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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



|                          |  |                
|------------------------- |  | ---------------
|For the Fiscal Year Ended |  | Commission File
|December 31, 2003         |  | Number 1-5313  

LOGO



Potlatch Corporation



|                       |  |                             
|---------------------- |  | ----------------------------
|A Delaware Corporation |  | (IRS Employer Identification
|                       |  | Number 82-0156045)          



601 West Riverside Ave., Suite
1100

Spokane, Washington 99201

Telephone (509)
835-1500



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



|                    |  |                                         
|------------------- |  | ----------------------------------------
|Title of each class |  | Name of each exchangeon which registered
|                    | 
|Common Stock        |  | New York Stock Exchange                 
|($1 par value)      |  | Pacific Exchange                        
|                    |  | Chicago Stock Exchange                  



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

Title of each class



None



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



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



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



The aggregate market value of the voting
stock held by non-affiliates of the registrant at June 30, 2003, was approximately $695.9 million, based on the closing price of $25.75, as reported on the New York Stock Exchange Composite Transactions.



The number of shares of common stock outstanding as of January 31, 2004: 28,956,554 shares of Common
Stock, par value of $1 per share.



Documents Incorporated by Reference



Portions of the definitive proxy statement for the 2004 annual meeting of
stockholders are incorporated by reference in Part III hereof.



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



Index to 2003 Form 10-K



|                                                         |  |                                                                                                |  |           
|-------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ----------
|                                                         |  |                                                                                                |  | PageNumber
|PART I                                                   |  |                                                                                               
|                                                         |  |                                                                                               
|ITEM 1.                                                  |  | Business                                                                                       |  | 2-7       
|                                                         |  |                                                                                               
|ITEM 2.                                                  |  | Properties                                                                                     |  | 8         
|                                                         |  |                                                                                               
|ITEM 3.                                                  |  | Legal Proceedings                                                                              |  | 9         
|                                                         |  |                                                                                               
|ITEM 4.                                                  |  | Submission of Matters to a Vote of Security Holders                                            |  | 9         
|                                                         | 
|Executive Officers of the Registrant                     |  | 9                                                                                             
|                                                         | 
|PART II                                                  |  |                                                                                               
|                                                         |  |                                                                                               
|ITEM 5.                                                  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 10        
|                                                         |  |                                                                                               
|ITEM 6.                                                  |  | Selected Financial Data                                                                        |  | 11        
|                                                         |  |                                                                                               
|ITEM 7.                                                  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 11        
|                                                         |  |                                                                                               
|ITEM 7A.                                                 |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 11        
|                                                         |  |                                                                                               
|ITEM 8.                                                  |  | Financial Statements and Supplementary Data                                                    |  | 11        
|                                                         |  |                                                                                               
|ITEM 9.                                                  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 11        
|                                                         |  |                                                                                               
|ITEM 9A.                                                 |  | Controls and Procedures                                                                        |  | 11        
|                                                         | 
|PART III                                                 |  |                                                                                               
|                                                         |  |                                                                                               
|ITEM 10.                                                 |  | Directors and Executive Officers of the Registrant                                             |  | 12        
|                                                         |  |                                                                                               
|ITEM 11.                                                 |  | Executive Compensation                                                                         |  | 12        
|                                                         |  |                                                                                               
|ITEM 12.                                                 |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 12        
|                                                         |  |                                                                                               
|ITEM 13.                                                 |  | Certain Relationships and Related Transactions                                                 |  | 13        
|                                                         |  |                                                                                               
|ITEM 14.                                                 |  | Principal Accounting Fees and Services                                                         |  | 13        
|                                                         | 
|PART IV                                                  |  |                                                                                               
|                                                         |  |                                                                                               
|ITEM 15.                                                 |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 14        
|                                                         | 
|SIGNATURES                                               |  | 15-16                                                                                         
|                                                         | 
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES |  | 17                                                                                            
|                                                         | 
|EXHIBIT INDEX                                            |  | 71-74                                                                                         



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##### Table of Contents

PART I



ITEM 1.    BUSINESS



General



Potlatch Corporation (herein referred to as the
company, us, we, and our), incorporated in 1903, is a vertically integrated and diversified forest products company. We own and manage approximately 1.5 million acres of timberlands and operate 15
manufacturing facilities. Our timberlands and all of our manufacturing facilities are located within the continental United States, primarily in Arkansas, Idaho and Minnesota. We are engaged principally in growing and harvesting timber and
converting wood fiber into two broad product lines: (a) commodity and specialty wood products; and (b) bleached pulp products. Our business is organized into four operating segments: Resource; Wood Products; Pulp and Paperboard; and Consumer
Products.



Information relating to the amounts of net sales, operating
income (loss) and identifiable assets attributable to each of our operating segments for 2001-2003 is included in Note 15 to the financial statements on pages 56-58 of this report.



Interested parties may access our periodic and current reports filed with the Securities and Exchange Commission, at no charge, by
visiting our website: www.potlatchcorp.com. In the menu choose: Corporate Governance, then choose: SEC Filings. Information on our website is not part of this report.



Cautionary Statement Regarding Forward-Looking Information



This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, including without limitation, statements regarding future revenues, costs, manufacturing output, capital expenditures and timber supply issues. These forward-looking statements reflect managements
current views regarding future events based on estimates and assumptions, and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially
from those expressed or implied by forward-looking statements contained in this report. Factors that could cause or contribute to such differences include, but are not limited to, changes in the United States and international economies; changes in
exchange rates between the U.S. dollar and other currencies; changes in the level of construction activity; changes in worldwide demand for our products; changes in worldwide production and production capacity in the forest products industry;
competitive pricing pressures for our products; unanticipated manufacturing disruptions; changes in general and industry-specific environmental laws and regulations; unforeseen environmental liabilities or expenditures; weather conditions; and
changes in raw material, energy and other costs. Other potential factors that could affect our financial position or results of operations include, but are not limited to, our ability to extend or replace our current bank credit facility.
Forward-looking statements contained in this report present managements views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of managements
views to reflect events or circumstances occurring after the date of this report.



Raw
Materials



The principal raw material used by our manufacturing
operations is wood fiber, which is obtained from our own timberlands and purchased on the open market. During 2003, we harvested approximately 783,000 tons of sawtimber from our Arkansas timberlands and purchased an additional 1,330,000 tons. Of the
2,113,000 tons of sawtimber harvested and purchased, we sold 390,000 tons to third parties during the year. We also harvested 603,000 tons of pulpwood from our Arkansas



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timberlands and purchased an additional 944,000 tons. We sold 492,000 tons of the harvested and purchased pulpwood to third parties. In 2003 we harvested approximately
1,214,000 tons of sawtimber from our Idaho timberlands and purchased an additional 414,000 tons. From these amounts we sold 488,000 tons to third parties. We also harvested 245,000 tons of pulpwood from our timberlands in Idaho and purchased 54,000
tons. Of the 299,000 tons of pulpwood harvested and purchased, we sold 59,000 tons to third parties. We harvested from our Minnesota timberlands in 2003 approximately 366,000 tons of both sawtimber and logs used in the manufacture of oriented strand
board (OSB). We also purchased an additional 2,312,000 tons of sawtimber and OSB logs and, from the total of 2,678,000 tons, sold 266,000 tons to third parties. We harvested 17,000 tons of pulpwood from our Minnesota timberlands, purchased 7,000
tons and sold all 24,000 tons to third parties.



In 2003, 500,022 tons of
the total 5,061,000 tons of purchased sawtimber, OSB logs and pulpwood were acquired directly from timberlands owned by federal, state and local governments. Wood fiber acquisitions from these sources occur in market transactions at current market
prices. We generally do not maintain long-term supply contracts for a significant volume of timber.



Our Resource segment supplies fiber from our timberlands, as well as some purchased fiber, to our manufacturing facilities. In addition, each of our manufacturing
segments procures fiber directly from third parties for use in their respective operations. Our Wood Products segment purchases a portion of its sawtimber and OSB log needs; our Pulp and Paperboard segment purchases a substantial amount of wood
chips and sawdust from third parties for use in the production of pulp; and the Consumer Products segment purchases several varieties of pulp, used in manufacturing tissue products in addition to pulp provided by our Pulp and Paperboard segment.



Timber from our lands, together with outside purchases, is presently
adequate to support our manufacturing operations. For more than a decade, the timber supply from federal lands has been increasingly curtailed, largely due to environmental pressures that are expected to continue for the foreseeable future. This
trend has had a favorable effect on earnings, but the long-term effect of this trend on earnings cannot be predicted.



The volume and value of timber that can be harvested from our lands may be affected by natural disasters such as fire, insect infestation, disease, ice storms, wind
storms, floods and other weather conditions and causes. We assume substantially all risk of loss from fire and other hazards on the standing timber we own, as do most owners of timber tracts in the United States.



Resource Segment



The Resource segment manages our 1.5 million acres of timberlands located in Arkansas, Idaho and Minnesota, and a 17,000 acre hybrid
poplar plantation in Oregon. The timberlands include a wide diversity of softwood and hardwood species. In Arkansas we own approximately 478,000 acres of timberlands. Primary species on these lands include southern yellow pine, red oak, white oak
and other hardwoods. We own approximately 668,000 acres of timberlands in the northern portion of the state of Idaho. Primary species on these lands include grand fir, inland red cedar, Douglas fir, ponderosa pine, western larch, Engelmann spruce
and western white pine. We own approximately 326,000 acres of timberlands in Minnesota, comprised primarily of aspen and red pine.



The segment sells wood fiber to our manufacturing facilities at market prices, as well as to third parties. We believe this maximizes our timber value and motivates
management of our manufacturing segments to optimize operating efficiencies and identify profitable markets in which to compete. The Resource segment also provides some fiber procurement services to our manufacturing facilities and uses its
expertise for regional timber and log acquisitions and sales.



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In addition to sales to our manufacturing facilities, which accounted for 62% of the segments net sales in
2003, the Resource segment sells wood fiber to a variety of paper and forest products companies situated within economically viable transportation distance of our timberlands. These customers range in size from small operators to multinational
corporations. The segment competes with owners of timberlands that operate in areas adjacent to or near our timberlands, ranging from private owners of small tracts of land to some of the largest timberland companies in the United States. The
segment competes principally on the basis of log quality, customer service and price.



We own 17,000 acres of agricultural land located in northeastern Oregon, which is being developed for the production of hybrid poplar. In 2001, these development efforts were re-directed from the production of an alternate
source of wood chips for pulping, with a harvest rotation of seven years, to the production of high-quality solid wood logs, with a harvest rotation of approximately 11 years. Stable production of high quality logs is expected to begin in 2006. We
intend to sell hardwood sawlogs from the plantation for conversion into plywood and lumber for furniture manufacturing and other non-structural uses. Our success in the project will depend upon our ability to market hybrid poplar as a
cost-competitive, viable alternative to other regional hardwood species, mainly red alder, which are currently used to supply the raw material needs for these activities. The supply of available red alder is declining due to increased environmental
restrictions in riparian areas throughout the Pacific Northwest. We believe our operation in Oregon and the positive characteristics of hybrid poplar logs produced there will enable us to compete effectively with producers of other hardwood species.



The amount of timber harvested in any year from company-owned lands
varies according to the requirements of sustainable forest management. By continually improving silvicultural techniques and other forest management practices, we have been able to increase the volume of wood fiber produced per acre from our
timberlands. Due to a low cost basis, on average, the cost of timber from company-owned land is substantially below the cost of timber obtained on the open market. We manage long-term harvest levels on our timberlands in a manner that assures
sustainable yields consistent with the Sustainable Forestry Initiative® (SFI)
Program. The SFI Program was initially developed by the American Forest & Paper Association (AF&PA) to establish principles and objectives for program participants committed to sustainable forestry and to provide measures by which the public
can monitor and evaluate this commitment. The SFI Program is currently managed by an independent board (The Sustainable Forestry Board) whose members include representatives of the forest products industry as well as representatives of diversified
stakeholders. As a member of AF&PA and a participant in the SFI Program, we have implemented the principles of the SFI Program: sustainable forestry, responsible practices, forest health and productivity, and protection of special sites. During
2002, an independent third party certified that management practices on our timberlands in Arkansas, Idaho and Minnesota met the requirements for SFI certification, as well as the International Organization on Standardization (ISO) 14001 standard
for environmental management systems. In 2003, our management practices on all 1.5 million acres of timberlands were re-certified under these programs. Our Boardman, Oregon, hybrid poplar plantation was certified as well managed in 2001
under the Forest Stewardship Council® (FSC) standards, and was also certified
under the ISO standard in 2003. The SFI and ISO certifications should aid us in marketing our products to customers who require that products they purchase for resale have such certification.



In 2003, the Idaho region elected to be the sole industry participant in a
certification system comparison project conducted by the Pinchot Institute, initiated to understand and document similarities and differences between the SFI and FSC standards of performance, the two primary North American programs. Participation
required that our Idaho timberlands undergo third party audits under both programs. Results of the audits and comparisons will be made public and reported by the Pinchot Institute during the first half of 2004.



In late 2002, we reached agreement with the Trust for Public Lands to establish
working-forest conservation easements to be held by the Idaho Department of Lands on up to 600,000 acres of our



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Idaho timberlands in phases over a period of years. The first phase was completed in the third quarter of 2003, covering over 2,700 acres. The next phase, comprising
approximately 25,000 acres, is expected to be completed by September 2004. We expect that additional conservation easements will be developed and established in phases over the next several years. The easements require us to accept certain
restrictions on the use of the property over which the easements are granted, such as a prohibition on converting land to residential or commercial uses. The easement terms permit the continued use of the land as a working, managed forest. Our
compensation for accepting restrictions is based upon a fair-market appraisal of the rights foregone. In 2003 we recognized approximately $0.5 million in Idaho easement revenues. In December 2003, we announced another agreement with the Trust for
Public Land to pursue conservation easements in the Brainerd Lakes region of Minnesota. The first phase of that agreement will involve easements on 4,700 acres of land to be held by the Minnesota Department of Natural Resources. Similar easements
are being considered on other portions of our Minnesota timberlands and on our Arkansas timberlands.



Wood Products Segment



The Wood Products
segment manufactures and markets oriented strand board (OSB), lumber, plywood and particleboard. These products are sold through our sales offices primarily to wholesalers for nationwide distribution.



To produce these solid wood products, we own and operate ten manufacturing facilities
in Arkansas, Idaho and Minnesota. A description of these facilities is included under Item 2 of this report.



The forest products industry is highly competitive, and we compete with both smaller and substantially larger forest products companies as well as companies that
manufacture substitutes for wood and wood fiber products. Although we are a relatively large OSB manufacturer, we believe we make less than ten percent of the OSB manufactured in the United States and less than seven percent of the OSB manufactured
in North America. Our share of the market for lumber, plywood and particleboard is not significant compared to the total United States market for these products. We believe that competitiveness in this industry is largely based on individual mill
efficiency and on the availability of competitively priced resources on a facility-by-facility basis, rather than the number of mills operated. This is due to the fact that it is generally not economical to transfer wood between or among facilities,
which would permit a greater degree of specialization and operating efficiencies. Instead, each facility must utilize the raw materials that are available to it in a relatively limited geographic area. For these reasons, we believe we are able to
compete effectively with companies that have a larger number of mills. In addition, we are developing and marketing a series of specialty OSB products designed to provide a radiant heat barrier, moisture resistance, insect resistance or fungal
resistance. Initial market acceptance has been positive and we believe these value-added products will become a significant portion of our total OSB sales. We also have a number of other specialty products under development. We compete based on
product quality, customer service and price.



Pulp and Paperboard Segment



The Pulp and Paperboard segment produces and markets bleached
paperboard and bleached pulp. A description of the facilities used to produce these products is included under Item 2 of this report.



As a result of management changes effective in January 2003, the former Pulp and Paper segment was split into two separate business segments, the Pulp and
Paperboard segment and the Consumer Products segment. Beginning in the first quarter of 2003, results for these two segments were reported separately, with prior year amounts reclassified for comparative purposes.



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We are a major producer of bleached paperboard in the United States, where we compete with at least six other
domestic pulp and paperboard producers. We believe we are the third largest domestic producer of bleached paperboard, with approximately 10% of the available capacity. The business is capital intensive, which leads to high fixed costs. As a result,
production generally continues as long as selling prices cover variable costs. As part of our ongoing effort to increase manufacturing efficiency and lower costs, we have allocated production of various paperboard products between our two
facilities.



Bleached paperboard is a product used in the high-end
segment of the packaging industry due to its strength, brightness and favorable printing and graphic surface features. Our bleached paperboard is processed by our customers into a variety of end products, including packaging for liquids and other
food products, pharmaceuticals, toiletries and other consumable goods as well as paper cups and paper plates.



We also produce and sell bleached softwood market pulp, which is used as the basis for many paper products. We do not consider ourselves among the larger
manufacturers of softwood market pulp in the United States.



We utilize
various methods of sale and distribution for our paperboard and softwood pulp. In general, we sell paperboard to packaging converters domestically through sales offices located throughout the United States. The majority of our international
paperboard sales are made in Japan, Korea, China and other Southeast Asian countries through sales representative offices. The majority of softwood market pulp sales are generally made through agents. Our principal methods of competing are product
quality, customer service and price.



Consumer Products Segment



The Consumer Products segment produces and markets household tissue products. A
description of the facilities used to produce these products is included under Item 2 of this report. During 2002 we began construction of a new 102-inch trim through-air-dried tissue machine next to our existing tissue converting facility in Las
Vegas, Nevada. The machine began production in early 2004.



During
2003 our tissue products were manufactured on three machines at our Lewiston, Idaho, facility and then converted into packaged tissue products at three converting facilities in Lewiston, Las Vegas, and Benton Harbor, Michigan. Approximately 70% of
the pulp we used to make our tissue products was obtained from our Lewiston pulp mill. The remaining portion was purchased on the open market and consisted primarily of hardwood pulp, which enhances the quality of certain grades of tissue.



We are a leading North American producer of private label household
tissue products, and we produce most of the private label tissue products sold in grocery stores in the western U.S. We compete with at least three companies that are much larger than Potlatch who sell national brand tissue products, as well as
commercial, industrial and private label products. We also compete with smaller companies who sell regional brand products, commercial, industrial and private label products. Our household tissue products (facial and bathroom tissues, paper towels
and napkins) are packaged to order for retail chains, wholesalers and cooperative buying organizations throughout the United States and to a lesser extent Canada. These products are sold to consumers under our customers own brand names. We
sell a majority of our tissue products to three national grocery store chains. We do not have long-term supply contracts with any of these national chains and the loss of one or more of these customers could potentially have a material adverse
effect upon the operating results of the segment.



We sell tissue
products to major retail outlets through brokers. Our principal methods of competing are product quality, customer service and price.



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Discontinued Operations



On March 18, 2002, we announced that we had signed a definitive agreement with a domestic subsidiary of Sappi Limited for the sale of our Cloquet, Minnesota, pulp
and printing papers facilities and certain associated assets for $485.5 million in cash, after closing adjustments. The sale was completed in May 2002. In conjunction with the sale, we closed our Brainerd, Minnesota, printing papers mill and exited
the coated printing papers business. As a result, we recorded an after-tax charge of $149.8 million in the first quarter of 2002. The charge represented estimated costs associated with the write-down of the carrying value of the assets involved in
the sale and the closure of the Brainerd facility, as well as other costs associated with our exit of the coated paper business. In December 2002, we recorded an additional after-tax charge of $14.6 million to adjust employee severance costs, the
carrying value of the remaining Brainerd assets and other exit costs. We sold the Brainerd facility in February 2003 for $4.44 million in cash. In December 2003, we recorded an after-tax charge of $1.6 million for a continuing contractual obligation
related to the Brainerd facility. Our exit from the printing papers business reflects a strategic realignment to focus on our natural resources, wood products and consumer tissue businesses, which we believe have the greatest potential for growth.



On June 3, 2002, we announced that we would close our Bradley hardwood
sawmill in Warren, Arkansas, and exit the hardwood lumber business. An after-tax charge of $5.7 million was recorded for estimated asset write-down and closure costs. We sold the facility in August 2002. In December 2002, we reversed $1.6 million of
the after-tax charge to reflect the actual costs incurred for the closure and sale.



Environment



Information regarding environmental matters
is included under Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations on pages 33-34 of this report.



Employees



As of December 31, 2003, we had approximately 4,300 full time employees. The workforce consisted of approximately 1,000 salaried, 3,300 hourly and 100 temporary or part-time employees. As of December 31, 2003, approximately 54%
of the workforce was covered under collective bargaining agreements.



Hourly union labor contracts expiring in 2004 are set forth below.



|                       |  |                                                                     |  |                                                                           |  |                                      
|---------------------- |  | ------------------------------------------------------------------- |  | ------------------------------------------------------------------------- |  | -------------------------------------
|ContractExpirationDate |  | Location                                                            |  | Union                                                                     |  | Approximate Number
of HourlyEmployees
|May 31                 |  | Wood Products Division &Resource Management DivisionLewiston, Idaho |  | International Association of Machinists & Aerospace Workers               |  | 310                                  
|                       |  |                                                                     | 
|May 31                 |  | Idaho Pulp & Paperboard DivisionNo. 4 Power BoilerLewiston, Idaho   |  | International Association of Machinists & Aerospace Workers               |  | 50                                   
|                       |  |                                                                     | 
|June 30                |  | Nursery OperationsLewiston, Idaho                                   |  | Paper, Allied-Industrial, Chemical and Energy Workers International Union |  | 10                                   
|                       |  |                                                                     | 
|October 14             |  | Wood Products DivisionGrand Rapids, Minnesota                       |  | Paper, Allied-Industrial, Chemical and Energy Workers International Union |  | 130                                  



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ITEM 2.    PROPERTIES



For information regarding our timberlands, see the discussion under the heading Resource Segment on pages 3-5 of this report. Our principal manufacturing facilities at December 31, 2003, which are all owned by us except as
noted, together with their respective 2003 annual capacities and production, are as follows:



|                                |  |              |  |              
|------------------------------- |  | ------------ |  | -------------
|                                |  | Capacity(A)  |  | Production(A)
|Wood Products                   |  |              |  |              
|Oriented Strand Board Mills(B): |  |              |  |              
|Bemidji, Minnesota              |  | 535,000 msf  |  | 529,000 msf  
|Cook, Minnesota                 |  | 440,000 msf  |  | 436,000 msf  
|Grand Rapids, Minnesota         |  | 375,000 msf  |  | 372,000 msf  
|Sawmills:                       |  |              |  |              
|Prescott, Arkansas              |  | 225,000 mbf  |  | 222,000 mbf  
|Warren, Arkansas                |  | 225,000 mbf  |  | 219,000 mbf  
|Lewiston, Idaho                 |  | 170,000 mbf  |  | 168,000 mbf  
|St. Maries, Idaho               |  | 105,000 mbf  |  | 104,000 mbf  
|Bemidji, Minnesota              |  | 95,000 mbf   |  | 94,000 mbf   
|Plywood Mill(B):                |  |              |  |              
|St. Maries, Idaho               |  | 145,000 msf  |  | 141,000 msf  
|Particleboard Mill(C):          |  |              |  |              
|Post Falls, Idaho               |  | 71,000 msf   |  | 71,000 msf   
|Pulp and Paperboard             |  |              |  |              
|Pulp Mills:                     |  |              |  |              
|Cypress Bend, Arkansas          |  | 270,000 tons |  | 268,000 tons 
|Lewiston, Idaho                 |  | 530,000 tons |  | 522,000 tons 
|Bleached Paperboard Mills:      |  |              |  |              
|Cypress Bend, Arkansas          |  | 290,000 tons |  | 289,000 tons 
|Lewiston, Idaho                 |  | 390,000 tons |  | 371,000 tons 
|Consumer Products               |  |              |  |              
|Tissue Mills:                   |  |              |  |              
|Lewiston, Idaho                 |  | 180,000 tons |  | 176,000 tons 
|Las Vegas, Nevada(D)            |  | 30,000 tons  |  |  tons       
|Tissue Converting Facilities:   |  |              |  |              
|Lewiston, Idaho                 |  | 115,000 tons |  | 112,000 tons 
|Benton Harbor, Michigan(E)      |  | 10,000 tons  |  | 5,000 tons   
|Las Vegas, Nevada               |  | 55,000 tons  |  | 46,000 tons  

---

|(A) |  | msf stands for thousand square feet; mbf stands for thousand board feet.
|--- |  | ------------------------------------------------------------------------

|(B) |  | 3/8inch panel thickness basis.
|--- |  | ------------------------------

|(C) |  | 3/4inch panel thickness basis.
|--- |  | ------------------------------

|(D) |  | Commenced operations in 2004. Capacity shown is rated capacity.
|--- |  | ---------------------------------------------------------------

|(E) |  | Operated as a leased facility. Lease expires in May 2005.
|--- |  | ---------------------------------------------------------



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



In late January 2004, we voluntarily reported to the Minnesota Pollution Control Agency (MPCA) a potential air permit violation at our oriented strand board
facility in Bemidji, Minnesota, relating to the non-operation of equipment used to control nitrous oxide emissions from a wood-fired boiler for a period of approximately 29 months. Corrective action has been taken, and we are cooperating with the
MPCA in its investigation. As the investigation is ongoing, we have not been advised as to what action the MPCA may take.



Taking into consideration the possible consequences of the above described matter, we believe there is no pending or threatened litigation that would have a
material adverse effect on our financial position, operations or liquidity.



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



There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.



EXECUTIVE OFFICERS OF THE REGISTRANT



Information as of March 1, 2004, and for the past five years concerning the executive officers of the company is as follows:



L. Pendleton Siegel (age 61), first elected an officer in 1983, has served as Chairman of the Board and Chief Executive Officer since May 1999. From May 1994
to May 1999, he was President and Chief Operating Officer. Mr. Siegel was elected a director of the company effective November 1997. He is a member of the Finance Committee of the Board of Directors.



Richard L. Paulson(age 62), first elected an officer in 1992, has served as
President and Chief Operating Officer since May 1999. From May 1996 through April 1999, he was Vice President, Minnesota Pulp and Paper Division. Mr. Paulson will retire from the company on March 31, 2004.



Richard K. Kelly (age 56), first elected an officer in 1999, has served as Vice
President, Wood Products Division, since July 1999. From May 1999 to July 1999, he was Vice President, Western Wood Products Division. From April 1993 to May 1999, he was an appointed officer and served as Vice President, Western Wood Products
Division.



Craig H. Nelson (age 47), first elected an officer in
1996, has served as Vice President, Consumer Products Division since January 2003. From May 2000 through December 2002 he was Vice President, Consumer Products and Paperboard Division. From May 1996 through May 2000, he was Vice President, Consumer
Products Division.



John R. Olson (age 55), first elected an
officer in 1999, has served as Vice President, Resource Management Division, since May 1999. From August 1998 through May 1999 he was an appointed officer serving as Vice President, Resource Management Division.



Harry D. Seamans (age 50), first elected an officer in 2003, has served as Vice
President, Pulp and Paperboard Division, since January 2003. From March 2000 through December 2002, he was Arkansas Pulp and Paperboard Mill Manager. From January 1993 through February 2000, he was an appointed officer serving as Vice President,
Arkansas Pulp and Paperboard Division.



Gerald L. Zuehlke (age
55), first elected an officer in 1994, has served as Vice President, Finance, Chief Financial Officer and Treasurer since June 2000. From June 1994 to June 2000, he was Treasurer.



|NOTE: |  | The aforementioned officers of the company are elected to hold office until the officers successor has been duly elected and has qualified or until the earlier of the officers
death, resignation, retirement or removal by the board.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

PART II



|ITEM  5. |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|-------- |  | ---------------------------------------------------------------------



The companys common stock is traded on the New York, Chicago and Pacific Stock Exchanges. The quarterly and yearly high and low sales price per share of our
common stock, as reported in the New York Stock Exchange Composite Transactions for 2003 and 2002 were as follows:



|        |  |      |       |      |   |       |  |     |       |  |   |      
|------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|        |  | 2003 |       | 2002
|Quarter |  | High |       | Low  |   | High  |  | Low
|1st     |  | $    | 25.10 |      | $ | 18.75 |  | $   | 34.44 |  | $ | 27.85
|2nd     |  |      | 26.10 |      |   | 20.00 |  |     | 36.13 |  |   | 32.32
|3rd     |  |      | 31.90 |      |   | 25.35 |  |     | 33.69 |  |   | 28.35
|4th     |  |      | 35.95 |      |   | 29.90 |  |     | 29.88 |  |   | 23.88
|Year    |  |      | 35.95 |      |   | 18.75 |  |     | 36.13 |  |   | 23.88



In general, all holders of
Potlatch common stock who own shares 48 consecutive calendar months or longer (long-term holders) are entitled to exercise four votes per share of stock so held, while stockholders who are not long-term holders are entitled to one vote
per share. All stockholders are entitled to only one vote per share on matters arising under certain provisions of the companys charter. There were approximately 1,800 common stockholders of record at December 31, 2003.



The board of directors annually reviews and approves the dividend policy. The board
considers a variety of factors in determining whether to pay a dividend and the dividend rate, including, among other things, conditions in the forest products industry and the economy generally, dividend pay rates in the forest products industry,
our operating results and cash flows, anticipated capital expenditures and compliance with the terms of any debt instrument that limit the payment of dividends on our common stock. The quarterly dividend rate is subject to change from time to time
based on the boards business judgment with respect to these and other relevant factors. Quarterly dividend payments per common share for 2003 and 2002 were:



|        |  |      |     |      |   |    
|------- |  | ---- | --- | ---- | - | ---
|Quarter |  | 2003 |     | 2002
|1st     |  | $    | .15 |      | $ | .15
|2nd     |  |      | .15 |      |   | .15
|3rd     |  |      | .15 |      |   | .15
|4th     |  |      | .15 |      |   | .15
|        |  |      |     |      |   |    
|        |  | $    | .60 |      | $ | .60
|        |  |      |     |      |   |    



10



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##### Table of Contents

|ITEMS  6, |  | 7, 7A and 8
|--------- |  | -----------



The information called for by Items 6, 7, 7A and 8, inclusive, of Part II of this form is contained in the following sections of this report at the pages indicated below:



|        |  |                                                                                       |  |           
|------- |  | ------------------------------------------------------------------------------------- |  | ----------
|        |  |                                                                                       |  | PageNumber
|ITEM 6  |  | Selected Financial Data                                                               |  | 18        
|ITEM 7  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18-34     
|ITEM 7A |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 34-35     
|ITEM 8  |  | Financial Statements and Supplementary Data                                           |  | 36-70     



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



None.



ITEM 9A.     
CONTROLS AND PROCEDURES



Potlatch maintains
disclosure controls and procedures, as such term is defined in Rule 13a-14(c) under the Securities and Exchange Act of 1934 (the Exchange Act), that are designed to ensure that information required to be disclosed by Potlatch in reports
that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to
Potlatchs management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating Potlatchs disclosure controls and
procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures, Potlatchs management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any
disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.



Subject to the limitations noted above, our management, with the
participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of Potlatchs disclosure controls and procedures as of the end of the fiscal year covered by the annual report on this Form 10-K. Based on that
evaluation, the CEO and CFO have concluded that Potlatchs disclosure controls and procedures were effective to meet the objective for which they were designed.



There were no changes in Potlatchs internal control over financial reporting that occurred during the last fiscal quarter that
have materially affected, or are reasonable likely to materially affect, Potlatchs internal control over financial reporting.



11



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##### Table of Contents

PART III



ITEM  10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Information regarding the directors of our company is set forth under the heading Board of Directors on pages 7-8 of our definitive proxy statement,
dated April 5, 2004, for the 2004 annual meeting of stockholders (the 2004 Proxy Statement), which information is incorporated herein by reference. Information concerning Executive Officers is included in Part I of this report following
Item 4. Information regarding reporting compliance with Section 16(a) for directors, officers or other parties is set forth under the heading Section 16(a) Beneficial Ownership Reporting Compliance on page 21 of the 2004 Proxy Statement
and is incorporated herein by reference.



We have adopted a Corporate
Conduct and Ethics Code that applies to all directors, officers and employees. You can find our Corporate Conduct and Ethics Code on our website by going to the following address: www.potlatchcorp.com, clicking on Corporate Governance, and then
clicking on the link for Corporate Conduct and Ethics Code. We will post any amendments, as well as any waivers that are required to be disclosed by the rules of either the Securities and Exchange Commission or the New York Stock Exchange, on our
website.



Our board of directors has adopted Corporate Governance
Guidelines and charters for the board of directors Audit Committee, Executive Compensation and Personnel Policies Committee, and Nominating and Corporate Governance Committee. You can find these documents on our website by going to the
following address: www.potlatchcorp.com, clicking on Corporate Governance, and then clicking on the appropriate link.



You can also obtain a printed copy of any of the materials referred to above by contacting us at the following address:



Potlatch Corporation

Attention: Mac Ryerse, Corporate Secretary

601 West Riverside Ave., Suite 1100

Spokane, Washington 99201

Telephone: (509) 835-1500



The Audit Committee of our board of directors is an audit committee for purposes of Section 3(a)(58) of the Securities Exchange Act of 1934. As of
December 31, 2003, the members of that committee were: Boh A. Dickey (Chair), Jerome C. Knoll, and Gregory L. Quesnel. The board of directors has determined that Mr. Dickey is an audit committee financial expert and that he and all of
our Audit Committee members are independent as defined under the applicable rules and regulations of the Securities and Exchange Commission.



ITEM 11.    EXECUTIVE COMPENSATION



Information set forth under the heading Compensation of the Named Executive Officers on pages 16-19 of the 2004 Proxy Statement is incorporated herein by reference.



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS



Information regarding any person or group known by us to be the beneficial owner of more than five percent of our common stock as well
as the security ownership of management set forth under the heading Stock Ownership on pages 9-10 of the 2004 Proxy Statement is incorporated herein by reference.



12



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##### Table of Contents

The following table provides certain information as of December 31, 2003, with respect to our equity compensation
plans:



|                                                           |  |                                                                      |  |                                                   |       |                                                                                      |        
|---------------------------------------------------------- |  | -------------------------------------------------------------------- |  | ------------------------------------------------- | ----- | ------------------------------------------------------------------------------------ | -------
|Plan category                                              |  | Number ofsecuritiesto be issueduponexercise ofoutstandingoptions (1) |  | Weightedaverageexerciseprice ofoutstandingoptions |       | Number ofsecuritiesremainingavailable forfutureissuanceunder equitycompensationplans
|Equity compensation plans approved by security holders     |  | 2,804,975                                                            |  | $                                                 | 36.19 |                                                                                      | 569,042
|Equity compensation plans not approved by security holders |  |                                                                     |  |                                                   |      |                                                                                      |       
|                                                           |  |                                                                      |  |                                                   |       |                                                                                      |        
|Total                                                      |  | 2,804,975                                                            |  | $                                                 | 36.19 |                                                                                      | 569,042
|                                                           |  |                                                                      |  |                                                   |       |                                                                                      |        

---

|(1) |  | Includes 88,155 performance shares granted in December 2003, which amount includes the maximum number of shares that could be awarded under the grant, but does not include future dividend
equivalents. Performance shares are not included in the weighted average exercise price calculation.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Not applicable.



ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES



Information set forth under the heading Fees Paid to Independent Auditor in 2003 and 2002 on page 21 of the 2004 Proxy Statement is incorporated herein
by reference.



13



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##### Table of Contents

PART IV



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



Consolidated Financial Statements



Our consolidated financial statements are listed in the Index to Consolidated Financial Statements and Schedules on page 17 of this Form 10-K.



Financial Statement Schedules



Our financial statement schedules are listed in the Index to Consolidated Financial Statements and Schedules on page 17 of this Form
10-K.



Reports on Form 8-K



A current report on Form 8-K was filed on October 24, 2003. Under Item 5, Other
Events, we announced the election of Ruth Ann M. Gillis to our Board of Directors, effective November 1, 2003.



A current report on Form 8-K was filed on November 10, 2003. Under Item 5, Other Events, we reported the details of remarks made by company officials at an industry
analysts meeting that day.



A current report on Form 8-K was filed on
December 19, 2003. Under Item 5, Other Events, we announced the election of William L. Driscoll to our Board of Directors, effective January 1, 2004.



A current report on Form 8-K was filed on December 29, 2003. Under Item 5, Other Events, we disclosed that Richard L. Paulson, our President and Chief Operating
Officer, will retire at the end of March 2004. We had previously disclosed that Mr. Paulson planned to retire at the end of 2003.



Exhibits



Exhibits are listed in the Exhibit Index on pages 71-74 of this Form 10-K.



14



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##### Table of Contents

SIGNATURES



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



POTLATCH CORPORATION (Registrant)By:

/s/    L. PENDLETON SIEGELL. Pendleton Siegel Chairman of the Board andChief Executive Officer


Date: March 12, 2004



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 12, 2004, by the following persons on behalf of the
company in the capacities indicated.



|   |  |                                               |  |                                                                                              |  | 
|-- |  | --------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | 
|   |  |                                               | 
|By |  | /s/    L. PENDLETON
SIEGELL. Pendleton Siegel |  | Director and Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |  | 
|   |  |                                               | 
|By |  | /s/    RICHARD L.
PAULSONRichard L. Paulson   |  | President and Chief Operating Officer (Principal Operating Officer)                          |  | 
|   |  |                                               | 
|By |  | /s/    GERALD L.
ZUEHLKEGerald L. Zuehlke     |  | Vice President, Finance,Chief Financial Officer and Treasurer (Principal Financial Officer)  |  | 
|   |  |                                               | 
|By |  | /s/    TERRY L.
CARTERTerry L. Carter         |  | Controller (PrincipalAccounting Officer)                                                     |  | 
|   |  |                                               | 
|   |  | *Boh A. Dickey                                |  | Director                                                                                     |  | 
|   |  |                                               | 
|   |  | *Ruth Ann M. Gillis                           |  | Director                                                                                     |  | 
|   |  |                                               | 
|   |  | *Jerome C. Knoll                              |  | Director                                                                                     |  | 
|   |  |                                               | 
|   |  | *Lawrence S. Peiros                           |  | Director                                                                                     |  | 



15



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##### Table of Contents

| |  |                              |  |          |  | 
| |  | ---------------------------- |  | -------- |  | 
| |  |                              | 
| |  | *                            |  | Director |  | 
| |  | Michael T. Riordan           |  |          |  | 
| |  |                              | 
| |  | *Judith M. Runstad           |  | Director |  | 
| |  |                              | 
| |  | *Dr. William T. Weyerhaeuser |  | Director |  | 



|    |  |                                     
|--- |  | ------------------------------------
|    | 
|*By |  | /s/    MALCOLM A.
RYERSE            
|    |  | Malcolm A. Ryerse (Attorney-in-fact)



16



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##### Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIE
S



Index to Consolidated Financial
Statements and Schedules



The following documents are filed as part
of this report:



|                                                                                                                    |  |           
|------------------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                                    |  | PageNumber
|Selected Financial Data                                                                                             |  | 18        
|Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 18-34     
|Consolidated Financial Statements:                                                                                  |  |           
|                                                                                                                    | 
|Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2003, 2002 and 2001 |  | 36        
|                                                                                                                    | 
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                           |  | 37        
|                                                                                                                    | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                          |  | 38        
|                                                                                                                    | 
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2003, 2002 and 2001                |  | 39        
|                                                                                                                    | 
|Summary of Principal Accounting Policies                                                                            |  | 40-43     
|                                                                                                                    | 
|Notes to Consolidated Financial Statements                                                                          |  | 44-68     
|                                                                                                                    | 
|Independent Auditors Report                                                                                        |  | 69        
|                                                                                                                    | 
|Schedules:                                                                                                          |  |           
|                                                                                                                    | 
|II.    Valuation and Qualifying Accounts                                                                            |  | 70        



All other schedules are omitted
because they are not required, not applicable or the required information is given in the consolidated financial statements.



17



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##### Table of Contents

Potlatch Corporation and Consolidated Subsidiaries



Selected Financial Data

(Dollars in thousands  except per-share amounts)



|                                                                        |  |      |           |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          
|----------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | ---------
|                                                                        |  | 2003 |           | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999
|Net sales                                                               |  | $    | 1,506,634 |      | $ | 1,293,546 |      |  | $ | 1,278,864 |   |  | $    | 1,295,810 |   |  | $ | 1,347,533
|Earnings (loss) from continuing operations                              |  |      | 53,221    |      |   | (50,933   | )    |  |   | (56,566   | ) |  |      | (33,393   | ) |  |   | 52,210   
|Net earnings (loss)                                                     |  |      | 50,727    |      |   | (234,381  | )    |  |   | (79,445   | ) |  |      | (33,214   | ) |  |   | 40,947   
|Net cash provided by (used for) operations                              |  |      | 181,349   |      |   | (41,914   | )    |  |   | 29,360    |   |  |      | 74,513    |   |  |   | 194,612  
|Working capital                                                         |  |      | 160,802   |      |   | 102,693   |      |  |   | 612,384   |   |  |      | 745,052   |   |  |   | 780,003  
|Current ratio                                                           |  |      | 1.9 to 1  |      |   | 1.4 to 1  |      |  |   | 2.1 to 1  |   |  |      | 2.7 to 1  |   |  |   | 3.1 to 1 
|Long-term debt (including current portion)                              |  | $    | 618,785   |      | $ | 638,252   |      |  | $ | 1,150,125 |   |  | $    | 801,874   |   |  | $ | 712,121  
|Stockholders equity                                                    |  |      | 470,851   |      |   | 430,791   |      |  |   | 707,304   |   |  |      | 813,236   |   |  |   | 921,039  
|Long-term debt to stockholders equity ratio                            |  |      | 1.3 to 1  |      |   | 1.5 to 1  |      |  |   | 1.6 to 1  |   |  |      | .99 to 1  |   |  |   | .77 to 1 
|Capital expenditures                                                    |  | $    | 79,686    |      | $ | 51,614    |      |  | $ | 42,679    |   |  | $    | 142,812   |   |  | $ | 65,277   
|Total assets                                                            |  |      | 1,597,377 |      |   | 1,624,817 |      |  |   | 2,488,439 |   |  |      | 2,542,445 |   |  |   | 2,446,500
|Basic net earnings (loss) from continuing operations per common share   |  | $    | 1.85      |      | $ | (1.79     | )    |  | $ | (2.00     | ) |  | $    | (1.17     | ) |  | $ | 1.80     
|Basic net earnings (loss) per common share                              |  |      | 1.77      |      |   | (8.23     | )    |  |   | (2.81     | ) |  |      | (1.16     | ) |  |   | 1.41     
|Average common shares outstanding (in thousands)                        |  |      | 28,706    |      |   | 28,462    |      |  |   | 28,282    |   |  |      | 28,523    |   |  |   | 28,947   
|Diluted net earnings (loss) from continuing operations per common share |  | $    | 1.85      |      | $ | (1.79     | )    |  | $ | (2.00     | ) |  | $    | (1.17     | ) |  | $ | 1.80     
|Diluted net earnings (loss) per common share                            |  |      | 1.77      |      |   | (8.23     | )    |  |   | (2.81     | ) |  |      | (1.16     | ) |  |   | 1.41     
|Average common shares outstanding, assuming dilution (in thousands)     |  |      | 28,718    |      |   | 28,462    |      |  |   | 28,282    |   |  |      | 28,523    |   |  |   | 28,967   
|Cash dividends per common share                                         |  | $    | .60       |      | $ | .60       |      |  | $ | 1.17      |   |  | $    | 1.74      |   |  | $ | 1.74     
|                                                                        |  |      |           |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          

Certain amounts for 1999-2002 have been reclassified to conform to the 2003 presentation.



Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



We are a vertically integrated and diversified forest products company. We own approximately 1.5 million acres of timberland and operate 15 manufacturing facilities, located primarily in Arkansas, Idaho and Minnesota. Our
business is organized into four segments:



| |  |  | The Resource segment manages our timberlands, which supply logs, wood chips, pulpwood and other wood fiber to our manufacturing segments, as well as to third parties. Intersegment sales are
based on prevailing market prices for wood fiber. In 2003, Resource segment net sales were $252.6 million, representing approximately 15% of our net sales, before elimination of intersegment sales. Intersegment sales were $157.2 million in 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



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##### Table of Contents

| |  |  | The Wood Products segment manufactures oriented strand board (OSB), lumber, plywood and particleboard at ten mills located in Arkansas, Idaho and Minnesota. These products are largely
commodity products, which are sold to wholesalers primarily for use in home building and other construction activity. Wood Products segment net sales were $683.1 million in 2003, representing approximately 40% of our net sales, before elimination of
intersegment sales. Intersegment sales were $11.7 million in 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Pulp and Paperboard segment manufactures bleached paperboard used in packaging and bleached softwood market pulp. The Pulp and Paperboard segment operates two pulp mills and two
paperboard mills located in Arkansas and Idaho. Pulp and Paperboard segment net sales were $482.0 million in 2003, representing approximately 28% of our net sales, before elimination of intersegment sales. Intersegment sales were $43.0 million in
2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Consumer Products segment manufactures tissue products primarily sold on a private label basis by major grocery store chains. In 2003 the Consumer Products segment operated one tissue
mill and three tissue converting facilities located in Idaho, Michigan and Nevada. The segment began operating a newly constructed tissue machine in Las Vegas in 2004. Consumer Products segment net sales were $300.9 million in 2003, representing
approximately 17% of our net sales, before elimination of intersegment sales. Intersegment sales were $0.1 million in 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of management changes effective in January 2003, the former Pulp and Paper segment was split into two separate business segments, the Consumer Products
segment and the Pulp and Paperboard segment. Segment data for 2002 and 2001 related to the two segments has been reclassified to be comparative with 2003 data.



In May 2002, we exited our Printing Papers segment, which produced primarily high-grade coated printing papers and bleached hardwood market pulp. We sold our
Cloquet, Minnesota, pulp and printing papers facilities and certain associated assets to a domestic subsidiary of Sappi Limited for $485.5 million in cash, after closing adjustments. We closed our Brainerd, Minnesota, printing papers mill at the
same time. That facility was sold in February 2003 for $4.44 million in cash. The sale of the printing papers business reflects a strategic realignment to focus on our natural resources, wood products and consumer tissue businesses, which we believe
have the greatest potential for growth.



In June 2002, we announced that
we would close our Bradley hardwood mill in Warren, Arkansas, and exit the hardwood lumber business. We sold the facility in August 2002.



Our consolidated financial statements and this discussion reflect the classification of the Printing Papers segment and the Bradley hardwood mill as discontinued
operations for all periods presented.



Certifications with respect to
this annual report on Form 10-K by our Chief Executive Officer and Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002, are included as exhibits to this report. Certifications as required by Section 906 of the
Sarbanes-Oxley Act are furnished as exhibits to this report.



Factors Influencing Our
Results of Operations



Our operating results have been and will
continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry, competition, the efficiency and level of capacity utilization of our manufacturing operations, changes in our principal expenses, such
as wood fiber and energy costs, changes in the production capacity of our manufacturing operations as a result of major capital spending projects, asset dispositions or acquisitions and other factors.



19



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##### Table of Contents

Our operating results generally reflect the cyclical pattern of the forest products industry. Historical prices for
our products have been volatile, and we, like other manufacturers in the forest products industry, have limited direct influence over the timing and extent of price changes for our products. Product pricing is significantly affected by the
relationship between supply and demand. Product supply is influenced primarily by fluctuations in available manufacturing capacity. Demand is affected by the state of the economy in general and a variety of other factors. The demand for our timber
resources and wood products is affected by the level of new residential construction activity and, to a lesser extent, home repair and remodeling activity, which are subject to fluctuations due to changes in economic conditions, interest rates,
population growth, weather conditions and other factors. The demand for most of our pulp and paperboard products is primarily affected by the general state of the global economy, and the economies in North America and east Asia in particular. The
demand for our tissue products is primarily affected by the state of the United States economy.



The markets for our products are highly competitive and companies that have substantially greater financial resources than we do compete with us in each of our
markets. Logs and other fiber from our timberlands, as well as our wood products, are subject to competition from timberland owners and wood products manufacturers in North America and to a lesser extent in South America, Europe, Australia and New
Zealand. Our pulp-based products, other than tissue products, are globally-traded commodity products. Because our competitors in these segments are located throughout the world, variations in exchange rates between the U.S. dollar and other
currencies can significantly affect our competitive position compared to our international competitors. As it is generally not profitable to sell tissue products overseas due to high transportation costs, currency exchange rates do not have a major
effect on our ability to compete in our tissue business.



Tariffs, quotas
or trade agreements can also affect the markets for our products, particularly our wood products. In 2002, the United States imposed duties on imported lumber from Canada in response to a dispute over the stumpage policies of some provincial
governments. The two countries are currently in negotiations to resolve the dispute, and any resulting agreement could have a significant effect on lumber markets in the United States.



In addition, our industry is capital intensive, which leads to high fixed costs and generally results in continued production as long
as prices are sufficient to cover variable costs. These conditions have contributed to substantial price competition, particularly during periods of reduced demand. Some of our competitors are currently lower-cost producers in some of the businesses
in which we operate, and accordingly these competitors may be less adversely affected than we are by price decreases.



Energy has become one of our most volatile operating expenses over the past several years. Substantial price increases commenced in late 2000 and continued in the
first half of 2001, before moderating in the second half of 2001. These price increases were substantial and contributed to the net losses we incurred during these periods. Energy prices returned to more normal historical levels in 2002, which had a
favorable effect on our results compared to 2001. Energy costs rose overall in 2003, but the effects varied among our operating regions; from modest increases at our facilities in Idaho to a significant increase at our pulp and paperboard facility
in Arkansas. In periods of high energy prices, market conditions may prevent us from passing higher energy costs on to our customers through price increases and therefore could adversely affect our operating results. We have taken steps through
conservation and electrical production to reduce our exposure to the volatile spot market for energy. Our energy costs in future periods will depend principally on our ability to continue to produce internally a substantial portion of our
electricity needs and on changes in market prices for natural gas. From time to time we have entered into derivative financial instruments as a hedge against potential increases in the cost of natural gas. We entered into several such contracts in
the third quarter of 2003, covering a portion of our expected natural gas purchases from November 2003 through March 2004.



20



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##### Table of Contents

Another significant expense is the cost of wood fiber needed to supply our manufacturing facilities. The percentage
of our wood fiber requirements supplied by our timberlands will fluctuate based on a variety of factors, including changes in our timber harvest levels, changes in our manufacturing capacity and changes in the amount of timber sales to third
parties. The cost of various types of wood fiber that we purchase in the market has at times fluctuated greatly because of economic or industry conditions. Selling prices of our products have not always increased in response to wood fiber price
increases nor have wood fiber prices always decreased in conjunction with declining product prices. On occasion, our results of operations have been and may in the future be adversely affected if we are unable to pass cost increases through to our
customers.



Finally, changes in our manufacturing capacity, primarily as
a result of capital spending programs or asset dispositions, have significantly affected our results of operations in recent periods. In January 2001, we completed a modernization and expansion of our OSB mill in Cook, Minnesota, which resulted in
an increase in annual production capacity from 250 million square feet to 440 million square feet. In May 2002, we sold a majority of our Printing Papers segment assets to a domestic subsidiary of Sappi Limited and exited the printing papers
business. In August 2002, we sold a hardwood sawmill in Arkansas. We are currently in the process of bringing a newly constructed tissue machine in Las Vegas, Nevada, up to full operating production, which we anticipate will produce 30,000 tons a
year. Each of these changes has affected or will affect our levels of net sales and expenses, as well as the comparability of our operating results from period to period. Additionally, the profitability of our manufacturing segments depends largely
on our ability to operate our manufacturing facilities efficiently and at or near full capacity. Our operating results would be adversely affected if market demand does not justify operating at these levels or if our operations are inefficient or
suffer significant interruption for any reason.



Critical Accounting Policies



Our principal accounting policies are discussed on pages 40-43 of
this Form 10-K. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported financial position and
operating results of the company. Management believes the accounting policies discussed below represent the most complex, difficult and subjective judgments it makes in this regard.



Long-lived assets.    We account for impairment of long-lived assets in accordance with Financial
Accounting Standards Board (FASB) Statement No. 144. The statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test
for impairment requires management to estimate future cash flows, which can differ materially from actual future results based upon many factors, including but not limited to changes in economic conditions, environmental requirements, and capital
spending. If a determination is made, based upon estimated future cash flows, that the carrying amount of the asset is not recoverable, an impairment charge would be recognized for the excess of the assets carrying value over its fair value.



Timber and timberlands.    Timber and
timberlands are recorded at cost, net of fee timber harvested. Expenditures for reforestation, including all costs related to stand establishment, such as site preparation, costs of seeds or seedlings and tree planting, are capitalized. Expenditures
for forest management, consisting of regularly recurring items necessary to the ownership and administration of our timber and timberlands, are accounted for as current operating expense. Our cost of timber harvested is determined based on costs
capitalized and the related current estimated recoverable timber volume. Recoverable volume does not include anticipated future growth, nor are anticipated future costs considered.



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There are currently no authoritative accounting rules relating to costs to be capitalized in timber and
timberlands. We have used relevant portions of current accounting rules, industry practices and our judgment in determining costs to be capitalized or expensed. Alternate interpretations and judgments could significantly affect the amounts
capitalized. Additionally, models and observations used to estimate the current recoverable timber volume on our lands are subject to judgments that could significantly affect volume estimates. Different assumptions for either the cost or volume
estimates, or both, could have a significant effect upon amounts reported in our statements of operations and financial condition.



Restructuring charges and discontinued operations.    In 2001 and 2002 we recorded charges for the reduction of the hourly workforce at a
manufacturing site and a reduction of our salaried workforce, respectively. In May 2002 we completed the sale of a majority of the assets of our Printing Papers segment and closed a printing papers facility in Brainerd, Minnesota, which was
subsequently sold in 2003. In July 2002 we closed a hardwood lumber mill in Warren, Arkansas. The mill was sold in August 2002. These events required us to record estimates of liabilities for employee benefits, environmental clean-up and other costs
at the time of the event. These estimated liabilities could differ materially from actual costs incurred, with resulting adjustments to future period earnings for any differences.



Environmental liabilities.    We record accruals for estimated environmental liabilities in accordance with
FASB Statement No. 5. These estimates reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and monitoring activities. Due to the numerous uncertainties and variables associated with
these assumptions and judgments, and changes in governmental regulations and environmental technologies, our accruals are subject to substantial uncertainties and our actual costs could be materially more or less than the estimated amounts.



Pension and postretirement benefits.    The
determination of pension plan expense and the requirements for funding our pension plans are based on a number of actuarial assumptions. Two critical assumptions are the discount rate applied to pension plan obligations and the rate of return on
plan assets. For other postretirement employee benefit (OPEB) plans, which provide certain health care and life insurance benefits to qualified retired employees, critical assumptions in determining OPEB expense are the discount rate applied to
benefit obligations and the assumed health care cost trend rates used in the calculation of benefit obligations.



Note 12 to the consolidated financial statements on pages 50-54 includes information for the three years ending December 31, 2003, on the components of pension and
OPEB expense, the underlying actuarial assumptions used to calculate periodic expense, as well as the funded status for our pension and OPEB plans as of December 31, 2003 and 2002.



The discount rate used in the determination of pension benefit obligations and pension expense is based on high-quality fixed income
investment interest rates. At December 31, 2003, we calculated obligations using a 6.25% discount rate. The discount rates used at December 31, 2002 and 2001 were 6.75% and 7.25%, respectively. To determine the expected long-term rate of return on
pension assets, we employ a process that analyzes historical long-term returns for various investment categories, as measured by appropriate indexes. These indexes are weighted based upon the extent to which plan assets are invested in the
particular categories in arriving at our determination of a composite expected return. The assumed long-term rate of return on pension plan assets used for 2003-2001 was 9.5%.



An increase in the discount rate or the expected return on plan assets, all other assumptions remaining the same, would reduce pension
plan expense, and conversely, a decrease in either of



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these measures would increase plan expense. Total periodic pension plan income in 2003 was $13.3 million. As an indication of the sensitivity that pension expense has
to the discount rate assumption, a 25 basis point change in the discount rate would affect plan expense by approximately $1.1 million. A 25 basis point change in the assumption for expected return on plan assets would affect plan expense by
approximately $1.5 million. The actual rates on plan assets may vary significantly from the assumption used because of unanticipated changes in financial markets.



We estimate contributions to our pension plan will total approximately $1.2 million in 2004.



For our OPEB plans, expense for 2003 was $23.4 million. The discount rate used to
calculate OPEB obligations was also 6.25% at December 31, 2003, and 6.75% and 7.25% at December 31, 2002 and 2001, respectively. The assumed health care cost trend rate used to calculate OPEB obligations and expense at December 31, 2003, was an 8%
increase over the previous year, declining 1 percent annually to a long-term ultimate rate increase assumption of 6% for 2005 and thereafter.



As an indication of the sensitivity that OPEB expense has to the discount rate assumption, a 25 basis point change in the discount rate would affect plan expense by
approximately $0.8 million. A 1% change in the assumption for health care cost trend rates would have affected 2003 plan expense by approximately $2.2-$2.6 million and the total postretirement obligation by approximately $27.0-$31.7 million, as
reported in Note 12 on page 52. The actual rates of health care cost increases may vary significantly from the assumption used because of unanticipated changes in health care costs.



Periodic pension and OPEB expense are included in Materials, labor and other operating expenses and Selling, general
and administrative expenses in the statements of operations. The expense is allocated to all business segments. Depending upon the funded status of the different plans, either a long-term asset or long-term liability is recorded for plans with
overfunding or underfunding, respectively. Any unfunded accumulated pension benefit obligation in excess of recorded liabilities is accounted for in Accumulated other comprehensive income. See Note 12 on pages 50-54 for related balance
sheet effects at December 31, 2003 and 2002.



Results of Operations



At December 31, 2003, our business was organized into four reporting segments:
Resource, Wood Products, Pulp and Paperboard, and Consumer Products. Sales or transfers between segments are recorded as intersegment sales based on prevailing market prices. Because of the role of the Resource segment in supplying our manufacturing
segments with wood fiber, intersegment sales represent a significant portion of the Resource segments total net sales. Beginning in the third quarter of 2002, our Wood Products and Pulp and Paperboard operating segments transitioned to a fiber
procurement system where a portion of third party fiber purchases are made directly by each of these segments, rather than from the Resource segment. The change in the fiber procurement system has significantly decreased intersegment sales for the
Resource segment and decreased fiber purchases by the Resource segment from third parties. Intersegment sales represent a substantially smaller percentage of net sales for our other segments.



In the period-to-period discussion of our results of operations below, when we discuss
our consolidated net sales, contributions by each of the segments to our net sales are reported after elimination of intersegment sales. In the Discussion of Business Segments sections below, each segments net sales are set forth
before elimination of intersegment sales.



As a result of our decisions
to sell our Printing Papers segment assets and to close the Bradley hardwood sawmill, those operations have been classified as discontinued operations and assets held for sale in the financial statements. The discussion below
addresses our continuing businesses.



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In addition, revenues and expenses associated with land sales have been reclassified, for periods prior to the second quarter of 2003, in our Statements of Operations
and Comprehensive Income. Revenues from land sales are included in net sales and the associated expense is included in materials, labor and other operating expenses. Revenues and expenses from land sales are attributable to the Resource segment. The
change in presentation reflects the Resource segments ongoing commitment to actively manage timberland assets, which includes land sales for higher and better use, in the normal course of business.



Certain 2002 and 2001 period amounts presented below have been conformed to 2003
classifications.



Year Ended December 31, 2003 Compared to Year Ended December 31,
2002



Net sales of $1.51 billion for the year ended December 31,
2003, increased 16% compared to net sales of $1.29 billion recorded for the year ended December 31, 2002. Increases in net sales for the Wood Products, Pulp and Paperboard and Resource segments of $174.7 million, $30.5 million and $22.7 million,
respectively, more than offset a decline in Consumer Products net sales of $14.8 million. Increased shipments and higher sales prices for oriented strand board in the Wood Products segment and increased paperboard shipments in the Pulp and
Paperboard segment were largely responsible for the increase in net sales for these segments. The Resource segment net sales were higher due to increased land sales. A decrease in sales prices resulted in lower net sales for the Consumer Products
segment.



Expenses for depreciation, amortization and cost of fee timber
harvested were $104.9 million for the year ended December 31, 2003, a decrease of $10.6 million from the prior year total of $115.5 million. Lower permit timber harvests in Minnesota and decreased depreciation expense in the Wood Products and Pulp
and Paperboard segments were largely responsible for the decline.



For
the year ended December 31, 2003, materials, labor and other operating expenses rose to $1.21 billion from $1.10 billion in 2002. The higher costs were due primarily to increased shipments of oriented strand board, lumber and paperboard.



Selling, general and administrative expenses were $80.3 million for the year ended
December 31, 2003, a slight increase from 2002s expense of $79.6 million, due principally to a small increase in selling expense.



The following items were included in the Restructuring charges line in the Statements of Operations:



| |  |  | In 2002, we recorded a $9.0 million pre-tax charge for costs associated with the elimination of 106 salaried production and administrative positions. As of December 31, 2002, 82 employees had
been terminated, three had assumed other positions within the company as a result of job openings and 21 were scheduled for termination in the first half of 2003. We recorded $3.8 million against the accrued liability associated with the charge at
December 31, 2002.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the first quarter of 2003, we recorded additional charges totaling $0.2 million for costs related to terminated employees whose service had been retained beyond the initial 60-day period
following the announced job eliminations in 2002. In December 2003 we recorded a $0.7 million credit, reflecting final cost determinations for pension and medical benefits. As of December 31, 2003, 100 employees had been terminated, four had assumed
other positions within the company as a result of job openings and two individuals have been retained until mid-2004. As of December 31, 2003, all costs except immaterial amounts related to the retained individuals, associated with the salaried
workforce reduction had been incurred.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Interest expense, net of capitalized interest, was $48.2 million for the year ended December 31, 2003,
substantially less compared to the $59.9 million charged against income in 2002. The decrease reflected the lower amount of average debt outstanding during 2003 compared to 2002, as well as an increase of $2.6 million in the amount of interest
capitalized from major construction projects in 2003 versus 2002. These factors were partially offset by increased interest expense of approximately $2.8 million on our $100 million credit sensitive debentures, due to the lowering of our debt
ratings in January 2003.



In 2003, we incurred one-time, pre-tax costs of
$0.2 million for the early retirement of $3.1 million of outstanding debt. During 2002, we incurred one-time, pre-tax costs of $15.4 million related to our early retirement of over $380 million of outstanding debt.



Interest income for the year ended December 31, 2003, was $14.1 million, compared to
$1.9 million recorded in 2002. The increase was primarily due to the receipt of $13.2 million of interest income in conjunction with a settlement with the Internal Revenue Service for tax years 1989 through 1994.



For the year ended December 31, 2003, we recorded an income tax provision of $27.3
million on income from continuing operations, based on an estimated effective tax rate of 34%. During the third quarter of 2003 we revised our estimated tax rate from 39% to 34% as a result of applying anticipated tax credits to our income tax
provision. For the year ended December 31, 2002, we recorded an income tax benefit of $32.6 million, reflecting our net loss from continuing operations before taxes, based on an estimated effective tax rate of 39%.



Our earnings from continuing operations for the year ended December 31, 2003, were
$53.2 million, compared to our net loss from continuing operations of $50.9 million for the year ended December 31, 2002.



We incurred a pre-tax loss on our discontinued operations of $4.1 million in 2003, compared to a pre-tax loss of $300.7 million in 2002. Discontinued operations
include our former Printing Papers segment and a hardwood sawmill. The 2003 loss represents costs we incurred related to maintaining the Brainerd facility before its sale in February 2003, an additional loss on the sale and recognition of a
continuing contractual obligation relating to the Brainerd facility. Included in the 2002 amount was $276.2 million for loss on disposition of these properties and $24.5 million in operational losses.



Our net earnings, including discontinued operations, for 2003 were $50.7 million,
compared to a net loss of $234.4 million in 2002.



Items recorded in
Other comprehensive loss, net of tax for 2003 include a $0.4 million, after-tax increase to our minimum pension liability partially offset by cash flow hedge derivative gains of $0.1 million, after tax, related to our natural gas hedging
activities. The increase to the minimum pension liability is the result of a change in the discount rate from 6.75% to 6.25%, partially offset by market increases in our pension assets. In 2002 we recorded a minimum pension liability increase
totaling $33.2 million, after-tax, as a result of market declines in our pension assets and a reduction in the discount rate from 7.25% to 6.75%.



Discussion of business segments



See Note 15, Segment Information, on pages 56-58 for tabular presentation of sales, operating income (loss), depreciation and amortization, assets and capital
expenditures attributable to our business segments.



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The Resource segment reported operating income of $65.5 million for the year ended December 31, 2003, slightly
higher than the $62.6 million reported in 2002. Higher income from land sales in 2003 offset lower earnings from wood fiber sales. Segment net sales decreased to $252.6 million, compared to $411.8 million in 2002. The decrease in net sales was due
to decreased wood fiber sales to our Wood Products and Pulp and Paperboard operating segments in Arkansas, Idaho and Minnesota. In the third quarter of 2002, these operating segments began the transition to a fiber procurement system where portions
of third party fiber purchases are made directly by each segment. The changes in the fiber procurement system have resulted in lower intersegment sales for the Resource segment and, consequently, lower wood fiber purchases by the Resource segment
from third parties. Intersegment sales declined $181.9 million in 2003 compared to 2002. Increased land sales partially offset the decline in wood fiber sales. Land sales revenue totaled $26.5 million in 2003 compared to $7.3 million in 2002.
Expenses for the Resource segment were $187.1 million in 2003, significantly lower than the $349.3 million recorded in 2002, due to reduced outside wood purchases by the Resource segment.



The Wood Products segments operating income of $97.6 million for the year ended December 31, 2003, was a significant improvement
over the operating loss of $27.0 million incurred in 2002. Net sales for the segment were $683.1 million, compared to $509.2 million reported in 2002. Low interest rates during 2003 helped to sustain a high level of new home construction, and by
mid-year panel inventory levels and, to a lesser extent, dimension lumber began to recover from their oversupplied position, with a corresponding rise in sales prices. The effect was particularly favorable for oriented strand board. OSB net sales
increased 68% in 2003, to $314.2 million, largely due to a 61% increase in 2003 versus 2002 average sales prices. Sales prices peaked at record high levels early in the fourth quarter and declined towards year end. Shipments of OSB were 4% higher in
2003 due to production efficiencies at our three facilities in Minnesota. The upturn in OSB markets also aided the markets for certain grades of plywood. Our plywood facility in Idaho adjusted its product mix and temporarily operated some additional
shifts during the year to take advantage of market conditions. The resulting added production allowed a 27% increase in shipments, and, combined with increased sales prices, accounted for plywood net sales of $46.4 million, compared to $34.9 million
in 2002. Lumber net sales increased to $279.2 million in 2003, compared to $249.8 million in 2002, due to a 17% increase in shipments that was partially offset by a 5% decline in sales prices. The increase in shipments was due to higher production
at our lumber mills, largely as a result of adding a shift at each of our Arkansas facilities. Particleboard shipments increased 14% in 2003, due to the absence of market-related downtime taken in 2002. Net sales of particleboard were $15.2 million
in 2003, compared to $14.1 million in 2002. Expenses were $585.5 million for the segment in 2003, compared to $536.2 million in 2002. Higher product shipments and resin costs were primarily responsible for the increase.



The Pulp and Paperboard segment incurred an operating loss of $15.1 million in 2003,
versus a loss of $42.8 million in 2002. Segment net sales increased to $482.0 million for 2003, compared to $443.6 million in 2002. Paperboard net sales were $420.8 million in 2003, compared to $395.1 million in 2002. Paperboard shipments increased
9% compared to 2002, more than offsetting a 2% decline in sales prices. Pulp sales (including intersegment sales) were higher in 2003, rising to $61.2 million, compared to $48.5 million for 2002. The increase in pulp and paperboard sales was due to
higher production at our Lewiston, Idaho, facility, which allowed increased pulp shipments internally and increased paperboard and pulp shipments to external customers. Pulp sales prices to external customers increased 12% in 2003. Segment expenses
for 2003 totaled $497.1 million, compared to $486.4 million in 2002. The increase reflects greater volumes of product shipments in 2003 compared to 2002, as well as higher energy and wood fiber costs at our McGehee, Arkansas, facility. However,
increased paperboard and pulp production at the Lewiston facility has resulted in lower unit production costs compared to 2002.



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The Consumer Products segment reported operating income of $1.3 million in 2003, significantly less than the $42.8
million earned in 2002. Very competitive markets during the year resulted in a 5% decline in net sales, to $300.9 million, compared to $315.7 million in 2002. The effect of a sales price decline of 7% for 2003 was only partially offset by a 2%
increase in product shipments. Segment expenses were $299.6 million in 2003, compared to $272.9 million in 2002. Higher per unit costs due to downtime taken on some converting lines during the year to reduce finished goods inventory levels, higher
pulp costs, higher selling and administration costs in anticipation of the start-up of the new tissue machine in Las Vegas, and increased product shipments contributed to the increase in expenses.



Year Ended December 31, 2002 Compared to Year Ended December 31, 2001



Net sales of $1.29 billion for the year ended December 31, 2002, were slightly higher
compared to net sales of $1.28 billion recorded for the year ended December 31, 2001. Increases in Resource and Wood Product segment net sales in 2002 of $30.3 million and $11.8 million, respectively, were partially offset by decreases in net sales
for the Pulp and Paperboard segment of $25.4 million and $2.0 million for the Consumer Products segment. In 2002 Resource sales were greater due to increased sales to external customers, while Wood Products net sales increased as a result of an
increase in OSB shipments. The decrease in net sales for Pulp and Paperboard was primarily due to lower sales prices for paperboard. In the Consumer Products segment, the effect of lower sales prices for tissue products was partially offset by
higher product shipments in 2002.



Expenses for depreciation,
amortization and cost of fee timber harvested were $115.5 million for the year ended December 31, 2002, an increase of $.5 million from the prior year amount of $115.0 million.



For the year ended December 31, 2002, materials, labor and other operating expenses were $1.10 billion, compared to $1.10 billion in
2001. Repair and maintenance expense and wood fiber costs were higher in 2002, but were offset by lower energy costs.



Selling, general and administrative expenses totaled $79.6 million for the year ended December 31, 2002, compared to 2001s expense of $82.8 million. The
change was primarily due to bad debt expense incurred in 2001 as a result of a $2.2 million charge related to the insolvency of a pulp broker. In 2002, we expensed the remaining balance due from the pulp broker, totaling $.8 million, after it was
determined that collection was not reasonably likely to occur. In addition, bank fees were lower in 2002 versus 2001.



The following three charges were included in the Restructuring charges line in the Statements of Operations:



| |  |  | In 2002 we recorded a $9.0 million pre-tax charge for costs associated with the elimination of 106 salaried production and administrative positions. We recorded an additional $.2 million
during the first half of 2003 for costs related to terminated employees whose services have been retained beyond the initial 60-day period following the announced job elimination, as required by Statement of Financial Accounting Standards (SFAS) No.
146. As of December 31, 2002, 82 employees had been terminated, three had assumed other positions within the company as a result of job openings, and 21 were scheduled for termination at a later date.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March 2001, we recorded a $4.2 million pre-tax charge associated with a workforce reduction plan at our pulp, paperboard and consumer products operations in Idaho. In
September 2001, an additional $0.4 million pre-tax charge was recorded as a result of final cost determinations for pension and medical benefits. The plan permanently reduced the
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | workforce by 124 hourly production and maintenance positions. As of December 31, 2001, all material costs associated with the plan had been incurred.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2001, we reversed $1.8 million of an $18.5 million pre-tax charge, taken in September 2000, for costs associated with the closure of a plywood mill. Our initial estimate of the
cost to close the mill included expected costs for some aspects of maintenance and demolition that were not incurred.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest expense was $59.9 million for the year ended December 31, 2002, substantially less than the $77.9 million charged against income in 2001. The decrease
reflected our net reduction of over $470 million of debt during 2002.



We
incurred one-time, pre-tax costs of $15.4 million during 2002 related to our early retirement of over $380 million of outstanding debt. These costs included cash fees and premiums of $10.6 million and the non-cash write-off of related debt financing
costs totaling $4.8 million.



Interest income for 2002 totaled $1.9
million, slightly less than the $2.6 million recorded in 2001.



For the
year ended December 31, 2002, we recorded an income tax benefit of $32.6 million, reflecting our net loss from continuing operations before taxes, based on an estimated effective tax rate of 39%. For the year ended December 31, 2001, we recorded an
income tax benefit of $36.2 million, also reflecting an estimated effective tax rate of 39%.



We recorded a net loss from continuing operations of $50.9 million for the year ended December 31, 2002, compared to a net loss from continuing operations of $56.6 million for the year ended December 31, 2001.



We incurred a pre-tax loss on our discontinued operations of $300.7 million in 2002.
The discontinued operations included our former Printing Papers segment and a hardwood sawmill. Included in the amount was $276.2 million for loss on the disposition of these properties and $24.5 million from operational losses. In 2001 these
operations incurred pre-tax losses of $37.5 million.



Our net loss for
2002 was $234.4 million, compared to a net loss of $79.4 million in 2001. The unfavorable comparison was due to recognition of the substantial charge for our discontinued operations.



In December 2002, as a result of market declines in our pension assets in the second half of 2002 and a reduction in the discount rate
from 7.25% to 6.75%, we recorded in Other comprehensive loss, net of tax an adjustment for a minimum pension liability totaling $33.2 million, after tax.



Discussion of business segments



The Resource segment reported operating income of $62.6 million for the year ended December 31, 2002, up from $55.3 million reported in 2001. Segment net sales were
$411.8 million, compared to $410.1 million in 2001. Increased sales prices and higher sales volumes to third parties in Idaho, Minnesota and Arkansas in 2002, as well as slightly higher land sales, were largely offset by a decrease in internal net
sales. Resource segment expenses decreased 2% to $349.3 million in 2002, compared to $354.8 million in 2001. Decreased purchases of residual fiber reduced costs but were partially offset by increased logging costs.



The Wood Products segment incurred an operating loss of $27.0 million for the year
ended December 31, 2002, compared to an operating loss of $26.6 million incurred in 2001. Market conditions were difficult for our wood products due to the industrys oversupply position, which



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persisted throughout 2002, despite a positive new home construction environment. Foreign imports continued to affect pricing during all of 2002, even after imposition
of a U.S. duty on Canadian products beginning in May. Net sales for the segment were $509.2 million, slightly higher compared to $502.3 million reported in 2001. Net sales of oriented strand board increased 12% in 2002, to $187.3 million, due to a
13% increase in shipments. A small decrease in lumber shipments, combined with slightly lower sales prices, resulted in a net sales decrease to $249.8 million from $251.9 million in 2001. Net sales of plywood decreased 14% to $34.9 million. Plywood
shipments were down 17%, due in large part to lower production in 2002 compared to 2001. Production was higher in 2001 due to extra shifts above the normal operating schedule at our St. Maries, Idaho, mill. Net sales of particleboard were $14.1
million, compared to $15.8 million in 2001. Expenses were $536.2 million for the segment in 2002, compared to $528.9 million in 2001. Higher wood fiber costs were partially offset by small declines in energy and labor costs. Wood fiber costs were
higher due in large part to the full years operation of the Cook, Minnesota, oriented strand board mill. The mill was shut down for a portion of the first quarter of 2001 to complete a modernization and expansion project.



The Pulp and Paperboard segment incurred an operating loss of $42.8 million in 2002,
compared to a loss of $56.0 million in 2001. Segment net sales decreased to $443.6 million for 2002, compared to $464.7 million in 2001. The decrease was due to lower sales prices and shipments for paperboard. Paperboard net sales declined 6% to
$395.1 million from $420.6 million in 2001 due to a 5% decrease in sales prices and a 1% decline in shipments. The markets for paperboard reflected the difficult general economic conditions in 2002, as well as increased competition from
international producers of paperboard. A $4.4 million increase in pulp net sales, due to a 12% increase in shipments, partially offset the decrease in paperboard net sales. Segment expenses were $486.4 million in 2002, compared to $520.7 million in
2001. Energy expense was significantly lower in 2002 but was partially offset by higher repair and maintenance expense and wood fiber costs. Repair and maintenance expense was higher due to a scheduled major maintenance shutdown at the Cypress Bend,
Arkansas, pulp and paperboard mill and some equipment improvements at the Lewiston, Idaho, pulp and paperboard mill. Included in expenses for 2001 was an $11.1 million charge related to a lawsuit against a vendor and bad debt expense of $2.2 million
related to the insolvency of a pulp broker.



The Consumer Products
segment reported operating income of $42.8 million in 2002, slightly higher than 2001s operating income of $41.6 million. Sales prices for consumer tissue products were down 3%, resulting in a decline in 2002 net sales to $315.7 million from
$317.7 million in 2001. Segment expenses were $272.9 million in 2002, compared to $276.2 million in 2001. Lower energy expense in 2002 was primarily responsible for the favorable comparison.



Liquidity and Capital Resources



At December 31, 2003, our financial position included long-term debt of $618.8 million, including current installments on long-term
debt of $0.5 million. Long-term debt at December 31, 2003 (including current installments) declined $19.5 million from the December 2002 balance due to normal payments on maturing debt of $15.5 million and the early retirement of $4.0 million of
long-term debt. The majority of the repayments on maturing debt were made using $15.0 million placed in an interest-bearing escrow account in September 2002 that was restricted to the repayment of $15 million of our medium-term notes, which matured
on April 4, 2003. Early retirements of long-term debt consisted of a bond associated with our Brainerd facility totaling $0.9 million and medium-term notes of $3.1 million. The Brainerd bond was called as a result of the sale of the facility in
February 2003, and the medium-term notes (whose maturity date was 2018) were repurchased on the open market. Stockholders equity increased $40.1 million, largely due to net earnings of $50.7 million for 2003 and treasury stock issuances of
$6.9 million, partially offset by dividend payments of $17.2 million. The ratio of long-term debt (including current installments) to stockholders equity was 1.31 to 1 at December 31, 2003, compared to 1.48 to 1 at December 31, 2002.



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Scheduled payments due on long-term debt during each of the five years subsequent to December 31, 2003, are as
follows:



|     |  |                        |      
|---- |  | ---------------------- | -----
|     |  | (Dollars in thousands)
|2004 |  | $                      | 507  
|2005 |  |                        | 1,508
|2006 |  |                        | 2,758
|2007 |  |                        | 6,559
|2008 |  |                        | 609  



Working capital totaled $160.8
million at December 31, 2003, an increase of $58.1 million from December 31, 2002. The significant changes in the components of working capital are as follows:



| |  |  | Restricted cash declined $15.1 million due to its use for the repayment of medium term notes, which matured in April 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Short-term investments increased $38.1 million. We invested positive cash flow from increased operating earnings not immediately needed for operations or capital expenditures into short-term
bank instruments. The increase also reflects our investment in Euro, which will be used to pay the remaining balance due to the supplier of our tissue machine in Las Vegas.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Receivables declined $14.6 million as a result of the receipt of an income tax settlement from the Internal Revenue Service totaling approximately $22.3 million. Increased sales and the
corresponding increase in customer receivables partially offset the effect of the tax settlement receipt.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prepaid expenses declined $20.7 million largely as a result of a $10.4 million reduction in our current deferred tax asset and a reimbursement for a deposit on production equipment of
approximately $10.0 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2003 we repaid $40.0 million of notes payable outstanding at December 31, 2002, under our bank credit facility.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Current installments on long-term debt declined $15.1 million. We made $15.5 million of scheduled debt payments, which were partially offset by approximately $0.5 million of debt scheduled
for payment in 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accounts payable and accrued liabilities declined $22.2 million, largely due to accrued taxes declining $9.4 million and declines in reserves for insurance, property taxes and employee
benefits.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net cash provided by operations in 2003 totaled
$181.3 million, compared with cash used for operations of $41.9 million in 2002 and cash provided by operations of $29.4 million in 2001. Net earnings from continuing operations, versus a net loss in 2002, combined with cash generated from working
capital changes were largely responsible for the favorable comparison in 2003. The net earnings were generally due to significantly higher sales, lower interest expense and higher interest income, as previously discussed. An increase in cash used
for working capital items in 2002 accounted for a majority of the unfavorable comparison to 2001.



Net cash used for investing was $131.4 million in 2003, while net cash provided by investing was $46.5 million in 2002 and net cash used for investing was $177.4
million in 2001. In 2003 we used $79.7 million for capital spending, $19.5 million to fund qualified pension plans and $38.1 million to increase our short-term investments. These activities were partially offset by the use of $15.1 million of
restricted cash to repay debt. A significant portion of 2003 capital spending was used for construction of a new tissue machine in North Las Vegas, Nevada. Total spending on this project was $44.4 million during the year. The balance of capital
spending in 2003 was focused on forest resources



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and various small projects designed to improve product quality and manufacturing efficiency. We contributed $19.5 million to our two qualified hourly defined benefit
pension plans, representing the maximum contribution allowed for tax deduction purposes. The contribution should eliminate the requirement for any material contributions to the plans for the next two years, in the absence of a significant drop in
our discount rate assumption. Cash provided by investing in 2002 was largely from the use of restricted cash and the liquidation of short-term investments. The funds were used to repay long-term debt. Capital spending of $51.6 million in 2002 was
modestly higher than the $42.7 million spent in 2001. In September 2002, we announced plans to spend $66 million to construct a new tissue machine in Las Vegas, Nevada. Of that amount, $19.2 million was spent on the project in 2002. The balance of
capital spending in 2002 focused on routine general replacement, safety, forest resource and environmental projects.



At December 31, 2003, our authorized capital spending budget, including $11.4 million carried over from prior years, totaled $68.2 million. We expect to spend $67.7
million of this amount in 2004. Spending in 2004 will consist of the completion of the new tissue machine in Las Vegas as well as various routine general replacement and forest resource projects. Spending on projects may be delayed due to the
acquisition of environmental permits, acquisition of equipment, engineering, weather and other factors.



Net cash used for financing totaled $55.4 million in 2003, compared to cash used for financing of $492.0 million in 2002 and cash provided by financing of $102.0
million in 2001. The majority of cash used for financing in 2003 was to repay borrowings under our bank credit facility totaling $40.0 million and to retire long-term debt in the amount of $19.5 million. Cash was also used to pay dividends of $17.2
million. The majority of cash used for financing in 2002 was for the retirement of $511.9 million of long-term debt. During 2002 we used restricted cash to repay our $100 million 6.25% Debentures, and we retired other debt using proceeds from asset
sales. Notes payable increased $40.0 million in 2002, partially offsetting cash used for debt payments.



Cash generated from discontinued operations in 2003 totaled $3.6 million, which is the net result of the sale of the Brainerd facility in February for $4.44
million. Cash from discontinued operations in 2002 totaled $488.9 million, most of which was cash received from the sale of our Printing Papers segment assets and the sale of our hardwood sawmill in Arkansas. In connection with the sale of our
Printing Papers segment assets in May 2002, we were required under the terms of our bank credit facility to use the proceeds to repay $198.5 million under the term loan portion of our bank credit facility, and all outstanding debt under our
revolving credit line at the date of sale, totaling $33.2 million. We also used a portion of the proceeds to retire approximately $164.9 million of additional debt.



Our current bank credit facility, which expires June 28, 2004, is comprised of a revolving line of credit of up to $150.0 million,
including a $70.0 million subfacility for letters of credit, usage of which reduces availability under the revolving line of credit. Our obligations under the bank credit facility are secured by our accounts receivable and inventory. As of December
31, 2003, there were no borrowings outstanding under the revolving line of credit; however, approximately $14.7 million of the revolving line of credit was used to support outstanding letters of credit. Prior to the expiration of our current bank
credit facility, we expect to either extend the current credit facility or enter into a new credit facility.



Both the agreement governing our bank credit facility and the indenture governing our $250 million 10% senior subordinated notes contain certain covenants that,
among other things, restrict our ability and our subsidiaries ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain
investments or acquisitions, enter into certain transactions with affiliates, make capital



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expenditures, or change the nature of our business. The bank credit facility also contains financial maintenance covenants establishing a maximum funded indebtedness
to capitalization ratio, a minimum consolidated net worth requirement, and a minimum interest coverage ratio. Events of default under the bank credit facility and the indenture include, but are not limited to, payment defaults, covenant defaults,
breaches of representations and warranties, cross defaults to certain other material agreements and indebtedness, bankruptcy and other insolvency events, material adverse judgments, actual or asserted invalidity of security interests or loan
documentation, and certain change of control events involving our company. As of December 31, 2003, we were in compliance with the covenants of our bank credit facility and the $250 million 10% senior subordinated notes.



We believe that our cash, cash flows from operations and available borrowings under our
current bank credit facility (including our anticipated extension or replacement of the bank credit facility) will be sufficient to fund our operations, capital expenditures and debt service obligations for the next twelve months. We cannot assure,
however, that our business will generate sufficient cash flow from operations or that we will be able to extend or replace our current bank credit facility, or that we will be in compliance with the financial covenants in our bank credit facility so
that future borrowings thereunder will be available to us. Thus, our ability to fund our operations will be dependent upon our future financial performance, which will be affected by general economic, competitive and other factors, including those
discussed above under Factors Influencing Our Results of Operations, many of which are beyond our control.



On January 30, 2003, Standard & Poors Ratings Services (S&P) announced that it had lowered our senior unsecured debt rating to BB+ and affirmed our
senior secured bank loan rating at BBB-. The ratings downgrade by S&P caused the interest rate on our $100 million Credit Sensitive Debentures to increase from 9.425% to 12.5%, effective January 30, 2003. Also during the first quarter of 2003,
Fitch, Inc. downgraded our senior unsecured debt to BB+ with a negative outlook and affirmed our senior secured bank loan rating at BBB-. Moodys Investors Service Inc.s rating of our debt remains unchanged at Baa3 with a negative
outlook.



The following table summarizes our contractual obligations as
of December 31, 2003. Portions of the amounts shown are reflected in our consolidated financial statements and accompanying footnotes, as required by generally accepted accounting principles. See the footnotes following the table for information
regarding the amounts presented and for references to appropriate financial statement footnotes, which include a detailed discussion of the item.



|                               |  |                        |           |        |   |           |  |           |        |             |   |         |  |   |        
|------------------------------ |  | ---------------------- | --------- | ------ | - | --------- |  | --------- | ------ | ----------- | - | ------- |  | - | -------
|                               |  | Payments due by period
|                               |  | Total                  |           | 1 Year |   | 2-3 Years |  | 4-5 Years |        | Over 5Years
|                               |  | (Dollars in thousands)
|Long-term debt(1)              |  | $                      | 618,785   |        | $ | 507       |  | $         | 4,266  |             | $ | 7,168   |  | $ | 606,844
|Operating leases(2)            |  |                        | 87,907    |        |   | 12,391    |  |           | 21,524 |             |   | 16,779  |  |   | 37,213 
|Purchase obligations           |  |                        | 144,355   |        |   | 110,994   |  |           | 24,850 |             |   | 8,416   |  |   | 95     
|Other long-term obligations(3) |  |                        | 266,514   |        |   | 21,858    |  |           | 46,541 |             |   | 74,801  |  |   | 123,314
|                               |  |                        |           |        |   |           |  |           |        |             |   |         |  |   |        
|Total                          |  | $                      | 1,117,561 |        | $ | 145,750   |  | $         | 97,181 |             | $ | 107,164 |  | $ | 767,466
|                               |  |                        |           |        |   |           |  |           |        |             |   |         |  |   |        

---

|(1) |  | See Note 8, Debt, in the notes to financial statements.
|--- |  | -------------------------------------------------------

|(2) |  | See Note 13, Commitments and Contingencies, in the notes to financial statements.
|--- |  | ---------------------------------------------------------------------------------

|(3) |  | Payments on qualified pension plans are based on estimated minimum required contributions for years 1-5. Payments on postretirement benefit plans are based on expected future benefit payments
as disclosed in Note 12 to the financial statements for years 1-5.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Since December 1999, we have been authorized under a stock repurchase program to repurchase up to two million
shares of our common stock. Under the plan, purchases of common stock may be made from time to time through open market and privately negotiated transactions at prices deemed appropriate by management. Through December 31, 2001, a total of 910,900
shares had been acquired under the stock repurchase program. No shares were acquired in 2002 or 2003, and we do not expect to repurchase additional common stock in the near future.



It is our practice to periodically review strategic and operational alternatives to improve our operating results and financial
position. In this regard, we consider and plan to continue to consider, among other things, adjustments to our capital expenditures and overall spending, the restructuring of our operations to achieve greater efficiencies, and the disposition of
assets that may have greater value to others. There can be no assurance that we will be successful in implementing any new strategic or operational initiatives or, if implemented, that they will have the effect of improving our operating results and
financial position.



Off-Balance Sheet Arrangements



We currently are not a party to off-balance sheet arrangements that would require
disclosure under this section.



Environment



We are subject to extensive federal and state environmental regulations at our
operating facilities and timberlands, particularly with respect to air emissions, wastewater discharges, solid and hazardous waste management, site remediation, forestry operations and endangered species. We endeavor to comply with all environmental
regulations and regularly monitor our activities for such compliance. Compliance with environmental regulations is a significant factor in our business and requires capital expenditures as well as additional operating costs. Capital expenditures
specifically designated for environmental compliance totaled approximately $0.4 million during 2003 and are budgeted to be approximately $4.8 million in 2004.



As previously discussed in Item I, Business, our timberlands in Idaho, Arkansas and Minnesota are certified by third parties to be in compliance with the
Sustainable Forestry Initiative (SFI) Program and the International Organization on Standardization (ISO) 14001 standard for environmental management systems. Participation in the SFI and ISO programs is voluntary, can require operating processes
which are more stringent than existing federal or state requirements, and can increase our operating costs to maintain certification. Such operating costs have not had a material adverse effect on our competitive position, nor do we expect that they
will in the future.



In early 1998 the Environmental Protection Agency
(EPA) published the Cluster Rule regulations specifically applicable to the pulp and paper industry. These extensive regulations govern both air and water emissions. During 2001, we completed modifications to process equipment and
operating procedures to comply with Phase I of the regulations. Phase II of the regulations relates to control of high volume, low concentration emissions at kraft pulp mills, and our compliance efforts are scheduled to be completed in 2006 at an
expected cost of approximately $6 million. We do not expect that such compliance costs will have a material adverse effect on our competitive position.



Our pulp mill at Lewiston, Idaho, discharges treated mill effluent into the nearby Snake River. Federal law requires that we comply with provisions of a National
Pollution Discharge Elimination System (NPDES) permit. As allowed by federal regulations, we are operating under an NPDES permit that expired in 1997, but which continues to be in force until the effective date of a new NPDES permit. The EPA
published a revised draft NPDES permit in June 2003, which among other matters requires a significant reduction in biochemical oxygen demand over the five year period of the new



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permit and also requires within two years of the effective date of the new permit a reduction in the temperature of the effluent during the months of July, August and
September each year. Meeting these requirements would require modifications of operating practices that will increase operating costs. Physical modifications to the effluent system over the next several years may be required at a cost of up to $5
million. We do not expect that such compliance costs will have a material adverse effect on our competitive position.



The EPA is currently developing additional Maximum Achievable Control Technology (MACT) standards, which will affect wood products panel facilities. The effective
date of these standards is expected to be in early 2004, with compliance required by early 2007. We have studied the proposed MACT standards for power boiler operations and for wood products operations, and estimate the capital expenditures
necessary for compliance will be approximately $11 million. We do not expect such compliance costs to have a material adverse effect on our competitive position.



We believe that our facilities are currently in substantial compliance with applicable environmental laws and regulations. We cannot
assure, however, that situations that may give rise to material environmental liabilities will not be discovered or that the enactment of new environmental laws or regulations or changes in existing laws or regulations will not require significant
expenditures by us. In that regard, in late January 2004, we voluntarily reported to the Minnesota Pollution Control Agency (MPCA) a potential air permit violation at our oriented strand board facility in Bemidji, Minnesota, relating to the
non-operation of equipment used to control nitrous oxide emissions from a wood-fired boiler for a period of approximately 29 months. Corrective action has been taken, and we are cooperating with the MPCA in its investigation. As the investigation is
ongoing, we have not been advised as to what action the MPCA may take.



Taking into consideration the possible consequences of the above described matter, we believe there is no pending or threatened litigation that would have a material adverse effect on our financial position, operations or liquidity.



Income Taxes



Our effective tax rate for 2003 was 34%, compared to 39% for 2002 and 2001. The effective rate for 2003 differs from the one used for
2002 and 2001 as a result of applying anticipated tax credits to our tax provision.



Subsequent Event



In late January 2004, we implemented a
plan to reduce the hourly and salaried workforces at our Consumer Products manufacturing facilities in Lewiston and Las Vegas. A total of 8 salaried and 60 hourly positions were eliminated. Costs for the workforce reduction, consisting of severance
benefits, are expected to be approximately $1.0 million to $1.5 million and will be incurred during the first quarter of 2004.



Quantitative and Qualitative Disclosures About Market Risks



Our exposure to market risks on financial instruments includes interest rate risk on our bank credit facility and long-term debt, credit rate risk on our credit
sensitive debentures, foreign currency exchange rates that affect the value of our investment in Euro and commodity price risk on collars we use to hedge a portion of our short-term natural gas purchases.



As of December 31, 2003, we had no borrowings outstanding under our bank credit
facility. The interest rates applied to borrowings under the bank credit facility are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. We do not attempt to



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mitigate the effects of short-term interest rate fluctuations on our bank credit facility borrowings through the use of derivative financial instruments.



All of our long-term debt is fixed-rate and therefore changes in market interest
rates do not expose us to interest rate risk for these financial instruments. However, in August 2003 we entered into a fixed-to-variable interest rate swap to hedge a portion of our 10% senior subordinated debentures. The swap was designated as a
fair value hedge and calls for the company to pay a variable interest amount, determined semi-annually in arrears and equal to LIBOR plus 4.80%, and receive a fixed-rate payment from a financial institution, calculated on $165.0 million of our 10%
senior subordinated debentures. The terms of the swap allow us to assume there is no ineffectiveness in the hedge. A previous swap, with essentially the same terms, was terminated in June 2003. We have received cash settlements totaling $20.0
million for the previous swap, representing the value of the swap at the time of termination as well as for a repricing of the swap in August 2002. The cash received will be accreted to earnings until the 10% senior subordinated debentures are
retired.



We currently have $100 million of credit sensitive debentures
outstanding which pay interest to the debt holder based upon our credit ratings as established by Standard & Poors Ratings Services (S&P) or Moodys Investors Services, Inc. The following table denotes the interest rate applicable
based on various credit ratings:



|            |  |             |  |                   
|----------- |  | ----------- |  | ------------------
|Ratings     |  |            
|Moodys     |  | S&P         |  | Applicable Rate(%)
|Aaa         |  | AAA         |  | 8.825             
|Aa1 - Aa3   |  | AA+- AA-    |  | 8.925             
|A1 - Baa2   |  | A+- BBB     |  | 9.125             
|Baa3        |  | BBB-        |  | 9.425             
|Ba1         |  | BB+         |  | 12.500            
|Ba2         |  | BB          |  | 13.000            
|Ba3         |  | BB-         |  | 13.500            
|B1 or lower |  | B+ or lower |  | 14.000            



On January 30, 2003, S&P announced that it
had lowered our senior unsecured debt rating to BB+ from BBB-. The ratings downgrade caused the interest rate on our credit sensitive
debentures to increase from 9.425% to 12.5%, effective January 30, 2003.



In the first half of 2003 we entered into forward purchase contracts to acquire Euro, with the settlement of these forward contracts timed to coincide with our required Euro payments to the supplier of our new tissue machine under
construction in North Las Vegas, Nevada. As of December 31, 2003, we had no forward purchase contracts outstanding, however, we held 3.9 million Euro to be used to pay the remainder of the amount due to the supplier upon completion of the project.
The Euro are valued on our Balance Sheet at the exchange rate quoted at December 31, 2003.



During the third quarter of 2003, we entered into several derivative financial instruments designated as cash flow hedges for a portion of our expected natural gas purchases during November 2003 through March 2004. The
financial instruments are in the form of collars, with a ceiling of $6.35 per mmBtu and floors ranging from $4.44 to $5.30 per mmBtu, indexed to the NYMEX, Rocky Mountain and Canadian Border indices. The collars apply to 13,200 mmBtu of natural gas
purchased per day for the five-month period beginning November 1, which represents approximately 60% of our expected daily usage during that period. As designated cash flow hedges, changes in the fair value of the financial instruments are
recognized in Other comprehensive loss, net of tax to the extent the hedges are deemed effective, until the hedged item is recognized in the statement of operations.



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Dollars in thousands  except per-share amounts)



|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                          |  | For the years ended December 31 |          
|                                                                                          |  | 2003                            |           |   | 2002 |   |           | 2001 | 
|Net sales                                                                                 |  | $                               | 1,506,634 |   |      | $ | 1,293,546 |      |  | $ | 1,278,864 |  
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|Costs and expenses:                                                                       |  |                                 |           |   |      |   |           |      |  |   |           |  
|Depreciation, amortization and cost of fee timber harvested                               |  |                                 | 104,859   |   |      |   | 115,469   |      |  |   | 115,033   |  
|Materials, labor and other operating expenses                                             |  |                                 | 1,207,086 |   |      |   | 1,099,690 |      |  |   | 1,095,686 |  
|Selling, general and administrative expenses                                              |  |                                 | 80,280    |   |      |   | 79,618    |      |  |   | 82,842    |  
|Restructuring charges (Note 16)                                                           |  |                                 | (476      | ) |      |   | 8,963     |      |  |   | 2,750     |  
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|                                                                                          |  |                                 | 1,391,749 |   |      |   | 1,303,740 |      |  |   | 1,296,311 |  
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) from operations                                                           |  |                                 | 114,885   |   |      |   | (10,194   | )    |  |   | (17,447   | )
|Interest expense, net of capitalized interest of $2,907 ($300 in 2002 and $1,032 in 2001) |  |                                 | (48,172   | ) |      |   | (59,882   | )    |  |   | (77,853   | )
|Debt retirement costs                                                                     |  |                                 | (248      | ) |      |   | (15,360   | )    |  |   |          |  
|Interest income                                                                           |  |                                 | 14,090    |   |      |   | 1,939     |      |  |   | 2,569     |  
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) before taxes                                                              |  |                                 | 80,555    |   |      |   | (83,497   | )    |  |   | (92,731   | )
|Provision (benefit) for taxes (Note 7)                                                    |  |                                 | 27,334    |   |      |   | (32,564   | )    |  |   | (36,165   | )
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) from continuing operations                                                |  |                                 | 53,221    |   |      |   | (50,933   | )    |  |   | (56,566   | )
|Discontinued operations (Note 17):                                                        |  |                                 |           |   |      |   |           |      |  |   |           |  
|Loss from discontinued operations (including loss on disposal of $2,745, $276,218 and $0) |  |                                 | (4,089    | ) |      |   | (300,734  | )    |  |   | (37,507   | )
|Income tax benefit                                                                        |  |                                 | (1,595    | ) |      |   | (117,286  | )    |  |   | (14,628   | )
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|Net earnings (loss)                                                                       |  | $                               | 50,727    |   |      | $ | (234,381  | )    |  | $ | (79,445   | )
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|Other comprehensive loss, net of tax:                                                     |  |                                 |           |   |      |   |           |      |  |   |           |  
|Cash flow hedges:                                                                         |  |                                 |           |   |      |   |           |      |  |   |           |  
|Net derivative gains, net of income tax provision of $44, $0 and $0                       |  |                                 | 68        |   |      |   |          |      |  |   |          |  
|Minimum pension liability adjustment, net of income tax benefit of $239, $21,231 and $0   |  |                                 | (374      | ) |      |   | (33,207   | )    |  |   |          |  
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|Comprehensive income (loss)                                                               |  | $                               | 50,421    |   |      | $ | (267,588  | )    |  | $ | (79,445   | )
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|Net earnings (loss) per common share from continuing operations:                          |  |                                 |           |   |      |   |           |      |  |   |           |  
|Basic                                                                                     |  | $                               | 1.85      |   |      | $ | (1.79     | )    |  | $ | (2.00     | )
|Diluted                                                                                   |  |                                 | 1.85      |   |      |   | (1.79     | )    |  |   | (2.00     | )
|Net earnings (loss) per common share:                                                     |  |                                 |           |   |      |   |           |      |  |   |           |  
|Basic                                                                                     |  |                                 | 1.77      |   |      |   | (8.23     | )    |  |   | (2.81     | )
|Diluted                                                                                   |  |                                 | 1.77      |   |      |   | (8.23     | )    |  |   | (2.81     | )
|                                                                                          |  |                                 |           |   |      |   |           |      |  |   |           |  



Certain amounts for 2002 and 2001
have been reclassified to conform to the 2003 presentation.



The
accompanying notes and summary of principal accounting policies are

an integral part of these financial statements.



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(Dollars in thousands  except per-share amounts)



|                                                                                                       |  |                |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------ |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                                                       |  | At December 31 |          
|                                                                                                       |  | 2003           |           |   | 2002 |  
|ASSETS                                                                                                 |  |                |           |   |      |  
|Current assets:                                                                                        |  |                |           |   |      |   |           |  
|Cash (Note 11)                                                                                         |  | $              | 7,190     |   |      | $ | 8,973     |  
|Restricted cash (Notes 1, 8 and 11)                                                                    |  |                |          |   |      |   | 15,069    |  
|Short-term investments (Note 11)                                                                       |  |                | 40,091    |   |      |   | 2,000     |  
|Receivables, net of allowance for doubtful accounts of $1,285 ($1,624 in 2002) (Notes 2 and 8)         |  |                | 105,345   |   |      |   | 119,964   |  
|Inventories (Notes 3 and 8)                                                                            |  |                | 159,678   |   |      |   | 159,798   |  
|Prepaid expenses (Note 7)                                                                              |  |                | 18,315    |   |      |   | 39,005    |  
|Assets held for sale (Note 17)                                                                         |  |                |          |   |      |   | 5,000     |  
|                                                                                                       |  |                |           |   |      |   |           |  
|Total current assets                                                                                   |  |                | 330,619   |   |      |   | 349,809   |  
|                                                                                                       |  |                |           |   |      |   |           |  
|Land, other than timberlands                                                                           |  |                | 8,831     |   |      |   | 8,750     |  
|Plant and equipment, at cost less accumulated depreciation of $1,334,918 ($1,260,487 in 2002) (Note 4) |  |                | 740,342   |   |      |   | 758,168   |  
|Timber, timberlands and related logging facilities, net (Note 5)                                       |  |                | 398,899   |   |      |   | 396,426   |  
|Other assets (Note 6)                                                                                  |  |                | 118,686   |   |      |   | 111,664   |  
|                                                                                                       |  |                |           |   |      |   |           |  
|                                                                                                       |  | $              | 1,597,377 |   |      | $ | 1,624,817 |  
|                                                                                                       |  |                |           |   |      |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                   |  |                |           |   |      |  
|Current liabilities:                                                                                   |  |                |           |   |      |   |           |  
|Notes payable (Notes 8 and 11)                                                                         |  | $              |          |   |      | $ | 40,000    |  
|Current installments on long-term debt (Notes 8 and 11)                                                |  |                | 507       |   |      |   | 15,607    |  
|Accounts payable and accrued liabilities (Note 9)                                                      |  |                | 169,310   |   |      |   | 191,497   |  
|Liabilities related to assets held for sale (Note 17)                                                  |  |                |          |   |      |   | 12        |  
|                                                                                                       |  |                |           |   |      |   |           |  
|Total current liabilities                                                                              |  |                | 169,817   |   |      |   | 247,116   |  
|                                                                                                       |  |                |           |   |      |   |           |  
|Long-term debt (Notes 8 and 11)                                                                        |  |                | 618,278   |   |      |   | 622,645   |  
|Other long-term obligations (Note 10)                                                                  |  |                | 266,514   |   |      |   | 267,611   |  
|Deferred taxes (Note 7)                                                                                |  |                | 71,917    |   |      |   | 56,654    |  
|Stockholders equity:                                                                                  |  |                |           |   |      |   |           |  
|Preferred stock, Authorized 4,000,000 shares                                                           |  |                |          |   |      |   |          |  
|Common stock, $1 par value Authorized 40,000,000 shares, issued 32,721,980 shares                      |  |                | 32,722    |   |      |   | 32,722    |  
|Additional paid-in capital                                                                             |  |                | 130,996   |   |      |   | 131,065   |  
|Retained earnings                                                                                      |  |                | 443,158   |   |      |   | 409,692   |  
|Accumulated other comprehensive loss:                                                                  |  |                |           |   |      |   |           |  
|Minimum pension liability adjustment                                                                   |  |                | (33,581   | ) |      |   | (33,207   | )
|Cash flow hedges                                                                                       |  |                | 112       |   |      |   |          |  
|Common shares in treasury 3,881,217 (4,143,329 in 2002)                                                |  |                | (102,556  | ) |      |   | (109,481  | )
|                                                                                                       |  |                |           |   |      |   |           |  
|Total stockholders equity                                                                             |  |                | 470,851   |   |      |   | 430,791   |  
|                                                                                                       |  |                |           |   |      |   |           |  
|                                                                                                       |  | $              | 1,597,377 |   |      | $ | 1,624,817 |  
|                                                                                                       |  |                |           |   |      |   |           |  



Certain amounts for 2002 have
been reclassified to conform to the 2003 presentation.



The accompanying
notes and summary of principal accounting policies are

an integral part of these financial statements.



37



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##### Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)



|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                          |  | For the years ended December 31 |         
|                                                                          |  | 2003                            |          |   | 2002 |   |          | 2001 | 
|CASH FLOWS FROM CONTINUING OPERATIONS                                     |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net earnings (loss)                                                       |  | $                               | 50,727   |   |      | $ | (234,381 | )    |  | $ | (79,445  | )
|Adjustments to reconcile net earnings (loss) to net operating cash flows: |  |                                 |          |   |      |   |          |      |  |   |          |  
|Loss from discontinued operations                                         |  |                                 | 820      |   |      |   | 14,955   |      |  |   | 22,879   |  
|Loss on disposal of discontinued operations                               |  |                                 | 60       |   |      |   | 229,023  |      |  |   |         |  
|Depreciation, amortization and cost of fee timber harvested               |  |                                 | 104,859  |   |      |   | 115,469  |      |  |   | 115,033  |  
|Debt retirement costs                                                     |  |                                 | 248      |   |      |   | 15,360   |      |  |   |         |  
|Deferred taxes                                                            |  |                                 | 15,503   |   |      |   | (132,725 | )    |  |   | (83,351  | )
|Decrease in receivables                                                   |  |                                 | 14,619   |   |      |   | (1,333   | )    |  |   | 27,499   |  
|Decrease (increase) in inventories                                        |  |                                 | 120      |   |      |   | (52,085  | )    |  |   | 19,077   |  
|Decrease (increase) in prepaid expenses                                   |  |                                 | 20,690   |   |      |   | (7,731   | )    |  |   | 29,879   |  
|Increase (decrease) in accounts payable and accrued liabilities           |  |                                 | (26,297  | ) |      |   | 11,534   |      |  |   | (22,211  | )
|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used for) operations                                |  |                                 | 181,349  |   |      |   | (41,914  | )    |  |   | 29,360   |  
|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM INVESTING                                                 |  |                                 |          |   |      |   |          |      |  |   |          |  
|Decrease (increase) in restricted cash                                    |  |                                 | 15,069   |   |      |   | 83,131   |      |  |   | (98,200  | )
|Decrease (increase) in short-term investments                             |  |                                 | (38,091  | ) |      |   | 28,500   |      |  |   | (30,500  | )
|Funding of qualified pension plans                                        |  |                                 | (19,461  | ) |      |   |         |      |  |   | (1,465   | )
|Additions to plant and equipment, and to land other than timberlands      |  |                                 | (64,991  | ) |      |   | (36,956  | )    |  |   | (29,063  | )
|Additions to timber, timberlands and related logging facilities           |  |                                 | (14,695  | ) |      |   | (14,658  | )    |  |   | (13,616  | )
|Disposition of plant and properties                                       |  |                                 | 709      |   |      |   | 2,099    |      |  |   | 15,695   |  
|Other, net                                                                |  |                                 | (9,927   | ) |      |   | (15,629  | )    |  |   | (20,244  | )
|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used for) investing                                 |  |                                 | (131,387 | ) |      |   | 46,487   |      |  |   | (177,393 | )
|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM FINANCING                                                 |  |                                 |          |   |      |   |          |      |  |   |          |  
|Change in book overdrafts                                                 |  |                                 | 4,610    |   |      |   | (9,952   | )    |  |   | (2,366   | )
|Increase (decrease) in notes payable                                      |  |                                 | (40,000  | ) |      |   | 40,000   |      |  |   | (188,943 | )
|Proceeds from long-term debt                                              |  |                                 |         |   |      |   |         |      |  |   | 450,000  |  
|Retirement of long-term debt                                              |  |                                 | (19,467  | ) |      |   | (511,873 | )    |  |   | (101,749 | )
|Premiums and fees on debt retirement                                      |  |                                 | (248     | ) |      |   | (10,584  | )    |  |   |         |  
|Long-term debt issuance fees                                              |  |                                 |         |   |      |   |         |      |  |   | (15,553  | )
|Issuance of treasury stock                                                |  |                                 | 6,856    |   |      |   | 8,146    |      |  |   | 6,620    |  
|Purchase of treasury stock                                                |  |                                 |         |   |      |   |         |      |  |   | (10,453  | )
|Dividends on common stock                                                 |  |                                 | (17,217  | ) |      |   | (17,071  | )    |  |   | (33,108  | )
|Other, net                                                                |  |                                 | 10,113   |   |      |   | 9,349    |      |  |   | (2,477   | )
|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used for) financing                                 |  |                                 | (55,353  | ) |      |   | (491,985 | )    |  |   | 101,971  |  
|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  
|Cash from continuing operations                                           |  |                                 | (5,391   | ) |      |   | (487,412 | )    |  |   | (46,062  | )
|Cash from discontinued operations                                         |  |                                 | 3,608    |   |      |   | 488,910  |      |  |   | 42,880   |  
|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  
|Increase (decrease) in cash                                               |  |                                 | (1,783   | ) |      |   | 1,498    |      |  |   | (3,182   | )
|Balance at beginning of year                                              |  |                                 | 8,973    |   |      |   | 7,475    |      |  |   | 10,657   |  
|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  
|Balance at end of year                                                    |  | $                               | 7,190    |   |      | $ | 8,973    |      |  | $ | 7,475    |  
|                                                                          |  |                                 |          |   |      |   |          |      |  |   |          |  



Net interest paid (net of amounts capitalized)
in 2003, 2002 and 2001 was $46.2 million, $65.1 million and $66.1 million, respectively. Net income tax payments (refunds) in 2003, 2002 and 2001 were $(13.1) million, $(16.0) million and $.3 million, respectively.



Certain amounts for 2002 and 2001 have been reclassified to conform to the 2003
presentation.



The accompanying notes and summary of principal accounting
policies are

an integral part of these financial statements.



38



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##### Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(Dollars in thousands  except per-share amounts)



|                                           |  |                     |  |                           |        |  |                   |         |        |                                    |   |          |                |  |   |                           |   |  |           |   |  |   |          |   |  |   |          |  
|------------------------------------------ |  | ------------------- |  | ------------------------- | ------ |  | ----------------- | ------- | ------ | ---------------------------------- | - | -------- | -------------- |  | - | ------------------------- | - |  | --------- | - |  | - | -------- | - |  | - | -------- | -
|                                           |  | Common Stock Issued |  | AdditionalPaid-In Capital |        |  | Retained Earnings |         |        | AccumulatedOtherComprehensive Loss |   |          | Treasury Stock |  |   | TotalStockholders Equity |  
|                                           |  | Shares              |  | Amount                    |        |  |                   |         | Shares |                                    |   | Amount   |                | 
|Balance, December 31, 2000                 |  | 32,721,980          |  | $                         | 32,722 |  | $                 | 128,984 |        |                                    | $ | 773,697  |                |  | $ |                          |   |  | 4,375,546 |   |  | $ | (122,167 | ) |  | $ | 813,236  |  
|Exercise of stock options and stock awards |  |                    |  |                           |       |  |                   | 5       |        |                                    |   |         |                |  |   |                          |   |  | (750      | ) |  |   | 19       |   |  |   | 24       |  
|Shares purchased at cost*                  |  |                    |  |                           |       |  |                   |        |        |                                    |   |         |                |  |   |                          |   |  | 250,000   |   |  |   |         |   |  |   |         |  
|Issuance of treasury stock                 |  |                    |  |                           |       |  |                   | 989     |        |                                    |   |         |                |  |   |                          |   |  | (214,268  | ) |  |   | 5,608    |   |  |   | 6,597    |  
|Net loss                                   |  |                    |  |                           |       |  |                   |        |        |                                    |   | (79,445  | )              |  |   |                          |   |  |          |   |  |   |         |   |  |   | (79,445  | )
|Common dividends, $1.17 per share          |  |                    |  |                           |       |  |                   |        |        |                                    |   | (33,108  | )              |  |   |                          |   |  |          |   |  |   |         |   |  |   | (33,108  | )
|                                           |  |                     |  |                           |        |  |                   |         |        |                                    |   |          |                |  |   |                           |   |  |           |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2001                 |  | 32,721,980          |  | $                         | 32,722 |  | $                 | 129,978 |        |                                    | $ | 661,144  |                |  | $ |                          |   |  | 4,410,528 |   |  | $ | (116,540 | ) |  | $ | 707,304  |  
|Exercise of stock options and stock awards |  |                    |  |                           |       |  |                   | 141     |        |                                    |   |         |                |  |   |                          |   |  | (25,050   | ) |  |   | 662      |   |  |   | 803      |  
|Issuance of treasury stock                 |  |                    |  |                           |       |  |                   | 946     |        |                                    |   |         |                |  |   |                          |   |  | (242,149  | ) |  |   | 6,397    |   |  |   | 7,343    |  
|Net loss                                   |  |                    |  |                           |       |  |                   |        |        |                                    |   | (234,381 | )              |  |   |                          |   |  |          |   |  |   |         |   |  |   | (234,381 | )
|Minimum pension liability adjustment       |  |                    |  |                           |       |  |                   |        |        |                                    |   |         |                |  |   | (33,207                   | ) |  |          |   |  |   |         |   |  |   | (33,207  | )
|Common dividends, $.60 per share           |  |                    |  |                           |       |  |                   |        |        |                                    |   | (17,071  | )              |  |   |                          |   |  |          |   |  |   |         |   |  |   | (17,071  | )
|                                           |  |                     |  |                           |        |  |                   |         |        |                                    |   |          |                |  |   |                           |   |  |           |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2002                 |  | 32,721,980          |  | $                         | 32,722 |  | $                 | 131,065 |        |                                    | $ | 409,692  |                |  | $ | (33,207                   | ) |  | 4,143,329 |   |  | $ | (109,481 | ) |  | $ | 430,791  |  
|Exercise of stock options and stock awards |  |                    |  |                           |       |  |                   | 47      |        |                                    |   |         |                |  |   |                          |   |  | (49,925   | ) |  |   | 1,319    |   |  |   | 1,366    |  
|Issuance of treasury stock                 |  |                    |  |                           |       |  |                   | (173    | )      |                                    |   |         |                |  |   |                          |   |  | (212,187  | ) |  |   | 5,606    |   |  |   | 5,433    |  
|Performance share awards                   |  |                    |  |                           |       |  |                   | 57      |        |                                    |   |         |                |  |   |                          |   |  |          |   |  |   |         |   |  |   | 57       |  
|Net earnings                               |  |                    |  |                           |       |  |                   |        |        |                                    |   | 50,727   |                |  |   |                          |   |  |          |   |  |   |         |   |  |   | 50,727   |  
|Cash flow hedges                           |  |                    |  |                           |       |  |                   |        |        |                                    |   | (44      | )              |  |   | 112                       |   |  |          |   |  |   |         |   |  |   | 68       |  
|Minimum pension liability adjustment       |  |                    |  |                           |       |  |                   |        |        |                                    |   |         |                |  |   | (374                      | ) |  |          |   |  |   |         |   |  |   | (374     | )
|Common dividends, $.60 per share           |  |                    |  |                           |       |  |                   |        |        |                                    |   | (17,217  | )              |  |   |                          |   |  |          |   |  |   |         |   |  |   | (17,217  | )
|                                           |  |                     |  |                           |        |  |                   |         |        |                                    |   |          |                |  |   |                           |   |  |           |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2003                 |  | 32,721,980          |  | $                         | 32,722 |  | $                 | 130,996 |        |                                    | $ | 443,158  |                |  | $ | (33,469                   | ) |  | 3,881,217 |   |  | $ | (102,556 | ) |  | $ | 470,851  |  
|                                           |  |                     |  |                           |        |  |                   |         |        |                                    |   |          |                |  |   |                           |   |  |           |   |  |   |          |   |  |   |          |  

---

|* |  | Represents shares purchased pursuant to previously issued put option contracts. The cost of the shares ($10,453) was recorded in treasury stock at the time the put option contract was issued.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The accompanying notes and summary of principal accounting
policies are

an integral part of these financial statements.



39



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##### Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



SUMMARY OF PRINCIPAL ACCOUNTING POLICIES



Consolidation



The financial statements include the accounts of Potlatch
Corporation and its subsidiaries after elimination of significant intercompany transactions and accounts. There are no significant unconsolidated subsidiaries.



Potlatch Corporation is an integrated forest products company with substantial timber resources. We are engaged principally in the growing and harvesting of
timber and the manufacture and sale of wood products and pulp and paper products. Our timberlands and all of our manufacturing facilities are located within the continental United States. The primary market for our products is the United States,
although we sell a significant amount of paperboard to countries in the Pacific Rim.



Certain amounts for 2002 and 2001 have been reclassified in the financial statements and notes to conform to the 2003 presentation.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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 and
assumptions.



Earnings (Loss) Per Common Share



Earnings (loss) per common share are computed by dividing net earnings (loss) by the
weighted average number of common shares outstanding in accordance with SFAS No. 128, Earnings Per Share. The following table reconciles the number of common shares used in the basic and diluted earnings per share calculations:



|                                          |  |            |  |            |  |           
|----------------------------------------- |  | ---------- |  | ---------- |  | ----------
|                                          |  | 2003       |  | 2002       |  | 2001      
|Basic average common shares outstanding   |  | 28,706,323 |  | 28,461,817 |  | 28,281,785
|Incremental shares due to:                |  |            |  |            |  |           
|Common stock options                      |  | 12,105     |  |           |  |          
|                                          |  |            |  |            |  |           
|Diluted average common shares outstanding |  | 28,718,428 |  | 28,461,817 |  | 28,281,785
|                                          |  |            |  |            |  |           



Incremental shares due to common
stock options of 17,042 for the year ended December 31, 2002, and common stock options of 2,162 and put options of 34,147 for the year ended December 31, 2001, were not included in the diluted average common shares outstanding totals for 2002 and
2001 due to their antidilutive effect as a result of our net losses for those years. Stock options to purchase 2,327,470, 1,981,907 and 2,508,375 shares of common stock for 2003, 2002 and 2001, respectively, were not included in the computation of
diluted earnings per share because the exercise prices of the stock options were greater than the average market price of the common shares.



Stock Based Compensation



We currently have three stock incentive plans, the 1989, 1995 and 2000 plans, under which options or performance shares are outstanding. We apply the intrinsic
value method under Accounting



40



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##### Table of Contents

Principles Board (APB) Opinion No. 25 and related Interpretations in accounting for our stock based compensation. No compensation cost is recognized for options
granted under the plans when the exercise price is equal to market value at the grant date. For performance share awards, which were first granted in December 2003, compensation expense is recorded ratably over the performance period based upon the
market value of our stock and the likelihood that performance measurements will be met. Compensation expense related to performance shares was less than $0.1 million in 2003.



Had stock based compensation costs been determined based on the fair value at the grant dates as prescribed by SFAS No. 123, our net
earnings (loss) and earnings (loss) per share would have been the pro forma amounts indicated below:



|                                                                            |  |                                                   |        |   |      |   |          |      |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------------------------- | ------ | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                            |  | 2003                                              |        |   | 2002 |   |          | 2001 | 
|                                                                            |  | (Dollars in thousands  except per-share amounts) |       
|Net earnings (loss), as reported                                            |  | $                                                 | 50,727 |   |      | $ | (234,381 | )    |  | $ | (79,445 | )
|Add: stock based compensation expense recorded under APB No. 25, net of tax |  |                                                   | 35     |   |      |   |         |      |  |   |        |  
|Deduct: stock based compensation determined under SFAS No. 123, net of tax  |  |                                                   | (1,964 | ) |      |   | (1,912   | )    |  |   | (1,993  | )
|                                                                            |  |                                                   |        |   |      |   |          |      |  |   |         |  
|Pro forma net earnings (loss)                                               |  | $                                                 | 48,798 |   |      | $ | (236,293 | )    |  | $ | (81,438 | )
|                                                                            |  |                                                   |        |   |      |   |          |      |  |   |         |  
|Basic and diluted earnings (loss) per share, as reported                    |  | $                                                 | 1.77   |   |      | $ | (8.23    | )    |  | $ | (2.81   | )
|Pro forma basic and diluted earnings (loss) per share                       |  |                                                   | 1.70   |   |      |   | (8.30    | )    |  |   | (2.88   | )
|                                                                            |  |                                                   |        |   |      |   |          |      |  |   |         |  



Inventories



Inventories are stated at the lower of cost or market. The last-in, first-out method
is used to determine cost of logs, lumber, plywood, particleboard and chips. The average cost method is used to determine cost of all other inventories.



Properties



Property, plant and equipment are valued at cost less accumulated depreciation. Depreciation of buildings, equipment and other depreciable assets is determined using the straight-line method of depreciation. Estimated useful
lives range from 30 to 40 years for buildings and structures and 2 to 25 years for equipment.



Timber, timberlands and related logging facilities are valued at cost, net of the cost of fee timber harvested and depreciation or amortization. Cost of fee timber harvested is determined annually based on costs incurred and
the related current estimated recoverable volume. Recoverable volume includes growth that has occurred to date and does not include any anticipated future cost or future growth. Permit timber is timber purchased under contracts where the company
does not own the underlying land. The cost of permit timber is capitalized in timber accounts, and these costs are classified as depletion expense as the volume of timber is harvested.



Expenditures for reforestation include all costs related to stand establishment, such as site preparation, costs of seeds or
seedlings, and tree planting. All reforestation expenditures representing direct costs incurred for stand establishment are capitalized in reproduction accounts until the timber reaches maturity. Costs are then depleted when harvesting activities
begin. Expenditures for forest management, which consist of regularly recurring items necessary to the ownership and administration of our timber and timberlands, are accounted for as current operating expenses.



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##### Table of Contents

Logging roads and related facilities on land not owned by us are amortized as the related timber is removed.
Logging roads and related facilities on our land are presumed to become a part of our road system unless it is known at the time of construction that the road will be abandoned. Therefore, the base cost of the road, such as the clearing, grading,
and ditching, is not amortized and remains a capitalized item until abandonment or other disposition, while other portions of the initial cost, such as bridges, culverts and gravel surfacing are depreciated over their useful lives, which range from
10 to 20 years. When it is known at the time of construction or purchase that a road will be abandoned after a given event has occurred, the total cost is amortized in the same manner as for roads on non-owned land.



Major improvements and replacements of property are capitalized. Maintenance, repairs,
and minor improvements and replacements are expensed. Upon retirement or other disposition of property, applicable cost and accumulated depreciation or amortization are removed from the accounts. Any gains or losses are included in earnings.



Long-Lived Assets



We account for impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets to be disposed of are reported
at the lower of carrying amount or fair value less cost to sell.



Income Taxes



The provision for taxes on income is based on earnings or loss
reported in the financial statements. Deferred income taxes are recorded under the asset and liability method for the temporary differences between reported earnings and taxable income using current tax laws and rates.



Environment



As part of our corporate policy, we have an ongoing process to monitor, report on and comply with environmental requirements. Based on
this ongoing process, accruals for environmental liabilities are established in accordance with SFAS No. 5. We estimate our environmental liabilities based on various assumptions and judgments, the specific nature of which varies in light of the
particular facts and circumstances surrounding each environmental liability. These estimates typically reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and monitoring activities
and the probable cost of these activities, and in some cases reflect assumptions and judgments as to the obligation or willingness and ability of third parties to bear a proportionate or allocated share of the cost of these activities. Due to the
numerous uncertainties and variables associated with these assumptions and judgments, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related
liabilities are subject to substantial uncertainties. We regularly monitor our estimated exposure to environmental liabilities and, as additional information becomes known, our estimates may change significantly. Our estimates of our environmental
liabilities do not reflect potential future recoveries from insurance carriers except to the extent that recovery may from time to time be deemed probable as a result of a carriers agreement to payment terms. In those instances in which our
estimated exposure reflects actual or anticipated cost-sharing arrangements with third parties, we do not believe that we will be exposed to additional material liability as a result of non-performance by such third parties. Currently, we are not
aware of any material environmental liabilities and have accrued for only specific environmental remediation costs that we have determined are probable and reasonably estimable.



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Revenue Recognition



We recognize revenue from product sales to our customers when title and risk of loss pass to the customer, which generally occurs upon shipment. In the case of
export sales, title may not pass until the product reaches a foreign port.



Recent
Accounting Pronouncements



We adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, effective January 1, 2003. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, with the associated asset retirement
costs capitalized as part of the carrying amount of the long-lived asset. Adoption of this Statement did not have a material effect on our financial condition or results of operations.



We adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities effective January 1, 2003 and as
subsequently amended. The Interpretation requires that an enterprises consolidated financial statements include entities in which the enterprise has a controlling financial interest. Adoption of the Interpretation did not have a material
effect on our financial condition or results of operations.



In May 2003,
the FASB issued and we adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement requires certain financial instruments to be classified as liabilities, rather
than equity, in a statement of financial condition. We currently do not have outstanding any financial instruments that fall under the scope of SFAS No. 150.



In December 2003, the FASB issued a revision of SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits. The revised
statement is effective for financial statements with fiscal years ending after December 15, 2003. It requires disclosures in addition to those contained in the original Statement No. 132 about assets, obligations, cash flows and the net periodic
benefit cost of defined benefit pension plans and other postretirement benefit plans. The information contained in Note 12, Savings, Pension and Other Postretirement Benefit Plans, on pages 50-54, incorporates the additional disclosure items
required by the revised Statement No. 132.



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note
1.    Restricted Cash



In September 2002, we
placed $15.0 million into an interest-bearing escrow account under the terms of an amendment to our credit agreement. The escrow accounts use was restricted to the repayment of $15 million of our medium-term notes, which matured on April 4,
2003.



Note 2.    Receivables, net



The receivables balance at December 31, 2002, included approximately $22.3 million for
settlements reached with the Internal Revenue Service for the years 1989 through 1994. The settlements were received in June 2003. Of the amount received, $12.5 million was classified as interest income.



Note 3.    Inventories



|                                            |  |                        |         |      |   |        
|------------------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                            |  | 2003                   |         | 2002
|                                            |  | (Dollars in thousands)
|Logs, pulpwood, chips and sawdust           |  | $                      | 25,156  |      | $ | 25,212 
|Lumber and other manufactured wood products |  |                        | 20,008  |      |   | 14,954 
|Pulp, paper and converted paper products    |  |                        | 71,410  |      |   | 79,690 
|Materials and supplies                      |  |                        | 43,104  |      |   | 39,942 
|                                            |  |                        |         |      |   |        
|                                            |  | $                      | 159,678 |      | $ | 159,798
|                                            |  |                        |         |      |   |        
|Valued at lower of cost or market:          |  |                        |         |      |   |        
|Last-in, first-out basis                    |  | $                      | 40,056  |      | $ | 36,125 
|Average cost basis                          |  |                        | 119,622 |      |   | 123,673
|                                            |  |                        |         |      |   |        
|                                            |  | $                      | 159,678 |      | $ | 159,798
|                                            |  |                        |         |      |   |        



If the last-in, first-out
inventory had been priced at lower of current average cost or market, the values would have been approximately $27.3 million higher at December 31, 2003, and $22.4 million higher at December 31, 2002. In 2003 and 2002, reductions in quantities of
LIFO inventories valued at lower costs prevailing in prior years had the effect of increasing earnings, net of income taxes, by approximately $0.5 million ($.02 per common share) and $3.2 million ($.11 per common share), respectively.



Note 4.    Plant and Equipment



|                         |  |                        |           |      |   |          
|------------------------ |  | ---------------------- | --------- | ---- | - | ---------
|                         |  | 2003                   |           | 2002
|                         |  | (Dollars in thousands)
|Land improvements        |  | $                      | 75,128    |      | $ | 74,661   
|Buildings and structures |  |                        | 278,256   |      |   | 277,369  
|Machinery and equipment  |  |                        | 1,646,265 |      |   | 1,637,864
|Construction in progress |  |                        | 75,611    |      |   | 28,761   
|                         |  |                        |           |      |   |          
|                         |  | $                      | 2,075,260 |      | $ | 2,018,655
|                         |  |                        |           |      |   |          



Depreciation charged against
income amounted to $80.8 million in 2003 ($84.5 million in 2002 and $85.1 million in 2001).



At December 31, 2003, our authorized capital spending budget, including $11.4 million carried over from prior years, totaled $68.2 million. We expect to spend $67.7 million of this amount in 2004.



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Note 5.    Timber, Timberlands and Related Logging Facilities



|                           |  |                        |         |      |   |        
|-------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                           |  | 2003                   |         | 2002
|                           |  | (Dollars in thousands)
|Timber and timberlands     |  | $                      | 349,740 |      | $ | 347,853
|Related logging facilities |  |                        | 49,159  |      |   | 48,573 
|                           |  |                        |         |      |   |        
|                           |  | $                      | 398,899 |      | $ | 396,426
|                           |  |                        |         |      |   |        



The cost of timber harvested
from company-owned lands amounted to $9.2 million in 2003 ($10.6 million in 2002 and $8.9 million in 2001). The cost of permit timber harvested from non-company owned lands amounted to $8.8 million in 2003 ($15.8 million in 2002 and $14.8 million in
2001). Amortization of logging roads and related facilities amounted to $2.3 million in 2003 ($2.0 million in 2002 and $2.4 million in 2001).



Note 6.    Other Assets



|               |  |                        |         |      |   |        
|-------------- |  | ---------------------- | ------- | ---- | - | -------
|               |  | 2003                   |         | 2002
|               |  | (Dollars in thousands)
|Pension assets |  | $                      | 91,779  |      | $ | 81,582 
|Other          |  |                        | 26,907  |      |   | 30,082 
|               |  |                        |         |      |   |        
|               |  | $                      | 118,686 |      | $ | 111,664
|               |  |                        |         |      |   |        



Note 7.    Taxes on
Income



The provision (benefit) for taxes on income is comprised of
the following:



|                                        |  |                        |        |      |   |          |      |  |   |         |  
|--------------------------------------- |  | ---------------------- | ------ | ---- | - | -------- | ---- |  | - | ------- | -
|                                        |  | 2003                   |        | 2002 |   |          | 2001 | 
|                                        |  | (Dollars in thousands) |       
|Current                                 |  | $                      | 358    |      | $ | 535      |      |  | $ | 438     |  
|Deferred                                |  |                        | 25,425 |      |   | (150,385 | )    |  |   | (51,231 | )
|                                        |  |                        |        |      |   |          |      |  |   |         |  
|Provision (benefit) for taxes on income |  | $                      | 25,783 |      | $ | (149,850 | )    |  | $ | (50,793 | )
|                                        |  |                        |        |      |   |          |      |  |   |         |  



The provision (benefit) for
taxes on income differs from the amount computed by applying the statutory federal income tax rate of 35 percent to earnings before taxes on income due to the following:



|                                                          |  |                        |        |   |      |   |          |      |  |   |         |  
|--------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                          |  | 2003                   |        |   | 2002 |   |          | 2001 | 
|                                                          |  | (Dollars in thousands) |       
|Computed expected tax expense (benefit)                 |  | $                      | 26,802 |   |      | $ | (134,481 | )    |  | $ | (45,583 | )
|State and local taxes, net of federal income tax benefits |  |                        | 2,987  |   |      |   | (14,985  | )    |  |   | (5,079  | )
|Tax credits                                               |  |                        | (4,000 | ) |      |   |         |      |  |   |        |  
|All other items                                           |  |                        | (6     | ) |      |   | (384     | )    |  |   | (131    | )
|                                                          |  |                        |        |   |      |   |          |      |  |   |         |  
|Provision (benefit) for taxes on income                   |  | $                      | 25,783 |   |      | $ | (149,850 | )    |  | $ | (50,793 | )
|                                                          |  |                        |        |   |      |   |          |      |  |   |         |  
|Effective tax rate                                        |  |                        | 33.7   | % |      |   | 39.0     | %    |  |   | 39.0    | %
|                                                          |  |                        |        |   |      |   |          |      |  |   |         |  



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The tax effects of significant temporary differences creating deferred tax assets and liabilities at December 31
were:



|                                                   |  |                        |         |   |      |   |         |  
|-------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | -
|                                                   |  | 2003                   |         |   | 2002 |  
|                                                   |  | (Dollars in thousands) |        
|Plant and equipment                                |  | $                      | 187,018 |   |      | $ | 214,677 |  
|Timber, timberlands and related logging facilities |  |                        | 57,644  |   |      |   | 53,341  |  
|Postretirement benefits                            |  |                        | (75,310 | ) |      |   | (68,794 | )
|Alternative minimum tax                            |  |                        | (43,868 | ) |      |   | (43,867 | )
|Net operating loss carryforward                    |  |                        | (59,713 | ) |      |   | (71,565 | )
|Employee benefits                                  |  |                        | (12,864 | ) |      |   | (19,108 | )
|Pensions                                           |  |                        | 16,847  |   |      |   | 3,709   |  
|Discontinued operations                            |  |                        | (1,323  | ) |      |   | (26,663 | )
|Other, net                                         |  |                        | (11,345 | ) |      |   | (10,300 | )
|                                                   |  |                        |         |   |      |   |         |  
|Net deferred tax liability                         |  |                        | 57,086  |   |      |   | 31,430  |  
|Current deferred tax assets(1)                     |  |                        | 14,831  |   |      |   | 25,224  |  
|                                                   |  |                        |         |   |      |   |         |  
|Net noncurrent deferred tax liabilities            |  | $                      | 71,917  |   |      | $ | 56,654  |  
|                                                   |  |                        |         |   |      |   |         |  

---

|1 |  | Included in Prepaid expenses in the Balance Sheets.
|- |  | -----------------------------------------------------



As of December 31, 2003 and 2002, we had $153.1 million and $183.5 million, respectively, of net operating loss carryforwards available for use against taxable
earnings in the next 17 to 18 years.



Our federal income tax returns have
been examined, and we have reached final settlement, for all tax years through 1994. The years 1995 through 2001 are currently under examination. In the opinion of management, adequate provision had been made at December 31, 2003, for income taxes
that might be due as a result of these audits, and any resulting assessments will have no material effect on our consolidated earnings.



Note 8.    Debt



|                                                                  |  |                        |         |      |   |        
|----------------------------------------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                                                  |  | 2003                   |         | 2002
|                                                                  |  | (Dollars in thousands)
|Revenue bonds fixed-rate 5.9% to 7.75% due 2003 through 2026      |  | $                      | 170,265 |      | $ | 171,628
|Debentures 6.95% due 2015                                         |  |                        | 22,471  |      |   | 22,469 
|Credit sensitive debentures 9.125% due 2009                       |  |                        | 100,000 |      |   | 100,000
|Medium-term notes fixed-rate 8.27% to 9.46% due 2006 through 2022 |  |                        | 75,950  |      |   | 94,050 
|Senior subordinated notes 10% due 2011                            |  |                        | 250,000 |      |   | 250,000
|Other notes                                                       |  |                        | 99      |      |   | 105    
|                                                                  |  |                        |         |      |   |        
|                                                                  |  |                        | 618,785 |      |   | 638,252
|Less current installments on long-term debt                       |  |                        | 507     |      |   | 15,607 
|                                                                  |  |                        |         |      |   |        
|Long-term debt                                                    |  | $                      | 618,278 |      | $ | 622,645
|                                                                  |  |                        |         |      |   |        



As a result of the Brainerd
facilitys sale in February 2003, we retired early $0.9 million of associated revenue bonds.



We repaid $15.0 million of our medium-term notes, which became due April 4, 2003, using the funds contained in an interest-bearing escrow account that were
restricted to such use. In the fourth quarter of 2003, we retired $3.1 million of medium-term notes (which were due in 2018) through repurchase on the open market.



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The interest rate payable on the 9.125% credit sensitive debentures is subject to adjustment in accordance with the
table below if certain changes in the debt rating of the debentures occur. On January 30, 2003, S&P lowered its rating on our senior debt to BB+, causing the interest rate to increase from 9.425% to 12.5% effective that date.



|            |  |             |  |                   
|----------- |  | ----------- |  | ------------------
|Ratings     |  |            
|Moodys     |  | S&P         |  | Applicable Rate(%)
|Aaa         |  | AAA         |  | 8.825             
|Aa1  Aa3   |  | AA+  AA   |  | 8.925             
|A1  Baa2   |  | A+  BBB    |  | 9.125             
|Baa3        |  | BBB        |  | 9.425             
|Ba1         |  | BB+         |  | 12.500            
|Ba2         |  | BB          |  | 13.000            
|Ba3         |  | BB         |  | 13.500            
|B1 or lower |  | B+ or lower |  | 14.000            



Our current bank credit
facility, which expires June 28, 2004, is comprised of a revolving line of credit of up to $150.0 million, including a $70.0 million subfacility for letters of credit, usage of which reduces availability under the revolving line of credit. Our
obligations under the bank credit facility are secured by our accounts receivable and inventory. As of December 31, 2003, there were no borrowings outstanding under the revolving line of credit; however, approximately $14.7 million of the revolving
line of credit was used to support outstanding letters of credit. At December 31, 2002, we had borrowed $40.0 million under the revolving line of credit, that was classified as Notes payable in the Balance Sheets. Prior to the expiration
of our current bank credit facility, we expect to either extend the current credit facility or enter into a new credit facility.



Our 10% senior subordinated notes due 2011 are unsecured and are subordinated to our senior notes and our bank credit facility.



Both the agreement governing our bank credit facility and the indenture governing our
$250 million 10% senior subordinated notes contain certain covenants that, among other things, restrict our ability and our subsidiaries ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay
dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures, or change the nature of our business. The bank credit facility also
contains financial maintenance covenants establishing a maximum funded indebtedness to capitalization ratio, a minimum consolidated net worth requirement, and a minimum interest coverage ratio. Events of default under the bank credit facility and
the indenture include, but are not limited to, payment defaults, covenant defaults, breaches of representations and warranties, cross defaults to certain other material agreements and indebtedness, bankruptcy and other insolvency events, material
adverse judgments, actual or asserted invalidity of security interests or loan documentation, and certain change of control events involving our company. As of December 31, 2003, we were in compliance with the covenants of our bank credit facility
and the $250 million 10% senior subordinated notes.



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Payments due on long-term debt during each of the five years subsequent to December 31, 2003, are as follows:



|     |  |                        |      
|---- |  | ---------------------- | -----
|     |  | (Dollars in thousands)
|2004 |  | $                      | 507  
|2005 |  |                        | 1,508
|2006 |  |                        | 2,758
|2007 |  |                        | 6,559
|2008 |  |                        | 609  



Note 9.    Accounts
Payable and Accrued Liabilities



|                                                            |  |                        |         |      |   |        
|----------------------------------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                                            |  | 2003                   |         | 2002
|                                                            |  | (Dollars in thousands)
|Trade accounts payable                                      |  | $                      | 42,428  |      | $ | 44,371 
|Accrued wages, salaries and employee benefits               |  |                        | 42,555  |      |   | 51,015 
|Accrued taxes other than taxes on income                    |  |                        | 11,842  |      |   | 11,066 
|Accrued interest                                            |  |                        | 18,074  |      |   | 17,050 
|Accrued taxes on income                                     |  |                        | 3,709   |      |   | 13,059 
|Book overdrafts                                             |  |                        | 20,640  |      |   | 16,030 
|Accrued restructuring, mill closure and divestiture charges |  |                        | 3,541   |      |   | 8,659  
|Other                                                       |  |                        | 26,521  |      |   | 30,247 
|                                                            |  |                        |         |      |   |        
|                                                            |  | $                      | 169,310 |      | $ | 191,497
|                                                            |  |                        |         |      |   |        



Note 10.    Other
Long-Term Obligations



|                                |  |                        |         |      |   |        
|------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                |  | 2003                   |         | 2002
|                                |  | (Dollars in thousands)
|Postretirement benefits         |  | $                      | 193,103 |      | $ | 176,394
|Pension and related liabilities |  |                        | 46,572  |      |   | 69,747 
|Other                           |  |                        | 26,839  |      |   | 21,470 
|                                |  |                        |         |      |   |        
|                                |  | $                      | 266,514 |      | $ | 267,611
|                                |  |                        |         |      |   |        



Note 11.    Financial
Instruments



Estimated fair values of our financial instruments are
as follows:



|                                                 |  |                        |         |           |   |                |  |           |         |  |   |        
|------------------------------------------------ |  | ---------------------- | ------- | --------- | - | -------------- |  | --------- | ------- |  | - | -------
|                                                 |  | 2003                   |         | 2002     
|                                                 |  | CarryingAmount         |         | FairValue |   | CarryingAmount |  | FairValue
|                                                 |  | (Dollars in thousands)
|Cash, restricted cash and short-term investments |  | $                      | 47,169  |           | $ | 47,169         |  | $         | 26,042  |  | $ | 26,042 
|Natural gas collars                              |  |                        | 112     |           |   | 112            |  |           |        |  |   |       
|Interest rate swap                               |  |                        | 2,386   |           |   | 2,386          |  |           | 6,446   |  |   | 6,446  
|Current notes payable                            |  |                        |        |           |   |               |  |           | 40,000  |  |   | 40,000 
|Long-term debt                                   |  |                        | 618,785 |           |   | 651,905        |  |           | 638,252 |  |   | 659,818
|                                                 |  |                        |         |           |   |                |  |           |         |  |   |        



For short-term investments and
current notes payable, the carrying amount approximates fair value. The carrying amount and fair value of our interest rate swap and natural gas collars are based on



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current termination values. The fair value of our long-term debt is estimated based upon the quoted market prices for the same or similar debt issues. The amount of
long-term debt for which there is no quoted market price is immaterial and the carrying amount approximates fair value.



We use derivative financial instruments from time to time as a tool to help us manage our exposure to certain market risks. We enter into derivative financial
instruments as hedges against our exposure to market risks only if we believe there is a high probability that changes in the value of the hedging instrument will offset corresponding changes in the underlying exposure. Relationships between hedging
instruments and hedged items are formally documented, as well as our risk management objectives and strategies for entering into the transactions. Designated cash flow hedges are linked to forecasted transactions. We also periodically assess whether
the derivative financial instruments are effective in offsetting changes in cash flows or the fair value of the hedged items. If a hedge ceases to be highly effective, hedge accounting will be discontinued and derivative instrument gains and losses
will be recognized in earnings. We do not enter into derivative contracts for speculative purposes, whether or not we utilize hedge accounting treatment for a specific transaction. The following describes our activities in this area during 2003.



In December 2001, we entered into a fixed-to-variable interest rate swap
to hedge a portion of our 10% senior subordinated debentures. The swap was designated a fair value hedge and called for the company to pay a variable interest amount, based on LIBOR rates, and receive a fixed-rate payment from a financial
institution, calculated on $165.0 million of our 10% senior subordinated debentures. In June 2003, we terminated the swap. The cash received upon termination of the swap, together with earlier amounts received for an August 2002 repricing, totaled
$20.0 million and will be accreted to earnings until the 10% senior subordinated debentures are retired. In August 2003, we entered into another fixed-to-variable interest rate swap for the same portion of our 10% senior subordinated debentures with
essentially the same terms as the swap that was terminated in June 2003. The variable interest rate we pay is determined semi-annually in arrears and will be equal to LIBOR plus 4.80%.



During the third quarter of 2003, we entered into several derivative financial instruments designated as cash flow hedges for a
portion of our expected natural gas purchases during November 2003 through March 2004. The financial instruments are in the form of collars, with a ceiling of $6.35 per mmBtu and floors ranging from $4.44 to $5.30 per mmBtu, indexed to the NYMEX,
Rocky Mountain and Canadian Border indices. The collars apply to 13,200 mmBtu of natural gas purchased per day for the five-month period beginning November 1, which represents approximately 60% of our expected daily usage during that period. As
designated cash flow hedges, changes in the fair value of the financial instruments are recognized in Other comprehensive loss, to the extent the hedges are deemed effective, until the hedged item is recognized in the statement of
operations.



In the first half of 2003 we entered into forward purchase
contracts to acquire Euro, with the settlement of these forward contracts timed to coincide with our required Euro payments to the supplier of our new tissue machine under construction in North Las Vegas, Nevada. As of December 31, 2003, we had no
forward purchase contracts outstanding; however, we held 3.9 million Euro to be used to pay the remainder of the amount due to the supplier upon completion of the project. The Euro are valued on our Balance Sheet at the exchange rate quoted at
December 31, 2003.



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Note 12.    Savings, Pension and Other Postretirement Benefit Plans



Substantially all of our employees are eligible to participate in 401(k) savings plans
and are covered by noncontributory defined benefit pension plans. These include both company-sponsored and multi-employer plans. In 2003, 2002 and 2001 we made matching 401(k) contributions on behalf of employees of $5.4 million, $7.3 million and
$8.9 million, respectively. We also provide benefits under company-sponsored defined benefit retiree health care and life insurance plans, which cover certain salaried and hourly employees. Most of the retiree health care plans require retiree
contributions and contain other cost sharing features. The retiree life insurance plans are primarily noncontributory.



We use a December 31 measurement date for our benefit plans. The change in benefit obligation, change in plan assets, funded status and related balance sheet
amounts for company-sponsored benefit plans are as follows:



|                                                       |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  
|------------------------------------------------------ |  | ---------------------- | ------- | - | ---------------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                       |  | Pension Benefit Plans  |         |   | Other Postretirement Benefit Plans |  
|                                                       |  | 2003                   |         |   | 2002                               |   |         | 2003 |  |   | 2002     |  
|                                                       |  | (Dollars in thousands) |        
|Benefit obligation at beginning of year                |  | $                      | 525,107 |   |                                    | $ | 527,039 |      |  | $ | 242,413  |   |  | $ | 219,129  |  
|Service cost                                           |  |                        | 9,060   |   |                                    |   | 10,605  |      |  |   | 2,507    |   |  |   | 3,723    |  
|Interest cost                                          |  |                        | 34,067  |   |                                    |   | 36,979  |      |  |   | 17,006   |   |  |   | 16,205   |  
|Plan amendments                                        |  |                        | 750     |   |                                    |   | 2,560   |      |  |   | (7,684   | ) |  |   |         |  
|Actuarial losses                                       |  |                        | 35,569  |   |                                    |   | 16,619  |      |  |   | 44,136   |   |  |   | 37,084   |  
|Curtailments                                           |  |                        |        |   |                                    |   |        |      |  |   |         |   |  |   | (18,272  | )
|Mergers, sales and closures                            |  |                        | (1,285  | ) |                                    |   | (30,603 | )    |  |   |         |   |  |   |         |  
|Benefits paid                                          |  |                        | (40,536 | ) |                                    |   | (38,092 | )    |  |   | (17,414  | ) |  |   | (15,456  | )
|                                                       |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  
|Benefit obligation at end of year                      |  |                        | 562,732 |   |                                    |   | 525,107 |      |  |   | 280,964  |   |  |   | 242,413  |  
|                                                       |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  
|Fair value of plan assets at beginning of year         |  |                        | 471,390 |   |                                    |   | 615,269 |      |  |   | 9,813    |   |  |   | 22,198   |  
|Actual return on plan assets                           |  |                        | 104,206 |   |                                    |   | (67,821 | )    |  |   | 834      |   |  |   | (3,909   | )
|Employer contribution                                  |  |                        | 20,680  |   |                                    |   | 1,215   |      |  |   |         |   |  |   |         |  
|Mergers, sales and closures                            |  |                        |        |   |                                    |   | (39,181 | )    |  |   |         |   |  |   |         |  
|Benefits paid                                          |  |                        | (40,536 | ) |                                    |   | (38,092 | )    |  |   | (10,645  | ) |  |   | (8,476   | )
|                                                       |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  
|Fair value of plan assets at end of year               |  |                        | 555,740 |   |                                    |   | 471,390 |      |  |   | 2        |   |  |   | 9,813    |  
|                                                       |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  
|Funded status                                          |  |                        | (6,992  | ) |                                    |   | (53,717 | )    |  |   | (280,962 | ) |  |   | (232,600 | )
|Unrecognized prior service cost (benefit)              |  |                        | 15,359  |   |                                    |   | 16,411  |      |  |   | (14,695  | ) |  |   | (8,614   | )
|Unrecognized net loss                                  |  |                        | 97,562  |   |                                    |   | 109,399 |      |  |   | 102,554  |   |  |   | 64,820   |  
|Unrecognized net transition asset                      |  |                        |        |   |                                    |   | (37     | )    |  |   |         |   |  |   |         |  
|                                                       |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  
|Prepaid (accrued) benefit cost                         |  | $                      | 105,929 |   |                                    | $ | 72,056  |      |  | $ | (193,103 | ) |  | $ | (176,394 | )
|                                                       |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  
|Amounts recognized in the consolidated balance sheets: |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  
|Prepaid benefit cost                                   |  | $                      | 122,701 |   |                                    | $ | 88,609  |      |  | $ |         |   |  | $ |         |  
|Accrued benefit cost                                   |  |                        | (87,061 | ) |                                    |   | (87,188 | )    |  |   | (193,103 | ) |  |   | (176,394 | )
|Intangible assets                                      |  |                        | 15,238  |   |                                    |   | 16,197  |      |  |   |         |   |  |   |         |  
|Accumulated other comprehensive loss                   |  |                        | 55,051  |   |                                    |   | 54,438  |      |  |   |         |   |  |   |         |  
|                                                       |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  
|Net amount recognized                                  |  | $                      | 105,929 |   |                                    | $ | 72,056  |      |  | $ | (193,103 | ) |  | $ | (176,394 | )
|                                                       |  |                        |         |   |                                    |   |         |      |  |   |          |   |  |   |          |  



The accumulated benefit
obligation for all defined benefit pension plans was $540.8 million and $506.6 million at December 31, 2003, and 2002, respectively.



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In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed
into law. The Act introduces a drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide an equivalent benefit. Neither the accumulated benefit obligation nor the net periodic
benefit cost presented in this footnote reflect the effects of the Act on our postretirement benefit plans. Specific authoritative guidance on accounting for the proposed subsidy is pending and once issued could require us (as sponsor) to change
previously reported information. We have no current plans to amend our postretirement benefit plans as a result of the Act.



Information as of December 31 for pension plans with accumulated benefit obligations in excess of plan assets were as follows:



|                               |  |                        |         |      |   |        
|------------------------------ |  | ---------------------- | ------- | ---- | - | -------
|                               |  | 2003                   |         | 2002
|                               |  | (Dollars in thousands)
|Projected benefit obligation   |  | $                      | 279,680 |      | $ | 262,405
|Accumulated benefit obligation |  |                        | 278,562 |      |   | 259,117
|Fair value of plan assets      |  |                        | 237,660 |      |   | 196,540



Net periodic costs (benefit)
were:



|                                   |  |                        |         |   |                                    |   |         |      |  |   |         |   |  |      |        |   |      |   |        |   |  |   |        |  
|---------------------------------- |  | ---------------------- | ------- | - | ---------------------------------- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                                   |  | Pension Benefit Plans  |         |   | Other Postretirement Benefit Plans |  
|                                   |  | 2003                   |         |   | 2002                               |   |         | 2001 |  |   | 2003    |   |  | 2002 |        |   | 2001 |  
|                                   |  | (Dollars in thousands) |        
|Service cost                       |  | $                      | 9,060   |   |                                    | $ | 10,605  |      |  | $ | 13,178  |   |  | $    | 2,507  |   |      | $ | 3,723  |   |  | $ | 3,243  |  
|Interest cost                      |  |                        | 34,067  |   |                                    |   | 36,979  |      |  |   | 35,754  |   |  |      | 17,006 |   |      |   | 16,205 |   |  |   | 12,942 |  
|Expected return on plan assets     |  |                        | (57,940 | ) |                                    |   | (62,686 | )    |  |   | (60,453 | ) |  |      | (416   | ) |      |   | (1,620 | ) |  |   | (2,847 | )
|Amortization of prior service cost |  |                        | 1,747   |   |                                    |   | 2,296   |      |  |   | 3,356   |   |  |      | (1,618 | ) |      |   | (820   | ) |  |   | (833   | )
|Recognized actuarial loss (gain)   |  |                        | (174    | ) |                                    |   | (5,037  | )    |  |   | (5,378  | ) |  |      | 5,905  |   |      |   | 2,790  |   |  |   |       |  
|Recognized net initial asset       |  |                        | (37     | ) |                                    |   | (37     | )    |  |   | (45     | ) |  |      |       |   |      |   |       |   |  |   |       |  
|                                   |  |                        |         |   |                                    |   |         |      |  |   |         |   |  |      |        |   |      |   |        |   |  |   |        |  
|Net periodic cost (benefit)        |  | $                      | (13,277 | ) |                                    | $ | (17,880 | )    |  | $ | (13,588 | ) |  | $    | 23,384 |   |      | $ | 20,278 |   |  | $ | 12,505 |  
|                                   |  |                        |         |   |                                    |   |         |      |  |   |         |   |  |      |        |   |      |   |        |   |  |   |        |  



The pension benefits presented
above exclude a charge of $0.1 million for a salaried workforce reduction in 2002 and a charge of $2.7 million in 2001 for an hourly workforce reduction program, which are included in Restructuring charges in the Statements of
Operations. The postretirement costs presented above exclude $1.8 million for the salaried workforce reduction in 2002 and $0.5 million in 2001 for the hourly workforce reduction program, which are included in Restructuring charges in
the Statements of Operations.



The pension benefits for 2002 presented
above also do not reflect a cost of $11.0 million related to the sale of Printing Papers segment assets and subsequent closure of a printing papers facility, as well as $0.2 million for the sale of a lumber mill. Postretirement costs of $0.2 million
and $0.2 million, respectively, as a result of these events are also excluded from the 2002 costs presented above. The combined costs of $11.6 million are included in Loss from discontinued operations.



As of December 31, 2003, $70.3 million of minimum pension liabilities for underfunded
plans were included in other long-term liabilities, with corresponding intangible assets of $15.2 million and accumulated other comprehensive loss of $33.6 million, which is net of deferred taxes of $21.5 million. As of December 31, 2002, $70.6
million of minimum pension liabilities were included in other long-term liabilities, with corresponding intangible assets of $16.2 million and accumulated other



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comprehensive loss of $33.2 million, which is net of deferred taxes of $21.2 million. As of December 31, 2001, minimum pension liabilities totaled $2.2 million, with a
corresponding intangible asset of the same amount.



Weighted average
assumptions used to determine the benefit obligation as of December 31 were:



|                                       |  |                       |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |  
|-------------------------------------- |  | --------------------- | - |  | --------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                       |  | Pension Benefit Plans |   |  | Other PostretirementBenefit Plans |  
|                                       |  | 2003                  |   |  | 2002                              |   |  | 2001 |   |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Discount rate                          |  | 6.25                  | % |  | 6.75                              | % |  | 7.25 | % |  | 6.25 | % |  | 6.75 | % |  | 7.25 | %
|Expected return on plan assets         |  | 9.50                  |   |  | 9.50                              |   |  | 9.50 |   |  | 9.00 |   |  | 9.00 |   |  | 9.00 |  
|Rate of salaried compensation increase |  | 4.00                  |   |  | 4.00                              |   |  | 5.00 |   |  |     |   |  |     |   |  |     |  



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



|                                       |  |                       |   |  |                                    |   |  |      |   |  |      |   |  |      |   |  |      |  
|-------------------------------------- |  | --------------------- | - |  | ---------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                       |  | Pension Benefit Plans |   |  | Other Postretirement Benefit Plans |  
|                                       |  | 2003                  |   |  | 2002                               |   |  | 2001 |   |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Discount rate                          |  | 6.75                  | % |  | 7.25                               | % |  | 7.25 | % |  | 6.75 | % |  | 7.25 | % |  | 7.25 | %
|Expected return on plan assets         |  | 9.50                  |   |  | 9.50                               |   |  | 9.50 |   |  | 9.00 |   |  | 9.00 |   |  | 9.00 |  
|Rate of salaried compensation increase |  | 4.00                  |   |  | 5.00                               |   |  | 5.00 |   |  |     |   |  |     |   |  |     |  



The expected return on plan
assets assumption is based upon an analysis of historical long-term returns for various investment categories as measured by appropriate indexes. These indexes are weighted based upon the extent to which plan assets are invested in the particular
categories in arriving at our determination of a composite expected return. Over the past 25 years our actual average annual return on pension plan assets has been 12.0%.



The health care cost trend rate assumption used in determining the accumulated postretirement benefit obligation is 8.00% for 2003.
The rate is assumed to decrease one percent annually to 6.00% in 2005 and remain at that level thereafter. This assumption has a significant effect on the amounts reported. A one percentage point change in the health care cost trend rates would have
the following effects:



|                                                        |  |                        |        |             |   |         |  
|------------------------------------------------------- |  | ---------------------- | ------ | ----------- | - | ------- | -
|                                                        |  | 1% Increase            |        | 1% Decrease |  
|                                                        |  | (Dollars in thousands) |       
|Effect on total of service and interest cost components |  | $                      | 2,594  |             | $ | (2,165  | )
|Effect on postretirement benefit obligation             |  |                        | 31,749 |             |   | (26,973 | )



The weighted average asset
allocations at December 31 by asset category are as follows:



|                           |  |                       |   |  |                                   |   |  |      |   |  |      |  
|-------------------------- |  | --------------------- | - |  | --------------------------------- | - |  | ---- | - |  | ---- | -
|                           |  | Pension Benefit Plans |   |  | Other PostretirementBenefit Plans |  
|Asset category             |  | 2003                  |   |  | 2002                              |   |  | 2003 |   |  | 2002 |  
|Domestic equity securities |  | 63                    | % |  | 57                                | % |  |     | % |  | 100  | %
|Global equity securities   |  | 10                    |   |  | 9                                 |   |  |     |   |  |     |  
|Debt securities            |  | 25                    |   |  | 30                                |   |  |     |   |  |     |  
|Other                      |  | 2                     |   |  | 4                                 |   |  | 100  |   |  |     |  
|                           |  |                       |   |  |                                   |   |  |      |   |  |      |  
|Total                      |  | 100                   | % |  | 100                               | % |  | 100  | % |  | 100  | %
|                           |  |                       |   |  |                                   |   |  |      |   |  |      |  



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We utilize formal investment policy guidelines for our company-sponsored pension plans. These guidelines are
approved by the board of directors and are periodically reviewed, as the board of directors has ultimate fiduciary responsibility for pension plan assets. The board of directors has delegated its authority to management to insure that the investment
policy and guidelines are adhered to and the investment objectives are met.



The general policy states that plan assets will be invested to seek the greatest return consistent with the fiduciary character of the pension funds and to allow the plans to meet the need for timely pension benefit payments. The specific
investment guidelines stipulate that adequate liquidity will be maintained for meeting expected benefit payments by reviewing, on a timely basis, contribution and benefit payment levels and appropriately revising long-term and short-term asset
allocations. Management will take reasonable and prudent steps to preserve the value of pension fund assets and to avoid the risk of large losses. Major steps taken to provide this protection include:



| |  |  | Assets will be diversified among various asset classes, such as domestic equities, global equities, fixed income, convertible securities, venture capital and liquid reserves. The long-term
asset allocation ranges are as follows:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                        |  |          
|--------------------------------------- |  | ---------
|Domestic and global equities            |  | 50% - 80%
|Fixed income and convertible securities |  | 15% - 40%
|Venture Capital                         |  | 00% - 05%
|Liquid reserves                         |  | 00% - 10%



The ranges are more heavily
weighted toward equities since the liabilities of the pension plans are long-term in nature and equities have proven to significantly outperform other asset classes over long periods of time. Periodic reviews of allocations within these ranges are
made to determine what adjustments should be made based on changing economic and market conditions and specific liquidity requirements.



| |  |  | Assets will be managed by professional investment managers and may be invested in separately managed accounts or commingled funds. Assets will be diversified by selecting different investment
managers for each asset class and by limiting assets under each manager to no more than 25% of the total pension fund.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Assets, other than venture capital, will not be invested in securities rated below BBB- by S&P or Baa3 by Moodys.
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Assets will not be invested in Potlatch stock.
| | - |  | ----------------------------------------------



The investment guidelines also require that the individual investment managers will be expected to achieve a reasonable rate of return over a market cycle. Emphasis
will be placed on long-term performance versus short-term market aberrations. Factors to be considered in determining reasonable rates of return include performance achieved by a diverse cross section of other investment managers, performance of
commonly used benchmarks (e.g., S&P 500 Index, Shearson Lehman Government/Corporate Intermediate Index, Morgan Stanley World Index, Merrill Lynch Investment Grade Convertibles Index, Consumer Price Index), actuarial assumptions for return on
plan investments and specific performance guidelines given to individual investment managers.



During 2003, eight active investment managers managed approximately 97% of the pension funds, each of whom played a specific role in the management of these assets. The remaining 3% of the pension funds consisted of a dedicated
bond portfolio managed by a fixed income manager and liquid reserves held by the plan trustee. Plan assets were diversified among the various asset classes within the allocation ranges approved by the board of directors.



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We estimate contributions to defined benefit pension plans will total $1.2 million in 2004. We do not anticipate
funding our postretirement benefit plans in 2004 except to pay benefit costs as incurred during the year by plan participants.



Estimated future benefit payments, which reflect expected future service, are as follows for the years indicated:



|          |  |                        |         |                                   |   |        
|--------- |  | ---------------------- | ------- | --------------------------------- | - | -------
|          |  | Pension Benefit Plans  |         | Other PostretirementBenefit Plans
|          |  | (Dollars in thousands)
|2004      |  | $                      | 41,290  |                                   | $ | 18,900 
|2005      |  |                        | 40,675  |                                   |   | 19,400 
|2006      |  |                        | 40,289  |                                   |   | 19,800 
|2007      |  |                        | 39,968  |                                   |   | 20,300 
|2008      |  |                        | 40,020  |                                   |   | 20,500 
|2009-2013 |  |                        | 203,605 |                                   |   | 110,800



Hourly employees at two of our
manufacturing facilities participate in multi-employer defined benefit pension plans, the Paper, Allied-Industrial, Chemical and Energy Workers International Union (PACE) Pension Fund and the International Association of Machinist & Aerospace
Workers (IAMA) National Pension Fund, to which we make contributions. We also make contributions to a trust fund established to provide retiree medical benefits for a portion of these employees, which is managed by PACE. Company contributions to
these plans in 2003, 2002 and 2001 amounted to $7.7 million, $6.4 million and $6.1 million, respectively.



Note 13.    Commitments and Contingencies



We have operating leases covering office, warehouse and distribution space, equipment and vehicles expiring at various dates through 2019. As leases expire, it can be expected that, in the normal course of business, certain
leases will be renewed or replaced.



As of December 31, 2003, the future
minimum rental payments required under our operating leases are as follows:



|                     |  |                        |       
|-------------------- |  | ---------------------- | ------
|                     |  | (Dollars in thousands)
|2004                 |  | $                      | 12,391
|2005                 |  |                        | 11,408
|2006                 |  |                        | 10,116
|2007                 |  |                        | 8,547 
|2008                 |  |                        | 8,232 
|2009 and later years |  |                        | 37,213
|                     |  |                        |       
|Total                |  | $                      | 87,907
|                     |  |                        |       



Total rent expense was $9.0
million, $5.3 million and $4.3 million for the years ended December 31, 2003, 2002 and 2001, respectively.



In late January 2004, we voluntarily reported to the Minnesota Pollution Control Agency (MPCA) a potential air permit violation at our oriented strand board
facility in Bemidji, Minnesota, relating to the non-operation of equipment used to control nitrous oxide emissions from a wood-fired boiler for a period of approximately 29 months. Corrective action has been taken, and we are cooperating with the
MPCA in its investigation. As the investigation is ongoing, we have not been advised as to what action the MPCA may take.



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Taking into consideration the possible consequences of the above described matter, we believe there is no pending
or threatened litigation that would have a material adverse effect on our financial position, operations or liquidity.



Note 14.    Stock Compensation Plans



We currently have three fixed stock option plans under which options are issued and outstanding. All of these plans have received shareholder approval. Options are
granted with an exercise price equal to market value at the grant date and prior to 1995 may have included a stock appreciation right. Options are fully exercisable after two years and expire not later than 10 years from the date of grant. We were
originally authorized to issue up to 1.5 million shares, 1.7 million shares and 1.4 million shares under our 1989 Stock Incentive Plan, 1995 Stock Incentive Plan and 2000 Stock Incentive Plan, respectively. At December 31, 2003, no shares were
available for future use under the 1989 Stock Incentive Plan, while approximately 1,000 shares and 568,000 shares were authorized for future use under the 1995 and 2000 Stock Incentive Plans, respectively.



A summary of the status of outstanding stock options as of December 31, 2003, 2002 and
2001 and changes during those years is presented below:



|                                                             |  |        |           |      |                              |      |        |  |   |                              |   |        |   |       |                              |   |           |   |  |   |      
|------------------------------------------------------------ |  | ------ | --------- | ---- | ---------------------------- | ---- | ------ |  | - | ---------------------------- | - | ------ | - | ----- | ---------------------------- | - | --------- | - |  | - | -----
|                                                             |  | 2003   |           | 2002 |                              | 2001
|Options                                                      |  | Shares |           |      | Weighted Avg. Exercise Price |      | Shares |  |   | Weighted Avg. Exercise Price |   | Shares |   |       | Weighted Avg. Exercise Price
|Outstanding at January 1                                     |  |        | 2,836,357 |      |                              | $    | 36.67  |  |   | 2,993,000                    |   |        | $ | 38.63 |                              |   | 2,664,025 |   |  | $ | 40.41
|Granted                                                      |  |        | 150,070   |      |                              |      | 33.18  |  |   | 378,300                      |   |        |   | 24.87 |                              |   | 488,275   |   |  |   | 28.69
|Shares exercised                                             |  |        | (49,925   | )    |                              |      | 27.37  |  |   | (25,050                      | ) |        |   | 32.06 |                              |   | (750      | ) |  |   | 32.63
|SARs exercised                                               |  |        |          |      |                              |      |       |  |   |                             |   |        |   |      |                              |   | (4,050    | ) |  |   | 32.63
|Canceled or expired                                          |  |        | (219,682  | )    |                              |      | 42.32  |  |   | (509,893                     | ) |        |   | 39.67 |                              |   | (154,500  | ) |  |   | 38.08
|                                                             |  |        |           |      |                              |      |        |  |   |                              |   |        |   |       |                              |   |           |   |  |   |      
|Outstanding at December 31                                   |  |        | 2,716,820 |      |                              |      | 36.19  |  |   | 2,836,357                    |   |        |   | 36.67 |                              |   | 2,993,000 |   |  |   | 38.63
|                                                             |  |        |           |      |                              |      |        |  |   |                              |   |        |   |       |                              |   |           |   |  |   |      
|Options exercisable                                          |  |        | 2,385,000 |      |                              |      | 37.25  |  |   | 2,263,594                    |   |        |   | 39.33 |                              |   | 2,287,312 |   |  |   | 41.38
|Options outstanding which include a stock appreciation right |  |        | 41,700    |      |                              |      |        |  |   | 78,600                       |   |        |   |       |                              |   | 120,350   |   |  |   |      
|Shares reserved for future grants                            |  |        | 569,042   |      |                              |      |        |  |   | 793,963                      |   |        |   |       |                              |   | 834,145   |   |  |   |      
|Fair value of options granted during the year                |  | $      | 11.72     |      |                              |      |        |  | $ | 7.20                         |   |        |   |       |                              | $ | 10.02     |   |  |   |      



The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2003, 2002 and 2001, respectively: dividend yield of 1.73, 2.41 and 2.09 percent; stock volatility of .2737, .2538
and .275; risk free rate of return of 4.36, 4.17 and 5.28 percent; and expected term of 10 years for all grants.



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The following table summarizes information about stock options outstanding at December 31, 2003:



|                         |  |                              |  |                                        |  |                             |       |                              |           |                             |   |      
|------------------------ |  | ---------------------------- |  | -------------------------------------- |  | --------------------------- | ----- | ---------------------------- | --------- | --------------------------- | - | -----
|                         |  | Options Outstanding          |  | Options Exercisable                   
|Range of Exercise Prices |  | NumberOutstandingat 12/31/03 |  | Weighted Avg.RemainingContractual Life |  | Weighted Avg.Exercise Price |       | NumberExercisableat 12/31/03 |           | Weighted Avg.Exercise Price
|$23.88 to $29.32         |  | 706,000                      |  | 8.49 years                             |  | $                           | 26.81 |                              | 523,250   |                             | $ | 27.48
|$32.06 to $37.75         |  | 941,720                      |  | 5.79 years                             |  |                             | 34.68 |                              | 792,650   |                             |   | 34.96
|$41.25 to $48.25         |  | 1,069,100                    |  | 3.92 years                             |  |                             | 43.72 |                              | 1,069,100 |                             |   | 43.72
|                         |  |                              |  |                                        |  |                             |       |                              |           |                             |   |      
|$23.88 to $48.25         |  | 2,716,820                    |  | 5.76 years                             |  |                             | 36.19 |                              | 2,385,000 |                             |   | 37.25
|                         |  |                              |  |                                        |  |                             |       |                              |           |                             |   |      



Options may also be issued in
the form of restricted stock and other share-based awards. In December 2003, 59,270 shares of stock were granted under a performance-based award program. This program replaced a portion of the stock options normally granted. The performance shares
have a three-year performance period and will be issued at the end of the period if the performance measure is met. The performance measure is a comparison of the percentile ranking of our total shareholder return compared to the total shareholder
return performance of a selected peer group of forest product companies. The number of shares actually issued could range from 0%-150% of the amount initially granted. Shares granted under the program may not be voted until issued. A dividend
equivalent will be calculated based upon shares earned and paid out as additional shares. In accordance with APB No. 25, we will recognize compensation expense over the performance period equal to the market value of our stock times the number of
shares expected to be issued. Compensation expense in 2003 related to these performance shares was less than $0.1 million.



Note 15.    Segment Information



As of December 31, 2003, our operations were divided into four reporting segments: Resource, Wood Products, Pulp and Paperboard, and Consumer Products, based upon
similarities in product lines, manufacturing processes, marketing and management of our businesses. The Resource segment manages our timberland base, provides wood fiber to the manufacturing segments and sells wood fiber to third parties. The Wood
Products segment produces oriented strand board, lumber, plywood and particleboard. The Pulp and Paperboard segment produces paperboard and pulp. The Consumer Products segment produces consumer tissue products. Prior to 2003, the Pulp and Paperboard
segment and the Consumer Products segment were combined into one reporting segment. Prior year results for these two segments have been reclassified for comparative purposes.



We exited our Printing Papers segment in May 2002 when a majority of the segments assets were sold to a domestic subsidiary of
Sappi Limited. We also closed and sold a hardwood sawmill during the third quarter of 2002. Amounts presented for 2002 and 2001 in the tables below have been adjusted for these discontinued operations.



The reporting segments follow the same accounting policies used for our consolidated
financial statements, as described in the summary of significant accounting policies, with the exception of the valuation of inventories. All segment inventories are reported using the average cost method and the LIFO reserve is recorded at the
corporate level. Management evaluates a segments performance based upon profit or loss from operations before income taxes. Intersegment sales or transfers are recorded based on prevailing market prices.



Following is a tabulation of business segment information for each of the past three
years. Corporate information is included to reconcile segment data to the consolidated financial statements.



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|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------ |  | ---------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                             |  | 2003                   |           |   | 2002 |   |           | 2001 | 
|                                                             |  | (Dollars in thousands) |          
|Segment Sales:                                               |  |                        |           |   |      |   |           |      |  |   |           |  
|Resource                                                     |  | $                      | 252,614   |   |      | $ | 411,833   |      |  | $ | 410,089   |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Wood products:                                               |  |                        |           |   |      |   |           |      |  |   |           |  
|Oriented strand board                                        |  |                        | 314,197   |   |      |   | 187,293   |      |  |   | 167,182   |  
|Lumber                                                       |  |                        | 279,192   |   |      |   | 249,790   |      |  |   | 251,891   |  
|Plywood                                                      |  |                        | 46,402    |   |      |   | 34,915    |      |  |   | 40,529    |  
|Particleboard                                                |  |                        | 15,230    |   |      |   | 14,083    |      |  |   | 15,833    |  
|Other                                                        |  |                        | 28,063    |   |      |   | 23,077    |      |  |   | 26,858    |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                        | 683,084   |   |      |   | 509,158   |      |  |   | 502,293   |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Pulp and paperboard:                                         |  |                        |           |   |      |   |           |      |  |   |           |  
|Paperboard                                                   |  |                        | 420,805   |   |      |   | 395,085   |      |  |   | 420,588   |  
|Pulp                                                         |  |                        | 61,239    |   |      |   | 48,483    |      |  |   | 44,092    |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                        | 482,044   |   |      |   | 443,568   |      |  |   | 464,680   |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Consumer products:                                           |  |                        |           |   |      |   |           |      |  |   |           |  
|Tissue                                                       |  |                        | 300,896   |   |      |   | 315,708   |      |  |   | 317,743   |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                        | 1,718,638 |   |      |   | 1,680,267 |      |  |   | 1,694,805 |  
|Elimination of intersegment sales                            |  |                        | (212,004  | ) |      |   | (386,721  | )    |  |   | (415,941  | )
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Total consolidated net sales                                 |  | $                      | 1,506,634 |   |      | $ | 1,293,546 |      |  | $ | 1,278,864 |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Intersegment Sales or Transfers(1):                          |  |                        |           |   |      |   |           |      |  |   |           |  
|Resource                                                     |  | $                      | 157,233   |   |      | $ | 339,169   |      |  | $ | 367,737   |  
|Wood products                                                |  |                        | 11,715    |   |      |   | 12,489    |      |  |   | 17,450    |  
|Pulp and paperboard                                          |  |                        | 42,971    |   |      |   | 34,975    |      |  |   | 30,666    |  
|Consumer products                                            |  |                        | 85        |   |      |   | 88        |      |  |   | 88        |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Total                                                        |  | $                      | 212,004   |   |      | $ | 386,721   |      |  | $ | 415,941   |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Operating Income (Loss):                                     |  |                        |           |   |      |   |           |      |  |   |           |  
|Resource                                                     |  | $                      | 65,511    |   |      | $ | 62,554    |      |  | $ | 55,337    |  
|Wood products                                                |  |                        | 97,623    |   |      |   | (27,031   | )    |  |   | (26,562   | )
|Pulp and paperboard                                          |  |                        | (15,104   | ) |      |   | (42,821   | )    |  |   | (56,045   | )
|Consumer products                                            |  |                        | 1,266     |   |      |   | 42,806    |      |  |   | 41,572    |  
|Eliminations and adjustments                                 |  |                        | (181      | ) |      |   | (3,389    | )    |  |   | 2,058     |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                        | 149,115   |   |      |   | 32,119    |      |  |   | 16,360    |  
|Corporate Items:                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Administration expense                                       |  |                        | (34,706   | ) |      |   | (33,341   | )    |  |   | (33,686   | )
|Interest expense                                             |  |                        | (48,172   | ) |      |   | (59,882   | )    |  |   | (77,853   | )
|Interest income                                              |  |                        | 14,090    |   |      |   | 1,930     |      |  |   | 2,448     |  
|Restructuring charge                                         |  |                        | 476       |   |      |   | (8,963    | )    |  |   |          |  
|Debt reduction charge                                        |  |                        | (248      | ) |      |   | (15,360   | )    |  |   |          |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Consolidated income (loss) before taxes on income            |  | $                      | 80,555    |   |      | $ | (83,497   | )    |  | $ | (92,731   | )
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Depreciation, Amortization and Cost of Fee Timber Harvested: |  |                        |           |   |      |   |           |      |  |   |           |  
|Resource                                                     |  | $                      | 20,917    |   |      | $ | 28,791    |      |  | $ | 26,527    |  
|Wood products                                                |  |                        | 29,049    |   |      |   | 30,591    |      |  |   | 30,530    |  
|Pulp and paperboard                                          |  |                        | 38,171    |   |      |   | 39,866    |      |  |   | 40,875    |  
|Consumer products                                            |  |                        | 12,585    |   |      |   | 13,028    |      |  |   | 12,870    |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                        | 100,722   |   |      |   | 112,276   |      |  |   | 110,802   |  
|Corporate                                                    |  |                        | 4,137     |   |      |   | 3,193     |      |  |   | 4,231     |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Total                                                        |  | $                      | 104,859   |   |      | $ | 115,469   |      |  | $ | 115,033   |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Assets:                                                      |  |                        |           |   |      |   |           |      |  |   |           |  
|Resource                                                     |  | $                      | 438,495   |   |      | $ | 432,036   |      |  | $ | 434,293   |  
|Wood products                                                |  |                        | 339,477   |   |      |   | 353,693   |      |  |   | 357,581   |  
|Pulp and paperboard                                          |  |                        | 418,706   |   |      |   | 446,362   |      |  |   | 462,450   |  
|Consumer products                                            |  |                        | 245,581   |   |      |   | 231,387   |      |  |   | 201,459   |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                        | 1,442,259 |   |      |   | 1,463,478 |      |  |   | 1,455,783 |  
|Assets held for sale                                         |  |                        |          |   |      |   | 5,000     |      |  |   | 772,033   |  
|Corporate                                                    |  |                        | 155,118   |   |      |   | 156,339   |      |  |   | 260,623   |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Total consolidated assets                                    |  | $                      | 1,597,377 |   |      | $ | 1,624,817 |      |  | $ | 2,488,439 |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Capital Expenditures:                                        |  |                        |           |   |      |   |           |      |  |   |           |  
|Resource                                                     |  | $                      | 15,519    |   |      | $ | 15,346    |      |  | $ | 14,132    |  
|Wood products                                                |  |                        | 10,895    |   |      |   | 8,520     |      |  |   | 14,572    |  
|Pulp and paperboard                                          |  |                        | 5,193     |   |      |   | 3,972     |      |  |   | 11,778    |  
|Consumer products                                            |  |                        | 47,881    |   |      |   | 23,446    |      |  |   | 2,120     |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                        | 79,488    |   |      |   | 51,284    |      |  |   | 42,602    |  
|Corporate                                                    |  |                        | 198       |   |      |   | 330       |      |  |   | 77        |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  
|Total                                                        |  | $                      | 79,686    |   |      | $ | 51,614    |      |  | $ | 42,679    |  
|                                                             |  |                        |           |   |      |   |           |      |  |   |           |  



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---

|(1) |  | Intersegment sales for 2001-2003, which were based on prevailing market prices, consisted primarily of logs, chips, pulp logs and other fiber sales by our Resource segment to the Wood
Products, Printing Papers and Pulp and Paperboard segments.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All of our manufacturing facilities and all other assets are located within the continental United States. However, we sell and ship products to many foreign countries. Geographic information regarding our net sales is summarized as
follows:



|                             |  |                        |           |      |   |           |  |   |          
|---------------------------- |  | ---------------------- | --------- | ---- | - | --------- |  | - | ---------
|                             |  | 2003                   |           | 2002 |   | 2001     
|                             |  | (Dollars in thousands)
|United States                |  | $                      | 1,399,971 |      | $ | 1,197,154 |  | $ | 1,193,939
|Japan                        |  |                        | 48,666    |      |   | 48,224    |  |   | 33,771   
|Australia                    |  |                        | 6,498     |      |   | 4,881     |  |   | 4,378    
|Canada                       |  |                        | 12,997    |      |   | 9,090     |  |   | 8,731    
|China                        |  |                        | 14,711    |      |   | 12,303    |  |   | 9,327    
|Italy                        |  |                        | 7,013     |      |   | 6,543     |  |   | 7,450    
|Korea                        |  |                        | 9,842     |      |   | 11,210    |  |   | 13,501   
|Other foreign countries      |  |                        | 6,936     |      |   | 4,141     |  |   | 7,767    
|                             |  |                        |           |      |   |           |  |   |          
|Total consolidated net sales |  | $                      | 1,506,634 |      | $ | 1,293,546 |  | $ | 1,278,864
|                             |  |                        |           |      |   |           |  |   |          



Note 16.    Restructuring
Charges



The following is a description of the charges included in
the Restructuring charges line in the Statements of Operations.



In the first quarter of 2003, we recorded charges totaling $0.2 million for costs related to terminated employees whose service had been retained beyond the initial 60-day period following the announced elimination of 106 salaried positions
in 2002. In December 2003 we recorded a $0.7 million credit, reflecting final cost determinations for pension and medical benefits. As of December 31, 2003, 100 employees had been terminated, four had assumed other positions within the company as a
result of job openings and two individuals have been retained until mid-2004. All costs, except immaterial amounts related to the retained individuals, had been incurred by December 31, 2003.



In 2002, we recorded a $9.0 million pre-tax charge for costs associated with the
elimination of 106 salaried production and administrative positions. As of December 31, 2002, 82 employees had been terminated, three had assumed other positions within the company as a result of job openings, and 21 were scheduled for termination
in the first half of 2003. We recorded $3.8 million against the accrued liability associated with the charge at December 31, 2002.



In March 2001, we recorded a $4.2 million pre-tax charge associated with a workforce reduction plan at our pulp, paperboard and consumer products operations in
Idaho. In September 2001, an additional $0.4 million pre-tax charge was recorded as a result of final cost determinations for pension and medical benefits. The plan permanently reduced the workforce by 124 hourly production and maintenance
positions. As of December 31, 2001, all material costs associated with the plan, had been incurred.



In December 2001, we reversed $1.8 million of an $18.5 million pre-tax charge, taken in September 2000, for costs associated with the closure of a plywood mill. Our
initial estimate of the cost to close the mill included expected costs for some aspects of maintenance and demolition that were not incurred.





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Note 17.    Discontinued Operations



On March 18, 2002, we announced that we had signed a definitive agreement with a domestic subsidiary of Sappi Limited for the sale of
our Cloquet, Minnesota, pulp and printing papers facilities and certain associated assets for $485.5 million in cash, after closing adjustments. The sale was completed in May 2002. As a result of the transaction, we recorded an after-tax charge of
$149.8 million in the first quarter of 2002. The charge represented estimated costs associated with the write-down of the carrying value of the assets involved in the sale and closure of the Brainerd facility, as well as other costs associated with
exiting the coated paper business. In December 2002, we recorded an additional after-tax charge of $14.6 million to adjust employee severance costs, the carrying value of the remaining Brainerd assets and other exit costs. The charges and 2002
operating losses of $13.9 million, after-tax, are presented as discontinued operations in the Statements of Operations, as required by SFAS No. 144.



In conjunction with the sale, we closed our Brainerd printing papers mill. The facility was sold on February 28, 2003, for $4.44 million in cash. The loss on
discontinued operations for 2003 of $2.5 million, after-tax, includes costs for maintaining the facility before its sale, an additional loss on the sale and recognition of a continuing contractual obligation.



On June 3, 2002, we announced that we would close our Bradley hardwood mill in Warren,
Arkansas. We sold the facility in August 2002. An initial after-tax charge of $5.7 million was recorded for estimated asset write-down and closure costs. In December 2002, we reversed $1.6 million of the initial charge, after tax, to reflect actual
costs incurred for the closure and sale. The net charge and 2002 operating losses of $1.0 million, after tax, are also presented as discontinued operations in the Statements of Operations, as required by SFAS No. 144.



The assets and liabilities of the Printing Papers segment and the Bradley lumber mill
are presented in the Balance Sheets under the captions Assets held for sale and Liabilities related to assets held for sale. The carrying amounts of the major classes of these assets and liabilities at December 31 were as
follows:



|                                         |  |                        |   |      |   |      
|---------------------------------------- |  | ---------------------- | - | ---- | - | -----
|                                         |  | 2003                   |   | 2002
|                                         |  | (Dollars in thousands)
|Assets:                                  |  |                        |   |      |   |      
|Cash                                     |  | $                      |  |      | $ |     
|Receivables, net                         |  |                        |  |      |   |     
|Inventories                              |  |                        |  |      |   |     
|Land, other than timberlands             |  |                        |  |      |   | 108  
|Plant and equipment, net                 |  |                        |  |      |   | 4,892
|Other assets                             |  |                        |  |      |   |     
|                                         |  |                        |   |      |   |      
|Total assets held for sale               |  | $                      |  |      | $ | 5,000
|                                         |  |                        |   |      |   |      
|Liabilities:                             |  |                        |   |      |   |      
|Accounts payable and accrued liabilities |  | $                      |  |      | $ | 12   
|                                         |  |                        |   |      |   |      



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Note 18.    Financial Results by Quarter (Unaudited)



|                                                                 |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------------------------------------------- | ------- | - | ------- | - | -------- | ------------ |  | - | ----------- | - |  | ---- | ------- | ---- |  | - | ------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                 |  | Three Months Ended                                |        
|                                                                 |  | March 31                                          |         |   | June 30 |   |          | September 30 |  |   | December 31 |  
|                                                                 |  | 2003                                              |         |   | 2002    |   |          | 2003         |  |   | 2002        |   |  | 2003 |         | 2002 |  |   | 2003    |  |   | 2002    |  
|                                                                 |  | (Dollars in thousands  except per-share amounts) |        
|Net sales                                                        |  | $                                                 | 334,802 |   |         | $ | 318,675  |              |  | $ | 368,094     |   |  | $    | 336,273 |      |  | $ | 400,259 |  | $ | 326,544 |   |  | $ | 403,479 |   |  | $ | 312,054 |  
|                                                                 |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|Costs and expenses:                                              |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|Depreciation, amortization and cost of fee timber harvested      |  |                                                   | 26,859  |   |         |   | 30,484   |              |  |   | 25,202      |   |  |      | 27,244  |      |  |   | 25,779  |  |   | 29,067  |   |  |   | 27,019  |   |  |   | 28,674  |  
|Materials, labor and other operating expenses                    |  |                                                   | 292,344 |   |         |   | 273,452  |              |  |   | 311,915     |   |  |      | 278,895 |      |  |   | 308,469 |  |   | 272,100 |   |  |   | 294,358 |   |  |   | 275,243 |  
|Selling, general and administrative expenses                     |  |                                                   | 17,252  |   |         |   | 21,091   |              |  |   | 20,239      |   |  |      | 19,850  |      |  |   | 20,359  |  |   | 19,930  |   |  |   | 22,430  |   |  |   | 18,747  |  
|Restructuring charges                                            |  |                                                   | 227     |   |         |   |         |              |  |   |            |   |  |      |        |      |  |   |        |  |   |        |   |  |   | (703    | ) |  |   | 8,963   |  
|                                                                 |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|                                                                 |  |                                                   | 336,682 |   |         |   | 325,027  |              |  |   | 357,356     |   |  |      | 325,989 |      |  |   | 354,607 |  |   | 321,097 |   |  |   | 343,104 |   |  |   | 331,627 |  
|                                                                 |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|Earnings (loss) from operations                                  |  | $                                                 | (1,880  | ) |         | $ | (6,352   | )            |  | $ | 10,738      |   |  | $    | 10,284  |      |  | $ | 45,652  |  | $ | 5,447   |   |  | $ | 60,375  |   |  | $ | (19,573 | )
|                                                                 |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|Loss from discontinued operations, net of tax                    |  | $                                                 | (674    | ) |         | $ | (152,443 | )            |  | $ | (173        | ) |  | $    | (13,532 | )    |  | $ |        |  | $ | (2,051  | ) |  | $ | (1,647  | ) |  | $ | (15,422 | )
|                                                                 |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|Net earnings (loss)                                              |  | $                                                 | (9,565  | ) |         | $ | (167,381 | )            |  | $ | 6,649       |   |  | $    | (20,089 | )    |  | $ | 22,156  |  | $ | (12,433 | ) |  | $ | 31,487  |   |  | $ | (34,478 | )
|                                                                 |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|Net earnings (loss) per common share from continuing operations: |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|Basic                                                            |  | $                                                 | (.31    | ) |         | $ | (.53     | )            |  | $ | .24         |   |  | $    | (.23    | )    |  | $ | .77     |  | $ | (.36    | ) |  | $ | 1.15    |   |  | $ | (.67    | )
|Diluted                                                          |  |                                                   | (.31    | ) |         |   | (.53     | )            |  |   | .24         |   |  |      | (.23    | )    |  |   | .77     |  |   | (.36    | ) |  |   | 1.15    |   |  |   | (.67    | )
|Net earnings (loss) per common share:                            |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|Basic                                                            |  |                                                   | (.33    | ) |         |   | (5.90    | )            |  |   | .23         |   |  |      | (.70    | )    |  |   | .77     |  |   | (.43    | ) |  |   | 1.10    |   |  |   | (1.20   | )
|Diluted                                                          |  |                                                   | (.33    | ) |         |   | (5.90    | )            |  |   | .23         |   |  |      | (.70    | )    |  |   | .77     |  |   | (.43    | ) |  |   | 1.10    |   |  |   | (1.20   | )
|                                                                 |  |                                                   |         |   |         |   |          |              |  |   |             |   |  |      |         |      |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  



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Note 19.    Subsidiary Guarantors



A portion of our outstanding debt is unconditionally guaranteed, on a joint and several basis, by four of our subsidiaries, which are
also guarantors, on an unconditional, joint and several basis, of the obligations under our current credit facilities.



Consolidating statements of operations and comprehensive income for the years ended December 31, 2003, 2002, and 2001 are as follows:



|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|--------------------------------------------------------------------------- |  | ------------------------------------ | --------- | - | -------------------- | - | ------------ |  | - | ------------ | - |  | - | --------- | -
|                                                                            |  | For the year ended December 31, 2003 |          
|                                                                            |  | Parent Company                       |           |   | SubsidiaryGuarantors |   | Eliminations |  |   | Consolidated |  
|                                                                            |  | (Dollars in thousands)               |          
|Net sales                                                                   |  | $                                    | 1,506,634 |   |                      | $ | 1,124        |  | $ | (1,124       | ) |  | $ | 1,506,634 |  
|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Costs and expenses:                                                         |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Depreciation, amortization and cost of fee timber harvested                 |  |                                      | 104,761   |   |                      |   | 98           |  |   |             |   |  |   | 104,859   |  
|Materials, labor and other operating expenses                               |  |                                      | 1,208,006 |   |                      |   | 204          |  |   | (1,124       | ) |  |   | 1,207,086 |  
|Selling, general and administrative expenses                                |  |                                      | 79,867    |   |                      |   | 413          |  |   |             |   |  |   | 80,280    |  
|Restructuring charges                                                       |  |                                      | (476      | ) |                      |   |             |  |   |             |   |  |   | (476      | )
|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|                                                                            |  |                                      | 1,392,158 |   |                      |   | 715          |  |   | (1,124       | ) |  |   | 1,391,749 |  
|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Earnings from operations                                                    |  |                                      | 114,476   |   |                      |   | 409          |  |   |             |   |  |   | 114,885   |  
|Interest expense                                                            |  |                                      | (48,172   | ) |                      |   |             |  |   |             |   |  |   | (48,172   | )
|Debt retirement costs                                                       |  |                                      | (248      | ) |                      |   |             |  |   |             |   |  |   | (248      | )
|Interest income                                                             |  |                                      | 14,090    |   |                      |   |             |  |   |             |   |  |   | 14,090    |  
|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Earnings before taxes and equity in net income of consolidated subsidiaries |  |                                      | 80,146    |   |                      |   | 409          |  |   |             |   |  |   | 80,555    |  
|Equity in net income of consolidated subsidiaries                           |  |                                      | 271       |   |                      |   |             |  |   | (271         | ) |  |   |          |  
|Provision for taxes                                                         |  |                                      | 27,196    |   |                      |   | 138          |  |   |             |   |  |   | 27,334    |  
|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Earnings from continuing operations                                         |  |                                      | 53,221    |   |                      |   | 271          |  |   | (271         | ) |  |   | 53,221    |  
|Discontinued operations:                                                    |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Loss from discontinued operations                                           |  |                                      | (4,089    | ) |                      |   |             |  |   |             |   |  |   | (4,089    | )
|Income tax benefit                                                          |  |                                      | (1,595    | ) |                      |   |             |  |   |             |   |  |   | (1,595    | )
|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Net earnings                                                                |  | $                                    | 50,727    |   |                      | $ | 271          |  | $ | (271         | ) |  | $ | 50,727    |  
|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Other comprehensive loss, net of tax:                                       |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Cash flow hedges:                                                           |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Net derivative gains, net of income tax provision                           |  |                                      | 68        |   |                      |   |             |  |   |             |   |  |   | 68        |  
|Minimum pension liability adjustment, net of income tax benefit             |  |                                      | (374      | ) |                      |   |             |  |   |             |   |  |   | (374      | )
|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Comprehensive income                                                        |  | $                                    | 50,421    |   |                      | $ | 271          |  | $ | (271         | ) |  | $ | 50,421    |  
|                                                                            |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  



61



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|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|---------------------------------------------------------------------------------- |  | ------------------------------------ | --------- | - | -------------------- | - | ----- | ------------ |  | - | ------------ | - |  | - | --------- | -
|                                                                                   |  | For the year ended December 31, 2002 |          
|                                                                                   |  | ParentCompany                        |           |   | SubsidiaryGuarantors |   |       | Eliminations |  |   | Consolidated |  
|                                                                                   |  | (Dollars in thousands)               |          
|Net sales                                                                          |  | $                                    | 1,293,546 |   |                      | $ | 1,002 |              |  | $ | (1,002       | ) |  | $ | 1,293,546 |  
|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Costs and expenses:                                                                |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Depreciation, amortization and cost of fee timber harvested                        |  |                                      | 115,388   |   |                      |   | 81    |              |  |   |             |   |  |   | 115,469   |  
|Materials, labor and other operating expenses                                      |  |                                      | 1,100,369 |   |                      |   | 323   |              |  |   | (1,002       | ) |  |   | 1,099,690 |  
|Selling, general and administrative expenses                                       |  |                                      | 79,223    |   |                      |   | 395   |              |  |   |             |   |  |   | 79,618    |  
|Restructuring charges                                                              |  |                                      | 8,963     |   |                      |   |      |              |  |   |             |   |  |   | 8,963     |  
|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|                                                                                   |  |                                      | 1,303,943 |   |                      |   | 799   |              |  |   | (1,002       | ) |  |   | 1,303,740 |  
|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Earnings (loss) from operations                                                    |  |                                      | (10,397   | ) |                      |   | 203   |              |  |   |             |   |  |   | (10,194   | )
|Interest expense                                                                   |  |                                      | (59,882   | ) |                      |   |      |              |  |   |             |   |  |   | (59,882   | )
|Debt retirement costs                                                              |  |                                      | (15,360   | ) |                      |   |      |              |  |   |             |   |  |   | (15,360   | )
|Interest income                                                                    |  |                                      | 1,939     |   |                      |   |      |              |  |   |             |   |  |   | 1,939     |  
|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Earnings (loss) before taxes and equity in net income of consolidated subsidiaries |  |                                      | (83,700   | ) |                      |   | 203   |              |  |   |             |   |  |   | (83,497   | )
|Equity in net income of consolidated subsidiaries                                  |  |                                      | 124       |   |                      |   |      |              |  |   | (124         | ) |  |   |          |  
|Provision (benefit) for taxes                                                      |  |                                      | (32,643   | ) |                      |   | 79    |              |  |   |             |   |  |   | (32,564   | )
|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Earnings (loss) from continuing operations                                         |  |                                      | (50,933   | ) |                      |   | 124   |              |  |   | (124         | ) |  |   | (50,933   | )
|Discontinued operations:                                                           |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Loss from discontinued operations                                                  |  |                                      | (300,734  | ) |                      |   | (82   | )            |  |   | 82           |   |  |   | (300,734  | )
|Income tax benefit                                                                 |  |                                      | (117,286  | ) |                      |   | (32   | )            |  |   | 32           |   |  |   | (117,286  | )
|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Net earnings (loss)                                                                |  | $                                    | (234,381  | ) |                      | $ | 74    |              |  | $ | (74          | ) |  | $ | (234,381  | )
|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Other comprehensive loss, net of tax:                                              |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Minimum pension liability adjustment, net of income tax benefit                    |  |                                      | (33,207   | ) |                      |   |      |              |  |   |             |   |  |   | (33,207   | )
|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  
|Comprehensive income (loss)                                                        |  | $                                    | (267,588  | ) |                      | $ | 74    |              |  | $ | (74          | ) |  | $ | (267,588  | )
|                                                                                   |  |                                      |           |   |                      |   |       |              |  |   |              |   |  |   |           |  



62



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|                                                                                   |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|---------------------------------------------------------------------------------- |  | ------------------------------------ | --------- | - | -------------------- | - | ------------ |  | - | ------------ | - |  | - | --------- | -
|                                                                                   |  | For the year ended December 31, 2001 |          
|                                                                                   |  | ParentCompany                        |           |   | SubsidiaryGuarantors |   | Eliminations |  |   | Consolidated |  
|                                                                                   |  | (Dollars in thousands)               |          
|Net sales                                                                          |  | $                                    | 1,278,864 |   |                      | $ | 1,061        |  | $ | (1,061       | ) |  | $ | 1,278,864 |  
|                                                                                   |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Costs and expenses:                                                                |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Depreciation, amortization and cost of fee timber harvested                        |  |                                      | 114,948   |   |                      |   | 85           |  |   |             |   |  |   | 115,033   |  
|Materials, labor and other operating expenses                                      |  |                                      | 1,096,486 |   |                      |   | 261          |  |   | (1,061       | ) |  |   | 1,095,686 |  
|Selling, general and administrative expenses                                       |  |                                      | 82,435    |   |                      |   | 407          |  |   |             |   |  |   | 82,842    |  
|Restructuring charges                                                              |  |                                      | 2,750     |   |                      |   |             |  |   |             |   |  |   | 2,750     |  
|                                                                                   |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|                                                                                   |  |                                      | 1,296,619 |   |                      |   | 753          |  |   | (1,061       | ) |  |   | 1,296,311 |  
|                                                                                   |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Earnings (loss) from operations                                                    |  |                                      | (17,755   | ) |                      |   | 308          |  |   |             |   |  |   | (17,447   | )
|Interest expense                                                                   |  |                                      | (77,853   | ) |                      |   |             |  |   |             |   |  |   | (77,853   | )
|Interest income                                                                    |  |                                      | 2,569     |   |                      |   |             |  |   |             |   |  |   | 2,569     |  
|                                                                                   |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Earnings (loss) before taxes and equity in net income of consolidated subsidiaries |  |                                      | (93,039   | ) |                      |   | 308          |  |   |             |   |  |   | (92,731   | )
|Equity in net income of consolidated subsidiaries                                  |  |                                      | 188       |   |                      |   |             |  |   | (188         | ) |  |   |          |  
|Provision (benefit) for taxes                                                      |  |                                      | (36,285   | ) |                      |   | 120          |  |   |             |   |  |   | (36,165   | )
|                                                                                   |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Earnings (loss) from continuing operations                                         |  |                                      | (56,566   | ) |                      |   | 188          |  |   | (188         | ) |  |   | (56,566   | )
|Discontinued operations:                                                           |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Earnings (loss) from discontinued operations                                       |  |                                      | (37,507   | ) |                      |   | 952          |  |   | (952         | ) |  |   | (37,507   | )
|Income tax provision (benefit)                                                     |  |                                      | (14,628   | ) |                      |   | 371          |  |   | (371         | ) |  |   | (14,628   | )
|                                                                                   |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  
|Net earnings (loss)                                                                |  | $                                    | (79,445   | ) |                      | $ | 769          |  | $ | (769         | ) |  | $ | (79,445   | )
|                                                                                   |  |                                      |           |   |                      |   |              |  |   |              |   |  |   |           |  



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Condensed consolidating balance sheets as of December 31, 2003 and 2002 are as follows:



|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|---------------------------------------------------------- |  | ---------------------- | --------- | -------------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ---------
|                                                           |  | December 31, 2003     
|                                                           |  | ParentCompany          |           | SubsidiaryGuarantors |   |         | Eliminations |  |   | Consolidated
|                                                           |  | (Dollars in thousands)
|Assets                                                     |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current assets:                                            |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Cash                                                       |  | $                      | 7,149     |                      | $ | 41      |              |  | $ |             |   |  | $ | 7,190    
|Short-term investments                                     |  |                        | 40,091    |                      |   |        |              |  |   |             |   |  |   | 40,091   
|Receivables, net                                           |  |                        | 105,088   |                      |   | 257     |              |  |   |             |   |  |   | 105,345  
|Inventories                                                |  |                        | 159,550   |                      |   | 128     |              |  |   |             |   |  |   | 159,678  
|Prepaid expenses                                           |  |                        | 18,315    |                      |   |        |              |  |   |             |   |  |   | 18,315   
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Total current assets                                       |  |                        | 330,193   |                      |   | 426     |              |  |   |             |   |  |   | 330,619  
|Land, other than timberlands                               |  |                        | 8,338     |                      |   | 493     |              |  |   |             |   |  |   | 8,831    
|Plant and equipment, at cost less accumulated depreciation |  |                        | 739,741   |                      |   | 601     |              |  |   |             |   |  |   | 740,342  
|Timber, timberlands and related logging facilities         |  |                        | 398,899   |                      |   |        |              |  |   |             |   |  |   | 398,899  
|Other assets                                               |  |                        | 119,932   |                      |   |        |              |  |   | (1,246       | ) |  |   | 118,686  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|                                                           |  | $                      | 1,597,103 |                      | $ | 1,520   |              |  | $ | (1,246       | ) |  | $ | 1,597,377
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Liabilities and Stockholders Equity                       |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current liabilities:                                       |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current installments on long-term debt                     |  | $                      | 507       |                      | $ |        |              |  | $ |             |   |  | $ | 507      
|Accounts payable and accrued liabilities                   |  |                        | 169,165   |                      |   | 145     |              |  |   |             |   |  |   | 169,310  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Total current liabilities                                  |  |                        | 169,672   |                      |   | 145     |              |  |   |             |   |  |   | 169,817  
|Intercompany transfers                                     |  |                        | 31,197    |                      |   | (31,197 | )            |  |   |             |   |  |   |         
|Long-term debt                                             |  |                        | 618,278   |                      |   |        |              |  |   |             |   |  |   | 618,278  
|Other long-term obligations                                |  |                        | 266,514   |                      |   |        |              |  |   |             |   |  |   | 266,514  
|Deferred taxes                                             |  |                        | 71,917    |                      |   |        |              |  |   |             |   |  |   | 71,917   
|Stockholders equity                                       |  |                        | 439,525   |                      |   | 32,572  |              |  |   | (1,246       | ) |  |   | 470,851  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|                                                           |  | $                      | 1,597,103 |                      | $ | 1,520   |              |  | $ | (1,246       | ) |  | $ | 1,597,377
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          



64



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|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|---------------------------------------------------------- |  | ---------------------- | --------- | -------------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ---------
|                                                           |  | December 31, 2002     
|                                                           |  | ParentCompany          |           | SubsidiaryGuarantors |   |         | Eliminations |  |   | Consolidated
|                                                           |  | (Dollars in thousands)
|Assets                                                     |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current assets:                                            |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Cash                                                       |  | $                      | 8,811     |                      | $ | 162     |              |  | $ |             |   |  | $ | 8,973    
|Restricted cash                                            |  |                        | 15,069    |                      |   |        |              |  |   |             |   |  |   | 15,069   
|Short-term investments                                     |  |                        | 2,000     |                      |   |        |              |  |   |             |   |  |   | 2,000    
|Receivables, net                                           |  |                        | 119,803   |                      |   | 161     |              |  |   |             |   |  |   | 119,964  
|Inventories                                                |  |                        | 159,637   |                      |   | 161     |              |  |   |             |   |  |   | 159,798  
|Prepaid expenses                                           |  |                        | 39,006    |                      |   | (1      | )            |  |   |             |   |  |   | 39,005   
|Assets held for sale                                       |  |                        | 5,000     |                      |   |        |              |  |   |             |   |  |   | 5,000    
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Total current assets                                       |  |                        | 349,326   |                      |   | 483     |              |  |   |             |   |  |   | 349,809  
|Land, other than timberlands                               |  |                        | 8,354     |                      |   | 396     |              |  |   |             |   |  |   | 8,750    
|Plant and equipment, at cost less accumulated depreciation |  |                        | 757,372   |                      |   | 796     |              |  |   |             |   |  |   | 758,168  
|Timber, timberlands and related logging facilities         |  |                        | 396,426   |                      |   |        |              |  |   |             |   |  |   | 396,426  
|Other assets                                               |  |                        | 112,910   |                      |   |        |              |  |   | (1,246       | ) |  |   | 111,664  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|                                                           |  | $                      | 1,624,388 |                      | $ | 1,675   |              |  | $ | (1,246       | ) |  | $ | 1,624,817
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Liabilities and Stockholders Equity                       |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current liabilities:                                       |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Notes payable                                              |  | $                      | 40,000    |                      | $ |        |              |  | $ |             |   |  | $ | 40,000   
|Current installments on long-term debt                     |  |                        | 15,607    |                      |   |        |              |  |   |             |   |  |   | 15,607   
|Accounts payable and accrued liabilities                   |  |                        | 191,368   |                      |   | 129     |              |  |   |             |   |  |   | 191,497  
|Liabilities related to assets held for sale                |  |                        | 12        |                      |   |        |              |  |   |             |   |  |   | 12       
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Total current liabilities                                  |  |                        | 246,987   |                      |   | 129     |              |  |   |             |   |  |   | 247,116  
|Intercompany transfers                                     |  |                        | 30,779    |                      |   | (30,779 | )            |  |   |             |   |  |   |         
|Long-term debt                                             |  |                        | 622,645   |                      |   |        |              |  |   |             |   |  |   | 622,645  
|Other long-term obligations                                |  |                        | 267,611   |                      |   |        |              |  |   |             |   |  |   | 267,611  
|Deferred taxes                                             |  |                        | 56,654    |                      |   |        |              |  |   |             |   |  |   | 56,654   
|Stockholders equity                                       |  |                        | 399,712   |                      |   | 32,325  |              |  |   | (1,246       | ) |  |   | 430,791  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|                                                           |  | $                      | 1,624,388 |                      | $ | 1,675   |              |  | $ | (1,246       | ) |  | $ | 1,624,817
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          



65



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Condensed consolidating statements of cash flows for the years ended December 31, 2003, 2002 and 2001 are as
follows:



|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|------------------------------------------------------------------ |  | ------------------------------------ | -------- | - | -------------------- | - | ---- | ------------ |  | ------------ | - |  | - | -------- | -
|                                                                   |  | For the year ended December 31, 2003 |         
|                                                                   |  | ParentCompany                        |          |   | SubsidiaryGuarantors |   |      | Eliminations |  | Consolidated |  
|                                                                   |  | (Dollars in thousands)               |         
|Cash Flows From Continuing Operations                              |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Net earnings                                                       |  | $                                    | 50,456   |   |                      | $ | 271  |              |  | $            |  |  | $ | 50,727   |  
|Adjustments to reconcile net earnings to net operating cash flows: |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Loss from discontinued operations                                  |  |                                      | 820      |   |                      |   |     |              |  |              |  |  |   | 820      |  
|Loss on disposal of discontinued operations                        |  |                                      | 60       |   |                      |   |     |              |  |              |  |  |   | 60       |  
|Depreciation, amortization and cost of fee timber harvested        |  |                                      | 104,761  |   |                      |   | 98   |              |  |              |  |  |   | 104,859  |  
|Debt retirement costs                                              |  |                                      | 248      |   |                      |   |     |              |  |              |  |  |   | 248      |  
|Deferred taxes                                                     |  |                                      | 15,503   |   |                      |   |     |              |  |              |  |  |   | 15,503   |  
|Working capital changes                                            |  |                                      | 9,180    |   |                      |   | (48  | )            |  |              |  |  |   | 9,132    |  
|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Net cash provided by operations                                    |  |                                      | 181,028  |   |                      |   | 321  |              |  |              |  |  |   | 181,349  |  
|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Cash Flows From Investing                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Decrease in restricted cash                                        |  |                                      | 15,069   |   |                      |   |     |              |  |              |  |  |   | 15,069   |  
|Increase in short-term investments                                 |  |                                      | (38,091  | ) |                      |   |     |              |  |              |  |  |   | (38,091  | )
|Funding of qualified pension plans                                 |  |                                      | (19,461  | ) |                      |   |     |              |  |              |  |  |   | (19,461  | )
|Investments and advances from subsidiaries                         |  |                                      | 442      |   |                      |   | (442 | )            |  |              |  |  |   |         |  
|Additions to plant and properties                                  |  |                                      | (79,686  | ) |                      |   |     |              |  |              |  |  |   | (79,686  | )
|Other, net                                                         |  |                                      | (9,218   | ) |                      |   |     |              |  |              |  |  |   | (9,218   | )
|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Net cash used for investing                                        |  |                                      | (130,945 | ) |                      |   | (442 | )            |  |              |  |  |   | (131,387 | )
|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Cash Flows From Financing                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Change in book overdrafts                                          |  |                                      | 4,610    |   |                      |   |     |              |  |              |  |  |   | 4,610    |  
|Decrease in notes payable                                          |  |                                      | (40,000  | ) |                      |   |     |              |  |              |  |  |   | (40,000  | )
|Retirement of long-term debt                                       |  |                                      | (19,467  | ) |                      |   |     |              |  |              |  |  |   | (19,467  | )
|Premiums and fees on debt retirement                               |  |                                      | (248     | ) |                      |   |     |              |  |              |  |  |   | (248     | )
|Issuance of treasury stock                                         |  |                                      | 6,856    |   |                      |   |     |              |  |              |  |  |   | 6,856    |  
|Dividends                                                          |  |                                      | (17,217  | ) |                      |   |     |              |  |              |  |  |   | (17,217  | )
|Other, net                                                         |  |                                      | 10,113   |   |                      |   |     |              |  |              |  |  |   | 10,113   |  
|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Net cash used for financing                                        |  |                                      | (55,353  | ) |                      |   |     |              |  |              |  |  |   | (55,353  | )
|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Cash from continuing operations                                    |  |                                      | (5,270   | ) |                      |   | (121 | )            |  |              |  |  |   | (5,391   | )
|Cash from discontinued operations                                  |  |                                      | 3,608    |   |                      |   |     |              |  |              |  |  |   | 3,608    |  
|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Decrease in cash                                                   |  |                                      | (1,662   | ) |                      |   | (121 | )            |  |              |  |  |   | (1,783   | )
|Balance at beginning of year                                       |  |                                      | 8,811    |   |                      |   | 162  |              |  |              |  |  |   | 8,973    |  
|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Balance at end of year                                             |  | $                                    | 7,149    |   |                      | $ | 41   |              |  | $            |  |  | $ | 7,190    |  
|                                                                   |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  



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|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|------------------------------------------------------------------------- |  | ------------------------------------ | -------- | - | -------------------- | - | ---- | ------------ |  | ------------ | - |  | - | -------- | -
|                                                                          |  | For the year ended December 31, 2002 |         
|                                                                          |  | ParentCompany                        |          |   | SubsidiaryGuarantors |   |      | Eliminations |  | Consolidated |  
|                                                                          |  | (Dollars in thousands)               |         
|Cash Flows From Continuing Operations                                     |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Net earnings (loss)                                                       |  | $                                    | (234,455 | ) |                      | $ | 74   |              |  | $            |  |  | $ | (234,381 | )
|Adjustments to reconcile net earnings (loss) to net operating cash flows: |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Loss from discontinued operations                                         |  |                                      | 14,905   |   |                      |   | 50   |              |  |              |  |  |   | 14,955   |  
|Loss on disposal of discontinued operations                               |  |                                      | 229,023  |   |                      |   |     |              |  |              |  |  |   | 229,023  |  
|Depreciation, amortization and cost of fee timber harvested               |  |                                      | 115,388  |   |                      |   | 81   |              |  |              |  |  |   | 115,469  |  
|Debt retirement costs                                                     |  |                                      | 15,360   |   |                      |   |     |              |  |              |  |  |   | 15,360   |  
|Deferred taxes                                                            |  |                                      | (132,725 | ) |                      |   |     |              |  |              |  |  |   | (132,725 | )
|Working capital changes                                                   |  |                                      | (49,613  | ) |                      |   | (2   | )            |  |              |  |  |   | (49,615  | )
|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Net cash provided by (used for) operations                                |  |                                      | (42,117  | ) |                      |   | 203  |              |  |              |  |  |   | (41,914  | )
|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Cash Flows From Investing                                                 |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Decrease in restricted cash                                               |  |                                      | 83,131   |   |                      |   |     |              |  |              |  |  |   | 83,131   |  
|Decrease in short-term investments                                        |  |                                      | 28,500   |   |                      |   |     |              |  |              |  |  |   | 28,500   |  
|Investments and advances from subsidiaries                                |  |                                      | 394      |   |                      |   | (394 | )            |  |              |  |  |   |         |  
|Additions to plant and properties                                         |  |                                      | (51,614  | ) |                      |   |     |              |  |              |  |  |   | (51,614  | )
|Other, net                                                                |  |                                      | (13,530  | ) |                      |   |     |              |  |              |  |  |   | (13,530  | )
|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Net cash provided by (used for) investing                                 |  |                                      | 46,881   |   |                      |   | (394 | )            |  |              |  |  |   | 46,487   |  
|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Cash Flows From Financing                                                 |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Change in book overdrafts                                                 |  |                                      | (9,952   | ) |                      |   |     |              |  |              |  |  |   | (9,952   | )
|Increase in notes payable                                                 |  |                                      | 40,000   |   |                      |   |     |              |  |              |  |  |   | 40,000   |  
|Retirement of long-term debt                                              |  |                                      | (511,873 | ) |                      |   |     |              |  |              |  |  |   | (511,873 | )
|Premiums and fees on debt retirement                                      |  |                                      | (10,584  | ) |                      |   |     |              |  |              |  |  |   | (10,584  | )
|Issuance of treasury stock                                                |  |                                      | 8,146    |   |                      |   |     |              |  |              |  |  |   | 8,146    |  
|Dividends                                                                 |  |                                      | (17,071  | ) |                      |   |     |              |  |              |  |  |   | (17,071  | )
|Other, net                                                                |  |                                      | 9,349    |   |                      |   |     |              |  |              |  |  |   | 9,349    |  
|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Net cash used for financing                                               |  |                                      | (491,985 | ) |                      |   |     |              |  |              |  |  |   | (491,985 | )
|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Cash from continuing operations                                           |  |                                      | (487,221 | ) |                      |   | (191 | )            |  |              |  |  |   | (487,412 | )
|Cash from discontinued operations                                         |  |                                      | 488,641  |   |                      |   | 269  |              |  |              |  |  |   | 488,910  |  
|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Increase in cash                                                          |  |                                      | 1,420    |   |                      |   | 78   |              |  |              |  |  |   | 1,498    |  
|Balance at beginning of year                                              |  |                                      | 7,391    |   |                      |   | 84   |              |  |              |  |  |   | 7,475    |  
|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  
|Balance at end of year                                                    |  | $                                    | 8,811    |   |                      | $ | 162  |              |  | $            |  |  | $ | 8,973    |  
|                                                                          |  |                                      |          |   |                      |   |      |              |  |              |   |  |   |          |  



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|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|------------------------------------------------------------------------- |  | ------------------------------------ | -------- | - | -------------------- | - | ------ | ------------ |  | ------------ | - |  | - | -------- | -
|                                                                          |  | For the year ended December 31, 2001 |         
|                                                                          |  | ParentCompany                        |          |   | SubsidiaryGuarantors |   |        | Eliminations |  | Consolidated |  
|                                                                          |  | (Dollars in thousands)               |         
|Cash Flows From Continuing Operations                                     |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Net earnings (loss)                                                       |  | $                                    | (80,214  | ) |                      | $ | 769    |              |  | $            |  |  | $ | (79,445  | )
|Adjustments to reconcile net earnings (loss) to net operating cash flows: |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Loss (earnings) from discontinued operations                              |  |                                      | 23,460   |   |                      |   | (581   | )            |  |              |  |  |   | 22,879   |  
|Depreciation, amortization and cost of fee timber harvested               |  |                                      | 114,948  |   |                      |   | 85     |              |  |              |  |  |   | 115,033  |  
|Deferred taxes                                                            |  |                                      | (83,351  | ) |                      |   |       |              |  |              |  |  |   | (83,351  | )
|Working capital changes                                                   |  |                                      | 54,227   |   |                      |   | 17     |              |  |              |  |  |   | 54,244   |  
|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Net cash provided by operations                                           |  |                                      | 29,070   |   |                      |   | 290    |              |  |              |  |  |   | 29,360   |  
|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Cash Flows From Investing                                                 |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Increase in restricted cash                                               |  |                                      | (98,200  | ) |                      |   |       |              |  |              |  |  |   | (98,200  | )
|Increase in short-term investments                                        |  |                                      | (30,500  | ) |                      |   |       |              |  |              |  |  |   | (30,500  | )
|Funding of qualified pension plans                                        |  |                                      | (1,465   | ) |                      |   |       |              |  |              |  |  |   | (1,465   | )
|Investments and advances from subsidiaries                                |  |                                      | 1,052    |   |                      |   | (1,052 | )            |  |              |  |  |   |         |  
|Additions to plant and properties                                         |  |                                      | (42,679  | ) |                      |   |       |              |  |              |  |  |   | (42,679  | )
|Other, net                                                                |  |                                      | (4,541   | ) |                      |   | (8     | )            |  |              |  |  |   | (4,549   | )
|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Net cash used for investing                                               |  |                                      | (176,333 | ) |                      |   | (1,060 | )            |  |              |  |  |   | (177,393 | )
|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Cash Flows From Financing                                                 |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Change in book overdrafts                                                 |  |                                      | (2,366   | ) |                      |   |       |              |  |              |  |  |   | (2,366   | )
|Decrease in notes payable                                                 |  |                                      | (188,943 | ) |                      |   |       |              |  |              |  |  |   | (188,943 | )
|Proceeds from long-term debt                                              |  |                                      | 450,000  |   |                      |   |       |              |  |              |  |  |   | 450,000  |  
|Retirement of long-term debt                                              |  |                                      | (101,749 | ) |                      |   |       |              |  |              |  |  |   | (101,749 | )
|Long-term debt issuance fees                                              |  |                                      | (15,553  | ) |                      |   |       |              |  |              |  |  |   | (15,553  | )
|Issuance of treasury stock                                                |  |                                      | 6,620    |   |                      |   |       |              |  |              |  |  |   | 6,620    |  
|Purchase of treasury stock                                                |  |                                      | (10,453  | ) |                      |   |       |              |  |              |  |  |   | (10,453  | )
|Dividends                                                                 |  |                                      | (33,108  | ) |                      |   |       |              |  |              |  |  |   | (33,108  | )
|Other, net                                                                |  |                                      | (2,477   | ) |                      |   |       |              |  |              |  |  |   | (2,477   | )
|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Net cash provided by financing                                            |  |                                      | 101,971  |   |                      |   |       |              |  |              |  |  |   | 101,971  |  
|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Cash from continuing operations                                           |  |                                      | (45,292  | ) |                      |   | (770   | )            |  |              |  |  |   | (46,062  | )
|Cash from discontinued operations                                         |  |                                      | 42,157   |   |                      |   | 723    |              |  |              |  |  |   | 42,880   |  
|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Decrease in cash                                                          |  |                                      | (3,135   | ) |                      |   | (47    | )            |  |              |  |  |   | (3,182   | )
|Balance at beginning of year                                              |  |                                      | 10,526   |   |                      |   | 131    |              |  |              |  |  |   | 10,657   |  
|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Balance at end of year                                                    |  | $                                    | 7,391    |   |                      | $ | 84     |              |  | $            |  |  | $ | 7,475    |  
|                                                                          |  |                                      |          |   |                      |   |        |              |  |              |   |  |   |          |  



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INDEPENDENT AUDITORS REPORT



The Board of Directors:



We have audited the accompanying balance sheets of Potlatch Corporation
and consolidated subsidiaries as of December 31, 2003 and 2002 and the related statements of operations and comprehensive income, stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2003. In
connection with our audits of the financial statements, we also have audited the financial statement schedule on page 70. These financial statements and financial statement schedule are the responsibility of the companys management. Our
responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 Potlatch Corporation and consolidated subsidiaries as of December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information set forth therein.



KPMG LLP



Portland, Oregon

January 23, 2004



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Schedule II



POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Valuation and Qualifying Accounts

For the Years Ended December 31, 2003, 2002 and 2001

(Dollars in thousands)



|                                      |  |                           |       |                                             |   |             |  |   |                      |   |  |   |      
|------------------------------------- |  | ------------------------- | ----- | ------------------------------------------- | - | ----------- |  | - | -------------------- | - |  | - | -----
|Description                           |  | Balanceatbeginningof year |       | Amountscharged(credited)to costsandexpenses |   | Deductions1 |  |   | Balanceat endof year
|Reserve deducted from related assets: |  |                           |       |                                             |   |             |  |   |                      |   |  |   |      
|Doubtful accounts                    |  |                           |       |                                             |   |             |  |   |                      |   |  |   |      
|Accounts receivable                   |  |                           |       |                                             |   |             |  |   |                      |   |  |   |      
|Year ended December 31, 2003          |  | $                         | 1,624 |                                             | $ | 376         |  | $ | (715                 | ) |  | $ | 1,285
|                                      |  |                           |       |                                             |   |             |  |   |                      |   |  |   |      
|Year ended December 31, 2002          |  | $                         | 1,589 |                                             | $ | 881         |  | $ | (846                 | ) |  | $ | 1,624
|                                      |  |                           |       |                                             |   |             |  |   |                      |   |  |   |      
|Year ended December 31, 2001          |  | $                         | 612   |                                             | $ | 3,832       |  | $ | (2,855               | ) |  | $ | 1,589
|                                      |  |                           |       |                                             |   |             |  |   |                      |   |  |   |      

---

|1 |  | Accounts written off, net of recoveries.
|- |  | ----------------------------------------



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



Exhibit Index



|              |  |                                                                                                                                                                                                                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit       |  |                                                                                                                                                                                                                                                                                                                                                                              
|              | 
|(2)*          |  | Asset Purchase Agreement, dated as of March 18, 2002, between Potlatch Corporation, Sappi Limited and Northern Holdings LLC, now known as Sappi Cloquet LLC, filed as Exhibit (2) to the Quarterly Report
on Form 10-Q for the quarter ended March 31, 2002. (The Registrant agrees to furnish supplementally to the Commission upon request a copy of any omitted schedule.)
|              | 
|(3)(a)*       |  | Restated Certificate of Incorporation, filed as Exhibit (3)(a) to the Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (2002 Form 10-K).                                                                                                                                                                                                             
|              | 
|(3)(c)*       |  | By-laws, as amended through January 24, 2002, filed as Exhibit (3)(c) to the Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (2001 Form 10-K).                                                                                                                                                                                                      
|              | 
|(4)           |  | See Exhibits (3)(a) and (3)(c). Registrant also undertakes to file with the Securities and Exchange Commission, upon request, any instrument with respect to long-term debt.                                                                                                                                                                                                 
|              | 
|(4)(a)*       |  | Form of Indenture, dated as of November 27, 1990, filed as Exhibit (4)(a) to the Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (2000 Form 10-K).                                                                                                                                                                                                  
|              | 
|(4)(a)(i)*    |  | Officers Certificate, dated January 24, 1991, filed as Exhibit (4)(a)(i) to the 2000 Form 10-K.                                                                                                                                                                                                                                                                             
|              | 
|(4)(a)(ii)*   |  | Officers Certificate, dated December 12, 1991, filed as Exhibit (4)(a)(ii) to the 2001 Form 10-K.                                                                                                                                                                                                                                                                           
|              | 
|(4)(b)*       |  | Form of Indenture, dated as of June 29, 2001, for the 10% Senior Subordinated Notes due 2011, filed as Exhibit (10)(o) to the Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.                                                                                                                                                                             
|              | 
|(10)(a)1*     |  | Potlatch Corporation Management Performance Award Plan, as amended effective March 7, 2003, filed as Exhibit(10)(a) to the Quarterly Report on Form 10-Q for the quarter ended March 31,
2003.                                                                                                                                                                               
|              | 
|(10)(b)1*     |  | Potlatch Corporation Severance Program for Executive Employees, as amended and restated as of December 1, 1999, filed as Exhibit (10)(b) to the Quarterly Report on Form 10-Q for the quarter ended June
30, 2000.                                                                                                                                                           
|              | 
|(10)(c)1*     |  | Potlatch Corporation 2000 Stock Incentive Plan, adopted December 2, 1999, filed as Exhibit (10)(c) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (1999 Form
10-K).                                                                                                                                                                         
|              | 
|(10)(c)(i)1*  |  | Form of employee Stock Option agreement for the Potlatch Corporation 2000 Stock Incentive Plan together with the Addendum thereto as used for options granted in December 2000, 2001, 2002 and 2003,
filed as Exhibit (10)(c)(i) to the 2001 Form 10-K.                                                                                                                      
|              | 
|(10)(c)(ii)1* |  | Form of outside director Stock Option agreement for the Potlatch Corporation 2000 Stock Incentive Plan together with the Addendum thereto as used for options granted in December 2000, 2001, 2002 and
2003, filed as Exhibit (10)(c)(ii) to the 2001 Form 10-K.                                                                                                             
|              | 
|(10)(d)1      |  | Potlatch Corporation Salaried Employees Supplemental Benefit Plan (As Amended and Restated Effective January 1, 1989).                                                                                                                                                                                                                                                      
|              | 
|(10)(d)(i)1   |  | Amendment, effective as of January 1, 1998, to Plan described in Exhibit (10)(d).                                                                                                                                                                                                                                                                                            
|              | 
|(10)(g)1*     |  | Potlatch Corporation Deferred Compensation Plan for Directors, as amended through May 18, 2000, filed as Exhibit (10)(g) to the Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.                                                                                                                                                                           



71



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|               |  |                                                                                                                                                                                                                                                                                                                                     
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit        |  |                                                                                                                                                                                                                                                                                                                                     
|               | 
|(10)(h)1*      |  | Potlatch Corporation Benefits Protection Trust Agreement, as amended and restated effective September 20, 2002, filed as Exhibit (10)(h) to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.                                                                                                             
|               | 
|(10)(i)1*      |  | Compensation of Directors, dated December 5, 2002, filed as Exhibit (10)(i) to the 2002 Form 10-K.                                                                                                                                                                                                                                  
|               | 
|(10)(j)2*      |  | Form of Indemnification Agreement with each director of Potlatch Corporation as set forth on Schedule A, filed as Exhibit (10)(j) to the 2001 Form 10-K.                                                                                                                                                                            
|               | 
|(10)(j)(i)2    |  | Amendment No. 2 to Schedule A to Exhibit (10)(j).                                                                                                                                                                                                                                                                                   
|               | 
|(10)(k)2*      |  | Form of Indemnification Agreement with certain officers of Potlatch Corporation as set forth on Schedule A, filed as Exhibit (10)(k) to the 2001 Form 10-K.                                                                                                                                                                         
|               | 
|(10)(k)(i)2*   |  | Amendment No. 4 to Schedule A to Exhibit (10)(k), filed as Exhibit (10)(k)(i) to the 2002 Form 10-K.                                                                                                                                                                                                                                
|               | 
|(10)(l)1*      |  | Potlatch Corporation 1989 Stock Incentive Plan adopted December 8, 1988, and as amended and restated December 2, 1999, filed as Exhibit (10)(l) to the 1999 Form 10-K.                                                                                                                                                              
|               | 
|(10)(l)(ii)1*  |  | Form of Stock Option Agreement for the Potlatch Corporation 1989 Stock Incentive Plan together with the Addendum thereto as used for options granted in each December of 1990-1997, filed as Exhibit
(10)(l)(ii) to the 2000 Form 10-K.                                                                                             
|               | 
|(10)(l)(iii)1  |  | Form of Stock Option Agreement for the Potlatch Corporation 1989 Stock Incentive Plan together with the Addendum thereto as used for options granted in December, 1998.                                                                                                                                                             
|               | 
|(10)(m)(i)1    |  | Form of Amendments, dated January 12, 1999, to outstanding employee Stock Option Agreements.                                                                                                                                                                                                                                        
|               | 
|(10)(m)(ii)1   |  | Form of Amendment, dated December 29, 1998, to outstanding outside director Stock Option Agreements.                                                                                                                                                                                                                                
|               | 
|(10)(n)1*      |  | Potlatch Corporation 1995 Stock Incentive Plan adopted December 7, 1995, as amended and restated December 2, 1999, filed as Exhibit (10)(n) to the 1999 Form 10-K.                                                                                                                                                                  
|               | 
|(10)(n)(i)1*   |  | Form of Stock Option Agreement used for employees for the Potlatch Corporation 1995 Stock Incentive Plan together with the Addendum thereto as used for options granted in December, 1995 filed as
Exhibit (10)(n)(i) to the 2000 Form 10-K.                                                                                        
|               | 
|(10)(n)(ii)1*  |  | Form of Addendum used in connection with the Stock Option Agreement set forth in Exhibit (10)(n)(i) for options granted in each December, 1996 and 1997, filed as Exhibit (10)(n)(ii) to the 2001 Form
10-K.                                                                                                                        
|               | 
|(10)(n)(iii)1* |  | Form of Stock Option Agreement used for outside directors for the Potlatch Corporation 1995 Stock Incentive Plan together with the form of Addendum used for options granted in December 1995 and the
Form of Addendum used for options granted in each December 1996 and 1997, filed as Exhibit (10)(n)(iii) to the 2001 Form 10-K.
|               | 
|(10)(n)(iv)1   |  | Form of employee Stock Option Agreement for the Potlatch Corporation 1995 Stock Incentive Plan together with the Addendum thereto as used for options granted in December 1998.                                                                                                                                                     
|               | 
|(10)(n)(v)1    |  | Form of outside director Stock Option Agreement for the Potlatch Corporation 1995 Stock Incentive Plan together with the Addendum thereto as used for options granted in December 1998.                                                                                                                                             



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit        |  |                                                                                                                                                                                                                                                               
|               | 
|(10)(n)(vi)1*  |  | Form of employee Stock Option Agreement for the Potlatch Corporation 1995 Stock Incentive Plan together with the Addendum thereto as used for options granted in December 1999, 2000, 2001 and 2002,
filed as Exhibit (10)(n)(vi) to the 1999 Form 10-K.      
|               | 
|(10)(n)(vii)1* |  | Form of outside director Stock Option Agreement for the Potlatch Corporation 1995 Stock Incentive Plan together with the Addendum thereto as used for options granted in December 1999 and 2000, filed as
Exhibit (10)(n)(vii) to the 1999 Form 10-K.         
|               | 
|(10)(o)*       |  | Credit Agreement, dated as of June 29, 2001, filed as Exhibit (10)(p) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.                                                                                                               
|               | 
|(10)(o)(i)*    |  | First Amendment to Exhibit (10)(o), dated as of August 27, 2001, filed as Exhibit (10)(o)(i) to the 2001 Form 10-K.                                                                                                                                           
|               | 
|(10)(o)(ii)*   |  | Second Amendment to Exhibit (10)(o), dated as of December 19, 2001, filed as Exhibit (10)(o)(ii) to the 2001 Form 10-K.                                                                                                                                       
|               | 
|(10)(o)(iii)*  |  | Third Amendment to Exhibit (10)(o), dated as of January 24, 2002, filed as Exhibit (10)(o)(iii) to the 2001 Form 10-K.                                                                                                                                        
|               | 
|(10)(o)(iv)*   |  | Consent Letter, dated March 19, 2002, whereby lenders consent to the sale of Printing Papers segment assets to a domestic subsidiary of Sappi Limited, filed as Exhibit (10)(o)(iv) to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.
|               | 
|(10)(o)(v)*    |  | Consent and Modification, dated June 12, 2002, amending the definition of Consolidated Net Worth, filed as Exhibit (10)(o)(v) to the Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.                                                       
|               | 
|(10)(o)(vi)*   |  | Fourth Amendment to Credit Agreement and Waiver, dated as of July 16, 2002, filed as Exhibit (10)(o)(vi) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.                                                                            
|               | 
|(10)(o)(vii)*  |  | Fifth Amendment to Credit Agreement and Waiver, dated as of September 9, 2002, filed as Exhibit (10)(o)(vii) to the Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.                                                                   
|               | 
|(10)(o)(viii)* |  | Consent and Modification dated September 11, 2002, filed as Exhibit (10)(o)(vii) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.                                                                                               
|               | 
|(10)(o)(ix)*   |  | Consent and Modification dated September 27, 2002, filed as Exhibit (10)(o)(ix) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.                                                                                                
|               | 
|(10)(o)(x)*    |  | Consent dated October 23, 2002, filed as Exhibit (10)(o)(x) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.                                                                                                                    
|               | 
|(10)(o)(xi)*   |  | Sixth Amendment to Exhibit (10)(o), dated as of December 18, 2002, filed as Exhibit (10)(o)(xi) to the 2002 Form 10-K                                                                                                                                         
|               | 
|(10)(o)(xii)*  |  | Seventh Amendment to Exhibit (10)(o), dated as of January 23, 2003, filed as Exhibit (10)(o)(xii) to the 2002 Form 10-K.                                                                                                                                      
|               | 
|(10)(o)(xiii)  |  | Consent and Modification dated September 10, 2003.                                                                                                                                                                                                            
|               | 
|(10)(p)*       |  | Severance arrangement with Phillip M. Baker, filed as Exhibit (10)(p) to the 2001 Form 10-K.                                                                                                                                                                  
|               | 
|(10)(q)1       |  | Form of Performance Share Agreement for the Potlatch Corporation 2000 Stock Incentive Plan, together with the Addendum thereto as used for performance share awards granted in December,
2003.                                                                



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##### Table of Contents

|        |  |                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                              
|        | 
|(12)    |  | Computation of Ratio of Earnings to Fixed Charges.                                                           
|        | 
|(21)    |  | Potlatch Corporation Subsidiaries.                                                                           
|        | 
|(23)    |  | Consent of Independent Certified Public Accountants.                                                         
|        | 
|(24)    |  | Powers of Attorney.                                                                                          
|        | 
|(31)    |  | Rule 13a-14(a)/15d-14(a) Certifications.                                                                     
|        | 
|(32)    |  | Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350.

---

|* |  | Incorporated by reference.
|- |  | --------------------------

|1 |  | Management compensatory plan or arrangement.
|- |  | --------------------------------------------

|2 |  | Management contract.
|- |  | --------------------



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