ** ** | ** **       | **(7** | **)**            |       | 4                |   |   | 3 |   |   |
| State                                                                       | ** ** | ** **       | **(1** | **)**            |       | (1               | )      |   | — |   |   |
| Utilization (benefit) of operating loss  carryforwards                      | ** ** | ** **       | **17** | ** **       |       | (10              | )      |   | (2 | ) |   |
| Provision  (benefit) for income taxes on income from continuing  operations | ** ** | ** **       | **$**  | **27**           | ** ** |             | $      | (6 | ) |   | $ | 2 |   |   |

 

Thefederal statutory income tax rate was 35%. The income generated by theactivities of the REIT is generally not subject to federal and state incometax. The provision for income taxes is reconciled as follows to the federalstatutory rate for the **years ended December 31**(in millions):
| ** **                                                                                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Provision for  income taxes on income from continuing operations computed at the Federal  statutory tax rate | ** ** | **$**    | **128**    |     | $          | 65       |       | $ | 82 |   |
| REIT income not  subject to Federal tax                                                                      | ** ** | **(101** | **)**      | (68      | )          | (79      | )          |
| State income  taxes, net of Federal benefit                                                                  | ** ** | **4**    |       | (1       | )          | —   |       |
| Permanent  book-tax differences                                                                              | ** ** | **(4**   | **)**      | (2       | )          | (1       | )          |
| Provision (benefit) for  income taxes on income from continuing operations                                   | ** ** | **$**    | **27**     |     | $          | (6       | )          | $ | 2 |   |

 

For the year ended December 31, 2004, $27 millionof income tax expense was allocated to Income from Continuing Operations and$0.3 million of income tax expense was allocated to Gain on Sale of Properties,net of tax.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Deferredincome taxes are provided for net operating loss carryforwards and thetemporary differences between the financial reporting basis and tax basis ofthe company’s assets and liabilities. The components of net deferred income taxliabilities are as follows (in millions):
| ** **                          | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred income  tax assets:        |       |                        |       | ** **                  |       |   |   |   |   |
| Accrued compensation                | ** ** | ** **                  | **$**      | **13**                      | ** ** |   |   | $ | 14 |   |   |
| Net operating loss carryforwards    | ** ** | ** **                  | **—** | ** **                  |       |   | 17 |   |   |
| Other accruals and reserves         | ** ** | ** **                  | **9**      | ** **                  |       |   | 6 |   |   |
| ** **                          |       | ** **                  | **22**     | ** **                  |       |   | 37 |   |   |
| Deferred income  tax liabilities:   |       |                        |       | ** **                  |       |   |   |   |   |
| Machinery and equipment             | ** ** | ** **                  | **(54**    | **)**                       |       |   | (60 | ) |   |
| Timber and timberlands              | ** ** | ** **                  | **(3**     | **)**                       |       |   | (3 | ) |   |
| ** **                          |       | ** **                  | **(57**    | **)**                       |       |   | (63 | ) |   |
| Deferred income tax  liability, net | ** ** | ** **                  | **$**      | **(35**                     | **)**      |   |   | $ | (26 | ) |   |

 

During 2004, the companyutilized $45 million of netoperating loss carryforwards. Deferred income tax liabilitiesat December 31, 2004 and 2003,are net of deferred tax assets of $10 million and $11 million,respectively, included in current assets.

As a consequence of the October 6, 2001, merger with The Timber Company,which involved merging a taxable entity into a nontaxable entity, Plum Creekwill generally be subject to corporate-level tax (built-in gains tax) only ifthe company makes a taxable disposition of certain property acquired in themerger with The Timber Company within the ten-year period following the mergerdate. The built-in gains tax only applies to gains from such asset sales to theextent that the fair value of the property exceeded its tax basis at the mergerdate. The built-in gains tax does not apply to income generated from theharvesting and sale of timber.

Plum Creek conducts its activities through various whollyowned operating partnerships and through several taxable REIT subsidiaries. Theactivities of the REIT are not subject to corporate-level income tax (otherthan the built-in gains tax) provided the REIT’s taxable income is distributedto its shareholders. The book basis of the REIT’s assets and liabilitiesexceeds its tax basis by approximately $1.7 billion at December 31, 2004.Plum Creek’s taxable REIT subsidiaries file a consolidated federal income taxreturn.

The company filed itsfederal income tax return as part of Georgia-Pacific’s consolidated income taxreturn for all tax years through the date of the merger with The Timber Companyon October 6, 2001. Under the agreement governing the terms of the mergerwith The Timber Company, the company remains liable to Georgia-Pacific for anyadditional tax that would result from audit adjustments by the Internal RevenueService (the “Service”) and by State and Local Taxing Authorities. The Servicehas completed all examinations of Georgia-Pacific’s consolidated income taxreturns through 1998 and the company has no further obligation toGeorgia-Pacific as of December 31, 2004. Georgia-Pacific’s consolidatedincome tax returns for 2001, 2000, and 1999 are currently under examination. Additionally,the Service has completed examinations of the federal income tax return of PlumCreek Timber Company, Inc. and the consolidated federal income tax returnof the taxable REIT subsidiaries for the year 2000 and the period ended December 31,1999. Plum Creek has no open tax years prior to 2001.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 5.**   REITDisclosures

Plum Creek has elected to be taxed as a REIT undersections 856-860 of the United States Internal Revenue Code. For the years2004, 2003, and 2002, Plum Creek elected to designate all taxable distributionsas long-term capital gain dividends. Accordingly, as of and for the years endedDecember 31, 2004, 2003, and 2002, Plum Creek has distributed all of itstaxable income.

Thetable below summarizes the historical tax character of distributions from theREIT to Plum Creek shareholders for the **yearsended December 31**(in millions):
| ** **                     | ** ** | **2004** | ** ** | **2003**(A) | ** ** | **2002** | ** ** |
|--------------------------------|------------|----------|------------|-------------|------------|----------|------------|
| Capital gain  dividend         | ** ** | **$**    | **1.27**   |        |       | $        | 1.01       |   |   | $ | 1.20 |   |
| Non-taxable  return of capital | ** ** | **0.15** |       |        | 0.39       |     |       | 0.29 |   |
| Total  distributions           | ** ** | **$**    | **1.42**   |        |       | $        | 1.40       |   |   | $ | 1.49 |   |

----

**(A)****        **Approximately65.75% of the 2003 capital gain dividend represents Post-May 5 CapitalGain Distribution and qualifies for the new 15% and 5% capital gains tax rates.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 6.**   Borrowings

Long–termdebt and the line of credit consist of the following (in millions): 
| ** **                                                                                                                                              | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Revolving Line of Credit  due 2009, 3.3% at 12/31/04, based on LIBOR plus 0.875%, and 2.7% at 12/31/03,  based on LIBOR plus 1.5%                  | ** ** |                        | **$**      | **448**                     | ** ** |   |   | $ | 594 |   |   |
| Senior Notes due 2007,  11.125% plus unamortized premium of $3.1 at 12/31/04, effective rate of 6.19%                                                   | ** ** |                        | **46**     | ** **                  |       |   | 62 |   |   |
| First Mortgage Notes due  2007, 11.125% plus unamortized premium of $2.8 at 12/31/04, effective rate of  6.19%                                          | ** ** |                        | **41**     | ** **                  |       |   | 56 |   |   |
| Senior Notes due 2007,  5.31%                                                                                                                           | ** ** |                        | **25**     | ** **                  |       |   | 25 |   |   |
| Senior Notes due 2009,  8.73% plus unamortized premium of $6.7 at 12/31/04, effective rate of 7.55%                                                     | ** ** |                        | **157**    | ** **                  |       |   | 158 |   |   |
| Senior Notes due 2011,  mature serially 2007 to 2011, 7.62% to 7.83%, plus unamortized premium of  $1.5 at 12/31/04, effective rates of 6.96% to 7.84%  | ** ** |                        | **173**    | ** **                  |       |   | 173 |   |   |
| Senior Notes due 2013,  mature serially 2006 to 2013, 6.96% to 7.76%, less unamortized discount of  $5.5 at 12/31/04, effective rates of 6.95% to 8.04% | ** ** |                        | **494**    | ** **                  |       |   | 494 |   |   |
| Senior Notes due 2016,  mature serially 2006 to 2016, 7.74% to 8.05%, plus unamortized premium of  $1.4 at 12/31/04, effective rates of 6.96% to 8.04%  | ** ** |                        | **201**    | ** **                  |       |   | 202 |   |   |
| Senior Notes due 2013,  mature serially 2008 to 2013, 4.96% to 6.18%                                                                               | ** ** |                        | **280**    | ** **                  |       |   | 280 |   |   |
| Senior Notes due 2008,  3.5% at 12/31/04, based on  3-month LIBOR plus 1.445%                                                                           | ** ** |                        | **20**     | ** **                  |       |   | 20 |   |   |
| Total Long-term Debt                                                                                                                                    | ** ** |                        | **$**      | **1,885**                   | ** ** |   |   | $ | 2,064 |   |   |
| Less:  Current  Portion                                                                                                                       | ** ** |                        | **(32**    | **)**                       |       |   | (33 | ) |   |
| Long-term Portion                                                                                                                                       | ** ** |                        | **$**      | **1,853**                   | ** ** |   |   | $ | 2,031 |   |   |

 

In January of 2004, the company refinanced itsrevolving line of credit with a new $650 million facility maturing January 15,2009. As of December 31, 2004, the interest rate for the new facility wasLIBOR plus 0.875%, which included facility fees. This rate can range from LIBORplus 0.75% to LIBOR plus 1.625% depending on our financial results. Subject tocustomary covenants, the line of credit allows for borrowings from time to timeup to $650 million, including up to $50 million of standby letters of credit. Borrowingson the line of credit fluctuate daily,based on cash needs. As of December 31, 2004, we had $448 million of borrowingsand $6 million of standby letters of credit outstanding; $196 millionremained available for borrowing under our line of credit. As of January 7,2005, $348 million of the borrowings under our line of credit was repaid.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In August of 2004, the company filed with theSecurities and Exchange Commission a shelf registration statement under whichthe company from time to time may offer and sell any combination of preferredstock, common stock, depositary shares, warrants and guarantees up to a total amountof $400 million, and under which Plum Creek Timberlands, L.P., the company’swholly owned operating partnership, may from time to time offer and sell debtsecurities of up to an additional total amount of $400 million. As of December 31,2004, the entire amounts for issuance of equity and debt securities remainedavailable under the shelf registration statement.

In January 2003, the company issued $300 millionof senior notes payable. These notes comprised $280 million fixed rateborrowings bearing interest at 4.96% to 6.18% maturing serially in 2008 to 2013and $20 million variable rate debt bearing interest at 3-month LIBOR plus1.445% maturing in 2008. The proceeds from the issuance of these notes wereused to repay a portion of the outstanding borrowings under lines of credit andfor general business funding purposes.

The unamortized balance of the premium recorded toreflect the difference between the market rate of interest and the statedinterest rates at the time of the merger with Timber Company in 2001 was$10 million and $16 million at December 31, 2004 and 2003,respectively.

The Senior Notes (excluding the Senior Notes due 2011)and the First Mortgage Notes are redeemable prior to maturity subject to apremium on redemption, which is based upon interest rates of United StatesTreasury securities having similar average maturities as these notes. Thepremium that would have been due upon early retirement approximated $178million at December 31, 2004, and $218 million at December 31, 2003.The Senior Notes are unsecured. The First Mortgage Notes are collateralized bysubstantially all of the property, plant and equipment of the lumber, plywoodand MDF manufacturing facilities. The Senior Notes due 2011 are not redeemableprior to maturity.

Theaggregate maturities on the note agreements and the line of credit are asfollows as of **December 31, 2004**(in millions): 
| **Maturity** | ** ** | ** ** | ** ** | **Note Agreements**(A) | ** ** | **Line of Credit** | ** ** |
|--------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|
| 2005         |       |       | $          | 32                          |       |                         |       |   |   |   |
| 2006         |       |       | 161        |                        |       |                         |       |   |   |
| 2007         |       |       | 125        |                        |       |                         |       |   |   |
| 2008         |       |       | 168        |                        |       |                         |       |   |   |
| 2009         |       |       | 200        |                        |       |                         | $          | 448 |   |   |
| Thereafter   |       |       | 751        |                        |       |                         |       |   |   |
| Total        |       |       | $          | 1,437                       |       |                         |       | $ | 448 |   |   |

----

**(A)****        **Principalpayments of $14 million are due annually on the Senior Notes due 2007. Principalpayments of $13 million are due annually on the First Mortgage Notes due 2007.

The company’s noteagreements and the line of credit contain various restrictive covenants,including limitations on harvest levels, sales of assets, the incurrence ofindebtedness and making restricted payments (such as payments of cash dividendsor stock repurchases). The borrowing agreements limit our ability to makerestricted payments (see Note 7 of the Notes to Financial Statements) based onavailable cash, which is generally our net income (excluding gains on the saleof capital assets) after adjusting for non-cash charges (such as depreciationand depletion), changes in various reserves, less capital expenditures andprincipal payments on indebtedness that are not financed. Additionally, theamount of 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

availablecash may be increased by the amount of proceeds from the sale of higher andbetter use properties and, under certain circumstances, by 50% of the amount ofnet proceeds from the sale of other assets. Furthermore, our line of creditrequires that we maintain certain interest coverage and maximum leverage ratios. The company was in compliance with suchcovenants at December 31, 2004.

**Note 7.   Restricted Net Assets**

Plum Creek Timber Company, Inc. is the directparent company of Plum Creek Timberlands, L.P., our operating partnership (the “Partnership”),and the indirect parent of all the subsidiaries of our consolidated group. PlumCreek Timber Company, Inc. has no assets or liabilities other than itsownership interest in the Partnership and proceeds from stock option exercises.Under the terms of our note agreements and line of credit (see Note 6 of theNotes toFinancial Statements), the Partnership is restricted from transferring assetsand funds in the form of loans, advances or cash dividends to Plum Creek TimberCompany, Inc. Subject to certain restrictions, the Partnership can makeloans or advances to Plum Creek Timber Company, Inc. Based on theseprovisions, the Partnership could distribute or advance the cash on its balancesheet as of December 31, 2004, or $347 million, all of which isconsidered unrestricted assets. At December 31, 2004, the Partnership andits consolidated subsidiaries had net assets of $2,238 millionof which $1,891 million were restrictedfrom being transferred by the Partnership to Plum Creek Timber Company, Inc.

Presented below is thecondensed unconsolidated financial information for Plum Creek Timber Company, Inc.as of December 31, 2004 and 2003, and for each of the years in thethree-year period ended December 31, 2004. The ownership of Plum CreekTimberlands, L.P. is presented using the equity basis of accounting. Plum CreekTimber Company, Inc. does not have any direct or indirect ownershipinterest in unconsolidated subsidiaries or 50 percent or less owned personsaccounted for by the equity method of accounting.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**PlumCreek Timber Company, Inc.Condensed Unconsolidated Balance Sheet Data**
| ** **                                                   | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                   | ** ** | **(In Millions)**      | ** ** |
| **Assets**                                                   |       |                        |       | ** **                  |       |   |   |   |   |
| Investment in  Plum Creek Timberlands, L.P. and Subsidiaries | ** ** | ** **                  | **$**      | **2,238**                   | ** ** |   |   | $ | 2,119 |   |   |
| Total Assets                                                 | ** ** | ** **                  | **$**      | **2,238**                   | ** ** |   |   | $ | 2,119 |   |   |
| **Liabilities**                                              |       |                        |       | ** **                  |       |   |   |   |   |
| Total Liabilities                                            | ** ** | ** **                  | **$**      | **—**                  | ** ** |   |   | $ | — |   |   |
| Commitments and Contingencies                                |       |                        |       | ** **                  |       |   |   |   |   |
| **Stockholders’  Equity**                               |       |                        |       | ** **                  |       |   |   |   |   |
| Common Stock                                                 | ** ** | ** **                  | **2**      | ** **                  |       |   | 2 |   |   |
| Additional Paid  in Capital                                  | ** ** | ** **                  | **2,168**  | ** **                  |       |   | 2,150 |   |   |
| Retained Earnings  and Other Equity                          | ** ** | ** **                  | **111**    | ** **                  |       |   | 10 |   |   |
| Treasury Stock,  at cost                                     | ** ** | ** **                  | **(43**    | **)**                       |       |   | (43 | ) |   |
| Total Stockholders’ Equity                              | ** ** | ** **                  | **2,238**  | ** **                  |       |   | 2,119 |   |   |
| Total Liabilities  and Equity                                | ** ** | ** **                  | **$**      | **2,238**                   | ** ** |   |   | $ | 2,119 |   |   |

 

**PlumCreek Timber Company, Inc.Condensed Unconsolidated Statement of Income Data**
| ** **                                                  | ** ** | **Year Ended**         | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
| ** **                                                  | ** ** | **(In Millions)**      | ** ** |
| Equity in Net  Income of Plum Creek Timberlands, L.P.  | ** ** |                        | **$**      | **362** |   |   |   | $ | 192 |   |   |   | $ | 233 |   |   |
| Net Income                                                  | ** ** |                        | **$**      | **362** |   |   |   | $ | 192 |   |   |   | $ | 233 |   |   |

 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**PlumCreek Timber Company, Inc.Condensed Unconsolidated Statement of Cash Flows Data **
| ** **                                                                         | ** ** | **Year Ended**         | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
| ** **                                                                         | ** ** | **(In Millions)**      | ** ** |
| Cash Flows From  Operating Activities:                                             |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Net Income                                                                         | ** ** | ** **                  | **$**      | **362** | ** ** |   |   | $ | 192 |   |   |   | $ | 233 |   |   |
| Adjustments to Reconcile Net Income to Net Cash  Provided By Operating Activities: |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Equity in Net Income of Plum Creek Timberlands, L.P.                               | ** ** | ** **                  | **(362**   | **)** |   |   | (192 | ) |   |   | (233 | ) |   |
| Net Cash Provided  By (Used In) Operating Activities                               | ** ** | ** **                  | **—** | ** ** |   |   | — |   |   |   | — |   |   |
| Net Cash Provided By (Used In) Investing Activities                                | ** ** | ** **                  | **—** | ** ** |   |   | — |   |   |   | — |   |   |
| Cash Flows From Financing Activities:                                              |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Cash Dividends                                                                     | ** ** | ** **                  | **(260**   | **)** |   |   | (257 | ) |   |   | (275 | ) |   |
| Cash Distribution from Plum Creek Timberlands, L.P.                                | ** ** | ** **                  | **248**    | ** ** |   |   | 299 |   |   |   | 257 |   |   |
| Proceeds from Stock Option Exercises                                               | ** ** | ** **                  | **12**     | ** ** |   |   | 1 |   |   |   | 18 |   |   |
| Acquisition of Treasury Stock                                                      | ** ** | ** **                  | **—** | ** ** |   |   | (43 | ) |   |   | — |   |   |
| Net Cash Provided  by (Used In) Financing Activities                               | ** ** | ** **                  | **—** | ** ** |   |   | — |   |   |   | — |   |   |
| Increase In Cash and Cash Equivalents                                              | ** ** | ** **                  | **—** | ** ** |   |   | — |   |   |   | — |   |   |
| Cash and Cash  Equivalents:                                                        |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Beginning of Period                                                                | ** ** | ** **                  | **—** | ** ** |   |   | — |   |   |   | — |   |   |
| End of Period                                                                      | ** ** | ** **                  | **$**      | **—** | ** ** |   |   | $ | — |   |   |   | $ | — |   |   |

 

**Note 8.**   Financial Instruments

The carrying amounts of cash and cash equivalents andnotes receivable approximate fair value due to the short-term maturities ofthese instruments. The estimated fair value of the company’s debt, based oncurrent interest rates for similar obligations with like maturities, wasapproximately $2.01 billion and $2.21 billion at December 31,2004 and 2003, respectively. The carrying amount was $1.89 billion and$2.06 billion at December 31, 2004 and 2003, respectively.

Certain investments in the grantor trusts relate tothe company’s non-qualified pension plans and are classified asavailable-for-sale securities. The company has invested in various moneymarket, debt and equity mutual funds. The company plans to use theseinvestments to fund its non-qualified pension obligations. The fair value ofthese investments was $15 million and $13 million at December 31, 2004 and2003, respectively. Unrealized holding gains and losses are included as acomponent of accumulated other comprehensive income, unless a permanentimpairment has occurred, which is then charged to expense. Unrealized holding gains relating to mutualfund investments were $2 million at December 31, 2004, compared to$1 million at December 31, 2003. The company recorded the $1 millionchange in unrealized holding gains in Other Comprehensive Income. Realizedgains and losses were less than $1 million in 2004, 2003, and 2002.  See Note 10 of the Notes to FinancialStatements for discussion of the company’s Pension Plans.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Certain investments in thegrantor trusts relate to the company’s deferred compensation plans and areclassified as trading securities. Deferred compensation amounts are invested invarious money market, debt and equity mutual funds. The company plans to use these investments tofund certain deferred incentive plan awards. Unrealized holding gains relatedto mutual fund investments were $1 million at December 31, 2004. Thechange in unrealized holding gains or losses has been recognized in the company’sconsolidated statement of income resulting in gains of $1 million in 2004 and$2 million in 2003, and a loss of $1 million in 2002. Realized gains andlosses were less than $1 million in 2004, 2003, and 2002. Deferredcompensation obligations are included in Other Liabilities and were$14 million and $13 million at December 31, 2004 and 2003,respectively.

**Note 9.**   Capital

At December 31, 2004, Plum Creek had thefollowing authorized capital of which only 183.7 million shares of common stockwere 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. 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thechanges in the company’s capital accounts are as follows (in millions):
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Other**    | ** ** | **Treasury** | ** ** | ** **   | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                                 | ** ** | **Shares**            | ** ** | **Dollars** | ** ** | **Capital**  | ** ** | **Earnings** | ** ** | **Equity**   | ** ** | **Stock**(B) | ** ** | **Total Equity** | ** ** |
| **January 1,  2002**                                  |       | 183.9                 |       |        | $          | 2            |       |         | $          | 2,227        |       |         | $          | 17 | ** ** |   |   | $ | 1 | ** ** |   |   |   | ** ** |   |   | $ | 2,247 |   |   |
| Net Income                                                 |       |                  |       |        |       |         |       |         |       |         | 233        | ** **   |       |   |   | ** ** |   |   |   | ** ** |   |   | 233 |   |   |
| Dividends                                                  |       |                  |       |        |       |         |       | (48          | )          |         | (227       | )            |       |   |   | ** ** |   |   |   | ** ** |   |   | (275 | ) |   |
| Stock Option  Exercises                                    |       | 1.0                   |       |        |       |         |       | 18           |       |         |       |         |       |   |   | ** ** |   |   |   | ** ** |   |   | 18 |   |   |
| Deferred  Compensation and Other Comprehensive Loss        |       |                  |       |        |       |         |       |         |       |         |       |         |       |   | (1 | ) |   |   |   | ** ** |   |   | (1 | ) |   |
| **December 31,  2002**                                |       | 184.9                 |       |        | 2          |         |       | 2,197        |       |         | 23         |         |       |   | — | ** ** |   |   |   | ** ** |   |   | 2,222 |   |   |
| Net Income                                                 |       |                  |       |        |       |         |       |         |       |         | 192        |         |       |   |   | ** ** |   |   |   | ** ** |   |   | 192 |   |   |
| Dividends                                                  |       |                  |       |        |       |         |       | (51          | )          |         | (206       | )            |       |   |   | ** ** |   |   |   | ** ** |   |   | (257 | ) |   |
| Stock Option  Exercises                                    |       | 0.1                   |       |        |       |         |       | 1            |       |         |       | ** **   |       |   |   | ** ** |   |   |   | ** ** |   |   | 1 | ** ** |   |
| VMA Shares Issued**(A)**                                   |       | 0.1                   |       |        |       |         |       | 2            |       |         |       | ** **   |       |   |   | ** ** |   |   |   | ** ** |   |   | 2 | ** ** |   |
| Treasury Shares  Acquired                                  |       | (2.0                  | )          |        |       |         |       |         |       |         |       | ** **   |       |   |   | ** ** |   |   | $ | (43 | ) |   |   | (43 | ) |   |
| Deferred  Compensation and Other Comprehensive Loss        |       |                  |       |        |       |         |       | 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  Option Exercises                         | ** ** |                  |       | ** **  | ** ** |         | ** ** | **1**        |       | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **1** | ** ** |   |
| VMA Shares Issued**(A)**                                   | ** ** | **0.1**               |       | ** **  | ** ** |         | ** ** | **2**        |       | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2** | ** ** |   |
| Restricted Stock  Granted                                  | ** ** |                  |       | ** **  | ** ** |         | ** ** | **1**        |       | ** **   | ** ** | ** **   | ** ** | ** ** | **(1** | **)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **—** | ** ** |   |
| Deferred  Compensation and Other Comprehensive Income/Loss | ** ** |                  |       | ** **  | ** ** |         | ** ** | **2**        |       | ** **   | ** ** | ** **   | ** ** | ** ** | **2** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **4** | ** ** |   |
| **December 31, 2004**                                 | ** ** | **183.7**             |       | ** **  | **$**      | **2**        |       | ** **   | **$**      | **2,168**    |       | ** **   | **$**      | **111** | ** ** | ** ** | ** ** | **$** | **2** | ** ** | ** ** | ** ** | **$** | **(43** | **)** | ** ** | ** ** | **$** | **2,240** | ** ** |   |

----

**(A)****        **AtDecember 31, 2002, participants in Plum Creek’s Stock Incentive Planearned 44,870 value management awards, which had a value of $200 per award, or$9 million in total. Under the terms of the plan, the awards were paid 50%in the first quarter of 2003 and 50% in the first quarter of 2004. Furthermore,each payment was made 50% in cash and 50% in Plum Creek stock.

**(B)****       **Thecompany has authority from its Board of Directors to repurchase up to $200million of the company’s common stock. As of December 31, 2004, thecompany had repurchased approximately 2 million shares of common stock fora total cost of $43 million at an average price of $21.53 per share.

During 2004, Plum Creek paid dividends of $260 millionor $1.42 per share. Dividends of $0.35 per share each were paid in January andMay 2004. Dividends of $0.36 per share each were paid in August and November 2004.

During 2003, Plum Creek paid dividends of $257 millionor $1.40 per share. Dividends of $0.35 per share were paid quarterly inFebruary, May, August and November 2003.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

During 2002, Plum Creek entered into two treasury-lockarrangements to secure current long-term interest rates on approximately $100million of the $300 million fixed rate debt that was issued in January 2003.See Note 6 of the Notes to Financial Statements. The company designated thesetransactions as cash flow hedges. The company incurred a loss of approximately$1 million in connection with these arrangements. In accordance with SFAS No. 133,*Accounting for Derivative Instruments andHedging Activities*, the loss is recorded as other comprehensiveloss, which is included in Other Equity. Hedge ineffectiveness is reported inearnings and was not material in 2004, 2003 or 2002. Reclassificationadjustments to interest expense occur over the life of the related debt.

At December 31, 2004,there were 0.4 million shares of Plum Creek common stock held in grantortrusts to fund deferred incentive plan awards compared to 0.3 millionshares at December 31, 2003. These shares were recorded at$10 million at December 31, 2004, and $8 million at December 31,2003. The related liabilities at December 31, 2004, and 2003 were$12 million and $10 million, respectively. The above amounts are shown netin the equity section of the consolidated balance sheet. Additionally, the costof restricted stock awards is recorded in equity as deferred compensation andis amortized over the restriction period. See Note 11 of the Notes to FinancialStatements.

**Note10.**   Employee Pension and Retirement Plans

***Pension Plan.  ***The company provides definedbenefit pension plans that cover substantially all employees of the company.The company uses a December 31 measurement date for its pension plans. Thefollowing tables provide a reconciliation of benefit obligations, plan assets,and funded status of the plans for the **yearsended December 31** (in millions):
| ** **                                        | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------|------------|
| **Change  in benefit obligation**                 |       |       |       |     |       |
| Benefit obligation  at beginning of period        | ** ** | **$**      | **95**     |     | $          | 81 |   |
| Service cost                                      | ** ** | **6**      |       | 5        |       |
| Interest cost                                     | ** ** | **6**      |       | 6        |       |
| Amendment                                         | ** ** | **—** |       | 1        |       |
| Actuarial loss                                    | ** ** | **6**      |       | 8        |       |
| Benefits paid                                     | ** ** | **(6**     | **)**      | (6       | )          |
| Benefit obligation at end of period               | ** ** | **$**      | **107**    |     | $          | 95 |   |
| **Change in plan assets**                         |       |       |       |     |       |
| Fair value of  plan assets at beginning of period | ** ** | **$**      | **65**     |     | $          | 63 |   |
| Actual return on  plan assets                     | ** ** | **7**      |       | 14       |       |
| Employer  contributions                           | ** ** | **9**      |       | 6        |       |
| Reclassification  to Investment in Grantor Trusts | ** ** | **—** |       | (12      | )          |
| Benefits paid                                     | ** ** | **(6**     | **)**      | (6       | )          |
| Fair value of  plan assets at end of period       | ** ** | **$**      | **75**     |     | $          | 65 |   |

 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefunded status is set forth in the following table (in millions):
| ** **                       | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Funded status                    | ** ** |                        | **$**      | **(32**                     | **)**      |   |   | $ | (30 | ) |   |
| Unrecognized net  actuarial loss | ** ** |                        | **17**     | ** **                  |       |   | 14 |   |   |
| Unrecognized  prior service cost | ** ** |                        | **1**      | ** **                  |       |   | 2 |   |   |
| Unfunded accrued  pension cost   | ** ** |                        | **$**      | **(14**                     | **)**      |   |   | $ | (14 | ) |   |

 

The unfunded accrued pension cost at December 31,2004, consistsof accrued pension liability of $15 million for the non-qualified pensionplans and $1 million of prepaid pension cost for the qualified pension plan. Theunfunded accrued pension cost at December 31, 2003, consists of accrued pensionliability of $12 million for the non-qualified pension plans and $2 million forthe qualified pension plan.

Thecomponents of pension cost were as follows for the **years ended December 31**(in millions):
| ** **                      | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** | **  2002  ** | ** ** |
|---------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Service cost                    | ** ** |                             | **$**      | **6**                            | ** ** |                             |       | $ | 5 |   |   |   | $ | 5 |   |   |
| Interest cost                   | ** ** |                             | **6**      | ** **                       |       |                             | 6          |   |   |   | 5 |   |   |
| Expected return  on plan assets | ** ** |                             | **(5**     | **)**                            |       |                             | (5         | ) |   |   | (6 | ) |   |
| Total pension  cost             | ** ** |                             | **$**      | **7**                            | ** ** |                             |       | $ | 6 |   |   |   | $ | 4 |   |   |

 

Most of the company’s salaried and all hourlyemployees who complete one year of service in which they work at least 1,000hours are eligible to participate in the plan. Participants vest after fiveyears of service. The cash balance benefits for salaried employees isdetermined based primarily on certain percentages of compensation, age, yearsof service and interest accrued based on the 30-year treasury bond rate. Participantswho were employees of the company on September 1, 2000, earn benefitsbased on the greater of the cash balance formula or a monthly pension benefitthat is principally based on highest monthly average earnings during anyconsecutive sixty-month out of 120-month period and the number of years ofservice credit. The benefits of hourly employees are generally based on a fixedamount per year of service.

The company maintains a qualified defined benefitpension 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’spolicy to fund the qualified plan annually such that the fair value of planassets equals or exceeds the actuarially computed accumulated benefitobligation (the approximate actuarially computed current pension obligation ifthe plan was discontinued). At December 31, 2004, the fair value of planassets for the qualified plan was $75 million and its related accumulatedbenefit obligation was $73 million. At December 31, 2003, the fairvalue of plan assets for the qualified plan was $65 million and itsrelated accumulated benefit obligation was $61 million.

The company has the same funding policy for thenon-qualified plans. However, assets related to the non-qualified plans areheld in a grantor trust and are subject to the claims of creditors in the eventof bankruptcy. Prior to 2004, assets associated with the non-qualified planswere netted against our unfunded accrued pension cost liability. At January 1,2004, $12 million of assets associated with the non-qualified plans wasreclassified to Investment in Grantor Trusts. Prior year amounts werereclassified for comparable presentation. At December 31, 2004 and 2003,the accumulated benefit obligation for the non-

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

qualified plans was$15 million and $12 million, respectively. The fair value of assetsheld in a grantor trust associated with the non-qualified plans was$15 million at December 31, 2004, and $13 million at December 31,2003.

As a result of the company’s funding policy, annualqualified pension contributions and grantor trust funding are significantlyimpacted by investment returns and changes in interest rates. Based on currentinterest rates and expected investment returns, the company expects 2005contributions to the qualified pension plan to range between $3 millionand $8 million. Additionally, during 2005 the company expects tocontribute between $1 million and $3 million to its grantor trustassociated with the non-qualified plans.

Thefollowing table presents expected future benefit payments projected based onthe same assumptions used by the company to measure the benefit obligation andestimate future employee service (in millions):
| **Year**          | ** ** | ** ** | ** ** | **Projected benefit  payments** | ** ** |
|-------------------|------------|------------|------------|--------------------------------------|------------|
| 2005              | ** ** |       | **$**      | **8**                                | ** ** |   |
| 2006              | ** ** |       | **8**      | ** **                           |       |
| 2007              | ** ** |       | **10**     | ** **                           |       |
| 2008              | ** ** |       | **10**     | ** **                           |       |
| 2009              | ** ** |       | **11**     | ** **                           |       |
| 2010 through 2014 | ** ** |       | **$**      | **58**                               | ** ** |   |

 

As ofyear-end, plan assets were allocated as follows:
| ** **                                           | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Large  Capitalization Domestic Equities              | ** ** |                        | **37**     | **%**                       |       |   | 41 | % |   |
| Small and  Mid-Size Capitalization Domestic Equities | ** ** |                        | **14**     | **%**                       |       |   | 13 | % |   |
| International  Equities                              | ** ** |                        | **10**     | **%**                       |       |   | 12 | % |   |
| Fixed Income                                         | ** ** |                        | **28**     | **%**                       |       |   | 33 | % |   |
| Hedge Funds                                          | ** ** |                        | **10**     | **%**                       |       |   | — | % |   |
| Cash                                                 | ** ** |                        | **1**      | **%**                       |       |   | 1 | % |   |
| Total                                                | ** ** |                        | **100**    | **%**                       |       |   | 100 | % |   |

 

It isthe company’s investment policy to achieve maximum returns at a reasonable riskfor pension assets over a full market cycle. The company uses eight fund managersto capture favorable returns in various asset classes and to diversify risk. Targetallocations for the various asset classes are as follows:
| Large  Capitalization Domestic Equities              |   | 31% to 43% |   |
|------------------------------------------------------|--------|------------|--------|
| Small and  Mid-Size Capitalization Domestic Equities |   | 10% to 16% |   |
| International  Equities                              |   | 8% to 12%  |   |
| Fixed Income                                         |   | 27% to 33% |   |
| Hedge Funds                                          |   | 8% to 12%  |   |

 

Pension assets are rebalanced on a quarterly basis tomaintain the above target allocations. To further reduce risk, fund managersare required to invest in a diversified portfolio. No more than 5% of an equity

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

portfolio can be investedin a single company, and fund managers are expected to be well diversified withrespect to industry and economic sectors. No more than 10% of a fixed incomeportfolio can be invested in a single issuer (other than U.S. treasuries). Equityinvestments are limited to common stocks, common stock equivalents andpreferred 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 fundsare used to reduce market risk and generate absolute returns regardless ofmarket direction by employing limited use of derivative instruments, sellingsecurities short, and buying and selling futures and options contracts.

Over a full market cycle the investment goals forpension assets are as follows:
| Large Capitalization  Domestic Equities              |   | Exceed the S&P 500  Index by 0.5% per annum                                                       |
|------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|
| Small and Mid-Size  Capitalization Domestic Equities |   | Exceed the  Russell 2500 Index by 1% per annum                                                        |
| International Equities                               |   | Exceed the Morgan Stanley Capital International  Europe, Australia and Far East Index by 1% per annum |
| Fixed Income                                         |   | Exceed the Lehman Brothers Aggregate Bond Index by  0.5% per annum                                    |
| Hedge Funds                                          |   | Exceed the HFR  Index                                                                                 |

 

Weighted-average assumptions used to determine benefitobligation:
| ** **                     | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Discount rate                  | ** ** |                        | **5.75**   | **%**                       |       |   | 6.25 | % |   |
| Rate of compensation  increase | ** ** |                        | **3.7**    | **%**                       |       |   | 4.5 | % |   |

 

Weighted-averageassumptions used to determine net periodic benefit cost for the **years ended December 31**:
| ** **                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Discount rate                             | ** ** | **6.25** | **%**      | 6.75     | %          |
| Expected  long-term return on plan assets | ** ** | **7.75** | **%**      | 7.75     | %          |
| Rate of compensation  increase            | ** ** | **3.7**  | **%**      | 4.5      | %          |

 

To develop the expected long-term rate of return onplan assets assumption, the company considered the current level of expectedreturns on risk free investments (primarily government bonds), the historicallevel of the risk premium associated with the other asset classes in which theportfolio is invested and the expectations for future returns on each assetclass. The expected return for each asset class was then weighted based on thetarget asset allocation to develop the expected long-term rate of return onplan assets assumption for the portfolio. This resulted in the selection of the7.75% assumption as of January 1, 2004 and 2003.

***Thrift and Profit Sharing Plan.  ***Thecompany sponsors an employee thrift and profit sharing plan under Section 401(k) ofthe Internal Revenue Code. This plan covers substantially all full-timeemployees. 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The company matchesemployee contributions of up to six percent of compensation at rates rangingfrom 35 to 100 percent, depending upon financial performance.

Amounts charged to expense relating to the company’sthrift and profit sharing plan were $5 million each for 2004, 2003, and2002. The employer match for each of the three years was 100%.

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

**Note11.**   Stock–Based Compensation Plans

Plum Creek has a stockholder approved Stock IncentivePlan that provides for the award of non-qualified stock options, restrictedstock and restricted stock units, dividend equivalents and value managementawards. Under Plum Creek’s Stock Incentive Plan, as amended in May 2004,there are 12.4 million shares of common stock reserved and eligible forissuance. At December 31, 2004, 2.4 million shares of the12.4 million reserved shares have been used and, therefore,10.0 million shares remain available for grants of non-qualified stockoptions, grants of restricted stock and units, or payments of vested dividendequivalents and value management awards. The number of shares to be issued inconnection with dividend equivalents and value management awards is notdetermined until the end of their respective performance periods.

In addition to the 12.4 million shares that areeligible for issuance under Plum Creek’s Stock Incentive Plan, Plum Creekassumed 3.8 million Timber Company Stock options in connection with the October 6,2001, mergerwith The Timber Company that were converted to Plum Creek stock options. At December 31,2004, 0.6 million options of the 3.8 million options remain issuedand outstanding.

***Stock Options.  ***Underthe plan, non-qualified stock options may be granted to any officer, director,employee, consultant or advisor of the company. Each stock option grantedallows the recipient the right to purchase the company’s common stock at thefair 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-yearperiod at a rate of 25% per year. Under the plan, the exercise price of anoption may not be reduced. See table below for summary of stock optionsgranted, exercised and forfeited.

***Restricted Stock and RestrictedStock Units.  ***Under the plan, restricted stock andrestricted 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 timefrom the date on which the restricted stock was granted. The recipients ofrestricted stock generally have the rights of stockholders of the company withrespect to voting and receipt of dividends during the restricted period. Therecipients of restricted stock units generally have the right to receivedividends during the restricted period and at the expiration of the restrictionperiod the right to receive an equal number of shares of the company’s commonstock. Termination of employment prior to the end of the restricted period willgenerally require the return of the restricted stock or restricted stock unitsto the company. The company had 39,500 shares of restricted stockoutstanding under this plan as of December 31, 2004, compared to32,412 shares of restricted stock as of December 31, 2003. Norestricted stock units have been issued by the company.

***Dividend Equivalents.  ***Underthe plan, dividend equivalents may be granted in connection with stock options.Dividend equivalents represent the right to receive a payment equal in value tothe per-share 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

dividend paid over afive-year period by the company multiplied by the number of unexercised stockoptions.

For awards granted in 2004, each year during thefive-year performance period, a participant may be eligible to earn apercentage of the company’s current year dividend plus a percentage of prioryear unearned dividends to the extent that the company’s total shareholderreturn on an annualized basis is at least 5.5% at the end of any such year. Thetotal shareholder return computation consists of the company’s stock priceappreciation plus dividends paid. The specific percentage to be applied to anysuch earned dividends for a given year of the performance period is contingentupon the company’s performance for that year measured against the performanceof a peer group of companies. Dividends are earned in whole or in part based ona sliding scale. If the company’s total shareholder return is below the 50thpercentile of the peer group, then the percentage amount is zero. If thecompany’s total shareholder return is at or above the 75thpercentile, the full amount of the dividend is earned. If the company’srelative performance is between the 50th and the 75thpercentile, dividendequivalents are valued based on a sliding scale between 50% and 100% of thedividends paid during the year.

For awards granted prior to 2004, each year during therespective five-year performance period, a participant may earn an amountequal to the company’s current year dividend plus prior year unearned dividendsto the extent the company’s total shareholder return on an annualized basisequals or exceeds 13% for 15 trading days out of any 30 trading day period inany given year.

Payments related to anyearned dividend equivalents are made at the end of the five-year performanceperiod. Unless otherwise specified by the participant, each payment ispaid in cash, except that any officer not in compliance with the company’sstock ownership guidelines is required to receive up to half of the paymentvalue in the company’s common stock. If a participant terminates employment prior to the end of the five-yearperformance period, a cash payment is made for any performance goals achievedin connection with vested stock options through the last day of employment.Payment related to unvested stock options and performance goals achieved aftertermination of employment are forfeited. At December 31, 2004,1.7 million dividend equivalents, net of forfeitures, granted toemployees, officers and directors of the company were outstanding compared to1.6 million dividend equivalents outstanding at December 31, 2003.

***Value Management Awards.  ***Valuemanagement awards granted in 2004 provide incentive compensation toparticipants that is contingent upon company performance over a three-yearperiod measured against the performance of a peer group consisting of forestproducts companies, the S&P 500 Index and the Morgan Stanley REIT Indexover the same period. Awards granted in 2002 were based on the company’sperformance measured against a peer group consisting of forest productcompanies.

Value management awards are earned in whole or in partbased on a sliding scale. No value management award is earned if the company’stotal shareholder return is below the 50thpercentile of the peer group. The full value management award is earned if thecompany’s total shareholder return is above the 75thpercentile. A unit has a face value of $100. The value of an award between the50thand 75thpercentile is a sliding scale between 0% and 200% of the face value. At the endof the performance period, the awards will be paid in full to each participant.Unless otherwise specified by the participant, each payment will be paid incash, except that any officer not in compliance with the company’s stockownership guidelines is required to receive up to half of the payment value inthe company’s common stock. Generally, to be entitled to the payment, aparticipant must be employed by the company on the last date of the performanceperiod.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Valuemanagement awards activity was as follows for the **years ended December 31**(number of units, face value $100per unit):
| ** **                      | ** ** | **2004**    | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Balance at  January 1      | ** ** | **99,315**  |       | 119,750  |       | 45,230   |       |
| Grants                          | ** ** | **43,050**  |       | 2,000    |       | 75,560   |       |
| Payments                        | ** ** | **(22,435** | **)**      | (22,435  | )          | —   |       |
| Forfeitures                     | ** ** | **(490**    | **)**      | —   |       | (1,040   | )          |
| **Balance at December 31** | ** ** | **119,440** |       | 99,315   |       | 119,750  |       |

 

Value management award payments were as follows forthe **years ended December 31**(in millions):
| ** **          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash                | ** ** | **$**    | **2**      |     | $          | 2        |       | $ | — |   |
| Common Stock Shares | ** ** | **0.1**  |       | 0.1      |       | —   |       |
|                     |            |          |            |          |            |          |            |  |  |  |

 

See Note 9 of the Notes to Financial Statements.

The three-year performance period for the 2002 grantsended on December 31, 2004. Based on our performance compared to theperformance of our peer group, approximately 76,500 units (with a per unitvalue 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.

***Summary of Stock Option Activity.  ***Presentedbelow is a summary of Plum Creek’s stock option plan activity (includes theTimber Company Stock options assumed and converted in connection with the October 6,2001, merger withThe Timber Company): 
| ** **                             | ** ** | **Options Outstanding**   | ** **    |
|----------------------------------------|------------|--------------------------------|---------------|
| ** **                             | ** ** | **Number of shares** | ** **    | **Wtd. Avg.  exercise price** | ** ** |
| Balance at  January 1, 2002       |       |                           | 2,615,570     | ** ** |   |   | $ | 18.70 |   |   |
| Options granted                        |       |                           | 480,050       | ** ** |   |   | 29.62 |   |   |
| Options  exercised/surrendered         |       |                           | (1,020,522    | ) |   |   | 16.66 |   |   |
| Options cancelled/forfeited            |       |                           | (46,794       | ) |   |   | 24.50 |   |   |
| **Balance  at December 31, 2002** |       |                           | 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** |   |   |

 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefollowing table summarizes the options outstanding and exercisable:
| ** **                         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** **    |
|------------------------------------|------------|------------------------------|------------|------------------------------|---------------|
| **Range of prices**      | ** ** | ** **                   | ** ** | **Number**                   | ** **    | **Wtd. Avg.  remaining life** | ** ** | **Wtd. Avg.  exercise price** | ** ** | **Number** | ** ** | **Wtd. Avg.  exercise price** | ** ** |
| **December 31, 2002**         |       |                         |       |                         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| $29.70 – $30.70     |       | 460,050                      |       |                         | 9.1 years     |   |   |   | $ | 29.72 |   |   | — |   |   | $ | — |   |   |
| $22.21 – $26.25     |       | 634,954                      |       |                         | 7.8 years     |   |   |   | $ | 25.82 |   |   | 227,976 |   |   | $ | 25.78 |   |   |
| $16.94 – $18.34     |       | 253,927                      |       |                         | 2.7 years     |   |   |   | $ | 17.22 |   |   | 253,927 |   |   | $ | 17.22 |   |   |
| $15.29 – $16.42     |       | 679,373                      |       |                         | 3.7 years     |   |   |   | $ | 15.52 |   |   | 679,373 |   |   | $ | 15.52 |   |   |
| $15.29 – $30.70     |       | 2,028,304                    |       |                         | 6.1 years     |   |   |   | $ | 22.18 |   |   | 1,161,276 |   |   | $ | 17.91 |   |   |
| **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** |   |   |
|                                    |            |                              |            |                              |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Accounting forStock-Based Compensation.  ***The company expensesstock-based employee compensation in accordance with the fair value recognitionprovisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*. Under the prospective method adoptedby the company in 2002, stock-based employee compensation cost is recognizedusing the fair value method for all employee awards granted, modified, orsettled on or after January 1, 2002. Total compensation expense for theabove stock-based compensation plans (including both awards paid in stock andcash) was $13 million, $7 million, and $8 million for the yearsended December 31, 2004, 2003, and 2002, respectively. See Note 1 ofthe Notes to Financial Statements.

Theweighted-average measurement date fair values were computed using theBlack-Scholes option valuation model with the following assumptions: 
| ** **                                               | ** ** | **Options Granted** | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|
| ** **                                               | ** ** | **2004**                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Expected life in  years                                  | ** ** | **7**                    |       | 7 |   | 7 |   |
| Risk-free  interest rates                                | ** ** | **3.7**                  | **%**      | 3.5 | % | 3.5-4.8 | % |
| Volatility                                               | ** ** | **24**                   | **%**      | 29 | % | 31 | % |
| Dividend yield                                           | ** ** | **4.5**                  | **%**      | 6.4 | % | 6.0-7.7 | % |
| Weighted-average  measurement date fair values per share | ** ** | **$**                    | **5.13**   |   | $ | 3.27 |   | $ | 4.21-4.33 |   |
|                                                          |            |                          |            |  |  |  |  |  |  |  |

 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note12.   Detail of Certain Balance Sheet Accounts**

Certainbalance sheet accounts consisted of the following (in millions): 
| ** **                         | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Other  Current Assets**          |       |                        |       |                        |       |   |   |   |   |
| Prepaid expenses                   | ** ** | ** **                  | **$**      | **8**                       |       |   |   | $ | 9 |   |   |
| Real estate sales receivable       | ** ** | ** **                  | **11**     |                        |       |   | 14 |   |   |
| Other                              | ** ** | ** **                  | **8**      |                        |       |   | 7 |   |   |
| ** **                         |       | ** **                  | **$**      | **27**                      |       |   |   | $ | 30 |   |   |
| **Other  Current Liabilities**     |       |                        |       |                        |       |   |   |   |   |
| Long-term incentive compensation   | ** ** | ** **                  | **$**      | **11**                      |       |   |   | $ | 2 |   |   |
| Other                              | ** ** | ** **                  | **9**      |                        |       |   | 11 |   |   |
| ** **                         |       | ** **                  | **$**      | **20**                      |       |   |   | $ | 13 |   |   |
| **Other  Non-Current Liabilities** |       |                        |       |                        |       |   |   |   |   |
| Long-term incentive compensation   | ** ** | ** **                  | **$**      | **7**                       |       |   |   | $ | 11 |   |   |
| Timber obligations                 | ** ** | ** **                  | **12**     |                        |       |   | 12 |   |   |
| Deferred compensation              | ** ** | ** **                  | **14**     |                        |       |   | 13 |   |   |
| Unfunded accrued pension cost      | ** ** | ** **                  | **15**     |                        |       |   | 14 |   |   |
| Other                              | ** ** | ** **                  | **8**      |                        |       |   | 8 |   |   |
| ** **                         |       | ** **                  | **$**      | **56**                      |       |   |   | $ | 58 |   |   |

 

**Note13.   Commitments and Contingencies**

***Contingencies.  ***Thecompany is subject to regulations regarding forest and harvest practices andis, from time to time, involved in various legal proceedings, includingenvironmental matters, incidental to its business. Moreover, the company iscurrently in the early stages of several lawsuits related to property damagecaused by various sources, including fire and flooding (“Property DamageLitigations”). The company believes it is more likely than not that theProperty Damage Litigations will be resolved favorably. However, the finaloutcome of any legal proceeding is subject to many variables and cannot bepredicted with any degree of certainty. The company believes that there aremeritorious defenses for these claims and is vigorously defending these matters.However, if the company is not successful in defending the claims, we believethe aggregate losses for the Property Damage Litigations would range between $0and $12 million. While administration of current regulations and any newregulations or proceedings have elements of uncertainty, it is anticipated thatno pending legal proceedings or regulatory matters, other than the PropertyDamage Litigations, would have a materially adverse effect on the financialposition, results of operations or liquidity of the company.

***EnvironmentalContingencies.  ***In connection with the October 6,2001, mergerwith The Timber Company, Plum Creek agreed to indemnify Georgia-Pacific forsubstantially all of the liabilities attributed to The Timber Company. Duringthe fourth quarter of 2003, Georgia-Pacific provided Plum Creek withinformation about the existence of mine tailings and approximately4.5 billion gallons of acidic surface water on approximately 90 acres inHot Spring County, Arkansas, on former Georgia-Pacific properties. Baritemining and related activities were conducted on the site between 1939 and 1981in part by lessees of an entity that was acquired by Georgia-Pacific. Theenvironmental issues associated with this site are currently being investigatedand no remediation plan has yet been approved. There is not sufficient 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

information, therefore, toadequately assess the costs, if any, associated with this matter orGeorgia-Pacific’s degree of responsibility. No amounts have been accrued forthis potential liability, as Plum Creek’s liability in this matter cannot bereasonably determined at this time. Furthermore, to the extent Plum Creek isrequired 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’sinsurance policy, or indemnity obligations of various lessees that conductedmining operations on the property, or both.

***ContractualObligations.  ***The company has contracted to sourcelogs and supply fiber with customers under long-term agreements at prevailingmarket rates. The agreements range from one to 25 years with renewal options byeither party for periods ranging from five years to 15 additional years. Theseagreements expire beginning in 2005 through 2023.

***Lease Commitments.  ***The companyleases buildings and equipment under non—cancelable operating lease agreements.Operating lease expense was $3 million in 2004, $4 million in 2003and $3 million in 2002. The company leases certain timberlands in which thecompany acquired title to the standing timber at the inception of the lease. Thefollowing summarizes the future minimum operating lease payments andobligations in connection with leasing timberlands at **December 31, 2004** (in millions):
| ** ** | ** ** | **Operating Leases** | ** ** | **Timber Obligations** | ** ** |
|------------|------------|---------------------------|------------|-----------------------------|------------|
| 2005       |       |                      | $          | 3                           |       |   |   | $ | 1 |   |   |
| 2006       |       |                      | 2          |                        |       |   | 1 |   |   |
| 2007       |       |                      | 2          |                        |       |   | 1 |   |   |
| 2008       |       |                      | 2          |                        |       |   | 1 |   |   |
| 2009       |       |                      | 1          |                        |       |   | 1 |   |   |
| Thereafter |       |                      | 2          |                        |       |   | 7 |   |   |
| Total      |       |                      | $          | 12                          |       |   |   | $ | 12 |   |   |

 

***Registration Rights.  ***Plum Creekis party to a registration rights agreement with its former general partner andcertain named investors (collectively the “Selling Stockholders”) pursuant towhich Plum Creek agreed to register the Selling Stockholders’ shares of thecompany’s common stock under applicable federal and state securities laws underspecific circumstances and at specific times. The registration rights agreementprovides for cross-indemnification of the Selling Stockholders and the companyand the directors, officers and controlling persons of the Selling Stockholdersand the company, respectively, against specific liabilities arising inconnection with the offer and sale of the company’s common stock, includingliabilities arising under the Securities Act of 1933, as amended. In November 2001,pursuant to the terms of the registration rights agreement, the SellingStockholders asked the company to register for public sale under the SecuritiesAct up to 9,851,633 shares of common stock of the company owned collectively bythe Selling Stockholders. The company incurred costs relating to theregistration of these securities of approximately $0.4 million in 2001.

**Note 14.   Segment Information**

The company is organized into eight business units onthe basis of both product line and geographic region. Each business unit has aseparate management team due to geographic location, marketing strategiesand/or production processes. In applying SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information*, these business units have been aggregated intofive reportable segments 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

based on similar long-termeconomic characteristics. The company’s reportable segments are: (1) NorthernResources, (2) Southern Resources, (3) Real Estate, (4) ManufacturedProducts and (5) Other.

***Northern ResourcesSegment.  ***The Northwest Resource region and theNortheast Resource region are aggregated into the Northern Resources Segment.The Northern Resources Segment consists of timberlands located in Idaho, Maine,Michigan, Montana, New Hampshire, Oregon, Washington, West Virginia andWisconsin. The Northern Resources Segment grows timber for sale primarily indomestic regional markets. Additionally, some logs are sold in export markets,mainly the Pacific Rim countries and Canada. The Northern Resources Segmentsells softwood and hardwood sawlogs and softwood and hardwood pulpwood.Softwood sawlogs are sold to regional lumber and plywood manufacturers. Logsharvested in Montana are sold mostly to our lumber and plywood mills (which arepart of the Manufactured Products Segment). Hardwood sawlogs are sold primarilyto furniture manufacturers. Softwood and hardwood pulpwood is sold to regionalpaper and packaging manufacturers.

***Southern ResourcesSegment.  ***The Southwest Resource region and theSoutheast 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 salein domestic regional markets. The Southern Resources Segment sells primarilysoftwood sawlogs and pulpwood. Softwood sawlogs are sold to regional lumber andplywood manufacturers. Softwood pulpwood is sold to regional paper and packagingmanufacturers. Additionally, the Southern Resources Segment leases timberlandsto third parties on an annual basis for recreational purposes.

***Real Estate Segment.  ***TheReal Estate Segment consists of sales of higher and better use timberlands andsales of non-strategic timberlands. Management estimates that included in thecompany’s approximately 7.8 million acres of timberlands are about1.3 million acres of higher and better use timberlands and about 1.0million acres of non-strategic timberlands. The higher and better usetimberlands are expected to be sold over the next 15 years for conservation,residential or recreational purposes. The non-strategic timberlands, whichconsist of large blocks as well as smaller tracts, are expected to be sold overthe next five to ten years. In the meantime, these timberlands continue to beused productively in our business of growing and selling timber.

***Manufactured Products Segment.  ***Thelumber and panel businesses are aggregated into the Manufactured ProductsSegment. The Manufactured Products Segment consists of four lumber mills, twoplywood mills, two MDF facilities and one lumber remanufacturing facility inMontana, and one lumber remanufacturing facility in Idaho. The lumberfacilities produce boards, studs, and dimension lumber and the panel facilitiesproduce high-quality plywood and MDF panels. All of these products are targetedto domestic lumber retailers, home construction, and industrial customers, andto a lesser extent for export primarily to Canada. Residual chips are sold toregional pulp and paper manufacturers. Revenues from manufactured products byproduct line were as follows for the **yearsended December 31** (in millions):
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Lumber     | ** ** | **$**    | **235**    |     | $          | 192      |       | $ | 203 |   |
| Plywood    | ** ** | **157**  |       | 115      |       | 105      |       |
| MDF        | ** ** | **126**  |       | 90       |       | 73       |       |
| Total      | ** ** | **$**    | **518**    |     | $          | 397      |       | $ | 381 |   |

 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Other Segment.  ***TheOther 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 December 2004, Plum Creek sold substantiallyall of its subsurface property rights (primarily coal reserves, excludingcoal-bed methane, oil and gas reserves) in Buchanan County, Virginia, to ConsolEnergy, Inc. The company received proceeds of $23 million inconnection with the sale and the release of certain legal claims, which thecompany believes comprised a portion of the proceeds. However, the saleagreement did not specify an allocation. Prior to the sale, substantially allof the coal reserves were subject to long-term mineral leases with Consol. Foreach of the years in the three-year period ended December 31, 2004, theOther Segment revenues and operating income included approximately$1 million from royalties associated with the mineral leases. The net gainfrom this sale and settlement of certain legal claims, after reducing theproceeds for applicable income taxes, was $23 million, which has been reportedin our income statement as a separate line item below Income from Continuing Operations.

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

Thetable below presents information about reported segments for the **years ended December 31**(in millions): 
| ** **                                | ** ** | **Northern  Resources**(A) | ** ** | **Southern  Resources** | ** ** | **Real  Estate**(B) | ** ** | **Manufactured  Products**(C) | ** ** | **Other**(D) | ** ** | **Total**(E) | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-------------------------|------------|---------------------|------------|-------------------------------|------------|--------------|------------|--------------|------------|
| **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 |   |
| **2002**                                  |       |                       |       |                    |       |                |       |                          |       |         |       |         |       |   |   |   |   |   |   |   |   |   |   |
| External revenues                         |       |                       | $          | 226                     |       |                |       | $                             | 423        |         |       |         | $          | 98 |   |   |   | $ | 381 |   |   |   | $ | 9 |   |   | $ | 1,137 |   |
| Intersegment revenues                     |       |                       | 94         |                    |       |                | —     |                          |       |         | —     |         |       |   | — |   |   |   | — |   |   | 94 |   |
| Export revenues                           |       |                       | 26         |                    |       |                | —     |                          |       |         | —     |         |       |   | 11 |   |   |   | — |   |   | 37 |   |
| Depreciation, depletion  and amortization |       |                       | 33         |                    |       |                | 49         |                          |       |         | —     |         |       |   | 23 |   |   |   | — |   |   | 105 |   |
| Operating income                          |       |                       | 80         |                    |       |                | 227        |                          |       |         | 64         |         |       |   | 1 |   |   |   | 7 |   |   | 379 |   |

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**(A)****        **For2003, Northern Resources Segment depreciation, depletion and amortization, andoperating income include $4 million loss related to forest fires.

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(B)****       **Thecompany recognized impairment losses on sales of timberlands expected to closewithin a twelve-month period totaled $21 million during 2004, compared toa $14 million during 2003. No impairment loss was incurred during 2002. Impairmentsare recognized as part of cost of goods sold and reflected in operating income.

**(C)****       **For2004, Manufactured Products Segment depreciation, depletion and amortization,and operating income include $9 million lumber assets impairment loss.

**(D)****      **Since2001, 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 anddeveloped coalbed methane gas found on certain of its timberlands in WestVirginia and Virginia. During the second quarter of 2004, the company sold itsworking interest in the joint operating agreement to Geomet, Inc. for$27 million. The resulting gain of $5 million before income taxes isincluded in Gain on Sale of Other Assets in our operating income for 2004. Theagreement provides for contingent additional sales proceeds of up to$3 million payable in 2008. Theimpact on  operating income from our workinginterest in the joint operating agreement during the three-year period ended December 31,2004, was less than $1 million annually. Plum Creek retained its royalty interestin the project.

**(E)****       **Consolidatedsegment depreciation, depletion and amortization for 2004, 2003, and 2002includes $1 million of debt fee amortization, which is included ininterest expense.

Areconciliation of total operating income to income before income taxes ispresented below for the **years ended December 31**(in millions):
| ** **                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total segment  operating income           | ** ** | **$**    | **526**    |     | $          | 347      |       | $ | 379 |   |
| Interest expense,  net                    | ** ** | **(111** | **)**      | (117     | )          | (103     | )          |
| Corporate and  other unallocated expenses | ** ** | **(54**  | **)**      | (44      | )          | (41      | )          |
| Gain on sale of  other assets             | ** ** | **5**    |       | —   |       | —   |       |
| Income before income  taxes               | ** ** | **$**    | **366**    |     | $          | 186      |       | $ | 235 |   |

 

Intersegment sales prices are determined at leastquarterly, 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 asmanufactured product sales primarily to Canada. The company does not hold anylong-lived foreign assets.

Segmentrevenues from sales to a single customer in excess of 10% of total revenueswere as follows for the **years ended December 31**(in millions):
| ** **             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Northern  Resources    | ** ** | **$**    | **8**      |     | $          | 12       |       | $ | 14 |   |
| Southern  Resources    | ** ** | **144**  |       | 136      |       | 152      |       |
| Manufactured  Products | ** ** | **12**   |       | 29       |       | 29       |       |
| Total                  | ** ** | **$**    | **164**    |     | $          | 177      |       | $ | 195 |   |

 

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**PLUM CREEK TIMBER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note15.   Subsequent Events**

On February 10, 2005, our Board of Directorsauthorized Plum Creek Timber Company, Inc. to make a dividend distributionof $0.38 per share. Total dividends approximated $70 million and will be paidon March 8, 2005, to stockholders of record on February 22, 2005.

During the first quarter of 2005,Plum Creek soldits remaining coal reserves for $21 million in proceeds.

**Note16.   Unaudited Selected Quarterly Financial Data**
| ** **                             | ** ** | ** 1**st Qtr.                                         | ** ** | ** 2**nd Qtr.  | ** ** | ** 3**rd Qtr.  | ** ** | ** 4**th Qtr.(A) | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **(In Millions, Except Per Share Amounts)** | ** ** |
| **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—Basic**(B)** | ** ** |                                                                 | **$**      | **0.85**                      | ** ** |                          |       | **$**                      | **0.31**   | ** ** |   |   | **$** | **0.42** | ** ** |   |   | **$** | **0.40** | ** ** |   |
| Net Income per Share—Diluted      | ** ** |                                                                 | **$**      | **0.84**                      | ** ** |                          |       | **$**                      | **0.31**   | ** ** |   |   | **$** | **0.42** | ** ** |   |   | **$** | **0.40** | ** ** |   |
| **2003**                               | ** ** |                                                                 | ** ** | ** **                    |       |                          | ** ** | ** **                 |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenues                               |       |                                                                 | $          | 273                           | ** ** |                          |       | $                          | 318        | ** ** |   |   | $ | 290 | ** ** |   |   | $ | 315 | ** ** |   |
| Gross Profit                           |       |                                                                 | 76         | ** **                    |       |                          | 103        | ** **                 |       |   | 92 | ** ** |   |   | 109 | ** ** |   |
| Operating Income                       |       |                                                                 | 59         | ** **                    |       |                          | 84         | ** **                 |       |   | 72 | ** ** |   |   | 88 | ** ** |   |
| Net Income                             |       |                                                                 | 33         | ** **                    |       |                          | 58         | ** **                 |       |   | 45 | ** ** |   |   | 56 | ** ** |   |
| Net Income per Share—Basic**(B)** |       |                                                                 | $          | 0.18                          | ** ** |                          |       | $                          | 0.32       | ** ** |   |   | $ | 0.25 | ** ** |   |   | $ | 0.31 | ** ** |   |
| Net Income per  Share—Diluted**** |       |                                                                 | $          | 0.18                          | ** ** |                          |       | $                          | 0.31       | ** ** |   |   | $ | 0.25 | ** ** |   |   | $ | 0.30 | ** ** |   |

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**(A)****        **2004  fourth quarter net income includesa $23 million, or $0.12 per share, Gain on Sale of Properties, netof tax, which was not included in Income from Continuing Operations.

**(B)****       **Netincome per share is computed independently for each of the quarters presented.Therefore, the sum of the quarterly net income per share may not equal thetotal computed for the year. See Note 9 of the Notes to Financial Statements.

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**PLUM CREEK TIMBER COMPANY, INC.**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofPlum Creek Timber Company, Inc.

We have audited the accompanying consolidated balancesheets of Plum Creek Timber Company, Inc. as of December 31, 2004 and2003, and the related consolidated statements of income and cash flows for eachof the three years in the period ended December 31, 2004. These financialstatements are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements based on our audits.

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

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Plum Creek TimberCompany, Inc. at December 31, 2004 and 2003, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles.

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of Plum Creek Timber Company, Inc.’s internal control overfinancial reporting as of December 31, 2004, based on criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission, and our report dated March 2, 2005expressed an unqualified opinion thereon.
|                     | /s/ Ernst & Young LLP |
|---------------------|--------------------------------|
| Seattle, Washington |                           |
| March 2, 2005       |                           |

 

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**Item 8.**                        FinancialStatements and Supplementary Data (continued)

The following consolidatedfinancial statements relate to Plum Creek Timberlands, L.P., a Delaware LimitedPartnership and a wholly owned subsidiary of Plum Creek Timber Company, Inc.These financial statements are provided pursuant to Rule 3-10 ofRegulation S-X in connection with the shelf registration statement on Form S-3filed in August of 2004 pursuant to which Plum Creek Timberlands, L.P. hasregistered and from time to time may offer and sell up to $400 million of itsdebt securities.

**PLUM CREEK TIMBERLANDS, L.P.CONSOLIDATED STATEMENTS OF INCOME**
| ** **                             | ** ** | **Year Ended**         | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
| ** **                             | ** ** | **(In Millions)**      | ** ** |
| Revenues:                              |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Timber                                 | ** ** | ** **                  | **$**      | **694** | ** ** |   |   | $ | 664 |   |   |   | $ | 649 |   |   |
| Real Estate                            | ** ** | ** **                  | **303**    | ** ** |   |   | 124 |   |   |   | 98 |   |   |
| Manufacturing                          | ** ** | ** **                  | **518**    | ** ** |   |   | 397 |   |   |   | 381 |   |   |
| Other                                  | ** ** | ** **                  | **13**     | ** ** |   |   | 11 |   |   |   | 9 |   |   |
| Total Revenues                         | ** ** | ** **                  | **1,528**  | ** ** |   |   | 1,196 |   |   |   | 1,137 |   |   |
| Costs and Expenses:                    |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Cost of Goods  Sold:                   |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Timber                                 | ** ** | ** **                  | **368**    | ** ** |   |   | 345 |   |   |   | 318 |   |   |
| Real Estate                            | ** ** | ** **                  | **149**    | ** ** |   |   | 77 |   |   |   | 34 |   |   |
| Manufacturing                          | ** ** | ** **                  | **449**    | ** ** |   |   | 390 |   |   |   | 370 |   |   |
| Other                                  | ** ** | ** **                  | **4**      | ** ** |   |   | 4 |   |   |   | 2 |   |   |
| Total Cost of Goods Sold               | ** ** | ** **                  | **970**    | ** ** |   |   | 816 |   |   |   | 724 |   |   |
| Selling, General and Administrative    | ** ** | ** **                  | **86**     | ** ** |   |   | 77 |   |   |   | 75 |   |   |
| Total Costs and Expenses               | ** ** | ** **                  | **1,056**  | ** ** |   |   | 893 |   |   |   | 799 |   |   |
| Gain on Sale of Other Assets           | ** ** | ** **                  | **5**      | ** ** |   |   | — |   |   |   | — |   |   |
| Operating Income                       | ** ** | ** **                  | **477**    | ** ** |   |   | 303 |   |   |   | 338 |   |   |
| Interest Expense, net                  | ** ** | ** **                  | **111**    | ** ** |   |   | 117 |   |   |   | 103 |   |   |
| Income before Income Taxes             | ** ** | ** **                  | **366**    | ** ** |   |   | 186 |   |   |   | 235 |   |   |
| Benefit (Provision) for Income Taxes   | ** ** | ** **                  | **(27**    | **)** |   |   | 6 |   |   |   | (2 | ) |   |
| Income from Continuing Operations      | ** ** | ** **                  | **339**    | ** ** |   |   | 192 |   |   |   | 233 |   |   |
| Gain on Sale of Properties, net of tax | ** ** | ** **                  | **23**     | ** ** |   |   | — |   |   |   | — |   |   |
| Net Income                             | ** ** | ** **                  | **$**      | **362** | ** ** |   |   | $ | 192 |   |   |   | $ | 233 |   |   |

 

See accompanying Notes to Consolidated Financial Statements

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**PLUM CREEKTIMBERLANDS, L.P.CONSOLIDATED BALANCE SHEETS**
| ** **                                       | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(In Millions)**      | ** ** |
| **Assets**                                       |       |                        |       |                        |       |   |   |   |   |
| Current Assets:                                  |       |                        |       |                        |       |   |   |   |   |
| Cash and Cash Equivalents                        | ** ** | ** **                  | **$**      | **347**                     |       |   |   | $ | 267 |   |   |
| Restricted Advance from Customer                 | ** ** | ** **                  | **4**      |                        |       |   | 3 |   |   |
| Accounts Receivable                              | ** ** | ** **                  | **40**     |                        |       |   | 34 |   |   |
| Inventories                                      | ** ** | ** **                  | **71**     |                        |       |   | 54 |   |   |
| Deferred Tax Asset                               | ** ** | ** **                  | **10**     |                        |       |   | 11 |   |   |
| Other Current Assets                             | ** ** | ** **                  | **25**     |                        |       |   | 28 |   |   |
| ** **                                       |       |                        | **497**    |                        |       |   | 397 |   |   |
| Timber and Timberlands—Net                  | ** ** | ** **                  | **3,590**  |                        |       |   | 3,674 |   |   |
| Property, Plant  and Equipment—Net          | ** ** | ** **                  | **253**    |                        |       |   | 303 |   |   |
| Investment in  Grantor Trusts                    | ** ** | ** **                  | **41**     |                        |       |   | 36 |   |   |
| Other Assets                                     | ** ** | ** **                  | **8**      |                        |       |   | 6 |   |   |
| Total Assets                                     | ** ** | ** **                  | **$**      | **4,389**                   |       |   |   | $ | 4,416 |   |   |
| **Liabilities**                                  |       |                        |       |                        |       |   |   |   |   |
| Current Liabilities:                             |       |                        |       |                        |       |   |   |   |   |
| Current Portion of Long-Term Debt                | ** ** | ** **                  | **$**      | **32**                      |       |   |   | $ | 33 |   |   |
| Accounts Payable                                 | ** ** | ** **                  | **41**     |                        |       |   | 34 |   |   |
| Interest Payable                                 | ** ** | ** **                  | **28**     |                        |       |   | 28 |   |   |
| Wages Payable                                    | ** ** | ** **                  | **25**     |                        |       |   | 23 |   |   |
| Taxes Payable                                    | ** ** | ** **                  | **22**     |                        |       |   | 15 |   |   |
| Deferred Revenue                                 | ** ** | ** **                  | **16**     |                        |       |   | 16 |   |   |
| Other Current Liabilities                        | ** ** | ** **                  | **20**     |                        |       |   | 13 |   |   |
| ** **                                       |       |                        | **184**    |                        |       |   | 162 |   |   |
| Long-Term Debt                                   | ** ** | ** **                  | **1,405**  |                        |       |   | 1,437 |   |   |
| Lines of Credit                                  | ** ** | ** **                  | **448**    |                        |       |   | 594 |   |   |
| Deferred Tax  Liability                          | ** ** | ** **                  | **45**     |                        |       |   | 37 |   |   |
| Other Liabilities                                | ** ** | ** **                  | **69**     |                        |       |   | 67 |   |   |
| Total Liabilities                                | ** ** | ** **                  | **2,151**  |                        |       |   | 2,297 |   |   |
| Commitments and  Contingencies                   |       |                        |       |                        |       |   |   |   |   |
| **Equity**                                       |       |                        |       |                        |       |   |   |   |   |
| Partners’ Capital                           | ** ** | ** **                  | **2,238**  |                        |       |   | 2,119 |   |   |
| Total Liabilities  and Stockholders’ Equity | ** ** | ** **                  | **$**      | **4,389**                   |       |   |   | $ | 4,416 |   |   |

                                                                                                                                                

See accompanying Notes to Consolidated Financial Statements

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**PLUM CREEKTIMBERLANDS, L.P.CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                                                                    | ** ** | **Year Ended**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                    | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
| ** **                                                                                                                                    | ** ** | **(In Millions)**      | ** ** |
| **Cash Flows From Operating  Activities**                                                                                                     |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Net Income                                                                                                                                    | ** ** | ** **                  | **$**      | **362** | ** ** |   |   | $ | 192 |   |   |   | $ | 233 |   |   |
| Adjustments to  Reconcile Net Income to Net Cash Provided By Operating Activities:                                                            |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Depreciation, Depletion and Amortization (Includes  $9 Lumber Impairment Loss in 2004 and $4 Loss Related to Forest  Fires in 2003) | ** ** | ** **                  | **114**    | ** ** |   |   | 108 |   |   |   | 106 |   |   |
| Basis of Real Estate Sold (Includes Impairment  Losses of $21 in 2004 and $14 in 2003)                                                   | ** ** | ** **                  | **134**    | ** ** |   |   | 66 |   |   |   | 28 |   |   |
| Deferred Income Taxes                                                                                                                         | ** ** | ** **                  | **9**      | ** ** |   |   | (7 | ) |   |   | 1 |   |   |
| Gain on Sales of Other Assets and Properties                                                                                                  | ** ** | ** **                  | **(28**    | **)** |   |   | — |   |   |   | — |   |   |
| Working Capital Changes                                                                                                                       | ** ** | ** **                  | **6**      | ** ** |   |   | 4 |   |   |   | (7 | ) |   |
| Other                                                                                                                                         | ** ** | ** **                  | **3**      | ** ** |   |   | 9 |   |   |   | 8 |   |   |
| Net Cash Provided  By Operating Activities                                                                                                    | ** ** | ** **                  | **600**    | ** ** |   |   | 372 |   |   |   | 369 |   |   |
| **Cash  Flows From Investing Activities**                                                                                                     |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Property Additions (Excluding Timberland  Acquisitions)                                                                                       | ** ** | ** **                  | **(70**    | **)** |   |   | (84 | ) |   |   | (91 | ) |   |
| Timberlands Acquired (Including Tax-Deferred  Exchange Proceeds)                                                                              | ** ** | ** **                  | **(66**    | **)** |   |   | (162 | ) |   |   | (158 | ) |   |
| Proceeds from Sale of Other Assets and Properties                                                                                             | ** ** | ** **                  | **46**     | ** ** |   |   | — |   |   |   | — |   |   |
| Other                                                                                                                                         | ** ** | ** **                  | **(1**     | **)** |   |   | (1 | ) |   |   | (3 | ) |   |
| Net Cash Used In  Investing Activities                                                                                                        | ** ** | ** **                  | **(91**    | **)** |   |   | (247 | ) |   |   | (252 | ) |   |
| **Cash  Flows From Financing Activities**                                                                                                     |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Cash Distributions                                                                                                                            | ** ** | ** **                  | **(248**   | **)** |   |   | (299 | ) |   |   | (257 | ) |   |
| Borrowings of Long-term Debt                                                                                                                  | ** ** | ** **                  | **—** | ** ** |   |   | 298 |   |   |   | 25 |   |   |
| Retirement of Long-term Debt                                                                                                                  | ** ** | ** **                  | **(33**    | **)** |   |   | (33 | ) |   |   | (34 | ) |   |
| Borrowings on Lines of Credit                                                                                                                 | ** ** | ** **                  | **2,147**  | ** ** |   |   | 1,922 |   |   |   | 1,708 |   |   |
| Repayments on Lines of Credit                                                                                                                 | ** ** | ** **                  | **(2,295** | **)** |   |   | (1,997 | ) |   |   | (1,508 | ) |   |
| Net Cash Used In  Financing Activities                                                                                                        | ** ** | ** **                  | **(429**   | **)** |   |   | (109 | ) |   |   | (66 | ) |   |
| Increase In Cash  and Cash Equivalents                                                                                                        | ** ** | ** **                  | **80**     | ** ** |   |   | 16 |   |   |   | 51 |   |   |
| Cash and Cash  Equivalents:                                                                                                                   |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Beginning of Period                                                                                                                           | ** ** | ** **                  | **267**    | ** ** |   |   | 251 |   |   |   | 200 |   |   |
| End of Period                                                                                                                                 | ** ** | ** **                  | **$**      | **347** | ** ** |   |   | $ | 267 |   |   |   | $ | 251 |   |   |
| **Supplementary  Cash Flow Information**                                                                                                      |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Cash Paid  (Received) During the Year for:                                                                                                    |       |                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| Interest                                                                                                                                      | ** ** | ** **                  | **$**      | **115** | ** ** |   |   | $ | 112 |   |   |   | $ | 110 |   |   |
| Income Taxes—Net                                                                                                                         | ** ** | ** **                  | **$**      | **11** | ** ** |   |   | $ | (1 | ) |   |   | $ | 4 |   |   |

 

See accompanying Notes to Consolidated Financial Statements

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1.   Accounting Policies**

***General.  ***PlumCreek Timberlands, L.P. is a Delaware Limited Partnership and a wholly ownedsubsidiary 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 toPlum Creek Timberlands, L.P. and all of its wholly owned consolidatedsubsidiaries; references to “Plum Creek” relate to Plum Creek Timber Company, Inc.and its wholly owned subsidiaries.

At December 31, 2004, the Operating Partnershipowned and managed approximately 7.8 million acres of timberlands in theNorthwest, Southern and Northeast United States, and owned and operated tenwood product conversion facilities in the Northwest United States. Included inthe 7.8 million acres are about 1.3 million acres of higher andbetter use timberlands and about 1.0 million acres of non-strategictimberlands. The higher and better use timberlands are expected to be sold overthe next 15 years for conservation, residential or recreational purposes. Thenon-strategic timberlands, which consist of large blocks as well as smallertracts, are expected to be sold over the next five to ten years. In themeantime, these timberlands continue to be used productively in our business ofgrowing and selling timber.

On October 6, 2001, six former subsidiaries ofGeorgia-Pacific Corporation (“Georgia-Pacific”), collectively referred to as “TheTimber Company,” merged with and into Plum Creek. The Timber Company held allof the assets and liabilities attributed to Georgia-Pacific’s timber andtimberland business. In the merger, Plum Creek acquired approximately 3.9million acres of primarily pine forests in the southern regions of the UnitedStates, 287,000 acres of primarily Douglas-fir forests in Oregon and542,000 acres of mixed hardwood forests in the Appalachian andnortheastern regions of the United States for a purchase price of approximately$3.4 billion. Immediately following the merger, all assets and liabilitiesacquired from The Timber Company were transferred to the Operating Partnership.

***Basis of Presentation.  ***Theconsolidated financial statements of the Operating Partnership include theaccounts of Plum Creek Timberlands, L.P. and its subsidiaries. The OperatingPartnership is 100% owned by Plum Creek Timber Company, Inc. Plum CreekTimber Company, Inc. has no independent assets, liabilities or operationsother than its investment in Plum Creek Timberlands, L.P. and proceeds fromstock option exercises. Intercompany transactions and accounts between PlumCreek Timberlands, L.P. and its subsidiaries have been eliminated inconsolidation. All transactions are denominated in United States dollars.

***Use of Estimates.  ***Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

***Business Concentrations.  ***Salesof the Operating Partnership’s products are dependent upon the economicconditions of the housing, repair and remodeling, industrial, and pulp andpaper industries. Changes in these industries may significantly affectmanagement’s estimates and the Operating Partnership’s performance.

***Revenue Recognition.  ***Timbersales revenues are recognized when legal ownership and the risk of losstransfer to the purchaser and the quantity sold is determinable. The OperatingPartnership sells timber under delivered log agreements as well as throughsales of standing timber (or “stumpage”). For delivered 

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

sales, revenue, includingamounts billed for shipping and handling, is recognized when the log isdelivered to the customer. Stumpage is sold using either pay-as-cut orlump-sum sale agreements. First, under a pay-as-cut contract,the purchaser acquires the right to harvest specified timber on a tract, at anagreed-to price per unit. The sale and any related advances are recognized asrevenues as the purchaser harvests the timber on the tract. Secondly, under a lump-sum sale, the parties agree to apurchase 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 thetimber 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 timberharvested compared to total estimated timber available to be harvested on atract of land over the term of the contract (usually 12 to 18 months). Anadjustment may be required at the completion of the contract to the extent theactual timber harvested was different than the estimate of timber available forharvest based on the timber cruise.

Revenues generated from the sale of lumber, plywood,medium density fiberboard (“MDF”) and related by-products, primarily woodchips, and amounts billed for shipping and handling, are recognized at the timeof delivery. Revenues generated from real estate sales include the sale ofhigher and better use timberlands and non-strategic timberlands. In some ofthese transactions, the Operating Partnership exchanged timberlands thatqualified for like-kind (tax-deferred) exchange treatment under the InternalRevenue Code. Substantially all of these exchanges involved a third partyintermediary, whereby the third party intermediary received proceeds related tothe property disposed and then reinvested the proceeds in like-kind property.The proceeds are recorded as revenues when the third party intermediaryreceives them.

Revenue from realestate sales is recognized in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 66, *Accountingfor Sales of Real Estate.*For substantially all of the OperatingPartnership’s real estate sales, we receive the entire consideration in cash atclosing (“Cash Sales”). Also at closing, the risks and rewards of ownershiptransfer to the buyer and we do not have a continuing involvement in any of ourproperties after they are sold. The Operating Partnership recognizes revenueunder the full accrual method for Cash Sales of real estate when the sale isconsummated (i.e., at closing). On occasion the Operating Partnership receivesa portion of the real estate sale consideration in the form of a notereceivable. Such sales represented less than 5% of our revenue from real estatesales for each of the years in the three-year period ended December 31,2004. Under these circumstances, we use the full accrual method of recognizingrevenue if the buyer’s initial and continuing investment is adequate; otherwise,revenue is recognized under the cost recovery method. Furthermore, theOperating Partnership may occasionally sell timberlands to a single buyer undera multi-period contract covering a series of prescheduled closings and/oroptions. Under these multi-period contracts, once title and risk of loss havetransferred to the buyer for individual properties, the properties sold cannotbe returned for a refund. However, deposits for future closings undermulti-period contracts may be refunded under certain circumstances. The Operating Partnership treats eachclosing under a multi-period arrangement as a separate sale and recognizesrevenue in accordance with Emerging Issues Task Force (“EITF”) No. 00-21, *Revenue Arrangements with Multiple Deliverables.*Brokercommissions and closing costs of our Real Estate Segment are included in costof goods sold.

***Cash and Cash Equivalents.  ***Allhighly liquid investments purchased with an original maturity of three monthsor less are considered to be cash equivalents. Substantially all of the cashand cash equivalents are invested in money market funds. The OperatingPartnership periodically reviews the credit rating of the financial institutionwhere the money market funds are maintained. The Operating Partnership hasrestricted cash related to certain advances from a customer associated withlump-sum timber sales. When 

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

the trees associated withthese lump-sum contracts are harvested, the Operating Partnership may accessthe cash.

Prior to 2004, checks outstanding at the end of theperiod were netted against the Operating Partnership’s cash balance. For 2004,outstanding checks have been included in Accounts Payable. Prior yearamounts have been reclassified for comparable presentation. Included inAccounts Payable were outstanding checks of $11 million and$7 million at December 31, 2004 and 2003, respectively.

***Accounts Receivable*.  **Accountsreceivable at December 31, 2004 and 2003,is presented net of an allowance for doubtful accounts of $1 million.Accounts are deemed past due based on payment terms. The allowance for doubtfulaccounts represents management’s estimate and is based on historical losses,recent collection history, credit ratings of individual customers and existingeconomic conditions. Delinquent accounts are charged against the allowance fordoubtful accounts to the extent and at the time they are deemed uncollectible.

***Grantor Trusts*.  **Severalgrantor trusts have been established for deferred compensation and deferredshares of Plum Creek Timber Company, Inc. See Note 5 of the Notes toFinancial Statements. Deferred compensation assets, which include money marketand mutual fund investments, are classified as “trading securities” and arecarried at market value. Realized gains and losses and changes in unrealizedgains and losses and a corresponding amount of compensation expense arerecorded in the consolidated statement of income.

Certain deferred compensation obligations are fixed inshares of common stock of Plum Creek Timber Company, Inc. At December 31,2004 and 2003, the Operating Partnership’s grantor trusts held 0.4 millionand 0.3 million shares, respectively, of common stock of Plum Creek TimberCompany, Inc. These shares as well as the underlying obligations arereported on the consolidated balance sheet at historic costs and included inInvestment in Grantor Trusts and Other Non-Current Liabilities, respectively. SeeNote 5 of the Notes to Financial Statements.

Furthermore, Operating Partnership maintains a grantortrust, which the Operating Partnership uses to fund its non-qualified pensionplan obligation. See Note 7 of the Notes to Financial Statements. Moneymarket and mutual fund investments held by this trust are classified as “availablefor sale securities.”  The investmentsare carried at market values on the Operating Partnership’s balance sheet;realized gains and losses are recognized in the consolidated statement ofincome; changes in unrealized gains and losses are recorded as othercomprehensive income/loss as a component of Partners’ Capital.

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

***Timber and Timberlands*.  **Timberand timberlands, including logging roads, are stated at cost less accumulateddepletion for timber previously harvested and accumulated road amortization.The Operating Partnership capitalizes timber and timberland purchases andreforestation costs and other costs associated with the planting and growing oftimber, such as site preparation, growing or purchases of seedlings, planting,fertilization, herbicide application and the thinning of tree stands to improvegrowth. Timber carrying costs, such as real estate taxes, insect control,wildlife control, leases of timberlands (other than lease payments for thepurchase of standing timber, in which case the payments are capitalized) andforest 

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

management personnelsalaries and fringe benefits, are expensed as incurred. Costs of major roadsare capitalized and amortized over 30 years. Costs for roads that are built toaccess multiple logging sites over numerous years are capitalized and amortizedover six years. Costs for roads built to access a single logging site areexpensed as incurred.

Costs attributable to timber harvested, or depletion,are charged against income as trees are harvested. Depletion rates aredetermined annually based on the relationship between net carrying value of thetimber plus certain capitalizable silviculture costs expected to be incurredover the harvest cycle and total timber volume estimated to be available overthe harvest cycle. The depletion rate calculations do not include an estimatefor either future reforestation costs associated with a stand’s final harvestor future volume in connection with the replanting of a stand subsequent to itsfinal harvest. Net carrying value of the timber and timberlands is used tocompute the gain or loss in connection with timberland sales. There is no bookbasis allocated to the sale of conservation easements.

The Operating Partnership enters into like-kind(tax-deferred) exchange transactions to acquire and sell assets, principallytimberlands. During 2004, the Operating Partnership acquired assets totaling$161 million under tax-deferred exchange transactions compared to $57million during 2003 and $33 million during 2002. Also during 2004, theOperating Partnership disposed of assets for consideration of $163 millionunder tax-deferred exchange transactions, compared to $53 million during2003 and $36 million during 2002. The above amounts include both forward(timberlands sold, followedby reinvestment of proceeds to acquire timberlands) and reverse (timberlandspurchased, followedby receipt of proceeds from timberland sales) like-kind exchanges.

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

All property, plant and equipment other thanmanufacturing machinery (lumber, plywood and MDF) are depreciated using thestraight-line method over the estimated useful lives of the related assets.Manufacturing machinery and equipment are depreciated on a units-of-productionbasis, which approximates a straight-line basis. Useful lives are 25 years forland improvements, 20 to 45 years for buildings, and 3 to 20 years formachinery and equipment. Leasehold improvements are depreciated over the leaseterm or estimated useful life, whichever is shorter. The cost and relatedaccumulated depreciation of property sold or retired are removed from theaccounts and any gain or loss is recorded.

***Shipping and Handling Costs.  ***Costsincurred for shipping timber and manufactured products are included in cost ofgoods sold.

***Stock-Based Compensation Plans.  ***AtDecember 31, 2004, Plum Creek had stock-based employee compensation plans,which are described more fully in Note 8 of the Notes to Financial Statements. Thecost of these stock-based compensation plans has been allocated to theOperating Partnership. The Operating Partnership expenses stock-based employeecompensation on a straight-line basis over the vesting period in accordancewith the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*. Underthe prospective method adopted by the Operating Partnership in 2002,stock-based employee compensation cost is recognized using the fair value methodfor all employee awards granted, modified, or settled on or after January 1,2002. The Operating Partnership recognized stock-based compensation expense ofapproximately $3 million during 2004, and approximately $4 millioneach during 2003 and 2002. Had the Operating Partnership used the fair valuemethod of accounting for all 

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

stock-based compensation,net income would have been reduced by $0.3 million for 2004, and$0.5 million each for 2003 and 2002.

Stock-basedemployee compensation expense included in reported income before income taxeswas as follows for the **years ended December 31**(in millions):
| ** **                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Stock options                                                                  | ** ** | **$**    | **1.7**    |     | $          | 0.9      |       | $ | 0.4 |   |
| Value management  awards, dividend equivalents, and grants of restricted stock | ** ** | **1.7**  |       | 3.0      |       | 4.1      |       |
| Total                                                                          | ** ** | **$**    | **3.4**    |     | $          | 3.9      |       | $ | 4.5 |   |

 

Value management awards and dividend equivalents arepaid partially in stock of Plum Creek Timber Company, Inc. and partiallyin cash, based on payout elections made by recipients. The OperatingPartnership recorded expense of $9.3 million in 2004, $2.6 million in 2003and $3.3 million in 2002 for the estimated cash portion of these awards. SeeNote 8 of the Notes to Financial Statements.

***Reclassifications*.  **Certainprior year amounts have been reclassified to conform with the 2004presentation. The reclassifications had no impact on operating income or netincome. See above in Note 1 of the Notes to Financial Statements, “Cash andCash Equivalents,” for reclassification of outstanding checks. See Note 7 ofthe Notes to Financial Statements for reclassification of grantor trust assets.

***New Accounting Pronouncements.  ***InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123 (revised 2004), *Share-BasedPayment*, which is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*. SFASNo. 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*,and amends SFAS No. 95, *Statement ofCash Flows*. Generally, the approach in SFAS No. 123(R) issimilar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values. Proforma disclosure is no longer an alternative. SFAS No. 123(R) must beadopted no later than July 1, 2005. Early adoption will be permitted inperiods in which financial statements have not yet been issued. We expect toadopt SFAS No. 123(R) on July 1, 2005.

The Operating Partnership adopted the fair-value-basedmethod of accounting for share-based payments effective January 1, 2002,using the prospective method described in SFAS No. 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure*. Currently, the Operating Partnership uses theBlack-Scholes-Merton formula to estimate the value of stock options granted toemployees and expects to continue to use this acceptable option valuation modelupon the required adoption of SFAS No. 123(R) on July 1, 2005.SFAS No. 123(R) also requires the benefits of tax deductions inexcess 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 netfinancing cash flows in periods after adoption. While the Operating Partnershipcannot estimate what those amounts will be in the future (because they dependon, among other things, when employees exercise stock options), the amounts ofoperating cash flows recognized in prior periods for such excess tax deductionswere immaterial. In addition to stock options, Plum Creek may also grantdividend equivalents and value management awards, a portion of which may bepayable in shares of common stock of Plum Creek Timber Company, Inc. SeeNote 8 of the Notes to Financial Statements. The Operating Partnership 

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

is in the process ofdetermining the effect, if any, the adoption of SFAS No. 123(R) willhave on the financial statements.

In November 2004, the FASB issued SFAS No. 151,*Inventory Costs, an amendment of ARB No. 43,Chapter 4*. SFAS No. 151 clarifies that abnormal amounts of idlefacility expense, freight, handling costs, and wasted materials (spoilage)should be recognized as current-period charges and requires the allocation offixed production overheads to inventory based on the normal capacity of theproduction facilities. The new Statement is effective for inventory costsincurred during fiscal years beginning after June 15, 2005. Managementdoes not expect that adoption of this standard will have a material impact on theOperating Partnership’s financial condition, results of operations or cashflows.

In December 2004, theFASB issued SFAS No. 153, *Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29*. SFAS No. 153is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged. Opinion No. 29provided an exception to its basic measurement principle, fair value, forexchanges of similar production assets. Under Opinion No. 29, an exchangeof a productive asset was based on the recorded amount of the assetrelinquished. The FASB eliminated this exception and replaced it with anexception for exchanges of nonmonetary assets that do not have commercialsubstance. The FASB believes this Statement produces financial reporting thatmore faithfully represents the economics of nonmonetary asset exchangetransactions. The new Statement is effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005. Managementdoes not expect that adoption of this standard will have a material impact onthe Operating Partnership’s financial condition, results of operations or cashflows.

**Note2.   Timber and Timberlands and Property, Plant and Equipment and Inventory**

Timberand timberlands consisted of the following (in millions): 
| ** **                         | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Timber and  logging roads—net | ** ** |                        | **$**      | **2,367**                   |       |   |   | $ | 2,404 |   |   |
| Timberlands                        | ** ** |                        | **1,223**  |                        |       |   | 1,270 |   |   |
| Timber and  Timberlands—net   | ** ** |                        | **$**      | **3,590**                   |       |   |   | $ | 3,674 |   |   |

 

During 2004, the Operating Partnership acquiredapproximately 78,000 acres of timberlands located primarily in Arkansas andMaine for $66 million. Timberland dispositions during the same time periodcomprised approximately 377,000 acres of which 310,000 were located in theNorthern and 67,000 in the Southern United States. During 2003, timberlandacquisitions consisted primarily of 139,000 acres located in South Carolina,Arkansas and New Hampshire for $162 million. Timberland dispositions for thesame time period totaled 125,000 acres of which 78,000 were located in theNorthern and 47,000 in the Southern United States.

In December 2004, the Operating Partnership soldsubstantially all of its subsurface property rights (primarily coal reserves,excluding coal-bed methane, oil and gas reserves) in Buchanan County, Virginia,to Consol Energy, Inc. See Note 12 of the Notes to FinancialStatements. The book basis of these property rights of $0.1 million wasexpensed upon sale and is reflected in our Consolidated Statements of Incomefor the year ended December 31, 2004, as a deduction in Gain on Sale ofProperties, net of tax.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Operating Partnership’s Real Estate Segmentconsists of sales of higher and better use timberlands and sales ofnon-strategic timberland. Occasionally, non-strategic timberlands are sold at aloss. Each real estate sale is evaluated for a potential impairment inaccordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. During 2004,the Operating Partnership recorded impairment losses of $21 million inconnection with the potential sale of non-strategic timberlands, which had abook basis of $45 million. Substantially all of these properties were soldduring 2004. During 2003, the Operating Partnership recorded impairment lossesof $14 million in connection with the potential sale of non-strategictimberlands, which had a book basis of $50 million. Approximately two-thirds ofthese properties were sold during 2003. The impairment losses of $21 million in2004 and $14 million in 2003 are included in Cost of Goods Sold for RealEstate in our Consolidated Statements of Income.

During 2003, the Operating Partnership’s NorthernResources Segment recognized a $4 million loss, representing the book basis ofthe timber volume destroyed as a result of forest fires on approximately 45,000acres in Montana.

Property,plant and equipment consisted of the following (in millions): 
| ** **                              | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Land, buildings  and improvements       | ** ** |                        | **$**      | **80**                      | ** ** |   |   | $ | 81 |   |   |
| Machinery and  equipment                | ** ** |                        | **282**    | ** **                  |       |   | 304 |   |   |
| ** **                              |       |                        | **362**    | ** **                  |       |   | 385 |   |   |
| Accumulated  depreciation               | ** ** |                        | **(109**   | **)**                       |       |   | (82 | ) |   |
| Property, Plant and  Equipment—net | ** ** |                        | **$**      | **253**                     | ** ** |   |   | $ | 303 |   |   |

 

During the fourth quarter of 2004, the Operating Partnership completed anevaluation of its lumber business. In connection with the evaluation, the Operating Partnership concluded it hadexcess production capacity at one of its mills; and therefore, concluded thatthe mill’s long-lived assets were impaired. The Operating Partnership recorded an impairment loss of $9 millionduring the fourth quarter by writing the carrying value of the mill’slong-lived assets of $14 million down to their estimated fair value of$5 million. The impairment loss of $9 million is reflected in theoperating income of our Manufactured Products Segment and included in Cost ofGoods Sold for Manufacturing in our Consolidated Statements of Income. Theestimated fair value was computed based on expected future cash flowsdiscounted at the risk-free rate of interest.

Since 2001, the Operating Partnership had been a partyto a joint operating agreement with Geomet, Inc., a coalbed methanedeveloper, with whom the Operating Partnership jointly explored for and developedcoalbed methane gas found on certain of our timberlands in West Virginia andVirginia. During 2004, the Operating Partnership sold its working interest inthe joint operating agreement to Geomet, Inc. See Note 12 of theNotes to Financial Statements. At December 31, 2003, Property, Plant andEquipment—net included $22 million of capitalized costs associated with thesecoalbed methane exploration and development activities.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Inventories,accounted for using the lower of average cost or market, consisted of thefollowing (in millions): 
| ** **            | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Raw materials  (logs) | ** ** |                        | **$**      | **24**                      |       |   |   | $ | 13 |   |   |
| Work-in-process       | ** ** |                        | **4**      |                        |       |   | 3 |   |   |
| Finished goods        | ** ** |                        | **32**     |                        |       |   | 29 |   |   |
| ** **            |       |                        | **60**     |                        |       |   | 45 |   |   |
| Supplies              | ** ** |                        | **11**     |                        |       |   | 9 |   |   |
| Total                 | ** ** |                        | **$**      | **71**                      |       |   |   | $ | 54 |   |   |

 

**Note 3.   Income Taxes**

Plum Creek Timberlands, L.P. is a limited partnershipand, therefore, not subject to income tax. Plum Creek Timberlands,L.P.’s taxable income is allocated 100% to its parent, Plum Creek TimberCompany, Inc. Plum Creek Timber Company, Inc. has elected to be taxedas a REIT under sections 856-860 of the United States Internal RevenueCode. A REIT is generally not subject to corporate-level income tax if itsatisfies certain requirements as set forth in the Internal Revenue Code. Underthese sections, a REIT is permitted to deduct dividends paid to stockholders incomputing its taxable income. If a company fails to qualify as a REIT in anytaxable year, it will be subject to federal income taxes at regular corporaterates (including any applicable alternative minimum tax) and may not be able toqualify as a REIT for four subsequent taxable years.

Plum Creek conducts its activities through variouswholly owned operating partnerships. The activities of these operatingpartnerships consist primarily of sales of timber under pay-as-cut contracts,and the income from such sales is not subject to corporate income tax. Inaddition, our various taxable REIT subsidiaries (subchapter “C” corporations)harvest and sell logs, purchase and sell timber under pay-as-cut contracts orlump-sum sales, conduct our manufacturing operations and sell some higher andbetter use timberlands.

The Operating Partnership’s tax provision includes thetax expense and/or benefit associated with Plum Creek’s various taxable REIT subsidiaries,as well as any tax expense and/or benefit incurred by the REIT (e.g. built-ingains tax) and allocated to the operating partnership that caused the relatedincome tax expense or benefit.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The provision (benefit) forincome taxes consists of the following for the **years ended December 31** (in millions):
| ** **                                                                 | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Current income taxes:                                                      |       | ** ** | ** ** |       |       |     |       |
| Federal                                                                    | ** ** | **$**      | **15**     | ** ** | $          | 1        |       | $ | 1 |   |
| State                                                                      | ** ** | **3**      | ** ** | —     |       | —   |       |
| Deferred income taxes:                                                     |       | ** ** | ** ** |       |       |     |       |
| Federal                                                                    | ** ** | **(7**     | **)**      | 4          |       | 3        |       |
| State                                                                      | ** ** | **(1**     | **)**      | (1         | )          | —   |       |
| Utilization (benefit) of  operating loss carryforwards                     | ** ** | **17**     | ** ** | (10        | )          | (2       | )          |
| Provision (benefit) for income taxes on income  from continuing operations | ** ** | **$**      | **27**     | ** ** | $          | (6       | )          | $ | 2 |   |

 

Thefederal statutory income tax rate was 35%. The income generated by theactivities of the Operating Partnership is generally not subject to federal andstate income tax. The provision for income taxes is reconciled as follows tothe federal statutory rate for the **yearsended December 31** (in millions):
| ** **                                                                                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Provision for  income taxes on income from continuing operations computed at the Federal  statutory tax rate | ** ** | **$**    | **128**    |     | $          | 65       |       | $ | 82 |   |
| Partnership  income not subject to Federal tax                                                               | ** ** | **(101** | **)**      | (68      | )          | (79      | )          |
| State income  taxes, net of Federal benefit                                                                  | ** ** | **4**    |       | (1       | )          | —   |       |
| Permanent  book-tax differences                                                                              | ** ** | **(4**   | **)**      | (2       | )          | (1       | )          |
| Provision (benefit) for  income taxes on income from continuing operations                                   | ** ** | **$**    | **27**     |     | $          | (6       | )          | $ | 2 |   |

 

For the year ended December 31, 2004, $27 millionof income tax expense was allocated to Income from Continuing Operations and$0.3 million of income tax expense was allocated to Gain on Sale of Properties,net of tax.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Deferredincome taxes are provided for net operating loss carryforwards and thetemporary differences between the financial reporting basis and tax basis ofthe company’s assets and liabilities. The components of net deferred income taxliabilities are as follows (in millions):
| ** **                          | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred income  tax assets:        |       |                        |       | ** **                  |       |   |   |   |   |
| Accrued compensation                | ** ** | ** **                  | **$**      | **13**                      | ** ** |   |   | $ | 14 |   |   |
| Net operating loss carryforwards    | ** ** | ** **                  | **—** | ** **                  |       |   | 17 |   |   |
| Other accruals and reserves         | ** ** | ** **                  | **9**      | ** **                  |       |   | 6 |   |   |
| ** **                          |       |                        | **22**     | ** **                  |       |   | 37 |   |   |
| Deferred income  tax liabilities:   |       |                        |       | ** **                  |       |   |   |   |   |
| Machinery and equipment             | ** ** | ** **                  | **(54**    | **)**                       |       |   | (60 | ) |   |
| Timber and timberlands              | ** ** | ** **                  | **(3**     | **)**                       |       |   | (3 | ) |   |
| ** **                          |       |                        | **(57**    | **)**                       |       |   | (63 | ) |   |
| Deferred income tax  liability, net | ** ** | ** **                  | **$**      | **(35**                     | **)**      |   |   | $ | (26 | ) |   |

 

During 2004, Plum Creekutilized $45 million of net operating loss carryforwards. Deferredincome tax liabilities at December 31, 2004 and 2003, are net of deferred tax assetsof $10 million and $11 million, respectively, included in currentassets.

As a consequence of the October 6, 2001, merger with The Timber Company,which involved merging a taxable entity into a nontaxable entity, Plum Creekwill generally be subject to corporate-level tax (built-in gains tax) only ifthe company makes a taxable disposition of certain property acquired in themerger with The Timber Company within the ten-year period following the mergerdate. The built-in gains tax only applies to gains from such asset sales to theextent that the fair value of the property exceeded its tax basis at the mergerdate. The built-in gains tax does not apply to income generated from theharvesting and sale of timber.

Plum Creek conducts its activities through variouswholly owned operating partnerships and through several taxable REITsubsidiaries. The activities of the Operating Partnership are not subject tocorporate-level income tax. The book basis of the Operating Partnership’sassets and liabilities exceeds its tax basis by approximately $1.7 billion at December 31,2004. Plum Creek’s taxable REIT subsidiaries file a consolidated federal incometax return.

The Timber Company filedits federal income tax return as part of Georgia-Pacific’s consolidated incometax return for all tax years through the date of the merger with The TimberCompany on October 6, 2001. Under the agreement governing the terms of themerger with The Timber Company, the Operating Partnership remains liable toGeorgia-Pacific for any additional tax that would result from audit adjustmentsby the Internal Revenue Service (the “Service”) and by State and Local TaxingAuthorities. The Service has completed all examinations of Georgia-Pacific’sconsolidated income tax returns through 1998 and the Operating Partnership hasno further obligation to Georgia-Pacific as of December 31, 2004. Georgia-Pacific’sconsolidated income tax returns for 2001, 2000, and 1999 are currently underexamination. Additionally, the Service has completed examinations of thefederal income tax return of Plum Creek Timber Company, Inc. and theconsolidated federal income tax return of the taxable REIT subsidiaries for theyear 2000 and the period ended December 31, 1999. Plum Creek has no opentax years prior to 2001.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 4.   Borrowings**

Long–termdebt and the line of credit consist of the following (in millions): 
| ** **                                                                                                                                              | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Revolving Line of  Credit due 2009, 3.3% at 12/31/04, based on LIBOR plus 0.875%, and 2.7% at  12/31/03, based on LIBOR plus 1.5%                  | ** ** |                        | **$**      | **448**                     | ** ** |   |   | $ | 594 |   |   |
| Senior Notes due 2007, 11.125% plus unamortized  premium of $3.1 at 12/31/04, effective rate of 6.19%                                                   | ** ** |                        | **46**     | ** **                  |       |   | 62 |   |   |
| First Mortgage Notes due 2007, 11.125% plus  unamortized premium of $2.8 at 12/31/04, effective rate of 6.19%                                           | ** ** |                        | **41**     | ** **                  |       |   | 56 |   |   |
| Senior Notes due 2007, 5.31%                                                                                                                            | ** ** |                        | **25**     | ** **                  |       |   | 25 |   |   |
| Senior Notes due 2009, 8.73% plus unamortized  premium of $6.7 at 12/31/04, effective rate of 7.55%                                                     | ** ** |                        | **157**    | ** **                  |       |   | 158 |   |   |
| Senior Notes due 2011, mature serially 2007 to 2011,  7.62% to 7.83%, plus unamortized premium of $1.5 at 12/31/04, effective rates  of  6.96% to 7.84% | ** ** |                        | **173**    | ** **                  |       |   | 173 |   |   |
| Senior Notes due 2013, mature serially 2006 to 2013,  6.96% to 7.76%, less unamortized discount of $5.5 at 12/31/04, effective  rates of 6.95% to 8.04% | ** ** |                        | **494**    | ** **                  |       |   | 494 |   |   |
| Senior Notes due 2016, mature serially 2006 to 2016,  7.74% to 8.05%, plus unamortized premium of $1.4 at 12/31/04, effective rates  of 6.96% to 8.04%  | ** ** |                        | **201**    | ** **                  |       |   | 202 |   |   |
| Senior Notes due 2013, mature serially 2008 to 2013,  4.96% to 6.18%                                                                               | ** ** |                        | **280**    | ** **                  |       |   | 280 |   |   |
| Senior Notes due 2008, 3.5%  at 12/31/04, based on 3-month LIBOR plus 1.445%                                                                            | ** ** |                        | **20**     | ** **                  |       |   | 20 |   |   |
| Total Long-term Debt                                                                                                                                    | ** ** |                        | **$**      | **1,885**                   | ** ** |   |   | $ | 2,064 |   |   |
| Less:   Current  Portion                                                                                                                      | ** ** |                        | **(32**    | **)**                       |       |   | (33 | ) |   |
| Long-term Portion                                                                                                                                       | ** ** |                        | **$**      | **1,853**                   | ** ** |   |   | $ | 2,031 |   |   |

 

In January of 2004, the Operating Partnershiprefinanced its revolving line of credit with a new $650 million facilitymaturing January 15, 2009. As of December 31, 2004, the interest ratefor the new facility was LIBOR plus 0.875%, which included facility fees. Thisrate can range from LIBOR plus 0.75% to LIBOR plus 1.625% depending on ourfinancial results. Subject to customary covenants, the line of credit allowsfor borrowings from time to time up to $650 million, including up to $50million of standby letters of credit. Borrowings on the line of creditfluctuate daily, based oncash needs. As of December 31, 2004, the Operating Partnership had $448million of borrowings and $6 million of standby letters of creditoutstanding; $196 million remained available for borrowing under theOperating Partnership’s line of credit. As of January 7, 2005,$348 million of the borrowings under the line of credit was repaid.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In August of 2004, Plum Creek filed with theSecurities and Exchange Commission a shelf registration statement under whichthe Operating Partnership has registered and from time to time may offer andsell up to $400 million of its debt securities. As of September 30, 2004,the entire amount for issuance of debt securities remained available under theshelf registration statement.

In January 2003, the Operating Partnership issued$300 million of senior notes payable. These notes comprised $280 millionfixed rate borrowings bearing interest at 4.96% to 6.18% maturing serially in2008 to 2013 and $20 million variable rate debt bearing interest at3-month LIBOR plus 1.445% maturing in 2008. The proceeds from the issuance ofthese notes were used to repay a portion of the outstanding borrowings underlines of credit and for general business funding purposes.

The unamortized balance of the premium recorded toreflect the difference between the market rate of interest and the statedinterest rates at the time of the merger with Timber Company in 2001 was$10 million and $16 million at December 31, 2004 and 2003,respectively.

The Senior Notes (excluding the Senior Notes due 2011)and the First Mortgage Notes are redeemable prior to maturity subject to apremium on redemption, which is based upon interest rates of United StatesTreasury securities having similar average maturities as these notes. Thepremium that would have been due upon early retirement approximated $178million at December 31, 2004, and $218 million at December 31, 2003.The Senior Notes are unsecured. The First Mortgage Notes are collateralized bysubstantially all of the property, plant and equipment of the lumber, plywoodand MDF manufacturing facilities. The Senior Notes due 2011 are not redeemableprior to maturity.

The aggregate maturities on the note agreements andthe line of credit are as follows as of **December 31,2004** (in millions): 
| **Maturity** | ** ** | ** ** | ** ** | **Note  Agreements**(A) | ** ** | ** Line of  Credit ** | ** ** |
|--------------|------------|------------|------------|-------------------------|------------|--------------------------------------|------------|
| 2005         |       |       | $          | 32                      |       |                                 |       |   |   |   |
| 2006         |       |       | 161        |                    |       |                                 |       |   |   |
| 2007         |       |       | 125        |                    |       |                                 |       |   |   |
| 2008         |       |       | 168        |                    |       |                                 |       |   |   |
| 2009         |       |       | 200        |                    |       |                                 | $          | 448 |   |   |
| Thereafter   |       |       | 751        |                    |       |                                 |       |   |   |
| Total        |       |       | $          | 1,437                   |       |                                 |       | $ | 448 |   |   |

----

**(A)****        **Principalpayments of $14 million are due annually on the Senior Notes due 2007. Principalpayments of $13 million are due annually on the First Mortgage Notes due 2007.

The Operating Partnership’snote agreements and the line of credit contain various restrictive covenants,including limitations on harvest levels, sales of assets, the incurrence ofindebtedness and making restricted payments (such as payments of cash dividendsor stock repurchases). The borrowing agreements limit the Operating Partnership’sability to make restricted payments (see Note 6 of the Notes to FinancialStatements) based on available cash, which is generally the OperatingPartnership’s net income (excluding gains on the sale of capital assets) afteradjusting for non-cash charges (such as depreciation and depletion), changes invarious reserves, less capital expenditures and principal payments onindebtedness that are not financed. Additionally, the amount of available cashmay be increased by the amount of proceeds from the sale of higher and betteruse properties and, under certain circumstances, by 50% of the amount of netproceeds from the sale of other assets. Furthermore, the Operating 

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Partnership’sline of credit requires that we maintain certain interest coverage and maximumleverage ratios. The Operating Partnership was in compliance with suchcovenants at December 31, 2004.

**Note 5.   Financial Instruments**

The carrying amounts of cash and cash equivalents andnotes receivable approximate fair value due to the short-term maturities ofthese instruments. The estimated fair value of the Operating Partnership’sdebt, based on current interest rates for similar obligations with likematurities, was approximately $2.01 billion and $2.21 billion at December 31,2004 and 2003, respectively. The carrying amount was $1.89 billion and$2.06 billion at December 31, 2004 and 2003, respectively.

Certain investments in the Operating Partnership’sgrantor trusts relate to Plum Creek’s non-qualified pension plans and areclassified as available-for-sale securities. The Operating Partnership hasinvested in various money market, debt and equity mutual funds. The OperatingPartnership plans to use these investments to fund its non-qualified pensionobligations. The fair value of these investments was $15 million and $13million at December 31, 2004 and 2003, respectively. Unrealized holdinggains and losses are included as a component of accumulated other comprehensiveincome, unless a permanent impairment has occurred, which is then charged toexpense. Unrealizedholding gains relating to mutual fund investments were $2 million at December 31,2004, compared to $1 million at December 31, 2003. The OperatingPartnership recorded the $1 million change in unrealized holding gains inOther Comprehensive Income. Realized gains and losses were less than$1 million in 2004, 2003, and 2002. See Note 7 of the Notes toFinancial Statements for discussion of Plum Creek’s Pension Plans.

Certain investments in the Operating Partnership’sgrantor trusts relate to Plum Creek’s deferred compensation plans and areclassified as trading securities. Deferred compensation amounts are invested invarious money market, debt and equity mutual funds. The Operating Partnership plans to use theseinvestments to fund certain deferred incentive plan awards. Unrealized holdinggains related to mutual fund investments were $1 million at December 31,2004. The change in unrealized holding gains or losses has been recognized inthe Operating Partnership’s consolidated statement of income resulting in gainsof $1 million in 2004 and $2 million in 2003, and a loss of $1 million in2002. Realized gains and losses were less than $1 million in 2004, 2003, and2002. Deferred compensation obligations are included in OtherLiabilities and were $27 million and $22 million at December 31, 2004and 2003, respectively. See Note 10 of the Notes to Financial Statements.

At December 31, 2004,there were 0.4 million shares of common stock of Plum Creek Timber Company, Inc.held in grantor trusts to fund deferred incentive plan awards compared to0.3 million shares at December 31, 2003. These shares and the relateddeferred compensation obligation, which is fixed in shares of common stock ofPlum Creek Timber Company, Inc., are carried at historic cost. The relateddeferred compensation liabilities of $12 million and $10 million at December 31,2004, and 2003 were, respectively, are included in Other Non-CurrentLiabilities. Additionally, unamortized deferred compensation cost of restrictedstock awards of $1 million at December 31, 2004 and 2003, is recorded in Other Non-CurrentAssets and is amortized over the restriction period. See Note 8 of the Notes toFinancial Statements.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 6.   Partners’ Capital**

Thechanges in Partners’ Capital are as follows for the **years ended December 31** (in millions): 
| ** **                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning of Period                | ** ** | **$**    | **2,119**  |     | $          | 2,222    |       | $ | 2,247 |   |
| Net Income                         | ** ** | **362**  |       | 192      |       | 233      |       |
| Distributions to  Parent           | ** ** | **(248** | **)**      | (299     | )          | (258     | )          |
| Capital  Contributions from Parent | ** ** | **5**    |       | 4        |       | —   |       |
| End of Period                      | ** ** | **$**    | **2,238**  |     | $          | 2,119    |       | $ | 2,222 |   |

 

Under the terms of our note agreements and line ofcredit (see Note 4 of the Notes to Financial Statements) Plum CreekTimberlands, L.P. is restricted from transferring assets and funds in the formof loans, advances or cash dividends to its Parent, Plum Creek Timber Company, Inc.Subject to certain restrictions, the Operating Partnership can make loans oradvances to Plum Creek Timber Company, Inc. Based on these provisions, theOperating Partnership could distribute or advance the cash on its balance sheetas of December 31, 2004, or $347 million, all of which is consideredunrestricted assets. At December 31, 2004, the Operating Partnership andits consolidated subsidiaries had net assets of $2,238 million of which $1,891 million were restrictedfrom being transferred by the Operating Partnership to Plum Creek TimberCompany, Inc.

During 2002, the Operating Partnership entered intotwo treasury-lock arrangements to secure current long-term interest rates onapproximately $100 million of the $300 million fixed rate debt that was issuedin January 2003. See Note 4 of the Notes to Financial Statements. TheOperating Partnership designated these transactions as cash flow hedges. TheOperating Partnership incurred a loss of approximately $1 million inconnection with these arrangements. In accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, the loss is recorded as other comprehensive loss, whichis included in Partners’ Capital. Hedge ineffectiveness is reported in earningsand was not material in 2004, 2003 or 2002. Reclassification adjustments tointerest expense occur over the life of the related debt.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note7.   Employee Pension and Retirement Plans**

***Pension Plan.  ***Plum Creek Timber Company, Inc.sponsors defined benefit pension plans and a defined contribution pension plan.Substantially all employees of the Operating Partnership are covered by theseplans. All of Plum Creek’s activities are conducted through the OperatingPartnership. Therefore, all employee pension and retirement plan assets,obligations and costs are allocated to the Operating Partnership. The OperatingPartnership uses a December 31 measurement date for its pension plans. Thefollowing tables provide a reconciliation of benefit obligations, plan assets,and funded status of the plans for the **yearsended December 31**(in millions): 
| ** **                                        | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------|------------|
| **Change  in benefit obligation**                 |       |       |       |     |       |
| Benefit obligation  at beginning of period        | ** ** | **$**      | **95**     |     | $          | 81 |   |
| Service cost                                      | ** ** | **6**      |       | 5        |       |
| Interest cost                                     | ** ** | **6**      |       | 6        |       |
| Amendment                                         | ** ** | **—** |       | 1        |       |
| Actuarial loss                                    | ** ** | **6**      |       | 8        |       |
| Benefits paid                                     | ** ** | **(6**     | **)**      | (6       | )          |
| Benefit obligation at end of period               | ** ** | **$**      | **107**    |     | $          | 95 |   |
| **Change in plan assets**                         |       |       |       |     |       |
| Fair value of  plan assets at beginning of period | ** ** | **$**      | **65**     |     | $          | 63 |   |
| Actual return on  plan assets                     | ** ** | **7**      |       | 14       |       |
| Employer  contributions                           | ** ** | **9**      |       | 6        |       |
| Reclassification  to Investment in Grantor Trusts | ** ** | **—** |       | (12      | )          |
| Benefits paid                                     | ** ** | **(6**     | **)**      | (6       | )          |
| Fair value of  plan assets at end of period       | ** ** | **$**      | **75**     |     | $          | 65 |   |

 

Thefunded status is set forth in the following table (in millions):
| ** **                       | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Funded status                    | ** ** |                        | **$**      | **(32**                     | **)**      |   |   | $ | (30 | ) |   |
| Unrecognized net  actuarial loss | ** ** |                        | **17**     | ** **                  |       |   | 14 |   |   |
| Unrecognized  prior service cost | ** ** |                        | **1**      | ** **                  |       |   | 2 |   |   |
| Unfunded accrued  pension cost   | ** ** |                        | **$**      | **(14**                     | **)**      |   |   | $ | (14 | ) |   |

 

The unfunded accrued pension cost at December 31,2004, consistsof accrued pension liability of $15 million for the non-qualified pensionplans and $1 million of prepaid pension cost for the qualified pension plan. Theunfunded accrued pension cost at December 31, 2003, consists of accrued pensionliability of $12 million for the non-qualified pension plans and $2 million forthe qualified pension plan.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thecomponents of pension cost were as follows for the **years ended December 31**(in millions): 
| ** **                      | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** | **  2002  ** | ** ** |
|---------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Service cost                    | ** ** |                             | **$**      | **6**                            | ** ** |                             |       | $ | 5 |   |   |   | $ | 5 |   |   |
| Interest cost                   | ** ** |                             | **6**      | ** **                       |       |                             | 6          |   |   |   | 5 |   |   |
| Expected return  on plan assets | ** ** |                             | **(5**     | **)**                            |       |                             | (5         | ) |   |   | (6 | ) |   |
| Total pension  cost             | ** ** |                             | **$**      | **7**                            | ** ** |                             |       | $ | 6 |   |   |   | $ | 4 |   |   |

 

Most of the Operating Partnership’s salaried and allhourly employees who complete one year of service in which they work at least1,000 hours are eligible to participate in the plan. Participants vest afterfive years of service. The cash balance benefits for salaried employees isdetermined based primarily on certain percentages of compensation, age, yearsof service and interest accrued based on the 30-year treasury bond rate. Participantswho were employees of the Operating Partnership on September 1, 2000, earnbenefits based on the greater of the cash balance formula or a monthly pensionbenefit that is principally based on highest monthly average earnings duringany consecutive sixty-month out of 120-month period and the number ofyears of service credit. The benefits of hourly employees are generally basedon a fixed amount per year of service.

Plum Creek maintains a qualified defined benefitpension 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 annuallysuch that the fair value of plan assets equals or exceeds the actuariallycomputed accumulated benefit obligation (the approximate actuarially computedcurrent pension obligation if the plan was discontinued). At December 31,2004, the fair value of plan assets for the qualified plan was $75 million andits related accumulated benefit obligation was $73 million. At December 31,2003, the fair value of plan assets for the qualified plan was $65 millionand its related accumulated benefit obligation was $61 million.

The Operating Partnership has the same funding policyfor the non-qualified plans. However, assets related to the non-qualified plansare held in a grantor trust and are subject to the claims of creditors in theevent of bankruptcy. Prior to 2004, assets associated with the non-qualifiedplans were netted against our unfunded accrued pension cost liability. At January 1,2004, $12 million of assetsassociated with the non-qualified plans was reclassified to Investment inGrantor Trusts. Prior year amounts were reclassified for comparablepresentation. At December 31, 2004 and 2003, the accumulated benefitobligation for the non-qualified plans was $15 million and$12 million, respectively. The fair value of assets held in a grantortrust associated with the non-qualified plans was $15 million at December 31,2004, and $13 million at December 31,2003.

As a result of the Operating Partnership’s fundingpolicy, annual qualified pension contributions and grantor trust funding aresignificantly impacted by investment returns and changes in interest rates. Basedon current interest rates and expected investment returns, the Operating Partnershipexpects 2005 contributions to the qualified pension plan to range between$3 million and $8 million. Additionally, during 2005 the OperatingPartnership expects to contribute between $1 million and $3 millionto its grantor trust associated with the non-qualified plans.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefollowing table presents expected future benefit payments projected based onthe same assumptions used by the Operating Partnership to measure the benefitobligation and estimate future employee service (in millions): 
| **Year**          | ** ** | ** ** | ** ** | **Projected benefit  payments** | ** ** |
|-------------------|------------|------------|------------|--------------------------------------|------------|
| 2005              | ** ** |       | **$**      | **8**                                | ** ** |   |
| 2006              | ** ** |       | **8**      | ** **                           |       |
| 2007              | ** ** |       | **10**     | ** **                           |       |
| 2008              | ** ** |       | **10**     | ** **                           |       |
| 2009              | ** ** |       | **11**     | ** **                           |       |
| 2010 through 2014 | ** ** |       | **$**      | **58**                               | ** ** |   |

 

As ofyear-end, plan assets were allocated as follows:
| ** **                                           | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Large  Capitalization Domestic Equities              | ** ** |                        | **37**     | **%**                       |       |   | 41 | % |   |
| Small and  Mid-Size Capitalization Domestic Equities | ** ** |                        | **14**     | **%**                       |       |   | 13 | % |   |
| International  Equities                              | ** ** |                        | **10**     | **%**                       |       |   | 12 | % |   |
| Fixed Income                                         | ** ** |                        | **28**     | **%**                       |       |   | 33 | % |   |
| Hedge Funds                                          | ** ** |                        | **10**     | **%**                       |       |   | — | % |   |
| Cash                                                 | ** ** |                        | **1**      | **%**                       |       |   | 1 | % |   |
| Total                                                | ** ** |                        | **100**    | **%**                       |       |   | 100 | % |   |

 

It isthe Operating Partnership’s investment policy to achieve maximum returns at areasonable risk for pension assets over a full market cycle. The OperatingPartnership uses eight fund managers to capture favorable returns in variousasset classes and to diversify risk. Target allocations for the various assetclasses are as follows:
| Large  Capitalization Domestic Equities              |   | 31% to 43% |   |
|------------------------------------------------------|--------|------------|--------|
| Small and  Mid-Size Capitalization Domestic Equities |   | 10% to 16% |   |
| International  Equities                              |   | 8% to 12%  |   |
| Fixed Income                                         |   | 27% to 33% |   |
| Hedge Funds                                          |   | 8% to 12%  |   |

 

Pension assets are rebalanced on a quarterly basis tomaintain the above target allocations. To further reduce risk, fund managersare required to invest in a diversified portfolio. No more than 5% of an equityportfolio can be invested in a single company, and fund managers are expectedto be well diversified with respect to industry and economic sectors. No morethan 10% of a fixed income portfolio can be invested in a single issuer (otherthan U.S. treasuries). Equity investments are limited to common stocks, commonstock equivalents and preferred stock. Fixed income investments are limited toU.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 returnsregardless of market direction by employing limited use of derivativeinstruments, selling securities short, and buying and selling futures andoptions contracts.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Over afull market cycle the investment goals for pension assets are as follows:
| Large Capitalization  Domestic Equities              |   | Exceed the S&P 500  Index by 0.5% per annum                                                       |
|------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|
| Small and Mid-Size  Capitalization Domestic Equities |   | Exceed the Russell 2500  Index by 1% per annum                                                        |
| International Equities                               |   | Exceed the Morgan Stanley Capital International  Europe, Australia and Far East Index by 1% per annum |
| Fixed Income                                         |   | Exceed the Lehman Brothers Aggregate Bond Index by 0.5%  per annum                                    |
| Hedge Funds                                          |   | Exceed the HFR Index                                                                                  |

 

Weighted-averageassumptions used to determine benefit obligation: 
| ** **                     | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Discount rate                  | ** ** |                        | **5.75**   | **%**                       |       |   | 6.25 | % |   |
| Rate of compensation  increase | ** ** |                        | **3.7**    | **%**                       |       |   | 4.5 | % |   |

 

Weighted-averageassumptions used to determine net periodic benefit cost for the **years ended December 31**:
| ** **                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Discount rate                             | ** ** | **6.25** | **%**      | 6.75     | %          |
| Expected  long-term return on plan assets | ** ** | **7.75** | **%**      | 7.75     | %          |
| Rate of compensation  increase            | ** ** | **3.7**  | **%**      | 4.5      | %          |

 

To develop the expected long-term rate of return onplan assets assumption, the Operating Partnership considered the current levelof expected returns on risk free investments (primarily government bonds), thehistorical level of the risk premium associated with the other asset classes inwhich the portfolio is invested and the expectations for future returns on eachasset class. The expected return for each asset class was then weighted basedon the target asset allocation to develop the expected long-term rate of returnon plan assets assumption for the portfolio. This resulted in the selection ofthe 7.75% assumption as of January 1, 2004 and 2003.

***Thrift and Profit Sharing Plan.  ***PlumCreek Timber Company, Inc. sponsors an employee thrift and profit sharingplan under Section 401(k) of the Internal Revenue Code. This plancovers substantially all full-time employees of the Operating Partnership. TheOperating Partnership matches employee contributions of up to six percent ofcompensation at rates ranging from 35 to 100 percent, depending uponfinancial performance.

Amounts charged to expense relating to the OperatingPartnership’s thrift and profit sharing plan were $5 million each for2004, 2003, and 2002. The employer match for each of the three years was 100%.

***Other BenefitPlans.  ***Certain executives and key employees of theOperating Partnership participate in incentive benefit plans, which provide forthe granting of shares of Plum Creek common stock and/or cash bonuses uponmeeting performance objectives. See Note 8 of the Notes to FinancialStatements.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note8.   Stock-Based Compensation Plans**

Plum Creek Timber Company, Inc. has a StockIncentive Plan. Certain executives and key employees of the OperatingPartnership are covered by this plan. All of Plum Creek’s activities are conductedthrough the Operating Partnership. Therefore, all stock-based compensationexpense is allocated to the Operating Partnership. Proceeds from the exerciseof Plum Creek Timber Company, Inc. stock options are retained by PlumCreek Timber Company, Inc.

Plum Creek’s Stock Incentive Plan provides for theaward of non-qualified Plum Creek Timber Company, Inc. stock options,restricted stock and restricted stock units, dividend equivalents and valuemanagement awards. Under Plum Creek’s Stock Incentive Plan, as amended in May 2004,there are 12.4 million shares of common stock of Plum Creek Timber Company, Inc.reserved and eligible for issuance. At December 31, 2004, 2.4 millionshares of the 12.4 million reserved shares have been used and, therefore,10.0 million shares remain available for grants of non-qualified stockoptions, grants of restricted stock and units, or payments of vested dividendequivalents and value management awards. The number of shares to be issued inconnection with dividend equivalents and value management awards is notdetermined until the end of their respective performance periods.

In addition to the 12.4 million shares that areeligible for issuance under Plum Creek’s Stock Incentive Plan, Plum Creekassumed 3.8 million Timber Company Stock options in connection with the October 6, 2001, merger with The Timber Companythat were converted to Plum Creek stock options. At December 31, 2004,0.6 million options of the 3.8 million options remain issued andoutstanding.

***Stock Options.  ***Underthe plan, non-qualified stock options may be granted to any officer, director,employee, consultant or advisor of Plum Creek. Each stock option granted allowsthe recipient the right to purchase common stock of Plum Creek Timber Company, Inc.at the stock’s fair market value on the date of the grant. Generally, the stockoptions 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. Seetable below for summary of stock options granted, exercised and forfeited.

***Restricted Stock and RestrictedStock Units.  ***Under the plan, restricted stock andrestricted stock units of Plum Creek Timber Company, Inc. may be awardedto certain directors, officers and employees of the Operating Partnership. Restrictedstock may not be sold, assigned, transferred, pledged or otherwise disposed offor 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 ofPlum Creek with respect to voting and receipt of dividends during the restrictedperiod. The recipients of restricted stock units generally have the right toreceive dividends during the restricted period and at the expiration of therestriction period the right to receive an equal number of shares of the sharesof Plum Creek Timber Company, Inc. common stock. Termination of employmentprior to the end of the restricted period will generally require the return ofthe restricted stock or restricted stock units to Plum Creek. Plum Creek had39,500 shares of restricted stock outstanding under this plan as of December 31,2004, compared to 32,412 shares of restricted stock as of December 31,2003. No restricted stock units have been issued by Plum Creek.

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

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

For awards granted in 2004, each year during thefive-year performance period, a participant may be eligible to earn apercentage of Plum Creek’s current year dividend plus a percentage of prioryear unearned dividends to the extent that Plum Creek’s total shareholderreturn on an annualized basis is at least 5.5% at the end of any such year. Thetotal shareholder return computation consists of Plum Creek Timber Company Inc.’sstock price appreciation plus dividends paid. The specific percentage to beapplied to any such earned dividends for a given year of the performance periodis contingent upon Plum Creek’s performance for that year measured against theperformance of a peer group of companies. Dividends are earned in whole or inpart based on a sliding scale. If Plum Creek’s total shareholder return isbelow the 50th percentile of the peer group,then the percentage amount is zero. If Plum Creek’s total shareholder return isat or above the 75th percentile, the full amount of the dividend isearned. If Plum Creek’s relative performance is between the 50th andthe 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 therespective five-year performance period, a participant may earn an amountequal to Plum Creek Timber Company, Inc.’s current year dividend plusprior year unearned dividends to the extent Plum Creek’s total shareholderreturn on an annualized basis equals or exceeds 13% for 15 trading days out ofany 30 trading day period in any given year.

Payments related to anyearned dividend equivalents are made at the end of the five-year performanceperiod. Unless otherwise specified by the participant, each payment ispaid in cash, except that any officer not in compliance with Plum Creek’s stockownership guidelines is required to receive up to half of the payment value instock. If a participantterminates employment prior to the end of the five-year performanceperiod, a cash payment is made for any performance goals achieved in connectionwith vested stock options through the last day of employment. Payment relatedto unvested stock options and performance goals achieved after termination ofemployment are forfeited. At December 31, 2004, 1.7 million dividendequivalents, net of forfeitures, granted to employees of the OperatingPartnership and officers and directors of Plum Creek Timber Company, Inc.were outstanding compared to 1.6 million dividend equivalents outstanding at December 31,2003.

***Value Management Awards.  ***Valuemanagement awards granted in 2004 provide incentive compensation toparticipants that is contingent upon Plum Creek’s performance over a three-yearperiod measured against the performance of a peer group consisting of forestproducts companies, the S&P 500 Index and the Morgan Stanley REIT Indexover the same period. Awards granted in 2002 were based on Plum Creek’sperformance measured against a peer group consisting of forest productcompanies.

Value management awards are earned in whole or in partbased on a sliding scale. No value management award is earned if Plum Creek’stotal shareholder return is below the 50th percentile of the peergroup. The full value management award is earned if Plum Creek’s totalshareholder return is above the 75th percentile. A unit has a facevalue of $100. The value of an award between the 50th and 75thpercentile is a sliding scale between 0% and 200% of the face value. At the endof the performance period, the awards will be paid in full to each participant.Unless otherwise specified by the participant, each payment will be paid incash, except that any officer not in compliance with Plum Creek’s stockownership guidelines is required to receive up to half of the payment value inthe company’s common stock. Generally, to be entitled to the payment, aparticipant must be employed by the company on the last date of the performanceperiod.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Valuemanagement awards activity was as follows for the **years ended December 31**(number of units, face value $100per unit):
| ** **                      | ** ** | **2004**    | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Balance at  January 1      | ** ** | **99,315**  |       | 119,750  |       | 45,230   |       |
| Grants                          | ** ** | **43,050**  |       | 2,000    |       | 75,560   |       |
| Payments                        | ** ** | **(22,435** | **)**      | (22,435  | )          | —   |       |
| Forfeitures                     | ** ** | **(490**    | **)**      | —   |       | (1,040   | )          |
| **Balance at December 31** | ** ** | **119,440** |       | 99,315   |       | 119,750  |       |

 

Valuemanagement award payments were as follows for the **years ended December 31** (in millions):
| ** **          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash                | ** ** | **$**    | **2**      |     | $          | 2        |       | $ | — |   |
| Common Stock Shares | ** ** | **0.1**  |       | 0.1      |       | —   |       |
|                     |            |          |            |          |            |          |            |  |  |  |

 

The three-year performance period for the 2002 grantsended on December 31, 2004. Based on our performance compared to theperformance of our peer group, approximately 76,500units(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.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Summary of Stock Option Activity.  ***Presentedbelow is a summary of Plum Creek’s stock option plan activity (includes theTimber Company Stock options assumed and converted in connection with the October 6,2001, mergerwith The Timber Company):
| ** **                             | ** ** | **Options Outstanding** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **Number of  shares**   | ** ** | **Wtd. Avg.  exercise price** | ** ** |
| Balance at  January 1, 2002       |       | 2,615,570                    |       |   | $ | 18.70 |   |   |
| Options granted                        |       | 480,050                      |       |   | 29.62 |   |   |
| Options  exercised/surrendered         |       | (1,020,522                   | )          |   | 16.66 |   |   |
| Options  cancelled/forfeited           |       | (46,794                      | )          |   | 24.50 |   |   |
| **Balance  at December 31, 2002** |       | 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** |   |   |

 

Thefollowing table summarizes the options outstanding and exercisable:
| ** **                             | ** ** | ** **    | ** ** | **Options Outstanding** | ** **     | ** **                              | ** ** | **Options Exercisable**            | ** ** |
|----------------------------------------|------------|---------------|------------|------------------------------|----------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **Range of prices**          | ** ** | ** **    | ** ** | **Number**                   | ** **     | **Wtd. Avg.  remaining life** | ** ** | **Wtd. Avg.  exercise price** | ** ** | **Number** | ** ** | **Wtd. Avg.  exercise price** | ** ** |
| **December 31,  2002**            |       |          |       |                         |           |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| $29.70 – $30.70         |       | 460,050       |       |                         | 9.1 years      |                                    |       |                                    | $          | 29.72 |   |   | — |   |   | $ | — |   |   |
| $22.21 – $26.25         |       | 634,954       |       |                         | 7.8 years      |                                    |       |                                    | $          | 25.82 |   |   | 227,976 |   |   | $ | 25.78 |   |   |
| $16.94 – $18.34         |       | 253,927       |       |                         | 2.7 years      |                                    |       |                                    | $          | 17.22 |   |   | 253,927 |   |   | $ | 17.22 |   |   |
| $15.29 – $16.42         |       | 679,373       |       |                         | 3.7 years      |                                    |       |                                    | $          | 15.52 |   |   | 679,373 |   |   | $ | 15.52 |   |   |
| $15.29 – $30.70         |       | 2,028,304     |       |                         | 6.1 years      |                                    |       |                                    | $          | 22.18 |   |   | 1,161,276 |   |   | $ | 17.91 |   |   |
| **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** |   |   |
|                                        |            |               |            |                              |                |                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Accounting for Stock-Based Compensation.  ***TheOperating Partnership expenses stock-based employee compensation in accordancewith the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*. Underthe prospective method adopted by Plum Creek in 2002, stock-based employeecompensation cost is recognized using the fair value method for all employeeawards granted, modified, or settled on or after January 1, 2002. Totalcompensation expense for the above stock-based compensation plans (includingboth awards paid in stock and cash) was $13 million, $7 million, and$8 million for the years ended December 31, 2004, 2003, and 2002,respectively. See Note 1 of the Notes to Financial Statements.

Theweighted-average measurement date fair values were computed using the Black-Scholesoption valuation model with the following assumptions:
| ** **                                               | ** ** | **Options Granted** | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|
| ** **                                               | ** ** | **2004**                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Expected life in  years                                  | ** ** | **7**                    |       | 7 |   | 7 |   |
| Risk-free  interest rates                                | ** ** | **3.7**                  | **%**      | 3.5 | % | 3.5-4.8 | % |
| Volatility                                               | ** ** | **24**                   | **%**      | 29 | % | 31 | % |
| Dividend yield                                           | ** ** | **4.5**                  | **%**      | 6.4 | % | 6.0-7.7 | % |
| Weighted-average  measurement date fair values per share | ** ** | **$**                    | **5.13**   |   | $ | 3.27 |   | $ | 4.21- 4.33 |   |
|                                                          |            |                          |            |  |  |  |  |  |  |  |

 

**Note9.   Related-Party Transactions**

***Transactions with Parent.  ***TheOperating Partnership’s Parent, Plum Creek Timber Company, Inc., providespension plans and stock based and deferred compensation plans that coveremployees of the Operating Partnership (see Notes 7 and 8 of the Notes toFinancial Statements). All of Plum Creek’s activities are conducted through theOperating Partnership. Therefore, all pension and stock-based compensationexpense is allocated to the Operating Partnership.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note10.   Detail of Certain Balance Sheet Accounts**

Certainbalance sheet accounts consisted of the following (in millions):
| ** **                         | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Other Current Assets**           |       |                        |       |                        |       |   |   |   |   |
| Prepaid expenses                   | ** ** | ** **                  | **$**      | **8**                       |       |   |   | $ | 9 |   |   |
| Real estate sales receivable       | ** ** | ** **                  | **11**     |                        |       |   | 14 |   |   |
| Other                              | ** ** | ** **                  | **6**      |                        |       |   | 5 |   |   |
| ** **                         |       | ** **                  | **$**      | **25**                      |       |   |   | $ | 28 |   |   |
| **Other  Current Liabilities**     |       |                        |       |                        |       |   |   |   |   |
| Long-term incentive compensation   | ** ** | ** **                  | **$**      | **11**                      |       |   |   | $ | 2 |   |   |
| Other                              | ** ** | ** **                  | **9**      |                        |       |   | 11 |   |   |
| ** **                         |       | ** **                  | **$**      | **20**                      |       |   |   | $ | 13 |   |   |
| **Other  Non-Current Liabilities** |       |                        |       |                        |       |   |   |   |   |
| Long-term incentive compensation   | ** ** | ** **                  | **$**      | **7**                       |       |   |   | $ | 11 |   |   |
| Timber obligations                 | ** ** | ** **                  | **12**     |                        |       |   | 12 |   |   |
| Deferred compensation              | ** ** | ** **                  | **27**     |                        |       |   | 22 |   |   |
| Unfunded accrued pension cost      | ** ** | ** **                  | **15**     |                        |       |   | 14 |   |   |
| Other                              | ** ** | ** **                  | **8**      |                        |       |   | 8 |   |   |
| ** **                         |       | ** **                  | **$**      | **69**                      |       |   |   | $ | 67 |   |   |

 

**Note 11.   Commitments and Contingencies**

***Contingencies.  ***The OperatingPartnership is subject to regulations regarding forest and harvest practicesand is, from time to time, involved in various legal proceedings, includingenvironmental matters, incidental to its business. Moreover, the OperatingPartnership is currently in the early stages of several lawsuits related toproperty damage caused by various sources, including fire and flooding (“PropertyDamage Litigations”). The Operating Partnership believes it is more likely thannot that the Property Damage Litigations will be resolved favorably. However,the final outcome of any legal proceeding is subject to many variables andcannot be predicted with any degree of certainty. The Operating Partnershipbelieves that there are meritorious defenses for these claims and is vigorouslydefending these matters. However, if the Operating Partnership is notsuccessful in defending the claims, we believe the aggregate losses for theProperty Damage Litigations would range between $0 and $12 million. Whileadministration of current regulations and any new regulations or proceedingshave elements of uncertainty, it is anticipated that no pending legalproceedings or regulatory matters, other than the Property Damage Litigations,would have a materially adverse effect on the financial position, results ofoperations or liquidity of the Operating Partnership.

***Environmental Contingencies.  ***Inconnection with the October 6, 2001,merger with The Timber Company, Plum Creek agreed to indemnify Georgia-Pacificfor substantially all of the liabilities attributed to The Timber Company. Duringthe fourth quarter of 2003, Georgia-Pacific provided the Operating Partnershipwith information about the existence of mine tailings and approximately4.5 billion gallons of acidic surface water on approximately 90 acres inHot Spring County, Arkansas, on former Georgia-Pacific properties. Baritemining and related activities were conducted on the site between 1939 and 1981in part 

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

by lessees of anentity that was acquired by Georgia-Pacific. The environmental issuesassociated with this site are currently being investigated and no remediationplan has yet been approved. There is not sufficient information, therefore, toadequately assess the costs, if any, associated with this matter orGeorgia-Pacific’s degree of responsibility. No amounts have been accrued forthis potential liability, as the Operating Partnership’s liability in thismatter cannot be reasonably determined at this time. Furthermore, to the extentthe Operating Partnership is required to indemnify Georgia-Pacific for itsshare of the remediation costs, the Operating Partnership may be able to recovera portion of its cost from Georgia-Pacific’s insurance policy, or indemnityobligations of various lessees that conducted mining operations on theproperty, or both.

***Contractual Obligations.  ***TheOperating Partnership has contracted to source logs and supply fiber withcustomers under long-term agreements at prevailing market rates. The agreementsrange from one to 25 years with renewal options by either party forperiods ranging from five years to 15 additional years. These agreements expirebeginning in 2005 through 2023.

***Lease Commitments.  ***The OperatingPartnership leases buildings and equipment under non—cancelable operating leaseagreements. Operating lease expense was $3 million in 2004,$4 million in 2003 and $3 million in 2002. The Operating Partnershipleases certain timberlands in which the Operating Partnership acquired title tothe standing timber at the inception of the lease. The following summarizes thefuture minimum operating lease payments and obligations in connection withleasing timberlands at **December 31, 2004**(in millions):
| ** ** | ** ** | **Operating Leases** | ** ** | **Timber Obligations** | ** ** |
|------------|------------|---------------------------|------------|-----------------------------|------------|
| 2005       |       |                      | $          | 3                           |       |   |   | $ | 1 |   |   |
| 2006       |       |                      | 2          |                        |       |   | 1 |   |   |
| 2007       |       |                      | 2          |                        |       |   | 1 |   |   |
| 2008       |       |                      | 2          |                        |       |   | 1 |   |   |
| 2009       |       |                      | 1          |                        |       |   | 1 |   |   |
| Thereafter |       |                      | 2          |                        |       |   | 7 |   |   |
| Total      |       |                      | $          | 12                          |       |   |   | $ | 12 |   |   |

 

***Registration Rights.  ***Plum Creekis party to a registration rights agreement with its former general partner andcertain named investors (collectively the “Selling Stockholders”) pursuant towhich Plum Creek agreed to register the Selling Stockholders’ shares of PlumCreek’s common stock under applicable federal and state securities laws underspecific circumstances and at specific times. The registration rights agreementprovides for cross-indemnification of the Selling Stockholders and Plum Creekand the directors, officers and controlling persons of the Selling Stockholdersand the company, respectively, against specific liabilities arising inconnection with the offer and sale of Plum Creek’s common stock, includingliabilities arising under the Securities Act of 1933, as amended. In November 2001,pursuant to the terms of the registration rights agreement, the SellingStockholders asked Plum Creek to register for public sale under the SecuritiesAct up to 9,851,633 shares of common stock of Plum Creek owned collectively bythe Selling Stockholders. The Operating Partnership incurred costs relating tothe registration of these securities of approximately $0.4 million in2001.

**Note 12.   SegmentInformation**

The Operating Partnershipis organized into eight business units on the basis of both product line andgeographic region. Each business unit has a separate management team due togeographic location, 

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

marketingstrategies and/or production processes. In applying SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information*, these business units have been aggregated intofive reportable segments based on similar long-term economic characteristics.The Operating Partnership’s reportable segments are: (1) NorthernResources, (2) Southern Resources, (3) Real Estate, (4) ManufacturedProducts and (5) Other.

***Northern Resources Segment.  ***TheNorthwest Resource region and the Northeast Resource region are aggregated intothe Northern Resources Segment. The Northern Resources Segment consists oftimberlands located in Idaho, Maine, Michigan, Montana, New Hampshire, Oregon,Washington, West Virginia and Wisconsin. The Northern Resources Segment growstimber for sale primarily in domestic regional markets. Additionally, some logsare sold in export markets, mainly the Pacific Rim countries and Canada. TheNorthern Resources Segment sells softwood and hardwood sawlogs and softwood andhardwood pulpwood. Softwood sawlogs are sold to regional lumber and plywoodmanufacturers. Logs harvested in Montana are sold mostly to our lumber andplywood mills (which are part of the Manufactured Products Segment). Hardwoodsawlogs are sold primarily to furniture manufacturers. Softwood and hardwoodpulpwood is sold to regional paper and packaging manufacturers.

***Southern Resources Segment.  ***TheSouthwest Resource region and the Southeast Resource region are aggregated intothe Southern Resources Segment. The Southern Resources Segment consists oftimberlands located in Alabama, Arkansas, Florida, Georgia, Louisiana,Mississippi, North Carolina, Oklahoma, South Carolina and Texas. The SouthernResources Segment grows timber for sale in domestic regional markets. TheSouthern 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 thirdparties on an annual basis for recreational purposes.

***Real Estate Segment.  ***The RealEstate Segment consists of sales of higher and better use timberlands and salesof non-strategic timberlands. Management estimates that included in theOperating Partnership’s approximately 7.8 million acres of timberlands areabout 1.3 million acres of higher and better use timberlands and about 1.0million acres of non-strategic timberlands. The higher and better usetimberlands are expected to be sold over the next 15 years for conservation,residential or recreational purposes. The non-strategic timberlands, whichconsist of large blocks as well as smaller tracts, are expected to be sold overthe next five to ten years. In the meantime, these timberlands continue to beused productively in the Operating Partnership’s business of growing andselling timber.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Manufactured Products Segment.  ***Thelumber and panel businesses are aggregated into the Manufactured ProductsSegment. The Manufactured Products Segment consists of four lumber mills, twoplywood mills, two MDF facilities and one lumber remanufacturing facility inMontana, and one lumber remanufacturing facility in Idaho. The lumber facilitiesproduce boards, studs, and dimension lumber and the panel facilities producehigh-quality plywood and MDF panels. All of these products are targeted todomestic lumber retailers, home construction, and industrial customers, and toa lesser extent for export primarily to Canada. Residual chips are sold toregional pulp and paper manufacturers. Revenues from manufactured products byproduct line were as follows for the **yearsended December 31** (in millions):
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Lumber     | ** ** | **$**    | **235**    |     | $          | 192      |       | $ | 203 |   |
| Plywood    | ** ** | **157**  |       | 115      |       | 105      |       |
| MDF        | ** ** | **126**  |       | 90       |       | 73       |       |
| Total      | ** ** | **$**    | **518**    |     | $          | 397      |       | $ | 381 |   |

 

***Other Segment.  ***The Other Segmentconsists primarily of income associated with mineral extraction, natural gasproduction and communication and transportation rights of way. Mineral incomeconsists of royalty revenue from the extraction of oil and gas, naturalaggregates and coal.

In December 2004, theOperating Partnership sold substantially all of its subsurface property rights(primarily coal reserves, excluding coal-bed methane, oil and gas reserves) inBuchanan County, Virginia, to Consol Energy, Inc. The Operating Partnershipreceived proceeds of $23 million in connection with the sale and therelease of certain legal claims, which the Operating Partnership believescomprised a portion of the proceeds. However, the sale agreement did notspecify an allocation. Prior to the sale, substantially all of the coalreserves were subject to long-term mineral leases with Consol. For each of theyears in the three-year period ended December 31, 2004, the Other Segmentrevenues and operating income included approximately $1 million fromroyalties associated with the mineral leases. The net gain from this sale andsettlement of certain legal claims, after reducing the proceeds for applicableincome taxes, was $23 million, which has been reported in our income statementas a separate line item below Income from Continuing Operations.

Segment data includesexternal revenues, intersegment revenues and operating income, as well asexport revenue and depreciation, depletion and amortization. The OperatingPartnership evaluates performance and allocates capital to the segments basedon operating income before interest, unallocated corporate expenses and taxes.Asset information is not reported by segment, as the Operating Partnership doesnot produce such information internally.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thetable below presents information about reported segments for the **years ended December 31**(in millions):
| ** **                                | ** ** | **Northern  Resources**(A) | ** ** | **Southern  Resources** | ** ** | **Real  Estate**(B) | ** ** | **Manufactured  Products**(C) | ** ** | **Other**(D) | ** ** | ** Total**(E)  | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-------------------------|------------|---------------------|------------|-------------------------------|------------|--------------|------------|--------------------------|------------|
| **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 |   |   |
| **2002**                                  |       |                       |       |                    |       |                |       |                          |       |         |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| External revenues                         |       |                       | $          | 226                     |       |                |       | $                             | 423        |         |       |                     | $          | 98 |   |   |   | $ | 381 |   |   |   | $ | 9 |   |   |   | $ | 1,137 |   |   |
| Intersegment  revenues                    |       |                       | 94         |                    |       |                | —     |                          |       |         | —     |                     |       |   | — |   |   |   | — |   |   |   | 94 |   |   |
| Export revenues                           |       |                       | 26         |                    |       |                | —     |                          |       |         | —     |                     |       |   | 11 |   |   |   | — |   |   |   | 37 |   |   |
| Depreciation,  depletion and amortization |       |                       | 33         |                    |       |                | 49         |                          |       |         | —     |                     |       |   | 23 |   |   |   | — |   |   |   | 105 |   |   |
| Operating income                          |       |                       | 80         |                    |       |                | 227        |                          |       |         | 64         |                     |       |   | 1 |   |   |   | 7 |   |   |   | 379 |   |   |

----

**(A)****        **For2003, Northern Resources Segment depreciation, depletion and amortization, andoperating income include $4 million loss related to forest fires.

**(B)****       **TheOperating Partnership recognized impairment losses on sales of timberlandsexpected to close within a twelve-month period totaled $21 million during2004, compared to a $14 million during 2003. No impairment loss wasincurred during 2002. Impairments are recognized as part of cost of goods soldand reflected in operating income.

**(C)****       **For2004, Manufactured Products Segment depreciation, depletion and amortization,and operating income include $9 million lumber assets impairment loss.

**(D)****      **Since2001, the Operating Partnership had been a party to a joint operating agreementwith Geomet, Inc., a coalbed methane developer, with whom the OperatingPartnership had jointly explored for and developed coalbed methane gas found oncertain of its timberlands in West Virginia and Virginia. During the secondquarter of 2004, the Operating Partnership sold its working interest in thejoint operating agreement to Geomet, Inc. for $27 million. Theresulting gain of $5 million before income taxes is included in Gain on Sale ofOther Assets in our operating income for 2004. The agreement provides forcontingent additional sales proceeds of up to $3 million payable in 2008. The impact on operating incomefrom our working interest in the joint operating agreement during thethree-year period ended December 31, 2004, was less than $1 millionannually. Plum Creek retained its royalty interest in the project.

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**PLUM CREEK TIMBERLANDS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(E)****       **Consolidatedsegment depreciation, depletion and amortization for 2004, 2003, and 2002includes $1 million of debt fee amortization, which is included ininterest expense.

Areconciliation of total operating income to income before income taxes ispresented below for the **years ended December 31**(in millions):
| ** **                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total segment  operating income           | ** ** | **$**    | **526**    |     | $          | 347      |       | $ | 379 |   |
| Interest expense,  net                    | ** ** | **(111** | **)**      | (117     | )          | (103     | )          |
| Corporate and  other unallocated expenses | ** ** | **(54**  | **)**      | (44      | )          | (41      | )          |
| Gain on sale of  other assets             | ** ** | **5**    |       | —   |       | —   |       |
| Income before income  taxes               | ** ** | **$**    | **366**    |     | $          | 186      |       | $ | 235 |   |

 

Intersegment sales prices are determined at leastquarterly, 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 asmanufactured product sales primarily to Canada. The Operating Partnership doesnot hold any long-lived foreign assets.

Segmentrevenues from sales to a single customer in excess of 10% of total revenueswere as follows for the **years ended December 31**(in millions):
| ** **             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Northern  Resources    | ** ** | **$**    | **8**      |     | $          | 12       |       | $ | 14 |   |
| Southern  Resources    | ** ** | **144**  |       | 136      |       | 152      |       |
| Manufactured  Products | ** ** | **12**   |       | 29       |       | 29       |       |
| Total                  | ** ** | **$**    | **164**    |     | $          | 177      |       | $ | 195 |   |

 

**Note 13.   Subsequent Events**

During the first quarter of2005, the Operating Partnership sold its remaining coal reservesfor $21 million in proceeds.

**Note14.   Unaudited Selected Quarterly Financial Data**
| **(In Millions)** | ** ** | ** ** | ** ** | **1**st Qtr. | ** ** | **2**nd Qtr. | ** ** | **3**rd Qtr. | ** ** | **4**th Qtr. | ** ** |
|------------------------|------------|------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| **2004**               |       |       |       |              |       |              |       |              |       |              |       |   |   |   |   |   |   |
| Revenues               | ** ** | ** ** | **$**      | **497**           |       | ** **        | ** ** | **$**             | **341**    |              | ** ** | ** ** | **$** | **363** |   | ** ** | ** ** | **$** | **327** |   |   |
| Gross Profit           | ** ** | ** ** | **209**    |              | ** ** | ** **        | **111**    |              | ** ** | ** **        | **137**    |   | ** ** | ** ** | **101** |   |   |
| Operating Income       | ** ** | ** ** | **191**    |              | ** ** | ** **        | **94**     |              | ** ** | ** **        | **115**    |   | ** ** | ** ** | **77** |   |   |
| Net Income**(A)**      | ** ** | ** ** | **155**    |              | ** ** | ** **        | **57**     |              | ** ** | ** **        | **77**     |   | ** ** | ** ** | **73** |   |   |
| **2003**               |       |       |       |              |       |              |       |              |       |              |       |   |   |   |   |   |   |
| Revenues               |       |       | $          | 273               |       |              |       | $                 | 318        |              |       |   | $ | 290 |   |   |   | $ | 315 |   |   |
| Gross Profit           |       |       | 76         |              |       |              | 103        |              |       |              | 92         |   |   |   | 109 |   |   |
| Operating Income       |       |       | 59         |              |       |              | 84         |              |       |              | 72         |   |   |   | 88 |   |   |
| Net Income             |       |       | 33         |              |       |              | 58         |              |       |              | 45         |   |   |   | 56 |   |   |

----

**(A)****        **Fourth quarter net income includes a$23 million Gain on Sale of Properties, net of tax, which was not includedin Income from Continuing Operations.

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**PLUM CREEK TIMBERLANDS, L.P.**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Partners ofPlum Creek Timberlands, L.P.

We have audited the accompanying consolidated balancesheets of Plum Creek Timberlands, L.P. as of December 31, 2004 and 2003,and the related consolidated statements of income and cash flows for each ofthe three years in the period ended December 31, 2004. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes consideration of internal control overfinancial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but notfor 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 alsoincludes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Plum CreekTimberlands, L.P. at December 31, 2004 and 2003, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles.
|                     | /s/ Ernst & Young LLP |
|---------------------|-------------------------------------|
| Seattle, Washington |                                |
| March 2, 2005  |                                |

 

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**PLUM CREEK TIMBERCOMPANY, INC.**

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Stockholders ofPlum Creek Timber Company, Inc.

We have audited management’sassessment, included in the accompanying Management Report on Internal Control over Financial Reporting,that Plum Creek Timber Company, Inc. maintained effective internal controlover financial reporting as of December 31, 2004, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria). PlumCreek Timber Company, Inc.’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that Plum Creek Timber Company, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2004, isfairly stated, in all material respects, based on the COSO criteria. Also, inour opinion, Plum Creek Timber Company, Inc. maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2004, based on the COSO criteria.

We also have audited, inaccordance 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, 2004 and 2003, and the related consolidated statementsof income and cash flows for each of the three years in the period ended December 31,2004 of Plum Creek Timber Company, Inc. and our report dated March 2, 2005, expressed an unqualified opinionthereon.
|                     | /s/ Ernst & Young LLP |
|---------------------|-------------------------------------|
| Seattle, Washington |                                |
| March 2, 2005  |                                |

 

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**Item 9.   Changes in and Disagreements withAccountants on Accounting and Financial Disclosures**

None.

**Item 9A.   Controls and Procedures**

**Evaluationof Controls and Procedures**

**(a) DisclosureControls and Procedures**

The company’s management,with the participation of the company’s Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of the company’s disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of theend of the period covered by this report. Based on that evaluation, the company’smanagement, including the Chief Executive Officer and Chief Financial Officer,has concluded that the company’s disclosure controls and procedures wereeffective as of the end of such period.

**(b) Control overFinancial Reporting**

There have been no changes in the company’s internalcontrol over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended) duringthe quarter to which this report relates that have materially affected, or arereasonably likely to materially affect, the company’s internal control overfinancial reporting.

**Management’sReport on Internal Control over Financial Reporting**

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

Plum Creek Timber Company, Inc.’s management,under the supervision of the Chief Executive Officer and Chief FinancialOfficer, assessed the effectiveness of our internal control over financialreporting as of December 31, 2004. In making this assessment, we used theframework included in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on our evaluation under the criteria set forth in *Internal Control—Integrated Framework*,management concluded that our internal control over financial reporting waseffective as of December 31, 2004.

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

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2004, has been audited by Ernst &Young LLP, an independent registered public accounting firm, as stated in theirreport, which is included herein.

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**Item 9B.**               OtherInformation

**Reports on Form 8-K**

The company filed a Current Report on Form 8-K,dated October 25, 2004, furnishing a copy of its press release announcingthe company’s results of operations for the third quarter ended September 30,2004, and certain related information.

The company filed aCurrent Report on Form 8-K, dated December 30, 2004, furnishing acopy of its press release announcing its Chairman of the Board of Directors,David D. Leland, does not intend to stand for re-election at the Annual Meetingof Shareholders to be held on May 11, 2005.

**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

Our Code of Conduct, which contains a code of Ethicsthat applies to all of the company’s officers, directors and employees,including the company’s principal executive officer, principal financialofficer and principal accounting officer, is available on Plum Creek’s Internetwebsite at *www.plumcreek.com.*

Information with respectto directors, executive officers and 10% stockholders included in thedefinitive Proxy Statement for the Annual Meeting of Shareholders to be held onMay 11, 2005, under the captions “Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance,” is incorporated herein by reference. Theexecutive officers are presented in Part I of this Form 10-K.

**Item 11.**                 ExecutiveCompensation

Information with respectto executive compensation included in the definitive Proxy Statement for theAnnual Meeting of Shareholders to be held on May 11, 2005, under thecaption “Executive Compensation,” is incorporated herein by reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

Information with respectto security ownership of certain beneficial owners and management included inthe definitive Proxy Statement for the Annual Meeting of Shareholders to beheld on May 11, 2005, under the caption “Security Ownership of CertainBeneficial Owners and Management,” is incorporated herein by reference.

**Item 13.**                 CertainRelationships and Related Transactions

Information with respectto certain relationships and related transactions included in the definitiveProxy Statement for the Annual Meeting of Shareholders to be held on May 11,2005, under the captions “Related-Party Transactions” and “Indebtedness ofManagement,” is incorporated herein by reference.

**Item 14.**                 PrincipalAccountant Fees and Services

Information with respect to principal accountant feesand services included in the definitive Proxy Statement for the Annual Meetingof Shareholders to be held on May 11, 2005, under the caption “IndependentAuditors,” is incorporated herein by reference.

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**PART IV**

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

**(a)****         Documentsfiled as a part of this report**

**(1)****          *Financial Statements and Supplementary Financial Information***

The following consolidatedfinancial statements of the company are included in Part II, Item 8 ofthis Form 10-K:
| **PLUM CREEK TIMBER  COMPANY, INC.**                                                                                                         |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Consolidated Statement of Income                                                                                                                  |   | 46     |   |
| Consolidated Balance Sheet                                                                                                                        |   | 47     |   |
| Consolidated Statement of Cash  Flows                                                                                                             |   | 48     |   |
| Notes to  Consolidated Financial Statements                                                                                                       |   | 49     |   |
| Report  of Independent Registered Public Accounting Firm                                                                                          |   | 81     |   |
| **PLUM CREEK  TIMBERLANDS, L.P.**                                                                                                                 |   |   |   |
| Consolidated  Statement of Income                                                                                                                 |   | 82     |   |
| Consolidated Balance Sheet                                                                                                                        |   | 83     |   |
| Consolidated Statement of Cash  Flows                                                                                                             |   | 84     |   |
| Notes to  Consolidated Financial Statements                                                                                                       |   | 85     |   |
| Report  of Independent Registered Public Accounting Firm                                                                                          |   | 114    |   |
| Management’s  Assessment and Report on Internal Control over Financial Reporting                                                             |   | 116    |   |
| Report of Independent  Registered Public Accounting Firm on Management’s Assessment and Report on  Internal Control over Financial Reporting |   | 115    |   |

 

**(2)****          *Financial Statement Schedules***

All financial statementschedules have been omitted because they are not applicable, not material orthe required information is shown in the consolidated financial statements orthe notes thereto.

**(3)****          *List of Exhibits***

Each exhibit set forth belowin the Index to Exhibits is filed as a part of this report. All exhibits notfiled herewith are incorporated herein by reference to a prior filing asindicated. Exhibits designated by a positive sign (“+”) indicate managementcontracts or compensatory plans.

**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).                            |

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| 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, dated July 18, 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 June 12, 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).                                                                                                                                                                                                                                                                                                                                                  |
| 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   |   | Amendment 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, $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, $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   |   | The registrant agrees  that it will furnish the Commission a copy of any of its debt instruments not  listed herein upon request.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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+ |   | 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).                                                                                                                                                                                                                                                                    |

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| 10.3+  |   | 1994 Long-Term Incentive Plan, Plum Creek Management  Company, L.P. (Form 10-K/A, Amendment No. 1, for the year  ended December 31, 1993). First Amendment to the Plum Creek Management  Company, L.P. Long-Term Incentive Plan (Form 10-Q, File No. 1-10239,  for the quarter ended September 30, 1995).                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4+  |   | Plum Creek Timber  Company, Inc. Executive and Key Employee Salary and Incentive  Compensation Deferral Plan (Form 10-K, File No. 1-10239, for the  year ended December 31, 2002).                                                                                                                                                                                                                      |
| 10.5+  |   | Deferred Compensation  Plan for Directors, PC Advisory Corp. I. (Form 10-K/A, Amendment  No. 1, for the year ended December 31, 1994).                                                                                                                                                                                                                                                                       |
| 10.6+  |   | Plum Creek Director Unit  Ownership and Deferral Plan. (Form 10-K, File No. 1-10239, for the  year ended December 31, 1996).                                                                                                                                                                                                                                                                                 |
| 10.7   |   | 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). |
| 10.8   |   | Form of Primary  Insurance Policy (Registration Statement on Form S-4, Registration  No. 333-47708, filed July 13, 2001).                                                                                                                                                                                                                                                                               |
| 10.9+  |   | 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).                                                                                                                                                                                                                                     |
| 10.10+ |   | 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).                                                                                                                                                                                                                   |
| 10.11+ |   | Plum Creek Timber  Company, Inc. Annual Incentive Plan. (Form 10-K, File  No. 1-10239, for the year ended December 31, 2000).                                                                                                                                                                                                                                                                           |
| 10.12+ |   | 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).                                                                                                                                                                                                                                             |
| 10.13+ |   | 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).                                                                                                                                                                                                                                             |
| 10.14+ |   | Form of Executive  Stock Option, Dividend Equivalent Right and Value Management Award Agreement  (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  Effective For Plan Year 2004 (Form 10-Q, File No. 1-10239, for the  quarter ended June 30, 2004).                                                                                                                                                                                                      |
| 10.16+ |   | Form of Director  Stock Option and Dividend Equivalent Award Agreement (Form 10-K, File  No. 1-10239, for the year ended December 31, 2002).                                                                                                                                                                                                                                                            |
| 10.17+ |   | Form of Amendment  to Director Stock Option and Dividend Equivalent Award Agreement Effective  For Plan Years 2002 and 2003 (Form 8-K/A, File No. 1-10239, filed  on September 2, 2004).                                                                                                                                                                                                                |
| 10.18+ |   | Form of Amended and  Restated Director Stock Option and Dividend Equivalent Award Agreement For  Plan Year 2004 (Form 8-K/A, File No. 1-10239, filed on  September 2, 2004).                                                                                                                                                                                                                            |
| 10.19+ |   | Form of Director  Stock Award Agreement (Form 8-K, File No.  1-10239, filed on February 15, 2005).                                                                                                                                                                                                                                                                                                                |

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| 10.20+ |   | Summary of Current Director Compensation.                                                                                                                                                                                                                                                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.21+ |   | Form of Director and Officer Indemnity Agreement.                                                                                                                                                                                                                                                                     |
| 21     |   | Subsidiaries of the  Registrant.                                                                                                                                                                                                                                                                                      |
| 23.1   |   | Consent of  Ernst & Young LLP.                                                                                                                                                                                                                                                                               |
| 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. |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf 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*** |
|        |                                  |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Annual Reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.
| /s/ DAVID D. LELAND     |       | Chairman of the Board                   |   | March 4, 2005 |
|-------------------------|------------|-----------------------------------------|--------|---------------|
| **David  D. Leland**    | ** ** |                                    |   | **Date**      |
| /s/  IAN B. DAVIDSON    |       | Director                                |   | March 4, 2005 |
| **Ian B.  Davidson**    | ** ** |                                    |   | **Date**      |
| /s/  RICK R.  HOLLEY    |       | President and Chief  Executive Officer, |   | March 4, 2005 |
| **Rick R.  Holley**     | ** ** | Director                                |   | **Date**      |
| /s/  ROBIN JOSEPHS      |       | Director                                |   | March 4, 2005 |
| **Robin  Josephs**      | ** ** |                                    |   | **Date**      |
| /s/  JOHN G.  MCDONALD  |       | Director                                |   | March 4, 2005 |
| **John G.  McDonald**   | ** ** |                                    |   | **Date**      |
| /s/  ROBERT B.  MCLEOD  |       | Director                                |   | March 4, 2005 |
| **Robert  B. McLeod**   | ** ** |                                    |   | **Date**      |
| /s/  HAMID R.  MOGHADAM |       | Director                                |   | March 4, 2005 |
| **Hamid  R. Moghadam**  | ** ** |                                    |   | **Date**      |
| /s/  JOHN H.  SCULLY    |       | Director                                |   | March 4, 2005 |
| **John H.  Scully**     | ** ** |                                    |   | **Date**      |
| /s/  STEPHEN C.  TOBIAS |       | Director                                |   | March 4, 2005 |
| **Stephen  C. Tobias**  | ** ** |                                    |   | **Date**      |
| /s/  CARL B. WEBB       |       | Director                                |   | March 4, 2005 |
| **Carl B.  Webb**       | ** ** |                                    |   | **Date**      |
| /s/  WILLIAM R.  BROWN  |       | Executive Vice President  and Chief     |   | March 4, 2005 |
| **William  R. Brown**   | ** ** | Financial Officer                       |   | **Date**      |
| /s/  DAVID A.  BROWN    |       | Vice President and  Controller          |   | March 4, 2005 |
| **David  A. Brown**     | ** ** |                                    |   | **Date**      |

 

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