<PAGE>
 
                                                                      EXHIBIT 13

<TABLE> 
<CAPTION> 
Paper
------------------------------------------------------------------------------------------------------------------

Years Ended December 31

Net Sales     (in millions of dollars)             1997        %        1996        %        1995        %
--------------------------------------       ----------  -------  ----------  -------  ----------  -------
<S>                                          <C>         <C>      <C>         <C>      <C>         <C> 
Product Category:                                                                                         
                                                                                                          
Uncoated free sheet (U.S. & Brazil)            $  1,329       28    $  1,422       29   $   1,857       31
Coated free sheet                                   557       12         555       12         647       11
Coated groundwood                                   668       14         659       13         792       13
Uncoated groundwood                                 261        5         309        6         369        6
Newsprint                                           362        7         395        8         439        7
Bleached board business                             299        6         311        6         320        5
Kraft paper and linerboard                          189        4         199        4         267        4
Market pulp                                         411        9         360        7         541        9
Resale of outside purchases                         680       14         737       15         758       14
Other                                                10        1          15      ---          17      ---  
                                             ----------  -------  ----------  -------  ----------  -------
                                                                                                          
                                              $   4,766      100   $   4,962      100   $   6,007      100
                                             ==========  =======  ==========  =======  ==========  ======= 

Wood Products
----------------------------------------------------------------------------------------------------------

Years Ended December 31

Net Sales     (in millions of dollars)             1997        %        1996        %        1995       %
--------------------------------------       ----------  -------  ----------  -------  ---------- -------
Product Category:

Lumber                                        $     404       41   $     382       42   $     334      35     
Softwood plywood and waferboard                     230       24         237       26         284      29     
Logs and stumpage                                   226       23         224       24         247      26      
Sidings and industrial plywood                       54        6          54        6          49       5    
Chips                                                46        5          10        1          10       1    
Miscellaneous products                                9        1          12        1          41       4    
                                             ----------  -------  ----------  -------  ---------- -------
                                              $     969      100   $     919      100   $     965     100   
                                             ==========  =======  ==========  =======  ========== =======
</TABLE>

                                       1
<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------

Consolidated Statement of Income (in millions, except per share amounts)

<TABLE> 
<CAPTION> 
                    Years Ended December 31                 1997           1996           1995          
--------------------------------------------        ------------   ------------   ------------        
<S>                                                 <C>            <C>            <C>  
Net Sales                                            $   5,735.5    $   5,880.4   $    6,972.0        
                                                                                                      
Costs and Expenses:                                                                                   
   Cost of products sold                                 5,152.6        5,134.4        5,156.4        
   Selling, general and administrative expenses            392.8          363.0          386.1        
   Provision for restructuring (Note 9)                    891.0            ---            ---        
   Interest and debt expense (Notes 3 and 5)               240.1          222.2          226.0        
   Other (income) expense -- net (Note 10)                 (44.4)         (44.2)         (33.0)       
                                                    ------------   ------------   ------------        
Total Costs and Expenses                                 6,632.1        5,675.4        5,735.5        
                                                                                                      
Income (Loss) before Income Taxes                         (896.6)         205.0        1,236.5        
                                                                                                      
Income Taxes (Benefit) (Note 11)                          (348.1)          63.7          464.7        
                                                    ------------   ------------   ------------        
                                                                                                      
Net Income (Loss)                                    $    (548.5)   $     141.3    $     771.8        
                                                    ============   ============   ============        
                                                                                                      
Dividends on Preference Stock (Note 7)                       ---            ---           13.2        
                                                    ------------   ------------   ------------        
                                                                                                      
Net Income (Loss) Applicable to Common Stock         $    (548.5)   $     141.3   $      758.6        
                                                    ============   ============   ============        
                                                                                                      
Average Number of Common Shares Outstanding                 98.5           95.5           94.7        
                                                    ============   ============   ============        
                                                                                                      
Basic Earnings (Loss) Per Common Share               $     (5.72)   $      1.48   $       8.01        
                                                    ============   ============   ============        
Diluted Earnings (Loss) Per Common Share             $     (5.72)   $      1.48   $       7.67        
                                                    ============   ============   ============         
</TABLE> 

The accompanying notes are an integral part of this statement.

                                       2

<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------

Consolidated Balance Sheet (in millions of dollars)

<TABLE> 
<CAPTION> 
Assets                          December 31                          1997            1996 
--------------------------------------------                 ------------    ------------
<S>                                                          <C>             <C> 
Current Assets:                                                                          
Cash and cash equivalents                                     $     275.0      $    174.6
Receivables                                                         594.9           579.4
Inventories (Note 2)                                                451.1           458.1
Prepaid expenses                                                     25.6            29.9
Deferred income taxes (Note 11)                                     101.4            73.7
                                                             ------------    ------------
   Total Current Assets                                           1,448.0         1,315.7
                                                             ------------    ------------
Timber and Timberlands, at cost -- less cost of timber                                   
   harvested                                                      2,397.3         2,364.9
                                                             ------------    ------------
Property, Plant and Equipment, at cost                                                   
   (Notes 3, 5 and 6)                                             9,473.4         9,297.6  
Less - accumulated depreciation                                   4,673.3         3,644.1  
                                                             ------------    ------------
                                                                  4,800.1         5,653.5  
                                                             ------------    ------------

Other Assets and Deferred Charges                                   465.2           485.9 
                                                             ------------    ------------
                                                                                         
                                                               $  9,110.6       $ 9,820.0   
                                                             ============    ============ 
</TABLE> 

The accompanying notes are an integral part of this statement.

                                       3
<PAGE>
 


Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------


Consolidated Balance Sheet (in millions of dollars)

<TABLE> 
<CAPTION> 
Liabilities and Shareholders' Equity        December 31               1997           1996
-------------------------------------------------------          ---------      ---------
<S>                                                              <C>            <C> 
Current Liabilities:
Current installments of long-term debt (Note 5)                  $   143.7      $    80.9
Short-term borrowings (Note 5)                                        71.1          126.9
Accounts payable and accrued liabilities (Note 4)                    794.2          713.1
Income taxes (Note 11)                                                10.5           23.1
                                                                 ---------      ---------
   Total Current Liabilities                                       1,019.5          944.0
                                                                 ---------      ---------
Long-Term Debt (Note 5)                                            3,194.4        3,085.4
                                                                 ---------      ---------
Other Liabilities (Notes 12 and 15)                                  693.1          671.0
                                                                 ---------      ---------
Deferred Income Taxes (Note 11)                                      993.6        1,363.9
                                                                 ---------      ---------
Commitments and Contingent Liabilities
   (Notes 6, 15 and 16)                                                ---            ---
                                                                 ---------      ---------

Shareholders' Equity:
Capital Shares (Notes 7 and 8):
   Preference stock, 8,531,431 shares authorized but unissued          ---            ---
   Common stock, $.50 par value:  250,000,000 authorized
      shares; 110,900,212 and 110,323,099 issued shares               55.5           55.2
   Capital surplus                                                 1,697.2        1,651.4
Retained Earnings (Note 5)                                         2,172.5        2,740.2
                                                                 ---------      ---------
                                                                   3,925.2        4,446.8

Treasury Shares, at cost (Note 7)                                   (657.9)        (657.9)
Cumulative Translation Adjustment                                    (57.3)         (33.2)
                                                                 ---------      ---------
                                                                   3,210.0        3,755.7
                                                                 ---------      ---------
                                                                 $ 9,110.6      $ 9,820.0
                                                                 =========      =========
</TABLE> 


The accompanying notes are an integral part of this statement.

                                       4
<PAGE>
 
Champion International Corporation and Subsidiaries                  
--------------------------------------------------------------------------------

Consolidated Cash Flows (in millions of dollars)
   
<TABLE> 
<CAPTION> 
                   Years Ended December 31                                      1997         1996         1995
------------------------------------------                                 ---------     --------     -------- 
<S>                                                                     <C>           <C>          <C> 
Cash flows from operating activities:                                                                     
Net Income (Loss)                                                       $  (548.5)    $  141.3     $  771.8 

Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
    Provision for restructuring                                             891.0          ---          --- 
    Depreciation expense                                                    424.6        407.8        392.5
    Cost of timber harvested                                                 93.4         94.1         78.9
    Gain on disposal of assets                                              (24.0)       (23.1)       (46.5)
    Pension contributions                                                     ---        (70.2)       (10.1)
    (Increase) decrease in:                                                                                
       Receivables                                                          (15.7)        65.0        (77.7)
       Inventories                                                            6.6        (34.4)       (72.6)
       Prepaid expenses                                                       4.2         (4.6)        (6.4) 
    Increase (decrease) in:                                                                                
       Accounts payable and accrued liabilities                             (23.0)       (38.2)       118.3 
       Income taxes payable                                                 (12.2)      (102.1)        81.4
       Other liabilities                                                      9.5        (13.9)       (20.7) 
       Deferred income taxes                                               (370.9)         3.2        159.0  
    All other - net                                                          50.5         13.5         84.7 
                                                                        ---------     --------     -------- 
Net cash provided by operating activities                                   485.5        438.4      1,452.6 
                                                                        ---------     --------     --------   
Cash flows from investing activities:                                                                        
    Expenditures for property, plant and equipment                         (321.1)      (460.5)      (367.6) 
    Timber and timberlands expenditures                                    (128.4)      (121.2)      (256.6)  
    Timberlands and related assets acquisitions                             (46.9)      (130.4)         ---   
    Purchase of investments                                                 (22.1)         ---        (98.3) 
    Proceeds from redemptions of investments                                 25.0        101.2          --- 
    Proceeds from sales of property, plant and                                                              
       equipment and timber and timberlands                                  43.1         39.8        181.2 
    All other - net                                                         (15.0)        16.6         (9.5)
                                                                        ---------     --------     --------  
Net cash used in investing activities                                      (465.4)      (554.5)      (550.8) 
                                                                        ---------     --------     -------- 
Cash flows from financing activities:
    Proceeds from issuance of long-term debt                                473.9        834.2        826.1
    Payments of current installments of 
       long-term debt and long-term debt                                   (385.0)      (645.1)      (951.3) 
    Purchase by Weldwood of minority interest                                 ---       (191.4)         --- 
    Cash dividends paid                                                     (19.2)       (19.2)       (32.1)
    Payments to acquire treasury stock                                        ---         (7.8)      (549.7)
    All other - net                                                          10.6          2.9         31.3 
                                                                        ---------     --------     -------- 
Net cash provided by (used in) financing activities                          80.3        (26.4)      (675.7) 
                                                                        ---------     --------     -------- 
Increase (decrease) in cash and cash equivalents                            100.4       (142.5)       226.1 

Cash and cash equivalents:
  Beginning of period                                                       174.6        317.1         91.0 
                                                                        ---------     --------     -------- 
  End of period                                                         $   275.0     $  174.6     $  317.1 
                                                                        =========     ========     ========
Supplemental cash flow disclosures:
    Nonmonetary transactions (Note 5)  
    Cash paid during the year for:
       Interest (net of capitalized amounts)                            $   241.2     $  210.0     $  227.3 
       Income taxes (net of refunds) (Note 11)                               42.1        178.8        208.6 
</TABLE> 

The accompanying notes are an integral part of this statement.
   

                                       5
<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------


Consolidated Retained Earnings  (in millions, except per share amounts)

<TABLE> 
<CAPTION> 
                     Years Ended December 31          1997       1996      1995
--------------------------------------------      --------   --------  --------
<S>                                               <C>        <C>       <C> 
Beginning Balance                                 $2,740.2   $2,618.0  $1,878.5

Net Income (Loss)                                   (548.5)     141.3     771.8

Cash Dividends Declared:
$92.50 Convertible Preference Stock - $44.19
  per share in 1995                                      _          _     (13.3)
Common Stock - $.20 per share in 1997, 1996
  and 1995                                           (19.2)     (19.1)    (19.0)
                                                  --------   --------  --------
Ending Balance                                    $2,172.5   $2,740.2  $2,618.0
                                                  ========   ========  ========
</TABLE> 


The accompanying notes are an integral part of this statement.

                                       6

<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------


Notes to Financial Statements


Note 1.  Summary of Significant Accounting Policies

A.  Consolidation

The consolidated financial statements include the accounts of the company and
all of its domestic and foreign subsidiaries. Affiliates which are 20% to 50%
owned are reflected using the equity method of accounting, with the related
investments included in Other Assets and Deferred Charges. All significant
intercompany transactions have been eliminated.

Certain amounts have been reclassified to conform to the current year's
presentation.

B.  Use of Estimates

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

C.  Cash and Cash Equivalents

Cash and cash equivalents includes all highly liquid investments with original
maturities of three months or less. Short-term investments are investments which
mature within 12 months but which do not meet the criteria of cash equivalents.

D.  Inventories

Inventories are generally stated at the lower of average cost or market (market
approximates net realizable value), except for certain inventories of the paper
segment which are stated on the last-in, first-out (LIFO) method.

E.  Fixed Assets

Property, Plant and Equipment, which includes capitalized leases, is stated at
cost. Timber and Timberlands, which includes original costs, road construction
costs, and reforestation costs, such as site preparation and planting costs, is
stated at unamortized cost. Property taxes, surveying, fire control and other
forest management expenses are charged to expense as incurred. When fixed assets
are sold or retired, cost and accumulated depreciation are eliminated from the
accounts and gains or losses are recorded in income.

For financial reporting purposes, plant and equipment are depreciated using the
straight-line method over the estimated service lives of the individual assets.

Machinery and equipment lives range from three to 35 years, buildings from 10 to
40 years, and land improvements from five to 24 years. Leasehold improvements
are amortized over the shorter of the lives of the leases or estimated service
lives. Cost of timber harvested is based on the estimated quantity of timber
available during the growth cycle and is credited directly to the asset
accounts.

                                       7
<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------

Notes to Financial Statements


F.  Revenue Recognition

The company recognizes revenues as products are shipped.

G.  Earnings Per Share

In December 1997, the company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". Under this standard, basic earnings per
share is computed by dividing net income applicable to common stockholders by
the average number of common shares outstanding during the year. The computation
of diluted earnings per share assumes that the average number of common shares
outstanding is increased by dilutive common share equivalents and the conversion
of securities having a dilutive effect, and that net income applicable to common
stock is increased by dividends and after-tax interest on such securities.

H.  Foreign Currency Translation

The assets and liabilities of the company's Canadian subsidiary are translated
into U.S. dollars using year-end exchange rates. The resulting translation gains
or losses are included with the cumulative translation adjustment in the
Shareholders' Equity section of the balance sheet.

Due to the high inflation rate in Brazil, the company's Brazilian subsidiary
used the U.S. dollar as its functional currency for the periods covered by these
financial statements. Except for certain items translated at historical exchange
rates, assets and liabilities have been translated using year-end exchange
rates. Gains or losses resulting from balance sheet translation have been
included in net income.

Gains or losses resulting from foreign currency transactions are included in net
income.

During 1997, Brazil's three-year cumulative inflation rate fell below 100% and,
as a result, Brazil was determined to be non-highly-inflationary for accounting
purposes. Effective January 1, 1998, the company will begin accounting for its
Brazilian subsidiary using the Real as its functional currency, and assets and
liabilities will be translated into U.S. dollars using the same procedures as
described above for the company's Canadian subsidiary.

I.  Financial Instruments

The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables, short-term borrowings, and accounts payable and
accrued liabilities approximate fair values due to the short maturity of those
instruments. The fair value of the company's debt is discussed in Note 5.

The company occasionally enters into forward exchange contracts to hedge certain
assets that are denominated in foreign currencies. At December 31, 1997, the
company had forward exchange contracts covering approximately $72 million of
investments and accounts receivable, the deferred gains and losses on which were
not material. The contracts range in duration from 21 days to 63 days. The
company does not hold financial instruments for trading purposes.

                                       8

<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------

Notes to Financial Statements

Note 2.  Inventories

<TABLE> 
<CAPTION> 
December 31     (in millions of dollars)                   1997           1996
----------------------------------------           ------------   ------------
<S>                                                <C>            <C> 
Paper, pulp and packaging products                  $     244.3   $      261.7
Wood products                                              35.4           31.8
Logs                                                       46.5           42.7
Pulpwood                                                   23.0           24.3
Raw materials, parts and supplies                         101.9           97.6
                                                   ------------   ------------

                                                    $     451.1    $     458.1
                                                   ============   ============
</TABLE> 

At December 31, 1997 and 1996, inventories stated using the last-in, first-out
(LIFO) method, representing approximately 29% and 34% of total inventories, were
$129.8 million and $154.3 million, respectively. If the lower of average cost or
market method (which approximates current cost) had been utilized for
inventories carried at LIFO, inventory balances would have been increased by
$65.4 million and $69.5 million at December 31, 1997 and 1996, respectively.

The LIFO inventory reduction in 1997 resulted in a liquidation of LIFO inventory
layers carried at lower costs which prevailed in prior years. The effect of this
liquidation was to decrease cost of products sold by $1.3 million and to
increase net income $0.8 million or $.01 per share.

Note 3. Property, Plant and Equipment

<TABLE> 
<CAPTION> 
December 31     (in millions of dollars)                    1997           1996
---------------------------------                   ------------   ------------
<S>                                                 <C>            <C> 
Land and land improvements                           $     356.4   $      340.4
Buildings and leasehold improvements                       993.3          936.4
Machinery and equipment                                  7,965.5        7,742.9
Construction in progress                                   158.2          277.9
                                                    ------------   ------------
                                                                               
                                                         9,473.4        9,297.6
                                                                               
Accumulated depreciation                                (4,673.3)      (3,644.1)
                                                    ------------   ------------
                                                                               
                                                     $   4,800.1   $    5,653.5
                                                    ============   ============
</TABLE> 

                                       9

<PAGE>
 
 Champion International Corporation and Subsidiaries                      
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
Interest capitalized into construction in progress during 1997, 1996 and 1995
was $8.0 million, $10.6 million, and $9.6 million, respectively. Accumulated
depreciation at December 31, 1997 includes $680 million of asset impairment and
asset write-off charges related to assets to be divested pursuant to the
company's restructuring plan (Note 9).

Depreciation expense includes the following components:

<TABLE> 
<CAPTION>   
Years Ended December 31     (in millions of dollars)               1997         1996         1995
----------------------------------------------------            ---------    ---------    ---------
<S>                                                             <C>          <C>          <C> 
Land improvements                                                 $ 13.0       $ 14.3       $ 13.4
Buildings and leasehold improvements                                29.2         27.8         28.0
Machinery and equipment                                            382.4        365.7        351.1
                                                                ---------    ---------    ---------

                                                                  $424.6       $407.8       $392.5
                                                                =========    =========    ========= 
</TABLE> 
   
Note 4.  Accounts Payable and Accrued Liabilities

<TABLE> 
<CAPTION> 
December 31     (in millions of dollars)                                        1997         1996
-----------------------------------------                                    --------     --------
<S>                                                                          <C>          <C>   
Accounts payable                                                             $ 285.3      $ 294.0
                                                                             --------     --------
Accrued liabilities:
   Payrolls and commissions                                                    125.4        137.6
   Employee benefits                                                           133.2         63.4
   Interest                                                                     56.3         57.7
   Taxes, other than income taxes                                               33.1         31.4
   Other                                                                       156.1        124.2
                                                                             --------     --------

          Total accrued liabilities                                            504.1        414.3
                                                                             --------     -------- 

Dividends payable                                                                4.8          4.8
                                                                             --------     --------  

                                                                             $ 794.2      $ 713.1
                                                                             ========     ========
</TABLE> 
   
                                      10 
   
<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------

Notes to Financial Statements


Note 5. Indebtedness

<TABLE> 
<CAPTION> 
December 31                      (in millions of dollars)                    1997          1996
---------------------------------------------------------                ------------   ------------                     
<S>                                                                      <C>            <C>                              
Secured debt, 7.8% average rate, payable through 2012 (a)                $       48.0   $       50.6       
Unsecured fixed rate debt, 7.8% average rate, payable                                                                    
   through 2037 (b)                                                           2,669.9        2,470.3        
Unsecured variable rate debt, 6.7% average rate, payable                                                                 
   through 2012 (b)                                                             318.7          348.9       
Lease obligations, 6.8% average rate, payable through 2029                      297.2          290.0       
Other contractual obligations, 7.3% average rate, payable                                                                
   through 2001                                                                   4.3            6.5  
                                                                         ------------   ------------
                                                                                                                         
   Total Debt                                                                 3,338.1        3,166.3        
                                                                                                  
Less:  Current installments of long-term debt                                   143.7           80.9      
                                                                         ------------   ------------
                                                                                                                         
Long-term debt (c)                                                       $    3,194.4   $    3,085.4         
                                                                         ============   ============
                                                                                                                         
Short-term borrowings (d)                                                $       71.1   $      126.9        
                                                                         ============   ============
</TABLE> 

(a) Such debt is secured by assets with a net book value at December 31, 1997 of
    approximately $204 million, primarily assets of Lake Superior Land Company,
    a wholly-owned subsidiary of the company.

(b) Unsecured fixed and variable rate debt includes borrowings payable in less
    than one year. The company has the ability to refinance these borrowings
    under the credit agreements discussed below. At December 31, 1997, $345
    million of current maturities of long-term debt and short-term obligations
    have been classified as long-term debt since the company intends to renew or
    refinance these obligations through 1998 and into future periods.

(c) The annual principal payment requirements under the terms of all long-term
    debt agreements for the years 1998 through 2002 are $489 million, $258
    million, $206 million, $206 million and $6 million, respectively.

(d) Weighted average interest rates on outstanding balances, excluding book cash
    overdrafts, for 1997 and 1996 were 7.7% and 7.8%, respectively. Book cash
    overdrafts totaled $70 million and $84 million, respectively, at December
    31, 1997 and 1996.

The indentures and agreements relating to long-term debt arrangements, as well
as the company's Certificate of Incorporation, contain restrictions on the
payment of cash dividends. Under the most restrictive of these provisions,
approximately $571 million of consolidated retained earnings at December 31,
1997 is free of such restrictions.

                                      11
<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------


Notes to Financial Statements


At December 31, 1997, the company had unused U.S. lines of credit of $1.19
billion ($345 million of which supported the classification of current
maturities of long-term debt and short-term obligations as long-term debt) and
unused foreign bank lines of credit of approximately $126 million. At December
31, 1997, interest rates on the U.S. and foreign lines were no higher than the
prime rate or its equivalent. Facility fees of .10% are required on the $1.19
billion U.S. lines of credit, which are available to May 31, 2002 on a revolving
basis, at which time amounts owed, if any, become payable. Commitment fees of no
more than .17% are required on the $126 million foreign lines of credit.
Commitments under the credit agreements cannot be withdrawn provided the company
continues to meet required conditions.

The fair value of the company's long-term debt, which includes current
installments and excludes lease obligations, exceeded the carrying amount by
$180 million and $60 million, at December 31, 1997 and 1996, respectively. The
fair value was estimated using discounted cash flow analyses, based on the
company's incremental borrowing rates for similar types of borrowings.

At the time of their acquisition by the company in 1996, Lake Superior Land
Company had a $44 million mortgage loan outstanding, and Amapa Florestal e
Celulose (AMCEL) had $35 million of debt outstanding.

                                      12


<PAGE>
 
Champion International Corporation and Subsidiaries                      
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
Note 6.  Commitments
   
<TABLE> 
<CAPTION>                                                                                                       
                                                                  Future Minimum Lease Payments                 
                                                             ----------------------------------------           
                                                                 Capitalized          Non-Cancelable            
Period     (in millions of dollars)                                   Leases         Operating Leases           
-----------------------------------                          ---------------         ----------------           
<S>                                                          <C>                     <C>                        
1998                                                                $   20.2                 $   27.2           
1999                                                                    20.2                     29.3           
2000                                                                    20.2                     26.5           
2001                                                                    20.2                     25.7           
2002                                                                    20.2                     24.6           
Thereafter                                                             680.0                    184.1           
                                                             ---------------         ----------------           
Total Payments                                                         781.0                    317.4           
                                                                                                                
Less:  Sublease rental receipts                                                                  61.7           
                                                                                     ----------------           
Net operating lease payments                                                                $   255.7           
                                                                                     ================           
Less:  Amount representing interest                                    483.8                                    
                                                             ---------------                                    
Present value of capitalized lease                                                                              
payments (all long-term)                                            $  297.2                                    
                                                             ===============                                     
</TABLE> 
   
      
The following schedule shows the composition of total rental expense for all
operating leases:
 
<TABLE> 
<CAPTION> 
Years Ended December 31 (in millions of dollars)                 1997         1996        1995
------------------------------------------------             --------     --------   ---------
<S>                                                          <C>          <C>        <C> 
Minimum rentals                                              $   34.1     $   29.8   $    24.5
Less:  Sublease rental income                                     0.2          0.2         0.2
                                                             --------     --------   ---------

                                                             $   33.9     $   29.6   $    24.3
                                                             ========     ========   ========= 
</TABLE> 

                                       13
<PAGE>
 
Champion International Corporation and Subsidiaries                           
--------------------------------------------------------------------------------

Notes to Financial Statements           

Note 7.  Capital Shares and Earnings Per Share

Unissued Preference Stock
-------------------------

At December 31, 1997 and 1996, 7,031,431 preference shares for which no series
has been designated were authorized and unissued. At December 31, 1997 and 1996,
1,500,000 additional authorized and unissued shares were designated and reserved
for the issuance of the company's Preference Stock, Participating Cumulative
Series or Participating Cumulative Series B, $1.00 par value.

Preference Stock
----------------

On December 6, 1989, the company issued 300,000 shares of Preference Stock,
$92.50 Cumulative Convertible Series, $1.00 par value ("$92.50 Preference
Stock"). On June 22, 1995, all of the $92.50 Preference Stock was converted into
7,894,737 shares of common stock, which then were purchased by the company on
that date.

Common Stock
------------

Changes in common shares during the three years ended December 31, 1997 are as
follows:

<TABLE> 
<CAPTION> 
(in shares and millions of dollars)
                                                                                 Treasury Shares
                                                Issued Shares                        (at cost)    
                                    ------------------------------------     -------------------------
                                                       Par      Capital
                                         Shares      Value      Surplus            Shares       Amount
                                     ----------   --------  -----------       -----------    ---------
<S>                                  <C>          <C>       <C>               <C>            <C> 
Balance at January 1, 1995           96,786,039      $48.4     $1,175.0       (3,492,280)      ($100.3)
Conversions                          12,205,192        6.1        441.7              ---           --- 
Exercise of stock options             1,224,750        0.6         36.4              ---           --- 
Compensation plans                       11,805        ---          0.3              ---           --- 
Repurchase of stock                         ---        ---          ---      (11,080,731)       (549.7)
Other                                     2,593        ---          ---              ---           --- 
                                    -----------   --------  -----------       ----------     ----------  

Balance at December 31, 1995        110,230,379       55.1      1,653.4      (14,573,011)       (650.0)
Exercise of stock options                79,800        0.1          2.4              ---           --- 
Compensation plans                        9,184        ---          1.5              ---           --- 
Repurchase of stock                         ---        ---          ---         (195,300)         (7.9)
Other                                     3,736        ---         (5.9)             ---           --- 
                                    -----------   --------  -----------       ----------     ----------   

Balance at December 31, 1996        110,323,099       55.2      1,651.4      (14,768,311)       (657.9)
Exercise of stock options               566,075        0.3         24.4              ---           --- 
Compensation plans                        8,829        ---         21.4              ---           --- 
Other                                     2,209        ---          ---              200           --- 
                                    -----------   --------  -----------       ----------     ----------   

Balance at December 31, 1997        110,900,212      $55.5     $1,697.2      (14,768,111)      ($657.9)
                                    ===========   ========  ===========       ==========     ==========     
</TABLE> 

                                       14
<PAGE>
 
Champion International Corporation and Subsidiaries                        
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
   
At December 31, 1997, common shares of the company were reserved for issue as
follows:
   
Stock options granted or available for grant                  4,217,675
Compensation plans                                            2,731,337
                                                            -----------
                                                              6,949,012
                                                            ===========

Earnings (Loss) Per Share
-------------------------

In December 1997, the company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". In accordance with this standard, basic
and diluted earnings (loss) per share were calculated as follows:

<TABLE> 
<CAPTION>    
Years Ended December 31
(in millions, except per share amounts)                              1997        1996        1995
-----------------------------------------------                 ---------     -------     ------- 
<S>                                                             <C>           <C>         <C>  
Basic earnings (loss) per share:
 Net income (loss)                                              $  (548.5)    $ 141.3     $ 771.8
 Less:  Dividends on preference shares                                ---         ---        13.2
                                                                ---------     -------     -------
 Net income (loss) applicable to common stockholders            $  (548.5)    $ 141.3     $ 758.6
                                                                =========     =======     =======  
 Average number of common shares outstanding                         95.8        95.5        94.7
                                                                =========     =======     =======  
 Basic earnings (loss) per share                                $   (5.72)    $  1.48     $  8.01
                                                                =========     =======     =======  
   
Diluted earnings (loss) per share:
 Net income (loss) applicable to common stockholders            $  (548.5)    $ 141.3     $ 758.6
 Add:  Income effect, assuming conversion of
  potentially dilutive securities                                     ---         ---        15.1
                                                                ---------     -------     -------
 Net income (loss) on diluted basis                             $  (548.5)    $ 141.3     $ 773.7
                                                                =========     =======     =======      
   
 Average number of common shares outstanding                         95.8        95.5        94.7
   
 Add:  Common share effect, assuming conversion of
  potentially dilutive securities                                     ---         0.3         6.2
                                                                ---------     -------     -------
   
 Average number of common shares outstanding
  on a diluted basis                                                 95.8        95.8       100.9
                                                                =========     =======     =======
 Diluted earnings (loss) per share                              $   (5.72)    $  1.48     $  7.67
                                                                =========     =======     =======
</TABLE> 

Potentially dilutive securities at December 31, 1997 included shares issuable
pursuant to certain stock-based compensation (Note 8). These securities included
450,000 shares issuable upon the vesting of the restricted share units issued in
1996 as well as 270,000 shares issuable upon the exercise of stock options
calculated using the treasury stock method. Potentially dilutive securities in
1997 were not included in the computation of diluted earnings per share because
the effect would have been antidilutive.   

                                       15
<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------

Notes to Financial Statements


Note 8.  Stock-Based Compensation

Stock Options
-------------

The company has granted to officers and key employees options to purchase common
shares at the market price of the shares on the date of grant. All options
granted to officers prior to 1997 were accompanied by stock appreciation rights.
Options granted to officers and key employees in 1997 were not accompanied by
stock appreciation rights. The options expire 10 years or 10 years and 31 days
from the date of grant and generally become exercisable subsequent to a period
of 12 calendar months from date of grant.

Stock Option Transactions:

<TABLE> 
<CAPTION> 
                                                              Weighted Average
                                               Options          Exercise Price
                                           -----------        ----------------
<S>                                        <C>                <C>    
Balance at January 1, 1995                   3,964,800                 $29.71
     Granted                                   605,100                  39.13
     Exercised                              (2,272,100)                 29.46
     Surrendered or canceled                   (18,650)                 35.02
                                           -----------            ----------- 

Balance at December 31, 1995                 2,279,150                  32.42
     Granted                                   556,350                  46.63
     Exercised                                (215,400)                 30.45
     Surrendered or canceled                   (24,300)                 33.16
                                           -----------            ----------- 

Balance at December 31, 1996                 2,595,800                  35.62
     Granted                                   684,380                  44.63
     Exercised                              (1,188,525)                 33.99
     Surrendered or canceled                   (19,100)                 40.80
                                           -----------            ----------- 

Balance at December 31, 1997                 2,072,555                 $39.48
                                           ===========             ==========  

Options exercisable at December 31                                    
----------------------------------
    1995                                     1,683,650                 $30.05
    1996                                     2,043,550                  32.65
    1997                                     1,398,775                  37.01
</TABLE> 

At December 31, 1997, the stock options outstanding had an aggregate exercise
price of $81.8 million, with exercise prices ranging from $26.25 to $46.63 and a
weighted average remaining contractual life of 7.3 years.

Other Stock-Based Compensation
------------------------------

The company granted an aggregate of 450,000 restricted share units on August 15,
1996 to certain officers and key employees at the market price per share on that
date ($44.25). Each unit represents one share of common stock to be issued upon
vesting (unless the issuance is deferred), provided that the awardee remains in
the company's employ until the vesting date. The units vest over a six-year
period as follows: 135,000 on August 15, 1998; 135,000 on August 15, 2000; and
180,000 on August 15, 2002.

                                       16
<PAGE>
 
Champion International Corporation and Subsidiaries                          
--------------------------------------------------------------------------------

Notes to Financial Statements
   
   
In March 1997, the company adopted a performance share plan under which share
units were awarded to officers and key employees. These units entitle the
recipients, upon earn-out, to receive shares of common stock. The earn-out of
shares is dependent on the company's stock price appreciation plus dividend
yield (i.e., total shareholder return or "TSR") increasing, at any time within
three years from the date of grant, to a value equivalent to approximately 15%
per annum compounded for three years. If the TSR goal is achieved, the amount of
the payout will depend on the company's TSR, during the performance period,
relative to an industry peer group. If the TSR goal is not achieved, there will
be will be no payout. Based on the current dividend rate, the shares would be
earned if the common stock price reaches $67.25 per share. The number of shares
that could be earned ranges from 340,000 shares to 720,000 shares.

Total compensation expense recognized for stock appreciation rights and other
stock-based compensation for 1997, 1996 and 1995 was $35 million, $3 million and
$25 million, respectively.

Pro Forma Impact of Grant of Stock Options
------------------------------------------

The company accounts for stock options under Accounting Principles Board Opinion
No. 25, pursuant to which no compensation cost has been recognized for the
options that are not accompanied by stock appreciation rights. Had compensation
cost for these options been determined consistent with Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," the impact on net income and earnings per share would have been
as follows:

<TABLE> 
<CAPTION> 
Years Ended December 31                                1997     1996      1995
------------------------------                     --------   ------    ------
<S>                                  <C>           <C>        <C>       <C> 
Net Income (Loss) (in millions)      As reported   $(548.5)   $141.3    $771.8 
                                     Pro forma     $(554.3)   $137.7    $769.6 
                                                                               
Basic Earnings (Loss) Per Share      As reported   $ (5.72)   $ 1.48    $ 8.01 
                                     Pro forma       (5.79)   $ 1.44    $ 7.98 
                                                                               
Diluted Earnings (Loss) Per Share    As reported   $ (5.72)   $ 1.48    $ 7.67 
                                     Pro forma     $ (5.79)   $ 1.44    $ 7.65 
                                                                               
Weighted Average Fair Value of                                                 
    Options Granted                                $ 14.90    $14.92    $13.15 
</TABLE> 

Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma amounts for 1995 only
reflect compensation cost for 9.5 months (the time between the date of grant and
year end).

                                       17
<PAGE>
 
Champion International Corporation and Subsidiaries   
--------------------------------------------------------------------------------

Notes to Financial Statements


The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1997, 1996 and 1995.

<TABLE> 
<CAPTION> 
Years Ended December 31                         1997        1996         1995
---------------------------------           --------    --------     -------- 
<S>                                         <C>         <C>          <C> 
Risk-free interest rates                        6.57 %      6.31 %       6.95 %
Expected dividend yield                          0.4 %       0.4 %        0.4 %
Expected volatility                             20.1 %      20.4 %       20.4 %
Expected life (years)                           5.50        5.25         5.25
</TABLE> 

Note 9. Provision for Restructuring


On October 7, 1997, the company approved a plan to maximize total shareholder
return by focusing on strategic businesses, increasing profitability and
improving financial discipline. As part of this plan, the company will divest
several non-strategic product segments. These product segments include the
newsprint, recycling, coated and uncoated groundwood specialty papers, premium
papers, specialty uncoated papers, and liquid packaging and bleached board
businesses. Also to be divested are 325,000 acres of timberlands. Additionally,
the company plans to reduce its worldwide workforce in the businesses remaining
after the divestitures by 11%, or approximately 2,000 positions, by the end of
1999.

As a result of the above plan, in the fourth quarter of 1997, the company
recorded a pre-tax charge of $891 million ($552 million after-tax, or $5.76 per
share). The charge included $763 million of non-cash expenses and $128 million
for one-time cash costs. Components of the provision were: $658 million for
asset impairment, $82 million for other asset write-offs, $38 million for
pension and postretirement enhancement and curtailment losses, $42 million for
other severance costs and $71 million for other expenses, including selling
costs, contract cancellations and other costs. Asset impairment was based on
estimated sales proceeds.

The company expects the non-strategic segments to be sold in 1998. Results of
operations for the product segments to be divested are as follows:

<TABLE> 
<CAPTION> 
Years Ended December 31 
(in millions of dollars)                          1997        1996         1995
-------------------------------------         --------    --------     -------- 
<S>                                           <C>         <C>          <C> 
Net sales                                     $1,316.0    $1,391.0     $1,597.6

Costs and expenses                             1,394.4     1,438.7      1,450.7
                                              --------    --------     -------- 
Income (loss) from operations                 $ ( 78.4)   $ ( 47.7)    $  146.9
                                              ========    ========     ========
</TABLE> 

                                       18
<PAGE>
 
Champion International Corporation and Subsidiaries   
--------------------------------------------------------------------------------

Notes to Financial Statements

The consolidated balance sheet includes the following amounts related to the
product segments to be divested, excluding the asset impairment provision:

<TABLE> 
<CAPTION> 
December 31      (in millions of dollars)         1997
-----------------------------------------     --------
<S>                                           <C> 
Current assets                                $  241.9
Long-term assets (primarily property,
   plant and equipment)                        1,431.6
Current liabilities                              (91.8)
Long-term liabilities                             (2.9)
                                              --------

    Net assets                                $1,578.8
                                              ========
</TABLE> 

Note 10.  Other (Income) Expense -- Net 

<TABLE> 
<CAPTION> 
Years Ended December 31 
(in millions of dollars)                          1997        1996         1995
---------------------------------------        -------     -------      -------
<S>                                            <C>         <C>          <C> 
Interest income (a)                            $(17.8)     $(32.4)      $(38.0)
Foreign currency (gains) losses -- net           (1.1)        3.4          5.9
Minority interest in subsidiaries (b)            (0.5)        1.9         34.3
Equity in net income of affiliates               (1.0)       (1.0)        (0.3)
Royalty, rental and commission income           (13.6)      (13.9)       (11.3)
Net gain on disposal of fixed assets,
  timberlands and investments (c)               (24.0)      (23.1)       (46.5)
Miscellaneous -- net                             13.6        20.9         22.9
                                               -------     -------      -------
                                               $(44.4)     $(44.2)      $(33.0)
                                               =======     =======      =======
</TABLE> 

(a) The decline in interest income in 1997 compared to 1996 and 1995 was due
    primarily to a reduction in average outstanding cash investments by the
    company's foreign subsidiaries.

(b) In July 1996, Weldwood of Canada Limited acquired all of its publicly-held
    shares for (U.S.) $191 million and became a wholly-owned subsidiary of the
    company.

(c) 1995 included a gain of $89 million from the sale of certain operations in
    Canada and charges of $68 million primarily for the writedown of certain
    U.S. paper and wood products assets.

                                       19
<PAGE>
 
Champion International Corporation and Subsidiaries                             
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
   
Note 11.  Income Taxes
   
The provision (benefit) for income taxes includes the following components:


<TABLE> 
<CAPTION> 
Years Ended December 31 (in millions of dollars)              1997        1996         1995     
------------------------------------------------           -------    --------     --------                                   
<S>                                                        <C>        <C>          <C> 
Provision for income taxes currently                                                          
payable (receivable):                                                                         
    Federal                                                $ (14.6)   $    6.1     $  128.8   
    State and local                                            2.6         2.4         10.7   
    Foreign                                                   34.8        52.0        166.2   
                                                           -------    --------     --------                          
                                                              22.8        60.5        305.7   
                                                           -------    --------     --------                                     
Provision for deferred income taxes:     
    Federal                                                 (306.5)        8.0        120.1   
    State and local                                          (47.3)        1.3         31.5   
    Foreign                                                  (17.1)       (6.1)         7.4   
                                                           -------    --------     --------                                     
                                                            (370.9)        3.2        159.0   
                                                           -------    --------     --------                                      
Total Provision                                            ($348.1)      $63.7       $464.7   
                                                           =======    ========     ========
</TABLE> 
   
Domestic and foreign income (loss) before income taxes are as follows:
   
<TABLE> 
<CAPTION>    
Years Ended December 31 (in millions of dollars)              1997        1996         1995 
-------------------------------------------------          -------    --------     --------                                      
<S>                                                        <C>        <C>          <C> 
Domestic                                                   $(982.9)   $   30.6     $  785.2 
Foreign                                                       86.3       174.4        451.3
                                                           -------    --------     --------                                       
Total income (loss) before income taxes                    $(896.6)   $  205.0     $1,236.5
                                                           =======    ========     ========
</TABLE> 
   

                                       20
<PAGE>
 
Champion International Corporation and Subsidiaries                        
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
Principal reasons for the variation between the statutory rate and the effective
federal income tax rate are as follows:
   
<TABLE> 
<CAPTION> 
Years Ended December 31                                    1997       1996         1995     
----------------------------                            -------    -------       ------                              
<S>                                                     <C>        <C>           <C> 
Statutory rate -- provision (benefit)                    (35.0) %     35.0 %       35.0 %  
Rate difference -- foreign subsidiaries                   (2.4)       (7.5)         1.7    
Foreign dividends                                          1.3         4.3          0.3    
State and local taxes, net of federal tax effect          (3.2)        0.1          2.2    
All other -- net                                           0.5        (0.8)        (1.6)     
                                                       -------     -------       ------                              
Effective income tax rate                                (38.8) %     31.1 %       37.6 %
                                                       =======     =======       ======
</TABLE> 


Deferred tax liabilities (assets) are composed of the following:
   
<TABLE> 
<CAPTION> 
December 31    (in millions of dollars)                            1997          1996
--------------------------------------                         --------      -------- 
<S>                                                            <C>           <C> 
Depreciation and cost of timber harvested                      $1,754.6      $1,783.2
Capitalization of interest and deferral of 
   other costs                                                     30.4          32.6
Other                                                              88.7           86.2
                                                               --------      ---------     
     Gross Liabilities                                          1,873.7        1,902.0
                                                               --------      ---------       
Reserve for asset impairment                                    (277.7)            --- 
Loss and other carryforwards                                    (266.2)        (236.4)
Accrued liabilities and reserves                                (207.6)        (151.8)
Postretirement benefits other than pensions                     (155.6)        (151.7)
Other                                                            (91.3)         (87.1)
                                                               --------      ---------     
     Gross Assets                                               (998.4)        (627.0)
                                                               --------      ---------     
Valuation allowance                                               16.9           15.2
                                                               --------      ---------     
                                                                $892.2       $1,290.2
                                                               ========      =========  
</TABLE> 
   

                                       21
<PAGE>
 
Champion International Corporation and Subsidiaries                            
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
   
As of December 31, 1997, the company had available, for U.S. income tax return
purposes, general business credit carryforwards of $37 million, which expire
from 2001 through 2011, and alternative minimum tax credit carryforwards of $196
million, which do not expire. In addition, the company had, for Brazilian income
tax return purposes, operating loss carryforwards of $60 million, which do not
expire.
   
It is the company's intention to reinvest undistributed earnings of certain of
its foreign subsidiaries and thereby indefinitely postpone their remittance.
Accordingly, no provision has been made for income taxes on undistributed
earnings of $1.2 billion at December 31, 1997. Computation of the potential
deferred tax liability associated with these undistributed earnings is not
practicable.
   
The valuation allowance primarily relates to general business credit and other
carryforwards. The increase in the valuation allowance of $1.7 million for 1997
and the decrease of $5.6 million for 1996 is primarily due to issues with
respect to the utilization of such carryforwards.
   
Purchase accounting adjustments for various acquisitions resulted in a decrease
to the company's deferred tax liabilities of approximately $14 million in 1997
and an increase of approximately $136 million in 1996.
   
   
Note 12.  Pension and Other Benefit Plans
   
The company and its subsidiaries have a number of noncontributory pension plans
covering substantially all employees. The plans covering salaried employees
provide pension benefits that generally are based on the employee's compensation
during the 60 months before retirement. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service. The
company bases domestic pension contributions on funding standards established by
the Employee Retirement Income Security Act of 1974.
   
During the year, the company approved a plan to restructure its operations (Note
9). In connection with this plan, the company intends to divest several non-
strategic product segments and reduce the workforce in its ongoing operations by
approximately 2,000 employees, some of whom will be eligible for enhanced early
retirement benefits. The expense associated with such benefits, together with
the curtailment gains or losses, is reflected in net periodic pension cost and
net periodic postretirement costs below.
   
The net periodic pension cost of these plans in 1997, 1996 and 1995 consisted of
the following:
   
<TABLE> 
<CAPTION> 
Years Ended December 31 
(in millions of dollars)                                      1997        1996         1995
------------------------------------------------          --------     -------      -------  
<S>                                                       <C>          <C>          <C> 
Service cost--benefits earned during the period           $   29.2     $  26.4      $  23.9
Interest cost on projected benefit obligation                112.6       106.4        102.7
Actual return on plan assets                                (383.5)     (123.7)      (253.4)
Net amortization and deferral                                246.1         7.1        130.4
Curtailment and termination benefits                          27.6         ___          ___ 
                                                          --------     -------      -------    
Net periodic pension cost                                 $   32.0     $  16.2      $   3.6
                                                          ========     =======      =======
</TABLE> 

                                       22
<PAGE>
 
Champion International Corporation and Subsidiaries                             
--------------------------------------------------------------------------------
   
Notes to Financial Statements

<TABLE> 
<CAPTION> 
===============================================================================================   
Assumptions used in determining 1997, 1996 and
 1995 net periodic pension cost were:
<S>                                                       <C>         <C>          <C>     
Expected long-term rate of return on assets               10.0%       10.0%        10.0% 
Discount rate                                             7.75%        7.5%         8.0% 
Long-term rate of increase in compensation levels         4.75%        4.5%         5.0%     
===============================================================================================
</TABLE> 
   
The consolidated accrued pension asset at December 31, 1997 and 1996 for defined
benefit plans is shown below. The measurement dates used to determine the funded
status were September 30, 1997 and 1996. The funded status was adjusted to
record the effect of curtailment and termination benefits resulting from the
company's restructuring plan, which was approved on October 7, 1997 (Note 9).
Benefit obligations for 1997 and 1996 were determined using an assumed discount
rate of 7.5% and 7.75%, respectively, and an assumed average long-term rate of
increase in compensation levels of 4.5% and 4.75%, respectively. Plan assets
consist primarily of listed stocks and bonds.
   
<TABLE> 
<CAPTION> 
December 31    (in millions of dollars)                       1997         1996
--------------------------------------                    --------     -------- 
<S>                                                       <C>          <C> 
Actuarial present value of benefit obligations:
    Vested benefit obligation                             $1,525.9     $1,364.3
                                                          ========     ========
       
    Accumulated benefit obligation                        $1,578.8     $1,412.9
                                                          ========     ======== 

    Projected benefit obligation                          $1,651.7     $1,509.7

Plan assets at fair value                                  1,839.6      1,549.4
                                                          --------     --------   
Plan assets in excess of the projected 
    benefit obligation                                       187.9         39.7

Unrecognized net gain                                       (162.6)       (13.9)

Prior service cost not yet recognized in net 
    periodic pension cost                                     38.0         54.1

Unrecognized net transitional asset                           (4.6)        (5.3)
                                                          --------     -------- 
Pension asset                                             $   58.7     $   74.6
                                                          ========     ======== 
</TABLE> 
   
The company sponsors several defined contribution plans that provide all
domestic salaried employees and certain domestic hourly employees of the company
an opportunity to accumulate funds for their retirement. The company matches the
contributions of participating employees on the basis of the percentages
specified in the respective plans. Company matching contributions to the plans,
which are invested in shares of the company's common stock, were approximately
$14 million in 1997, $13 million in 1996 and $12 million in 1995.
   
                                       23
<PAGE>
 
Champion International Corporation and Subsidiaries                           
--------------------------------------------------------------------------------


   
Notes to Financial Statements
   
   
Other Retiree Benefits
   
The company provides certain health care and life insurance benefits to eligible
retired employees. Employees are generally eligible for benefits upon retirement
following a specified number of years of service. These benefit plans are
unfunded.   

Summary information on the company's plans providing postretirement benefits
other than pensions is as follows:

<TABLE> 
<CAPTION> 
December 31    (in millions of dollars)                       1997         1996
-------------------------------------                      -------       ------ 
<S>                                                        <C>           <C> 
Accumulated postretirement benefit obligation:
    Retirees                                                $300.7       $284.6
    Fully eligible, active plan participants                  48.0         19.1
    Other active plan participants                            59.1         68.4
                                                           -------       ------ 
Accumulated postretirement benefit obligation                407.8        372.1
Unrecognized prior service benefit                            20.1         24.4
Unrecognized net (loss)                                      (35.9)       (17.3)
                                                           -------       ------
Accrued postretirement benefit obligation                   $392.0       $379.2
                                                           =======       ======
</TABLE> 
   
Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes the
following components:
   
<TABLE> 
<CAPTION> 
Years Ended December 31
(in millions of dollars)                                   1997        1996         1995   
-------------------------------------------            --------     -------      -------                                    
<S>                                                    <C>          <C>          <C>  
Service cost                                           $    3.6     $   3.8      $   3.5   
Interest cost on accumulated postretirement                                                
  benefit obligation                                       28.5        26.9         27.9     
Net amortization and deferral                              (2.0)       (2.0)        (2.0)   
Effect of curtailment                                      10.8         ___          ___    
                                                       --------     -------      -------                                    
   Net periodic postretirement benefit cost            $   40.9     $  28.7      $  29.4 
                                                       ========     =======      =======
</TABLE> 
   

The accumulated postretirement benefit obligation at December 31, 1997 and 1996
was determined using an assumed discount rate of 7.75% and 8.0%, respectively.
The assumed health care cost trend rate used for measurement purposes is 7.4%
for 1998, declining ratably to an ultimate rate of 5.0% over a period of four
years.
   
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of December 31, 1997 would be
increased by approximately 8%. The effect of this change on the aggregate of
service and interest cost for 1997 would be an increase of approximately 12%.

                                       24
<PAGE>
 
Champion International Corporation and Subsidiaries                       
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
   
Note 13.  Business Segments
   
   
The company's business segments are paper and wood products. The markets in
which the company sells its products are highly competitive. The company faces
numerous competitors within the forest products industry in each of its major
markets and also competes with suppliers of milk and juice cartons and kraft
paper substitutes made from plastics. Competition in all markets is based
primarily on price. The company is one of the largest domestic producers and
suppliers of coated and uncoated free sheet and groundwood papers, newsprint,
milk and juice cartons, and hardwood market pulp. Weldwood of Canada Limited, a
wholly-owned Canadian subsidiary, is one of the largest producers of lumber and
softwood market pulp in Canada. Champion Papel e Celulose Ltda., a wholly-owned
Brazilian subsidiary, is one of the largest producers and suppliers of uncoated
free sheet papers in Brazil. See Note 9 regarding the planned divestiture of
certain domestic product segments. See Note 17 regarding the acquisition of a
coated groundwood papers mill in Brazil on January 26, 1998.
   
The company believes that the risks associated with its foreign operations are
somewhat greater than those associated with its domestic operations. Weldwood
and Champion Papel export substantial portions of their products and, as a
result, are affected by currency fluctuations. In addition, Champion Papel is
subject to Brazil's continuing inflation, which has moderated substantially as
the result of various governmental actions in the last four years. Tight
monetary and fiscal policies, including high interest rates, imposed in recent
years in an attempt to control Brazil's high inflation rate, remain in effect.
In addition, in late 1997 the government of Brazil implemented stringent
economic austerity measures, including increases in certain taxes and interest
rates and limitations on government spending, to support the Brazilian currency
in light of the recent economic crisis in certain Asian countries. The company
is not yet in a position to determine whether these measures will adversely
affect results at its Brazilian operations.
   
Exports by the company, including by its Brazilian and Canadian operations, to
the Asian countries that currently are experiencing economic turmoil are not
material. However, the company would be adversely affected if pulp and paper
producers significantly shift sales from those Asian markets to markets in which
the company has a more significant presence, such as North America, South
America and, to a lesser extent, Europe.
   

                                       25
<PAGE>
 
Champion International Corporation and Subsidiaries                       
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
Information about the company's operations in different businesses for the three
years in the period ended December 31, 1997 is as follows:
   
<TABLE> 
<CAPTION> 
                                                                        Timber, 
                                                                    Timberlands
                                                                       and Wood       Corporate       Consolidated
(in millions of dollars)                                  Paper        Products       and Other              Total
--------------------------------------               ----------     -----------       ---------       ------------
<S>                                                  <C>            <C>               <C>             <C>  
Net Sales to                               
Unaffiliated Customers:                                                                           
                                                                                                  
   1997                                              $  4,766.5     $     969.0       $     ---       $    5,735.5
   1996                                                 4,961.7           918.7             ---            5,880.4
   1995                                                 6,007.1           964.9             ---            6,972.0
                                                                                                      
Income from Operations:                                                                               
                                                                                                      
   1997:                                                                                              
    Before provision for restructuring               $    140.7     $     106.5       $   (57.1)      $      190.1
    Provision for restructuring                          (870.2)          (17.5)           (3.3)            (891.0)
    After provision for restructuring                    (729.5)           89.0           (60.4)            (700.9)
   1996                                                   290.0           126.1           (33.2)             382.9
   1995                                                 1,344.0           138.3           (52.8)           1,429.5
                                                                                                      
Identifiable Assets:                                                                                  
                                                                                                      
   1997                                              $  5,599.7     $   2,917.4       $   593.5       $    9,110.6
   1996                                                 6,486.1         2,863.4           470.5            9,820.0
   1995                                                 6,432.7         2,673.0           437.6            9,543.3
                                                                                                      
Capital Expenditures:                                                                                 
                                                                                                      
   1997                                              $    246.9     $     183.5       $    19.1       $      449.5
   1996                                                   339.0           214.1            28.6              581.7
   1995                                                   313.5           299.5            11.2              624.2
                                                                                                      
Depreciation Expense and                                                                              
Cost of Timber Harvested:                                                                             
                                                                                                      
   1997                                              $    433.1     $      69.2       $    15.7       $      518.0
   1996                                                   427.1            62.0            12.8              501.9
   1995                                                   404.2            54.4            12.8              471.4
</TABLE> 
   
The company's timber and timberlands assets and related capital expenditures
support both business segments but were not allocated to the paper segment
because identification of the specific timber and timberlands assets associated
with either segment is impossible. The timber that has been harvested has been
included at cost in the results of the business segments.
   

                                       26
<PAGE>
 
Champion International Corporation and Subsidiaries                       
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
Information about the company's operations in different geographic areas for the
three years ended December 31, 1997 is as follows:   
   
<TABLE> 
<CAPTION> 
                                                                                                Corporate     Consolidated
(in millions of dollars)                                   U.S.       Canada        Brazil      and Other            Total
-------------------------------------                 ---------     --------    ----------    -----------     ------------
<S>                                                   <C>           <C>         <C>           <C>             <C> 
Net Sales to                                                                                             
Unaffiliated Customers:                                                                                  
                                                                                                         
  1997                                                $ 4,852.7     $  556.3    $    326.5    $       ___     $    5,735.5
  1996                                                  5,006.1        535.4         338.9            ___          5,880.4
  1995                                                  5,912.3        655.6         404.1            ___          6,972.0
                                                                                                          
Income from Operations:                                                                                   
                                                                                                          
  1997:                                                                                                   
   Before provision for restructuring                 $   145.7     $   39.0    $     62.5    $     (57.1)    $      190.1
   Provision for restructuring                           (869.8)       (13.0)         (4.9)          (3.3)          (891.0)
   After provision for restructuring                     (724.1)        26.0          57.6          (60.4)          (700.9)
  1996                                                    271.6         58.2          86.3          (33.2)           382.9
  1995                                                  1,116.2        205.6         160.5          (52.8)         1,429.5
                                                                                                         
Identifiable Assets:                                                                                     
                                                                                                         
  1997                                                $ 6,688.2     $  818.1    $  1,010.8    $     593.5     $    9,110.6
  1996                                                  7,515.3        857.9         976.3          470.5          9,820.0
  1995                                                  7,418.5        920.2         767.0          437.6          9,543.3
                                                                                                         
Capital Expenditures:                                                                                    
                                                                                                         
  1997                                                $   290.6     $   61.2    $     78.6    $      19.1     $      449.5
  1996                                                    409.7         70.0          73.4           28.6            581.7
  1995                                                    434.2         16.0         162.8           11.2            624.2
                                                                                                         
Depreciation Expense and                                                                                 
Cost of Timber Harvested:                                                                                
                                                                                                         
  1997                                                $   425.8     $   39.0    $     37.5    $      15.7     $      518.0
  1996                                                    424.6         34.0          30.5           12.8            501.9
  1995                                                    401.2         29.8          27.6           12.8            471.4
</TABLE> 

As of December 31, 1997, net assets located outside of the United States
included in the consolidated financial statements were approximately $1.4
billion. Of this amount, $174 million of cash and cash equivalents was held by
the company's Canadian and Brazilian subsidiaries.
  

                                       27
<PAGE>
 
Champion International Corporation and Subsidiaries                       
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
Note 14.  Quarterly Results of Operations (Unaudited)
   
(in millions of dollars, except per share amounts)                        
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                    March 31    June 30    September 30   December 31
                                                  ----------   --------    ------------   -----------
<S>                                          <C>    <C>        <C>         <C>            <C> 
Net Sales:                                   1997   $1,366.7   $1,407.5        $1,478.4      $1,482.9  
                                             1996    1,533.2    1,444.6         1,470.5       1,432.2  

Gross Profit:                                1997   $   85.6   $  125.9        $  180.4      $  191.0  
                                             1996      272.7      158.1           187.5         127.7  

Income Taxes (Benefit) (a):                  1997   $  (22.5)  $  (14.3)       $   10.1      $ (321.4)  
                                             1996       48.3        6.8            13.5          (4.9)  

Net Income (Loss) (a):                       1997   $  (37.1)  $  (11.4)       $   20.2      $ (520.2)  
                                             1996       83.6       15.6            32.0          10.1  

Basic Earnings (Loss) Per                                                                              
   Common Share (a):                         1997   $   (.39)  $   (.12)       $    .21      $  (5.42) 
                                             1996        .88        .16             .33           .11   
                                                                                      
Diluted Earnings (Loss) Per                                                           
   Common Share (a):                         1997   $   (.39)  $  ($.12)       $   $.21        ($5.42)
                                             1996        .88        .16             .33           .11
</TABLE> 
   
(a)  The income tax benefit and net loss for the three months ended December 31,
     1997 included the provision for restructuring (Note 9). The provision
     resulted in a pre-tax charge of $891 million ($552 million after-tax, or
     $5.76 per share).
        

                                       28
<PAGE>
 
Champion International Corporation and Subsidiaries                       
--------------------------------------------------------------------------------
   
Notes to Financial Statements
   
   
Note 15.  Environmental Liabilities
   
The company has been designated as a potentially responsible party by the U.S.
Environmental Protection Agency (the "EPA") under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, and by certain
states under applicable state laws, with respect to the cleanup of hazardous
substances at a number of sites. In the case of many of these sites, other
potentially responsible parties also have been so designated. In addition, the
company and, in certain instances, other responsible parties have entered into
agreements with the EPA and certain states regarding the cleanup of hazardous
substances at various other locations. Also, the company is involved in the
remediation of certain other sites which are not the subject of investigation by
federal or state agencies.
   
The company cannot predict with certainty the total cost of such cleanups, the
company's share of the total cost of multiparty cleanups or the extent to which
contribution will be available from other parties, or the amount of time
necessary to accomplish such cleanups. However, based upon, among other things,
its previous experience with respect to the cleanup of hazardous substances as
well as the regular detailed review of known hazardous waste sites by the
company, the company has accrued $73 million at December 31, 1997, which
represents its current estimate of the probable cleanup liabilities, including
remediation and legal costs, at all known sites. This accrual does not reflect
any possible future insurance recoveries, which are not expected to be
significant, but does reflect a reasonable estimate of cost-sharing at
multiparty sites.
   
Although the company's probable liabilities have been accrued for currently,
hazardous substance cleanup expenditures generally are paid over an extended
period of time, in some cases possibly more than 30 years. Annual cleanup
expenditures during the period from 1995 through 1997 were approximately $5
million, $4 million and $3 million, respectively.



Note 16.  Legal Proceedings

The company is involved in legal and administrative proceedings and claims of
various types. While any litigation contains an element of uncertainty,
management, based upon the opinion of the company's General Counsel, presently
believes that the outcome of each such proceeding or claim which is pending or
known to be threatened will not have a material adverse effect on the company.

   
Note 17.  Subsequent Event
   
On January 26, 1998, the company's Brazilian subsidiary acquired Industria de
Papel Arapoti S.A. ("Inpacel") and its forestry affiliate for $75 million.
Inpacel has outstanding debt of $277 million. Inpacel and its affiliate are
Brazilian companies that own a pulp and coated groundwood papers mill with an
annual capacity of 160,000 tons of pulp and 178,000 tons of coated groundwood
papers, a sawmill and 124,000 acres of timberlands, all of which are located in
the State of Parana, Brazil. The transaction will be accounted for using the
purchase method of accounting.

                                       29
<PAGE>
 
Report of Independent Public Accountants                                   
--------------------------------------------------------------------------------
   
To the Shareholders and Board of Directors
of Champion International Corporation:
   
   
     We have audited the accompanying consolidated balance sheet of Champion
International Corporation (a New York corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
   
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
   
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Champion International
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
   



                                         /s/ Arthur Andersen LLP
   




   
New York, N.Y.
January 16, 1998 (except for Note 17, as to which the date is January 26, 1998)
   

                                       30
<PAGE>
 
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
 
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations
 

Results of Operations
 
 
Overall Annual Results
 
Results for 1997 declined significantly from 1996 and 1995. In 1997, net income
was $4 million, or four cents per share, before an after-tax charge of $552
million, or $5.76 per share, related to the restructuring plan announced in
October 1997. This compared with net income of $141 million or $1.48 per share
in 1996 and $772 million or $7.67 per share, diluted, in 1995. The decline from
both prior years reflected significantly lower operating income in the paper
segment due to lower average prices, and, to a lesser extent, lower operating
income in the wood products segment.
 
Restructuring Plan
 
On October 7, 1997, the company approved a plan to maximize total shareholder
return by focusing on strategic businesses, increasing profitability and
improving financial discipline. As part of this plan, the company will divest
several non-strategic product segments with 1997 net sales of $1.3 billion and a
1997 operating loss of $78 million. These product segments include newsprint,
the recycling business, coated and uncoated groundwood specialty papers, premium
papers, specialty uncoated papers and liquid packaging and bleached board. Also
to be divested are 325,000 acres of timberlands. The proceeds from these
divestitures will initially be used for debt repayment.
 
The plan also includes a profit-improvement program that is targeted to increase
the annual pre-tax profit of the company's ongoing operations by $400 million by
the end of 2000 through cost reduction, productivity increases and changes in
product mix. As part of cost reduction, the company has set a goal of reducing
its worldwide workforce in the businesses remaining after the divestitures by
11% by the end of 1999.
 
As a result of the restructuring plan, the company incurred a pre-tax charge of
$891 million ($552 million after-tax, or $5.76 per share), in the fourth quarter
of 1997. The charge included (i) $763 million of non-cash expenses, primarily
for asset impairment and other asset write-offs, and (ii) one-time cash costs of
$65 million for severance and $63 million for other expenses.
 
Significant Income Statement Line Item Changes
 
Net sales for 1997 of $5.7 billion declined from $5.9 billion in 1996 and $7
billion in 1995. Gross profit was $583 million, compared to $746 million in 1996
and $1.8 billion in 1995. A pre-tax loss of $6 million, before the restructuring
charge, represented a decline from pre-tax income of $205 million in 1996 and
$1.2 billion in 1995. The declines in net sales, gross profit and pre-tax
income, before the restructuring charge, from both prior years were primarily
due to lower average prices for all of the company's major paper (and, compared
to 1995, pulp) grades, which more than offset higher pulp and paper shipments
and lower pulp and paper manufacturing costs. Wood products shipments were
approximately even with 1996 and declined from 1995, reflecting the sale and the
closure of various plywood plants.
 
                                      31
<PAGE>
 
Selling, general and administrative expenses of $393 million increased from $363
million in 1996 and $386 million in 1995. The increase from 1996 was principally
the result of the impact of stock price fluctuations on the value of stock
appreciation rights and other stock-based compensation, including the
performance share units described in Note 8 to the consolidated financial
statements. Future stock price volatility would impact the expense associated
with the company's stock-based compensation. The increase from 1995 was mainly
due to higher compensation costs and professional fees.
 
Interest and debt expense increased from both 1996 and 1995, primarily due to an
increase in the average amount of long-term debt.
 
Other (income) expense-net for 1997 was approximately even with 1996 and
improved from 1995. The improvement from 1995 was principally due to lower
minority interest expense, which more than offset lower net gains from the sale
and disposition of assets. The decrease in minority interest expense resulted
from the purchase by the company's Canadian subsidiary, Weldwood of Canada
Limited ("Weldwood"), of all its publicly-held shares in 1996. Other (income)
expense - net for 1995 included an $89 million gain from the sale by Weldwood of
its coastal British Columbia timberlands and wood products facilities and
charges of $68 million principally for the writedown of certain U.S. paper and
wood products assets.
 
The tax benefit in 1997 reflected an effective tax rate higher than the rate
associated with the tax provisions in 1996 and 1995. The increases from both
prior years were primarily due to the mix of earnings from the company's
operations in North America and Brazil. A much larger portion of the
restructuring charge applied to the company's North American operations than to
its Brazilian operations, and the tax rate applicable to North American
operations was higher than the Brazilian tax rate in 1997.
 
All outstanding shares of the company's $92.50 Cumulative Convertible Preference
Stock were converted on June 22, 1995. As a result, there were no dividends on
preference stock in 1997 and 1996.
 
Quarterly Results
 
Earnings per share of 34 cents for the fourth quarter of 1997, before the impact
of the restructuring charge, compared to 11 cents for the fourth quarter of 1996
and 21 cents for the third quarter of 1997. The improvement from the year-ago
quarter reflected higher operating income in the paper segment due to lower
manufacturing costs, higher prices for most of the company's pulp and paper
grades and increased shipments. The improvement from the prior quarter was due
to improved results, including higher prices, in uncoated free sheet operations
and lower general corporate expense. The decline in general corporate expense
was principally due to the impact of stock price fluctuations on the value of
stock appreciation rights and other stock-based compensation, including the
performance share units described in Note 8 to the consolidated financial
statements. These improvements more than offset the decline in wood products
earnings from both prior quarters.
 
Paper Segment
 
For the company's paper segment, operating income of $141 million in 1997
declined substantially from $290 million in 1996 and $1.3 billion in 1995.
Compared to both prior years, lower average prices more than offset lower
manufacturing costs and increased shipments. Total paper, packaging and pulp
shipments of approximately 6.3 million tons in 1997 increased from approximately
6 million tons in 1996 and 1995. Fourth quarter 1997 operating income of $95
million compared with $21 million in the fourth quarter of 1996 and $72 million
in the third quarter of 1997.


                                       32
<PAGE>
 
In general, pulp and paper prices tend to reflect overall economic trends as
well as industry production levels. The decline in pulp and paper prices that
began in the fourth quarter of 1995 continued through the first quarter of 1997.
Average prices for all of the company's paper grades were lower in 1997 than in
both prior years. However, prices for many of the company's key pulp and paper
grades gradually improved over the last nine months of 1997, reflecting strong
demand attributable to economic growth in North America and Europe. In addition,
on the supply side, there were relatively few capacity additions in the
industry, although domestic pulp and paper manufacturers increased production
from existing facilities. This somewhat improved demand/supply relationship
contributed to progressively higher earnings in the paper segment during the
last three quarters of 1997. In late 1997 and early 1998, the continued weak
economy of Japan and the recent economic crisis in certain Asian countries
resulted in a moderation in paper prices and a decline in prices for pulp.
 
Operating income for the domestic free sheet business improved from 1996 but
declined substantially from 1995. The average price for domestic uncoated free
sheet papers, the principal product of the free sheet business, was $657 per ton
in 1997, compared to $708 per ton in 1996 and $960 per ton in 1995. The average
price for coated free sheet papers was $850 per ton in 1997, compared to $893
per ton in 1996 and $1,038 per ton in 1995. Shipments of all grades of 2,240,000
tons increased slightly from the two prior years. The improvement in operating
income from 1996 was due to lower manufacturing costs and slightly higher
shipments, which more than offset the lower prices. The decline from 1995 was
attributable to the sharply lower prices. The operating income for the fourth
quarter of 1997 represented a significant improvement from the operating loss
for the fourth quarter of 1996 and an increase from the operating income for the
third quarter of 1997. The improvement from the fourth quarter of 1996 was
mainly due to higher prices for coated and uncoated free sheet papers and lower
manufacturing costs. The improvement from the prior quarter was principally due
to higher prices for uncoated free sheet papers. A maintenance outage is
scheduled at the company's Pensacola, Florida mill in the first quarter of 1998.
 
Operating income at the company's Brazilian subsidiary, Champion Papel e
Celulose Ltda. ("Champion Papel"), declined from 1996 and was down significantly
from 1995. The decline from both prior years was primarily due to lower domestic
and export prices for uncoated free sheet papers, which more than offset lower
manufacturing costs and slightly higher shipments. The overall average price for
uncoated free sheet papers was $722 per ton in 1997, compared to $838 per ton in
1996 and $1,028 per ton in 1995. Shipments of uncoated free sheet papers of
392,000 tons increased slightly from both 1996 and 1995. Fourth quarter
operating income declined from the fourth quarter of 1996, but improved from the
third quarter of 1997. The decline from the fourth quarter of 1996 was
principally due to lower domestic and export prices for uncoated free sheet
papers, which more than offset lower manufacturing costs. The improvement from
last quarter was primarily due to lower manufacturing costs.
 
Operating income for the groundwood business declined substantially from 1996
and 1995. The decline from both prior years was mainly due to lower prices for
coated and uncoated groundwood papers and newsprint, which more than offset
lower manufacturing costs and higher shipments. The average price for coated
groundwood papers was $835 per ton in 1997, compared to $963 per ton in 1996 and
$1,047 per ton in 1995. Prices for uncoated groundwood papers were also lower
than in both prior years. The average price for newsprint was $491 per ton in
1997, compared to $564 per ton in 1996 and $618 per ton in 1995. Shipments of
all groundwood and newsprint grades were 1,793,000 tons in 1997, compared to
1,659,000 tons in 1996 and 1,747,000 tons in 1995. Fourth quarter 1997 operating
income improved significantly from the fourth quarter of 1996 and was
approximately even with the third quarter of 1997. The improvement from the
fourth quarter of 1996 was mainly due to higher prices for all grades and lower
manufacturing costs. Early in 1998, a price increase for coated groundwood
papers was implemented.


                                       33
<PAGE>
 
The operating loss for the specialty business represented a substantial decline
from the operating income of both 1996 and 1995. The decline from both prior
years was primarily due to lower average prices for all grades, which more than
offset lower manufacturing costs and higher overall shipments. Shipments of all
grades were 887,000 tons in 1997, compared to 843,000 tons in 1996 and 870,000
tons in 1995. Fourth quarter 1997 operating income was approximately even with
the fourth quarter of 1996 but improved from an operating loss in the third
quarter of 1997. The improvement from the prior quarter was mainly due to higher
prices for coated and uncoated groundwood papers and linerboard, which more than
offset higher purchased pulp and energy costs. In early 1998, the Deferiet, New
York mill had a seven-day, weather-related outage.
 
Operating income for the U.S. and Canadian market pulp operations improved from
1996 but declined significantly from 1995. The improvement from 1996 was
principally due to lower manufacturing costs, higher prices for northern
hardwood pulp and higher overall shipments. The decline from 1995 was due to
significantly lower prices for all grades, which more than offset higher
shipments and lower manufacturing costs. The average price for Canadian softwood
pulp was (U.S.) $419 per ton in 1997, compared to $422 per ton in 1996 and $693
per ton in 1995. The average price for northern hardwood pulp improved slightly
from 1996 but declined significantly from 1995. Shipments of all pulp grades
were 948,000 tons in 1997, compared to 894,000 tons in 1996 and 797,000 tons in
1995. Operating income in the fourth quarter of 1997 improved from the fourth
quarter of 1996 but declined from the third quarter of 1997. The improvement
from the fourth quarter of 1996 was principally due to higher prices for all
grades, lower manufacturing costs and higher shipments. The decline from the
third quarter of 1997 was mainly due to lower prices for northern hardwood and
softwood pulp grades and slightly higher manufacturing costs. In early 1998,
Weldwood's Hinton, Alberta pulp mill took an 11-day outage due to market
conditions. Since the company is a net seller of pulp, overall profits are
adversely affected by lower pulp prices; however, the company's Bucksport,
Canton, Deferiet, Hamilton and Sartell mills purchase pulp from outside
suppliers and benefit from lower pulp prices.
 
 
Wood Products Segment
 
For the company's wood products segment, which includes the wood-related
operations of Weldwood and Champion Papel, income from operations of $106
million in 1997 declined from $126 million in 1996 and $138 million in 1995.
Fourth quarter 1997 operating income of $13 million declined from $36 million in
the fourth quarter of 1996 and $25 million in the third quarter of 1997.
 
The decline from both prior years primarily reflected lower results for
Weldwood's wood products operations. Lower results at Weldwood were attributable
to higher purchased wood costs, the start-up of a new sawmill and rebuilt
plywood plant and reduced plywood shipments due to the sale and the closure of
various plywood plants.
 
For U.S. and Canadian operations overall, the average price for plywood was 2%
higher than in 1996 and 6% lower than in 1995. The average price for lumber
increased 5% from 1996 and 26% from 1995.
 
The decline in earnings from the fourth quarter of 1996 and the third quarter of
1997 was mainly due to lower lumber prices in the United States and Canada.
 
Foreign Operations
 
The company's major foreign operations, which are discussed above under their
respective segment headings, are in Brazil and Canada. Net sales to unaffiliated
customers for Champion Papel and Weldwood for 1997 were (U.S.) $327 million and
(U.S.) $556 million, respectively, accounting for 5.7% and 9.7%, respectively,
of consolidated net


                                       34
<PAGE>
 
sales of the company. Excluding the 1997 restructuring provision, pre-tax income
for Champion Papel and Weldwood for 1997 was (U.S.) $59 million and (U.S.) $45
million, respectively, which was more than offset by the pre-tax loss of the
company's domestic operations. Excluding the 1997 restructuring provision, net
income for 1997 for Champion Papel and Weldwood was (U.S.) $61 million and
(U.S.) $28 million, respectively, which was substantially offset by the
company's domestic loss. Substantially all of the restructuring provision was
applicable to the company's domestic operations. Identifiable assets held by
Champion Papel and Weldwood at December 31, 1997 were $1.01 billion and $818
million, respectively, accounting for 11.1% and 9.0%, respectively, of
consolidated assets of the company.
 
The company recently increased its presence in Brazil through the acquisition on
January 26, 1998 of Industria de Papel Arapoti S.A. ("Inpacel") and its forestry
affiliate, as discussed below. With this acquisition and the divestiture in 1998
of certain non-strategic assets in the United States, foreign operations overall
and Brazilian operations in particular will account for a larger percentage of
the company's consolidated sales and assets.
 
The company believes that the risks associated with its foreign operations are
somewhat greater than those associated with its domestic operations. Weldwood
and Champion Papel export substantial portions of their products and, as a
result, are affected by currency fluctuations. In addition, Champion Papel is
subject to Brazil's continuing inflation, which has moderated substantially as
the result of various governmental actions in the last four years. Tight
monetary and fiscal policies, including high interest rates, imposed in recent
years to control Brazil's high inflation rate, remain in effect. In addition, in
late 1997 the government of Brazil implemented stringent economic austerity
measures, including increases in certain taxes and interest rates and
limitations on government spending, to support the Brazilian currency in light
of the recent economic crisis in certain Asian countries. The company is not yet
in a position to determine whether these measures will adversely affect results
at its Brazilian operations.
 
Exports by the company, including by its Brazilian and Canadian operations, to
the Asian countries that currently are experiencing economic turmoil are not
material. However, the company would be adversely affected if pulp and paper
producers significantly shift sales from those Asian markets to markets in which
the company has a more significant presence, such as North America, South
America and, to a lesser extent, Europe.
 
Labor Contracts
 
The company has labor agreements, which expire between 1998 and 2002, at ten of
its eleven domestic paper mills. The only such mills whose labor agreements
expire in 1998 are the pulp and paper mills at Canton, North Carolina and
Deferiet, New York, which are among the facilities to be divested by the
company. The Quinnesec, Michigan mill is a non-union facility.
 
The labor agreement that covers the paper industry in Brazil, including Champion
Papel, is renegotiated each year.
 
New labor agreements are in effect at most of Weldwood's wood products plants.
Efforts to reach new labor agreements continue at the Hinton, Alberta pulp mill
and wood products plant, and the joint venture pulp mill at Quesnel, British
Columbia, which are presently operating under the terms of their expired
contracts.


                                       35
<PAGE>
 
Financial Condition
 
General
 
The company's current ratio was 1.4 to 1 at year-end 1997 and at year-end 1996,
as compared to 1.5 to 1 at year-end 1995. Total debt to total capitalization was
45% at year-end 1997, compared to 39% at year-end 1996 and 38% at year-end 1995.
The increase in 1997 was principally attributable to the restructuring charge
and, to a lesser extent, a financing in December 1997, a portion of the proceeds
of which will be used to repay debt as it matures in early 1998.
 
Significant Balance Sheet Line Item Changes
 
The provision for restructuring in 1997 was the main reason for (i) the
decreases from December 31, 1996 in property, plant and equipment - net; other
assets and deferred charges; the deferred income tax liability; and retained
earnings; and (ii) the increases from December 31, 1996 in the deferred income
tax asset; accrued liabilities; and other liabilities.
 
Timber and timberlands - net increased by $32 million from December 31, 1996
primarily due to the acquisition from Fort James Corporation of forest lands in
central Maine. Short-term borrowings decreased by $56 million principally due to
the timing of payments. The cumulative translation adjustment increased by $24
million mainly due to the effect of the decline in the value of the Canadian
dollar on the valuation of the company's Canadian net assets. For a discussion
of changes in long-term debt (including current installments) and cash and cash
equivalents, see below.
 
Cash Flows Statement - General
 
1997
----
In 1997, the company's net cash provided by operating activities, asset sales
and financing activities exceeded the requirements of its investing activities
(principally capital expenditures) and financing activities (principally debt
payments and cash dividends). The excess was used to increase cash and cash
equivalents by $100 million to a total of $275 million, $174 million of which
was held by the company's Canadian and Brazilian subsidiaries. In 1997, net
borrowings generated cash proceeds of $89 million; long-term debt (including
current installments) and short-term borrowings in the aggregate increased by
$116 million. The approximately equal increases in cash and cash equivalents and
debt was attributable largely to a financing in December 1997, a portion of the
proceeds of which will be used to repay debt as it matures in early 1998.
 
1996
----
In 1996, the company's net cash provided by operating activities and asset sales
was not sufficient to meet the requirements of its investing activities
(principally capital expenditures and the acquisitions of Lake Superior Land
Company and Amapa Florestal e Celulose ("AMCEL")) and its financing activities
(principally debt payments, cash dividends, the purchase of shares of the
company's common stock and the Weldwood share purchase). The difference was
financed through borrowings and the use of cash and cash equivalents. In 1996,
net borrowings generated cash proceeds of $189 million; long-term debt
(including current installments) increased by $260 million, including a $44
million mortgage loan of Lake Superior Land Company and $35 million of debt from
AMCEL which were outstanding at the time of their respective acquisitions. Cash
and cash equivalents decreased by $142 million in 1996 to a total of $175
million. A substantial portion of the company's cash deficit in 1996 was
attributable to the Weldwood share purchase and the acquisitions of Lake
Superior Land Company and AMCEL.


                                       36
<PAGE>
 
1995
----
In 1995, the company's net cash provided by operation activities and assets
sales substantially exceeded the requirements of its investing activities
(principally capital expenditures). The excess was used primarily to pay
dividends, to pay a portion of the company's long-term debt (including current
installments), to increase cash and cash equivalents, and to purchase shares of
the company's common stock. In 1995, long-term debt (including current
installments) declined by $292 million; a substantial portion of this reduction
was effected through the conversion of virtually all $149,893,000 of the
company's 6 1/2% Convertible Subordinated Debentures into an aggregate of
4,309,070 shares of common stock rather than through the use of cash. Cash and
cash equivalents increased by $226 million.
 
Cash Flows Statement - Operating Activities
 
Net cash provided by operating activities of $485 million increased from $438
million in 1996 but decreased from $1.5 billion in 1995. The increase from 1996
was mainly due to lower income tax payments and a decrease in pension
contributions and inventories, which more than offset lower earnings and an
increase in receivables. The decrease from 1995 was primarily due to lower
earnings, deferred income taxes and accounts payable and accrued liabilities,
which more than offset lower income tax payments, a decrease in inventories and
a smaller increase in receivables.
 
Cash Flows Statement  - Investing Activities
 
Net cash used in investing activities of $465 million decreased from $554
million in 1996 and $551 million in 1995. The decrease from 1996 was primarily
due to lower capital expenditures and asset acquisitions, which more than offset
lower proceeds from the redemptions of investments. The decrease from 1995 was
mainly due to lower capital expenditures and lower purchases of investments,
which more than offset lower net proceeds from the sale of assets.
 
In 1997, the company purchased from Fort James Corporation 140,000 acres of
forest lands in central Maine as well as a stud mill in Passadumkeag, Maine for
$46 million. In 1996, the company acquired Lake Superior Land Company for $76
million (as well as an outstanding $44 million mortgage loan) and AMCEL for $60
million (as well as $35 million of outstanding debt). Lake Superior Land Company
owns 290,000 acres of forest lands in Michigan and Wisconsin. AMCEL is a
Brazilian company that owns 438,000 acres of land and a chip mill in the State
of Amapa, Brazil. In 1997, the company received $43 million of proceeds from
sales of timberlands and fixed assets. In 1996, the company received $101
million of proceeds from redemptions of investments and $40 million from sales
of timberlands and fixed assets. In 1995, Weldwood received net proceeds of
(U.S.) $175 million from the sale of its coastal British Columbia timberlands
and wood operations, and the company purchased investments for $98 million.
 
On January 26, 1998, the company's Brazilian subsidiary acquired Inpacel and its
forestry affiliate for $75 million. Inpacel has outstanding debt of $277
million. Inpacel and its affiliate are Brazilian companies that own a pulp and
coated groundwood papers mill with an annual capacity of 160,000 tons of pulp
and 178,000 tons of coated groundwood papers, a sawmill and 124,000 acres of
timberlands, all of which is located in the State of Parana, Brazil.
 
Cash Flows Statement  - Financing Activities
 
Net cash provided by financing activities of $80 million increased from net cash
used in financing activities of $26 million in 1996 and $676 million in 1995.
The increase from 1996 mainly reflected the purchase of the Weldwood shares in
1996, which more than offset larger net borrowings in 1996. The increase from
1995 was principally due to the purchase of shares of common stock in 1995 and
the reduction in long-term debt (including current installments) in 1995.
 

                                       37
<PAGE>
 
At December 31, 1997, the company had $345 million of current maturities of 
long-term debt and short-term obligations outstanding, all of which is
classified as long-term debt, down from $7 million at year-end 1996 and $58
million at year-end 1995. At December 31, 1997 and December 31, 1996, no notes
were outstanding under the company's U.S. bank lines of credit, compared to $40
million at year-end 1995. Domestically, at December 31, 1997, $345 million of
the company's unused bank lines of credit of $1.19 billion supported the
classification of current maturities of long-term debt and short-term
obligations as long-term debt. At December 31, 1997, Weldwood had unused bank
lines of credit of approximately (U.S.) $126 million.
 
During 1997, the company (i) issued $100 million of debentures which are due in
2027, (ii) issued $100 million of notes which are redeemable at the option of
the holders in 2007 and are due in 2037 and (iii) borrowed $7 million through
the issuance of long-term tax-exempt bonds.
 
The annual principal payment requirements under the terms of all long-term debt
agreements for the years 1998 through 2002 are $489 million, $258 million, $206
million, $206 million and $6 million, respectively.
 
Capital Expenditures
 
Capital expenditures, including contract timber, reforestation and capitalized
interest, were $449 million in 1997 compared to $582 million in 1996 and $624
million in 1995. The company presently anticipates that capital expenditures
will be approximately $500 million in 1998, all of which is expected to be
financed through internally generated funds and the use of cash and cash
equivalents.
 
At Quesnel, British Columbia, the company completed construction of a lumber
mill and the modernization of the existing plywood plant in 1997. The total
project cost was approximately (U.S.) $83 million.
 
In 1997, the company began a project to modernize the No. 5 paper machine at the
Bucksport, Maine mill. The project is expected to be completed in 1998 at a cost
of approximately $40 million, of which approximately $18 million had been
expended as of December 31, 1997.
 
In 1997, the company began an alkaline-conversion project and various
environmental improvement projects at the Courtland, Alabama mill. These
projects are expected to be completed in 2000 at a total cost of approximately
$121 million, of which approximately $76 million will be spent in 1998.
 
In addition to the pine and eucalyptus plantations and chip mill acquired
through the purchase of AMCEL in 1996, the company plans to establish eucalyptus
and pine plantations and a new chipping operation in the State of Amapa, Brazil,
in the next few years. The company also has under consideration the possible
construction of a pulp and paper mill at Tres Lagoas, State of Mato Grosso do
Sul, Brazil, in the next several years. Approximately $27 million of the
anticipated capital spending in 1998 will be devoted to these projects.
 
In 1997, the company canceled the $127 million recycling project at the
Courtland, Alabama mill.
 
The Environment
 
Environmental Capital Expenditures
 
The company is subject to various federal, state and local laws and regulations
relating to the discharge of materials into the environment and to the disposal
of solid waste. These laws and regulations require the company to obtain permits
and licenses from appropriate governmental authorities with respect to its
facilities and to operate its facilities in compliance with such permits and
licenses.
 

                                       38
<PAGE>
 
In order to meet the standards established by the various federal, state and
local environmental laws and regulations to which the company is subject, the
company is required to invest substantial amounts in pollution abatement
facilities. During the period from 1993 through 1997, the company spent
approximately $229 million in its domestic operations to purchase and install
systems to control the discharge of pollutants into air and water and to dispose
of solid wastes. In addition, from 1990 through 1994, the company spent
approximately $300 million on an environmental improvement and modernization
project at the Canton, North Carolina mill. In 1997, capital expenditures
incurred in the United States for environmental purposes were $23 million. In
view of changing environmental laws and regulations and their interpretation, as
well as the uncertainties and variables inherent in business planning, it is not
possible for the company to predict with certainty the amount of capital
expenditures to be incurred for environmental purposes in the future. However,
the company estimates that capital expenditures for air and water pollution
control systems and solid waste disposal systems in the United States will be
approximately $63 million in 1998 and $25 million in 1999. In carrying forward
its environmental program, the company will commit additional amounts for
environmental purposes in years subsequent to 1999. Preliminary estimates
indicate that for the period from 2000 through 2002 capital expenditures for air
and water pollution control facilities and solid waste disposal facilities in
the United States will aggregate approximately $21 million. The environmental
capital expenditures described in this paragraph are included in the respective
past and estimated 1998 capital expenditure amounts set forth above under
"Capital Expenditures."
 
As previously reported, the company is evaluating relocating the point of
discharge for its Pensacola, Florida mill's effluent due to potential
limitations on the assimilative capacity of the existing receiving body of
water. The results of the study are expected to be submitted to the Florida
Department of Environmental Protection by May 1998, and a decision on a possible
new point of discharge will then be made. The cost of this potential project is
not included in the capital expenditure information set forth above under
"Capital Expenditures" or set forth above in this section.
 
Although some pollution control and solid waste disposal facilities produce
improvements in operating efficiency, most increase product costs without
enhancing capacity or operating efficiency. However, since other paper and
forest products companies also are subject to environmental laws and
regulations, the company does not believe that compliance with such laws and
regulations will have a material adverse effect on its competitive position.
 
New EPA Air and Water Regulations
 
In 1997, the United States Environmental Protection Agency (the "EPA") adopted
regulations, known as the "Cluster Rule", pursuant to the federal Clean Air Act
Amendments of 1990 and the federal Clean Water Act. Compliance is required as
early as 2000 for certain provisions and as late as 2004 for other provisions of
the Cluster Rule. Further regulations are expected to be proposed in the future.
Compliance with such further regulations is expected to be required within three
years after each becomes final.
 
As previously reported, trace amounts of dioxin were found in the pulp, sludge
and effluent at some bleached kraft mills in the United States and Canada,
including certain of the company's mills. The water-related provisions of the
Cluster Rule are based upon the substitution of chlorine dioxide for elemental
chlorine, which reduces the potential for the formation of dioxin in the pulp-
bleaching process. This technology already has been installed at most, and by
the end of 2000 will be in place at all, of the company's fully bleached kraft
mills in the United States.
 
The company presently expects that it will incur capital expenditures to meet
the requirements of the Cluster Rule and state air toxics regulations,
additional to those set forth above under "Capital Expenditures" and
"Environmental Capital Expenditures," in the range of $20 million to $40 million
over the period of approximately 1998 through 2004.
 

                                       39
<PAGE>
 
Great Lakes Initiative
 
The company may incur capital expenditures, additional to those set forth above
under "Capital Expenditures" and "Environmental Capital Expenditures," in order
to meet the requirements of the Great Lakes Water Quality Agreement of 1978 and
the Great Lakes Critical Programs Act of 1990. Pursuant thereto, in March 1995,
the EPA issued guidance to the states regarding water quality standards for the
waters of the Great Lakes and their tributaries. The company is awaiting the
issuance of implementing regulations by the environmental agencies of the
affected states in order to determine the extent of any additional costs and the
period over which they will be incurred. As a result, the company is not yet in
a position to provide a meaningful estimate of any such costs.

Hazardous Substance Cleanup
 
The company has been designated as a potentially responsible party by the EPA
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, and by certain states under applicable state laws, with respect to the
cleanup of hazardous substances at a number of sites. In the case of many of
these sites, other potentially responsible parties also have been so designated.
In addition, the company and, in certain instances, other responsible parties
have entered into agreements with the EPA and certain states regarding the
cleanup of hazardous substances at various other locations. Also, the company is
involved in the remediation of certain other sites which are not the subject of
investigation by federal or state agencies. The cost of all such cleanups is not
capitalized and, accordingly, is not included in the capital expenditure
information set forth above under "Capital Expenditures" and "Environmental
Capital Expenditures."
 
The company cannot predict with certainty the total cost of such cleanups, the
company's share of the total cost of multiparty cleanups or the extent to which
contribution will be available from other parties, or the amount of time
necessary to accomplish such cleanups. However, based upon, among other things,
its previous experience with respect to the cleanup of hazardous substances as
well as the regular detailed review of known hazardous waste sites by the
company, the company has developed an estimate of its probable cleanup
liabilities. This estimate includes remediation and legal costs with respect to
properties presently or formerly owned or operated by the company or its
predecessors as well as properties, such as municipal or county landfills, owned
and operated by third parties to which the company or its contractor sent waste
material. The company has accrued $73 million at December 31, 1997, on a non-
discounted basis, which represents its current estimate of the probable cleanup
liabilities at all known sites. This accrual does not reflect any possible
insurance recoveries, which are not expected to be significant, but does reflect
a reasonable estimate of cost-sharing at multiparty sites.
 
Although the company's probable liabilities have been accrued for currently,
hazardous substance cleanup expenditures generally are paid over an extended
period of time, in some cases possibly more than 30 years. Annual cleanup
expenditures during the period from 1995 through 1997 were approximately $5
million, $4 million and $3 million, respectively.
 
Wastewater Discharge Permit for Canton, North Carolina Mill
 
As previously reported, in late 1996, the North Carolina Department of
Environment, Health and Natural Resources renewed the NPDES wastewater discharge
permit for the company's Canton, North Carolina mill. The permit included a
revised variance from the North Carolina water quality standard for color in the
Pigeon River. In early 1997, the State of Tennessee and various municipalities
and environmental groups in Tennessee filed an administrative appeal of the
permit, principally on the grounds that the color variance failed to satisfy
Tennessee's water quality standard for the portion of the Pigeon River in
Tennessee.
 
In December 1997, the permit was modified to the satisfaction of the company,
the EPA, the State of North Carolina, the State of Tennessee and the other
parties to the appeal, which withdrew their administrative appeal of the permit.
 
                                      40
<PAGE>
 
Other
 
Year 2000 Computer Issue
 
The company utilizes computer software and related technologies throughout its
businesses that will be affected by the date change to the year 2000. In early
1996, the company organized a Year 2000 project team to assess the impact of the
Year 2000 issue on its operations and to develop plans to address the issue.
 
The company is in the process of modifying or replacing portions of its software
and related technologies so that they will continue to function properly after
December 31, 1999. The company expects that this project will be completed
before the end of 1999 at a cost of approximately $10 million, of which
approximately $3 million had been incurred as of December 31, 1997. All
maintenance and modification costs are being expensed as incurred.
 
In addition, the Year 2000 issue will impact the company's customers and
suppliers. The company is in the process of discussing with certain of its major
customers and suppliers their own remediation plans with respect to the Year
2000 issue. These customers and suppliers have indicated that they expect to
successfully address the issue in timely fashion. However, it is not possible
for the company to predict with certainty whether its customers and suppliers
will experience any remediation problems and, if so, the materiality of the
impact of such problems on the company.
 
Change in Accounting for Brazilian Operations
 
Accounting standards require that a country whose three-year cumulative
inflation rate falls below 100% be categorized as a non-highly-inflationary
economy. During 1997, Brazil's three-year cumulative inflation rate fell below
100%. Effective January 1, 1998, the company will begin accounting for its
Brazilian operations as non-highly inflationary. In the past, the U.S. dollar
was used as the functional currency for Brazilian operations. As the result of
the accounting change, effective January 1, 1998, the Brazilian currency, the
Real, will be used as the functional currency, and the recorded net book value
of fixed assets such as property, plant and equipment, and timber and
timberlands, will be converted to U.S. dollars based on current exchange rates.
 
As a result of this accounting change, effective January 1, 1998, the company
will record a one-time balance sheet adjustment, increasing its deferred tax
liability by approximately $50 million with a corresponding increase in
cumulative translation adjustment in shareholders' equity.
 
The Brazilian currency has historically declined in value relative to the U.S.
dollar. If this trend continues, the recorded net book value of the company's
fixed assets in Brazil will decrease in future years to reflect this decline in
value, offset by an increase in the cumulative translation adjustment balance.
The company does not expect a material change in results of operations as a
result of this accounting change, although depreciation and depletion expense
will decrease over time if the recorded net book value of fixed assets declines
due to a decline in value of the Brazilian currency.
 
Financial Market Risk
 
The company's financial market risk arises from fluctuations in interest rates
and foreign currencies.
 
Most of the company's debt obligations at year-end 1997 were at fixed interest
rates. Consequently, a 10% change in market interest rates would not have a
material effect on the company's 1998 pre-tax earnings or cash flows.
 

                                       41
<PAGE>
 
At December 31, 1997, the company had forward exchange contracts covering
approximately $72 million of investments and accounts receivable, the deferred
gains and losses on which were not material. The company has no material
sensitivity to changes in foreign currency exchange rates on its derivative
financial instrument position. The company does not hold financial instruments
for trading purposes.
 
Asset Replacement Value
 
The industry in which the company operates is capital intensive. Due to
inflation, the company's property, plant and equipment, and timber and
timberlands, could not be replaced for the historical cost value at which they
are reflected in the company's financial statements. On a current cost basis,
depreciation expense and cost of timber harvested would be greater than reported
on a historical cost basis.
 

                                       42
<PAGE>
 
<TABLE> 
<CAPTION>    
   Champion International Corporation and Subsidiaries  
--------------------------------------------------------------------------------------------------------------------
   Eleven-Year Selected Financial Data      
   (in millions, except per share amounts and ratio data)           1997            1996          1995         1994   
---------------------------------------------------------------  --------        --------      --------     -------- 
<S>                                                              <C>             <C>           <C>          <C> 
 Earnings:         
      Net Sales                                                  $ 5,736         $ 5,880       $ 6,972      $ 5,318   
      Depreciation expense and cost of timber harvested              518             502           471          459   
      Gross profit                                                   583             746         1,816          565   
      Provision for restructuring                                    891             ---           ---          ---   
      Interest and debt expense                                      240             222           226          235   
      Other (income) expense - net                                   (44)            (44)          (33)         (57)  
      Income (loss) before income taxes, extraordinary item                                                           
         and cumulative effect of accounting changes                (897)            205         1,237           88   
      Income taxes (benefit)                                        (348)             64           465           25   
      Income (loss) before extraordinary item and cumulative                                                          
         effect of accounting changes                               (549)            141           772           63   
      Extraordinary item, net of taxes                               ---             ---           ---          ---
      Cumulative effect of accounting changes, net of taxes          ---             ---           ---          ---
      Net income (loss)                                             (549)            141           772           63   
                                                                                                                      
 Per Common Share (a):
      Basic earnings (loss)                                      $ (5.72)        $  1.48       $  8.01      $  0.38   
      Diluted earnings (loss)                                      (5.72)           1.48          7.67         0.38   
      Cash dividends declared                                       0.20            0.20          0.20         0.20   
      Cash dividends paid                                           0.20            0.20          0.20         0.20   
      Shareholders' equity                                         33.39           39.30         38.12        31.25   
                                                                                                                      
 Financial Position:
      Current assets                                             $ 1,448         $ 1,316       $ 1,583      $ 1,179   
      Timber and timberlands - net                                 2,397           2,365         2,008        1,847   
      Property, plant and equipment - net                          4,800           5,653         5,514        5,603   
      Other assets and deferred charges                              466             486           438          335   
                                                                 --------        --------      --------     --------
         Total assets                                            $ 9,111         $ 9,820       $ 9,543      $ 8,964   
                                                                 ========        ========      ========     ======== 
      Current liabilities                                        $ 1,020         $   944       $ 1,080      $ 1,034   
      Long-term debt                                               3,194           3,085         2,828        2,889   
      Other liabilities                                              693             671           769          740   
      Deferred income taxes                                          994           1,364         1,219        1,040   
      $92.50 convertible preference stock                            ---             ---           ---          300   
      Shareholders' equity                                         3,210           3,756         3,647        2,961   
                                                                 --------        --------      --------     -------- 
         Total liabilities and shareholders' equity              $ 9,111         $ 9,820       $ 9,543      $ 8,964   
                                                                 ========        ========      ========     ========
 Other Statistics:
      Expenditures for property, plant and equipment             $   321         $   461       $   368      $   225   
      Timber and timberlands expenditures                        $   128         $   121       $   257      $   104   
      U.S. timber acreage owned or controlled                        5.4             5.3           5.3          5.1   
      Common shares outstanding at year-end                           96              96            96           93   
      Dividends declared on preference shares                    $   ---         $   ---       $    13      $    28         
      Dividends declared on common shares                        $    19         $    19       $    19      $    19   
      Current ratio                                                  1.4             1.4           1.5          1.1   
      Ratio of total debt to total capitalization                  .45:1           .39:1         .38:1        .43:1   
      Return on average shareholders' equity and $92.50                                                               
         convertible preference stock before extraordinary                                                            
         item and cumulative effect of accounting changes          (15.7)% (b)       3.8%         22.6%         2.0 % 
</TABLE> 
   
 (a)  Basic and diluted earnings (loss) per share for 1997 includes the
      provision for restructuring of ($5.76).

      Basic and diluted earnings (loss) per share for 1993 includes the
      cumulative effect of an accounting change of ($.08) and an extraordinary
      item for early retirement of debt of ($.15).
   
      Basic and diluted earnings (loss) per share for 1992 includes the
      cumulative effect of accounting changes of ($4.90).
   
 (b)  Includes the 1997 provision for restructuring of $891 million ($552
      million after-tax).
   

                                       43
<PAGE>
 
<TABLE> 
<CAPTION> 
-------------------------------------------------------------------------------------

        1993        1992         1991        1990        1989        1988        1987  
     --------    --------     --------    --------    --------    --------    -------- 
<S>  <C>         <C>          <C>         <C>         <C>         <C>         <C> 
     $ 5,069     $ 4,926      $ 4,786     $ 5,090     $ 5,163     $ 5,129     $ 4,615         
         443         411          342         323         279         260         252         
         359         362          454         800       1,048       1,141         872         
         ---         ---          ---         ---         ---         ---         ---
         224         206          211         156         136         161         177         
           7        (143)        (110)        (85)        (93)        (30)       (198)        
                                                                                              
        (165)         10           78         420         726         730         619         
         (31)         (4)          38         197         294         274         237         
                                                                                              
        (134)         14           40         223         432         456         382         
         (14)        ---          ---         ---         ---         ---         ---
          (8)       (454)         ---         ---         ----        ----        ---
        (156)       (440)          40         223         432         456         382         
                                                                                              
                                                                                              
     $ (1.98)    $ (5.05)     $  0.14     $  2.11     $  4.56     $  4.80     $  4.03         
       (1.98)      (5.05)        0.14        2.08        4.43        4.65        3.92         
        0.20        0.20         0.20        1.10        1.10        0.95        0.72         
        0.20        0.20         0.43        1.10        1.08        0.90        0.65         
       31.23       33.53        39.02       39.10       38.12       35.06       30.82         
                                                                                              
                                                                                              
     $ 1,114     $ 1,142      $ 1,162     $ 1,104     $ 1,074     $   986     $   896         
       1,839       2,012        1,666       1,645       1,613       1,581       1,554         
       5,802       5,763        5,386       5,117       4,404       3,702       3,340         
         388         464          442         485         440         431         389         
     --------    --------     --------    --------    --------    --------    -------- 
     $ 9,143     $ 9,381      $ 8,656     $ 8,351     $ 7,531     $ 6,700     $ 6,179         
     ========    ========     ========    ========    ========    ========    ======== 
     $   772     $   786      $   794     $   801     $   804     $   699     $   657         
       3,316       3,291        2,978       2,689       2,025       1,909       1,864         
         728         686          235         231         208         273         307         
       1,077       1,159          678         651         605         474         415         
         300         300          300         300         300         ---         ---
       2,950       3,159        3,671       3,679       3,589       3,345       2,936         
     --------    --------     --------    --------    --------    --------    --------
     $ 9,143     $ 9,381      $ 8,656     $ 8,351     $ 7,531     $ 6,700     $ 6,179         
     ========    ========     ========    ========    ========    ========    ========
                                                                                              
     $   476     $   623      $   604     $   959     $   916     $   585     $   340         
     $   130     $    95      $    58     $    88     $    78     $    88     $    62         
         5.1         6.0          6.2         6.4         6.4         6.4         6.5         
          93          93           93          93          93          95          95         
     $    28     $    28      $    28     $    28     $     2     $   ---     $   ---          
     $    19     $    19      $    19     $   102     $   104     $    91     $    69         
         1.4         1.5          1.5         1.4         1.3         1.4         1.4         
       .44:1       .42:1        .40:1       .38:1       .32:1       .34:1       .36:1         
                                                                                              
                                                                                              
        (4.0) %      0.4 %        1.0 %       5.6 %      12.2 %      14.5 %      13.8 %        
</TABLE> 

                                       44
<PAGE>
 
Common Stock
Prices and
Dividends Paid    Quarterly sales prices for the company's common stock as
                  reported on the New York Stock Exchange composite tape, and
                  quarterly dividends paid, in 1997 and 1996 were:
   
<TABLE> 
<CAPTION>                                                                      
--------------------------------------------------------------------------------

                              March 31      June 30     Sept. 30      Dec. 31
                            ----------    ---------   ----------    --------- 
<S>                         <C>           <C>         <C>           <C>   
1997
---
High                          $47 3/8       $55 7/16   $65 5/16       $66 1/2
Low                            41 3/8        42 1/4     55 1/4         43 1/16
Dividends Paid                    .05           .05         .05           .05
--------------------------------------------------------------------------------
   
                              March 31      June 30     Sept. 30      Dec. 31
                            ----------    ---------   ----------    ---------  
1996
High                          $48 3/8      $51 1/8      $48 1/8      $46 1/2
Low                            39           41 1/4       40 1/4       40 7/8
Dividends Paid                    .05          .05          .05          .05
--------------------------------------------------------------------------------
</TABLE> 

                                      45