As filed with the Securities and Exchange Commission on May 26, 2005

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 20-F



| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------



OR



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



FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004



OR



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



Commission File Number: 1-14932



UPM-Kymmene Oyj

(Exact name of
Registrant as specified in its charter)



UPM-Kymmene
Corporation

(Translation of Registrants name into English)



The Republic of Finland

(Jurisdiction of incorporation or organization)



Eteläesplanadi 2

FIN-00130 Helsinki

Finland

358-204 15111

(Address and telephone number of principal executive offices)



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



|                                                                                  |  |                                           
|--------------------------------------------------------------------------------- |  | ------------------------------------------
|Title of each class:                                                              |  | Name of each exchange on which registered:
|Ordinary shares, with no nominal value, represented by American Depositary Shares |  | New York Stock Exchange, Inc.             



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



Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None



Number of ordinary shares outstanding on December 31, 2004: 524,320,252



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 x No ̈



Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ̈Item 18 x



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TABLE OF CONTENTS



|                                                              |  |     
|------------------------------------------------------------- |  | ----
|                                                              |  | Page
|INTRODUCTION                                                  |  | iii 
|                                                              | 
|GLOSSARY                                                      |  | iv  
|                                                              | 
|PART I                                                        |  | 1   
|                                                              | 
|Item 1. Identity of Directors, Senior Management and Advisors |  | 1   
|                                                              | 
|Item 2. Offer Statistics and Expected Timetable               |  | 1   
|                                                              | 
|Item 3. Key Information                                       |  | 1   
|                                                              | 
|Selected Financial Data                                       |  | 1   
|                                                              | 
|Dividends                                                     |  | 3   
|                                                              | 
|Exchange Rates                                                |  | 3   
|                                                              | 
|Risk Factors                                                  |  | 5   
|                                                              | 
|Item 4. Information on the Company                            |  | 8   
|                                                              | 
|Item 5. Operating and Financial Review and Prospects          |  | 31  
|                                                              | 
|Recent Developments                                           |  | 40  
|                                                              | 
|Currency Fluctuations                                         |  | 41  
|                                                              | 
|Results of Operations                                         |  | 42  
|                                                              | 
|Capital Expenditures                                          |  | 54  
|                                                              | 
|Inflation                                                     |  | 55  
|                                                              | 
|Item 6. Directors, Senior Management and Employees            |  | 55  
|                                                              | 
|Board of Directors                                            |  | 56  
|                                                              | 
|Executive Team                                                |  | 58  
|                                                              | 
|Compensation of Directors and Officers                        |  | 62  
|                                                              | 
|Board Practices                                               |  | 63  
|                                                              | 
|Home Country Practices                                        |  | 63  
|                                                              | 
|Employees                                                     |  | 63  
|                                                              | 
|Share Ownership                                               |  | 65  
|                                                              | 
|Item 7. Major Shareholders and Related Party Transactions     |  | 66  
|                                                              | 
|Related Party Transactions                                    |  | 67  
|                                                              | 
|Item 8. Financial Information                                 |  | 69  
|                                                              | 
|Consolidated Financial Statements                             |  | 69  
|                                                              | 
|Other Financial Information                                   |  | 69  
|                                                              | 
|Significant Changes                                           |  | 71  
|                                                              | 
|Item 9. The Offer and Listing                                 |  | 71  
|                                                              | 
|Nature of Trading Markets                                     |  | 71  
|                                                              | 
|Trading and Settlement on the Helsinki Stock Exchange         |  | 73  



i



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TABLE OF CONTENTS

(continued)



|                                                                                      |  |     
|------------------------------------------------------------------------------------- |  | ----
|                                                                                      |  | Page
|Regulation of the Finnish Securities Market                                           |  | 73  
|                                                                                      | 
|The Finnish Book-Entry Securities System                                              |  | 74  
|                                                                                      | 
|Item 10. Additional Information                                                       |  | 75  
|                                                                                      | 
|Authorized Share Capital                                                              |  | 75  
|                                                                                      | 
|Memorandum and Articles of Association                                                |  | 76  
|                                                                                      | 
|Exchange Controls                                                                     |  | 79  
|                                                                                      | 
|Taxation                                                                              |  | 79  
|                                                                                      | 
|Documents on Display                                                                  |  | 84  
|                                                                                      | 
|Item 11. Quantitative and Qualitative Disclosures about Market Risk                   |  | 84  
|                                                                                      | 
|Market-sensitive Instruments and Financial Risk Management                            |  | 84  
|                                                                                      | 
|Foreign Currency Exposure                                                             |  | 85  
|                                                                                      | 
|Interest Rate Risk                                                                    |  | 85  
|                                                                                      | 
|Equity Price Risk                                                                     |  | 85  
|                                                                                      | 
|Item 12. Description of Securities Other than Equity Securities                       |  | 86  
|                                                                                      | 
|PART II                                                                               |  | 87  
|                                                                                      | 
|Item 13. Defaults, Dividend Arrearages and Delinquencies                              |  | 87  
|                                                                                      | 
|Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 87  
|                                                                                      | 
|Item 15. Controls and Procedures                                                      |  | 87  
|                                                                                      | 
|Item 16. [Reserved]                                                                   |  | 87  
|                                                                                      | 
|Item 16A. Audit Committee Financial Expert                                            |  | 87  
|                                                                                      | 
|Item 16B. Code of Ethics                                                              |  | 88  
|                                                                                      | 
|Item 16C. Principle Accounting Fees and Services                                      |  | 88  
|                                                                                      | 
|Item 16D. Exemptions from the Listing Standards for Audit Committee                   |  | 88  
|                                                                                      | 
|Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchases       |  | 88  
|                                                                                      | 
|PART III                                                                              |  | 89  
|                                                                                      | 
|Item 17. Financial Statements                                                         |  | 89  
|                                                                                      | 
|Item 18. Financial Statements                                                         |  | 89  
|                                                                                      | 
|Item 19. Exhibits                                                                     |  | 89  



ii



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INTRODUCTION



In this annual
report, UPM, the Company, the Group, we, us and our refer to UPM-Kymmene Corporation or UPM-Kymmene Corporation and its consolidated subsidiaries, as the context may require. We
are incorporated as a stock corporation organized under the laws of the Republic of Finland. UPM-Kymmene Corporation was created as a result of the merger of Kymmene Corporation (Kymmene) and Repola Ltd (Repola), which took
legal effect on April 30, 1996. Prior to the merger, United Paper Mills Ltd had been a paper and forest products subsidiary of Repola.



FINANCIAL AND OTHER INFORMATION



We produce financial statements in accordance with International Financial Reporting Standards (IFRS), which vary in certain respects from
U.S. generally accepted accounting principles (U.S. GAAP). Reconciliation of certain amounts to U.S. GAAP is set forth in Note 40 of the notes to the consolidated financial statements included elsewhere in this annual report.



Our IFRS accounts, audited in accordance with Finnish Standards on
Auditing for statutory purposes, were approved by our management on February 1, 2005, and by our shareholders on March 31, 2005. For purposes of preparing our IFRS statements within this Form 20-F, audited in accordance with the standards of the
Public Company Accounting Oversight Board (United States), we have adjusted our statutory accounts in accordance with IAS 10, Events After the Balance Sheet Date. See discussion in Operating and Financial Review and
ProspectsResults of OperationsThe Year ended December 31, 2004 Compared to the Year ended December 31, 2003.



Except as otherwise indicated, information regarding sales for each of our divisions, as presented herein, include inter-divisional sales.



Certain financial terms and indicators used throughout this annual report on
Form 20-F are calculated by the Company as follows:



| |  |  | Return on capital employed or ROCE for the Group is calculated by multiplying (i) 100 by (ii) (a) the profit before tax plus interest expenses and other
financial expenses, divided by (b) the balance sheet total minus non-interest-bearing liabilities (average).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Return on capital employed for the operating divisions of the Group is calculated by multiplying (i) 100 by (ii) (a) operating profit, divided by (b) non-current assets
plus stocks (inventories) and trade receivables, minus trade payables (average).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



References in this annual report to European Union countries are to the 25 member states of the European Union, including Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. However, for any financial or statistical information for periods prior to
May 1, 2004 references to European Union countries are to the 15 member states that comprised the European Union during that period: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, Spain, Sweden and the United Kingdom.



We have derived certain information contained in this annual report concerning European demand and prices for printing papers from reports prepared by Confederation of European Paper Industries Print (CEPIPRINT) and
Confederation of European Paper Industries Fine (CEPIFINE). Beginning in 2004, the data reported by these organizations for the European market included the 25 European Union countries, together with an additional group of 26 European
countries, which are comprised mainly of Eastern European countries and autonomous states. Prior to 2004, the data reported by CEPIPRINT and CEPIFINE for the European market focused solely on a group of Western European countries, which was more
limited in scope than the current reporting market. Neither organization has made available information for the revised definition of the European market for periods prior to 2004. Accordingly, the European demand and pricing information provided in
this annual report for the year 2004 and onwards refers to the revised definition of the European market and for periods prior to 2004 to the previous definition of Western Europe.



All references herein to tons are to metric tons, which are equal to 1,000 kilograms.



iii



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U.S. DOLLAR PRESENTATION



We have published our consolidated financial statements in euro for periods beginning on or after January 1, 1999.
References to Euro, euro or  are to the common currency of the European Economic and Monetary Union or EMU.



Solely for the readers convenience, this annual report presents translations of certain euro amounts into U.S. dollars (U.S. dollars,
U.S.$ or $) at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate) in effect on December
31, 2004 of 1.00 = U.S.$1.3538 (U.S.$1.00 = 0.7387). On April 29, 2005, the rate was 1.00 = U.S.$1.2919 (U.S.$1.00 = 0.7741). You should not consider these translations as representations that the euro amounts actually
represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. For historical information concerning the euro to dollar exchange rate from January 1, 2000 to a recent date see Item 3. Key
InformationExchange Rates.



FORWARD-LOOKING
STATEMENTS



Certain statements in this annual report,
including but not limited to certain statements set forth under the captions Item 3. Key Information, Item 4. Information on the Company, Item 5. Operating and Financial Review and Prospects, Item 8.
Financial Information and Item 11. Quantitative and Qualitative Disclosures about Market Risk, are based upon the beliefs of management as well as assumptions made by and information currently available to management and such
statements may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Potential investors should note that many factors, some of which are discussed elsewhere in this annual
report, could affect the future operations and future financial results of the Group and could cause future operations and future financial results to differ materially from those expressed in such forward-looking statements. Such factors include,
among others: (i) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein, continued success of product development, acceptance of new products or services by the Groups targeted
customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Groups patents and other intellectual property rights,
the availability of capital on acceptable terms, (ii) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the Groups products and the pricing pressures thereto,
financial condition of the customers and the competitors of the Group, the potential introduction of competing products and technologies by the competitors, (iii) general economic conditions, such as rates of economic growth in the Groups
principal geographic markets or fluctuations in exchange and interest rates, and various other factors, including those described in Item 3. Key InformationRisk Factors and elsewhere in this annual report and in other filings that
we make with the U.S. Securities and Exchange Commission (the Commission). Should one or more of these factors materialize, or should any assumptions of the Groups management underlying such forward-looking statements prove to be
incorrect, the Groups actual financial condition or its results of operations and prospects could differ materially from those described herein as anticipated, believed, estimated or expected. We do not intend or assume any obligation to
update our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made.



GLOSSARY



The following
explanations are not intended as technical definitions, but to assist the general reader to understand certain terms as used in this annual report.



|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Coated fine paper |  | Also known as coated woodfree paper. Coated fine paper is used for demanding printing. The amount of coating and gloss of the paper is determined by the end-use. Top quality coated fine
papers are called art printing papers and due to excellent printability are used for art books, brochures, annual reports and other similar purposes. Other papers, with a lighter coating, are used for brochures, books, magazines, catalogues and
other similar purposes.



iv



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|                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Coated paper     |  | Paper which has been coated on one or both sides with a mix of clay or carbonates and latex to create a high quality printing surface.                                                                                                                                                                                                                                                                                                                                   
|                 | 
|LWC              |  | Light-weight coated paper. The main characteristics of LWC paper are its higher gloss, brightness and smoothness relative to uncoated supercalendered paper. These properties are necessary for
quality printing and good color reproduction. The main uses of LWC paper are in the printing of mainly mass circulation magazines, catalogues and direct mail literature.                                                                                                
|                 | 
|MWC              |  | Medium-weight coated paper. MWC paper has higher basis weight and consequently better characteristics of smoothness, brightness and gloss than LWC paper, qualities which are required for
demanding color reproduction during the printing process. The main uses of MWC paper are similar to those of LWC paper.                                                                                                                                                       
|                 | 
|MFC              |  | Machine finished coated paper. MFC paper has high brightness, opacity, bulk and stiffness and is used in specialized magazines, catalogues, inserts, advertising materials and books. The soft
nip calendar gives a matte finish to the paper.                                                                                                                                                                                                                           
|                 | 
|Deinking         |  | The process of obtaining recycled fiber, which can be used for papermaking by removing the ink and other non-fibrous components from recovered paper, by washing or flotation combined with
chemical treatment.                                                                                                                                                                                                                                                          
|                 | 
|Face papers      |  | Paper on which the label is printed in pressure-sensitive labelstock.                                                                                                                                                                                                                                                                                                                                                                                                    
|                 | 
|Fiber            |  | The basic structural unit of paper. Fibers used in papermaking originate mainly from the stem of softwood and hardwood trees.                                                                                                                                                                                                                                                                                                                                            
|                 | 
|Fine paper       |  | Also known as free sheet or woodfree paper. Fine paper generally contains chemical pulp, with no more than 10% of mechanical pulp, and its filler content varies between five and 25%. Fine
paper is generally highly regarded for its strength, brightness and good archiving characteristics. Fine paper may be coated or uncoated. Fine papers are used as office papers, such as photocopying and laser printing, as well as for publications
such as annual reports.
|                 | 
|Gravure printing |  | A process of printing that uses a thin, quick-drying ink applied from a cylindrical surface having an etched (recessed) design. Rotogravure printing is the opposite of letterpress printing,
since the design areas are recessed into the plate instead of being in relief.                                                                                                                                                                                             
|                 | 
|Kraft paper      |  | High strength packaging paper made of softwood pulp, which has the longest fibers. Kraft paper is used primarily in carrier bags, pouches and wrappings.                                                                                                                                                                                                                                                                                                                 
|                 | 
|Label paper      |  | Face and base papers suitable for pressure-sensitive labels. Face papers have distinct printing properties and base papers have siliconizing and tear-off properties.                                                                                                                                                                                                                                                                                                    
|                 | 
|Magazine paper   |  | Paper used in magazines, catalogues, brochures, direct mail advertising and similar printed material.                                                                                                                                                                                                                                                                                                                                                                    
|                 | 
|MFS              |  | Uncoated, machine-calendared speciality paper, containing mechanical pulp and recycled fiber as raw material. MFS is suitable for newspaper inserts, newspapers, magazines, books and
directories.                                                                                                                                                                                                                                                                       



v



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|                               |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|MG paper                       |  | Machine-glazed paper. Paper made smooth and glossy on one side by drying on a heated, polished metal cylinder, which forms part of the drying section of the machine.                                                                                                                                                                                                                                        
|                               | 
|Newsprint                      |  | Uncoated paper manufactured mainly from mechanical pulp or recycled paper and used for newspapers and directories. Newsprint has low basis weight and is mainly used for printing newspapers,
but it is also used for printing magazines and advertising publications, which do not require high quality printing and good color reproduction.                                                               
|                               | 
|Non-impact printing            |  | A method of printing involving electrophotographic and ink jet printing. In this method, the printing element does not make contact with the paper.                                                                                                                                                                                                                                                          
|                               | 
|PM                             |  | PM, or paper machine, is a term used when referring to individual paper manufacturing units within a paper mill.                                                                                                                                                                                                                                                                                           
|                               | 
|Pressure-sensitive label stock |  | Face and base materials laminated together for manufacturers of price and product labels, as well as labels used in automatic data processing. Pressure-sensitive label stock is also known as
self-adhesive label stock.                                                                                                                                                                                    
|                               | 
|Printing paper                 |  | Papers used in the graphic industry and for photocopying. Printing papers may be coated or uncoated.                                                                                                                                                                                                                                                                                                         
|                               | 
|Publication papers             |  | Papers used in publications such as newspapers, catalogues, magazines and advertising materials.                                                                                                                                                                                                                                                                                                             
|                               | 
|Pulp                           |  | Generic name for wood or plant based fiber masses used as raw material in papermaking.                                                                                                                                                                                                                                                                                                                       
|                               | 
|Chemical pulp                  |  | Generic name for wood or plant based fibers separated from each other by cooking wood chips or plants in hot alkaline or acidic solutions of various chemicals.                                                                                                                                                                                                                                            
|                               | 
|Mechanical pulp                |  | Generic name for wood or plant based fibers separated from each other mechanically.                                                                                                                                                                                                                                                                                                                          
|                               | 
|Softwood pulp                  |  | Pulp obtained from coniferous trees, which have the advantage of long fibers, which enhance the strength of the paper.                                                                                                                                                                                                                                                                                       
|                               | 
|RFID                           |  | RFID, or Radio Frequency Identification, is a technology that incorporates the use of radio waves to uniquely identify an object. A typical RFID system consists of a tag, a reader and a host
system.                                                                                                                                                                                                       
|                               | 
|Recovered paper                |  | Paper and board recovered for secondary use.                                                                                                                                                                                                                                                                                                                                                                 
|                               | 
|Recycled fiber                 |  | Fiber extracted from recovered paper.                                                                                                                                                                                                                                                                                                                                                                        
|                               | 
|Release paper                  |  | In pressure-sensitive labelstock, the back page of a label that is removed and discarded.                                                                                                                                                                                                                                                                                                                    
|                               | 
|SC                             |  | Supercalendered paper. Supercalendered paper is manufactured from mechanical and chemical pulp with mineral pigments as filler. This paper is used for printing magazines, especially
multi-color magazines with large circulations. Traditional SC paper is made for gravure printing, but other SC paper grades have also been developed to suit offset printing. SC-B paper grade contains recycled fiber.



vi



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|                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                        
|---------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Siliconized paper                  |  | Papers siliconized from one side to form the tear-off part of speciality tapes for hygiene products, labels and industrial applications.                                                                                                                                                                                                                                                               
|                                   | 
|Uncoated fine paper                |  | Also known as uncoated woodfree paper, this paper is principally used for printing and writing. It includes A4 paper used for photocopying and business form paper used as continuous
stationery for computer printouts. Uncoated fine paper, when pigmented or surface sized, is used for conversion into envelopes and labels. Machine glazed woodfree paper is used for wrapping and for paper bags.
|                                   | 
|Woodfree, free sheet or fine paper |  | See Fine paper.                                                                                                                                                                                                                                                                                                                                                                                      



vii



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PART I



|Item 1. | Identity of Directors, Senior Management and Advisors
|------- | -----------------------------------------------------



Not applicable.



|Item 2. | Offer Statistics and Expected Timetable
|------- | ---------------------------------------



Not applicable.



|Item 3. | Key Information
|------- | ---------------



Selected Financial Data



The
following table presents selected consolidated financial data as of and for each of the three years under IFRS and for each of the five years under U.S. GAAP in the period ended December 31, 2004. We do not have the information under IFRS for the
earliest two years because without undue effort and expenses such information cannot be obtained. The selected consolidated financial data presented below are derived from our audited consolidated financial statements for these periods and should be
read in conjunction with these financial statements and the related notes thereto. Our audited consolidated financial statements as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 and the related
notes are included elsewhere in this annual report.



We have
published our consolidated financial statements in euro for periods beginning on or after January 1, 1999. Solely for your convenience, we have included in the following table U.S. dollar amounts for the year ended December 31, 2004 which we have
obtained by converting amounts in euros at the rate of 1.00 = U.S.$1.3538 (U.S.$1.00 = 0.7387), the Noon Buying Rate for the euro in effect on December 31, 2004, the last trading day in that year. On April 29, 2005, the Noon Buying Rate
for the euro was 1.00 = U.S.$1.2919 (U.S.$1.00 = 0.7741).



Our consolidated financial statements are prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. Reconciliation of certain amounts to U.S. GAAP is set forth in Note 40 of the notes to the
consolidated financial statements included elsewhere in this annual report and should be read in conjunction with such financial statements, including the notes thereto.



1



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|                                                      |  |                                           |   |  |         |   |  |            |   |  |         |   |  |         |  |        
|----------------------------------------------------- |  | ----------------------------------------- | - |  | ------- | - |  | ---------- | - |  | ------- | - |  | ------- |  | -------
|                                                      |  | As of and for the Year ended December 31,
|                                                      |  | 2004                                      |   |  | 2004    |   |  | 2003       |   |  | 2002    |   |  | 2001    |  | 2000   
|                                                      |  | (U.S.$)                                   |   |  | ()     |   |  | ()        |   |  | ()     |   |  | ()     |  | ()    
|                                                      |  | (In millions, except per share data)     
|INCOME STATEMENT DATA                                 |  |                                           |   |  |         |   |  |            |   |  |         |   |  |         |  |        
|Amounts in accordance with IFRS                       |  |                                           |   |  |         |   |  |            |   |  |         |   |  |         |  |        
|                                                      |  |                                           |   |  |         |  
|Sales (net sales)                                     |  | 13,294                                    |   |  | 9,820   |   |  | 9,787      |   |  | 10,417  |   |  |        |  |       
|Operating profit                                      |  | 865                                       |   |  | 639     |   |  | 352        |   |  | 803     |   |  |        |  |       
|Profit before tax                                     |  | 812                                       |   |  | 600     |   |  | 438        |   |  | 710     |   |  |        |  |       
|Net income                                            |  | 1,365                                     |   |  | 1,008   |   |  | 319        |   |  | 500     |   |  |        |  |       
|Amounts in accordance with U.S. GAAP                  |  |                                           |   |  |         |   |  | (restated) |   |  |         |   | 
|                                                      |  |                                           |   |  |         |  
|Sales (net sales)                                     |  | 13,305                                    |   |  | 9,828   |   |  | 9,862      |   |  | 10,502  |   |  | 9,924   |  | 9,661  
|Operating profit                                      |  | 368                                       |   |  | 272     |   |  | 392        |   |  | 932     |   |  | 1,204   |  | 1,348  
|Net income                                            |  | 777                                       |   |  | 574     |   |  | 473        |   |  | 628     |   |  | 880     |  | 1,367  
|Net income from continuing operations                 |  | 620                                       |   |  | 458     |   |  | 404        |   |  | 606     |   |  | 898     |  | 1,372  
|BALANCE SHEET DATA                                    |  |                                           |   |  |         |   |  |            |   |  |         |   |  |         |  |        
|Amounts in accordance with IFRS                       |  |                                           |   |  |         |   |  |            |   |  |         |   |  |         |  |        
|                                                      |  |                                           |   |  |         |  
|Total assets                                          |  | 21,494                                    |   |  | 15,877  |   |  | 16,591     |   |  | 17,624  |   |  |        |  |       
|Current liabilities                                   |  | 3,045                                     |   |  | 2,249   |   |  | 2,240      |   |  | 2,283   |   |  |        |  |       
|Non-current liabilities                               |  | 8,077                                     |   |  | 5,966   |   |  | 7,322      |   |  | 8,104   |   |  |        |  |       
|Minority interest                                     |  | 35                                        |   |  | 26      |   |  | 32         |   |  | 33      |   |  |        |  |       
|Share capital                                         |  | 1,206                                     |   |  | 891     |   |  | 890        |   |  | 442     |   |  |        |  |       
|Shareholders equity, total                           |  | 10,337                                    |   |  | 7,636   |   |  | 6,997      |   |  | 7,204   |   |  |        |  |       
|Amounts in accordance with U.S. GAAP                  |  |                                           |   |  |         |   |  | (restated) |   |  |         |   | 
|                                                      |  |                                           |   |  |         |  
|Total assets                                          |  | 21,605                                    |   |  | 15,959  |   |  | 16,853     |   |  | 17,594  |   |  | 18,945  |  | 15,445 
|Current liabilities                                   |  | 3,042                                     |   |  | 2,247   |   |  | 2,391      |   |  | 2,209   |   |  | 3,133   |  | 2,379  
|Non-current liabilities                               |  | 8,407                                     |   |  | 6,210   |   |  | 7,192      |   |  | 8,024   |   |  | 8,291   |  | 5,890  
|Minority interest                                     |  | 35                                        |   |  | 26      |   |  | 32         |   |  | 33      |   |  | 28      |  | 19     
|Share capital                                         |  | 1,206                                     |   |  | 891     |   |  | 890        |   |  | 442     |   |  | 442     |  | 437    
|Shareholders equity                                  |  | 10,121                                    |   |  | 7,476   |   |  | 7,238      |   |  | 7,328   |   |  | 7,493   |  | 7,157  
|OTHER DATA                                            |  |                                           |   |  |         |   |  |            |   |  |         |   |  |         |  |        
|Amounts in accordance with IFRS                       |  |                                           |   |  |         |   |  |            |   |  |         |   |  |         |  |        
|                                                      |  |                                           |   |  |         |  
|Net cash provided by operating activities             |  | 1,350                                     |   |  | 997     |   |  | 1,258      |   |  | 1,418   |   |  |        |  |       
|Net cash used in investing activities                 |  | (631                                      | ) |  | (466    | ) |  | (373       | ) |  | (441    | ) |  |        |  |       
|Net cash used in financing activities                 |  | (961                                      | ) |  | (710    | ) |  | (964       | ) |  | (1,032  | ) |  |        |  |       
|Capital expenditures                                  |  | 929                                       |   |  | 686     |   |  | 720        |   |  | 620     |   |  |        |  |       
|Earnings per share                                    |  | 2.61                                      |   |  | 1.93    |   |  | 0.61       |   |  | 0.96    |   |  |        |  |       
|Diluted earnings per share                            |  | 2.60                                      |   |  | 1.92    |   |  | 0.61       |   |  | 0.96    |   |  |        |  |       
|Dividend per share(1)                                 |  | 0.97                                      |   |  | 0.75    |   |  | 0.75       |   |  | 0.75    |   |  | 0.75    |  | 0.75   
|Amounts in accordance with U.S. GAAP                  |  |                                           |   |  |         |   |  | (restated) |   |  |         |   | 
|                                                      |  |                                           |   |  |         |  
|Basic earnings per share                              |  | 1.49                                      |   |  | 1.10    |   |  | 0.90       |   |  | 1.21    |   |  | 1.77    |  | 2.66   
|Basic earnings from continuing operations per share   |  | 1.19                                      |   |  | 0.88    |   |  | 0.77       |   |  | 1.17    |   |  | 1.81    |  | 2.67   
|Diluted earnings per share                            |  | 1.48                                      |   |  | 1.09    |   |  | 0.90       |   |  | 1.20    |   |  | 1.75    |  | 2.62   
|Diluted earnings from continuing operations per share |  | 1.18                                      |   |  | 0.87    |   |  | 0.77       |   |  | 1.16    |   |  | 1.78    |  | 2.63   
|Number of shares                                      |  |                                           |   |  |         |   |  |            |   |  |         |   |  |         |  |        
|                                                      |  |                                           |   |  |         |  
|Basic number of shares (1,000s)                      |  | 523,641                                   |   |  | 523,641 |   |  | 523,130    |   |  | 518,935 |   |  | 495,784 |  | 513,634
|Diluted number of shares (1,000s)                    |  | 526,247                                   |   |  | 526,247 |   |  | 524,254    |   |  | 525,782 |   |  | 503,984 |  | 522,286

---

|(1) | In conformity with the exchange rate set forth in Dividends below, the dividend amount for 2004 was translated into U.S. dollars at the Noon Buying Rate of
1.00 = U.S.$1.2873 in effect on April 12, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



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Dividends



Our current dividend
policy is to declare and pay dividends based upon, and in relation to, profits, with a dividend averaging over one-third of the profits for the financial year as our target dividend pay-out ratio. The aim is to provide shareholders with a steady,
growing annual dividend. The timing and amount of future dividend payments, if any, will depend on our future earnings, financial condition (including our cash needs), future earnings prospects and other factors deemed relevant by our Board of
Directors.



The following table sets forth the dividends per
share paid in respect of the five most recent financial years and their corresponding U.S. dollar values:



|     |  |      |  |          
|---- |  | ---- |  | ---------
|     |  |     |  | U.S.$ (1)
|2000 |  | 0.75 |  | 0.67     
|2001 |  | 0.75 |  | 0.66     
|2002 |  | 0.75 |  | 0.82     
|2003 |  | 0.75 |  | 0.90     
|2004 |  | 0.75 |  | 0.97     

---

|(1) | The dividend amount for year 2004 was declared in euros and translated into U.S. dollars at the Noon Buying Rate in effect on April 12, 2005, when the dividend was paid. The
dividend amounts for years 2003, 2002, 2001 and 2000 were declared in euros and translated into U.S. dollars at the respective Noon Buying Rates in effect on the dates of payment of such dividends.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the Finnish Companies Act and general corporate practice, dividends on
the shares of a Finnish company are generally only paid annually after shareholder approval of both the companys results and the amount of the dividend proposed by the board of directors. Accordingly, our payment of each annual dividend in
respect of our shares will require the approval of the holders of a majority of votes carried by the shares represented at the annual general meeting of shareholders, which is usually held in March. Under Finnish law, the amount of any dividend is
limited to the lesser of the Companys and the Groups distributable funds available at the end of the preceding financial year and is further subject to certain additional limitations. As of December 31, 2004, the amounts of the
Companys and the Groups distributable funds were 3,420 million (U.S.$4,630 million) and 4,372 million (U.S.$5,919 million), respectively.



Dividends paid to holders of the shares (in the form of shares and American depositary shares, or ADSs) who are
non-residents of Finland will generally be subject to Finnish withholding tax at a rate of 28% as from January 1, 2005 according to the new Corporate and Capital Tax Reform. Such shareholders may, however, be subject to a lower withholding tax rate
and may be allowed an imputation tax credit to reduce the tax on dividends where there is a double taxation treaty with Finland that contains appropriate provisions. The current convention between the Government of the United States of America and
the Government of the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital does not contain provisions that extend such imputation credits to U.S. holders of the
shares (in the form of shares or ADSs). However, the treaty limits the Finnish withholding tax to 15%. See Item 10. Additional InformationTaxationFinnish Taxation.



Exchange Rates



The first table
below sets forth, for the periods and dates indicated, the average, high, low and period-end Noon Buying Rates for the euro expressed in euros per U.S. dollar. The second table below sets forth, for the dates indicated, the average, high, low and
period-end Noon Buying Rates for the U.S. dollar expressed in U.S. dollars per euro. The average rates set forth in both tables below are the average of the Noon Buying Rates on the last business day of each month during the relevant period. We make
no representation that euros could have been converted into U.S. dollars at the rates shown or at any other rate for such periods or at such dates.



3



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The following tables set forth the Noon Buying Rate for the euro for each of the previous five years, the
period from the beginning of 2005 until the latest practicable date, and for each of the last six months (expressed in euros per one U.S. dollar):



Euros per U.S. Dollar



|                        |  |         |  |        |  |        |  |           
|----------------------- |  | ------- |  | ------ |  | ------ |  | ----------
|Year                    |  | Average |  | High   |  | Low    |  | Period End
|2000                    |  | 1.0860  |  | 1.2090 |  | 0.9675 |  | 1.0652    
|2001                    |  | 1.1225  |  | 1.1827 |  | 1.0743 |  | 1.1235    
|2002                    |  | 1.0531  |  | 1.1636 |  | 0.9537 |  | 0.9537    
|2003                    |  | 0.8838  |  | 0.9641 |  | 0.7928 |  | 0.7928    
|2004                    |  | 0.8039  |  | 0.8473 |  | 0.7339 |  | 0.7387    
|2005 (through April 29) |  | 0.7652  |  | 0.7829 |  | 0.7420 |  | 0.7741    



|         |  |        |  |       
|-------- |  | ------ |  | ------
|         |  | High   |  | Low   
|2004     |  |        |  |       
|November |  | 0.7872 |  | 0.7514
|December |  | 0.7562 |  | 0.7339
|2005     |  |        |  |       
|January  |  | 0.7720 |  | 0.7420
|February |  | 0.7829 |  | 0.7533
|March    |  | 0.7766 |  | 0.7427
|April    |  | 0.7801 |  | 0.7638



The following tables
set forth the Noon Buying Rate for the dollar for each of the previous five years, the period from the beginning of 2005 until the latest practicable date, and for each of the last six months (expressed in U.S. dollars per one euro):



U.S. Dollars per Euro



|                        |  |         |  |        |  |        |  |           
|----------------------- |  | ------- |  | ------ |  | ------ |  | ----------
|Year                    |  | Average |  | High   |  | Low    |  | Period End
|2000                    |  | 0.9207  |  | 1.0335 |  | 0.8270 |  | 0.9388    
|2001                    |  | 0.8909  |  | 0.9308 |  | 0.8455 |  | 0.8901    
|2002                    |  | 0.9496  |  | 1.0485 |  | 0.8594 |  | 1.0485    
|2003                    |  | 1.1315  |  | 1.2613 |  | 1.0372 |  | 1.2613    
|2004                    |  | 1.2438  |  | 1.3625 |  | 1.1801 |  | 1.3538    
|2005 (through April 29) |  | 1.3069  |  | 1.3476 |  | 1.2773 |  | 1.2919    



|         |  |        |  |       
|-------- |  | ------ |  | ------
|         |  | High   |  | Low   
|2004     |  |        |  |       
|November |  | 1.3308 |  | 1.2703
|December |  | 1.3625 |  | 1.3224
|2005     |  |        |  |       
|January  |  | 1.3476 |  | 1.2954
|February |  | 1.3275 |  | 1.2773
|March    |  | 1.3465 |  | 1.2877
|April    |  | 1.3093 |  | 1.2819



Our shares trade on
the Helsinki Stock Exchange and our ADSs trade on the New York Stock Exchange. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro quotation of the shares on the Helsinki Stock
Exchange and, as a result, are likely to affect the market price of the ADSs on the New York Stock Exchange. We declare any cash dividends in euros and exchange rate fluctuations will affect the U.S. dollar amounts received on conversion of cash
dividends on the shares represented by ADSs.



For a discussion
of the effects of exchange rate movements on our operations and our risk management policies, see Item 5. Operating and Financial Review and ProspectsOther FactorsCurrency Fluctuations and Item 11. Quantitative and
Qualitative Disclosures about Market RiskForeign Currency Exposure.



4



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Risk Factors



Set forth below is
a description of certain factors that may affect our results of operations or financial condition or investments in our shares or ADSs from time to time.



We face significant competition from multinational and local competitors, who may offer our customers competing products with more attractive prices.



The paper and forest products markets in which we
operate are highly competitive. We have, from time to time, experienced price pressures from competitors in our main business areas and geographic markets and we have experienced particularly large fluctuations in operating margins due to this
competitive environment. We principally compete with a number of large multinational paper and forest products companies, some of which may have greater financial and other resources than we do, as well as with numerous regional or more specialized
competitors. There can be no assurance that we will have sufficient financial resources to respond to these competitive pressures and to continue to make investments in our manufacturing facilities or in product development at the same level as in
previous years. See Item 5. Operating and Financial Review and Prospects.



Our financial performance is influenced by the cyclicality of the markets and pricing fluctuations for paper and forest products.



The markets for paper and forest products are cyclical, being characterized by periods of imbalance between supply and demand. The general economic
conditions of the major economic regions are the primary determinants of the demand for paper and forest products, as demand and consumption generally correlate with overall economic activity. Prices of paper and forest products can fluctuate
significantly when supply and demand become imbalanced. These demand-supply imbalances may also be caused by inventory build-up and reduction and not necessarily by changes in end-consumption. During periods of weaker economic growth, the capacity
build-up can cause oversupply in the market and lower prices. Similarly, strong economic growth in main market areas can lead to shortage of paper and result in significant price increases. In particular, the price of pulp, which is a raw material
of some of our divisions and is also produced by us, has fluctuated significantly, while our principal product groups have experienced somewhat lesser fluctuations. In addition, many of our products are sold in markets with established regional or
world market prices, which fluctuate as a result of supply and demand imbalances. There can be no assurance that current price levels for our products will be maintained, that any additional price increases will be achieved or that the industry will
not add new capacity, thereby potentially causing an environment for instability between supply and demand. See Item 5. Operating and Financial Review and Prospects.



Shifts in consumer preferences can materially affect the demand for our products and our financial results.



Over the last several decades, consumer expectations with respect to paper
used for such items as books, catalogues, magazines, newspapers, advertising and direct mail literature, packaging and label materials and other similar uses have become both more demanding and more diverse as advances in technology have allowed
paper manufacturers to produce a greater variety and higher quality of paper at a lower cost. As consumers have become more environmentally conscious, consumer preferences have also shifted towards paper products, which contain a proportion of
recycled fiber. In addition, the trend towards a greater use of computers and electronic media may have an effect on consumption patterns for paper in the future. Our ability to continue to meet the shifting demands of consumers in the paper market
depends upon a variety of factors, including our ability to foresee and/or identify changes in consumer preferences, the technical capabilities of our manufacturing facilities, the speed of, and the costs associated with, the shifting of production
at such facilities and the success of our various research and development programs. There can be no assurance that we will be able to successfully meet future changes in consumer demands or that such changes would not have a material adverse impact
on our business, financial condition or operating results.



We are
subject to significant environmental regulations.



We
are subject to various environmental laws and regulations in the jurisdictions in which we operate, governing, among other things, wood procurement, use of recycled material and different forms of production discharges and emissions. We have made



5



---

substantial investments in environmental management covering areas such as wood procurement, use of recycled material, emissions into air, water discharges
and use of energy. We are currently not involved in any legal proceedings concerning environmental matters that could reasonably be expected to have a material adverse impact on our business, financial condition or results of operations, nor is
management aware of any claims or potential liability concerning environmental matters that could reasonably be expected to have a material adverse impact on our business, financial condition or results of operations. However, the risk of
substantial environmental costs and liabilities is inherent in industrial operations, including the paper and forest products industry, and there can be no assurance that significant costs and liabilities will not be incurred in the future or that
the adoption of increasingly strict environmental laws, regulations and enforcement policies could not result in substantially increased costs and liabilities in the future. See Item 4. Information on the CompanyEnvironmental and
Regulatory Matters.



Our competitiveness may be negatively affected
to the extent we are unable to enter into successful mergers and acquisitions or to integrate and manage acquired operations.



The paper and forest products industry has been experiencing a wave of consolidation typical of highly competitive industries, driven, in part, by a
desire to achieve economies of scale and synergies. We may seek growth through acquisitions or mergers to stay competitive with our increasingly larger competitors or to enter into and establish our position in our selected core areas of operation.
Such acquisitions may not be available to us, or may not be available at the times or on terms acceptable to us. In addition, the mergers and acquisitions which we might enter into or make could involve certain risks, including those concerning our
ability to successfully integrate and manage acquired operations and personnel, as well as to successfully achieve the economies of scale or synergies sought. The integration of acquired businesses may also lead to a possible deterioration of our
financial condition, a loss of key employees of the acquired companies or a diversion of management attention away from other ongoing business concerns.



Although our customer base is numerous and diverse, the loss of one or a group of customers could have an adverse impact for our business.



We sell a significant portion of our products to several major customers,
including certain significant printing houses and merchant distributors, which resell our products. Although we are not dependent on any specific customer or group of customers, the loss of one or more of our significant customers, if not replaced
on similar terms, could have an adverse effect on our business, financial condition or results of operations. Our ten largest customers accounted for approximately 13% of our sales in 2004 and our largest customer accounted for approximately 2%. In
addition, each of our divisions and business units have major customers that, although not necessarily material to our Group as a whole, are important to the operations of such divisions and business units.



Our company has an extensive insurance coverage for the ordinary course of business.
Such events as natural catastrophes or sabotage could, however, lead to a situation where we would suffer with regards to our financial condition and results of operations.



We operate a significant number of manufacturing facilities all over the world, most of which we own. We are also the
largest private owner of forestland in Finland. We currently have in place a program consisting of a number of different insurance policies that cover property damage and losses due to the interruption of any of our businesses, subject to applicable
insurance conditions. Management believes that this coverage is adequate to cover risks resulting from possible damage to our property or the interruption of any of our business operations. However, there can be no assurance that our insurance
program would be sufficient to cover potential catastrophic losses that could be suffered by us or that we, in the future, will be able to obtain sufficient levels of property insurance coverage or that such coverage will be available on terms
acceptable to us.



Our exposure to fluctuations in global exchange rates
can have a significant effect on our financial results.



As a consequence of the global nature of our business, we are exposed to risks associated with changes in foreign currency exchange rates, which may have an adverse effect on our business, financial condition and results of operations.
Currency risk exposure primarily affects our export operations to the extent our sales are denominated in currencies other than those in which manufacturing costs are incurred. In general, the introduction of the euro has reduced our exposure to
such currency risk.



6



---

Nevertheless, a significant portion of our sales are denominated in currencies (consisting primarily of the U.S. dollar and the British pound sterling) other
than the euro. In addition, our reported earnings may be affected by fluctuations between the euro and the non-euro currencies in which our various foreign subsidiaries report their results of operations when such results of operations are
translated back into euros. To manage exposure to such exchange rate fluctuations, we closely monitor our exposure to currency risks and seek to hedge such risks using certain financial instruments, including forward foreign exchange agreements and
currency swaps. There can be no assurance, however, that currency exchange rate fluctuations between the euro and other currencies, such as the U.S. dollar or the British pound sterling, will not have a material adverse effect on our business,
financial condition or results of operations in the future. In addition to the section titled Exchange Rates included above in this item, see Item 5. Operating and Financial Review and ProspectsOther FactorsCurrency
Fluctuations and Item 11. Quantitative and Qualitative Disclosures about Market RiskForeign Currency Exposure.



Adverse economic conditions in the markets we serve may increase the likelihood of payment defaults by our customers and adversely affect our financial results.



We face the risk of nonpayment or nonperformance by
our customers in connection with the sale of our products. In particular continued weakness in the general economy may result in increased defaults by customers and increased losses. We have various programs in place to monitor and mitigate customer
credit risk and we have insurance policies covering most of our trade receivables. However, we cannot assure you that such measures will be effective in eliminating our exposure to customer credit risk.



We rely on third-party suppliers for significant amounts of our raw materials.
Disruptions in our supply chain and fluctuations in the prices of these materials could materially affect our business.



In 2004, we relied on third-party suppliers for more than 90% of our wood requirements and approximately 30% of our electric power needs. We also buy
significant amounts of other production inputs, such as chemicals, fillers and recovered paper from third-party suppliers. In the event of a significant interruption or limitation in the supply of these production inputs from our current suppliers,
we would seek to obtain them from other sources. However, there can be no assurance that we would be able to do so without an adverse impact on our manufacturing operations, such as an interruption or downscaling of production or change in the
product mix, or increased costs. This could, in turn, have a material adverse effect on our business, financial condition and results of operations.



Our operations in the emerging market countries where we operate could be adversely affected by unexpected political, economic or legal developments.



We have manufacturing operations in certain emerging
market countries, including, among other countries, the Peoples Republic of China and Russia. The political, economic and legal systems in these countries may be less predictable than in countries with more established and sustained
institutional structures. Political or economic upheaval and changes in laws may have a material adverse effect on our operations in these countries and, in turn, the amount of income from, and the value of, the investments we have made in relation
to our operations in such countries. Our investments in these countries also may be subject to other risks and uncertainties such as unfavorable taxation treatment, exchange controls, inflation, currency fluctuations and nationalization.



Our ability to implement our strategies depends on our ability to recruit and retain
skilled employees.



To meet the challenges of
sustaining growth and retaining the effectiveness of our operations, we must continue to recruit and retain skilled employees. We are continuously evaluating our recruiting, compensation and career development policies and taking measures to attract
and retain skilled personnel. However, we cannot give assurance that we will not encounter shortages of sufficient numbers of appropriately skilled personnel in the future.



We have been financially rather successful in our industry with the existing product and geographical spread. It is not certain if
this will be the case in the future.



We seek to
generate profits through managing a balanced product portfolio and maintaining a diversified geographical presence. Although these actions have enabled us to achieve positive results in recent years, demand for our main products in our major markets



7



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may change and we cannot assure you that our current product portfolio and geographical diversification will be best-suited for successful business in the
future.



UPM-Kymmene Corporation and certain of its subsidiaries are the
subjects of investigation by antitrust authorities in various parts of the world, and named as defendants in civil litigation in the United States concerning allegedly anticompetitive conduct.



In 2003, UPM directed its outside counsel to conduct an internal
investigation of UPMs and its subsidiaries compliance with competition laws in the United States and other jurisdictions where the companies conduct business. UPM decided to approach competition law authorities to disclose any conduct
that did not comport with applicable competition laws, and to strengthen its competition law compliance programs. UPM has created a European Union Competition Law Compliance Manual and has initiated a comprehensive competition law training program
for all its employees. More than 2,000 executives and employees of the Company have participated in the competition law compliance training. Internal audits have been expanded to include competition law issues and a variety of other internal
controls have been implemented.



During 2004, UPM and its
subsidiaries have continued to cooperate with competition law authorities in the European Union, Canada, and the United States. UPM has received conditional immunity from competition authorities in the European Union and Canada with respect to
certain conduct UPM has disclosed to them. In the United States, the Antitrust Division of U.S. Department of Justice is conducting criminal investigations into alleged anticompetitive conduct in the labelstock and magazine paper industries. UPM
continues to cooperate fully with the various authorities and their ongoing investigations, and may yet be subject to additional investigations in other parts of the world.



UPM and its subsidiary Raflatac Inc., along with certain labelstock manufacturers, have been named as defendants in a number
of class-action lawsuits filed in United States District Courts by the Companys customers, and in state courts by customers of the Companys customers. These lawsuits allege that the defendants violated federal and/or state antitrust laws
by conspiring with one another to fix the prices of and allocate the markets for labelstock products. The complaints seek treble or punitive damages for alleged overcharges resulting from the purported conspiracy.



UPM and its subsidiary UPM-Kymmene Inc. have also been named as a defendant
in class-action lawsuits making similar allegations against manufacturers of magazine papers. These complaints, like the labelstock complaints, seek treble or punitive damages for alleged overcharges resulting from the purported conspiracy.



In an unrelated development, on May 3, 2004 UPM received a
Statement of Objection from the European Commission concerning alleged anticompetitive activities in the market for plastic industrial sacks. UPM has responded to the Statement of Objection as the European Commission requested and is awaiting a
decision by the Commission.



In the aggregate, these matters
may implicate or result in substantial adverse publicity, penalties, and damages. It is possible that any ultimate liability could be material to UPMs financial position, results of operations, and cash flow.



|Item 4. | Information on the Company
|------- | --------------------------



Organization



UPM-Kymmene Corporation is a stock corporation organized under the laws of the Republic of Finland. We were incorporated in the Republic of Finland on
April 30, 1996 as a result of the merger of two companies also incorporated in Finland, Kymmene and Repola. Our registered office is located at Eteläesplanadi 2, FIN-00101 Helsinki, Finland, telephone +358-204-15111. Our agent for U.S. federal
securities law purposes is: UPM-Kymmene, Inc., attn: President, located at 999 Oakmont Plaza Drive, Suite 200, Westmont, Illinois, 60559, telephone +1-630-850-4997.



8



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Development of the Company



On April 30, 1996, UPM-Kymmene Corporation was formed through the merger of Kymmene and Repola.



Kymmenes origins date back to 1872. Kymmene made its first
international acquisition in 1932. In the 1960s and 1970s, Kymmene expanded its operations into Germany through the construction of a new fine paper mill and into France through the acquisition of a French paper producer. In 1986, Kymmene merged
with Oy Kaukas Ab and from that time was able to use the pulp producing capacity of Kaukas to enhance Kymmenes vertical integration in the forest products industry. In 1987, Kymmene built a new light-weight coated paper mill in Irvine,
Scotland, establishing Caledonian Paper plc (Caledonian). In 1988, Kymmene acquired Oy Wilh. Schauman Ab, an important producer of pulp, panels, packaging materials and sawn goods in Finland. In 1990, Kymmene enhanced its position in the
European paper market with the acquisition of the French magazine paper and newsprint producer Chapelle Darblay S.A. (Chapelle Darblay).



The predecessor companies of Repola were founded in the late nineteenth century. In 1920, the ownership of three paper mills was consolidated to form UPM.
During the decades that followed, UPM expanded its operations, reaching new markets throughout Europe. In the 1980s, UPM acquired the Stracel S.A. (Stracel) pulp mill in Strasbourg, France, built a paper mill in Shotton, Wales, and
constructed a newsprint plant at Stracels mill site. In 1990, UPM merged with the forest products and engineering group Rauma-Repola Oy to form the international forest products and engineering group Repola. All engineering operations of the
merged companies were combined to form Rauma Corporation (Rauma) and their forest industry operations were combined within UPM. Both Rauma and UPM were then established as wholly-owned subsidiaries of Repola. In May 1997, Rauma became an
affiliated company following a share sale and dividend payment in the form of Raumas shares, as part of the Groups strategy to focus on forest industry operations. In 1999, Rauma merged with Valmet Corporation, a Finnish engineering
company, to form Metso Corporation, giving us a shareholding of approximately 15% in the new company. In March 2005, we sold our remaining shareholding of 14.6% in Metso for net proceeds of 282 million.



As part of our strategy to expand in areas where we are, or have the capacity
to be, an industry leader, we acquired, in October 1997, Blandin Paper Company (Blandin) in the United States and, in October, 2000, Repap Enterprises, Inc. (Repap) in Canada, which made us one of the three largest suppliers
of magazine paper in North America. Subsequent to the acquisition, Repaps main operating subsidiary, Repap New Brunswick Inc., changed its name to UPM-Kymmene Miramichi Inc. (Miramichi). In March 1998, we acquired a 49% interest in
a paper mill project at Changshu near Shanghai in China. In August 2000, we acquired the remaining 51% of the Changshu mill, providing us with a significant presence in fine paper manufacturing in China. In November 2001, we completed the largest
acquisition of our company history, when we purchased four of the six paper mills of the German G. Haindlsche Papierfabriken KGaA (Haindl) for a total enterprise value of 2,690 million. This acquisition added 1.9 million tons
of competitive publication paper capacity and strengthened our position as the leading magazine paper producer in the world and as one of the leading producers of newsprint in Europe. See Item 5. Operating and Financial Review and
ProspectsRecent DevelopmentsRecent Acquisitions and Divestitures.



Furthermore, we have pursued a strategy of expanding our operations in the Converting Division. For example, Loparex Group (Loparex), our siliconizing unit formerly called Lohjan Paperi, acquired the Rexam
Release siliconizing business in 2001. Raflatac has grown by opening a pressure-sensitive label stock factory in North Carolina in the fall of 2001, and by other fixed investments and small acquisitions. See Item 5. Operating and Financial
Review and ProspectsRecent DevelopmentsRecent Acquisitions and Divestitures and Item 8. Financial InformationOther Financial InformationLegal Proceedings.



Also, in the Wood Products Division, we have taken steps to strengthen our
position through both acquisitions and investments. Our recent investments in this division have been focused in Russia, primarily to improve our wood fiber raw material sourcing.



9



---

Strategy



Our goals are to be one of the leading paper industry companies in the world and to achieve profitable growth in a socially and ecologically sustainable
way. Our business focus is on printing papers, writing papers, speciality papers, converted paper products and wood products.



Our financial objective is to be more profitable than our main competitors. We also seek to maintain a strong financial position intended to secure the
long-term development of the Group and to make effective use of the capital markets. Many factors, including development of the operations of the Group, industry conditions and general economic conditions, could affect our future operations, future
financial results and future dividend payments, and there can be no assurance that we will achieve or maintain compliance with the financial objectives stated above.



Our strategy is built on the following key strengths:



Global activities. We have production plants in 16 countries, with principal facilities located in Finland, Germany,
France, the United Kingdom, Austria, the United States, Canada and China.



Long-term customer relations. We enjoy close and lasting relations with both local and multinational customers. We seek to enhance these relationships through continuous improvement of our operations and
long-term commitments to our customers. To ensure customer satisfaction, we aim to offer a competitive product portfolio, customer-orientated product development and a high standard of service.



Skilled personnel. We believe that one of our key competitive
advantages over our competitors is our skilled, highly motivated employees. Professional expertise is promoted through job rotation and continuous in-service training.



Modern machines. We believe that our paper production facilities are unrivalled in terms of average capacity and
competitiveness.



Comprehensive logistics network. We
operate a global and highly efficient logistics network. We make a high proportion of shipments by sea, which is intended to ensure competitive deliveries. We also utilize modern information technology-based management systems.



Strong business focus and market shares. We have focused our
activities by investing in our core businesses and by divesting non-core assets and activities. In all of our main product areas, we are among the leading manufacturers in our most important markets. To achieve leading market positions, we expect to
grow both organically and through acquisitions.



High level
of vertical integration. Our activities are based on close integration of raw materials, energy and production. We enjoy a high degree of self-sufficiency in chemical pulp and electric power. Wood raw material supplies are partly secured by our
own forests. In our production of pulp, paper and wood products, we make proper and efficient use of our wood raw material. Our Converting Division is based, to a large extent, on raw material supplied by our own paper mills as well as on in-house
specialized know-how.



As part of the implementation of our
strategy, we review acquisition opportunities arising, in particular, in product areas and markets where we are, or have the capacity to become, a leading manufacturer. In recent years, we have undertaken a number of acquisitions and we may, should
suitable opportunities arise, engage in additional acquisitions in the future and may, in connection with such acquisitions, use either cash, shares or convertible bonds or a combination of cash, shares and convertible bonds as consideration for the
assets or entity being acquired. In particular, we may engage in additional acquisitions that would strengthen our presence in our principal markets. Besides reviewing acquisition opportunities, we are continuously looking into possibilities for
investing in organic growth and invest in maintaining and improving our current production assets to remain among the most competitive producers in the industry.



10



---

Business Overview



UPM is one of the worlds leading papermakers with annual paper production capacity of 12.6 million tons. Our core businesses are the production,
sales and marketing of magazine papers, newsprint, fine and speciality papers, which are supplemented by converted and wood products. The main markets for our products are the member states of the European Union and North America, which together
accounted for 85% of our sales in 2004. In 2004, our total sales were 9.8 billion (U.S.$13.3 billion) and, at December 31, 2004, our total assets amounted to 15.9 billion (U.S.$21.5 billion).



Magazines and newspapers, sales catalogues, direct mailings, copying,
computer printouts and other business communication areas are the primary uses for our paper products. We are the worlds leading manufacturer of magazine papers and one of the largest manufacturers of newsprint and fine papers in Europe. In
selected speciality papers, we hold leading positions either globally or in Europe. We are also among the leading manufacturers in Europe or globally in the majority of our converting businesses, including pressure sensitive labelstock, siliconized
papers and barrier packaging. We are the largest producer of plywood in Europe and the third largest producer of sawn timber. Today, we have production facilities in 16 countries, with principal facilities located in Finland, Germany, France, the
United Kingdom, Austria, the United States, Canada and China.



Our operations are organized into the following three core business areas:



| |  |  | Paper divisions, which comprise:
| | - |  | --------------------------------



| |  |  | Magazine Papers Division
| | - |  | ------------------------



| |  |  | Newsprint Division
| | - |  | ------------------



| |  |  | Fine and Speciality Papers Division
| | - |  | -----------------------------------



| |  |  | Converting Division; and
| | - |  | ------------------------



| |  |  | Wood Products Division.
| | - |  | -----------------------



In addition to our core business areas, activities outside the segments are reported under Other Operations, which consists of our Finnish forest and
energy departments, our 47% interest in the chemical pulp company Oy Metsä-Botnia Ab (Metsä-Botnia), our New Ventures business unit, real estate units in Finland, logistics services and the central administrative functions for
the Group.



The following tables set forth the percentages of
our sales of 9.8 billion, 9.8 billion and 10.4 billion in 2004, 2003 and 2002, respectively, by division and market area:



|                           |  |                                 |   |  |      |   |  |      |  
|-------------------------- |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                           |  | 2004                            |   |  | 2003 |   |  | 2002 |  
|                           |  | (Percentage of Group sales (1)) |  
|Division                   |  |                                 |   |  |      |   |  |      |  
|Magazine papers            |  | 32                              | % |  | 32   | % |  | 32   | %
|Newsprint                  |  | 13                              |   |  | 12   |   |  | 13   |  
|Fine and speciality papers |  | 22                              |   |  | 22   |   |  | 22   |  
|Converting                 |  | 14                              |   |  | 14   |   |  | 14   |  
|Wood products              |  | 14                              |   |  | 15   |   |  | 14   |  
|Other operations(2)        |  | 5                               |   |  | 5    |   |  | 5    |  
|                           |  |                                 |   |  |      |   |  |      |  
|Total                      |  | 100                             | % |  | 100  | % |  | 100  | %
|                           |  |                                 |   |  |      |   |  |      |  

---

|(1) | This figure includes inter-divisional sales and sales made to third parties.
|--- | ----------------------------------------------------------------------------



|(2) | This figure includes sales made to third parties only.
|--- | ------------------------------------------------------



11



---

|                               |  |                             |   |  |      |   |  |      |  
|------------------------------ |  | --------------------------- | - |  | ---- | - |  | ---- | -
|                               |  | 2004                        |   |  | 2003 |   |  | 2002 |  
|                               |  | (Percentage of Group sales) |  
|Market area                    |  |                             |   |  |      |   |  |      |  
|European Union countries:      |  |                             |   |  |      |   |  |      |  
|Germany                        |  | 16                          | % |  | 16   | % |  | 17   | %
|United Kingdom                 |  | 13                          |   |  | 12   |   |  | 13   |  
|Finland                        |  | 11                          |   |  | 11   |   |  | 9    |  
|France                         |  | 7                           |   |  | 7    |   |  | 8    |  
|Other European Union countries |  | 23                          |   |  | 21   |   |  | 21   |  
|Total European Union countries |  | 70                          |   |  | 67   |   |  | 68   |  
|Other European countries       |  | 4                           |   |  | 8    |   |  | 8    |  
|U.S. and Canada                |  | 15                          |   |  | 14   |   |  | 14   |  
|Asia                           |  | 7                           |   |  | 6    |   |  | 5    |  
|Other countries(1)             |  | 4                           |   |  | 5    |   |  | 5    |  
|                               |  |                             |   |  |      |   |  |      |  
|Total                          |  | 100                         | % |  | 100  | % |  | 100  | %
|                               |  |                             |   |  |      |   |  |      |  

---

|(1) | Includes Middle East, Africa, South America, Mexico, Australia and Oceania.
|--- | ---------------------------------------------------------------------------



Paper Divisions



We manufacture a comprehensive range of paper grades to be used by our publisher, printer, retailer and other end-use customers. Both products and
customer service are constantly being developed. Our papers are produced from a varied fiber raw material base, and roughly a quarter of production is based on recycled fiber. We have paper mills in Finland, Germany, United Kingdom, France, Austria,
the United States, Canada and China. Our papermaking capacity is approximately 12.6 million tons a year.



Our Magazine Papers Division produces magazines, newspaper supplements, printed advertising material and sales catalogues. Most of this magazine paper is
supplied to buyers in Europe. The next most important market is the United States. With an annual capacity of 5.7 million tons, we are the worlds largest manufacturer of magazine paper. Our market share is about one-fifth of the global market
for magazine paper.



Our Newsprint Division manufactures
newsprint for publishers and printers, as well as for other uses such as telephone directories and mail order catalogues. The paper production capacity of the Newsprint Division is currently 2.8 million tons. Most of the newsprint is sold on the
markets of Europe, where we have a market share of approximately 20%.



Our Fine and Speciality Papers Division supplies fine paper products mainly to paper merchants, office supplies wholesalers, printers and converters. Uses for fine paper include copying and non-impact printing, direct mail advertising,
specialist magazines and high-quality printed products. The range includes both coated and uncoated fine papers. The main markets for our fine papers are in Europe and in Asia, particularly in the growing Chinese market. We are a leading supplier of
fine papers in Europe. Our speciality papers comprise face and release papers for pressure-sensitive labels, white and brown sack and kraft papers. We are the worlds largest producer of label papers. We are also one of Europes biggest
suppliers of packaging papers. Fine paper production capacity is currently 3.3 million tons and speciality paper capacity 0.8 million tons.



The following table sets forth the paper divisions 2004 sales by division and by geographic market:



|                  |  |                                         |       |         |     |   |           |   |         |  |     |                          |  |         |       |  |     |  
|----------------- |  | --------------------------------------- | ----- | ------- | --- | - | --------- | - | ------- |  | --- | ------------------------ |  | ------- | ----- |  | --- | -
|                  |  | MagazinePapers                          |       | Percent |     |   | Newsprint |   | Percent |  |     | Fine andSpecialityPapers |  | Percent |      
|                  |  | ( in millions, except for percentages) |      
|Europe            |  |                                        | 2,062 |         | 63  | % |           |  | 1,101   |  | 85  | %                        |  |        | 1,708 |  | 75  | %
|U.S. and Canada   |  |                                         | 914   |         | 28  |   |           |   | 88      |  | 7   |                          |  |         | 141   |  | 6   |  
|Rest of the world |  |                                         | 309   |         | 9   |   |           |   | 106     |  | 8   |                          |  |         | 426   |  | 19  |  
|Total             |  |                                        | 3,285 |         | 100 | % |           |  | 1,295   |  | 100 | %                        |  |        | 2,275 |  | 100 | %



12



---

The following table sets forth the annual capacity and industry market position of the main products
produced by our paper divisions as of December 31, 2004:



|                                |  |                           |  |                  |  |                |    
|------------------------------- |  | ------------------------- |  | ---------------- |  | -------------- | ---
|                                |  | Capacity(1,000 tons/year) |  | Europeanposition |  | Globalposition |    
|Magazine papers                 |  | 5,660                     |  | 1                |  | 1              |    
|Newsprint                       |  | 2,800                     |  | 2                |  | 5              |    
|Fine paper                      |  | 3,260                     |  | 3                |  | 7              |    
|                                |  |                           |  |                  |  |                |    
|Printing papers, total          |  | 11,720                    |  |                 |  |               |    
|Label papers                    |  | 385                       |  | 1                |  | 1              |    
|Packaging papers                |  | 415                       |  | 3                |  |               |    
|Papers from Converting Division |  | 65                        |  |                 |  |               |    
|                                |  |                           |  |                  |  |                |    
|Papers, total                   |  | 12,585                    |  | 2                |  | 3              | (1)
|                                |  |                           |  |                  |  |                |    

---

|Source: Jaakko | Pöyry Group Oyj
|-------------- | ---------------



|(1) | Includes all papers and paper board.
|--- | ------------------------------------



Magazine Papers Division



The Magazine Papers Division accounted for approximately 32% of our 2004 sales, making it our largest business division.



As of December 31, 2004, we were the worlds largest producer of
magazine paper, with an annual capacity of approximately 5.7 million tons, representing approximately one-fifth of the global magazine paper capacity.



The largest market for our Magazine Papers Division is Europe and the main market outside of Europe is the United States. Production of the
divisions papers is based almost exclusively on firm orders we receive. In this way, we avoid the need to maintain large inventories.



The following table sets forth certain financial and statistical data regarding the Magazine Papers Division:



|                                     |  |                                                                          |   |  |       |  |      
|------------------------------------ |  | ------------------------------------------------------------------------ | - |  | ----- |  | -----
|                                     |  | Year ended December 31,                                                 
|                                     |  | 2004                                                                     |   |  | 2003  |  | 2002 
|                                     |  | ( in millions, except for percentages andpersonnel and production data)
|Magazine papers                      |  |                                                                          |   |  |       |  |      
|Sales                                |  | 3,285                                                                    |   |  | 3,280 |  | 3,570
|Operating profit/loss(1)             |  | (78                                                                      | ) |  | 50    |  | 177  
|Capital employed (average)           |  | 4,754                                                                    |   |  | 5,089 |  | 5,396
|ROCE (%)                             |  | (1.6                                                                     | ) |  | 1.0   |  | 3.3  
|Capital expenditure and acquisitions |  | 149                                                                      |   |  | 162   |  | 189  
|Personnel at December 31             |  | 8,825                                                                    |   |  | 8,887 |  | 9,325
|Deliveries (tons in 000s)           |  | 4,940                                                                    |   |  | 4,822 |  | 4,618
|Capacity utilization rate (%)        |  | 90                                                                       |   |  | 87    |  | 85   

---

|(1) | Operating profit includes charges for 2004 of 110 million related to the closure of Miramichi pulp mill and income of 6 million related to the change in the Finnish
employment pension scheme (TEL), and charges in 2003 and 2002 of 22 million and 108 million, respectively, relating to the closure of two paper machines at our Blandin mill.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Magazine Papers Division comprises the Groups magazine paper
machines, the Kaukas pulp mill and the Miramichi sawmills.



13



---

Typically, magazine papers have high mechanical pulp content. However, certain of our mills also produce
magazine paper, namely SC-B, with a relatively high recycled fiber content. Magazine papers are generally used in magazines, newspaper supplements, catalogues and direct mailings. The unit has a comprehensive product range, offering a wide variety
of papers for specific printing purposes. We manufacture both coated and uncoated papers. Coated magazine papers, like light-weight coated (LWC), medium-weight coated (MWC) and machine-finished coated (MFC) paper, are mainly used in the manufacture
of high-quality, multi-coated printed products including magazines, catalogues, brochures, direct mail advertising and other advertising materials. Uncoated papers, like supercalendered paper (SC), are mainly used for magazines, weekend newspaper
supplements, catalogues and flyers. Magazine paper is sold mainly to multinational and national printers, publishers, media and mail order companies. Contracts with our customers in the magazine paper division generally have three-month, six-month
or 12-month terms, with the majority of the contracts having a 12-month term.



The Magazine Papers Division produces magazine paper on 23 machines at 13 mills in Finland, Germany, the United Kingdom, Austria, France, the United States and Canada. In Finland, the divisions products are
manufactured at six paper mills located in Jämsänkoski, Kaipola, Kajaani, Lappeenranta, Rauma and Voikkaa. The divisions seven other magazine paper-producing mills are: Augsburg and Schongau in Germany; Caledonian in Irvine,
Scotland; Steyrermühl in Austria; Stracel in Strasbourg, France; Blandin in Grand Rapids, Minnesota, the United States; and Miramichi in New Brunswick, Canada. We currently have 15 paper machines producing LWC paper with total annual capacity
of approximately 3.8 million tons and eight paper machines producing SC paper with total annual capacity of approximately 1.8 million tons.



In 2004, we completed the rebuild of one of our Rauma coated magazine paper machines at a cost of approximately 30 million. In addition, we
completed the 24 million rebuild of one of the Jämsänkoski SC paper machines during the first quarter of 2005. Such modernizations take place regularly to ensure the competitiveness and the quality of production. In December 2004, we
closed down our pulp mill at Miramichi, Canada, which had a production capacity of 240,000 tons per year and was no longer competitive.



Like all sectors of the paper industry, the market for magazine papers is highly competitive. Although quality considerations are a factor, the market is
affected mostly by price. We compete with various companies in Europe in the manufacture of magazine papers, including Stora Enso Oyj (Stora Enso), M-real Oyj (M-real), Cartiere Burgo spa (Cartiere Burgo),
Myllykoski Oyj (Myllykoski) and Norske Skogindustrier ASA (Norske Skog). In North America, our principal competitors are Stora Enso, Abitibi-Consolidated Inc., MeadWestvaco Corporation, International Paper Company
(International Paper) and Bowater Inc.



Newsprint Division



The Newsprint Division accounted for approximately 13% of
our 2004 sales. The division has approximately 2.8 million tons of annual newsprint production capacity, and our market share is approximately 20% in Europe. As of December 31, 2004, we were the second largest manufacturer of newsprint in Europe and
the fifth largest in the world. The mills of this division also produce paper for certain other products, including improved newsprint grades (MFS) for use in telephone and other directories and mail order catalogs.



The following table sets forth certain financial and statistical data
regarding the Newsprint Division:



|                                     |  |                                                                          |   |  |       |   |  |      
|------------------------------------ |  | ------------------------------------------------------------------------ | - |  | ----- | - |  | -----
|                                     |  | Year ended December 31,                                                 
|                                     |  | 2004                                                                     |   |  | 2003  |   |  | 2002 
|                                     |  | ( in millions, except for percentagesand personnel and production data)
|Newsprint                            |  |                                                                          |   |  |       |   |  |      
|Sales                                |  | 1,295                                                                    |   |  | 1,273 |   |  | 1,379
|Operating profit/loss(1)             |  | (1                                                                       | ) |  | (8    | ) |  | 121  
|Capital employed (average)           |  | 2,002                                                                    |   |  | 2,134 |   |  | 2,393
|ROCE (%)                             |  | 0.0                                                                      |   |  | (0.4  | ) |  | 5.1  
|Capital expenditure and acquisitions |  | 74                                                                       |   |  | 111   |   |  | 84   
|Personnel (at December 31)           |  | 3,451                                                                    |   |  | 3,785 |   |  | 3,826
|Deliveries (tons in 000s)           |  | 2,719                                                                    |   |  | 2,587 |   |  | 2,467
|Capacity utilization rate (%)        |  | 95                                                                       |   |  | 90    |   |  | 88   

---

|(1) | Operating profit includes income of 2 million related to the change in the Finnish employment pension scheme (TEL), for 2003, charges of 9 million related to the planned
close-down of the paper machine 17 at Voikkaa and for 2002, charges of 8 million related to the closing of the mechanical pulp mill at Shotton.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



---

The Newsprint Division comprises the Groups newsprint machines.



Production of our newsprint is based almost exclusively on firm orders
received. In this way, we avoid the necessity of maintaining large inventories. Newsprint is primarily sold to a number of large publishers in Europe. Typically, these publishers have had a long-term relationship with us lasting a number of years
or, in some cases, decades. We negotiate supply contracts with most of such publishers annually, but sales outside Europe are based mostly on short-term contracts.



Following the closure of a paper machine at Voikkaa (with a capacity of 100,000 tons/year) on May 1, 2004, our Newsprint
Division produces newsprint on 12 machines with total annual capacity of approximately 2.8 million tons at seven mills in Finland, Germany, the United Kingdom, France and Austria. In Finland, the divisions products are manufactured at two
paper mills located in Kaipola and Kajaani. The divisions five other mills are located in Schongau and Schwedt, Germany; Shotton, Wales; Grand Couronne, France; and Steyrermühl, Austria.



The Kaipola, Schongau, Schwedt, Shotton, Grand Couronne and Steyrermühl
mills each have their own deinking plants, which together processed approximately 2.3 million tons of waste paper in 2004. The recycled fiber content in our newsprint production is approximately 75%. In 2004, we decided to invest 18 million to
increase the use of recycled paper by raising deinking capacity at our Kaipola mill in Finland to over 210,000 tons per year. We expect to complete this project during the second quarter of 2005. In addition, we decided to install a new power boiler
at Shotton mill in Wales for a cost of 60 million.



Like
all sectors of the paper industry, the market for newsprint is highly competitive and is affected mostly by price, although quality considerations are also a factor. In Europe, we compete with such manufacturers as Stora Enso, Norske Skog, Holmen
AB, Myllykoski and Svenska Cellulosa Aktiebolaget SCA (publ). In addition, the aggregate annual exports of newsprint by Canadian producers to Europe amounted to approximately 6% of the European standard newsprint market and such producers compete
with us. Russian producers are also exporting newsprint to Western Europe in greater volumes than before, accounting for approximately 4% of the European market in 2004.



Fine and Speciality Papers Division



The Fine and Speciality Papers Division accounted for approximately 22% of our 2004 sales. Besides uncoated fine paper, which includes envelope papers,
and coated fine paper, the Fine and Speciality Papers Division includes speciality papers, which are comprised of label and packaging papers. The most important raw material used in the production of both coated and uncoated fine paper is chemical
pulp. Fine papers are used for copying, non-impact printing, facsimile, direct mail advertising, brochures and special interest magazines.



15



---

The following table sets forth certain financial and statistical data regarding the Fine and Speciality
Papers Division:



|                                     |  |                                                                           |  |       |  |      
|------------------------------------ |  | ------------------------------------------------------------------------- |  | ----- |  | -----
|                                     |  | Year ended December 31,                                                  
|                                     |  | 2004                                                                      |  | 2003  |  | 2002 
|                                     |  | ( in millions, except for percentages and personnel and production data)
|Fine and Speciality Papers           |  |                                                                           |  |       |  |      
|Sales                                |  | 2,275                                                                     |  | 2,244 |  | 2,446
|Operating profit(1)                  |  | 162                                                                       |  | 206   |  | 355  
|Capital employed (average)           |  | 2,640                                                                     |  | 2,621 |  | 2,657
|ROCE (%)                             |  | 6.1                                                                       |  | 7.9   |  | 13.4 
|Capital expenditure and acquisitions |  | 345                                                                       |  | 303   |  | 159  
|Personnel (at December 31)           |  | 6,831                                                                     |  | 6,654 |  | 6,611
|Deliveries (tons in 000s)           |  | 3,074                                                                     |  | 2,879 |  | 2,774
|Capacity utilization rate (%)        |  | 91                                                                        |  | 88    |  | 89   

---

|(1) | Operating profit includes, for 2004, an income of 3 million related to the change in the Finnish employment pension scheme (TEL).
|--- | ----------------------------------------------------------------------------------------------------------------------------------



The Fine and Speciality Papers Division includes the Groups fine and
speciality paper machines, as well as the Kuusankoski, Wisaforest and Tervasaari pulp mills.



As of December 31, 2004, our fine paper business in Europe, with a production capacity of approximately 2.9 million tons per year, had the third-leading market position in Europe and the seventh in the world. In
China, as of May 2005, our capacity of 800,000 tons per year gives us a leading position in that wood-pulp based fine paper market. We were the largest label paper producer in the world. In packaging papers, we were the third largest producer
overall in Western Europe.



The fine paper operations produce a
range of products on eight paper machines and related coaters. The products are produced by three of our mills: Nordland Papier AG (Nordland) in Dörpen, Germany; Kymi in Kuusankoski, Finland; and UPM-Kymmene (Changshu) Paper
Industry Co., Ltd. In Changshu, China. In 2003, we began construction on a new paper machine at Changshu, which will have a capacity of 450,000 tons/year and is expected to commence production in mid-2005. The mills capacity for coated fine
paper will be raised at the same time. Total cost for the investment is expected to be approximately 390 million. The capacities and locations of the divisions mills allow deliveries to be made at short notice in the local markets based
on specific orders.



The principal customers for the
divisions fine paper products are paper merchants, office supplies wholesalers, printers and paper converters. Because the divisions fine paper products are primarily sold to merchants and wholesalers, the divisions sales and
operating profit depend on underlying demand and also on the tendency of merchants to maintain, increase or reduce inventories of fine paper products that are dependent upon the relevant industry cycle. Like in the magazine papers and newsprint
divisions, fine papers are produced in response to firm orders received. Thus, there is no need to maintain inventories beyond what is needed for logistical purposes.



The market for fine paper in Europe is highly competitive, although the industry has consolidated rather significantly in
recent years. Our major competitors in Europe include M-real, Stora Enso, Sappi Limited, Portucel Soporcel Group, International Paper and Cartiere Burgo. In China, our competitors include Asia Pulp and Paper, Shandong Chenming Paper Holdings Ltd.
and Stora Enso, and, in other Asian markets where we export fine papers, we compete with various local producers.



Production capacity for the divisions speciality papers at eight paper machines totals approximately 800,000 tons per year.



We are the leading supplier of label papers to the pressure-sensitive
labelstock business in the world with a market share of approximately 20% in the year 2004. The label papers unit produces face and release papers utilizing three paper machines in Finland with a total capacity of approximately 390,000 tons per
year, following the expected completion of the rebuild of one of our Tervasaari paper machines in the summer of 2005. We expect the rebuild to cost approximately 60 million and increase our production capacity of release paper for
pressure-sensitive labelstock by 45,000 tons per year.



16



---

The packaging papers unit produces brown sack as well as white and brown kraft papers with a total
production capacity of approximately 415,000 tons per year. Sack and kraft papers are produced in Finland on two machines.



Converting Division



The Converting Division accounted for approximately 14% of our 2004 sales. Our Converting Division manufactures pressure-sensitive labelstock (through our
Raflatac subsidiary), siliconized papers (through our Loparex subsidiary) and industrial wrappings (through our Walki Wisa subsidiary). Beginning in 2005, the division also includes our UPM Rafsec subsidiary, a manufacturer of RFID smart labels. We
were the second largest producer of pressure-sensitive labelstock in Europe and in the world as of December 31, 2004. In siliconized paper, we were the largest producer in the world. In industrial wrappings, we were the largest producer in Europe.



The following table sets forth the industry position of the
Converting Division as of December 31, 2004:



|                                         |  |                   |  |                
|---------------------------------------- |  | ----------------- |  | ---------------
|                                         |  | European position |  | Global position
|Pressure-sensitive labelstock (Raflatac) |  | 2                 |  | 2              
|Siliconized papers (Loparex)             |  | 1                 |  | 1              
|Industrial wrappings (Walki Wisa)        |  | 1                 |  |               



The following table
sets forth certain financial and statistical data regarding the Converting Division:



|                                     |  |                                                                          |  |       |  |      
|------------------------------------ |  | ------------------------------------------------------------------------ |  | ----- |  | -----
|                                     |  | Year ended December 31,                                                 
|                                     |  | 2004                                                                     |  | 2003  |  | 2002 
|                                     |  | ( in millions, except for percentages andpersonnel and production data)
|Converting                           |  |                                                                          |  |       |  |      
|Sales                                |  | 1,409                                                                    |  | 1,370 |  | 1,539
|Operating profit(1)                  |  | 80                                                                       |  | 43    |  | 63   
|Capital employed (average)           |  | 642                                                                      |  | 690   |  | 794  
|ROCE (%)                             |  | 12.5                                                                     |  | 6.2   |  | 7.9  
|Capital expenditure and acquisitions |  | 28                                                                       |  | 31    |  | 68   
|Personnel (at December 31)           |  | 4,594                                                                    |  | 4,558 |  | 4,694
|Paper production (tons in 000s)     |  | 59                                                                       |  | 54    |  | 59   

---

|(1) | Operating profit includes, for 2004, income of 2 million related to the change in the Finnish employment pension scheme (TEL).
|--- | -------------------------------------------------------------------------------------------------------------------------------



The following table sets forth the Converting Divisions sales by unit:



|              |  |                         |       |   |      |   |       |      |  |   |       |  
|------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|              |  | Year ended December 31, |      
|              |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|              |  | ( in millions)         |      
|Raflatac      |  |                        | 779   |   |      |  | 734   |      |  |  | 735   |  
|Loparex       |  |                         | 337   |   |      |   | 332   |      |  |   | 388   |  
|Walki Wisa    |  |                         | 299   |   |      |   | 305   |      |  |   | 318   |  
|Sold units(1) |  |                         |      |   |      |   | 4     |      |  |   | 105   |  
|Internal      |  |                         | (6    | ) |      |   | (5    | )    |  |   | (7    | )
|              |  |                         |       |   |      |   |       |      |  |   |       |  
|Total         |  |                        | 1,409 |   |      |  | 1,370 |      |  |  | 1,539 |  
|              |  |                         |       |   |      |   |       |      |  |   |       |  

---

|(1) | Consists of sales by our former plastics packaging business, Walki Films. We sold Walki Films to Bemis Company Inc. in 2002. See Item 5. Operating and Financial Review and
ProspectsRecent Acquisitions and Divestitures.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



---

The Raflatac business unit, which is one of Europes leading producers of pressure-sensitive
labelstock, has production facilities in four European countries as well as in the United States, Australia, Malaysia, China and South Africa. Raflatac sells its products to label converters which produce labels used for production, decoration and
identification purposes.



Rafsec has continued to develop its
radio-frequency identification (RFID) products and production processes. Commercialization of UHI and HFRFID products is under process in a competitive environment. In March 2004, we decided to double the manufacturing capacity for RFID smart labels
and cards at the UPM Rafsec plant in Jyväskylä.



Loparex supplies siliconized papers for hygiene products, labels, films, tapes and other industrial applications utilizing both on-line and off-line siliconizing processes. Loparex is a global leader with a capacity market share of
approximately one-third in commercial siliconizing and it is one of the few producers of siliconized paper using an on-line siliconizing process. In this process, the paper is siliconized on the paper machine itself, providing efficiency benefits in
comparison to its competitors. Loparex has production plants in Finland, the United Kingdom, the Netherlands and the United States. In addition, Loparex is focusing on further development in Asia, including a joint venture in India and a new mill in
Guangzhou, China, which officially opened on November 19, 2004. The Guangzhou, China mill produces siliconized release materials.



Walki Wisa produces coated and laminated packaging materials and industrial wrappings in Finland, Germany, the United Kingdom, Sweden and China. Walki
Wisas products are used in the wrapping of paper, wood and steel products. Our Paper Divisions are customers of Walki Wisa.



The following table sets forth the Converting Divisions 2004 sales by geographic market:



|                         |  |               |       |                          |     |  
|------------------------ |  | ------------- | ----- | ------------------------ | --- | -
|                         |  |  in millions |       | Percent ofdivision sales |    
|Finland                  |  |               | 75    |                          | 5   |  
|Other European countries |  |               | 872   |                          | 62  |  
|U.S. and Canada          |  |               | 341   |                          | 24  |  
|Rest of the world        |  |               | 121   |                          | 9   |  
|                         |  |               |       |                          |     |  
|Total                    |  |              | 1,409 |                          | 100 | %
|                         |  |               |       |                          |     |  



Our main markets for
converted products are the European countries, which together accounted for approximately 67% of total sales in 2004, while the United States and Canada accounted for approximately 24%. Although other markets accounted for only 9% of sales in 2004,
the future growth potential in Asia is significant especially for Raflatac. Generally all converting businesses compete with a number of international and local competitors. The competitive structure, however, is not necessarily as dispersed as in
the paper businesses.



Wood Products Division



As of December 31, 2004, we were the largest plywood producer in Western
Europe in terms of production capacity and one of the worlds leading producers of high-quality plywoods. We were also Western Europes third largest supplier of sawn timber.



The following table sets forth the annual capacity and industry position of our Wood Products Divisions manufacturing
business units as of December 31, 2004:



|              |  |                         |  |                  
|------------- |  | ----------------------- |  | -----------------
|              |  | Capacity(1,000 m3/year) |  | European Position
|Plywood       |  | 1,110                   |  | 1                
|Sawmilling(1) |  | 2,250                   |  | 3                

---

|(1) | Including the Canadian sawmills with an annual sawn timber capacity of approximately 150,000 cubic meters reported in the Magazine Papers Division, and the new Pestovo sawmill, with
an annual capacity of 300,000 cubic meters, which commenced operations in the second quarter of 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

The following table sets forth certain financial and statistical data regarding the Wood Products
Division:



|                           |  |                                                                          |  |       |  |      
|-------------------------- |  | ------------------------------------------------------------------------ |  | ----- |  | -----
|                           |  | Year ended December 31,                                                 
|                           |  | 2004                                                                     |  | 2003  |  | 2002 
|                           |  | ( in millions, except for percentages andpersonnel and production data)
|Wood Products              |  |                                                                          |  |       |  |      
|Sales                      |  | 1,486                                                                    |  | 1,548 |  | 1,487
|Operating profit(1)        |  | 107                                                                      |  | 21    |  | 32   
|Capital employed (average) |  | 748                                                                      |  | 781   |  | 746  
|ROCE (%)                   |  | 14.3                                                                     |  | 2.7   |  | 4.3  
|Capital expenditure        |  | 30                                                                       |  | 92    |  | 69   
|Personnel (at December 31) |  | 6,851                                                                    |  | 7,711 |  | 7,577
|Production (in 1,000 m3)   |  |                                                                          |  |       |  |      
|Plywood                    |  | 969                                                                      |  | 936   |  | 905  
|Sawn timber                |  | 2,276                                                                    |  | 2,274 |  | 2,051

---

|(1) | Operating profit includes, for 2004, income of 110 million from the sale of Brooks Group and 7 million arising from the change in the Finnish employment pension scheme
costs, and charges of 34 million from restructuring of the sawmilling and plywood operations in Finland.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Wood Products Division accounted for approximately 14% of our 2004 sales.



The Wood Products Division is divided into three units: plywood, sawmilling and building supplies trade. This division
provides an important link in our integrated paper production processes through the use of the by-products of our sawn timber and plywood production, including waste wood and waste produced in the process of sawing, in the production of pulp and in
generating energy at our mills.



The following table sets forth
the Wood Products Divisions sales by unit:



|                         |  |                         |       |   |      |   |       |      |  |   |       |  
|------------------------ |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                         |  | Year ended December 31, |      
|                         |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|                         |  | ( in millions)         |      
|Plywood                  |  |                        | 567   |   |      |  | 553   |      |  |  | 536   |  
|Sawmilling               |  |                         | 498   |   |      |   | 515   |      |  |   | 459   |  
|Building supplies trade  |  |                         | 519   |   |      |   | 608   |      |  |   | 615   |  
|Internal sales and other |  |                         | (98   | ) |      |   | (128  | )    |  |   | (123  | )
|                         |  |                         |       |   |      |   |       |      |  |   |       |  
|Total                    |  |                        | 1,486 |   |      |  | 1,548 |      |  |  | 1,487 |  
|                         |  |                         |       |   |      |   |       |      |  |   |       |  



Plywood. The
plywood unit, which is responsible for the Wood Products Divisions plywood operations in Finland, France, Estonia and Russia, was Europes largest plywood manufacturer as of December 31, 2004. The production capacity of plywood unit is
approximately 1.1 million cubic meters per year. Our plywood production comprises of higher-value-added products, such as special plywoods and veneers, as well as commodity plywood grades, all using the WISA brand. The main buyers of plywood
products are the construction and transport industries, which use plywood in the construction of trailers and truck floors. Vehicle manufacturers use plywood because it is one of the strongest conventional lightweight materials available, making it
possible to increase cargo capacity and reduce fuel consumption. Other uses for plywood include parquet flooring, scaffolding, concrete forming and shipbuilding, where plywood is used to build, among other things, the interiors of liquid natural gas
transport tanks due to its ability to withstand extremely low temperatures without contracting. The plywood operations a significant restructuring of our Finnish wood products operations, we closed down our Viiala plywood mill at the end of 2004. We
also intend to close our Kuopio plywood mill in August 2005. As a result of these closures, our production capacity will decrease by 70,000 cubic meters per year.



19



---

Our principal competitors in plywood include Finnforest Corporation (Finnforest), various
midsize Eastern European producers, and a number of smaller producers in certain localized markets. In construction grade plywood, our principal competitors include North American, Russian and Indonesian producers, which export a substantial portion
of their plywood production to Western Europe.



Sawmilling
and Joinery. As of December 31, 2004, we were Europes third largest producer of sawn timber. The unit operates seven sawmills in Finland with a production capacity of approximately 1.7 million cubic meters per year, one mill in Austria
with a production capacity of approximately 300,000 cubic meters per year and one mill in Pestovo, Russia, with a production capacity of 300,000 cubic meters per year. Each cubic meter of sawn timber requires 2.0 to 2.5 cubic meters of raw wood. The
unit also produces joinery products from sawn timber at six locations in Finland. These joinery factories manufacture products and semi-finished products for the building industry and interior decorating, as well as wooden components for industrial
use. Sawn timber and joinery products also carry the WISA brand. Since 2001, we have moved towards specializing most of our sawmills in a single species of timber to raise production efficiency and improve quality.



In late 2004, we closed down our Aureskoski sawmill. In addition, we have
decided to reduce production at our Alholma and Kajaani sawmills by approximately one-third during 2005. As result of these measures our annual output of sawn timber will be decreased by approximately 400,000 cubic meters for 2005.



Our principal competitors in the sawn timber and joinery sector are suppliers
based in the Nordic countries, including Stora Enso, Finnforest and SCA Timber (SCA Timber). In addition, the unit faces competition from local producers, particularly in Germany and Austria, as well as from Eastern European producers.



Building Supplies Trade. The building supplies unit
operates the Puukeskus retail chain of mainly wood based building materials in Finland. We sold our Danish retail chain operations, Anco Træ, in April 2004 and our Irish-based building supplies trade operation, Brooks Group, in August 2004.
These businesses had combined annual sales of approximately 265 million in 2003 and employed 620 people. Our main competitors in the building supplies trade are suppliers based in Finland and Sweden, including Stora Enso and Finnforest. In
addition, the unit faces competition from smaller independent building material merchants that purchase sawn timber from a variety of producers. In 2004, 90% of the Wood Products Divisions production was sold in the European Union countries,
with sales in Finland representing approximately 34% of the divisions total sales. The other main markets were in the United Kingdom, Germany and France.



The following table sets forth the Wood Products Divisions 2004 sales by geographic market:



|                               |  |               |       |                              |   |    
|------------------------------ |  | ------------- | ----- | ---------------------------- | - | ---
|                               |  |  in millions |       | Percent ofbusinessarea sales
|Finland                        |  |              | 498   |                              |  | 34 
|Other European Union countries |  |               | 835   |                              |   | 56 
|Other European countries       |  |               | 41    |                              |   | 2  
|U.S. and Canada                |  |               | 14    |                              |   | 1  
|Rest of the world              |  |               | 98    |                              |   | 7  
|                               |  |               |       |                              |   |    
|Total                          |  |              | 1,486 |                              |  | 100
|                               |  |               |       |                              |   |    



Other Operations



The major business units in our other operations are the forestry and energy
departments in Finland and our associated companies, the most important of which are Metsä-Botnia and Pohjolan Voima Oy (Pohjolan Voima). The main purpose of these operations is to secure supplies of wood, energy and chemical pulp
at competitive prices. Approximately 75% of the sales of these operations are to other units within the Group.



Other business units in other operations include:



| |  |  | our logistics companies, including Rauma Stevedoring Oy and UPM-Kymmene Seaways Oy, which are responsible for the forwarding, storage and export transport of our products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

| |  |  | the new ventures business unit, which develops new products and services in support of our future business operations; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the real estate business unit, which holds business and residential premises in Finland.
| | - |  | ----------------------------------------------------------------------------------------



Other operations is also responsible for staff functions and shareholdings.



Rafsec, which was formerly part of other operations, became part of the
Converting Division as of January 2005.



The following table
sets forth certain financial data regarding other operations:



|                                                             |  |                                            |   |  |       |   |  |       |  
|------------------------------------------------------------ |  | ------------------------------------------ | - |  | ----- | - |  | ----- | -
|                                                             |  | Year ended December 31,                    |  
|                                                             |  | 2004                                       |   |  | 2003  |   |  | 2002  |  
|                                                             |  | ( in millions, except for personnel data) |  
|Other Operations                                             |  |                                            |   |  |       |   |  |       |  
|Sales(1)                                                     |  | 552                                        |   |  | 512   |   |  | 525   |  
|Operating profit(2)                                          |  | 369                                        |   |  | 40    |   |  | 55    |  
|                                                             |  |                                            |   |  |       |   |  |       |  
|Forestry department (Finland)                                |  | 61                                         |   |  | 49    |   |  | 31    |  
|Energy department (Finland)                                  |  | 118                                        |   |  | 96    |   |  | 69    |  
|Other                                                        |  | 190                                        |   |  | (105  | ) |  | (45   | )
|Personnel (at December 31)                                   |  | 2,881                                      |   |  | 2,887 |   |  | 3,546 |  
|Associated companies and joint ventures in Other Operations: |  |                                            |   |  |       |   |  |       |  
|Share of results, before tax(3)                              |  | 64                                         |   |  | 29    |   |  | 80    |  
|Metsä-Botnia                                                 |  | 67                                         |   |  | 37    |   |  | 70    |  
|Pohjolan Voima                                               |  | (9                                         | ) |  | (23   | ) |  | (13   | )
|Other                                                        |  | 6                                          |   |  | 15    |   |  | 23    |  

---

|(1) | Sales include sales outside the Group only.
|--- | -------------------------------------------



|(2) | Operating profit includes the following items: for 2004, income of 249 million arising from the change in Finlands employment pension scheme and charges of 11
million relating to the Groups restructuring and 19 million relating to long term wood supply agreements; for 2003, charges of 19 million arising from the cancelled MACtac deal, 6 million on the sale of the Rosenlew business,
and 5 million arising from restructuring of the forestry department in Finland; and, for 2002, income of 14 million on the sale of Walki Films business unit.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The 2004 figure includes income of 10 million arising from the change in the Finnish employment pension scheme, of which 6 million is attributable to Metsä-Botnia,
3 million to Pohjolan Voima and 1 million to other companies.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our energy and forestry departments are described in Energy and Wood Procurement below.



Associated Companies and Joined Ventures



Metsä-Botnia



We own 47% of Metsä-Botnia, one of Europes biggest pulp producers with a capacity of 2.7 million tons per year. The other owners of
Metsä-Botnia are M-real (39%) and Metsäliitto Cooperative (14%). Metsä-Botnia produces softwood and hardwood pulps at five mills in Finland and its sales in 2004 were 1,063 million. Metsä-Botnia had 1,359 employees as of
December 31, 2004. Most of the pulp produced by Metsä-Botnia is supplied to its shareholders. Through our annual quota of 1.1 million tons per year, Metsä-Botnia has the ability to provide approximately one-third of our annual chemical
pulp requirement. In 2004, we bought 568,000 tons of pulp from Metsä-Botnia.



Metsä-Botnia has decided to invest USD 1.1 billion in a pulp mill in Uruguay with an annual capacity of 1 million tons. The project received all necessary environmental permits in mid-February 2005 from
Uruguays environmental authority and the final decision to proceed was made at the beginning of March. The pulp mill will have a production capacity of approximately one million tons per year and is expected to begin production in the second
half of 2007. We will participate in Botnias pulp mill project in



21



---

Uruguay with a US$ 67 million (51 million) direct capital investment. In connection with the pulp mill investment decision, to ensure the stability of
Botnias ownership base, Botnias owners, UPM, M-real and Metsäliitto have agreed that Botnias shareholders will offer their shares to other shareholders in case of a possible change in their share or vote majority.



Pohjolan Voima



We have a 40.97% interest in Pohjolan Voima, which generates and procures
approximately 20 TWh of electricity and heat annually for its shareholders, which are typically Finnish industrial companies. The company supplies approximately 40% of our electricity requirement, mostly as hydropower and nuclear power. Nuclear
power is generated by Teollisuuden Voima Oy, which is 57.2% owned by Pohjolan Voima. In 2004, Pohjolan Voima had sales of 565 million and it employed, at year end, 177 people.



In 2003, Teollisuuden Voima made a decision to build a new nuclear power plant with a capacity of 1,630 megawatts (MW) in
Olkiluoto, Eurajoki, Finland. UPM has reserved 470 MW of power capacity of the new plant via Pohjolan Voima. With our 40 million equity investment in the project made at the end of 2004, we intend to secure competitively priced electricity for
our mills in Finland in the future.



Fiber Supply



Our activities are based on close integration of raw materials, energy and
production. The principal resources used in our production are chemical pulp, wood and energy.



Pulp is the major ingredient required in the manufacture of paper. There are three principal types of pulp: chemical pulp, mechanical pulp and recycled fiber pulp. Chemical pulp is produced by cooking wood chips in
solutions of caustic chemicals to separate the cellulose fibers used for pulping. Mechanical pulp is produced by grinding logs or wood chips. In addition, recycled fiber, which is produced by deinking recovered paper, is used as a source for
recycled fiber pulp. Mechanical and recycled fiber pulp production is fully integrated with our paper production.



We produce close to 90% of the chemical pulp supplies necessary for our papermaking operations internally or through our associated company,
Metsä-Botnia. The total production capacity of our five chemical pulp mills is 2.3 million tons per year. As of December 31, 2004, the Kaukas mill had an annual capacity of 730,000 tons, the Wisaforest mill had an annual capacity of 800,000
tons, the Kymi mill had an annual capacity of 525,000 tons, and the Tervasaari mill had an annual capacity of 240,000 tons. Our current chemical pulp entitlement from our 47% interest in Metsä-Botnia totals 1.1 million tons per year.



We sell most of our chemical pulp, which is considered a
commodity, internally at market price. In order to balance chemical pulp production and the specific pulp requirements of our paper mills, we sell some of the chemical pulp we produce and purchase some other qualities of pulp from other suppliers in
the open market. Our consumption of recycled fiber pulp amounted to 2.3 million tons in 2004, making us the largest user of recycled fiber for publication paper manufacturing in Europe.



The following table sets forth our annual pulp production volumes:



|                          |  |                         |  |       |  |      
|------------------------- |  | ----------------------- |  | ----- |  | -----
|                          |  | Year ended December 31,
|                          |  | 2004                    |  | 2003  |  | 2002 
|                          |  | (1,000 tons)           
|Production (1)            |  |                         |  |       |  |      
|Chemical pulp             |  |                         |  |       |  |      
|Own production            |  | 2,241                   |  | 2,027 |  | 2,102
|From associated companies |  | 568                     |  | 605   |  | 594  
|Mechanical pulp           |  | 2,902                   |  | 2,952 |  | 2,951
|Recycled fiber pulp       |  | 2,257                   |  | 1,875 |  | 1,735
|                          |  |                         |  |       |  |      
|Total                     |  | 7,968                   |  | 7,459 |  | 7,382
|                          |  |                         |  |       |  |      

---

|(1) | Includes the production of all our pulp mills.
|--- | ----------------------------------------------



22



---

The following table sets forth our annual pulp consumption volumes:



|                    |  |                         |  |       |  |      
|------------------- |  | ----------------------- |  | ----- |  | -----
|                    |  | Year ended December 31,
|                    |  | 2004                    |  | 2003  |  | 2002 
|                    |  | (1,000 tons)           
|Consumption         |  |                         |  |       |  |      
|Chemical pulp       |  | 3,290                   |  | 3,139 |  | 3,161
|Mechanical pulp     |  | 2,948                   |  | 3,002 |  | 2,988
|Recycled fiber pulp |  | 2,259                   |  | 1,877 |  | 1,737
|                    |  |                         |  |       |  |      
|Total               |  | 8,497                   |  | 8,018 |  | 7,886
|                    |  |                         |  |       |  |      



Energy



Energy is a significant component of paper industry costs, most notably in
the production of mechanical pulp for magazine papers and newsprint. Thus, low-cost energy is an important contributor to profitability when producing these grades of paper. Our energy policy is to secure supplies of electricity that are reliable
and cost-effective. Energy supplied by our owned and leased power plants or obtained through shares in power companies covers the requirement of our Finnish mills. Outside Finland, most of the electricity used by our mills is purchased locally.
Including our shares in power companies, the Group is approximately 70% self-sufficient in electric power. In Finland, we are self-sufficient.



Our electricity procurement in 2004 amounted to 21.0 TWh, of which 18.5 TWh was used internally and 2.5 TWh was sold. Total electricity consumption by our
mills outside of Finland was 6.9 TWh.



The generating capacity
available to us in Finland through in-house and leased capacity and through associated companies totaled approximately 2,200 MW as at December 31, 2004. Our most important associated companies in terms of energy are Pohjolan Voima, in which we have
a 40.97% holding, and Kemijoki Oy, of whose hydropower shares we own 19.0% representing 4.1% of Kemijokis total share capital.



As part of our environmental strategy, we have reduced our consumption of fossil fuels by substituting them primarily with biofuels. In 2004, biofuels
accounted for 58% of our total fuel supply. The high share of biofuels of the total supply is a result of an extensive recent investment program including the construction of several power plants utilizing biomass fuels. In addition, we have
expanded our use of biomass fuels to include the byproducts of logging. In 2004, we procured logging residues that generated energy of approximately 1.3 TWh. The energy was generated at our own power plants, as well as at our associated
companies power plants. We are required to participate in certain emissions trading programs, as such programs are developed, particularly in Europe.



Wood Procurement



We own 920,000 hectares of forestland in Finland, of which 770,000 hectares are in commercial use. Currently, the annual growth of these forests is
estimated to be approximately four million cubic meters and the planned level of sustainable felling is 2.1 million cubic meters per year, representing approximately 10% of our consumption in Finland. In addition, we manage approximately 230,000
hectares of forestland for private forest owners in Finland. In 2004, we felled 1.7 million cubic meters of wood on our land in Finland, representing 8% of our Finnish wood consumption. We also own approximately 3,000 hectares and manage (through
our Tilhill Forestry subsidiary) 160,000 hectares of forestland in the United Kingdom and own 79,000 hectares of forestland in the United States. In Canada, we have 17,000 hectares of forestland and also administer 942,000 hectares of Province-owned
forestland under long-term licenses. We also have a 38.4% direct ownership interest in Forestal Oriental, a forest management company in Uruguay with 87,000 hectares of land, of which approximately 42,000 hectares are planted with eucalyptus.
Metsä-Botnia, our 47% owned associated pulp company, has a 60% interest in Forestal Oriental. The joint venture in Zhanjiang, China to focus initially on forestation projects and possibly in the future to construct a pulp mill was dismantled
during the year.



23



---

The following table sets forth our wood consumption by country:



|               |  |            |  |        |  |       
|-------------- |  | ---------- |  | ------ |  | ------
|               |  | 2004       |  | 2003   |  | 2002  
|               |  | (1,000 m3)
|Finland        |  | 21,480     |  | 20,910 |  | 20,960
|United Kingdom |  | 300        |  | 690    |  | 760   
|Austria        |  | 900        |  | 980    |  | 800   
|Canada         |  | 2,140      |  | 2,080  |  | 2,140 
|France         |  | 500        |  | 460    |  | 420   
|Germany        |  | 560        |  | 520    |  | 500   
|Russia         |  | 380        |  | 200    |  | 200   
|United States  |  | 410        |  | 410    |  | 560   
|Estonia        |  | 40         |  | 60     |  |      
|               |  |            |  |        |  |       
|Total          |  | 26,710     |  | 26,310 |  | 26,340
|               |  |            |  |        |  |       



The Groups total
wood consumption was 26.7 million cubic meters in 2004. Wood consumption by our production plants in Finland totaled 21.5 million cubic meters. Of this amount, our paper divisions used approximately 71% and the Wood Products Division used
approximately 29%. Of the total Finnish wood consumption, 3.2 million cubic meters was imported. Imports declined from the previous year due primarily to weather-related supply restrictions. The forestry department in Finland, which is responsible
for overall wood procurement and own forest management, supplied 4.4 million cubic meters of wood to associated companies and other mills outside of our Group in addition to providing wood for our own mills.



Wood consumption by our mills outside Finland totaled 5.2 million cubic
meters in 2004. Wood required by our subsidiaries outside Finland is purchased primarily from local suppliers and is primarily based on long-term contracts.



The amount of wood cut from our forests can fluctuate from year to year depending on the supply of wood raw material from other sources. We are active in
the management of our forestlands. Areas that have been harvested for wood are regenerated with pine, spruce or birch. Four to five saplings are generally planted for each tree cut. We seek to maintain and enhance biodiversity on our forestlands
through the training of our personnel in implementing modern schemes of forestry for more diverse forest ecosystems.



Marketing



We market our products through our own sales companies in our major markets and through an extensive network of paper agents and representatives in other
countries. We sell paper products mainly to European customers and have an established customer base in North and South America, Asia, Africa and Australia. We believe that maintaining our own sales organization in major markets improves our ability
to respond to customers needs. The Converting Division has its own worldwide marketing and sales network. With respect to our Wood Products Division, we have sales and distribution companies in 15 countries as well as agents covering our most
important markets around the world.



The following table sets
forth our sales by market area:



|               |  |                         |       |      |   |       |  |   |      
|-------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|               |  | Year ended December 31,
|               |  | 2004                    |       | 2003 |   | 2002 
|               |  | ( in millions)        
|Germany        |  |                        | 1,543 |      |  | 1,550 |  |  | 1,803
|United Kingdom |  |                         | 1,295 |      |   | 1,216 |  |   | 1,369
|Finland        |  |                         | 1,029 |      |   | 1,090 |  |   | 942  
|France         |  |                         | 710   |      |   | 725   |  |   | 850  



24



---

|                               |  |                         |       |      |   |       |  |   |       
|------------------------------ |  | ----------------------- | ----- | ---- | - | ----- |  | - | ------
|                               |  | Year ended December 31,
|                               |  | 2004                    |       | 2003 |   | 2002 
|                               |  | ( in millions)        
|Other European Union countries |  |                         | 2,291 |      |   | 2,041 |  |   | 2,151 
|Other European countries       |  |                         | 422   |      |   | 775   |  |   | 800   
|U.S.                           |  |                         | 1,323 |      |   | 1,209 |  |   | 1,269 
|Canada                         |  |                         | 143   |      |   | 113   |  |   | 213   
|Rest of the world              |  |                        | 1,064 |      |  | 1,068 |  |  | 1,020 
|                               |  |                         |       |      |   |       |  |   |       
|Total                          |  |                        | 9,820 |      |  | 9,787 |  |  | 10,417
|                               |  |                         |       |      |   |       |  |   |       



Seasonality of UPMs Business



The demand for our products does not depend on the
seasons in any material way, nor does our manufacturing or marketing substantially fluctuate due to the seasons.



Dependence on Patents and Industrial, Commercial or Financial Contracts



Our business operations are based primarily on our long manufacturing experience in various wood based manufacturing operations and related know-how
and our proprietary process information. Our experience in all aspects of the forest industry, from timber to high technology products, has consistently provided us with the ability to modernize our operations and integrate leading technology,
manufacturing processes and control systems according to market requirements.



Our patent strategy is to protect the results of our research and development work, like manufacturing processes and end products, to the fullest extent allowed under relevant intellectual property law. In pursuing
this strategy, we seek to protect our right to utilize the results of our own research and development work worldwide and to prevent unfair competition from other companies.



For intellectual property arising from projects we have engaged in with other parties, it is our policy to pursue full
intellectual property rights, to secure ourselves the unrestricted right to use that intellectual property and to protect the fair and beneficial terms of any co-operative research and development agreement.



In some cases, we have also entered into licensing agreements, both as the
licensor and licensee. As licensee, we generally engage in strategic licensing agreements to reduce our own research and development costs and to focus our research and development efforts on our own core technologies. As licensor, we generally
enter into strategic arrangements on a case-by-case basis after taking into account the interests of the entire Group.



In 2004, we filed 13 patent applications as first filings and in addition to these 82 Patent Cooperation Treaty applications. As at December 31, 2004, our
intellectual property rights were protected by approximately 557 patents and patent applications.



Environmental and Regulatory Matters



Our operations are subject to comprehensive environmental laws and regulations. Violations of these laws or regulations could result in fines, injunctions (including orders to cease the violating operations and to
improve the condition of the environment in the affected area or to pay for such improvements) or other penalties. In addition, environmental permits are required for certain of our operations. These permits may be subject to revocation, renewal and
modification by the issuing authorities at their discretion and in compliance with applicable laws. Management believes that we are, in all material respects, in compliance with the environmental laws and regulations applicable to us and that our
discharges and emissions are within or well below levels established by regulation or permits. We invest substantial capital resources on environmental compliance and monitoring of the environment. Our operating expenses including depreciation
attributable to environmental protection amounted to 112 million and our capital expenditures on environmental protection amounted to 55 million in 2004, as compared to operating expenses (including depreciation) attributable to
environmental protection of 109 million and 113 million in 2003 and 2002, respectively, and capital expenditures on environmental protection of 37 million and 21 million in 2003 and 2002, respectively.



25



---

We are committed to the principles of sustainable development as set out in the charter of the
International Chamber of Commerce. In 1996, an environmental policy, which includes a principle of continual improvement of our environmental record, was approved for our operations. In 2002, this environmental policy was reviewed with minor
amendments. Management has set the goal that all of our major production plants should have ISO 14001 or other comparable standard compliant environmental management systems in use. At present, all of our paper mills, have ISO 14001 certified
environmental management systems in place. In addition, four of the Converting Divisions plants also have certified systems. Our Finnish plywood and sawmills, and our Finnish hydroelectric power plants and our forestry department each have
been granted an ISO 14001 certification. All of our pulp and paper mills in Finland and most of those elsewhere in Europe have also received approval for their systems under the EUs EMAS scheme. Our Finnish pulp and paper mills published a
joint EMAS report for 2003. We continued the work to gain certification for the chain of custody for our wood raw material. In 2004, approximately 70% of the wood we used came from certified forests, as compared to approximately 67% and 58% in 2003
and 2002, respectively. During the summer 2004, we began field-testing to compare forest certification schemes in three countries: Finland, Great Britain and Canada. The study compares national forest certification schemes with the international
PEFC and FSC schemes in forests owned or managed by us.



In
2002, the specific average waste water amount of paper production decreased by approximately 16% and the respective oxygen demand of discharges approximately by 15%. The total fossil carbon dioxide emissions of mill power plants were up some 22%,
but the total solid waste amount to landfills decreased by approximately four percent. Paper production increased by approximately 21%, primarily because of the four Central European mills we had acquired in 2001. In 2003, the specific average waste
water amount of paper production decreased by approximately 4% and the respective oxygen demand of discharges by approximately 11%. The total fossil carbon dioxide emissions of mill power plants remained about the same, while the total solid waste
amount to landfills increased by approximately 5%. Paper production increased about 2%. In 2004, the specific average waste water amount of paper production decreased by approximately 6% and the respective oxygen demand of discharges by
approximately 3%. The total fossil carbon dioxide emissions of mill power plants remained about the same, while the total solid waste amount to landfills decreased by approximately 26%. Paper production increased about 6%.



Our most important recent project in terms of its environmental impact was
the modernization work at Pietarsaari pulp mill, which was completed in May 2004. Following completion, the mills specific dust emissions have decreased by 60%, and the specific chemical oxygen demand of the effluent by 20% in 2004.



We have continued to improve the efficiency of our production
processes and our use of energy for those processes. We also have continuously increased the use of renewable fuels. Both improving efficiency and increasing use of renewable fuels contribute towards decreasing specific carbon dioxide emission.
Inasmuch as the impact of any climate change legislation will depend on the implementation measures adopted by the various countries in which we have production facilities, we are currently not in a position to assess the scope of such impact or the
need, if any, for capital expenditures in connection with any legislative proposals for addressing climate change. Based upon current information, however, we do not expect the implementation of climate change policies to have a material adverse
effect on our financial condition and results of operations. Renewable fuels presently account for approximately 58% of all fuels used by us to generate heat and electricity at our mills sites.



There has been a steady drive to increase the proportion of recycled fiber in
the raw material base in all countries where we produce newsprint. We are the largest user of recovered paper for printing papers in the world, with annual consumption of 2.8 million tons in 2004. As part of this effort, we are increasing the
deinking capacity of our Kaipola mill to 210,000 tons per year.



Forest and environmental protection legislation in Finland places the ecological and social sustainability of forests alongside their sustainability for commercial utilization. One of the central aims of the environmental legislation, is to
preserve natural biodiversity. As a result of current legislation, we provide extensive environmental training to our forestry departments entire field personnel.



We have adopted a policy of not purchasing wood from protected forestlands or from any other areas designated by local
forest or environmental authorities as being of special ecological importance. All suppliers of imported wood are required to provide proof of the origins of their wood.



26



---

We are included in the sustainability indices DJSI World and DJSI EuroStoxx, indices that have been
adopted by Dow Jones for companies that are industry leaders in ecological and social sustainability. In 2004, we were selected to the DJSI World Forest Products & Paper industry index as sector leader.



Organizational Structure



UPM-Kymmene Corporation, our Finnish parent company, holds the majority of
our operating assets in Finland, while our assets outside Finland are held through regional or divisional subsidiaries.



The following table sets forth the significant subsidiaries owned, directly or indirectly, by UPM-Kymmene Corporation, their country of incorporation, the
percentage of shares of that subsidiary that we own and the percentage of voting power we have in that subsidiary:



|                                            |  |                         |  |                 |  |                      
|------------------------------------------- |  | ----------------------- |  | --------------- |  | ---------------------
|Name of Company                             |  | Country ofIncorporation |  | PercentageOwned |  | PercentageVotingPower
|UPM-Kymmene Beteiligungs GmbH               |  | Germany                 |  | 100             |  | 100                  
|UPM-Kymmene Vervaltung GmbH                 |  | Germany                 |  | 100             |  | 100                  
|UPM-Kymmene Administrations GmbH & Co. KgaA |  | Germany                 |  | 100             |  | 100                  
|UPM-Kymmene Papier GmbH & Co. KG            |  | Germany                 |  | 100             |  | 100                  
|Nordland Papier GmbH                        |  | Germany                 |  | 100             |  | 100                  
|UPM-Kymmene Miramichi Inc.                  |  | Canada                  |  | 100             |  | 100                  



Property, Plants and Equipment



Our executive offices are located at Eteläesplanadi
2, Helsinki, Finland, in a building owned by the Group. We generally own all our manufacturing facilities. In addition to manufacturing facilities, we own a number of other facilities, including warehouses, distribution centers and shipping
terminals.



Our manufacturing facilities include the following:



|                     |  |             |  |                       |  |                                                                  
|-------------------- |  | ----------- |  | --------------------- |  | -----------------------------------------------------------------
|Location of Facility |  | Unit        |  | Capacity              |  | Principal Activity                                               
|                     |  |             |  | (tons)                |  |                                                                  
|Paper Divisions      |  |             |  |                       |  |                                                                  
|                     |  |             | 
|Austria              |  |             |  |                       |  |                                                                  
|                     |  |             | 
|Steyrermühl          |  | Steyrermühl |  | 190,000300,000        |  | SC magazine paper newsprint                                      
|                     |  |             | 
|Canada               |  |             |  |                       |  |                                                                  
|                     |  |             | 
|Miramichi, NB        |  | Miramichi   |  | 450,000240,000150,000 |  | LWC magazine paper chemical pulp (closed in Dec.
2004) timber, m3
|                     |  |             | 
|China                |  |             |  |                       |  |                                                                  
|                     |  |             | 
|Changshu(1)          |  | Changshu    |  | 600,000200,000        |  | uncoated fine paper coated fine
paper                            
|                     |  |             | 
|Finland              |  |             |  |                       |  |                                                                  
|                     |  |             | 
|Jämsänkoski          |  | Jämsänkoski |  | 120,000610,000140,000 |  | LWC magazine paper SC magazine paper label papers                
|                     |  |             | 
|Kaipola              |  | Kaipola     |  | 300,000410,000        |  | LWC magazine paper newsprint                                     

---

|(1) | Including new capacity of 450,000 tons after completion of the rebuild in May 2005.
|--- | -----------------------------------------------------------------------------------



27



---

|                     |  |                        |  |                             |  |                                                             
|-------------------- |  | ---------------------- |  | --------------------------- |  | ------------------------------------------------------------
|Location of Facility |  | Unit                   |  | Capacity                    |  | Principal Activity                                          
|                     |  |                        |  | (tons)                      |  |                                                             
|Kajaani              |  | Kajaani                |  | 160,000450,000              |  | SC magazine paper newsprint                                 
|                     |  |                        | 
|Kuusankoski          |  | Kymi                   |  | 570,000380,00020,000525,000 |  | coated fine paper uncoated fine paper MG paper chemical pulp
|                     |  |                        | 
|Lappeenranta         |  | Kaukas                 |  | 580,000730,000              |  | LWC magazine paper chemical pulp                            
|                     |  |                        | 
|Pietarsaari          |  | WisapaperWisapulp      |  | 180,000800,000              |  | kraft paper chemical pulp                                   
|                     |  |                        | 
|Rauma                |  | Rauma                  |  | 710,000540,000              |  | LWC magazine paper SC magazine
paper                        
|                     |  |                        | 
|Valkeakoski          |  | Tervasaari             |  | 460,000240,000              |  | kraft, envelope, release and base label papers chemical
pulp
|                     |  |                        | 
|Voikkaa              |  | Voikkaa                |  | 400,000                     |  | LWC magazine paper                                          
|                     |  |                        | 
|France               |  |                        |  |                             |  |                                                             
|                     |  |                        | 
|Docelles             |  | Papeteries de Docelles |  | 130,000                     |  | uncoated fine paper                                         
|Grand-Couronne       |  | Chapelle Darblay       |  | 350,000                     |  | newsprint                                                   
|Strasbourg           |  | Stracel                |  | 280,000                     |  | magazine paper and special newsprint                        
|                     |  |                        | 
|Germany              |  |                        |  |                             |  |                                                             
|                     |  |                        | 
|Augsburg             |  | Augsburg               |  | 360,000120,000              |  | LWC magazine paper SC magazine
paper                        
|                     |  |                        | 
|Dörpen               |  | Nordland               |  | 840,000540,000              |  | coated fine paper uncoated fine
paper                       
|                     |  |                        | 
|Schongau             |  | Schongau               |  | 220,000490,000              |  | SC magazine paper newsprint                                 
|                     |  |                        | 
|Schwedt              |  | Schwedt                |  | 300,000                     |  | newsprint                                                   
|                     |  |                        | 
|United Kingdom       |  |                        |  |                             |  |                                                             
|                     |  |                        | 
|Irvine               |  | Caledonian             |  | 270,000                     |  | LWC magazine paper                                          
|Shotton              |  | Shotton                |  | 500,000                     |  | newsprint                                                   
|                     |  |                        | 
|United States        |  |                        |  |                             |  |                                                             
|                     |  |                        | 
|Grand Rapids, MN     |  | Blandin                |  | 350,000                     |  | LWC magazine paper                                          
|                     |  |                        | 
|Converting Division  |  |                        |  |                             |  |                                                             
|                     |  |                        | 
|Australia            |  |                        |  |                             |  |                                                             
|                     |  |                        | 
|Braeside(2)          |  | Raflatac               |  | n/a                         |  | label materials                                             
|                     |  |                        | 
|China                |  |                        |  |                             |  |                                                             
|                     |  |                        | 
|Shanghai(2)          |  | RaflatacWalki Wisa     |  | n/an/a                      |  | label materials packaging materials                         

---

|(2) | Leased facility.
|--- | ----------------



28



---

|                     |  |               |  |          |  |                    
|-------------------- |  | ------------- |  | -------- |  | -------------------
|Location of Facility |  | Unit          |  | Capacity |  | Principal Activity 
|                     |  |               |  | (tons)   |  |                    
|Finland              |  |               |  |          |  |                    
|                     |  |               | 
|Jyväskylä            |  | Rafsec        |  | n/a      |  | label materials    
|Lohja                |  | Loparex Group |  | 65,000   |  | release paper      
|Pietarsaari          |  | Walki Wisa    |  | n/a      |  | packaging materials
|Tampere              |  | Raflatac      |  | n/a      |  | label materials    
|Valkeakoski          |  | Walki Wisa    |  | n/a      |  | packaging materials
|                     |  |               | 
|France               |  |               |  |          |  |                    
|                     |  |               | 
|Pompey (Nancy)       |  | Raflatac      |  | n/a      |  | label materials    
|                     |  |               | 
|Germany              |  |               |  |          |  |                    
|                     |  |               | 
|Jülich               |  | Walki Wisa    |  | n/a      |  | packaging materials
|Steinfurt            |  | Walki Wisa    |  | n/a      |  | packaging materials
|                     |  |               | 
|Malaysia             |  |               |  |          |  |                    
|                     |  |               | 
|Johor                |  | Raflatac      |  | n/a      |  | label materials    
|                     |  |               | 
|The Netherlands      |  |               |  |          |  |                    
|                     |  |               | 
|Apeldoorn            |  | Loparex Group |  | n/a      |  | release paper      
|                     |  |               | 
|South Africa         |  |               |  |          |  |                    
|                     |  |               | 
|Pinetown(2)          |  | Raflatac      |  | n/a      |  | label materials    
|                     |  |               | 
|Spain                |  |               |  |          |  |                    
|                     |  |               | 
|Polinyá (Barcelona)  |  | Raflatac      |  | n/a      |  | label materials    
|                     |  |               | 
|Sweden               |  |               |  |          |  |                    
|                     |  |               | 
|Örnsköldsvik         |  | Walki Wisa    |  | n/a      |  | packaging materials
|                     |  |               | 
|United Kingdom       |  |               |  |          |  |                    
|                     |  |               | 
|Garstang(2)          |  | Walki Wisa    |  | n/a      |  | packaging materials
|Glossop              |  | Loparex Group |  | n/a      |  | release paper      
|Scarborough          |  | Raflatac      |  | n/a      |  | label materials    
|                     |  |               | 
|United States        |  |               |  |          |  |                    
|                     |  |               | 
|Cullman, AL          |  | Loparex Group |  | n/a      |  | release paper      
|Dixon, IL            |  | Loparex Group |  | n/a      |  | release paper      
|Eden, NC             |  | Loparex Group |  | n/a      |  | release paper      
|Iowa City, IA        |  | Loparex Group |  | n/a      |  | release paper      
|Fletcher, NC         |  | Raflatac      |  | n/a      |  | label materials    



29



---

|                       |  |            |  |                  |  |                                      
|---------------------- |  | ---------- |  | ---------------- |  | -------------------------------------
|Location of Facility   |  | Unit       |  | Capacity         |  | Principal Activity                   
|                       |  |            |  | (tons)           |  |                                      
|Wood Products Division |  |            |  |                  |  |                                      
|                       |  |            | 
|Estonia                |  |            |  |                  |  |                                      
|                       |  |            | 
|Otepää                 |  | Plywood    |  | 25,000           |  | plywood                              
|                       |  |            | 
|Finland                |  |            |  |                  |  |                                      
|                       |  |            | 
|Heinola                |  | Plywood    |  | 50,000           |  | plywood                              
|Joensuu                |  | Plywood    |  | 50,000           |  | plywood                              
|Kuopio                 |  | Plywood    |  | 30,000           |  | plywood (to be closed in August 2005)
|Lahti                  |  | Plywood    |  | n/a              |  | plywood                              
|Lappeenranta           |  | Plywood    |  | 70,000           |  | plywood                              
|Pellos                 |  | Plywood    |  | 480,000          |  | plywood                              
|Savonlinna             |  | Plywood    |  | 75,000           |  | plywood                              
|Jyväskylä              |  | Plywood    |  | 100,000          |  | plywood                              
|Vuohijärvi             |  | Plywood    |  | 70,000           |  | veneer                               
|Keuruu and Lohja       |  | Plywood    |  | 18,000(combined) |  | Special plywood and veneer           
|                       |  |            | 
|France                 |  |            |  |                  |  |                                      
|                       |  |            | 
|Loulay                 |  | Plywood    |  | 50,000           |  | plywood                              
|                       |  |            | 
|Russia                 |  |            |  |                  |  |                                      
|                       |  |            | 
|Chudovo                |  | Plywood    |  | 75,0007,500      |  | plywood veneer                       
|                       |  |            | 
|Austria                |  |            |  |                  |  |                                      
|                       |  |            | 
|Steyrermühl            |  | Sawmilling |  | 300,000          |  | timber                               
|                       |  |            | 
|Finland                |  |            |  |                  |  |                                      
|                       |  |            | 
|Heinola                |  | Sawmilling |  | 120,00010,000    |  | timber components                    
|Kajaani                |  | Sawmilling |  | 120,000          |  | timber                               
|Korkeakoski            |  | Sawmilling |  | 300,000          |  | timber                               
|Lappeenranta           |  | Sawmilling |  | 500,000          |  | timber                               
|                       |  |            |  | 60,000           |  | components                           
|Leivonmäki             |  | Sawmilling |  | 70,000           |  | timber                               
|Luumäki(2)             |  | Sawmilling |  | 20,000           |  | components                           
|Parkano                |  | Sawmilling |  | 90,000           |  | components                           
|Pietarsaari            |  | Sawmilling |  | 200,000          |  | timber                               
|Pori                   |  | Sawmilling |  | 350,000          |  | timber                               
|                       |  |            | 
|Russia                 |  |            |  |                  |  |                                      
|                       |  |            | 
|Pestovo                |  | Sawmilling |  | 190,000          |  | timber                               

---

|(2) | Leased facility.
|--- | ----------------



In addition to the manufacturing facilities listed above, we own six and lease three hydro power plants with an aggregate capacity of 111 megawatts and 87
megawatts, respectively.



30



---

|Item 5. | Operating and Financial Review and Prospects
|------- | --------------------------------------------



General



The information in this item concerning our financial condition and results of operations refers to the consolidated financial statements included elsewhere in this annual report, which are prepared in accordance with
IFRS. IFRS differs in certain significant respects from U.S. GAAP. A reconciliation of the amounts of net profit and shareholders equity reported under IFRS to the amounts determined under U.S. GAAP is set out in Note 40 of the notes to the
consolidated financial statements included elsewhere in this annual report. For a discussion of the principal differences between IFRS and U.S. GAAP, see Principal Differences Between IFRS and U.S. GAAP.



Overview



UPM has a relatively broad product portfolio, but our focus is on papermaking. The sale of magazine papers, newsprint and
fine and speciality papers amounted to 67% of our total sales in 2004, compared with 66% in 2003 and 67% in 2002. We supply a broad range of paper products to our customers worldwide, including publishers, printers, retailers, converters and
merchants. We derive additional revenue from the sale of converted products and wood products which both accounted for 13-15% of sales in the years 2004, 2003 and 2002. Converted products include pressure-sensitive labelstock, RFID labels,
siliconized papers and industrial wrappings. Converted products utilize UPMs own proprietary technology and partially is a customer for our paper businesses. Wood products, which consists of plywood and sawn timber also supply wood raw
material to paper production. We are well-integrated, with a high degree of self-sufficiency in pulp and energy, while our forest holdings serve as a strategic buffer in the Finnish wood market. UPM is still primarily a European company, as sales to
Europe represented 74% of total sales during the year 2004, compared with 75% in 2003 and 76% in 2002. North America represented 15% of sales, compared with 14% in 2003 and 14% in 2002, and the rest of the world the remaining 11% of sales in 2004,
11% in 2003 and 10% in 2002. The geographic allocation of sales has remained similar over the past three years, but the importance of Asia and China in particular is expected to grow. See Item 4. Business OverviewMarket Area.



The main driving forces in the paper and forest products
industry are general economic growth, advertising, paper demand trends, industrys capacity build-up, commodity pricing, delivery volumes, capacity utilization, cost competitiveness and construction activity. The sales prices and capacity
utilization rates for our main products are strongly affected by general business conditions in the markets in which we operate. Individual suppliers have very little influence on these factors and the resulting product sales cycles. As a result,
the companies in the paper and forest products industry compete primarily on cost effectiveness to offset downturns in the sales cycles. Efficiency of operations, manufacturing costs, and the prevailing exchange rates between producer and consumer
countries affect profitability in our industry. We believe that to be successful in the industry, a company should be positioned at the lower end of a cost curve in its core product areas, have a suitable, high-quality product mix and proximity to
key global customers. Although we have been among the most profitable large companies in the paper and forest products industry, our profitability position may fluctuate depending on differences in business conditions for different products as well
as on changes in currency exchange rates.



Our management has
been focused on a continuous drive towards greater efficiency and cost-control. The restructuring measures we have undertaken since the merger of Repola and Kymmene and during the early 1990s have reduced our costs and supported our profitability in
the current cycle. During 2003, we introduced a cost savings program aimed at achieving annual savings



31



---

of 200 million by the beginning of 2005, which we achieved ahead of time in the second quarter of 2004. In addition, the synergy benefits from the
Haindl acquisition in late 2001 positively affected our financial performance. The synergy benefits of 70 million were reached by the end of in the third quarter of 2004.



Trends in Our Business



In the early 1990s, numerous capacity expansions in the industry led to an oversupply of many forest products which, exacerbated by the recession in
Western Europe and North America, led to reduced capacity utilization rates and intensified competition. Consequently, this period was characterized by lower paper and pulp prices. In 1994 and 1995, improvements in capacity utilization and price
increases in certain paper grades created a favorable economic environment for industry participants. As a result of their improved financial position, paper producers then initiated a number of new capital investment projects. The overall capacity
increase, however, was lower than during the previous industry cycle, as paper producers emphasized capacity gains through industry consolidation and greater financial strength. More controlled capital expenditure and consolidation have been
characteristic of the industry also in most recent years, although excessive investments have been made in some paper grades. Between 2001-2003, demand for most paper products was very weak, with declines in demand for certain paper grades resulting
in oversupply and low prices. During 2004, paper demand began to strengthen and industry operating rates rose to a level where price increases were once again possible.



Although consumption by end-users of most paper grades has in general increased relatively steadily by an average of
approximately 3% annually in recent history, significant fluctuations in levels of stocks maintained by paper producers and customers have periodically increased variations in demand. For example, from time to time, cyclicality has resulted from the
practice of customers leveraging inventory capacity by increasing stocks at lower prices and then reducing stocks as prices increase.



Due to a weak economic outlook, lower levels of profitability and adverse price developments in recent years, industry participants have been more
cautious about making significant investments in production capacity. European and North American paper producers have increased investments in capacity mainly through rebuilding, acquiring, and restructuring, rather than through investing in new
capacity. New capacity has, however, been introduced in Asia, and to a lesser degree in Europe in the area of newsprint and coated magazine and fine paper.



For certain paper grades, European industry participants also face a potential threat from producers in Asia and South America, as well as North America
and Eastern Europe. In 2004, for example, Asian and South American producers share of the European uncoated fine paper market was approximately 6%. In turn, approximately 10% of the newsprint consumed in Europe comes from North America and
Russia. Throughout the early 1990s, Asian producers increased their investments in new capacity and their share of world paper production rose. However, as a result of economic uncertainty in the area, these investments slowed down considerably from
1997 through the early 2000s as decreasing demand growth in the area resulted in over-capacity and local producers faced financial difficulties. Recently, the activity has picked up, with the growth of the Chinese paper market bringing
opportunities for paper companies. Significant investments in paper capacity are currently being made in China, including UPMs new fine paper machine to be started up in the summer of 2005.



Market Conditions for Paper Products



The main driving forces behind the demand for paper are economic growth,
advertising in printed media and circulation of magazines, newspapers and other paper-based material used by consumers. It is typical for the paper industry that demand and prices fluctuate significantly from one year to another.



32



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The following tables set forth global demand for printing papers in 2004:



|                  |  |                                 |  |           |  |            
|----------------- |  | ------------------------------- |  | --------- |  | -----------
|                  |  | MagazinePapers                  |  | Newsprint |  | Fine Papers
|                  |  | (Million tons per year)        
|Europe            |  | 10.8                            |  | 13.2      |  | 20.1       
|U.S. and Canada   |  | 8.4                             |  | 14.4      |  | 18.3       
|Rest of the world |  | 3.9                             |  | 17.5      |  | 34.7       
|                  |  |                                 |  |           |  |            
|Total             |  | 23.1                            |  | 45.1      |  | 73.1       
|                  |  |                                 |  |           |  |            
|                  |  |                                 | 
|                  |  | MagazinePapers                  |  | Newsprint |  | Fine Papers
|                  |  | (Kilograms per capita per year)
|Europe            |  | 14.7                            |  | 18.0      |  | 27.4       
|U.S. and Canada   |  | 25.8                            |  | 44.2      |  | 56.2       
|Rest of the world |  | 0.7                             |  | 3.3       |  | 6.5        
|World average     |  | 3.6                             |  | 7.1       |  | 11.5       

---

Sources: CEPIPRINT, CEPIFINE and Pulp and Paper
Products Council (PPPC).



The following tables set
forth changes in demand for printing papers in our principal markets, Europe and the United States and Canada in the last five years:



Changes in Demand for Printing Papers



|                    |  |                                     |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------- |  | ----------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|Paper Grade         |  | 2004                                |   |  | 2003 |   |  | 2002 |   |  | 2001 |   |  | 2000 |  
|                    |  | (Percentage change from prior year) |  
|Europe              |  |                                     |   |  |      |   |  |      |   |  |      |   |  |      |  
|                    |  |                                     |   |  |     
|Newsprint           |  | 5                                   |   |  | 1    |   |  | (5   | ) |  | (3   | ) |  | 4    |  
|SC magazine         |  | 3                                   |   |  | 2    |   |  | (1   | ) |  | 0    |   |  | 9    |  
|Coated magazine     |  | 6                                   |   |  | 3    |   |  | 1    |   |  | (6   | ) |  | 13   |  
|Coated fine paper   |  | 8                                   |   |  | 2    |   |  | 0    |   |  | (7   | ) |  | 3    |  
|Uncoated fine paper |  | 7                                   |   |  | (2   | ) |  | (1   | ) |  | (2   | ) |  | 2    |  
|                    |  |                                     |   |  |     
|U.S. and Canada     |  |                                     |   |  |      |   |  |      |   |  |      |   |  |      |  
|                    |  |                                     |   |  |     
|Newsprint           |  | (1                                  | ) |  | (1   | ) |  | (2   | ) |  | (11  | ) |  | 0    |  
|SC magazine         |  | (3                                  | ) |  | 6    |   |  | 5    |   |  | (2   | ) |  | 14   |  
|Coated magazine     |  | 8                                   |   |  | 5    |   |  | 5    |   |  | (8   | ) |  | 5    |  
|Coated fine paper   |  | 7                                   |   |  | (5   | ) |  | 4    |   |  | (9   | ) |  | 1    |  
|Uncoated fine paper |  | 1                                   |   |  | (1   | ) |  | (2   | ) |  | (7   | ) |  | (1   | )

---

Sources: CEPIPRINT, CEPIFINE and PPPC.



Paper demand fluctuations have been rather significant in recent years.
Because of good general economic conditions, demand growth in 2000 was strong and well above average. Economic growth weakened in 2001 as the subdued advertising market and the utilization of previously built up inventories resulted in a decreased
demand for paper, especially in the United States and Canada but also in Europe. In 2002, improvements were seen in the North American market as the economic environment improved, but the European paper demand continued to be weak. In 2003, magazine
paper demand picked up, but the demand for newsprint and fine paper was still weak on both continents. In 2004, as a result of strong economic growth, advertising, direct mail, pagination and classified ads increased. Accordingly, paper demand
overall grew above average in both Europe and North America, by approximately 6% in Europe and by approximately 2% in North America. Speciality paper demand (not included in the table) is generally more stable than that of commodity paper grades.
Label paper demand has continued to grow over the past five years, and the average long-term growth is approximately 5%. Demand for packaging paper typically grows more slowly, but the market has been relatively stable and the demand was quite
strong in 2004.



33



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Demand growth for the converting industrys products weakened in North America and Asia in 2001
following strong business conditions in 2000. The market remained challenging throughout 2002 and 2003, in North America, Asia, and Europe. Siliconized paper markets were especially lackluster. In 2004, due to strong economic growth, the converting
markets strengthened especially in North America but also in Europe. In particular, the demand for pressure-sensitive labels grew strongly driven primarily by growth in the United States of approximately 5% per year. Demand for sawn timber, as well
as for plywood and building supplies, was good in 2001, but the sawn timber market was heavily oversupplied. In 2002, demand for sawn timber was quite satisfactory, as was the case in plywood. Wood based building supplies business was brisk in 2002.
During 2003, the markets for plywood became competitive while oversupply of sawn timber continued in Europe. During 2004, the demand for plywood improved and the markets became less oversupplied. Sawn timber demand in Europe was satisfactory, but
the market continued to be well oversupplied. Global market pulp demand follows the paper business cycle. During 2001 and 2002, pulp markets were depressed due to weak paper demand, but with improving operating rates they improved somewhat in 2003.
During 2004, prices rose due to a strong demand for pulp and a decrease in producer inventories.



The following tables set forth changes in prices for printing papers in our principal markets, Europe and the United States and Canada, in the last five
years:



Changes in Prices for Printing Papers (1)



|                    |  |                                     |   |  |      |   |  |      |   |  |      |   |  |     
|------------------- |  | ----------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ----
|Paper Grade         |  | 2004                                |   |  | 2003 |   |  | 2002 |   |  | 2001 |   |  | 2000
|                    |  | (Percentage change from prior year)
|Europe              |  |                                     |   |  |      |   |  |      |   |  |      |   |  |     
|                    |  |                                     |   |  |     
|Newsprint           |  | (2                                  | ) |  | (13  | ) |  | (13  | ) |  | 16   |   |  | 2   
|SC magazine         |  | (3                                  | ) |  | (7   | ) |  | (5   | ) |  | 3    |   |  | 3   
|Coated magazine     |  | (3                                  | ) |  | (10  | ) |  | (10  | ) |  | 4    |   |  | 4   
|Coated fine paper   |  | (4                                  | ) |  | (11  | ) |  | (7   | ) |  | (2   | ) |  | 20  
|Uncoated fine paper |  | (6                                  | ) |  | (10  | ) |  | (5   | ) |  | (3   | ) |  | 21  
|                    |  |                                     |   |  |     
|U.S. and Canada     |  |                                     |   |  |      |   |  |      |   |  |      |   |  |     
|                    |  |                                     |   |  |     
|Newsprint           |  | 10                                  |   |  | 10   |   |  | (21  | ) |  | 3    |   |  | 9   
|SC magazine         |  | 4                                   |   |  | 3    |   |  | (14  | ) |  | (2   | ) |  | 2   
|Coated magazine     |  | 5                                   |   |  | 1    |   |  | (15  | ) |  | (7   | ) |  | 10  
|Coated fine paper   |  | 4                                   |   |  | 3    |   |  | (12  | ) |  | (11  | ) |  | 8   
|Uncoated fine paper |  | 5                                   |   |  | (5   | ) |  | (5   | ) |  | (5   | ) |  | 13  

---

Sources: Resource Information Systems, Inc. and Pulp
and Paper International.



|(1) | Price changes in Europe are based on prices in euros and price changes in U.S. and Canada are based on prices in U.S. dollars.
|--- | ------------------------------------------------------------------------------------------------------------------------------



Paper prices generally fluctuate even more than demand. In 2000, prices for
magazine paper and fine paper increased, while prices for newsprint remained stable. At the beginning of 2001, due to good demand, prices for magazine papers and newsprint increased further in Europe. Fine and speciality paper prices, along with
pulp prices, were under pressure during the year in both Europe and North America. During 2002, prices of all main paper grades declined, as overcapacity was persistent. The market situation began to improve in North America late in the year,
however, and during 2003 prices were increased from their historically low levels in 2002, with the exception of uncoated fine paper. In Europe, average prices of newsprint declined by 13%, magazine papers by 9% and fine papers by 10-11% in 2003.
During 2004, average prices continued to decline in Europe and improve in North America. In Europe, 2004 prices were at historically low levels, with prices approximately 15-25% lower depending on grade than in 2000. In North America, industry
operating rates were higher and prices continued to rise during 2004 from historically low levels.



34



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Market Conditions for Pulp



Pulp, which is a main ingredient in the manufacture of fine paper and an important element in the production of magazine
papers and selected other paper grades, has a more volatile price history than paper. The table below sets forth the price development of the benchmark pulp grade, Northern Bleached Softwood Pulp (NBSKP), for the last five years.



Market Pulp (NBSKP) Prices, USD/ton



|     |  |         |  |      |  |    
|---- |  | ------- |  | ---- |  | ---
|Year |  | Average |  | High |  | Low
|2000 |  | 683     |  | 710  |  | 630
|2001 |  | 535     |  | 705  |  | 450
|2002 |  | 463     |  | 490  |  | 435
|2003 |  | 526     |  | 560  |  | 440
|2004 |  | 617     |  | 660  |  | 560

---



High/Low Based on Monthly Average Prices



The direct impact of the fluctuation in market pulp prices on our overall profitability has been minimal since we use almost all our pulp production
internally as raw material for our paper production and have a share of associated company Metsä-Botnias pulp production available for our paper manufacturing. Overall, the Group is approximately 90% self-sufficient in pulp.



Market Conditions for Converted Products



During 2000, the markets for converted products were very strong during the
first half of the year but the situation moderated in the second half of the year. In 2001, the weaker general economic environment negatively affected the markets for siliconized papers and industrial wrappings. Also the demand growth rate of
pressure-sensitive labelstock declined from a year earlier, but it was still positive. The weaker demand continued in 2002 with some improvement in the latter half, when there were signs of improved market conditions for pressure-sensitive
labelstock. During 2003, the North American market for pressure-sensitive labelstock improved, but the European demand was weak. Also the Asian market developed positively. Meanwhile, the demand for siliconized papers continued to be weak in North
America and Europe. Weak demand in the paper and food industries led to weak markets for industrial wrappings in 2003. During 2004, the markets for converted products strengthened particularly in North America, but also in Europe. In particular the
demand for the pressure-sensitive labels grew strongly, driven primarily by growth in the United States of approximately 5% per year. European and Asian demand also picked up and selected price increases for pressure-sensitive label stock were
carried out in markets during 2004. The market conditions for siliconized papers also improved. The industrial wrappings market in Europe improved during 2004 as paper and other process industry operating rates rose and paper-based wrappings demand
grew.



Market Conditions for Wood Products



Prices for plywood, after rising in 2000, were relatively stable in 2001
as a result of good demand. During 2002, plywood prices declined somewhat due to fierce competition. Prices declined noticeably in 2003 due to tough market conditions and U.S. dollar based exporters becoming more active in the European market. The
demand for plywood improved again in 2004 and the market became more favorable during the second half of the year. As a result, price increases took place. Sawn timber prices strengthened during the first half of 2000, but began to falter towards
the end of the year, mainly due to increased supply. The oversupply situation continued in 2001 and prices weakened. In 2002, sawn timber prices remained low, but as a result of low inventories and relatively good demand, prices began to rise once
again towards the end of the year. During 2003, the market weakened especially in the second half of the year due to oversupply and average sawn timber prices in 2003 were little changed as compared to the year before. During 2004, sawn timber
markets continued to be oversupplied as production from Scandinavia and Eastern Europe entered the market. As a result prices remained depressed throughout 2004.



35



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First-time Adoption of International Financial Reporting Standards



These consolidated financial statements are the first financial statements
of UPM prepared in accordance with International Financial Reporting Standards (IFRS) to be filed with the Commission. IFRS 1, First-time Adoption of International Financial Reporting Standards, came into force for periods beginning on or after
January 1, 2004, and earlier application is allowed and encouraged. We adopted IFRS 1 in preparing our 2003 financial statements instead of SIC-8, First-Time Application of IAS, as the Primary Basis of Accounting. IFRS 1 requires an entity to comply
with each IFRS effective at the reporting date for its first IFRS financial statements. Up until December 31, 2003, the consolidated financial statements have been prepared in accordance with Finnish Accounting Standards (FAS). FAS differ in certain
respects from IFRS. When preparing our 2003 and 2002 consolidated financial statements, management has amended certain accounting, valuation and consolidation methods applied in the FAS financial statements to comply with IFRS. The comparative
figures in respect of 2002 have been restated to reflect these adjustments. Reconciliations and descriptions of the effects of the transition from FAS to IFRS on the Groups equity and its net profit are shown in Note 39 of the notes to the
consolidated financial statements included elsewhere in this annual report.



Retirement Benefit Obligations



Under FAS, the retirement benefit obligations are generally recorded in accordance with local accounting practices in the countries in which employees are provided with such benefits. On transition to IFRS, additional retirement benefit
obligations were recognized for certain defined benefit plans, especially in Finland. In accordance with IFRS 1, the Group elected to recognize all cumulative actuarial gains and losses of 126 million for all plans at the date of transition to
IFRS. Subsequent to the adoption of IFRS 1, we applied IAS 19 to all plans, in which we use the corridor approach for actuarial gains and losses.



The Group has not applied any other exemptions allowed by IFRS 1.



Application of Critical Accounting Policies



The following discussion is based upon our consolidated financial statements, which have been prepared in accordance with IFRS, with a reconciliation to
U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those related to tangible and intangible assets, bad debts, inventories, provisions and income taxes. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.



We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. All of our accounting policies are summarized in our
consolidated financial statements, which are included elsewhere in this annual report. Where there is a difference in accounting policy between U.S. GAAP (as reported in Note 40 to the financial statements) and IFRS that is material and contains
significant critical estimates, we have included a separate discussion below.



| |  |  | Impairment of non-current assets (long-lived tangible and intangible assets and investments). We review long-lived assets and investments for potential impairment
whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is measured by comparing the carrying amount of the asset to its fair value, which are primarily determined based on
estimated future net cash flows expected to be generated by the asset. The most significant variables in determining cash flows are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as, the
assumptions and estimates used to determine the cash inflows and outflows. To the extent carrying values exceed fair values, an impairment loss is recognized in operating results. Goodwill is amortized over 20 years. We regularly review goodwill to
evaluate whether events or changes have occurred that would suggest an impairment of its carrying value. If this review indicates that goodwill will not be recoverable, as determined based on the estimated undiscounted cash flows of the underlying
business, impairment is measured by comparing the carrying value of goodwill to its fair value. Fair value is determined based on discounted cash flows or external appraisals.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



36



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Under U.S. GAAP, we adopted SFAS No. 142, Goodwill and Other Intangible Assets (FAS 142) on
January 1, 2002. Under FAS 142, goodwill and intangible assets with indefinite useful lives are no longer amortized but will be tested for impairment at least on an annual basis, or more frequently whenever events and circumstances indicate that the
carrying amount may not be recoverable, in accordance with the provisions of FAS 142.



The goodwill impairment test involves a comparison of the fair value of each of our reporting units as defined under FAS 142, with the carrying amounts of net assets, including goodwill, related to each reporting
unit. If the carrying amount exceeds a reporting units fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The impairment loss is measured based on the amount by which the implied
fair value of goodwill exceeds the carrying amount of goodwill in the reporting unit being tested. Fair values are determined based on valuations that rely primarily on the discounted cash flow method. This method uses future projections of cash
flows from each of our reporting units and includes, among other estimates, projections of future product pricing, production levels, product costs, market supply and demand, projected capital spending and an assumption of our weighted average cost
of capital. Our evaluations of fair values include analyses based on the future savings generated by the underlying assets, estimated trends and other relevant determinants of fair value for these assets. If the fair value of the asset determined is
less than its carrying amount, a loss is recognized for the difference between the fair value and its carrying value.



Changes in any of these estimates, projections and assumptions could have a material effect on the fair value of these assets in future measurement
periods and could result in an impairment of goodwill or indefinite-lived intangibles with a material effect on our future net income and shareholders equity under U.S. GAAP.



Under U.S. GAAP, we evaluate the recoverability of the carrying amount of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully recoverable as required by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset (FAS 144). We use our judgment when applying the
impairment rules to determine when an impairment test is necessary. Factors that we consider, which could trigger an impairment review, include significant underperformance relative to historical or forecasted operating results, a significant
decrease in the market value of an asset, a significant change in the extent or manner in which an asset is used, and significant negative industry trends.



Impairment losses are measured as the amount by which the carrying value of an asset exceeds its estimated fair value, which is based on future
undiscounted cash flows. In estimating these future cash flows, we use future projections of cash flows directly associated with and that were expected to arise as a direct result of the use and eventual disposition of the assets. These assumptions
include, among other estimates, projections of future product pricing, production levels, product costs, market supply and demand and projected capital spending. If it is determined that a long-lived asset is not recoverable, an impairment loss
would be calculated based on the excess of the carrying amount of the long-lived asset over its fair value, primarily determined based on discounted cash flows. Changes in any of our estimates could have a material effect on the estimated future
cash flows expected to be generated by the asset and result in a future impairment of the involved assets with a material effect on our future net income and shareholders equity under U.S. GAAP.



| |  |  | Useful lives of tangible and intangible assets. We calculate depreciation and amortization of tangible and intangible assets on a straight-line basis so as to write
off the cost of the assets over their expected useful lives. The economic life of an asset is determined based on expected physical wear and tear, economic and technical aging, legal or other limits on the use of asset and obsolescence. If some of
these factors were to deteriorate materially, resulting in an impairment of the assets ability to generate future cash flows, we may accelerate depreciation and amortization to reflect the remaining useful life or record an impairment loss.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



37



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| |  |  | Biological assets. We measure our biological assets (i.e., living trees) at their fair value less estimated point-of-sale costs. The fair value of biological assets
other than young seedling stands is based on discounted cash flows from continuing operations. The fair value of young seedling stands is the actual reforestation cost of those stands. Our continuous operations, maintenance of currently existing
seedling stands and felling of forests during one rotation, are based on our forest management guidelines. In the calculation, we take into account the growth potential and environmental restrictions and other reservations of the forests. We
calculate felling revenues and maintenance costs on the basis of actual costs and prices, taking into account the projection of future price development. Periodic changes resulting from growth, felling, prices, costs and other premise changes are
included in operating profit in our income statement.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Doubtful accounts. We review our doubtful accounts on a monthly basis for estimated losses resulting from the inability of our customers to make required payments. If
the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional charges may be required. As a part of this evaluation, we take into account historical bad debts, customer
concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inventory obsolescence. We value our inventories at the lower of cost or expected market price, based on assumptions about future demand and market conditions. We
monitor inventory levels on a periodic basis based on expected usage. If actual market conditions prove to be less favorable than those projected by the management or future demand is different than managements projections, additional
inventory write-downs may be required.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Environmental provisions. We are committed to complying with stringent regulations about environmental quality. We estimate potential future costs relating to
environmental matters on a case-by-case basis based on our current interpretation of environmental laws and regulations in the territories we operate. The final outcome of these uncertainties could be different from current estimates, which could
have a material impact on the results of operations of future periods.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pension and postretirement benefits. We operate a mixture of pension schemes in accordance with the local conditions and practices in the countries in which we
operate. Such benefit plans vary according to the customary benefit plans prevailing in the country concerned. Most of these programs are defined benefit pension schemes with retirement, disability, death and termination income benefits. The
retirement income benefits are generally a function of years of employment and final salary with the company and are generally coordinated with local national pensions. Generally, the schemes are either funded through payments to insurance companies
or to trustee-administered funds as determined by periodic actuarial calculations or the obligations are assumed directly by us. Under U.S. GAAP, the cost of these plans is reported and accounted for in accordance with FASB Statement Nos. 87, 88 and
132R. These Statements require significant assumptions regarding discount rates, salary increases and asset returns. Despite our belief that our estimates are reasonable for these key actuarial assumptions, future actual results will likely differ
from our estimates, and these differences could materially affect our future net income and shareholders equity under U.S. GAAP either unfavorably or favorably.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Additionally, it is possible that the value of the plan assets could decline as a result of negative investment returns,
which combined with increasing amounts of accumulated benefit obligations, could result in our Group being required to make significant cash contributions to our plans in future periods.



For additional information regarding our pension plan assets, benefit obligations and accounting assumptions, see Note
40.I.(f) of the notes to the consolidated financial statements included elsewhere in this annual report.



38



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| |  |  | Taxes. As a part of preparing our consolidated financial statements, we are required to make estimates regarding our income taxes in each of the jurisdictions and
countries in which we operate. We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the consolidated balance sheet, as well as operating loss and tax credit
carryforwards. For each tax jurisdiction, we follow specific and detailed guidelines regarding the assessment of the recoverability of any tax assets recorded on the balance sheet, including scheduling of projected taxable income and consideration
of available prudent and feasible tax planning strategies. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. To the extent we establish a valuation allowance or increase this
allowance, we include an expense in the tax reserve in the income statement.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sensitivity Analysis



The main factor affecting our financial results is the sales prices of our paper. We estimate that a hypothetical 10% increase in paper prices would have had a positive effect of 310 million, 130 million and 160 million on
the operating profits of our magazine papers division, newsprint division and fine paper business, respectively, for the year ended December 31, 2004. A similar 10% change in the volume delivered, on the other hand, would only have had approximately
half the effect on operating profits as compared to the same percentage change in paper prices. In turn, a 10% increase in the price of plywood and sawn timber would have had a positive effect of 60 million and 50 million, respectively.



Long-term changes in exchange rates also have a marked impact
on our financial results. We estimate that a hypothetical 10% change in the value of the U.S. dollar against the euro would result in a change of approximately 45 million in pre-tax profits in the short term and approximately 90 million
in the long term under our current hedging policy and based on year-end 2004 net currency flows, which assumes that 50% of net currency exposure has been hedged for twelve months ahead in accordance with the Companys hedging policy.



Crude oil prices have limited direct impact on the Company. We
estimate that a hypothetical $5 per barrel increase in crude oil prices would decrease our operating profits by less than 10 million over a twelve-month period.



Cost Structure



Our main costs and expenses are personnel expenses and the cost of our fiber raw materials. Delivery cost to customers worldwide is also a major cost
item. In 2004, costs and expenses totaled 8.5 billion excluding the income due to the decrease of 269 million in the Finnish pension liability, as compared to 8.4 million and 8.6 million in 2003 and 2002, respectively.



The following is a breakdown of our cost structure (excluding
depreciation) in 2004, 2003 and 2002:



|                      |  |                                |   |  |      |   |  |      |  
|--------------------- |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                      |  | As a percentage of total costs |  
|                      |  | 2004                           |   |  | 2003 |   |  | 2002 |  
|Personnel expenses    |  | 20                             |   |  | 20   |   |  | 21   |  
|Logs and pulpwood     |  | 14                             |   |  | 13   |   |  | 14   |  
|Delivery              |  | 12                             |   |  | 12   |   |  | 12   |  
|Chemicals and fillers |  | 13                             |   |  | 12   |   |  | 12   |  
|Energy                |  | 9                              |   |  | 8    |   |  | 8    |  
|Recycled paper        |  | 3                              |   |  | 3    |   |  | 2    |  
|Other raw materials   |  | 10                             |   |  | 10   |   |  | 10   |  
|Other(1)              |  | 19                             |   |  | 22   |   |  | 21   |  
|                      |  |                                |   |  |      |   |  |      |  
|Total                 |  | 100                            | % |  | 100  | % |  | 100  | %
|                      |  |                                |   |  |      |   |  |      |  

---

|(1) | Other costs include, among others, maintenance costs, external services and administrative expenses.
|--- | ----------------------------------------------------------------------------------------------------



39



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Recent Developments



Results of Operations for
the Three Months Ended March 31, 2005



On April 26, 2005,
we announced our results for the three months ended March 31, 2005. Sales for the three months ended March 31, 2005 were 2,278 million, as compared to sales of 2,451 million for the same period in 2004. This decrease was due to
restructuring measures taken in 2004 and a decline in deliveries. Operating profit for the three months ended March 31, 2005 was 173 million, compared to 99 million for the same period in 2004. Taking into account the 25 million
goodwill amortization in the first quarter of 2004, the increase was 49 million. Higher average paper prices, as well as improved profitability in the Wood Products division had a positive impact on operating profit.



Recent Acquisitions and Divestitures



In July 2002, we sold 22.8% of the shipping company Transfennica Oy Ab to a
Dutch transport company Spliethoff. We owned 49.9% of the shares of Transfennica Oy Ab prior to the transaction and 27.1% after the sale. Transfennica Oy Ab had an average of 75 employees and sales of approximately 117 million for the year
ended December 31, 2001.



In October 2002, the Group sold its
Walki Films packaging films business to Bemis Company Inc. for U.S.$70 million (70.9 million). The Walki Films business comprised the manufacturing of vacuum and modified atmosphere plastic films with operations in Finland and France. Walki
Films was previously reported in Converting Divisions reportable segment.



In November 2002, we completed the sale of our Walki Can liquid packaging business unit to Stromsdal Oyj and RMG Pointo Oy. The Walki Can liquid packaging business unit had 35 employees at the end of 2001.



In September 2003, we sold our Rosenlew flexible intermediate bulk
container (FIBC) operations. The business had approximately 470 employees and annual sales of approximately 40 million.



In October 2003, we sold our 8.2% interest in the real estate company Polar Kiinteistöt for an aggregate consideration of 11 million.



In November and December 2003, we sold 11.3 million shares of
Nokia for an aggregate amount of 168 million. We realized capital gains of 147 million on the sale. As a result of the sale, we no longer own any shares in Nokia.



In April 2004, we sold the Danish building materials retail chain Anco Trae. In 2003, the operations in question had annual
sales of 70 million and employed 190 people.



In August
2004, we sold the Irish building supplies chain Brooks Group Limited for 213 million. In 2003, Brooks Group had annual sales of 195 million and 430 employees.



In November 2004, we announced our withdrawal from a planned wood procurement and possible pulp mill project in Zhanjiang,
Guandong province in China.



In March 2005, we sold our
remaining 19.9 million shares of Metso Corporation for a total amount of 285 million with a capital gain of 89 million.



Restructuring Activities



In December 2004, we closed the 240,000 tons per year kraft pulp mill at Miramichi in Canada. As a result, we booked a charge of 110 million in 2004
due to the Miramichi closing and associated restructuring charges.



In October 2004, we restructured the Wood Products Divisions businesses in Finland. As a result, our annual sawmilling production will decrease by about 400,000 cubic meters and birch plywood production by 70,000 cubic meters. We
expect that



40



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personnel reductions associated with these restructuring efforts will be about 670 employees. We closed our Aureskoski sawmill and our Viiala plywood mill at
the end of 2004, and expect to close our Kuopio plywood mill during the latter half of 2005. We also plan to reduce the sawmilling production at our Alholma and Kajaani mills by about one third in 2005. We also expect to adjust staff functions
accordingly. We booked charges of 34 million relating to these restructurings.



In May 2004, we closed down a book paper machine with a capacity of 100,000 tons/year, together with the adjacent stone ground-wood plant, at our paper mill in Voikkaa, Finland. As a result, we booked a charge of
9 million in 2003.



In January 2003, we closed the two
oldest paper machines at the Blandin mill in Minnesota, the United States. The paper machines were originally built in 1931 and 1963. Based on the machines age and production capacity, we decided that the paper machines were no longer
competitive, irrespective of any future investment. The Blandin mill will continue to operate its two newer machines, which were built in 1975 and 1989. As a result of these initiatives, the Group also reassessed the useful lives of the newer
machines.



The Group recorded a charge of 108 million in
2002 and 22 million in 2003 as a result of the closures and reassessments of useful lives of fixed assets. This charge includes impairment of assets of 71 million. In addition, the Group recorded accrued costs of 20 million in 2002
due to involuntary termination of approximately 300 employees and other closing-related costs, as well as 20 million in 2002 related to the settlement of pension and post-retirement healthcare plans at the Blandin mill.



In connection with the restructuring activities at the Blandin mill, a
cost-reduction agreement was entered into with the local union. The agreement provides for, among other things, a long-term wage freeze, a reduction of post-retirement medical benefits and certain changes in seniority rules.



In 2002, we also closed the mechanical pulp mill in our Shotton mill in the
United Kingdom. In connection therewith, we recorded a charge of 8 million to write down the related tangible assets. The closure resulted from our decision to use recycled pulp produced in our deinking plant in the United Kingdom.



Currency Fluctuations



The euro
was introduced as our accounting currency on January 1, 1999. After its introduction, the euro has increasingly been used as the pricing currency, although sales also often take place in the customers own currency, and the breakdown of sales
by country may also be partly indicative of the breakdown by currency. Additionally, long-fiber chemical pulp is generally priced in U.S. dollars. In general, the introduction of the euro has reduced our exposure to exchange rate fluctuations. In
2004, total foreign exchange gains resulting from currency fluctuations and included in the profit and loss account net of our hedging activities were 61 million, compared to gains of 62 million in 2003 and losses of 41 million in
2002. See Item 11. Quantitative and Qualitative Disclosures about Market Risks.



For additional discussion regarding the impact of the euro on exchange rate and currency risk exposure of the Company, see Item 11. Quantitative and Qualitative Disclosures about Market RiskForeign
Currency Exposure. During 2004, the U.S. dollar decreased in value against the euro by approximately 7.8% compared to the year end rate for the previous year, and the value of the British pound sterling decreased slightly from 0.7048 to 0.7051
on December 31, 2004.



Finnish Corporate Tax Rate



Effective January 1, 2005 the Finnish corporate tax rate was reduced by 3%
from 29% to 26%. We expect this reduction to have a favorable impact on our net profit because in the past more than half of our profit before tax has been generated from our Finnish operations.



Changes in International Financial Reporting Standards (IFRS)



Effective January 1, 2005, significant changes were implemented in our
financial reporting standards. The changes relate primarily to the accounting of goodwill and intangible assets, share-based compensation and available-for-sale investments. Additionally, changes in the presentation of income statement and balance
sheet will occur.



41



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New IFRS standards and revised IAS standards



In December 2003, International Financial Reporting Standards (IFRS) were amended as the IASB released revised IAS 32,
Financial Instruments: Disclosure and Presentation and IAS 39, Financial Instruments: Recognition and Measurement. These new standards must be applied for annual periods beginning on or after January 1, 2005. Under IAS 39 (revised) it is no longer
possible to reverse impairment losses on available-for-sale equity instruments through profit or loss, i.e. any subsequent increase in fair value is recognized in equity. The standard requires retrospective application, i.e. restatement of
comparative information resulting in a reversal of a gain of 26 million in 2004 profit and loss statement to fair value reserve in equity.



In February 2004, the IASB issued IFRS 2, Share-based Payment. The standard requires the recognition of share-based payment transactions in the financial
statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the Company. IFRS 2 is effective for fiscal years beginning on or after January 1, 2005 and applies to grants of shares,
share options or other equity instruments that were granted after November 7, 2002 and have not yet vested as of the effective date of the standard. The standard requires retrospective application resulting in a share-based payment expense for the
comparative years ended December 31, 2004 and December 31, 2003 of 12 million and 6 million, respectively. The corresponding expense for the first quarter of 2005 is 3 million.



In March 2004, the IASB issued IFRS 3, Business Combinations, and the revised
standards IAS 36, Impairment of Assets, and IAS 38, Intangible Assets. IFRS 3 is required to be applied to all business combinations for which the agreement date is on or after March 31, 2004. Goodwill related to acquisitions prior to March 31, 2004
continued to be amortized through December 31, 2004 as required under the IFRS transition guidance, while goodwill related to acquisitions subsequent to March 31, 2004 is not amortized. Intangible assets with definite useful lives will continue to
be amortized over their respective estimated useful lives. Intangible assets with indefinite useful lives are not amortized. The revised standards IAS 36 and IAS 38 are effective for fiscal years beginning on or after January 1, 2005. Amortization
of acquired goodwill in 2004 totaled 100 million. These assets will not be amortized in 2005.



In December 2004, the IASB issued IFRIC Interpretation 3, Emission Rights, which specifies the accounting for companies participating in government
schemes aimed at reducing greenhouse gas emissions. It requires companies to account the emission allowances they receive from governments as intangible assets, recorded initially at fair value. It also requires companies, as they produce emissions,
to recognize a liability for the obligation to deliver allowances to cover those emissions. This interpretation is applicable for periods beginning on or after 1 March 2005. UPM adopted IFRIC 3 for the first time in its Interim Report for January to
March 2005. The impact on the Groups net income and financial position was not significant.



In December 2003, the IASB issued a revised IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, which prescribes the criteria for
selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. This revised standard is applicable for periods beginning
on or after January 1, 2005. UPM adopted IAS 8 revised on January 1, 2005. UPM does not expect the adoption of this standard to have a material impact on the Groups financial position, results of operations or cash flows.



Results of Operations



The
following tables set forth the sales and operating profit of our various business areas and divisions in accordance with IFRS and the production and delivery volumes of our divisions for the three most recent years:



|                           |  |                         |   |  |       |   |  |        |  
|-------------------------- |  | ----------------------- | - |  | ----- | - |  | ------ | -
|                           |  | Year ended December 31, |  
|                           |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                           |  | ( in millions)         |  
|Sales by Division          |  |                         |   |  |       |   |  |        |  
|Paper Divisions            |  |                         |   |  |       |   |  |        |  
|Magazine papers            |  | 3,285                   |   |  | 3,280 |   |  | 3,570  |  
|Newsprint                  |  | 1,295                   |   |  | 1,273 |   |  | 1,379  |  
|Fine and speciality papers |  | 2,275                   |   |  | 2,244 |   |  | 2,446  |  
|Converting division        |  | 1,409                   |   |  | 1,370 |   |  | 1,539  |  
|Wood products division     |  | 1,486                   |   |  | 1,548 |   |  | 1,487  |  
|Other operations           |  | 552                     |   |  | 512   |   |  | 525    |  
|Interdivisional sales      |  | (482                    | ) |  | (440  | ) |  | (529   | )
|                           |  |                         |   |  |       |   |  |        |  
|Total                      |  | 9,820                   |   |  | 9,787 |   |  | 10,417 |  
|                           |  |                         |   |  |       |   |  |        |  



42



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|                                 |  |                         |   |  |      |   |  |     
|-------------------------------- |  | ----------------------- | - |  | ---- | - |  | ----
|                                 |  | Year ended December 31,
|                                 |  | 2004                    |   |  | 2003 |   |  | 2002
|                                 |  | ( in millions)        
|Operating Profit by Division (1) |  |                         |   |  |      |   |  |     
|Paper Divisions                  |  |                         |   |  |      |   |  |     
|Magazine papers                  |  | (78                     | ) |  | 50   |   |  | 177 
|Newsprint                        |  | (1                      | ) |  | (8   | ) |  | 121 
|Fine and speciality papers       |  | 162                     |   |  | 206  |   |  | 355 
|Converting division              |  | 80                      |   |  | 43   |   |  | 63  
|Wood products division           |  | 107                     |   |  | 21   |   |  | 32  
|Other operations                 |  | 369                     |   |  | 40   |   |  | 55  
|                                 |  |                         |   |  |      |   |  |     
|Total                            |  | 639                     |   |  | 352  |   |  | 803 
|                                 |  |                         |   |  |      |   |  |     

---

|(1) | The 2004 figures include 110 million for the Magazine Papers Division due to the Miramichi pulp mill closing and restructuring charges and 110 million gain on sale of
Brooks Group in Wood Products Division, as well as 34 million charges related to restructuring of Finnish Wood Products operations. In addition, the Magazine Papers Division, Newsprint Division, Fine and Speciality Paper Division, Converting
Division, Wood Products Division and Other Operations include income of 6 million, 2 million, 3 million, 2 million, 7 million and 249 million, respectively, related to the Finnish employment pensions scheme.
Additionally, in 2004, Other Operations include charges of 11 million for the Groups restructuring and a provision of 19 million for long-term wood procurement agreements. For the year ended December 31, 2003, restructuring costs
of 61 million included the 22 million related to the shut-down of two paper machines at Blandin mill in the Magazine Papers Division and 9 million related to the shut-down of a paper machine at Voikkaa mill in Finland in the
Newsprint Division. The operating loss related to the unrealized MACtac acquisition was 19 million, a loss of 6 million related to the disposal of Rosenlew and charges of 5 million related to the restructuring of forestry
operations in Finland in Other Operations. Operating profit for 2002 included net charges of 102 million, including charges of 108 million relating to close down of two paper machines at Blandin mill in the Magazine Papers Division,
charges of 8 million relating to rebuild of RCF plant at Shotton mill in the Newsprint Division and income of 14 million on the sale of Walki Films business unit in Other Operations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                           |  |                                                |  |        |  |       
|-------------------------- |  | ---------------------------------------------- |  | ------ |  | ------
|                           |  | Year ended December 31,                       
|                           |  | 2004                                           |  | 2003   |  | 2002  
|                           |  | (In 1,000 tons, exceptsawn timber and plywood)
|Production                 |  |                                                |  |        |  |       
|Papers total               |  | 10,886                                         |  | 10,232 |  | 10,046
|Chemical pulp              |  | 2,243                                          |  | 2,027  |  | 2,102 
|Plywood, 1000 m3           |  | 969                                            |  | 936    |  | 905   
|Sawn timber, 1000 m3       |  | 2,409                                          |  | 2,408  |  | 2,201 
|                           |  |                                                | 
|Deliveries                 |  |                                                |  |        |  |       
|Magazine papers            |  | 4,940                                          |  | 4,822  |  | 4,618 
|Newsprint                  |  | 2,719                                          |  | 2,587  |  | 2,467 
|Fine and speciality papers |  | 3,074                                          |  | 2,879  |  | 2,774 



The Year ended December 31, 2004
Compared to the Year ended December 31, 2003



Turnover



General. Our sales were
9,820 million for the year ended December 31, 2004, as compared to 9,787 million for the year ended December 31, 2003. Our total paper deliveries including all speciality papers for the year ended December 31, 2004 amounted to 10,792,000
tons, up by 4% compared with 10,342,000 tons for the year ended December 31, 2003. Although paper deliveries rose, sales were negatively affected by a decrease in paper prices in Europe ranging from 2-6%, depending on the paper grade, from the
previous year. Furthermore, our sales denominated in U.S. dollars were negatively affected by an 10% increase in the value of the euro against the U.S. dollar in 2004.



43



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Magazine papers. Sales in our Magazine Papers Division were 3,285 million for the year ended
December 31, 2004, which was relatively unchanged from sales of 3,280 million for the year ended December 31, 2003. Deliveries of magazine papers rose 2.4% from 4,822,000 tons in 2003 to 4,940,000 tons in 2004, as overall demand for coated
magazine paper increased 6% in Europe and 8% in the United States in 2004 as compared to 2003. Demand for uncoated magazine paper increased 3% in Europe in 2004, but declined 3% in the United States as buyers substituted uncoated paper with coated
grades.



Sales of magazine paper were also negatively affected
by a decline in average magazine paper prices in Europe, which were approximately 3% lower in 2004 as compared to 2003. While U.S. dollar-based magazine paper prices in North America increased by approximately 5% in 2004, this increase was partially
offset by the increase in the value of the euro against the U.S. dollar in 2004.



The capacity utilization rate for our Magazine Papers Division rose to 90% for the year ended December 31, 2004, as compared to 87% for the year ended December 31, 2003.



Newsprint. Sales in our Newsprint Division were 1,295 million
for the year ended December 31, 2004, an increase of 1.7% from sales of 1,273 million for the year ended December 31, 2003. Deliveries of newsprint rose 5.1% to 2,719,000 tons for the year ended December 31, 2004 from 2,587,000 tons for the
year ended December 31, 2003. The increase in sales was due primarily to a 5% increase in demand from our European markets, driven by the growth in newspaper advertising and classified advertisements. Demand growth in speciality newsprint grades was
even stronger, amounting in Europe to approximately 12% for the year ended December 31, 2004.



The increase in our newsprint sales was offset by the lower newsprint prices in Europe, our primary market, which declined on average by 2% for the year ended December 31, 2004 as compared to the year ended December
31, 2003. However, in other markets, including the United States and Asia, newsprint prices rose by 10% or more in 2004.



The capacity utilization rate for our Newsprint Division rose to 95% for the year ended December 31, 2004, as compared to 90% for the year ended December
31, 2003.



Fine and speciality papers. Sales in our Fine
and Speciality Papers Division were 2,275 million for the year ended December 31, 2004, an increase of 1.4% from sales of 2,244 million for the year ended December 31, 2003. Deliveries of fine and speciality paper rose 6.8% to 3,074,000
tons for the year ended December 31, 2004 from 2,879,000 tons for the year ended December 31, 2003. The increase in deliveries reflects increases in demand in 2004. However, this increase in demand was offset by decreases in average prices for fine
and speciality papers in 2004.



Demand for fine paper was
particularly strong in Europe for 2004, where demand for uncoated fine paper grew by approximately 7% and demand for coated fine paper grew by approximately 8% for 2004. In addition, strong economic growth boosted pulp based fine paper demand in
China. For speciality papers, demand increased overall in 2004, with demand for label papers strong throughout 2004 and demand for packaging papers fluctuating throughout the year.



The increase in demand was partially offset by a decline in average prices for fine papers in our largest markets. In
Europe, our primary market for fine and speciality papers, average prices of uncoated fine papers declined 6% and average prices of coated papers declined 4% in 2004. In China, prices fluctuated throughout the year, depending on changes in the
competitive situation and pulp prices in that market. In speciality papers, we experienced an increase in the average prices for label papers in 2004, particularly towards the end of the year. Prices for packaging papers remained relatively stable
throughout the year.



The capacity utilization rate for our
Fine and Speciality Papers Division rose to 91% for the year ended December 31, 2004, as compared to 88% for the year ended December 31, 2003. Due to the strong paper market in China, our Changshu mill operated at close to maximum capacity. However,
in Europe, fine paper production capacity was underutilized. Speciality paper operating rates were above 90%.



Converting. Sales in our Converting Division were 1,409 million for the year ended December 31, 2004, an increase of 2.8% from sales of
1,370 million for the year ended December 31, 2003. The increase in sales resulted primarily from increases in demand



44



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and deliveries for our converted products, particularly pressure-sensitive labels produced by our Raflatac subsidiary, as well as from the effect of selected
price increases. This increase was partially offset by the negative effects of the stronger euro in 2004.



Sales from our Raflatac subsidiary increased 6% to 779 million for the year ended December 31, 2004 from 736 million for the year ended
December 31, 2003. This increase resulted primarily from strong growth in demand for pressure-sensitive labels. In addition, we experienced selected price increases in our main markets for these products in 2004.



Sales from our Loparex subsidiary increased 1% to 337 million for the
year ended December 31, 2004 from 334 million for the year ended December 31, 2003. Demand for siliconized papers improved in North America in 2004, while demand in Europe for these products stabilized. However, average prices for these
products continued to be depressed in 2004. The negative effects of the stronger euro also limited sales growth for these products in 2004.



Sales from our Walki Wisa subsidiary decreased 2% to 299 million for the year ended December 31, 2004 from 305 million for the year ended
December 31, 2003. Demand for industrial wrappings in Europe improved, but the markets remained competitive, as the production and deliveries from for example Eastern European producer increased.



Wood Products. Sales in our Wood Products Division were 1,486
million for the year ended December 31, 2004, a decrease of 4.0% from sales of 1,548 million for the year ended December 31, 2003. This decrease was primarily due to the sale of our building supplies trade businesses of Anco Træ and
Brooks Group during 2004. These two businesses had combined sales of 160 million and 265 million in 2004 and 2003, respectively.



Our plywood operations had sales of 567 million for the year ended December 31, 2004, an increase of 2.5% from the sales of 553 million for
the year ended December 31, 2003. Plywood production amounted to 969,000 cubic meters for the year ended December 31, 2004, an increase of 3.5% compared to plywood production of 936,000 cubic meters for the year ended December 31, 2003. The increase
in sales was due primarily to increases in demand for both spruce plywood and birch plywood in 2004. As the demand for plywood continued to increase in 2004, the average prices for plywood also increased, particularly during the second half of the
year.



Our sawmilling operations generated sales of 498
million in 2004, a decrease of 3.3% from sales of 515 million for the year ended December 31, 2003. Deliveries of sawn timber volumes were rather stagnant, with deliveries of 2,276,000 cubic meters in 2004 compared with deliveries of 2,274,000
cubic meters in 2003. As a result, average prices for sawn timber remained relatively unchanged as well throughout 2004.



Our building supplies trade operations had sales of 519 million for the year ended December 2004, a decrease of 15% from sales of 608 million
for the year ended December 31, 2003. This decrease was due primarily to the sale of our Brooks and Anco Træ operations. The building supplies trading activity continued brisk throughout the year in the respective markets, particularly in
Ireland.



Other operations. Third-partys sales
from our other operations amounted to 552 million for the year ended December 31, 2004, an increase of 8% from sales of 512 million for the year ended December 31, 2003.



Operating Profit (loss)



General. The operating profit for the year ended December 31, 2004 amounted to 639 million, an increase of 82% from operating profit of
352 million for the year ended December 31, 2003. The primary reasons for the increase were a gain of 110 million resulting from the sale of our Brooks building supplies trade business and income of 246 million resulting from the
change in Finnish employment pension scheme. Other changes in pension accounting resulted in income of 23 million in 2004. During 2003, we did not realize any similar income.



This income was offset by costs of 110 million associated with the closure of Miramichi pulp mill, 34 million
for restructuring our Finnish wood products operations, a 19 million charge made in relation to long-term wood supply agreements



45



---

in Great Britain and an 11 million charge made for group restructuring. For the year ended December 31, 2003, we incurred costs of 61 million
associated with our restructuring activities, including 22 million related to the shut-down of two paper machines at our Blandin mill, 9 million related to the shut-down of a paper machine at our Voikkaa mill in Finland, a loss of
6 million related to the disposal of our Rosenlew business and charges of 5 million related to the restructuring of our forestry operations in Finland, as well as a loss of 19 million related to the unrealized MACtac acquisition.



The increase in operating profit was also a result of improved
cost effectiveness and higher deliveries, as well as the strong performance of our Converting Division and Other Operations. Our profitability growth was negatively affected by lower average paper prices and the effects of the stronger euro in 2004.



Magazine papers. We incurred an operating loss for our
Magazine Papers Division of 78 million for the year ended December 31, 2004, compared with an operating profit of 50 million for the year ended December 31, 2003. Despite increased deliveries of magazine papers and improvements in
operational efficiency in 2004, our operating profit was negatively affected by lower average prices in Europe and the effects of the weakened U.S. dollar. In addition, our profitability was negatively affected by increases in world market prices
for certain oil-based raw materials, such as latex, as well as higher energy prices in Europe and North America, particularly during the second half of the year.



Newsprint. We incurred an operating loss for our Newsprint Division of 1 million for the year ended December
31, 2004, compared with an operating loss of 8 million for the year ended December 31, 2003. Higher deliveries and improvements in cost efficiency in 2004 were offset by lower average prices in Europe and the negative effects of the stronger
euro. Furthermore, while the price of recovered paper, the primary raw material for the production of newsprint, remained stable compared to 2003, energy costs increased in 2004, particularly for our mills in continental Europe.



Fine and speciality papers. Operating profit for our Fine and
Speciality Papers Division was 162 million for the year ended December 31, 2004; a decrease of 21% from operating profit of 206 million for the year ended December 31, 2003. Although increases in both deliveries and speciality paper
prices improved profitability, the decline in our operating profit in 2004 was due primarily to the decline in prices for fine paper products in Europe and an increase in pulp costs. Average pulp price in U.S. dollars for the year ended December
2004 was USD 615 per ton vs. USD 525 per ton in 2003. Although the group is approximately 90% self-sufficient in pulp, fine and specialty paper division purchases some market priced pulp for its mills in Europe and China.



Converting. Operating profit for our Converting Division was 80
million for the year ended December 31, 2004, an increase of 86% from operating profit of 43 million for the year ended December 31, 2003. This increase was due to the increases in deliveries and prices for our converted products, especially
pressure-sensitive labels, as well as the effects from internal rationalization measures taken especially at Loparex. The increase in operating profit was partially offset by the strengthening of the euro against the U.S. dollar and an increase in
prices for certain raw materials, especially those that are oil-based.



Wood products. Operating profit for our Wood Products Division was 107 million for the year ended December 31, 2004, compared with operating profit of 21 million for the year ended December 31, 2003. The operating profit
was affected by a charge of 34 million relating to restructuring in Finland. The profitability in our plywood operations improved as a result of higher deliveries and prices. Our profitability was negatively affected by declines in the
profitability of our sawmilling operations due to oversupply and lower sawn timber prices in 2004. Average pine and spruce log prices were little changed from 2003, but moved up in the latter half of the year. In addition, the availability of
domestic wood in the second half of the year was affected by adverse weather conditions, which led to a downturn in production for our sawmilling operations. For our wood-based building supplies trade business, profitability remained substantively
unchanged in 2004.



Other operations.Operating profit
from Other Operations was 369 million for the year ended December 31, 2004, compared to operating profit of 40 million for the year ended December 31, 2003.



Operating profit for 2004 includes income of 249 million from the change in Finlands pension scheme and charges
of 11 million for the groups restructuring and 19 million relating to long-term wood supply agreements, compared with charges of



46



---

19 million from the cancelled MACtac deal, 6 million on the sale of Rosenlew, and 5 million for restructuring the forestry department in
Finland.



Our forestry operations in Finland contributed
operating profit of 61 million in 2004, compared to 49 million in 2003. This increase was due primarily to an increase in wood procurement volumes, which was partially offset by a slight decline in the average prices for wood.



Our energy operations contributed operating profit of
118 million in 2004, compared to 96 million in 2003. This increase was due primarily to good utilization of own energy resources and the increased supply of hydropower.



Financial Items



Our interest and other finance expenses net were 178 million compared to 177 million during the year ended December 31, 2003. Interest
expenses were lower, but dividend income fell by 11 million. Gains of 48 million were booked on exchange differences and changes in fair values, a decrease of 59 million from the previous year. In 2004, our net capital gains on
available-for-sale investments were 27 million, of which 26 million resulted from a reversal of the impairment charge booked in 2003, compared to net capital gains of 127 million on listed company shares for the year ended December
31, 2003. Our net interest-bearing liabilities decreased by 257 million during 2004 to 4,617 million at the end of 2004 from 4,874 million at the end of 2003, while interest rates remained at a low level throughout the year.



Our share of the results before tax of associated companies,
primarily Metsä-Botnia, contributed 64 million for the year ended December 31, 2004, compared with 29 million for the year ended December 31, 2003. This increase was primarily due to the higher price of pulp and 3% higher
deliveries.



Profit (loss)



We had a profit before tax of 600 million for the year ended December
31, 2004, an increase of 37% from profit of 438 million during the year ended December 31, 2003. We received tax income of 409 million for the year ended December 31, 2004, compared to expenses of 121 million for the year ended
December 31, 2003. The change in income taxes was due primarily to tax income of 284 million in 2004 related to the valuation of net assets for Haindl, which we acquired in late 2001, tax benefits of 235 million in 2004 resulting from
the changes in the Finnish tax law. We have also recognized tax income of 50 million in 2004 related to recognition of tax benefits of tax losses in Canada in our IFRS financial statements based on events occurring after the date our statutory
IFRS financial statements were issued. In April 2005, the Supreme Administrative Court of Finland affirmed that any reduction of share capital of a subsidiary is treated in a similar way as the sale of shares (i.e., as a tax free/non deductible
transaction in the taxation of a Finnish parent company). Prior to this ruling, it was unclear whether the change in the Finnish tax legislation, passed in December 2004 and effective starting January 1, 2005, would allow tax free repatriation of
capital contributions. Based on this ruling, we have committed to implement a prudent and feasible tax planning strategy to utilize the deferred tax assets of our Canadian subsidiary arising from net operating losses, generated after our acquisition
in late 2000, and the deferred tax assets arising from book over tax depreciation. The tax planning strategy intends to generate sufficient taxable income against which the deferred tax assets may be utilized.



Net profit amounted to 1,008 million for the year ended December 31,
2004, compared to 319 million for the year ended December 31, 2003.



The Year ended December 31, 2003 Compared to the Year ended December 31, 2002



Turnover



General. Our sales were 9,787 million for the year ended December 31, 2003, down by 6% from sales of 10,417 million for the year ended
December 31, 2002. Our total paper deliveries in 2003 amounted to 10,342,000 tons, compared with 9,918,000 tons for the year ended December 31, 2002. Although paper deliveries increased by 4%, sales declined due to the 7-13% lower average paper
prices in Europe. In addition, sales denominated in U.S. dollars were affected by the appreciation of the Euro by 20% vs. U.S. dollar during the year ended December 31, 2003, as compared with the year ended December 31, 2002.



Magazine papers. Sales in our Magazine Papers Division were
3,280 million for the year ended December 31, 2003, a decline of 8% from 3,570 million for the year ended December 31, 2002. Deliveries increased by 4% from 4,618,000 tons to 4,822,000 tons. The demand for coated magazine paper increased
by 3% in Europe and by 5% in the United States in comparison to the year ended December 31, 2002. Demand for uncoated magazine paper in turn increased by 2% in Europe and by 6% in the United States during 2003.



The main reason behind the decline in magazine paper sales was the
approximately 9% lower average prices in Europe in the year ended December 31, 2003 than they were in the year ended December 31, 2002. In the United States, average magazine paper prices increased by approximately 2% from record-low levels but the
positive effect of higher prices was mitigated by the appreciation of the euro.



47



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For the year ended December 31, 2003, our capacity utilization rate was 87%, as compared to 85% in the
previous year.



Newsprint. Sales in our Newsprint
Division were 1,273 million for the year ended December 31, 2003, a decrease of 8% from sales of 1,379 million for the year ended December 31, 2002. Our newsprint deliveries were 2,587,000 tons during the year ended December 31, 2003, an
increase of 5% from 2,467,000 tons in the year ended December 31, 2002. In 2003, demand for newsprint grew by only 1% in Europe and declined by 1% in the United States. The increase in deliveries was due to the increased sales volumes to markets
out-side Europe, where newsprint demand grew more vigorously.



Although deliveries rose, the sales of our Newsprint Division fell due to the 13% lower average prices in Europe during the year ended December 31, 2003 as compared to the year ended December 31, 2002. Price rises in markets outside Europe
had little impact, as newsprint is sold mainly in Europe.



The
capacity utilization rate for newsprint was 90% for the year ended December 31, 2003, as compared to 88% for the year ended December 31, 2002.



Fine and speciality papers. Sales in our Fine and Speciality Papers Division were 2,244 million for the year ended December 31, 2003, a
decrease of 8% from sales of 2,446 million for the year ended December 31, 2002. Our fine and speciality paper deliveries during the year ended December 31, 2003 were 2,879,000 tons, an increase of 4% from 2,774,000 tons during the year ended
December 31, 2002. Demand for fine paper was far from robust throughout 2003. In Europe, demand for uncoated fine paper declined by 2% and increased by only 2% for coated fine paper for the year ended December 31, 2003 as compared with the year
ended December 31, 2002. In China, the strong demand growth, estimated to be around 8-10% annually overall for fine paper, continued. The demand for label papers was rather solid in 2003, but the demand for envelope papers was again subdued compared
to the year 2002. Packaging paper demand fluctuated throughout the year, but strengthened towards the end of 2003.



The 8% decrease in sales for the division resulted from the 10% lower average prices of uncoated fine papers and 11% lower average prices of coated fine
papers in Europe in 2003 as compared to average prices in 2002 In China, prices on average remained similar compared with the previous year. Speciality paper prices declined marginally during 2003 as compared to 2002.



For the year ended December 31, 2003, the capacity utilization rate for our
Fine and Speciality Paper Division was 88%, compared with 89% for the year ended December 31, 2002. Speciality paper operating rates were above 90%, but coated fine paper operating rates continued to be low. The Chinese mill at Changshu operated at
practically maximum capacity.



Converting. Sales in our
Converting Division were 1,370 million for the year ended December 31, 2003, a decrease of 11% from sales of 1,539 million for the year ended December 31, 2002. The decrease in sales was primarily due to the sale of Walki Films in
October 2002. In addition, sales were negatively affected by the subdued demand of siliconised papers, as well as lower average prices for most converted products. The stronger Euro also had a negative impact on sales.



Raflatacs sales were unchanged at 736 million. Organic growth in
North America and stronger positions in the Asia-Pacific region and South Africa compensated for the weaker trend in the European self-adhesive labelstock market.



In 2003, the sales of Loparex decreased by 14% to 334 million for the year ended December 31, 2003 compared with sales
of 389 million for the year ended December 31, 2002. Sales declined as the demand for siliconised papers was lackluster in all the main markets, and fierce competition resulted in lower average prices.



Walki Wisas sales were down by 4% and amounted to 305 million for
the year ended December 31, 2003, as compared with 318 million for the year ended December 31, 2002. Market conditions for industrial wrappings continued to be challenging in Europe, with weak demand growth and stagnant prices.



48



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Wood products. Sales in our Wood Products Division were 1,548 million for the year ended
December 31, 2003, an increase of 4% from sales of 1,487 million for the year ended December 31, 2002. This increase was primarily due to higher production and deliveries. Construction activity grew, albeit modestly in our main markets,
resulting in higher demand for plywood and sawn timber while the demand for specialty plywood was brisk.



Our plywood operations had sales of 553 million for the year ended December 31, 2003, an increase of 3% from the sales of 536 million for the
year ended December 31, 2002. Our plywood production amounted to 936,000 cubic meters during the year ended December 31, 2003, an increase of 3% compared to plywood production of 905,000 cubic meters during the year ended December 31, 2002. Sales
prices remained relatively stable during the year, but the intensified competition from Eastern Europe and South America negatively affected pricing towards the end of the year.



Our sawmilling operations generated sales of 515 million in 2003, an increase of 12% compared with the sales of
459 million for the year ended December 31, 2002. The output of sawn timber during the year ended December 31, 2003 amounted to 2,274,000 cubic meters, an increase of 11% from the sawn timber output of 2,051,000 cubic meters during the year
ended December 31, 2002. Sales were negatively affected by the somewhat lower average prices, caused by the oversupply in the European market.



Our building supplies trade operations had sales of 608 million for the year ended December 31, 2003, a decrease of 1% from the 615 million
the year ended December 31, 2002. Building supplies trading activity was lively in Finland and Ireland, but subdued in Denmark



Other operations. Third-partys sales from our other operations amounted to 512 million for the year ended December 31, 2003, a decrease
of 3% from sales of 525 million for the year ended December 31, 2002.



Operating profit (loss)



General. Our operating profit amounted to 352 million for the year ended December 31, 2003; a decrease of 56% from operating profit of 803 million for the year ended December 31, 2002. Lower paper prices and the stronger
euro were the main reasons for the lower operating profit.



For
the year ended December 31, 2002, we realized income of 14 million related to the capital gain from the sale of Walki Films unit in other operations.



For the year ended December 31, 2003, we incurred costs of 22 million resulting from the shutdown of two machines at the Blandin mill in the United
States, 9 million related to the shutdown of a paper machine at Voikkaa mill in Finland, 19 million resulting from the unrealized MacTac acquisition, 6 million related to the disposal of the operations of Rosenlew and 5
million related to the restructuring of forest operations in Finland. For the year ended December 31, 2002, we incurred costs of 116 million, including 108 million resulting from the shutdown of two machines at the Blandin mill in the
United States and 8 million related to the rebuild of Shotton recycled fiber plant in the UK.



Deliveries increased, but profitability was negatively affected by 7-13% lower average paper prices in Europe. In addition, the on average 20% stronger
Euro versus the U.S. dollar negatively affected profits.



Magazine papers . Operating profit of the Magazine Papers Division amounted to 50 million for the year ended December 31, 2003, a decrease of 72% from operating profit of 177 million for the year ended December 31, 2002.
Operating profit includes charges of 22 million and 108 million in 2003 and 2002, respectively, related to the shut-down of two paper machines at our Blandin mill. The main reasons behind the fall in operating profit were the lower
average European prices and the stronger euro.



Newsprint. We had an operating loss of 8 million for the year ended December 31, 2003 in the Newsprint Division, compared with the operating profit of 121 million for the year ended December 31, 2002. Despite the rise of
our newsprint deliveries and good cost-efficiency, our operating profit was negatively affected by the 13% lower average European newsprint prices.



49



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Fine and speciality papers. Operating profit of the fine and speciality papers division amounted
to 206 million for the year ended December 31, 2003, a decrease of 42% from operating profit of 355 million for the year ended December 31, 2002. Average fine paper prices in Europe declined by 10- 11% which had a significant impact on
operating profit. Lower prices were only partially compensated by the 4% higher deliveries. In addition, the profitability of specialty papers declined somewhat for the year ended December 31, 2003 compared with the year ended December 31, 2002, as
a result of increased competition particularly in packaging papers.



Converting. Operating profit of the Converting Division amounted to 43 million for the year ended December 31, 2003, a decrease of 32% from operating profit of 63 million for the year ended December 31, 2002. Operating
profits at Raflatac improved somewhat due to stronger U.S. demand and the positive effects of rationalization measures. The weak demand and lower prices for siliconised papers negatively affected the operating profit of Loparex during the year ended
December 31, 2003, while profitability of Walki Wisa weakened due to the sluggish industrial wrappings markets in Europe.



Wood products. The Wood Products Division had an operating profit of 21 million for the year ended December 31, 2003, a decrease of 34% from
operating profit of 32 million for the year ended December 31, 2002. As a result of the intensified competition, plywood prices declined and resulted in weakened operating profits. The sawmilling also posted lower operating profit due to the
lower average prices resulting from oversupply. There were little changes in the operating profits of building supplies trade.



Other operations. Operating profit from other operations amounted to 40 million for the year ended December 31, 2003, as compared to
operating profit of 55 million for the year ended December 31, 2002.



Forestry operations in Finland contributed operating profit of 49 million in 2003, as compared to 31 million in 2002.



Energy operations had an operating profit of 96 million in 2003, as compared to 69 million in 2002. We were able
to sell higher volumes of excess energy to outside parties at favorable spot prices.



Financial Items



Our
interest and other finance expenses net were 177 million compared to 270 million during the year ended December 31, 2002 mainly resulting from decreased interest expenses from 307 million to 235 million. The decrease was due
to lower average interest rates and lower net interest-bearing liabilities. Gains of 107 million were booked on exchange differences and changes in fair values, an increase of 82 million from the previous year. In 2003, our net capital
gains on available-for-sale investments, from sale of listed company shares, were  127 million compared to net capital gains of 72 million for the year ended December 31, 2002. Our net interest-bearing liabilities were 4,874
million as of December 31, 2003 decreasing 261 million from 5,135 million at December 31, 2002.



Our share of the results before tax of associated companies, mainly Metsä-Botnia, contributed 29 million in 2003, compared with 80
million in 2002, the decrease being a result of the stronger euro mitigating the positive effect of higher pulp price and higher production costs.



Profit (loss)



We had a profit before tax of 438 million for the year ended December 31, 2003, a decrease of 38% from profit of 710 million during the year
ended December 31, 2002. Income taxes related to activities for the year ended December 31, 2003 amounted to 121 million, a decrease of 43% compared to income taxes related to activities of 212 million during the year ended December 31,
2002. Net profit amounted to 319 million for the year ended December 31, 2003, compared to 500 million for the year ended December 31, 2002. The decrease was primarily due to lower prices and the weaker U.S. dollar.



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Liquidity and Capital Resources



Overview



Our primary source of liquidity comes from our generation of operating cash flow. At December 31, 2004, we had 142 million in cash and cash
equivalents. At December 31, 2004 we also had unused credit facilities amounting to 3.3 million. We believe that our existing cash, cash equivalents and operating cash flow will be sufficient to satisfy our currently anticipated cash
requirements through at least the next 12 months. Refer to Note 2 of our consolidated financial statements for information regarding the reclassification of cash equivalents to available for sale investments for 2003 and 2002.



Our liquidity resources are subject to change as market and general economic
conditions evolve. Increases in liquidity could result from an increase in cash flow from operations or, for example, a divestment of non-core assets. Decreases in liquidity could result from a weaker than expected cash flow from operations caused
by lower demand or weaker prices for our products. In addition, any potential acquisitions in which all or a portion of the consideration would be payable in cash, could have a significant effect on our liquidity resources.



We seek to minimize risks relating to the refinancing of our outstanding debt
by ensuring that our loan portfolio has a balanced maturity schedule and that our loans have sufficiently long maturities. As of December 31, 2004, the average maturity of our outstanding debt was 7.6 years, compared to 8.1 years as of December 31,
2003.



The following table sets out a summary of our main cash
flows in 2002-2004:



|                                                  |  |                         |   |  |       |   |  |        |  
|------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ------ | -
|                                                  |  | Year ended December 31, |  
|                                                  |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                                                  |  | ( in millions)         |  
|Net cash flow from operating activities           |  | 997                     |   |  | 1,258 |   |  | 1,418  |  
|Net cash flow used in investing activities        |  | (466                    | ) |  | (373  | ) |  | (441   | )
|Net cash flow (used in)/from financing activities |  | (710                    | ) |  | (964  | ) |  | (1,032 | )



Cash from Operating Activities



Our net cash flow from operating activities was
997 million for the year ended December 31, 2004 as compared to 1,258 million for the year ended December 31, 2003. The decrease is mainly affected by 179 million arising from termination of the securitization program for trade
receivables. For the year ended December 31, 2002, our net operating cash flow was 1,418 million. Changes in cash flows from operating activities are primarily subject to the amounts of paper delivered and the prices at which the paper is
sold. Our operating cash flow remained good. Our operating profit for the year 2004 included capital gains on disposal of fixed assets of 138 million and our operating profit for the years 2003 and 2002 included capital gains of 19
million and 39 million, respectively. These capital gains are not included in our cash flow from operating activities for these periods. We believe that cash available through operations is adequate to fund our current scope of operations and
our projected capital expenditures.



Cash used in Investment Activities



Our cash flows in company acquisitions, purchases of
other shares and investments in intangible and tangible assets were 672 million 615 million and 612 million for the years ended December 31, 2004, 2003 and 2002 respectively. In 2003 and 2002, our capital expenditures were at a
lower level when we were paying more attention to investment efficiency and focusing on the synergies of the Haindl acquisition of November 2001. After sales of shares and other assets, and change of other long-term investments amounting to
206 million, 242 million and 171 million, our net cash flows in investing activities were 466 million, 373 million and 441 million for the years 2004, 2003 and 2002 respectively. In 2004, the biggest capital
expenditure projects completed were the rebuild at Wisaforest pulp mill in Finland, the rebuild of paper machine 2 at the Rauma mill in Finland and the new sawmill in Pestovo in Russia. In 2003, major capital expenditure items included the
construction of the new paper machine at Changshu mill to be completed in 2005 and the rebuild of Pietarsaari pulp mill completed in 2004. For the year ended December 31, 2002, the main projects were the new recycled fiber line in Shotton and the
modernization of Rauma paper machine 1, completed in 2003. Again, in 2002 the construction of the rebuild of Pietarsaari pulp mill was started.



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Cash used in Financing Activities



Net cash used in financing activities was 710 million for the year ended December 31, 2004, as compared to 964
million and 1,032 million for the years ended December 31, 2003 and December 31, 2002, respectively. Dividend payments of 393 million, 390 million and 388 million, for the financial years of 2003, 2002 and 2001, are included
in cash flow used in financing operations for the years ended December 31, 2004, 2003 and 2002 respectively.



At December 31, 2004, with 4.424 million of long-term, interest-bearing debt, mainly consisting of bond loans, loans from financial institutions and
pension loans, and 917 million of short-term interest-bearing debts totaling to 5.341 million and offset by 724 million interest-bearing receivables, primarily including cash and cash equivalents and available-for-sale investments,
we had a total of 4.617 million of net interest-bearing liabilities. For the third sequential year, our net interest-bearing liabilities decreased to 4.617 million at December 31, 2004 from 4.874 million at December 31, 2003
largely as the result of careful management of capital. As of December 31, 2002 our net interest-bearing liabilities were 5.135 million. Our interest-bearing liabilities amounted to 5,781 million and 6,451 million, and
interest-bearing receivables 907 million and 1,316 million as of December 31, 2003 and 2002, respectively. The gearing ratio, i.e., net interest-bearing liabilities divided by shareholders equity, was 61%, 69% and 71% at December
31, 2004, 2003 and 2002 respectively.



To diversify our funding
sources and to secure a balanced maturity schedule and sufficiently long maturities we have launched a number of issues in the capital markets. The average loan maturity at December 31, 2004 was 7.6 years.



In 2004, due to the net cash of 997 million provided by operating
activities with limited net cash of 466 million used in investing activities, we did not issue any new long-term loans.



In January 2003, we launched a U.S.$250 million bond issue with a maturity of 15 years.



In December 2002, we announced that we would redeem all outstanding bonds from the convertible bond issue of 161
million (FIM 960 million), launched in 1994. The redemption date was February 28, 2003. A total of 3,627,815.16 principal amount of convertible bonds were redeemed and the remaining approximately 36 million in principal amount of
convertible bonds were converted into 1,673,490 of our shares.



In November 2002, we launched a U.S.$500 million bond issue with a maturity of 12 years.



In January 2002, we launched on the international bond market a 600 million bond issue with a maturity of ten years and a £250 million bond
issue with a maturity of 15 years.



We have two major committed
revolving credit facilities, which are part of our liquidity resources. One is for 1.5 billion, which matures in 2010, signed in March 2005. The other is for 1.2 billion and matures in 2008. No drawings were outstanding under our
committed credit facilities at December 31, 2004.



Since 1998,
we have repurchased an aggregate of, after adjusted by the 2003 bonus issue, 78.1 million of our own shares. Such an amount of shares would equal approximately 14.9% of our present share capital. Of the total number of shares repurchased, 76.6
million have been cancelled and 1.5 million shares have been used to finance acquisitions. At the annual general meeting of shareholders on March 31, 2005, the shareholders authorized for a period of one year from the annual general meeting of
shareholders the repurchase of up to 25,000,000 shares. See Item 10. Additional InformationAuthorized Share Capital.



In May 2003, Standard & Poors lowered our credit rating from BBB+ to BBB. The downgrading was due to the weakening of the basic ratios the
rating agencies use in their evaluations. The ratios are affected by the main driving forces of the industry, which are prices for our products and volumes for our products delivered. The credit ratings for our bonds at the year-end were BBB
(S&Pstable) and Baa1 (Moodysnegative). In March 2004, Moodys changed their outlook for us to negative from stable. Any future downgrades may increase the cost of capital on any new debt we may incur.



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Off-Balance Sheet Arrangements



There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.



Contractual Obligations and Other Commitments



Our principal contractual obligations relate to outstanding debt, leasing commitments and other commercial commitments. The
following table sets forth our obligations and commitments to make future payments under contracts and contingent commitments at December 31, 2004:



|                                             |  |                                |  |                 |  |           |  |           |  |                 
|-------------------------------------------- |  | ------------------------------ |  | --------------- |  | --------- |  | --------- |  | ----------------
|                                             |  | Anticipated Payments by Period
|                                             |  | Total                          |  | Less than1 year |  | 1-3 years |  | 3-5 years |  | More than5 years
|                                             |  | ( in millions)               
|Contractual Obligations                      |  |                                |  |                 |  |           |  |           |  |                 
|Long-term debt                               |  | 6,487                          |  | 729             |  | 1,225     |  | 1,123     |  | 3,410           
|Operating lease commitments                  |  | 105                            |  | 23              |  | 36        |  | 22        |  | 24              
|Capital lease obligations including interest |  | 446                            |  | 43              |  | 129       |  | 171       |  | 103             
|Pension obligations                          |  | 566                            |  | 54              |  | 103       |  | 111       |  | 298             
|Purchase commitments                         |  | 1,565                          |  | 832             |  | 490       |  | 214       |  | 29              
|                                             |  |                                |  |                 |  |           |  |           |  |                 
|Total                                        |  | 9,169                          |  | 1,681           |  | 1,983     |  | 1,641     |  | 3,864           
|                                             |  |                                |  |                 |  |           |  |           |  |                 



The figures included
in Purchase commitments do not include our obligations to pay certain fixed and variable costs of Pohjolan Voima and Kemijoki Oy in connection with their supply of power to UPM. These rights and obligations arise as a result of our shareholdings in
each of the companies and are enforceable for so long as we continue to own such shares. The fixed costs are determined on an annual basis pursuant to the terms of the respective shareholders agreement for each of these companies, while the
variable costs will depend on the amount of power procured and consumed by UPM during the year. For a further discussion of Pohjolan Voima and Kemijoki Oy, see Item 4. Information on the CompanyBusiness OverviewOther
OperationsPohjolan Voima and Item 7. Major Shareholders and Related Party TransactionsRelated Party TransactionsEnergy.



Research and Development



Our research work helps the company and customers to succeed by providing better quality products more cost-effectively.



Our research and development work is divided between our own product and
process development and work conducted with universities, research institutes and suppliers of materials. In 2004, the company spent approximately 47 million on research and development projects, which corresponds to 0.5% of sales. Important
development work is also carried out in conjunction with production line modernizations.



Collaboration with Universities and Research Institutes



We own 39% of the Finnish Pulp and Paper Research Institute, which is owned collectively by the pulp and paper industry in Finland. Other research
institutes with which we work include Papiertechnische Stiftung (PTS) in Germany, Centre Technique du Papier (CTP) in France, and Paprican (Paper Research Institute) Canada. We have also been involved in many national pulp and paper technology
programs initiated by the National Technology Agency of Finland (TEKES).



The company also works closely together with universities and every year sponsors numerous postgraduate research projects connected with the companys products and manufacturing technologies.



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Product and Process Development



Our own research projects are aimed at developing the companys products and manufacturing processes.



Development work conducted by the Paper Divisions is aimed at providing
customers with tailor-made papers that are competitive and have the right quality for each end use. Improving cost-effectiveness means reducing raw material costs and energy consumption. Work is constantly being done to expand the range of fiber raw
materials and to manage energy consumption more efficiently.



The manufacture of publication papers has been made more cost-effective by making increasing use of recycled fiber and of minerals costing less than wood fiber, and by using less of the more expensive chemical pulp. In fine paper
manufacture, the proportions of short-fiber birch pulp and minerals have been increased.



Process research by the paper divisions is aimed at achieving more consistent quality and at reducing specific consumptions and wastes. Testing and introduction of new technical solutions together with machinery and
equipment manufacturers continued. This has led to better product quality and more efficient production.



The range of fiber raw materials has been extended in order to support growth, particularly in the fine papers business. Work is also being done to modify
the properties of fibers from different wood raw materials for optimum end-use suitability.



Our own softwood pulps have been developed to provide even better raw material for the manufacture of magazine papers. The properties of the fibers present in wood from forest thinning have been used to develop a new
type of pulp that is particularly suitable for the production of speciality papers.



In Converting, Raflatac has upgraded its filmic products using new adhesives and top coats. At the end of the year, Raflatac also conducted the first successful commercial tests with freshness indicator labels for
food packages.



UPM Rafsec has been playing an active role in
standardization work for the air interface protocol for UHF frequency, which is fundamental to the further development of this technology. UPM Rafsec has also made commercially available its own UHF tags, which are now being used by several major
retail companies.



Development work conducted by Loparex has
been aimed at direct customer applications notably in the USA. New applications for solventless coating have been developed at all factories. The Lohja factory has developed new products that will strengthen its competitiveness.



The focus of development by Walki Wisa has been on new composite materials
for the manufacture of packaging and insulation materials.



Product development work by the Wood Products Division mainly concerned new coating techniques. Good examples of these are the range of WISA-Multi products designed for the transport vehicle and building industries, and WISA-Form Elephant,
a product specially designed for concrete formwork. Other focal points in product development included more effective management of wood raw material properties with the aim of responding better to the demands imposed by end-product applications.



New Ventures



The New
Ventures unit develops products and processes based largely on new technology, and thus seeks to support our future business operations. Special attention is being given to coating, wood and fiber-based materials, waste utilization, and new
technologies and products for reel-to-reel production. Ideas and innovations are sought both internally and from outside partners.



Capital Expenditures



We expect
our capital expenditure, excluding acquisitions in 2005, to be somewhat higher than in 2004, but remain below annual depreciation. We have eight main projects under construction during 2005, including the construction of the new Changshu



54



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paper machine to be completed in June 2005, a new power plant in Shotton, the rebuild of paper machine 8 at Tervasaari, a new coater line at Raflatac
Fletcher mill, a new power plant in Rauma, the rebuild of paper machine 3 at Nordland, the rebuild of paper machine 1 at Docelles, and a new power plant at our Chapelle Darblay mill. The new Changshu paper machine will substantially increase the
mills production capacity for fine paper to approximately 800,000 tons per year. In the first stage, the mills coating capacity will increase to approximately 200,000 tons per year. The total cost of investments in the Changshu paper
machine is expected to amount to approximately 390 million.



During the year ended December 31, 2004, our gross capital expenditure amounted to 686 million, a decrease of 34 million from our capital expenditure of 720 million during the year ended December 31, 2003. During the year
ended December 31, 2002, our gross capital expenditure amounted to 620 million. Capital expenditures comprised primarily investments in plants and machinery. Acquisitions and purchases of shares accounted for 41 million in 2004, as
compared to 17 million in 2003 and 52 million in 2002. Maintenance and replacement investments in existing production machinery totaled 253 million in 2004 as compared to 278 million in 2003 and 363 million in 2002. In
addition to this, 392 million was spent in 2004 on changes in production and on new production units and production lines, as compared to 425 million in 2003 and 198 million in 2002.



Sales of shares and other non-current assets, comprising primarily of our
disposal of the Brooks Group, totaled 311 million in 2004. In 2003, the proceeds realized from the sale of shares and fixed assets were 255 million. In 2002, the proceeds realized from the sale of shares and fixed assets were 212
million. The proceeds from asset sales in 2003 and 2002 related principally to the disposition of shares in Nokia.



Inflation



Inflation in Finland
as measured by the consumer price index was 0.2% for the year 2004, 0.9% for the year 2003 and 1.6% for the year 2002. Inflation in Finland did not have a significant impact on our operating results. However, a portion of our operations, sales and
production is performed in countries with rates of inflation higher or lower than that of Finland. Changes in rates of exchange may or may not reflect differences in rates of inflation. It is therefore not possible to quantify the individual or
combined effects of these factors on reported income.



|Item 6. | Directors, Senior Management and Employees
|------- | ------------------------------------------



Pursuant to the provisions of the Companies Act and our articles of association, the control and management of the Company is divided between the
shareholders (through actions taken at general meetings of shareholders), the Board of Directors and the President and Chief Executive Officer. In addition, we have an Executive Team, which assists the President and Chief Executive Officer in the
daily management of the Company.



Our Board of Directors is
responsible for the management of the Company and for the proper organization of our activities. The Board of Directors establishes the principles of our strategy, organization, accounting and financial control and appoints the President and Chief
Executive Officer, who acts in accordance with the orders and instructions of our Board of Directors. The President and Chief Executive Officer, assisted by our Executive Team, is responsible for the day-to-day management of our affairs. Measures
that are not within the ordinary course of our business may be taken by the President and Chief Executive Officer only if approved by our Board of Directors, unless the time required to obtain the approval of our Board of Directors would cause us to
suffer a substantial disadvantage. In the latter case, our Board of Directors must be informed as soon as practicable of the measures which have been taken. The business address for each of the members of our Board of Directors and Executive Team is
Eteläesplanadi 2, P.O. Box 380, 00101 Helsinki.



Board of Directors



Pursuant to
our articles of association, our Board of Directors consists of at least five and no more than 12 members at any time. The Board of Directors currently consists of ten members, each of whom has been elected by the shareholders in an annual general
meeting of shareholders for a period ending with the following annual general meeting of shareholders. Members of our Board of Directors may be appointed, or removed, only by a resolution of shareholders in a general meeting of shareholders.
Pursuant to our articles of association, the mandatory age for retirement of members of our Board of Directors is 70 years.



55



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Following the annual general meeting of our shareholders held on March 31, 2005, the members of our Board
of Directors are as follows:



|                          |  |                                                                                                                                                                                                                                                                                                                                                  
|------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Vesa Vainio, b. 1942      |  | Board member since 1996, Vice Chairman in 1997, Chairman since 2001.                                                                                                                                                                                                                                                                             
|                          | 
|                          |  | L.L.M.                                                                                                                                                                                                                                                                                                                                           
|                          | 
|                          |  | Member of the Board of Nokia Corporation.                                                                                                                                                                                                                                                                                                        
|                          | 
|                          |  | Owns 10,161 of our shares.                                                                                                                                                                                                                                                                                                                       
|                          | 
|Berndt Brunow, b. 1950    |  | Board member since 2002.                                                                                                                                                                                                                                                                                                                         
|                          | 
|                          |  | B.Sc. (Econ.).                                                                                                                                                                                                                                                                                                                                   
|                          | 
|                          |  | President & CEO of Oy Karl Fazer Ab. Leading posts in UPM-Kymmene Corporation, 1996-1999, and Finnpap. 1988-1995.                                                                                                                                                                                                                                
|                          | 
|                          |  | Chairman of the Board of Sanitec Corporation.                                                                                                                                                                                                                                                                                                    
|                          | 
|                          |  | Member of the boards of Lemminkäinen Oyj, Oy Nautor Ab and Cloetta Fazer AB (publ.)                                                                                                                                                                                                                                                              
|                          | 
|                          |  | Owns 261,924 of our shares.                                                                                                                                                                                                                                                                                                                      
|                          | 
|Jorma Ollila, b. 1950     |  | Board member since 1997, Vice Chairman since 2004.                                                                                                                                                                                                                                                                                               
|                          | 
|                          |  | M.Sc. (Eng.), M.Sc. (Pol.Sci.), M.Sc. (Econ.), Ph.D. (Pol.Sc.) h.c. and D.Sc (Tech.) h.c.                                                                                                                                                                                                                                                        
|                          | 
|                          |  | Chairman and Chief Executive Officer of Nokia Corporation. Member of the Boards of Directors of Ford Motor Company and Otava Books and Magazines Group Ltd.                                                                                                                                                                                      
|                          | 
|                          |  | Owns 31,504 of our shares.                                                                                                                                                                                                                                                                                                                       
|                          | 
|Martti Ahtisaari, b. 1937 |  | Board member since 2000.                                                                                                                                                                                                                                                                                                                         
|                          | 
|                          |  | President of the Republic of Finland, 1994-2000. Teacher Training College, University of Oulu. Granted honorary doctorates by several universities.                                                                                                                                                                                              
|                          | 
|                          |  | Chairman of the Board of Crisis Management Initiative.                                                                                                                                                                                                                                                                                           
|                          | 
|                          |  | Positions in several international organizations and foundations, including Co-Chairman of the Board of the EastWest Institute.                                                                                                                                                                                                                  
|                          | 
|                          |  | Held several posts in Finlands Ministry for Foreign Affairs and the United Nations, including Finlands Ambassador to Tanzania, UN Commissioner for Namibia, Under-Secretary General
for Administration and Management (UN) and Secretary of State at the Ministry for Foreign Affairs. Member of the Board of Directors of Elcoteq Network Oyj.
|                          | 
|                          |  | Owns 5,712 of our shares.                                                                                                                                                                                                                                                                                                                        



56



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|                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Michael C. Bottenheim, b. 1947 |  | Board member since 2001.                                                                                                                                                                                                                                                                                                                                                                                                   
|                               | 
|                               |  | Master of Law, M.B.A.                                                                                                                                                                                                                                                                                                                                                                                                      
|                               | 
|                               |  | Advisory Board of Montrose Associates, London, since 2003. In 1972 joined Pierson, Heldring & Pierson, a private Dutch Bank as a corporate financier; left in 1976 to join Citicorps
European Investment Bank in London. From 1985 until 2000, served as a Director of Lazard Brothers & Co. Limited specializing in cross-border mergers and acquisitions, and was appointed in 1992 to the managing directors
committee.
|                               | 
|                               |  | Owns 5,712 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                  
|                               | 
|Karl Grotenfelt, b. 1944       |  | Board member since March 2004.                                                                                                                                                                                                                                                                                                                                                                                             
|                               | 
|                               |  | Masters Degree in Law.                                                                                                                                                                                                                                                                                                                                                                                                    
|                               | 
|                               |  | Chairman of the Board of Directors of Maximedia Oy, 1975-2001.                                                                                                                                                                                                                                                                                                                                                             
|                               | 
|                               |  | Chairman of the Board of Directors of Famigro Oy since 2003.                                                                                                                                                                                                                                                                                                                                                               
|                               | 
|                               |  | Lawyer, General Counsel, Administrative Director of Paper Industry and Member of the Executive Board with responsibility for the Paper Industry at A. Ahlström Oy during 1970-86. Chairman
of the Board of Directors of Maximedia Oy during 1975-2001.                                                                                                                                                                     
|                               | 
|                               |  | Member of the Board of Ahlstöm Capital Oy.                                                                                                                                                                                                                                                                                                                                                                                 
|                               | 
|                               |  | Owns 8,689 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                  
|                               | 
|Georg Holzhey, b. 1939         |  | Board member since 2003.                                                                                                                                                                                                                                                                                                                                                                                                   
|                               | 
|                               |  | Dr. occ.-publ.                                                                                                                                                                                                                                                                                                                                                                                                             
|                               | 
|                               |  | Executive Vice President and co-owner of G. Haindlsche Papierfabriken KgaA 1970-2001. Executive Vice President of UPM-Kymmene Corporation in 2002.                                                                                                                                                                                                                                                                        
|                               | 
|                               |  | Owns 646,468 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                
|                               | 
|Wendy Evrard Lane, b. 1951     |  | Board member since March 2005.                                                                                                                                                                                                                                                                                                                                                                                             
|                               | 
|                               |  | B.A. Mathematics & French.                                                                                                                                                                                                                                                                                                                                                                                                 
|                               | 
|                               |  | M.B.A. Finance.                                                                                                                                                                                                                                                                                                                                                                                                            
|                               | 
|                               |  | Chairman, Lane Holdings, a private equity investment firm (1992 to present). Director of Laboratory Corporation of America and Willis Holdings, Ltd. Trustee of the U.S. Ski & Snowboard
Team Foundation. Partner, officer and other positions at Donaldson, Lufkin & Jenrette Securities Corp. 1981-1992; and Goldman, Sachs & Co. 1977-1980.                                                                             
|                               | 
|                               |  | Owns none of our shares.                                                                                                                                                                                                                                                                                                                                                                                                   
|                               | 
|Françoise Sampermans, b. 1947  |  | Board member since March 2004.                                                                                                                                                                                                                                                                                                                                                                                             
|                               | 
|                               |  | B. Arts & Psych.                                                                                                                                                                                                                                                                                                                                                                                                           



57



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|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                           |  | Vice President of NMPP, a French distribution chain formed by the Hachette Publishing Consultant (France Soir, IT Press) Group and five media cooperatives. Vice President of business unit
Magazine and Multimedia Distribution in France at NMPP, 2000-2003. Executive positions at publishers (LExpress, le Point, Marianne, Le Nouvel Economiste), the printer Quebecor Europe and Alcatel-Alstom Group during 1984-2000.
|                           | 
|                           |  | Owns 2,689 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                     
|                           | 
|Gustaf Serlachius, b. 1935 |  | Board member since 1996.                                                                                                                                                                                                                                                                                                                                                                                                      
|                           | 
|                           |  | B.B.A.                                                                                                                                                                                                                                                                                                                                                                                                                        
|                           | 
|                           |  | Chairman of the Board of the Gösta Serlachius Fine Arts Foundation. Chairman of the Board of R. Erik Serlachius Foundation. Managing Director of G.A. Serlachius Oy, 1969-1986. Chairman
of the Board of Directors of Metsä-Serla Corporation, 1987-1993. Member of the Board of Directors of Oy Metsä-Botnia Ab, 1973-1990, and member of the Board of Directors of Repola Ltd., 1990-1995.                                  
|                           | 
|                           |  | Owns 1,772,782 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                 



The number of shares
held by the members of our Board of Directors as stated above are as of April 30, 2005. At the annual general meetings of shareholders on March 25, 1998 and March 19, 2002, the shareholders resolved that non-executive members of our Board of
Directors would not be entitled to receive stock options of the Company.



Executive Team



At the beginning
of 2004, UPM restructured the composition and responsibilities of the Executive Team in an effort to facilitate fast, customer orientated decision making. From the beginning of 2004, Mr. Jussi Pesonen assumed operative responsibility for all of our
divisions. Mr. Pesonen became President and CEO on January 29, 2004, following the resignation of our previous President and CEO, Mr. Juha Niemelä.



Currently, the members of our Executive Team are as follows:



|                       |  |                                                                                                                                                                                                                                                                                                                                                           
|---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Jussi Pesonen, b. 1960 |  | President and Chief Executive Officer of UPM-Kymmene Corporation since January 2004.                                                                                                                                                                                                                                                                      
|                       | 
|                       |  | M.Sc. (Eng.).                                                                                                                                                                                                                                                                                                                                             
|                       | 
|                       |  | Joined the company in 1987 and occupied several posts including Production Manager at Jämsänkoski mill, Production Unit Director at Kajaani, Kaukas and Shotton mills and Vice
President of Newsprint Product Group. COO of the paper divisions 2001-2003. From the beginning of 2004 Senior Executive Vice President and deputy to the President and CEO.
|                       | 
|                       |  | Owns 20,014 of our shares and holds 50,000 Class D stock options and 70,000 Class E stock options.                                                                                                                                                                                                                                                        
|                       | 
|Harald Finne, b. 1952  |  | President, Wood Products Division, since January 2004.                                                                                                                                                                                                                                                                                                    
|                       | 
|                       |  | M.Sc. (Psychology), MBA.                                                                                                                                                                                                                                                                                                                                  



58



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|                          |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                          |  | Served with Oy Wilh. Schauman Ab, Pietarsaari, as Human Resources Manager, 1976-1985. General Manager of Wasaplast, 1986-1988. Vice President, Administration, of Wisaforest Oy Ab, 1988-1994.
Managing Director of Oy Wisapak Ab, 1994-1996. UPM-Kymmene Corporation Vice President, Human Resources, 1996-2001, and Executive Vice President, Human Resources and Information Technology, 2002-2003.       
|                          | 
|                          |  | Owns 476 of our shares and holds 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                                                               
|                          | 
|Pirkko Harrela, b. 1960   |  | Executive Vice President, Corporate Communications, since January 2004.                                                                                                                                                                                                                                                                                                                                      
|                          | 
|                          |  | M.A.                                                                                                                                                                                                                                                                                                                                                                                                         
|                          | 
|                          |  | Several posts in Finnpap, 1985-1996. Several management posts in Communications for Printing Papers Division, 1996-2002. Vice President, Communications, 2003.                                                                                                                                                                                                                                               
|                          | 
|                          |  | Owns 4,270 of our shares and holds 13,200 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                            
|                          | 
|Pauli Hänninen, b. 1948   |  | Executive Vice President, Business Development, since January 2004.                                                                                                                                                                                                                                                                                                                                          
|                          | 
|                          |  | M.Sc. (Eng.), Tech. Licentiate.                                                                                                                                                                                                                                                                                                                                                                              
|                          | 
|                          |  | In A. Ahlstrom in various production and line management positions, 1974-1989, the last position as Vice President and General Manager of the Kauttua paper mill, 1986-1989. Director of
Kaipola LWC mill, 1989-1993. Vice President and General Manager of Kajaani paper mill, 1993-2000. Vice President, Product Group Uncoated Papers, 2000-2001. Senior Vice President, Fine Paper Operations, 2001-2003.
|                          | 
|                          |  | Holds 60 of our shares and holds 22,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                              
|                          | 
|Matti Lievonen, b. 1958   |  | President, Fine and Speciality Papers Division, since January 2004.                                                                                                                                                                                                                                                                                                                                          
|                          | 
|                          |  | B.Sc. (Eng.), M.B.A.                                                                                                                                                                                                                                                                                                                                                                                         
|                          | 
|                          |  | Several posts in United Paper Mills Ltd. since 1986, including Project Manager, Technical Manager and Director for TD production unit at Kaipola mill, 1994  1996. Director of
Chapelle Darblay S.A. production unit in France, 1997-2001. Executive Vice President, Business and Technology Optimization, 2002-2003.                                                                                       
|                          | 
|                          |  | Holds 33,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                                                         
|                          | 
|Matti J. Lindahl, b. 1946 |  | President, Speciality Coatings Business, since January 2005.                                                                                                                                                                                                                                                                                                                                                 
|                          | 
|                          |  | B.Sc. (Econ.).                                                                                                                                                                                                                                                                                                                                                                                               



59



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|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                            |  | Member of the Executive Team since October 2002. Joined Finnboard in 1972 and held several management posts in sales and marketing. Managing Director of Finnboard (UK) Ltd. 1982-1990.
President of Finnboard 1990-1992 and of Wisaforest Oy Ab 1992-1993. CEO of Nordland Papier AG 1994-2002. President, Fine Paper Division, 1997-2001. Executive Vice President, Haindl integration 2002. President, Converting Division,
2002-2004.         
|                            | 
|                            |  | Holds 33,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                                                                                              
|                            | 
|Jyrki Ovaska, b. 1958       |  | President, Magazine Papers Division, since January 2004.                                                                                                                                                                                                                                                                                                                                                                                          
|                            | 
|                            |  | M.Sc. (Eng.).                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                            | 
|                            |  | Held several posts in United Paper Mills Ltd., Jämsänkoski mill, in production, customer service and business management, 1984-1995. Vice President, Business Development, Printing
Papers, 1996-1998. Vice President, LWC Product Group, 1998-2000. Senior Vice President, Business Development and Support Functions, Publication Papers, 2000-2001. President, Fine & Speciality Papers Division, 2002-2003.                                   
|                            | 
|                            |  | Owns 3,300 of our shares and holds 33,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                                                                 
|                            | 
|Heikki Pikkarainen, b. 1963 |  | President, Labelstock Business, since January 2005                                                                                                                                                                                                                                                                                                                                                                                                
|                            | 
|                            |  | M.Sc. (For.) MBA.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                            | 
|                            |  | Corporate Analyst with Industrialization Fund of Finland, 1988-1989. Various tasks in M&A projects, business development and corporate analysis with Jaakko Pöyry Consulting,
1989-1998. Director, Business Development and Vice President of CHP business in Power and Heat Division, Fortum Oyj, 1998-2000. Since 2000 with UPM in several posts of strategic development, most recently Vice President, Strategic Development during
2003-2004.
|                            | 
|                            |  | Owns 7,400 of our shares and holds 7,800 Class D stock options and 12,200 Class E stock options.                                                                                                                                                                                                                                                                                                                                                  
|                            | 
|Heikki Sara, b. 1946        |  | Executive Vice President, Strategy, since January 2002.                                                                                                                                                                                                                                                                                                                                                                                           
|                            | 
|                            |  | D.Tech.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                            | 
|                            |  | Joined United Paper Mills in 1976 holding several posts including Development Manager, Mill Director and Vice President for Jämsänkoski business unit. Member of the Executive Board
of United Paper Mills, 1993-1995. UPM  Kymmene Corporation Executive Vice President, Resources, 1996-2001.                                                                                                                                                  
|                            | 
|                            |  | Owns 10,800 of our shares and holds 33,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                                                                
|                            | 
|Riitta Savonlahti, b. 1964  |  | Executive Vice President, Human Resources since May 2004.                                                                                                                                                                                                                                                                                                                                                                                         
|                            | 
|                            |  | M. Sc. (Econ.).                                                                                                                                                                                                                                                                                                                                                                                                                                   



60



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|                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                          |  | Held HR Specialist posts with ABB 1990-1994. Human Resources Manager with Nokia Mobile Phones, Salo Operations 1995-2000. Senior Vice President, Human Resources with Raisio Group 2000-2001.
Senior Vice President, Human Resources with Elcoteq Network Corporation 2001-2004.                                                                                                                                                                                                                                                       
|                          | 
|                          |  | Holds 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                          | 
|Hans Sohlström, b. 1964   |  | Executive Vice President, Marketing, since March 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                          | 
|                          |  | M.Sc. (Tech.), M.Sc. (Econ.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                          | 
|                          |  | Various tasks in business control and development, procurement, planning, production and maintenance at Oy Wilh. Schauman Ab, Nordland Papier GmbH and Kymmene Oy, 1984-1989. Marketing
Assistant, Finnpap, 1989-1990. Marketing Manager, Stracel S.A., 1990-1994. Mill Director, Jämsänkoski MFC and SC mills, 1994-1998. Management posts in sales and marketing, Publication Papers, 1998-2002. Senior Vice President Sales &
Marketing, Magazine Paper Division, 2002-2004.                                                        
|                          | 
|                          |  | Owns 1,492 of our shares and holds 26,400 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                          | 
|Kari Toikka, b. 1950      |  | Executive Vice President and CFO, since January 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                          | 
|                          |  | M.Sc. (Econ.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                          | 
|                          |  | Several posts in United Paper Mills Ltd. from 1976. Vice President, Corporate Planning, for Repola Ltd., 1990-1995, and member of the Executive Board, 1994-1995. UPM-Kymmene Corporation Vice
President, Investor Relations, 1996-1998, and Senior Vice President, Investor Relations and Administration, 1998-2001.                                                                                                                                                                                                                  
|                          | 
|                          |  | Owns 10,156 of our shares and holds 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                          | 
|Markku Tynkkynen, b. 1952 |  | Executive Vice President, Resources, since January 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                          | 
|                          |  | M.Sc. (Paper Eng.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                          | 
|                          |  | Employed by A. Ahlström, 1980-1982, as Production Engineer. Joined UPM in 1982 having several management posts in production, business development, sales and business management. Paper
mill director of Stracel S.A., 1990-1993. General Manager and Vice President of Jämsänkoski profit unit, 1994-1998. Vice President of SC Product Group, 1998-2000. Senior Vice President, Publication Papers Division, with responsibility for
product groups, technology and mills, 2000-2001. President, Magazine Paper Division, 2002-2003.
|                          | 
|                          |  | Owns 3,600 of our shares and holds 33,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                          | 
|Hartmut Wurster, b. 1955  |  | President, Newsprint Division, since January 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                          | 
|                          |  | D.Tech.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



61



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| |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Several posts with Hamburger AG and Brigl & Bergmeister in Austria, 1982-1987, including Head of Technology Department and Production Manager. Joined Haindl Papier GmbH & Co. KG in
1987. Head of Technology Department at Augsburg mill, 1987-1989. Mill Director, Augsburg, 1989-1996, and member of the Executive Board responsible for the Magazine Paper Division, 1996-2001.
| | 
| |  | Holds 33,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                               



The number of shares
and stock options held by the members of our Executive Team as stated above are as of April 30, 2005. The Class A and Class B stock options were issued pursuant to the management incentive program approved by the annual general meeting of our
shareholders in 1998 and the Class D stock options and Class E stock options were issued pursuant to a management incentive program approved by the annual general meeting of our shareholders in 2002. Each of these stock options is exercisable for
two of our shares. On March 31, 2005, our annual general shareholders meeting approved a new option program.



Compensation of Directors and Officers



For the year ended December 31, 2004, the aggregate remuneration paid to the members of our Board of Directors as a group (9 persons) was 918,000 of which 356,000 was paid in the form of UPM shares. For this same period, the
aggregate remuneration, including benefits in kind, paid to the members of our Executive Team as a group (13 persons) was approximately 4.6 million, 8% of which was paid in the form of bonuses pursuant to the decision of our Board of Directors
as proposed by the Human Resources Committee of our Board of Directors based on the performance of the Company. Such compensation, in the case of executive officers who are members of our Executive Team, was primarily in the form of salary and
bonuses and, in the case of non-executive members of our Board of Directors, in the form of directors fees. Under our profit-sharing and incentive scheme for top management, an amount equivalent of up to twelve months salary may be paid
to the Executive Team members as profit-sharing based on their overall performance.



In its meeting on January 29, 2004, our Board of Directors accepted the resignation of Juha Niemelä from the position of President and CEO. In the same meeting the Board appointed Mr. Jussi Pesonen, the Senior
Executive Vice President and COO, as the new President and CEO of the Company. The combined value of Mr. Pesonens salary, including benefits in kind in the form of housing, car and telephone benefits and other remuneration in 2004 was
665,000.



In addition to salary and bonuses, members of
our Executive Team are eligible to participate in stock option plans, the terms of which are described in Share Ownership.



Pursuant to an early retirement plan agreed with the company, the retirement age for our CEO is 60 years. Other members of our Executive Team are also
covered by early retirement plans in their service contracts, which provide for the possibility of early retirement at ages varying from 60 to 63. The costs of these early retirement plans or other supplements to the mandatory pension cover are
generally covered by voluntary pension insurance. In 2004, the total amount of pension expenses relating to the pension arrangements of the members of the Executive Team was 1.2 million.



Members of our Executive Team have negotiated certain benefits upon the
termination of their service contracts prior to the stated expiration date of such service contracts. If UPM-Kymmene Corporation gives notice of termination to Jussi Pesonen, our President and CEO, a severance compensation of 24 months fixed
salary will be paid, in addition to the six months salary required to be paid during the notice period for his termination. For other members of our Executive Team, the period for additional severance compensation is 12 months in addition to
the six months salary for the notice period.



If there is
a change of control in UPM-Kymmene Corporation (as defined in the Key Personnel Stock Options Terms and Conditions, authorized by the annual general shareholders meeting of March 19, 2002), each member of our Executive Team may terminate such
executives service contracts within one month or, in the case of Jussi Pesonen, within three months, of the closing of the trigger event for the change of control and receive compensation equivalent to such executives 24 months
fixed salary.



Members of our Executive Team have customary
benefits in conformity with the Companys practice.



62



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Board Practices



Members of our
Board of Directors are elected for a term of one year that begins at the end of the annual general meeting of shareholders at which they are elected and terminates at the end of the next annual general meeting of shareholders. Members of our Board
of Directors may be elected or removed only by a resolution of shareholders in a general meeting of shareholders and there are no benefits provided upon termination of their service as Board members. For the year during which a specific member was
elected to our Board of Directors, see the individual biographies of the members of our Board of Directors under Board of Directors above.



Our Board of Directors has elected, from among its independent members, an Audit Committee comprising Michael C. Bottenheim as Chairman and Martti
Ahtisaari and Wendy E. Lane as members. The Committees duties include scrutinizing the contents of our accounts and the Companys interim reviews, our internal control systems and audit. At its meetings, the Committee discusses matters
with our internal and external auditors, President and Chief Executive Officer, Chief Financial Officer and other executives as appropriate. Matters pertaining to the main organization structure and to the nomination of our Executive Team, salaries,
fees and other remuneration paid to the members of our Executive Team are handled by the Human Resources Committee, which comprises Berndt Brunow as Chairman and Francoise Sanpermans and Georg Holzhey as members. Final decisions on proposals made by
the Human Resources Committee concerning our Executive Team are made by our Board of Directors. Matters pertaining to the membership of our Board of Directors and its Committees are handled by the Nomination Committee, which comprises Karl
Grotenfelt as Chairman, Jorma Ollila and Berndt Brunow as members. Final decisions on proposals made by the Nomination Committee concerning our Board of Directors are made by the shareholders at the annual general meeting of shareholders. Meetings
of the committees may be attended by all members of our Board of Directors. There are no conflicts or potential conflicts of interest between any duties of the Company and our Directors and their private interests.



Home Country Practices



Under the
New York Stock Exchanges corporate governance listing standards, listed foreign private issuers, like UPM, must disclose any significant ways in which their corporate governance practices differ from those followed by U.S. domestic companies
under the NYSE listings standards. There are no significant differences in the corporate governance practices followed by UPM as compared to those followed by U.S. domestic companies under the NYSE listings standards, except that UPMs Human
Resources Committee (which functions as UPMs compensation committee) contains one non-independent director, Georg Holzhey. Under the Finnish law, the Human Resources Committee is not required to be composed entirely of independent directors.
UPMs corporate governance practices also comply with the Corporate Governance Recommendation for Listed Companies approved by the Helsinki Stock Exchange in December 2003.



Employees



Our human resources
policy is based on clear areas of responsibility with defined targets, regular appraisal discussions, a continuous training process as well as feedback and rewards. As of December 31, 2004, we employed 33,433 individuals of whom 18,720, or 56%, were
employed in Finland.



Our human resources policy is implemented
by local units, where the practices can be developed using regional synergies and local strengths. We have implemented a profit based bonus plan to provide incentives for all employees and to help build a corporate culture with increased emphasis on
profitability. Group employees also participate in various other incentive programs based on their productivity and other factors. We are extending our incentive schemes ever more widely throughout our divisions and business units. In most cases,
earnings comprise a fixed basic salary, performance-related pay and payments under our profit bonus scheme. Payments under the latter for the year 2004 totaled 9 million. As of January 1, 2005 a new incentive scheme for salaried employees is
applied. It combines performance related and profit based elements into one incentive. In addition, we conduct employee opinion surveys to study working conditions, working morale and employee satisfaction. Special importance is given to appraisal
discussions between employees and their superiors and to remuneration and recruitment policies. For this purpose, we have developed an index to be used to study the working community in relation to factors such as expertise, qualifications,
motivation, teamwork and the work of superiors.



63



---

A large number of our employees belong to trade unions. In Finland, approximately 90% of our employees
belong to unions, while in other countries where we have principal production plants, the proportion of unionized workers typically varies between 10% and 50%. Local practice and legislation are observed in our labor relations matters and in
negotiating collective agreements. The paper industry and wood products industry in Finland have typically concluded collective agreements with a group of trade unions, representing blue-collar workers and salaried employees in the paper industry,
wood products industry and forestry. In Finland, the previous nation-wide collective agreements covering our blue-collar workers in the forest industry were made for a two-year period, which expired on February 15, 2005. The collective agreements
covering our Finnish salaried white-collar employees were effective until February 28, 2005. In accordance with the agreements, a nationwide wage increase was implemented in Finland in March 2004. In December 2004 a comprehensive agreement was made
covering all industries in Finland until September 30, 2007. Wood products industry and forestry joined the comprehensive agreement regarding both blue-collar workers and white-collar employees but paper industry didnt. We employ 9,430 people
(28% of our worldwide personnel) in our Finnish paper industry operations. In those industries, which had joined the comprehensive agreement a nationwide wage increase was effected in March 2005.



Negotiations on the paper industrys collective agreements are underway
with the paper workers union and with the union of salaried employees. Following a ban on overtime work declared by the Finnish Paper Workers Union in March 2005, several illegal strikes and other shutdowns have occurred in the Finnish
paper industry, including a two-day strike beginning on May 15, 2005. In response, the member companies of the Finnish Forest Industries Federation declared a lockout at all Finnish pulp and paper mills beginning May 18, 2005 and ending June 1,
2005, with another two-week lockout scheduled to follow at that time if a settlement has not been reached. These lockouts cover all of our pulp and paper mills and converting units. We estimate that we are incurring losses of approximately 4
million per day during the strike and lockout period.



The
following table sets forth the number of personnel by country at the end of the past three years:



|                  |  |                    |  |        |  |       
|----------------- |  | ------------------ |  | ------ |  | ------
|                  |  | As of December 31,
|                  |  | 2004               |  | 2003   |  | 2002  
|Finland           |  | 18,720             |  | 19,401 |  | 19,873
|Germany           |  | 4,311              |  | 4,333  |  | 4,385 
|United Kingdom    |  | 1,852              |  | 1,960  |  | 2,001 
|France            |  | 1,712              |  | 1,771  |  | 2,032 
|Russia            |  | 750                |  | 660    |  | 571   
|Austria           |  | 678                |  | 712    |  | 737   
|Spain             |  | 277                |  | 272    |  | 255   
|Estonia           |  | 179                |  | 173    |  | 22    
|The Netherlands   |  | 166                |  | 169    |  | 185   
|Italy             |  | 83                 |  | 81     |  | 65    
|Belgium           |  | 74                 |  | 66     |  | 128   
|Sweden            |  | 58                 |  | 62     |  | 69    
|Hungary           |  | 46                 |  | 16     |  | 13    
|Poland            |  | 45                 |  | 50     |  | 53    
|Denmark           |  | 41                 |  | 234    |  | 233   
|Ireland           |  |                   |  | 345    |  | 315   
|Other Europe      |  | 66                 |  | 64     |  | 146   
|United States     |  | 1,571              |  | 1,526  |  | 1,968 
|Canada            |  | 1,296              |  | 1,414  |  | 1,449 
|China             |  | 1,109              |  | 834    |  | 772   
|Malaysia          |  | 151                |  | 126    |  | 103   
|Australia         |  | 104                |  | 96     |  | 90    
|South Africa      |  | 81                 |  | 78     |  | 73    
|Rest of the world |  | 63                 |  | 39     |  | 41    
|                  |  |                    |  |        |  |       
|Total             |  | 33,433             |  | 34,482 |  | 35,579
|                  |  |                    |  |        |  |       



64



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The following table sets forth the number of personnel by division at the end of the past three years:



|                           |  |                    |  |        |  |       
|-------------------------- |  | ------------------ |  | ------ |  | ------
|                           |  | As of December 31,
|                           |  | 2004               |  | 2003   |  | 2002  
|Magazine papers            |  | 8,825              |  | 8,887  |  | 9,325 
|Newsprint                  |  | 3,451              |  | 3,785  |  | 3,826 
|Fine and speciality papers |  | 6,831              |  | 6,654  |  | 6,611 
|Converting                 |  | 4,594              |  | 4,558  |  | 4,694 
|Wood products              |  | 6,851              |  | 7,711  |  | 7,577 
|Other operations           |  | 2,881              |  | 2,887  |  | 3,546 
|                           |  |                    |  |        |  |       
|Total                      |  | 33,433             |  | 34,482 |  | 35,579
|                           |  |                    |  |        |  |       



Share Ownership



As of April 15,
2005, members of our Board of Directors and our Executive Team, as a group, held 2,807,209 ordinary shares, representing 0.544% of the issued and outstanding share capital and 0.544% of the voting rights of UPM. Members of our Executive Team, in the
aggregate, also hold stock options that, if converted, could raise our share capital by 2,868,240 (1,687,200 ordinary shares), representing, as of April 15, 2005, 0.327% of the share capital of the Company, on a fully-diluted basis. Each
member of our Board of Directors and our Executive Team, on an individual basis, beneficially owned less than one percent of our issued and outstanding shares (including shares that are issuable upon the conversion of stock options) as of April 15,
2005.



On March 25, 1998, our shareholders approved the
issuance to our key personnel worldwide of 6,000,000 stock options conferring a right to subscribe for an aggregate of up to 6,000,000 of our shares. The stock options comprised three classes with 2,000,000 stock options in each class. In March
2002, the two million Class C stock options, which were held by Unicarta Oy, our wholly-owned subsidiary, were cancelled. Class A stock options have been exercisable since April 1, 2001 and have been exercisable through April 30, 2005 at an exercise
price of 30.95 per share, without giving effect to the bonus issue, and 30.95 per two shares, after giving effect to the bonus issue. Class B stock options have been exercisable from April 1, 2003 through April 30, 2005 at an exercise
price of 35.99 per share, without giving effect to the bonus issue, and 35.99 per two shares, after giving effect to the bonus issue. The exercise price for the stock options has been reduced by the amount of dividends distributed
(without any corporate tax credit) after May 1, 1998 and before the date of the share subscription. As a result of the share subscriptions with the 1998 stock options, our share capital may have been increased by a maximum of 13,600,000.



On March 19, 2002, our shareholders authorized the issuance of
7,600,000 stock options to key personnel as well as to one of our wholly owned subsidiaries. Each stock option entitles its holder to subscribe for two shares of UPM stock. Half of the stock options are marked with the symbol 2002D, while the other
half are marked 2002E. Those stock options marked 2002D may be exercised between April 1, 2004 and April 30, 2007 while those stock options marked 2002E may be exercised between April 1, 2005 and April 30, 2008.



The share subscription price for the stock options marked 2002D is
21.95 per share and the share subscription price for the stock options marked 2002E is 14.27 per share. The share subscription price of stock options 2002D and 2002E will, as per the dividend record date, be reduced by the amount of the
dividend decided after the end of the period for determination of the subscription price but before share subscription. As a result of the share subscriptions with the 2002 stock options, our share capital may be increased by a maximum of
25,840,000.



On March 31, 2005, our shareholders
authorized the issuance of 9,000,000 stock options to key personnel as well as to one of our wholly owned subsidiaries. Each stock option entitles its holder to subscribe for one share of UPM stock. Of the stock options, 3,000,000 are marked with
the symbol 2005F, 3,000,000 with the symbol 2005G and 3,000,000 with the symbol 2005H. Those stock options marked 2005F may be exercised between October 1, 2006 and October 31, 2008. Those stock options marked 2005G may be exercised between October
1, 2007 and October 31, 2009. And those stock options marked 2005H may be exercised between October 1, 2008 and October 31, 2010.



The share subscription price for the stock option 2005F is 18.23, the trade volume weighted average quotation of UPMs shares on the Helsinki
Stock Exchange between January 1 and February 28, 2005 with an addition of 10 percent. For the stock option 2005G, the share subscription price will be the trade volume weighted average quotation of UPMs share on the Helsinki Stock Exchange
between January 1 and February 28, 2006 plus an additional 10 percent. For the stock option 2005H, the share subscription



65



---

price will be the trade volume weighted average quotation of UPMs shares on the Helsinki Stock Exchange between January 1 and February 28, 2007 plus an
additional 10 percent.



The share subscription price of the
stock options shall, as per the dividend record date, be reduced by the amount of the dividend decided after the end of the period for determination of the subscription price but before the share subscription. However, the subscription price of the
share shall never be less than the book value (equivalent value) of the share.



As a result of the share subscriptions made against the 2005 stock options our share capital may be increased by a maximum of 15,300,000.



As of April 30, 2005, the maximum number of new shares that may be issued through the exercise of the D, E, F, G and H stock
options represents approximately 4.6% of our total share capital.



|Item 7. | Major Shareholders and Related Party Transactions
|------- | -------------------------------------------------



Major Shareholders



As far as it is known to our management, we are not, directly or indirectly, controlled by another corporation, by any government or by any other entity,
and there are no arrangements the operation of which may at a subsequent date result in a change in our control.



The following table sets forth our major shareholders as of April 30, 2005 based on registered share ownership as reflected in our share register (except
for the Holzhey/Bischoff group, which includes ten prior Haindl shareholders. The share ownership information is as of December 31, 2004.):



|                                                                    |  |                      |  |                  |  |                
|------------------------------------------------------------------- |  | -------------------- |  | ---------------- |  | ---------------
|                                                                    |  | As of April 30, 2005
|                                                                    |  | Number ofShares      |  | Percent ofShares |  | Percent ofVotes
|Holzhey/Bischoff group (including ten prior Haindl shareholders)    |  | 17,515,542           |  | 3.39             |  | 3.39           
|Ilmarinen Mutual Pension Insurance Company                          |  | 7,565,997            |  | 1.47             |  | 1.47           
|Gustaf Serlachius (representing five shareholders)                  |  | 6,328,855            |  | 1.23             |  | 1.23           
|Oy Premier Holding Ab                                               |  | 1,676,200            |  | 0.32             |  | 0.32           
|Palkkiyhtymä Oy                                                     |  | 1,700,000            |  | 0.33             |  | 0.33           
|Palkki Group, total                                                 |  | 3,376,200            |  | 0.65             |  | 0.65           
|The State Pension Fund                                              |  | 3,800,000            |  | 0.74             |  | 0.74           
|Varma-Sampo Mutual Pension Insurance Company                        |  | 2,923,140            |  | 0.57             |  | 0.57           
|Merita plc Pension Fund                                             |  | 1,213,470            |  | 0.23             |  | 0.23           
|Merita plc Pension Foundation                                       |  | 599,770              |  | 0.12             |  | 0.12           
|Nordea Securities plc                                               |  | 174,114              |  | 0.03             |  | 0.03           
|Nordea Life Assurance Finland Ltd                                   |  | 1,057,313            |  | 0.20             |  | 0.20           
|Nordea Group, total                                                 |  | 3,044,667            |  | 0.58             |  | 0.58           
|Svenska litteratursällskapet i Finland                              |  | 3,488,070            |  | 0.68             |  | 0.68           
|Eläke-Fennia Mutual Pension Fund                                    |  | 1,884,112            |  | 0.36             |  | 0.36           
|The Finnish Cultural Foundation                                     |  | 1,894,214            |  | 0.37             |  | 0.37           
|The Kymi 100 Year Foundation                                        |  | 2,005,254            |  | 0.39             |  | 0.39           
|Nominees & registered foreign owners (excl. Holzhey/Bischoff group) |  | 322,344,385          |  | 62.42            |  | 62.42          
|Nominees & registered foreign owners (incl. Holzhey/Bischoff group) |  | 339,859,927          |  | 65.81            |  | 65.81          
|Others                                                              |  | 140,279,836          |  | 27.15            |  | 27.15          
|                                                                    |  |                      |  |                  |  |                
|Total                                                               |  | 516,450,272          |  | 100.00           |  | 100.00         
|                                                                    |  |                      |  |                  |  |                



66



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To the knowledge of our management, there were two holders of 5% or more of our shares as of April 30, 2005:



|                                     |  |                      |  |                  |  |                
|------------------------------------ |  | -------------------- |  | ---------------- |  | ---------------
|                                     |  | As of April 30, 2005
|                                     |  | Number ofShares      |  | Percent ofShares |  | Percent ofVotes
|Capital Group International, Inc.(1) |  | 33,049,100           |  | 6.40             |  | 4.72           
|Franklin Resources Inc.(2)           |  | 39,737,680           |  | 7.69             |  | 10.27          
|Total                                |  | 516,450,272          |  | 100.00           |  | 100.00         

---

|(1) | On December 31, 2004, Capital Group International, Inc., through five investment management companies, Capital Guardian Trust Company, Capital International Limited, Capital
International S.A., Capital International K.K. and Capital International Inc., managed 33,049,100 UPM shares and held sole voting power in 24,386,420 shares. We are unable to determine the exact holdings of these accounts as per dates other than the
dates on which they notify us of their holdings on the basis of the flagging rules of the Finnish Securities Market of 1989, as amended, or the dates of the annual or extraordinary general meetings of shareholders of UPM-Kymmene Corporation, at
which time these entities have elected to register their holdings.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | These shares are held through accounts managed by affiliated investment advisors of Franklin Resources Inc. as of March 7, 2005. On that date, Franklin Resources, Inc. held
39,737,680 shares and in addition held voting rights in 13,285,228 shares. This represented 7.58% and 10.11% of UPMs total number of shares in issue 524,320,252 on March 7, 2005. We are unable to determine the exact holdings of these accounts
as per dates other than the dates on which they notify us of their holdings on the basis of the flagging rules of the Finnish Securities Market of 1989, as amended, or the dates of the annual or extraordinary general meetings of shareholders of
UPM-Kymmene Corporation, at which time these entities have elected to register their holdings.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The major shareholders of the Company do not have voting rights different from those of the other shareholders.



As of April 30, 2005, 20,483,336 shares in the form of ADSs, representing
3.97% of our issued and outstanding shares, were held in the United States by 20 record holders. In addition, as of May 3, 2005, 1,644,200 shares, representing 0.32% of our issued and outstanding shares, were held in the United States by 199 record
holders.



Related Party Transactions



As
described in Item 10. Additional InformationMaterial ContractsHaindl Share Sale and Purchase Agreement, we completed the purchase of Haindl in November 2001. Friedrich Holzhey, who was a member of our Board of Directors
between March 19, 2002 and 2003, was a major shareholder in Haindl and a Director of Haindl before the Haindl acquisition. Georg Holzhey, who was our Executive Vice President for Procurement and Logistics and a member of our Executive Team in 2002
and elected to our Board of Directors at the annual general meeting of our shareholders on March 19, 2003, was also a major shareholder in Haindl and Haindls Managing Director before the Haindl acquisition. The consideration that Mr. Friedrich
Holzhey and Mr. Georg Holzhey received in connection with the acquisition of Haindl was negotiated on an arms length basis. For a description of the Haindl transaction, see Item 5. Operating and Financial Review and ProspectsRecent
DevelopmentsHaindl Acquisitions and Item 10. Additional InformationMaterial ContractsContractual Arrangements relating to Haindl Acquisitions.



There is no outstanding indebtedness to UPM-Kymmene Corporation by any director or executive officer or 10% shareholder of
the Company. See also Note 37 of the notes to the consolidated financial statements included elsewhere in this annual report.



From time to time, UPM-Kymmene Corporation and its subsidiaries engage in ordinary course transactions with other companies that are related to
UPM-Kymmene Corporation. These transactions include the supply of different paper grades, pulp, wood or other products and the provision of treasury and financing transactions. Along with our subsidiaries, we negotiate the terms of each transaction
on an arms-length basis following management guidelines. We believe that the terms of each transaction are generally no less favorable than would be available in transactions with third parties that are not related to us.



Chemical Pulp. Most of our chemical pulp is produced and sold
internally. The internal sales are priced at the market price for the pulp. Furthermore, we hold a 47% interest in Metsä-Botnia, a joint venture between M-real Oyj (M-real) and Metsäliitto Group. M-real is a Finnish paper
producer, and Metsäliitto Group is a co-operative organization of Finnish forest owners. Metsäliitto Group



67



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is also the controlling shareholder of M-real. Chemical pulp produced by Metsä-Botnia is sold to the Group and to M-real at the market price less
certain transportation and other costs. In 2004 and 2003, our chemical pulp entitlement with respect to the production of Metsä-Botnia was 1.1 million tons per year. Total purchases of chemical pulp from Metsä-Botnia amounted to 238
million in 2004 and 226 million in 2003.



Energy.
We obtain most of the energy for our production units in Finland through our owned and leased power plants, as well as through ownership in power companies, which entitle us to receive electricity and heat from those companies. A significant volume
of our electricity procurement comes from Pohjolan Voima Oy, a Finnish power producer in which we hold a 40.97% equity interest and Kemijoki Oy, a Finnish hydropower producer in which we hold a 4.1% equity interest. Pohjolan Voima Oy is also a
majority shareholder in Teollisuuden Voima Oy, one of Finlands two nuclear power companies. Purchases of electricity from these associated companies totaled 198 million in 2004 and 181 million in 2003. In accordance with the power
companies respective articles of association and related shareholder agreements, the prices we pay to the power companies are based on production costs, which are generally lower than market prices. Internal sales are priced at the prevailing
market price.



Research and Development. Approximately
10 to 15% of our research and development activities is conducted by Oy Keskuslaboratorio-Centrallaboratorium Ab (the Finnish Pulp and Paper Research Institute or FPPRI), in which we are one of four corporate owners with a 38.7%
interest. Our ownership in FPPRI provides us with fundamental research information regarding our main raw materials, major manufacturing processes and key product attributes. In addition to joint research at FPPRI, we also utilize the institute for
contract research in connection with product and process development. These services are provided on an arms-length basis and upon terms that we believe to be customary within the industry and generally no less favorable than would be
available from unrelated third parties. See Item 5. Operating and Financial Review and ProspectsResearch and Development.



Shipping. We purchase logistics and transport services from certain associated companies, the most significant of which is Oy Transfennica Ab, in
which we hold a 27.1% interest. Oy Transfennica Ab is a Finnish shipping company engaged in the transport of cargo, primarily paper and other forest products, between Finland and the main European trading ports. Such purchases amounted to 20
million in 2004 and 19 million in 2003. These purchases were made on an arms-length basis and upon terms that we believe to be customary within the industry and generally no less favorable than would be available from unrelated third
parties.



Recovered Paper. We purchase raw materials
from certain associated companies, the most significant of which is Paperinkeräys Oy, a Finnish company in which we have a 23.0% interest. Paperinkeräys Oy is engaged in the procurement, processing and transport of recovered paper.
Aggregate raw material purchases from associated companies amounted to 15 million in 2004 and 14 million in 2003. Recovered paper is sold to us and other shareholders of Paperinkeräys Oy at a price which is determined using a
contractual formula that takes into account the world market prices for recovered paper and the prices of other fiber raw materials, as well as costs relating to paper recovery. In Austria, we have a similar arrangement concerning recovered paper,
which is purchased from Austria Paper Recycling G.m.b.H., a company in which we own a 33.3% equity interest. The aggregate recovered paper purchases amounted to 12 million in 2004 and 11 million in 2003.



Pension foundation. In Finland, UPM has a pension foundation (Kymin
Eläkesäätiö), which is a separate legal entity. The pensions of about 7% of our Finnish employees have been arranged by the foundation. The contributions paid by UPM to the foundation amounted to 19 million in 2004 and
15 million in 2003. The foundation manages and invests the contributions for the employee benefit plans. At December 31, 2004 UPM had borrowings of 174 million (167 million at December 31, 2003) from the foundation.



We intend to continue to engage in transactions on a similar basis with such
related companies. For additional discussion, see Note 37 of the notes to the consolidated financial statements included elsewhere in this annual report.



68



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|Item 8. | Financial Information
|------- | ---------------------



Consolidated Financial Statements



See Item 18. Financial Statements.



Other Financial Information



Export Sales from Finland and Sales by Market Area



We have production plants in 16 countries, including Austria, Finland, Germany, the United Kingdom, France, the United States, Canada and China. Although 56% of our employees are resident in Finland, sales to Finland accounted for only 11%
of our global sales in 2004. Sales to our most important markets, the European Union and North America, contributed over 85% of our total sales. Our export sales from Finland, our main base of operations, were equal to 4,301 million in 2004.



The following table sets forth the percentages of our sales in
2004 by market area:



|                               |  |                         
|------------------------------ |  | ------------------------
|                               |  | Percentage ofGroup Sales
|Market Area                    |  |                         
|Germany                        |  | 16                      
|United Kingdom                 |  | 13                      
|Finland                        |  | 11                      
|France                         |  | 7                       
|Other European Union countries |  | 23                      
|Rest of Europe                 |  | 4                       
|USA                            |  | 13                      
|Canada                         |  | 2                       
|Asia                           |  | 7                       
|Other countries(1)             |  | 4                       
|                               |  |                         
|Total                          |  | 100                     
|                               |  |                         

---

|(1) | Includes Africa, Mexico, South America, Australia and Oceania.
|--- | --------------------------------------------------------------



Legal Proceedings



We are a defendant or plaintiff in a number of legal proceedings incidental to our operations. These legal proceedings primarily involve claims arising
out of commercial law issues.



In 2003, UPM directed its
outside counsel to conduct an internal investigation of UPMs and its subsidiaries compliance with competition laws in the United States and other jurisdictions where the companies conduct business. UPM decided to approach competition law
authorities to disclose any conduct that did not comport with applicable competition laws, and to strengthen its competition law compliance programs. UPM has created a European Union Competition Law Compliance Manual and has initiated a
comprehensive competition law training program for all its employees. More than 2,000 executives and employees of the Company have participated in the competition law compliance training. Internal audits have been expanded to include competition law
issues and a variety of other internal controls have been implemented.



During 2004, UPM and its subsidiaries have continued to cooperate with competition law authorities in the European Union, Canada, and the United States. UPM received conditional immunity from competition authorities in the European Union
and Canada with respect to certain conduct UPM has disclosed to them. In the United States, the Antitrust Division of U.S. Department of Justice is conducting criminal investigations into alleged anticompetitive conduct in the labelstock and
magazine paper industries. UPM continues to cooperate fully with the various authorities and their ongoing investigations, and may yet be subject to additional investigations in other parts of the world.



69



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UPM and its subsidiary, Raflatac, Inc., along with certain labelstock manufacturers, have been named as
defendants in a number of class-action lawsuits filed in United States District Courts by the Companys customers, and in state courts by customers of the Companys customers. These lawsuits allege that the defendants violated federal
and/or state antitrust laws by conspiring with one another to fix the prices of and allocate the markets for labelstock products. The complaints seek treble or punitive damages for alleged overcharges resulting from the purported conspiracy.



UPM and its subsidiary, UPM-Kymmene, Inc., have also been
named as a defendant in class-action lawsuits making similar allegations against manufacturers of magazine papers. These complaints, like the labelstock complaints, seek treble or punitive damages for alleged overcharges resulting from the purported
conspiracy.



In an unrelated development, on May 3, 2004, UPM
received a Statement of Objection from the European Commission concerning alleged anticompetitive activities in the market for plastic industrial sacks. UPM has responded to the Statement of Objection as the European Commission requested and is
awaiting a decision by the Commission.



In the aggregate, these
matters may implicate or result in substantial adverse publicity, penalties, and damages. It is possible that any ultimate liability could be material to UPMs financial position, results of operations, and cash flow. At this time, however, and
in light of UPMs cooperation with the authorities, and due to the considerable uncertainties associated with these matters, it is not possible for UPM estimate any potential liability. UPM will continue to consider the need to establish loss
provisions in light of future developments.



Other than these
proceedings, we have not been involved in any legal, administrative or arbitration proceedings which the management would expect to potentially have a material adverse effect on our business, financial condition or results of operations, nor, so far
as management is aware, are any such legal, administrative or arbitration proceedings pending or threatened.



Dividend Policy



Dividends are proposed by our Board of Directors, based on our year-end consolidated and unconsolidated financial statements and subject to the amount of
distributable funds for both the Group as a whole and the Company, and are approved in respect of the prior year at the annual general meeting of shareholders. The annual general meeting is usually convened in March each year. Holders of record of
UPM-Kymmene Corporation ordinary shares on the date of the annual general meeting of shareholders at which a dividend is declared are entitled to receive the dividend, less any amounts required to be withheld on account of taxes or governmental
charges. Cash dividends payable to holders of ordinary shares will be distributed by the Company directly, except for those who hold ADSs, who will receive dividends from the depositary for the ADSs, Citibank N.A. (the Depositary). In
Finland, the payment will be made to the depositary bank or other institution holding the shares for the shareholder, which will credit the payment to the shareholders account. For shareholders in the United States, the payment will be
converted from euros into U.S. dollars unless they instruct otherwise. The U.S. dollar amounts of dividends received by holders of ordinary shares may be affected by fluctuations in exchange rates. See Item 3. Key InformationExchange
Rates.



We expect to continue to pay dividends, although
there can be no assurance as to the particular amounts that will be paid from year to year. The payment of future dividends will depend upon our future earnings, financial condition (including our cash needs), future earnings prospects and other
factors deemed relevant by our Board of Directors. See Item 5. Operating and Financial Review and Prospects.



See also Item 3. Key InformationDividends.



70



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Significant Changes



Other than
items described in Item 5. Operating and Financial Review and ProspectsRecent Developments, no significant change has occurred since the date of the annual financial statements included in this annual report.



|Item 9. | The Offer and Listing
|------- | ---------------------



Nature of Trading Markets



Our
shares are registered for trading on the Helsinki Stock Exchange under the symbol UPM1V.



The following table sets forth, for the periods indicated, the high and low sales prices of our shares on the Helsinki Stock Exchange, as reported in
euros by the Helsinki Stock Exchange:



|                                  |  |                            |  |      
|--------------------------------- |  | -------------------------- |  | -----
|                                  |  | Price perUPM-Kymmene Share
|                                  |  | High                       |  | Low  
|                                  |  |                          
|2000                              |  | 22.45                      |  | 12.46
|2001                              |  | 19.93                      |  | 14.00
|2002                              |  | 22.25                      |  | 12.61
|2003                              |  | 17.10                      |  | 11.05
|2004                              |  | 17.13                      |  | 14.44
|2005 (through April 29)           |  | 18.15                      |  | 15.05
|                                  |  |                           
|                                  |  | High                       |  | Low  
|                                  |  |                          
|2003                              |  |                            |  |      
|First Quarter                     |  | 16.90                      |  | 11.85
|Second Quarter                    |  | 13.85                      |  | 11.05
|Third Quarter                     |  | 17.10                      |  | 12.23
|Fourth Quarter                    |  | 16.65                      |  | 13.99
|                                  |  |                           
|2004                              |  |                            |  |      
|First Quarter                     |  | 16.60                      |  | 14.44
|Second Quarter                    |  | 16.40                      |  | 14.51
|Third Quarter                     |  | 16.18                      |  | 14.84
|Fourth Quarter                    |  | 17.13                      |  | 15.20
|                                  |  |                           
|2005                              |  |                            |  |      
|First Quarter                     |  | 18.15                      |  | 15.77
|Second Quarter (through April 29) |  | 16.67                      |  | 15.05
|                                  | 
|                                  |  | Price perUPM-Kymmene Share
|                                  |  | High                       |  | Low  
|                                  |  |                          
|November 2004                     |  | 17.13                      |  | 15.42
|December 2004                     |  | 16.98                      |  | 16.15
|January 2005                      |  | 16.80                      |  | 15.77
|February 2005                     |  | 17.29                      |  | 15.94
|March 2005                        |  | 18.15                      |  | 16.66
|April 2005                        |  | 16.67                      |  | 15.05



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Since June 29, 1999, our shares have been traded in the United States on the New York Stock Exchange
under the symbol UPM in the form of ADSs, which are evidenced by American Depositary Receipts. Each ADS represents one share.



The Depositary has advised us that, as of April 30, 2005, there were 20,483,336 ADSs outstanding. The outstanding ADSs were held of record by 20 record
holders. A significant number of ADSs are held of record by broker nominees. The number of beneficial owners is unknown but is believed to be materially higher than the 20 record holders.



The following table sets forth, for each of the periods indicated, the reported high and low closing price per UPM-Kymmene
ADS as reported on the New York Stock Exchange Composite Tape, retroactively taking into account the bonus issue in March 2003:



|                                  |  |                          |  |      
|--------------------------------- |  | ------------------------ |  | -----
|                                  |  | Price perUPM-Kymmene ADS
|                                  |  | High                     |  | Low  
|                                  |  | (U.S. $)                
|2000                              |  | 22.25                    |  | 11.75
|2001                              |  | 17.65                    |  | 12.83
|2002                              |  | 20.52                    |  | 12.85
|2003                              |  | 20.00                    |  | 12.70
|2004                              |  | 22.70                    |  | 17.65
|2005 (through April 29)           |  | 23.82                    |  | 19.82
|                                  |  |                         
|                                  |  | High                     |  | Low  
|                                  |  | (U.S. $)                
|2003                              |  |                          |  |      
|First Quarter                     |  | 17.40                    |  | 13.25
|Second Quarter                    |  | 14.43                    |  | 12.70
|Third Quarter                     |  | 18.55                    |  | 14.54
|Fourth Quarter                    |  | 20.00                    |  | 17.01
|                                  |  |                         
|2004                              |  |                          |  |      
|First Quarter                     |  | 20.21                    |  | 18.08
|Second Quarter                    |  | 19.16                    |  | 17.65
|Third Quarter                     |  | 19.58                    |  | 18.14
|Fourth Quarter                    |  | 22.70                    |  | 19.21
|                                  |  |                         
|2005                              |  |                          |  |      
|First Quarter                     |  | 23.82                    |  | 20.74
|Second Quarter (through April 29) |  | 21.43                    |  | 19.82
|                                  |  |                         
|                                  |  | High                     |  | Low  
|                                  |  | (U.S. $)                
|November 2004                     |  | 22.70                    |  | 19.95
|December 2004                     |  | 22.68                    |  | 21.60
|January 2005                      |  | 22.08                    |  | 20.74
|February 2005                     |  | 22.63                    |  | 21.47
|March 2005                        |  | 23.82                    |  | 22.00
|April 2005                        |  | 21.43                    |  | 19.82



72



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Trading and Settlement on the Helsinki Stock Exchange



Trading in, and clearing of, securities on the Helsinki Stock Exchange takes place in euros, with the minimum tick size for trading quotations being one euro cent. All price information is produced and published only
in euros.



The trading system of the Helsinki Stock Exchange,
the SAXESS Trading System, is a decentralized and fully automated order-driven system. Trading is conducted on the basis of trading lots, which are fixed separately for each share series.



Continuous trading takes place from 10:00 a.m. to 6:20 p.m. on each trading day. The closing prices are ready at the end of
closing call (from 6:20 to 6:30 p.m.). Offers may be placed in the system beginning at 8:30 a.m. during a pretrading session. Opening call takes place from 9:45 a.m. to 10:00 a.m. Contract transactions may also be registered during pretrading
session and post-trading session from 6:40 to 7:00 p.m.



Trades
are normally cleared in the Finnish Central Securities Depositorys, or FCSD, automated clearing and settlement system on the third banking day after the trade date unless otherwise agreed by the parties.



Regulation of the Finnish Securities Market



The securities market in Finland is supervised by the Finnish Financial Supervision Authority. The principal statute governing the securities market is the Finnish Securities Market Act of 1989, which contains
regulations with respect to company and shareholder disclosure obligations, admission to listing and trading of listed securities and public takeovers, among other things. The Finnish Financial Supervision Authority monitors compliance with these
regulations.



The Finnish Securities Market Act specifies
minimum disclosure requirements for Finnish companies applying for listing on the Helsinki Stock Exchange or making a public offering of securities in Finland. The information provided must be sufficient to enable investors to make a sound
evaluation of the security being offered and the issuing company. Finnish listed companies have a continuing obligation to publish regular financial information and to inform the market of any matters likely to have a material impact on the value of
their securities.



A shareholder is required, without undue
delay, to notify a Finnish listed company and the Finnish Financial Supervision Authority when its voting participation in, or its percentage ownership of, the issued share capital of such Finnish listed company reaches, exceeds or falls below 5%,
10%, 15%, 20%, 25%, 33 1/3%, 50% or 66 2/3%, calculated in accordance with the Finnish Securities Market Act, or when it enters into an agreement or other arrangement that, when affected, has such effect. If a Finnish listed company receives
information indicating that a voting interest or ownership interest has reached, exceeded or fallen below these thresholds, it must disclose such information to the public and to the Helsinki Stock Exchange.



Pursuant to the Finnish Securities Market Act, a shareholder whose holding in
a listed company increases above two-thirds of the total voting rights attached to the shares of the company, calculated in accordance with the Finnish Securities Market Act, after the commencement of a public quotation of such shares must offer to
purchase the remaining shares and other securities entitling their holders to shares of such company for fair market value. Under the Companies Act, a shareholder holding shares representing more than 90% of all the share capital in a company and
more than 90% of the shares and the votes entitled to be cast at a general meeting of shareholders has the right to require the minority shareholders to sell the remaining shares of such company to such shareholder for fair market value. In
addition, any minority shareholder that possesses shares that may be so purchased by a majority shareholder is entitled to require such majority shareholder to purchase its shares. Detailed rules apply for the calculation of the above proportions of
shares and votes.



The Finnish Criminal Code also contains
provisions relating to breach of disclosure requirements, misuse of privileged or inside information and market manipulation. Breach of these provisions constitutes a criminal offense.



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The Finnish Book-Entry Securities System



General



Finland has made a gradual
changeover from a certificated securities system to a book-entry securities system since August 1, 1991, when the relevant legislation came into effect. Use of the book-entry securities system is mandatory for shares listed on the Helsinki Stock
Exchange. Our shares were entered into the book-entry system on May 2, 1996.



The Finnish book-entry securities system is centralized at the FCSD, which provides national clearing and registration services for securities. The FCSD maintains a central book-entry securities system for both equity
and debt securities.



The FCSD maintains a register of the
shareholders of listed companies and book-entry accounts for shareholders that do not wish to utilize the services of a commercial account operator. The expenses incurred by the FCSD in connection with maintaining the central book-entry securities
system are borne by the issuers participating in the Finnish book-entry securities system and the account operators. The account operators, which consist of credit institutions, investment services companies and other institutions licensed to act as
account operators by the FCSD (each, an Account Operator), are entitled to make entries in the book-entry register and administer the book-entry accounts.



Registration



In order to effect entries in the Finnish book-entry securities system, a security holder or such holders nominee must establish a book-entry
account with the FCSD or an Account Operator or register its securities through nominee registration. Finnish shareholders may not register their securities through nominee registration. For shareholders who have not transferred their shares into
book-entries, a joint book-entry account shall be opened with the FCSD, the registered holder of which shall be the issuer. All transactions in securities registered with the Finnish book-entry securities system are executed as computerized
book-entry transfers. The Account Operator confirms book-entry transfers by sending notifications of transactions to the holder of the respective book-entry account. The account holders also receive an annual statement of their holdings as of the
end of each calendar year.



Each book-entry account is required
to contain specified information with respect to the account holder or the custodian administering the assets of a nominee account. Such information includes the type and number of book-entry securities registered and the rights and restrictions
pertaining to the account and to the book-entry securities registered in the account. A possible nominee account is identified as such on the entry. The FCSD and the Account Operators are required to observe strict confidentiality, although certain
information (e.g., the name, nationality and address of each account holder) contained in the register of shareholders maintained by the FCSD must be made available to the public by the FCSD and the issuer, except in the case of nominee
registration.



Each Account Operator is strictly liable for
errors and omissions on the registers maintained by it and for any unauthorized disclosure of information. However, if an account holder has suffered a loss as a result of a faulty registration or an amendment to, or deletion of, rights in respect
of registered securities and the Account Operator is unable to compensate such loss, such account holder is entitled to receive compensation from the FCSD. To cover this contingency, the FCSD maintains a statutory registration fund. The capital of
the fund must be at least 0.000048% of the average of the total market value of the book entries kept in the Finnish book-entry securities system during the last five calendar years and it must not be less than 20 million. The compensation to
be paid to one injured party shall be equal to the amount of damages suffered by such injured party from a single Account Operator subject to a maximum amount of 25,000. Furthermore, the liability of the registration fund is limited to
10 million per incident.



Custody of the Shares and Nominees



A non-Finnish shareholder may appoint an asset
manager (or certain non-Finnish organizations approved by the FCSD) to act as a custodial nominee account holder on its behalf. A nominee shareholder is entitled to receive dividends and to exercise all share subscription rights and other financial
and administrative rights attaching to the shares, such as the right to attend and vote at general



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meetings of the company. A beneficial owner wishing to attend and vote at a general meeting must seek a temporary registration in the register of
shareholders not later than ten days prior to the relevant general meeting. A custodial nominee account holder is required to disclose to the Finnish Financial Supervision Authority and the relevant company on request the name of the beneficial
owner of any shares registered in the name of such custodial nominee account holder, where the beneficial owner is known, as well as the number of shares owned by such beneficial owner. If the name of the beneficial owner is not known, the custodial
nominee account holder is required to disclose said information on the representative acting on behalf of the beneficial owner and to submit a written declaration to the effect that the beneficial owner of the shares is not a Finnish natural person
or legal entity.



Finnish Depositories for Clearstream Banking
S.A., Luxembourg, Clearstream Banking AG, Germany and Euroclear Bank, S.A./N.V., as operator of the Euroclear System, have nominee accounts within the Finnish book-entry securities system and, accordingly, non-Finnish shareholders may hold their
shares through their accounts with Clearstream Banking or Euroclear.



Shareholders wishing to hold their shares in the Finnish book-entry securities system in their name and who do not maintain a book-entry account in Finland are required to open a book-entry account at an authorized Account Operator in
Finland and a convertible euro account at a bank operating in Finland.



|Item 10. | Additional Information
|-------- | ----------------------



Authorized Share Capital



Under
our articles of association, our authorized share capital may not be less than 750,000,000 nor more than 3,000,000,000. As of December 31, 2004, our issued share capital was 891,344,428.40 consisting of 524,320,252 fully-paid
shares. Each of our shares entitles its holder to one vote. The shares are in book-entry format.



On March 31, 2005, our annual general meeting of shareholders resolved to repurchase on the open market some of our own shares using distributable funds.
According to the decision, any repurchased shares may be used to acquire assets relating to our business operations, as payment in any acquisitions we might make and as part of our share ownership plan in the manner and to the extent decided by our
Board of Directors, or for the relinquishment or invalidation of those shares. The number of shares repurchased will be no fewer than 100 and no more than 25,000,000 and they will be purchased through public trading on the Helsinki Stock Exchange.
The shares will be purchased at the market price quoted in public trading at the time of purchase, and the purchase price will be paid to the sellers within the payment time specified in the rules of the Helsinki Stock Exchange and the FCSD.
Purchase of the shares will reduce our distributable shareholders equity. Inasmuch as the maximum number of shares to be repurchased represents less than 5% of the total number of our shares and less than 5% of the number of votes carried by
the shares, the purchase will have no major impact on the distribution of share ownership and voting rights within the Company.



In addition, on March 31, 2005, the annual general meeting of our shareholders resolved to authorize our Board of Directors to increase our share capital
by issuing new shares and/or convertible bonds. Our Board of Directors is authorized to resolve on increasing our share capital by issuing new shares or convertible bonds in one or more issues. The increase of the share capital through share
issuance or subscription of shares pursuant to conversion of convertible bonds into shares may amount to a maximum aggregate number of 104,715,000 shares and to a maximum aggregate increase of the share capital of 178,015,500. The share
capital may be increased without giving regard to the shareholders pre-emptive rights to subscribe for new shares and convertible bonds and to resolve on the subscription prices and other terms and conditions of the subscription. If the share
capital is increased through a share issuance, our Board of Directors will be entitled to resolve that the shares can be subscribed for in exchange for a property in kind or otherwise on certain conditions. This authorization will remain valid for
one year.



As of December 31, 2004, none of our shares were
held as treasury shares. As authorized by the Annual General Meeting on March 24, 2004, we purchased 8,000,000 of our shares in open market transactions during the first quarter of 2005. After the invalidation of these shares pursuant to a decision
taken at the Annual General Meeting on March 31, 2005, the number of shares registered on April 12, 2005, was 516,450,272.



In April 2005, a total of 1,557,629 UPM stock options 1998A were used for the subscription of 3,115,258 shares. Furthermore, a total of 1,842,800 stock
options 1998B were used for the subscription of 3,685,600 shares. The shares have been registered in the Finnish Trade Register on May 16, 2005. During the period of January 2March 31, 2005, no stock options were used for the subscription of
shares. As a result of the subscriptions, the number of our shares was increased by 6,800,858 new shares and our share capital by 11,561,458.60. After the registration, the total number of our shares is 523,251,130 and the share captial of the
company is now 889,526,021.



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Memorandum and Articles of Association



Organization and Register



UPM-Kymmene
Corporation is organized under the laws of the Republic of Finland. We are registered in the Trade Register maintained by the National Board of Patents and Registration of Finland, under the business identity code 104 1090-0.



Purpose and Object



Pursuant to Section 2 of our articles of association, the sphere of
operations of the Company is to engage, either directly or through its subsidiaries, in the forest, packaging, chemical, engineering, marine technology and energy production industries as well as other business operations related to these. The
Company may also own and control real estate, shares and other securities, engage in other investment activities, and act as the parent company of the group that it forms.



Share Capital



For a description of our share capital, see Authorized Share Capital above.



Corporate Governance



Matters pertaining to corporate governance are mainly regulated under the
Companies Act. For discussion relating to corporate governance, see also Item 6. Directors, Senior Management and Employees.



Pre-emptive Rights



Under Finnish law, existing shareholders of Finnish companies have preferential rights to subscribe, in proportion to their shareholdings, for new shares
of such companies as well as for issues of stock options or debt instruments convertible into shares or carrying stock options to subscribe for shares, unless the corporate resolution approving such issue provides otherwise. Under the Companies Act,
a resolution waiving pre-emptive rights must be approved by at least two-thirds of the votes cast and the shares represented at the general meeting of shareholders.



General Meeting of Shareholders



Under the Companies Act, shareholders exercise their power to decide on corporate matters at general meetings of shareholders. Our articles of association
require that a general meeting of shareholders be held annually before the end of June on a date decided by our Board of Directors to decide upon the approval of the income statement and balance sheet and measures warranted by the profit or loss,
discharges from liability, emoluments for the members of the Board of Directors and remuneration of auditors, number and the members of the Board of Directors and auditors, as well as matters raised by individual shareholders. Extraordinary general
meetings of shareholders in respect of specific matters are held when considered necessary by our Board of Directors, or when requested in writing by an auditor of the Company or by shareholders representing at least one-tenth of all of our issued
shares.



Under our articles of association, a shareholder must
give notice to the Company of his or her intention to attend a general meeting no later than the date and time specified by the Board of Directors in the notice of the general meeting, which may not be earlier than five days before the general
meeting (the Registration Date). Under our articles of association, notices of general meetings of shareholders must be given not earlier than two months prior to the Registration Date and not later than 17 days before the meeting by
publishing an announcement of the meeting in at least two Finnish daily newspapers published in the Helsinki area designated by the Board of Directors at its discretion.



Inasmuch as the shares have been transferred to the Finnish Book-Entry Securities System, in order to have the right to
attend and vote at a general meeting, a shareholder must be registered not later than ten days prior to the relevant general meeting in the



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register of shareholders kept by the FCSD in accordance with the Companies Act and the Act on the Book-Entry Securities System. See Item 9. The Offer
and ListingThe Finnish Book-Entry Securities System. Voting rights may not be exercised by a shareholder if such shareholders shares are registered in the name of a nominee. A beneficial owner wishing to exercise such rights should
seek a temporary registration in the register of shareholders not later than ten days prior to the relevant general meeting. There are no quorum requirements for general meetings of shareholders in the Companies Act or the articles of association.
Hence, it is possible that, depending on the attendance at any particular general meeting of shareholders, a relatively limited number of shareholders may approve resolutions put forward at such meeting.



Voting



A shareholder may attend and vote at a general meeting of shareholders in person or through an authorized representative.
Shareholders that have not transferred their shares to the Finnish book-entry securities system may also attend and vote at general meetings if they were registered in the share register maintained by the Company before the date on which the shares
should have been transferred to the book-entry securities system at the latest and provide evidence of their ownership of shares on the date of the general meeting.



Each of our shares is entitled to one vote at a general meeting of shareholders. While resolutions are usually passed by a
majority of the votes cast, certain resolutions, such as a resolution to amend the articles of association, a resolution to issue shares not subject to shareholders preferential subscription rights and, in certain cases, a resolution regarding
a merger or liquidation of the Company, require a majority of at least two-thirds of the votes cast and the shares represented at the general meeting of shareholders. Any amendment to the redemption liability (purchase obligation) provisions of the
articles of association requires at least three-fourths of the votes cast and the shares represented at the relevant meeting.



Liquidation



If the Company were to be liquidated, any liquidation proceeds remaining after all of its liabilities were paid would be distributed to its shareholders
in proportion to their shareholdings.



Purchase Obligations



Our articles of association contain a clause
according to which a shareholder or a group of related shareholders who or which has acquired either 33 1/3% or 50% of the total ordinary shares or of the total voting power of the Company, at the minimum, is obligated to purchase the shares of all
other shareholders who request such purchase. The articles of association specify that the purchase price of such shares shall be the higher of the following:



|(a) | the weighted average trading price of the ordinary shares of the Company on the Helsinki Stock Exchange during the ten (10) business days prior to the day on which the shareholder
obligated to purchase ordinary shares of the Company in accordance with this provision informed the Company that the above-mentioned percentage of ownership of ordinary shares or votes has been reached or exceeded or, in the event that no such
notification is provided to the Company, or such notification is provided after the expiration of the period of time set forth in the articles of association, then during the ten (10) business days prior to the day on which the Companys Board
of Directors is informed in any other manner; or
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | the weighted average price per share, which the shareholder obligated to purchase ordinary shares of the Company in accordance with the provision of the articles of association has
paid for the ordinary shares that he/she has procured or obtained in some other way over the 12 months preceding the date defined in paragraph (a) above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, such shareholder is also obligated to purchase any subscription rights, warrants or convertible bonds issued by
the Company if so requested by the holder or holders thereof.



77



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Pursuant to the Securities Market Act, a shareholder who acquires in excess of two-thirds of the total
voting rights of the shares of a company after the commencement of a public quotation of the shares must offer to purchase the remaining shares.



Control of Foreign Ownership



Restrictions on foreign ownership of Finnish companies were abolished as of January 1, 1993. However, under the Act on the Monitoring of Foreigners
Corporate Acquisitions in Finland of 1992, clearance by the Finnish Ministry of Trade and Industry would be required if a foreign person or entity, other than a person or entity from another member state of the European Economic Area or the
Organization for Economic Cooperation and Development, or a Finnish entity controlled by one or more such foreign persons or entities, were to acquire a holding of one-third or more of the voting power of the Company. The Ministry of Trade and
Industry could refuse clearance where the acquisition would jeopardize important national interests, in which case the matter would be referred to the government of Finland.



Material Contracts



In May 2001, we entered into an agreement to acquire the shares of Haindl for a total purchase price of 3,640 million. In a back-to-back
transaction, we sold two of the six Haindl mills, Walsum and Parenco, to Norske Skog for a total consideration of 1,028 million. Below is a description of the agreement dated May 28, 2001 governing the Haindl acquisition (the Share
Purchase Agreement).



Haindl Share Sale and Purchase
Agreement



The Share Purchase Agreement entered into on
May 28, 2001 by and among the shareholders of Haindl (the Sellers), UPM-Kymmene Beteiligungs GmbH (the German Subsidiary) and UPM-Kymmene Corporation defines the terms of the sale by Haindls shareholders and the
purchase by our German Subsidiary of all of the shares of Haindl.



As a general matter, the representations and warranties of the Share Purchase Agreement survived the date of the closing, November 30, 2001, for a period of 12 months, but claims asserted against one of two escrow accounts are treated
differently under the Share Purchase Agreement. The time limitations generally concern the notification of a claim and not its resolution.



Under the terms of the Share Purchase Agreement, 364 million of the total purchase price was deposited by the Sellers on the date of the closing in
an escrow account to cover claims concerning discrepancies in any information in the financial statements provided by the Sellers (the First Escrow Account). Claims relating to the financial statements were required to be brought no
later than February 28, 2002, and no claims were brought in respect of the First Escrow Account. A review of the financial statements by Deloitte Touche was completed as of February 28, 2002. The funds in the First Escrow Account have now been
released to the Sellers.



Under the terms of the Share Purchase
Agreement, 291 million of the total purchase price was deposited by the Sellers on the date of the closing in an escrow account to cover any representation or warranty claims arising from the Share Purchase Agreement, including environmental,
tax and European Union regulatory claims (the Second Escrow Account). For the Second Escrow Account, claims relating to the representations and warranties in the Share Purchase Agreement were to be brought no later than November 30,
2002, claims relating to environmental issues were to be brought no later than November 30, 2003, and claims relating to European Union proceedings and tax matters are not subject to any time limit. All claims against the Second Escrow Account have
been settled by the parties and the funds in the Second Escrow Account were released to the Sellers on October 14, 2004.



Under the terms of the Share Purchase Agreement, the Sellers retained ownership of Augsburg Airways, the regional airline, and certain properties that do
not have great financial effect on our operations.



The Share
Purchase Agreement gives us the unrestricted right to use the name Haindl in any way if it is in connection with the Haindl business.



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Other Arrangements relating to Haindl Acquisition



On March 19, 2003, Georg Holzhey, a major shareholder in Haindl before the
acquisition and our Executive Vice President for Procurement and Logistics and member of our Executive Team between January 2002 and January 2003, was elected a member of our Board of Directors in the annual general meeting of our shareholders. In
connection with the acquisition of Haindl, Georg Holzhey and Friedrich Holzhey, a major shareholder in Haindl and a member of our Board of Directors between March 2002 and March 2003, received in cash portions of the total purchase price in the
amount of approximately 10.9 million and 85.6 million, respectively. In addition, Georg and Friedrich Holzhey subscribed for 321,323 and 2,512,259 of our shares, respectively, as part of the 12.3 million share issue offered to a group of
Haindl shareholders on November 30, 2001 in accordance with the subscription agreement entered into as part of the Haindl transaction.



Exchange Controls



Our shares may
be bought by non-residents of Finland (non-residents) on the Helsinki Stock Exchange without any separate Finnish exchange control consent. Non-residents may receive dividends without a separate Finnish exchange control consent, the
transfer out of Finland being subject to payment by the Company of withholding taxes. Non-residents that have acquired our shares may receive shares pursuant to a bonus issue or through participation in a new issue without a separate Finnish
exchange control consent. Shares may be sold in Finland by non-residents and the proceeds of such sale may be transferred out of Finland in any convertible currency. There are no Finnish exchange control regulations applying to the sale of shares of
the Company by non-residents to other non-residents.



Taxation



The following
description is based on tax laws of Finland and the United States as in effect and available on the date of this annual report and is subject to changes in Finnish and U.S. law, including changes that could have retroactive effect. Prospective
investors should consult their professional advisors as to the tax consequences of the purchase, ownership and disposition of shares or ADSs, including, in particular, the effect of tax laws of any other jurisdiction.



Finnish Taxation



The following is a description of the material Finnish income tax consequences of the purchase, ownership and disposition of
shares or ADSs by a holder who is not a resident of Finland (a non-resident). It does not purport to be a complete analysis of all potential Finnish tax consequences to holders of the shares and ADSs. Prospective investors should consult
their own advisers as to the consequences of the purchase, ownership and disposition of shares or ADSs in light of their particular circumstances, including the effect of any foreign, state, or local tax laws. Statements regarding Finnish tax laws
set forth below are based on the laws in force and as interpreted by the relevant taxation authorities as of the date hereof and are subject to any changes in Finnish law, or in the interpretation thereof by the relevant taxation authorities.



A beneficial owner of an ADS should be treated as the owner of
the underlying share for purposes of the current Convention between the Government of the United States of America and the Government of the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income and on Capital and for Finnish tax purposes. Accordingly, the Finnish tax consequences to owners of shares discussed below apply also to beneficial owners of ADSs.



Companies



Finnish companies are subject to national corporate income tax on their worldwide income. Starting from tax year 2005, the corporate income tax rate is
26%. The corporate income tax rate was 29% in tax years 2000-2004 and 28% in tax years 1996-1999. Within this context the tax year corresponds to calendar year.



Finland applied an imputation or avoir fiscal system until 2005 for profits distributed as dividends, but in June 2004 the Parliament of the
Republic of Finland approved a Corporate and Capital Tax Reform according to which the imputation system was



79



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replaced with effect from January 1, 2005 with a limited double taxation system. As part of the Tax Reform, capital gains related to certain shareholdings of
Finnish resident companies are tax exempt from May 19, 2005 onwards, correspondingly capital losses and write offs are not any more tax deductible.



Under the avoir fiscal system, there was a minimum tax payable to the Finnish tax authorities by a Finnish company depending on the amount of
profit distributed as dividends. For the tax year 1999, the applicable minimum tax was 7/18 of the dividends distributed to the shareholders and for the tax year 2000, the applicable minimum tax was 29/71. For tax years 2003, 2002 and 2001 the
applicable minimum tax was also 29/71. To the extent that this minimum tax exceeded or was less than the corporate tax charge payable to the Finnish taxation authorities calculated on taxable income, a tax surplus was established or a supplementary
tax liability was imposed (as appropriate). Any tax surplus generated may be used, for a period of ten years, to offset any supplementary tax which may become payable in subsequent years.



Under the new limited double taxation system the corporate income will first be taxed according to the corporate income tax
at the rate of 26% at the company level and subsequently the dividends received by shareholders will be taxed at the appropriate rates depending on the type of the company distributing dividends and on the other hand whether the resident shareholder
is a listed company, privately held company or a natural person  though in many cases the dividend received is at least partly exempt from income tax. Under the new taxation system there is no minimum tax payable by the companies depending on
the amount of dividends, as what was the case with the old avoir fiscal system. If the listed Finnish company distributes dividends to a shareholder, which is a natural person and resident of Finland, 70% of the dividends received by such a
shareholder will be taxable as capital income, thus, the applicable tax rate will be 28%. The rest of the dividend income received by such a shareholder will not be treated as taxable income. Year 2005 serves as a transition period, when only 57%
(instead of 70%) of the dividends will be taxable as capital income. Finnish company paying the dividends is responsible for withholding an advance tax at the rate of 15% of the amount of dividends (the tax rate will be 19% starting from year 2006).



Non-residents of Finland are subject to Finnish withholding
tax on dividends paid by a Finnish company.



Shareholders and Holders of
ADSs



Tax Credit on Dividends



The Finnish avoir fiscal system was applied in its entirety only to
shareholders who were residents of Finland. Under the avoir fiscal system, a tax credit is available to resident shareholders on the payment of dividends by a Finnish company equal to the lesser of, the tax paid by such company for its income
and 29/71 of the dividend paid, as described above. Because corporate income tax rate and the tax credit were of the same size, no taxes were generally payable by shareholders in respect of dividends income received from a listed Finnish company.
The tax credit is not generally available to non-residents. Shareholders who are non-residents may, however, be entitled to the tax credit in whole or in part where there is a double taxation treaty with Finland that contains the appropriate
provisions. Currently, the only such tax treaty in force is with Ireland, entitling certain shareholders resident in Ireland to a tax credit equal to one-half of the credit available to residents of Finland.



Withholding Tax on Dividends



Non-residents of Finland are subject to Finnish withholding tax on dividends
paid by a Finnish company. In the absence of any applicable treaty, the rate of withholding tax is 28% as from January 1, 2005 according to the new Corporate and Capital Tax Reform. The corresponding rate of withholding tax from 2000 through 2004
was 29% and in 1999 the rate was 28%. Finland has entered into double taxation treaties with many countries pursuant to which the withholding tax is reduced on dividends paid to persons entitled to the benefits under such treaties, unless the shares
from which such dividends derive are effectively connected with a permanent establishment or a fixed base in Finland, in which case Finnish income taxes are levied on the dividends so derived. In the case of the treaty with the United States, the
withholding tax rates are reduced to 15%. The Finnish company paying the dividend is responsible for deducting any applicable Finnish withholding tax.



A reduction of such withholding tax rate can be obtained at source upon the submission of a Source Tax Card or the required information (name, date of
birth and address) to the payer prior to the payment of dividends. If such a Source Tax Card or such



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information is not submitted in a timely manner, a refund of tax withheld in excess of the applicable treaty rate can be obtained upon application to the
local tax authority. Citibank N.A., as Depositary for the ADSs, has agreed to use reasonable efforts to make and maintain arrangements enabling holders to receive tax credits, reduction in Finnish withholding tax or other benefits (pursuant to
treaty or otherwise) relating to dividend payments on the ADSs at the time the dividend is paid.



No withholding tax is levied under Finnish law on dividends paid to corporate entities that reside in the European Union and directly hold at least 25% of
the capital of the distributing Finnish company, provided that such entities are not entitled to the tax credit under the Finnish avoir fiscal system and are subject to a general corporate income tax in their respective countries of
residency, as specified in Directive 90/435/EEC. Starting from the beginning of the year 2005 the requirement concerning the ownership of shares will be 20%. Additionally, due to the abolishment of the Finnish avoir fiscal system the
requirement concerning avoir fiscal will no longer apply starting from the beginning of the year 2005.



Finnish Transfer Tax



There is no transfer tax payable in Finland on share transfers made on the Helsinki Stock Exchange. If the transfer is not made on the Helsinki Stock
Exchange, a transfer tax at the rate of 1.6% of the relevant sales price is payable by the buyer. However, if the buyer is neither a resident of Finland nor a Finnish branch of a foreign credit institution nor a Finnish branch of a foreign brokerage
firm, the seller must collect the tax from the buyer. If neither the buyer nor the seller is a resident of Finland or a Finnish branch of a foreign credit institution or a Finnish branch of a foreign brokerage firm and it is not a question of
transfer of shares in a housing or real estate company, the transfer of shares will be exempt from Finnish transfer tax. No transfer tax is payable in connection with newly issued shares.



Finnish Capital Gains and Other Taxes



Shareholders who are not resident in Finland, and who do not engage in trade or business through a permanent establishment
or fixed base in Finland which could be regarded as the holder of the relevant shares or ADSs, will normally not be subject to Finnish taxes on capital gains realized on the transfer of shares. Transfers of shares by a non-resident of Finland by way
of gift or by reason of the death of the owner are subject to Finnish gift or inheritance tax respectively if either the transferor or the transferee was a resident of Finland at the time of death or when the gift was given, unless Finland has
waived its rights in a tax treaty to impose tax.



U.S. Federal Income
Taxation



General



The following is a description of the principal United States federal income
tax consequences that may be relevant with respect to the acquisition, ownership and disposition of our shares or ADSs, which are evidenced by American Depositary Receipts. This description addresses only the United States federal income tax
considerations of United States Holders (as defined below) that are initial purchasers of our shares or ADSs at the initial issue price and that will hold such shares or ADSs as capital assets. This description does not address tax considerations
applicable to holders that may be subject to special tax rules, such as banks, financial institutions, insurance companies, real estate investment trusts, grantor trusts, regulated investment companies, dealers or traders in securities or
currencies, tax-exempt entities, pension funds, persons that received our shares or ADSs pursuant to an exercise of employee stock options or rights or otherwise as compensation for the performance of services, persons that will hold our shares or
ADSs as part of a hedging or conversion transaction, a position in a straddle or in another integrated transaction for United States federal income tax purposes, persons that have a functional currency
other than the United States dollar, partnerships or other entities taxable as partnerships for United States federal income tax purposes, holders subject to the alternative minimum tax, individual holders subject to the tax on expatriates or
holders that own (or are deemed to own) 10% or more (by voting power or value) of our shares. This description does not address any state, local or non-U.S. tax consequences of the acquisition, ownership and disposition of our shares or ADSs.
Moreover, this description does not address the consequences of any United States federal tax other than income tax, including but not limited to the U.S. federal estate and gift taxes.



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This description is based on (i) the Internal Revenue Code of 1986, as amended (the Code),
existing, proposed and temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof and (ii), in part, on the representations of the depositary and
the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax
consequences described below.



The United States Treasury
Department has expressed concern that depositaries for American Depositary Receipts, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of United States
foreign tax credits by United States holders of such receipts or shares. Accordingly, the analysis regarding the availability of a United States foreign tax credit for Finnish taxes and sourcing rules described below could be affected by future
actions that may be taken by the United States Treasury Department.



For purposes of this description, a United States Holder is a beneficial owner of our shares or ADSs that, for United States federal income tax purposes, is: (i) a citizen or resident of the United States, (ii) a partnership or
corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), (iii) an estate the income of which is subject to United States federal
income taxation regardless of its source, or (iv) a trust, if such trust validly elects to be treated as a United States person for United States federal income tax purposes or if (A) a court within the United States is able to exercise primary
supervision over its administration and (B) one or more United States persons have the authority to control all of the substantial decisions of such trust. A Non-United States Holder is a beneficial owner of our shares or ADSs that is
not a United States Holder.



If a partnership (or any other
entity treated as a partnership for United States federal income tax purposes) holds our shares or ADSs, the tax treatment of the partnership or a partner in such partnership generally will depend upon the status of the partner and the activities of
the partnership. A partnership or a partner in a partnership that holds our shares or ADSs should consult its own tax advisor.



Ownership of ADSs in General



For United States federal income tax purposes, if you are a holder of ADSs, you generally will be treated as the owner of our shares represented by such
ADSs.



Distributions



If you are a United States Holder, the gross amount of any distribution made
to you of cash or property (other than certain distributions, if any, of our shares or ADSs distributed pro rata to all our shareholders, including holders of ADSs) with respect to your shares or ADSs, before reduction of any Finnish taxes withheld
thereon, will be includible in your income as dividend income to the extent such distributions are paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such dividends will not
be eligible for the dividends received deduction generally allowed to corporate United States Holders. To the extent, if any, that the amount of any distribution by the Company exceeds our current and accumulated earnings and profits as determined
under United States federal income tax principles, it will be treated first as a tax-free return of your adjusted tax basis in our shares or ADSs and thereafter as capital gain. We do not maintain calculations of our earnings and profits under
United States federal income tax principles.



Dividends
received by a non-corporate United States holder in tax years beginning on or before December 31, 2008 in respect of our shares or ADSs may, if eligible be taxed at a special reduced rate, provided that certain requirements are met, including a
requirement that the United States holder holds our shares or ADSs, as applicable, for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date.



Any dividend paid in euros (or any currency other than U.S. dollars) will be included in your gross income in an amount
equal to the U.S. dollar value of the euro (or, if not euros, the currency in which the dividend was paid) on the date of receipt by the United States Holder, in the case of shares, and by the depositary in the case of ADSs. Any gain or loss
realized by a United States Holder that subsequently sells or otherwise disposes of euros (or, any currency other than U.S. dollars), which gain or loss is attributable to currency fluctuations after the date of receipt of the dividend, will be
ordinary gain or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.



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Dividends received by a holder with respect to its shares or ADSs will be treated as foreign source
income, which may be relevant in calculating such holders foreign tax credit limitation. Subject to certain conditions and complex limitations on foreign tax credits generally, any Finnish tax withheld on dividends may be deducted from taxable
income or credited against the holders United States federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed
by the Company generally will constitute passive income, or, in the case of certain United States Holders, financial services income. United States holders should consult their tax advisors regarding the availability of, and
limitations on, any such foreign credit.



Subject to the
discussion below under Backup Withholding Tax and Information Reporting Requirements, if you are a Non-United States Holder of our shares or ADSs, you generally will not be subject to United States federal income or withholding tax on
dividends received by you on your shares or ADSs, unless such income is effectively connected with your conduct of a trade or business in the United States.



Sale or Exchange of Shares or ADSs



If you are a United States Holder, you generally will recognize gain or loss on the sale or exchange of your shares or ADSs equal to the difference
between the amount realized on such sale or exchange and your adjusted tax basis in your shares or ADSs. Such gain or loss will be capital gain or loss. If you are a non-corporate United States Holder, the maximum marginal United States federal
income tax rate applicable to such gain will be lower than the maximum marginal United States federal income tax rate applicable to ordinary income if your holding period for such shares or ADSs exceeds one year. Gain or loss, if any, recognized by
a United States Holder generally will be treated as United States source income or loss for United States foreign tax credit purposes. The deductibility of capital losses is subject to limitations.



The initial basis of your shares or ADSs will be the U.S. dollar value of the
euro denominated purchase price determined on the date of purchase. If the shares or ADSs are treated as traded on an established securities market, a cash basis United States Holder (or, if it elects, an accrual basis United States
Holder) will determine the dollar value of the cost of such shares or ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. The conversion of U.S. dollars to euros and the immediate use of that
currency to purchase shares or ADSs generally will not result in taxable gain or loss for a United States Holder.



With respect to the sale or exchange of shares or ADSs, the amount realized generally will be the U.S. dollar value of the payment received determined on
(i) the date of receipt of payment in the case of a cash basis United States Holder and (ii) the date of disposition in the case of an accrual basis United States Holder. If the shares or ADSs are treated as traded on an established securities
market, a cash basis taxpayer (or, if it elects, an accrual basis taxpayer) will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate on the settlement date of the sale.



Subject to the discussion below under Backup Withholding Tax and
Information Reporting Requirements, if you are a Non-United States Holder of our shares or ADSs, you generally will not be subject to United States federal income or withholding tax on any gain realized on the sale or exchange of such shares
or ADSs unless (i) such gain is effectively connected with your conduct of a trade or business in the United States or (ii) in the case of any gain realized by an individual Non-United States Holder, you are present in the United States for 183 days
or more in the taxable year of such sale or exchange and certain other conditions are met.



Backup Withholding Tax and Information Reporting Requirements



United States backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of stock.
Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, shares or ADSs made within the United States to a holder of shares or ADSs (other than an exempt recipient, including
a corporation, a payee that is not a United States person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the
sale or redemption of, shares or ADSs within the United States to a holder (other than an exempt recipient) if such holder fails to furnish its



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correct taxpayer identification number and other information or otherwise fails to comply with such backup withholding tax requirements. The current backup
withholding tax rate is 28%.



In the case of such payments made
within the United States to a foreign simple trust, foreign grantor trust or foreign partnership (other than a payment to a foreign simple trust, foreign grantor trust or foreign partnership that qualifies as a withholding foreign trust
or a withholding foreign partnership within the meaning of the applicable United States Treasury Regulations and a payment to a foreign simple trust, foreign grantor trust or foreign partnership that is effectively connected with the
conduct of a trade or business in the United States), the beneficiaries of the foreign simple trust, the persons treated as the owners of the foreign grantor trust or the partners of the foreign partnership, as the case may be, will be required to
provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements. Moreover, a payor may rely on a certification provided by a payee that is not a United States person
only if such payor does not have actual knowledge or a reason to know that any information or certification stated in such certificate is incorrect.



Amounts withheld as backup withholding are allowable as a credit against the holders federal income tax upon furnishing certain required information
to the IRS.



Documents on Display



We are
subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the Commission. These materials, including this annual report and the
exhibits thereto, may be inspected and copied at the Commissions Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the materials may be obtained from the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Commissions Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. The Commission also
maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. In addition, material submitted by us can be inspected at the offices of the
New York Stock Exchange at 20 Broad Street, New York, New York 10005.



|Item 11. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------



Market-sensitive Instruments and Financial Risk Management



The following discussion about our financial risk-management activities includes forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected
in the forward-looking statements.



Market risk represents the
risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in foreign currency exchange rates, interest rates and equity prices. The objective of our financial risk management strategy is to protect us
against unfavorable changes in financial markets, and thus help to secure profitability. The objectives and principles for financing activities are defined in our Financial Policy approved by our Board of Directors. Funding and management of the
financial risks are the responsibility of our central Treasury department in Finland.



In its financial risk management, the Group uses various financial instruments within specified limits to manage the primary market exposures associated with the underlying assets, liabilities, and anticipated
transactions. We use these instruments to reduce risk by essentially creating offsetting market exposures. We use derivative instruments that are held only for purposes other than trading. These contracts are entered into with financial institutions
in accordance with our financial policy, thereby reducing the risk of credit loss.



The following sensitivity analyses present the hypothetical loss in cash flows or fair values of the financial instruments and derivative financial instruments which were held by us as of December 31, 2004 and 2003,
and were subject to changes in foreign exchange rates, interest rates and equity prices. The range of sensitivities chosen for these analyses reflects our view of changes, which are reasonably possible over a one-year period.



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In the normal course of business, we also face risks that are either non-financial or non-quantifiable.
These risks principally include country risk, credit risk and legal risk and are not represented in the following analyses. We also face commodity price risk in relation to our use of wood pulp and energy in our operations. See Item 3. Key
InformationRisk Factors. We have entered into certain forward contracts at the end of 2004 to hedge our exposure to changes in energy and recycled fiber prices. We have not had significant involvement in any other derivative commodity
instruments. Accordingly, commodity price risk is also not represented in the following analyses.



Foreign Currency Exposure



We
operate internationally and thus are exposed to foreign exchange risk arising from fluctuations in exchange rates of various currencies. Our financial results and competitiveness are also affected indirectly by the domestic currencies of our main
competitors, principally the U.S. dollar, the Canadian dollar and the Swedish krona.



Foreign currency denominated sales and purchases together with foreign currency denominated assets and liabilities give rise to foreign currency exposure. Foreign currency exposure is managed in two parts: that
relating to forecasted net foreign currency flows and that relating to foreign currency denominated balance sheet items.



In this regard, our financial policy:



| |  |  | is to hedge 50% of the forecasted net foreign currency flows for the 12 months ahead; however, the figure may vary between 25 and 100%. Net foreign currency cash flow exposures are
hedged with derivative financial instruments like forward contracts, options and swap agreements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | is to leave no more than 300 million of the net balance sheet position (comprising foreign currency denominated debts and receivables) unhedged. For purposes of hedging any
excess exposure, we use forward contracts, options and swap agreements; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | is not to hedge our equity exposure arising from foreign net investments.
| | - |  | -------------------------------------------------------------------------



Using a hypothetical adverse change of 10% of exchange rates (a weakening of the euro), the hypothetical loss in cash flows of derivative and
non-derivative financial instruments and foreign currency denominated balance sheet positions at December 31, 2004 and 2003 was estimated to be 133 million and 125 million, respectively. The hypothetical loss was modeled consistent with
our forecasted 12-month currency flows.



Interest Rate Risk



Our financial
policy with respect to the management of interest rate risk is to maintain an average interest fixing period of twelve months (plus or minus six months) on our net debt portfolio. Having a relatively shorter interest fixing period may increase the
volatility of the average interest rate paid by us. On the assumption that yield curves will be positive, this approach reduces interest costs in the long term as compared to an interest fixing period greater than twelve months, therefore making it
less costly to borrow at short-term rates. For this purpose, we enter into various derivative financial instruments, including forward contracts, options and swap agreements.



As of December 31, 2004 and 2003, there was an estimated hypothetical negative effect of 53 million and 58
million, respectively, on fair value of our net debt portfolio (including derivative financial instruments) as a result of interest rate exposures existing at December 31 consequent to a 100 basis point (or 1% per year) downward parallel shift in
the yield curve.



Equity Price Risk



We have
certain investments in publicly traded companies (principally traded on the Helsinki Stock Exchange). These securities have exposure to price risk. The fair market value of the equity investments held by us as of December 31, 2004 and 2003 was
233 million and 197 million, respectively. The estimated potential loss in fair market value resulting from a hypothetical 10% adverse movement in equity prices quoted by stock exchanges was 23 million as of December 31, 2004 as
compared to 20 million as of December 31, 2003. Currently, there are no outstanding derivative financial instruments designated as hedges of these investments in publicly traded companies.



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|Item 12. | Description of Securities Other than Equity Securities
|-------- | ------------------------------------------------------



Not applicable.



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PART II



|Item 13. | Defaults, Dividend Arrearages and Delinquencies
|-------- | -----------------------------------------------



None.



|Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds
|-------- | ----------------------------------------------------------------------------



None.



|Item 15. | Controls and Procedures
|-------- | -----------------------



Our management, under the supervision of and with the participation of our President and Chief Executive Officer and our Executive Vice President and
Chief Financial Officer, has evaluated the effectiveness of the Groups disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) on December 31, 2004. Based on such evaluation,
our President and Chief Executive Officer, and our Executive Vice President and Chief Financial Officer, except as described below in relation to our U.S. GAAP reporting, have concluded that, as of such date, the Groups disclosure controls and
procedures were effective to ensure that material information relating to the Group was made known to them by others within the Group, particularly during the period in which this annual report was being prepared.



In connection with the preparation of our financial statements and our annual
report on Form 20-F for the year ended December 31, 2004, we were provided with additional information relating to the U.S. GAAP reporting of the financial statements of one of our associated companies accounted for in our financial statements using
the equity method. This information indicated that the associated company, Pohjolan Voima Oy, or PVO, which prepares its statutory financial statements in accordance with generally accepted accounting standards in Finland, had not previously
provided us information as to the effect of the adoption of FASB Statement No.143, Accounting for Asset Retirement Obligations, or FAS 143.



Consequently, we have restated our 2003 consolidated financial statements in accordance with U.S. GAAP to reflect the adoption of FAS 143 for PVO as of
January 1, 2003, as discussed in more detail in Note 40 to our audited financial statements included elsewhere in this annual report. The restatement increased our net income and shareholders equity by 75 million. Furthermore, we are in
the process of taking additional measures with which we expect to obtain further detailed U.S. GAAP information from our associated companies. We also plan to supplement our U.S. GAAP expertise and resources in the next year.



There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of such controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of
achieving their controls objectives. Acknowledging this, we have designed our disclosure controls and procedures to provide such reasonable assurance.



There were no significant changes in the Groups internal controls over financial reporting that occurred during the year ended December 31, 2004
that have materially affected, or are reasonably likely to materially affect, the Groups internal control over financial reporting. However, in connection with the material weakness in internal control over financial reporting discussed above,
we are currently in the process to remediate the material weakness.



|Item 16. | [Reserved]
|-------- | ----------



|Item 16A. | Audit Committee Financial Expert
|--------- | --------------------------------



The Board of Directors of the Group has determined that it has at least one audit committee financial expert, as defined in Item 16A of Form
20-F, serving on the Audit Committee. Michael Bottenheim is the director whom the Board of Directors has determined to be an audit committee financial expert. Holders of ADSs should understand that this designation is a disclosure requirement of the
Commission related to Mr. Bottenheims experience and understanding with respect to certain accounting and auditing matters. The designation does not impose on to Mr. Bottenheim any duties, obligations or liability that are greater than are
generally imposed on him as a member of the Audit Committee and Board of Directors, and his designation as an audit committee financial expert pursuant to this Commission requirement does not affect the duties, obligations or liability of any other
member of the Audit Committee or Board of Directors.



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|Item 16B. | Code of Ethics
|--------- | --------------



We have adopted a code of ethics consisting of several policies that apply to all of our employees, including our President and Chief Executive Officer,
Executive Vice President and Chief Financial Officer and Senior Vice President, Financial Control. These policies are available through our web site at http://www.upm-kymmene.com by clicking About Us  Corporate
Responsibility.



|Item 16C. | Principle Accounting Fees and Services
|--------- | --------------------------------------



Audit Fees. The total fees paid to our principal accountant, PricewaterhouseCoopers, for the audit of the annual consolidated financial for
the years ended December 31, 2004 and December 31, 2003 were 2.9 million and 2.9 million respectively.



Audit-Related Fees. The total fees related to assurance and other services that reasonably relate to the audit or review of financial
statements paid to PricewaterhouseCoopers were 0.8 million and 0.6 million respectively, for the years ended 2004 and 2003.



Tax Fees. Fees paid to PricewaterhouseCoopers, associated with tax compliance and tax consultation were 1.2 million and 1.3
million respectively, for the years ended 2004 and 2003.



All Other Fees. We did not pay any other fees to PricewaterhouseCoopers other than those described above in 2004 and 2003.



The Audit Committee has adopted a formal policy on auditor independence requiring the approval by the Audit Committee of all professional services
rendered by the Companys independent auditor prior to the commencement of the specified services. The Audit Committee will consider annually and, if appropriate, approve the provision of audit services by the Companys independent auditor
and consider and, if appropriate, pre-approve the provision of certain defined audit and non-audit services. The Audit Committee will also consider on a case-by-case basis and, if appropriate, approve specific engagements that are not otherwise
pre-approved.



Any proposed engagement that does not fit within
the definition of a pre-approved service may be presented to the Audit Committee for consideration at its next regular meeting or, if earlier consideration is required, to the Audit Committee for action by written consent. The Audit Committee has
also delegated to the Chair of the Audit Committee the authority to pre-approve audit-related and non-audit services not prohibited by law to be performed by the Companys independent auditors provided that the Chair shall report any decisions
to pre-approve such audit-related or non-audit services and fees to the full Audit Committee at its next regular meeting.



All of the services described in Audit-Related Fees, Tax Fees and All Other Fees, were approved by the Audit Committee in
accordance with the Companys formal policy on auditor independence.



|Item 16D. | Exemptions from the Listing Standards for Audit Committee
|--------- | ---------------------------------------------------------



Not applicable.



|Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchases
|--------- | ---------------------------------------------------------------------



Not applicable.



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PART III



|Item 17. | Financial Statements
|-------- | --------------------



Not applicable.



|Item 18. | Financial Statements
|-------- | --------------------



See pages F-1 to F-94 incorporated herein by reference.



|Item 19. | Exhibits
|-------- | --------



Documents filed as exhibits to this annual report.



1.1 Articles of Association of UPM-Kymmene as amended to date (incorporated herein by reference to Exhibit 1 of the annual report on Form 20-F for the
year ended December 31, 2002, as filed with the Securities and Exchange Commission on April 28, 2003).



2.1 Amended and Restated Trust Deed in respect of 5 billion Global Medium Term Note Programme of UPM-Kymmene Corporation and UPM-Kymmene Finance
B.V. guaranteed by UPM-Kymmene Corporation dated June 28, 2004.



4.1 Management Share Options Terms and Conditions, authorized by the annual general shareholders meeting of March 25, 1998, relating to the administration of stock options for the management of UPM-Kymmene (incorporated herein by
reference to Exhibit 4.1 of the annual report on Form 20-F for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on April 4, 2001).



4.2 Key Personnel Stock Options Terms and Conditions, authorized by the annual general shareholders meeting of March
19, 2002, relating to the administration of stock options for the key personnel of UPM-Kymmene (incorporated herein by reference to Exhibit 4.2 of the annual report on Form 20-F for the year ended December 31, 2001, as filed with the Securities and
Exchange Commission on May 31, 2002).



4.3 Contract of
Employment for Jussi Pesonen, President and Chief Executive Officer of UPM-Kymmene, dated February 17, 2004 (incorporated herein by reference to Exhibit 4.3 of the annual report on Form 20-F for the year ended December 31, 2003, as filed with the
Securities and Exchange Commission on June 21, 2004).



4.4
Haindl Share Sale and Purchase Agreement by and among the Sellers, who are the shareholders of Haindl, UPM-Kymmene Beteiligungs GmbH and UPM-Kymmene Corporation dated May 28, 2001 (the Share Sale and Purchase Agreement) (incorporated
herein by reference to Exhibit 4.5 of the annual report on Form 20-F for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on May 31, 2002).



4.5 Amendment I to the Share Sale and Purchase Agreement, dated June 12, 2001 (incorporated herein by reference to Exhibit
4.6 of the annual report on Form 20-F for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on May 31, 2002).



4.6 Amendment II to the Share Sale and Purchase Agreement, dated November 26, 2001 (incorporated herein by reference to Exhibit 4.7 of the annual report
on Form 20-F for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on May 31, 2002).



4.7 Stock Purchase Agreement between UPM-Kymmene Investment, Inc. and Bemis Company, Inc., dated as of August 20, 2002 (incorporated herein by reference
to Exhibit 4.8 of the annual report on Form 20-F for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on April 28, 2003).



4.8 Amendment I to the Stock Purchase Agreement between UPM-Kymmene Investment, Inc. and Bemis Company, Inc., dated as of March 13, 2003 (incorporated
herein by reference to Exhibit 4.9 of the annual report on Form 20-F for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on April 28, 2003).



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4.9 Amendment II to the Stock Purchase Agreement between UPM-Kymmene Investment, Inc. and Bemis Company,
Inc., dated as of April 10, 2003 (incorporated herein by reference to Exhibit 4.10 of the annual report on Form 20-F for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on April 28, 2003).



4.10 Agreement between UPM-Kymmene Corporation and Juha Niemelä dated
January 29, 2004 (incorporated herein by reference to Exhibit 4.11 of the annual report on Form 20-F for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on June 21, 2004).



4.11 Key Personnel Stock Options Terms and Conditions, authorized by the
annual general shareholders meeting of March 31, 2005, relating to the administration of Stock Options for the key personnel of UPM-Kymmene.



6.1 Under IFRS, basic earnings per share is calculated by taking profit for the period divided by the adjusted average number of shares during the period,
excluding own shares. The computation of diluted earnings per share is similar to that for basic earnings per share, except that it assumes the potentially dilutive securities, such as convertible bonds, were converted to shares as of the beginning
of the year. A description of the computation of earnings per share under U.S. GAAP is included in Note 40I(k) of the notes to the consolidated financial statements included herein.



8.1 For significant subsidiaries as of the end of the year covered by this annual report, see Item 4. Information on
the CompanyOrganizational Structure.



12.1
Certification by the President and Chief Executive Officer of UPM-Kymmene Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



12.2 Certification by the Executive Vice President and Chief Financial Officer of UPM-Kymmene Corporation pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.



13 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



90



---

SIGNATURES



The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.



Date: May 26, 2005



UPM-KYMMENE CORPORATIONBy:

/s/ Jouko TaipaleName:

Jouko TaipaleTitle:

Senior Vice President, Financial ControlBy:

/s/ Olavi KauppilaName:

Olavi KauppilaTitle:

Senior Vice President, Investor Relations




91



---

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



UPM-Kymmene Corporation



Consolidated
Financial Statements



|                                                                                              |  |     
|--------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  | Page
|Report of Independent Registered Public Accounting Firm                                       |  | F-2 
|                                                                                              | 
|Consolidated Income Statement for each of the years ended December 31, 2004, 2003 and 2002    |  | F-3 
|                                                                                              | 
|Consolidated Balance Sheet as of December 31, 2004 and 2003                                   |  | F-4 
|                                                                                              | 
|Consolidated Statement of Changes in Shareholders Equity as of December 31, 2004 and 2003    |  | F-5 
|                                                                                              | 
|Consolidated Cash Flow Statement for each of the years ended December 31, 2004, 2003 and 2002 |  | F-6 
|                                                                                              | 
|Notes to the Consolidated Financial Statements                                                |  | F-7 



F-1



---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders of UPM-Kymmene Corporation



In our
opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders equity and cash flow present fairly, in all material respects, the financial position of UPM-Kymmene Corporation and its
subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with International Financial Reporting Standards. These financial
statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States) and auditing standards generally accepted in Finland, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



International Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is presented in note 40, as restated, to the consolidated financial statements.



PRICEWATERHOUSECOOPERS OY

Authorized Public Accountants



Helsinki, Finland

May 26, 2005



F-2



---



UPM-KYMMENE CORPORATION



CONSOLIDATED INCOME STATEMENT



|                                                            |  |                                         |   |  |      |         |   |      |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------- |  | --------------------------------------- | - |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                            |  | Year ended December 31,                 |  
|                                                            |  | Note                                    |   |  | 2004 |         |   | 2004 |   |        | 2003 |  |   | 2002   |  
|                                                            |  | (In millions, except per share amounts) |  
|Sales                                                       |  | (4                                      | ) |  | $    | 13,294  |   |      |  | 9,820  |      |  |  | 9,787  |   |  |  | 10,417 |  
|Other operating income                                      |  | (6                                      | ) |  |      | 228     |   |      |   | 168    |      |  |   | 58     |   |  |   | 91     |  
|Costs and expenses                                          |  | (7                                      | ) |  |      | (11,138 | ) |      |   | (8,227 | )    |  |   | (8,445 | ) |  |   | (8,580 | )
|Depreciation, amortization and impairment charges           |  | (8                                      | ) |  |      | (1,519  | ) |      |   | (1,122 | )    |  |   | (1,048 | ) |  |   | (1,125 | )
|                                                            |  |                                         |   |  |      |         |   |      |   |        |      |  |   |        |   |  |   |        |  
|Operating profit                                            |  | (4                                      | ) |  |      | 865     |   |      |   | 639    |      |  |   | 352    |   |  |   | 803    |  
|Share of results of associated companies and joint ventures |  | (9                                      | ) |  |      | 87      |   |      |   | 64     |      |  |   | 29     |   |  |   | 80     |  
|Gains on available-for-sale investments, net                |  | (10                                     | ) |  |      | 37      |   |      |   | 27     |      |  |   | 127    |   |  |   | 72     |  
|Exchange rate and fair value gains and losses               |  | (11                                     | ) |  |      | 65      |   |      |   | 48     |      |  |   | 107    |   |  |   | 25     |  
|Finance costs, net                                          |  | (11                                     | ) |  |      | (242    | ) |      |   | (178   | )    |  |   | (177   | ) |  |   | (270   | )
|                                                            |  |                                         |   |  |      |         |   |      |   |        |      |  |   |        |   |  |   |        |  
|Profit before tax                                           |  |                                         |   |  |      | 812     |   |      |   | 600    |      |  |   | 438    |   |  |   | 710    |  
|Income taxes                                                |  | (12                                     | ) |  |      | 554     |   |      |   | 409    |      |  |   | (121   | ) |  |   | (212   | )
|                                                            |  |                                         |   |  |      |         |   |      |   |        |      |  |   |        |   |  |   |        |  
|Profit after tax                                            |  |                                         |   |  |      | 1,366   |   |      |   | 1,009  |      |  |   | 317    |   |  |   | 498    |  
|Minority interest                                           |  |                                         |   |  |      | (1      | ) |      |   | (1     | )    |  |   | 2      |   |  |   | 2      |  
|                                                            |  |                                         |   |  |      |         |   |      |   |        |      |  |   |        |   |  |   |        |  
|Net profit for the period                                   |  |                                         |   |  | $    | 1,365   |   |      |  | 1,008  |      |  |  | 319    |   |  |  | 500    |  
|                                                            |  |                                         |   |  |      |         |   |      |   |        |      |  |   |        |   |  |   |        |  
|Earnings per share                                          |  |                                         |   |  |      |         |   |      |   |        |      |  |   |        |   |  |   |        |  
|Basic earnings per share                                    |  | (13                                     | ) |  |      | 2.61    |   |      |   | 1.93   |      |  |   | 0.61   |   |  |   | 0.96   |  
|Diluted earnings per share                                  |  | (13                                     | ) |  |      | 2.60    |   |      |   | 1.92   |      |  |   | 0.61   |   |  |   | 0.96   |  



The notes are an
integral part of these financial statements.



F-3



---



UPM-KYMMENE CORPORATION



CONSOLIDATED BALANCE SHEET



|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------ |  | ----------------------- | - |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                       |  | Year ended December 31, |  
|                                                       |  | Note                    |   |  | 2004 |        |   | 2004 |   |        | 2003 | 
|                                                       |  | (In millions)           |  
|ASSETS                                                 |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|Non-current assets                                     |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|Goodwill                                               |  | (15                     | ) |  | $    | 2,112  |   |      |  | 1,560  |      |  |  | 1,663  |  
|Other intangible assets                                |  | (16                     | ) |  |      | 703    |   |      |   | 519    |      |  |   | 522    |  
|Property, plant and equipment                          |  | (17                     | ) |  |      | 10,318 |   |      |   | 7,621  |      |  |   | 8,125  |  
|Investment property                                    |  | (18                     | ) |  |      | 51     |   |      |   | 38     |      |  |   | 42     |  
|Biological assets                                      |  | (19                     | ) |  |      | 1,547  |   |      |   | 1,143  |      |  |   | 1,127  |  
|Investments in associated companies and joint ventures |  | (20                     | ) |  |      | 1,418  |   |      |   | 1,047  |      |  |   | 1,012  |  
|Available-for-sale investments                         |  | (21                     | ) |  |      | 495    |   |      |   | 366    |      |  |   | 353    |  
|Non-current receivables                                |  | (22                     | ) |  |      | 325    |   |      |   | 240    |      |  |   | 244    |  
|Deferred tax assets                                    |  | (28                     | ) |  |      | 400    |   |      |   | 296    |      |  |   | 403    |  
|Other non-current assets                               |  | (23                     | ) |  |      | 30     |   |      |   | 22     |      |  |   | 18     |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|                                                       |  |                         |   |  |      | 17,399 |   |      |   | 12,852 |      |  |   | 13,509 |  
|                                                       |  |                         |   | 
|Current assets                                         |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|Inventories                                            |  | (24                     | ) |  |      | 1,541  |   |      |   | 1,138  |      |  |   | 1,144  |  
|Trade and other receivables                            |  | (25                     | ) |  |      | 2,148  |   |      |   | 1,587  |      |  |   | 1,439  |  
|Accrued income tax receivables                         |  |                         |   |  |      | 81     |   |      |   | 60     |      |  |   | 62     |  
|Available-for-sale investments                         |  | (26                     | ) |  |      | 133    |   |      |   | 98     |      |  |   | 99     |  
|Cash and cash equivalents                              |  | (2                      | ) |  |      | 192    |   |      |   | 142    |      |  |   | 338    |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|                                                       |  |                         |   |  |      | 4,095  |   |      |   | 3,025  |      |  |   | 3,082  |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|Total assets                                           |  |                         |   |  | $    | 21,494 |   |      |  | 15,877 |      |  |  | 16,591 |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|                                                       |  |                         |   | 
|EQUITY AND LIABILITIES                                 |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|                                                       |  |                         |   | 
|Capital and reserves                                   |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|Share capital                                          |  | (27                     | ) |  | $    | 1,206  |   |      |  | 891    |      |  |  | 890    |  
|Share issue                                            |  |                         |   |  |      | 1      |   |      |   | 1      |      |  |   |       |  
|Share premium reserve                                  |  | (27                     | ) |  |      | 1,009  |   |      |   | 745    |      |  |   | 737    |  
|Translation differences                                |  |                         |   |  |      | (74    | ) |      |   | (55    | )    |  |   | (42    | )
|Fair value and other reserves                          |  | (27                     | ) |  |      | 384    |   |      |   | 284    |      |  |   | 258    |  
|Retained earnings                                      |  |                         |   |  |      | 7,811  |   |      |   | 5,770  |      |  |   | 5,154  |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|                                                       |  |                         |   |  |      | 10,337 |   |      |   | 7,636  |      |  |   | 6,997  |  
|Minority interest                                      |  |                         |   |  |      | 35     |   |      |   | 26     |      |  |   | 32     |  
|Non-current liabilities                                |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|Deferred tax liabilities                               |  | (28                     | ) |  |      | 1,262  |   |      |   | 932    |      |  |   | 1,579  |  
|Retirement benefit obligations                         |  | (29                     | ) |  |      | 551    |   |      |   | 407    |      |  |   | 650    |  
|Provisions                                             |  | (30                     | ) |  |      | 240    |   |      |   | 177    |      |  |   | 103    |  
|Interest-bearing liabilities                           |  | (31                     | ) |  |      | 5,989  |   |      |   | 4,424  |      |  |   | 4,911  |  
|Other liabilities                                      |  | (32                     | ) |  |      | 35     |   |      |   | 26     |      |  |   | 79     |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|                                                       |  |                         |   |  |      | 8,077  |   |      |   | 5,966  |      |  |   | 7,322  |  
|                                                       |  |                         |   | 
|Current liabilities                                    |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|Current interest-bearing liabilities                   |  | (31                     | ) |  |      | 1,241  |   |      |   | 917    |      |  |   | 870    |  
|Trade and other payables                               |  | (33                     | ) |  |      | 1,701  |   |      |   | 1,256  |      |  |   | 1,269  |  
|Accrued income tax payables                            |  |                         |   |  |      | 103    |   |      |   | 76     |      |  |   | 101    |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|                                                       |  |                         |   |  |      | 3,045  |   |      |   | 2,249  |      |  |   | 2,240  |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|Total liabilities                                      |  |                         |   |  |      | 11,122 |   |      |   | 8,215  |      |  |   | 9,562  |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  
|Total equity and liabilities                           |  |                         |   |  | $    | 21,494 |   |      |  | 15,877 |      |  |  | 16,591 |  
|                                                       |  |                         |   |  |      |        |   |      |   |        |      |  |   |        |  



The notes are an
integral part of these financial statements.



F-4



---



UPM-KYMMENE CORPORATION



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



|                                                     |  |               |     |            |   |                     |  |                        |     |  |                             |     |   |                  |   |      |       |  |   |       |   |  |   |       |  
|---------------------------------------------------- |  | ------------- | --- | ---------- | - | ------------------- |  | ---------------------- | --- |  | --------------------------- | --- | - | ---------------- | - | ---- | ----- |  | - | ----- | - |  | - | ----- | -
|                                                     |  | Sharecapital  |     | Shareissue |   | Sharepremiumreserve |  | Translationdifferences |     |  | Fair valueand otherreserves |     |   | Retainedearnings |   |      | Total | 
|                                                     |  | (In millions) |    
|Balance at January 1, 2003                           |  |              | 442 |            |  |                    |  |                       | 704 |  |                            | 24  |   |                  |  | 805  |       |  |  | 5,229 |   |  |  | 7,204 |  
|Share issue                                          |  |               | 445 |            |   |                    |  |                        |    |  |                             |    |   |                  |   | (445 | )     |  |   |      |   |  |   |      |  
|Convertible bond loan 1994                           |  |               | 3   |            |   |                    |  |                        | 33  |  |                             |    |   |                  |   | (36  | )     |  |   |      |   |  |   |      |  
|Translation differences                              |  |               |    |            |   |                    |  |                        |    |  |                             | (66 | ) |                  |   |     |       |  |   |      |   |  |   | (66   | )
|Other items                                          |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   |     |       |  |   | (4    | ) |  |   | (4    | )
|Cash flow hedges                                     |  |               |     |            |   |                     |  |                        |     |  |                             |     |   |                  |   |      |       |  |   |       |   |  |   |       |  
|recorded in shareholders equity, net of tax         |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   | 32   |       |  |   |      |   |  |   | 32    |  
|transferred to income statement, net of tax          |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   |     |       |  |   |      |   |  |   |      |  
|Available-for-sale investments                       |  |               |     |            |   |                     |  |                        |     |  |                             |     |   |                  |   |      |       |  |   |       |   |  |   |       |  
|gains/losses arising from fair valuation, net of tax |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   | 2    |       |  |   |      |   |  |   | 2     |  
|transferred to income statement, net of tax          |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   | (100 | )     |  |   |      |   |  |   | (100  | )
|Dividend paid                                        |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   |     |       |  |   | (390  | ) |  |   | (390  | )
|Net profit for the period                            |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   |     |       |  |   | 319   |   |  |   | 319   |  
|                                                     |  |               |     |            |   |                     |  |                        |     |  |                             |     |   |                  |   |      |       |  |   |       |   |  |   |       |  
|Balance at December 31, 2003                         |  |              | 890 |            |   |                    |  |                       | 737 |  |                            | (42 | ) |                  |  | 258  |       |  |  | 5,154 |   |  |  | 6,997 |  
|                                                     |  |               |     |            |   |                     |  |                        |     |  |                             |     |   |                  |   |      |       |  |   |       |   |  |   |       |  
|Balance at January 1, 2004                           |  |              | 890 |            |  |                    |  |                       | 737 |  |                            | (42 | ) |                  |  | 258  |       |  |  | 5,154 |   |  |  | 6,997 |  
|Share options exercised                              |  |               | 1   |            |   | 1                   |  |                        | 8   |  |                             |    |   |                  |   |     |       |  |   |      |   |  |   | 10    |  
|Translation differences                              |  |               |    |            |   |                    |  |                        |    |  |                             | (13 | ) |                  |   |     |       |  |   |      |   |  |   | (13   | )
|Other items                                          |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   | 1    |       |  |   | 1     |   |  |   | 2     |  
|Cash flow hedges                                     |  |               |     |            |   |                     |  |                        |     |  |                             |     |   |                  |   |      |       |  |   |       |   |  |   |       |  
|recorded in shareholders equity, net of tax         |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   | 31   |       |  |   |      |   |  |   | 31    |  
|transferred to income statement, net of tax          |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   | (19  | )     |  |   |      |   |  |   | (19   | )
|Available-for-sale investments                       |  |               |     |            |   |                     |  |                        |     |  |                             |     |   |                  |   |      |       |  |   |       |   |  |   |       |  
|gains/losses arising from fair valuation, net of tax |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   | 13   |       |  |   |      |   |  |   | 13    |  
|transferred to income statement, net of tax          |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   |     |       |  |   |      |   |  |   |      |  
|Dividend paid                                        |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   |     |       |  |   | (393  | ) |  |   | (393  | )
|Net profit for the period                            |  |               |    |            |   |                    |  |                        |    |  |                             |    |   |                  |   |     |       |  |   | 1,008 |   |  |   | 1,008 |  
|                                                     |  |               |     |            |   |                     |  |                        |     |  |                             |     |   |                  |   |      |       |  |   |       |   |  |   |       |  
|Balance at December 31, 2004                         |  |              | 891 |            |  | 1                   |  |                       | 745 |  |                            | (55 | ) |                  |  | 284  |       |  |  | 5,770 |   |  |  | 7,636 |  
|                                                     |  |               |     |            |   |                     |  |                        |     |  |                             |     |   |                  |   |      |       |  |   |       |   |  |   |       |  



The notes are an
integral part of these financial statements.



F-5



---

UPM-KYMMENE CORPORATION



CONSOLIDATED CASH FLOW STATEMENT



|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                  |  | Year ended December 31, |      
|                                                                                  |  | 2004                    |       |   | 2004 |   |       | 2003 |  |   | 2002   |  
|                                                                                  |  | (In millions)           |      
|Cash flow from operating activities                                               |  |                         |       |  
|Net profit for the period                                                         |  | $                       | 1,365 |   |      |  | 1,008 |      |  |  | 319    |   |  |  | 500    |  
|Adjustments to net profit(1)                                                      |  |                         | 448   |   |      |   | 331   |      |  |   | 1,081  |   |  |   | 1,392  |  
|Interest received                                                                 |  |                         | 53    |   |      |   | 39    |      |  |   | 16     |   |  |   | 30     |  
|Interest paid, net of amounts capitalized                                         |  |                         | (256  | ) |      |   | (189  | )    |  |   | (239   | ) |  |   | (311   | )
|Dividends received                                                                |  |                         | 53    |   |      |   | 39    |      |  |   | 70     |   |  |   | 67     |  
|Other financial items, net                                                        |  |                         | (61   | ) |      |   | (45   | )    |  |   | 54     |   |  |   | 46     |  
|Income taxes paid                                                                 |  |                         | (98   | ) |      |   | (72   | )    |  |   | (160   | ) |  |   | (194   | )
|Change in working capital(2)                                                      |  |                         | (154  | ) |      |   | (114  | )    |  |   | 117    |   |  |   | (112   | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Net cash provided by operating activities                                         |  | $                       | 1,350 |   |      |  | 997   |      |  |  | 1,258  |   |  |  | 1,418  |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Cash flow from investing activities                                               |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Acquisition of subsidiary shares, net of cash (Note 5)                            |  | $                       | (1    | ) |      |  | (1    | )    |  |  | (14    | ) |  |  | (10    | )
|Acquisition of shares in associated companies                                     |  |                         | (54   | ) |      |   | (40   | )    |  |   | (2     | ) |  |   | (26    | )
|Acquisition of available-for-sale investments                                     |  |                         | (1    | ) |      |   | (1    | )    |  |   |       |   |  |   | (5     | )
|Capital expenditures                                                              |  |                         | (853  | ) |      |   | (630  | )    |  |   | (599   | ) |  |   | (571   | )
|Proceeds (disbursements) from disposal of subsidiary shares, net of cash (Note 5) |  |                         | 250   |   |      |   | 185   |      |  |   | (5     | ) |  |   | 12     |  
|Proceeds (disbursements) from disposal of shares in associated companies          |  |                         | 34    |   |      |   | 25    |      |  |   | 14     |   |  |   | 7      |  
|Proceeds from disposal of available-for-sale investments                          |  |                         | (56   | ) |      |   | (41   | )    |  |   | 174    |   |  |   | (1     | )
|Proceeds from sale of fixed assets                                                |  |                         | 39    |   |      |   | 29    |      |  |   | 18     |   |  |   | 84     |  
|Proceeds from long-term receivables                                               |  |                         | 27    |   |      |   | 20    |      |  |   | 54     |   |  |   | 71     |  
|Increase in long-term receivables                                                 |  |                         | (16   | ) |      |   | (12   | )    |  |   | (6     | ) |  |   | (2     | )
|Other investing cash flow                                                         |  |                         |      |   |      |   |      |      |  |   | (7     | ) |  |   |       |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Net cash used in investing activities                                             |  | $                       | (631  | ) |      |  | (466  | )    |  |  | (373   | ) |  |  | (441   | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Cash flow from financing activities                                               |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Proceeds from long-term liabilities                                               |  | $                       |      |   |      |  |      |      |  |  | 579    |   |  |  | 1,050  |  
|Payments of long-term liabilities                                                 |  |                         | (304  | ) |      |   | (224  | )    |  |   | (1,015 | ) |  |   | (981   | )
|Payments of short-term borrowings, net                                            |  |                         | (138  | ) |      |   | (102  | )    |  |   | (111   | ) |  |   | (676   | )
|Proceeds from share options exercised                                             |  |                         | 14    |   |      |   | 10    |      |  |   |       |   |  |   |       |  
|Dividends paid                                                                    |  |                         | (532  | ) |      |   | (393  | )    |  |   | (390   | ) |  |   | (388   | )
|Other financing cash flow                                                         |  |                         | (1    | ) |      |   | (1    | )    |  |   | (27    | ) |  |   | (37    | )
|Net cash used in financing activities                                             |  | $                       | (961  | ) |      |  | (710  | )    |  |  | (964   | ) |  |  | (1,032 | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Change in cash and cash equivalents                                               |  | $                       | (242  | ) |      |  | (179  | )    |  |  | (79    | ) |  |  | (55    | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Cash and cash equivalents at the beginning of year                                |  | $                       | 457   |   |      |  | 338   |      |  |  | 449    |   |  |  | 520    |  
|Foreign exchange effect on cash                                                   |  |                         | (23   | ) |      |   | (17   | )    |  |   | (32    | ) |  |   | (16    | )
|Change in cash and cash equivalents                                               |  |                         | (242  | ) |      |   | (179  | )    |  |   | (79    | ) |  |   | (55    | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Cash and cash equivalents at year-end                                             |  | $                       | 192   |   |      |  | 142   |      |  |  | 338    |   |  |  | 449    |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Notes to the consolidated cash flow statement                                     |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|1)Adjustments to net profit                                                       |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Minority interest                                                                 |  | $                       | 1     |   |      |  | 1     |      |  |  | (2     | ) |  |  | (2     | )
|Taxes                                                                             |  |                         | (554  | ) |      |   | (409  | )    |  |   | 121    |   |  |   | 212    |  
|Depreciation, amortization and impairment charges                                 |  |                         | 1,519 |   |      |   | 1,122 |      |  |   | 1,048  |   |  |   | 1,125  |  
|Share of results in associated companies and joint ventures                       |  |                         | (87   | ) |      |   | (64   | )    |  |   | (29    | ) |  |   | (80    | )
|Profits and losses on sale of fixed assets and investments                        |  |                         | (186  | ) |      |   | (138  | )    |  |   | (19    | ) |  |   | (39    | )
|Gains on available-for-sale investments, net                                      |  |                         | (37   | ) |      |   | (27   | )    |  |   | (127   | ) |  |   | (72    | )
|Finance costs, net                                                                |  |                         | 176   |   |      |   | 130   |      |  |   | 70     |   |  |   | 245    |  
|Change in the Finnish pension system                                              |  |                         | (364  | ) |      |   | (269  | )    |  |   |       |   |  |   |       |  
|Other adjustments                                                                 |  |                         | (20   | ) |      |   | (15   | )    |  |   | 19     |   |  |   | 3      |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|                                                                                  |  | $                       | 448   |   |      |  | 331   |      |  |  | 1,081  |   |  |  | 1,392  |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|2)Change in working capital                                                       |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|Inventories                                                                       |  | $                       | (35   | ) |      |  | (26   | )    |  |  | 34     |   |  |  | (2     | )
|Current receivables(3)                                                            |  |                         | (275  | ) |      |   | (203  | )    |  |   | 66     |   |  |   | 89     |  
|Current non-interest bearing liabilities                                          |  |                         | 156   |   |      |   | 115   |      |  |   | 17     |   |  |   | (199   | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  
|                                                                                  |  | $                       | (154  | ) |      |  | (114  | )    |  |  | 117    |   |  |  | (112   | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |        |   |  |   |        |  



|3) | 2004 includes (179) million arising from termination of the securitization programme for trade receivables.
|-- | ------------------------------------------------------------------------------------------------------------



The notes are an integral part of these financial statements.



F-6



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UPM-KYMMENE CORPORATION



NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In the notes all amounts are shown in millions of euros unless otherwise stated.)



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



The principal accounting policies to be adopted in the preparation of the consolidated financial statements are set out below:



Transition to International Financial Reporting Standards (IFRS)



UPM has adopted International Financial Reporting Standards (IFRS). The
Groups first financial statements under IFRS for 2003 and 2002 were published on November 23, 2004.



Principal Activities



UPM is a global paper and forest products company engaged in the production of paper, with an emphasis on the manufacture and sale of printing and writing papers. The Group is vertically integrated with operations that are organized through
five divisions: Magazine Papers, Newsprint, Fine and Speciality Papers, Converting and Wood Products. The biggest units of UPMs Other operations are in the forestry and energy departments in Finland. The Groups activities are centered in
the European Union countries and North America, with production facilities in 16 countries.



Basis of Preparation



These consolidated financial statements of UPM-Kymmene Corporation, a Finnish limited liability company, domiciled in Helsinki in the Republic of Finland, are prepared in accordance with International Financial Reporting Standards (IFRS).



The financial statements have been prepared under the
historical cost convention as modified by the revaluation of biological assets, available-for-sale investment securities and certain other financial assets and financial liabilities.



Use of Estimates



The preparation of financial statements requires the use of 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 periods. Accounting estimates are employed in the financial statements to determine
reported amounts, including the realizability of certain assets, the useful lives of tangible and intangible assets, income taxes and others. Although these estimates are based on managements best knowledge of current events and actions,
actual results may ultimately differ from those estimates.



Consolidation
Principles



Subsidiaries



The consolidated financial statements of UPM include the financial
statements of the parent company, UPM-Kymmene Corporation, and its subsidiaries. Subsidiaries are those entities in which UPM-Kymmene Corporation either owns, directly or indirectly, over fifty per cent of the voting rights, or otherwise has the
power to govern their operating and financial policies.



Acquisitions of subsidiaries are accounted for using the purchase method of accounting. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus
costs directly attributable to the acquisition. The excess cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see Intangible Assets for the accounting policy on goodwill).
Subsidiaries acquired during the year are included in the consolidated financial statements from the date on which control is transferred to the Group, and subsidiaries sold are included up to the date that control is relinquished. Where necessary,
the accounting policies of subsidiaries have been adjusted to ensure consistency with the policies adopted by the Group.



F-7



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



All intercompany transactions, receivables, liabilities and unrealized profits, as well as intragroup
profit distributions, are eliminated.



The Group adopted the
transition provisions of IFRS 3, Business Combinations, with effect from April 1, 2004. As a result, goodwill relating to acquisitions for which the agreement date was on or after March 31, 2004, is no longer subject to amortization. Goodwill
arising in business combinations completed before March 31, 2004 will continue to be amortized until the standard is fully adopted as of January 1, 2005.



Associated Companies and Joint Ventures



Associated companies are entities over which the Group generally holds between 20% and 50% of the voting rights, or over which the Group has significant
influence but not overall control. Joint ventures are entities over which the Group has contractually agreed to share the power to govern the financial and operating policies of that entity with another venturer or venturers.



Interests in associated companies and joint ventures are accounted for using
the equity method of accounting. Under this method the Groups share of the associated companys and joint ventures profit or loss for the year less any amortized goodwill is recognized on the income statement. The Groups
interest in an associated company and joint venture is carried on the balance sheet at an amount that reflects its share of the net assets of the associated company and joint venture together with goodwill on acquisition, as amortized, less any
impairment. Gains and losses on transactions between the Group and its associated companies and joint ventures are eliminated to the extent of the Groups interest in the associated company and joint venture. Equity accounting is discontinued
when the carrying amount of the investment in an associated company or interest in a joint venture reaches zero, unless the Group has incurred or guaranteed obligations in respect of the associated company or joint venture.



Minority Interests



Minority interests have been disclosed separately from the consolidated
shareholders equity and are recorded as a separate deduction on the consolidated income statement.



Foreign Currency Transactions



Items included in the financial statements of each subsidiary in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that subsidiary (the
measurement currency). The consolidated financial statements are presented in euros, which is the measurement currency of the parent company.



Foreign currency transactions are translated into euros using the exchange rates prevailing at the dates of the transactions. Receivables and liabilities
in foreign currencies are translated into euros at the exchange rates ruling on the balance sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities
denominated in foreign currencies are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges. Foreign exchange differences arising in respect of operating business items are included in operating profit in
the appropriate income statement account, and those arising in respect of financial assets and liabilities are included as a net amount in finance costs.



The income statements and cash flows of subsidiaries, whose measurement and reporting currencies are not euros, are translated into euros at quarterly
average exchange rates. Their balance sheets are translated at the exchange rates ruling on the balance sheet date and the translation differences are taken to shareholders equity. When a foreign entity is sold or liquidated, such translation
differences are recognized in the income statement as part of the gain or loss on sale.



F-8



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Derivative Financial Instruments



Derivative financial instruments are initially recognized on the balance sheet at cost and thereafter revalued at their fair
value. The method of recognizing the resulting gain or loss is dependent on the nature of the item being hedged. On the date a derivative contract is entered into, the Group designates certain derivatives as either a hedge of the fair value of a
recognized asset or liability (fair value hedge), or a hedge of a forecasted transaction or of a firm commitment (cash flow hedge).



Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective both prospectively and
retrospectively are recorded in the income statement under finance costs, along with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk.



Changes in the fair value of derivatives that are designated and qualify as
cash flow hedges and that are highly effective both prospectively and retrospectively are recognized in equity (at the spot rate difference). Amounts deferred in equity are transferred to the income statement and classified as revenue or an expense
in the same period during which the hedged firm commitment or forecasted transaction affects the income statement (for example, when the forecasted external sale to the Group takes place). The period when the hedging reserve is released to sales
after each derivative has matured varies between 13 months.



When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting under IAS 39, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the committed
or forecasted transaction ultimately is recognized on the income statement. However, if a committed or forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the
income statement.



Certain derivative transactions, while
providing effective economic hedges under the Group Financial Policy, do not qualify for hedge accounting under the specific rules in IAS 39. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting under IAS
39 are recognized immediately in the income statement under finance costs.



The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.
This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The Group also documents its assessment, both at the hedge inception and on an ongoing
basis, as to whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.



Fair values of derivative financial instruments have been estimated as follows: Interest forward rate agreements and futures
contracts are fair valued based on quoted market rates as at the balance sheet date; forward foreign exchange contracts are fair valued based on the contract forward rates in effect as at the balance sheet date; foreign currency options are fair
valued based on quoted market rates as at the balance sheet date; interest and currency swap agreements are fair valued based on discounted cash flow analyses; and commodity derivatives are fair valued based on quoted market rates as at the balance
sheet date.



In assessing the fair value of non-traded
derivatives such as embedded derivatives and other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Other valuation techniques, such as option
pricing models and estimated discounted value of future cash flows, are used to determine fair value for the remaining financial instruments. Embedded derivatives that are identified and separated from the host contracts are monitored by the Group
and the fair value changes are reported in financial income and expenses on the income statement.



Segment Reporting



Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that
is subject to risks and returns that are different from those of components operating in other economic environments.



F-9



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The accounting policies of the segments and Other Operations are the same as those of the Group. The
costs and revenues as well as assets and liabilities of the segments are allocated on symmetrical basis. All inter-segment sales are based on market prices, and all inter-segment sales are eliminated in consolidation.



Discontinuing Operations



A discontinuing operation results from a decision, pursuant to a single
disposal plan, to divest an operation comprising a separate major line of business for which the assets less liabilities and net financial results may be distinguished physically, operationally and for financial reporting purposes. The pre-tax gain
or loss on disposal of discontinuing operation is shown as a separate item on the consolidated income statement.



Revenue Recognition



Sales are recognized after the transfer of the decisive risks and rewards that are connected with the ownership of the goods sold to the buyer and the
Group retains neither a continuing right to dispose of the goods, nor effective control of those goods. Revenues from services are recorded when the service has been performed. Sales are shown net of indirect sales taxes, discounts and exchange
differences on sales in foreign currency. The costs of distributing products sold are included in costs and expenses.



Income Taxes



The Groups income taxes include income taxes of Group companies based on taxable profit for the financial period, together with tax adjustments for
previous periods and the change of deferred income taxes. Tax credits arising from subsidiaries distribution of dividends are deducted from income taxes.



Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred income tax is also provided on temporary differences arising on investments in subsidiaries,
associated companies and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are
recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.



Intangible Assets



Amortization of intangible assets is based on the following expected useful lives:



|                        |  |           
|----------------------- |  | ----------
|Goodwill                |  | 520 years
|Computer software       |  | 35 years 
|Other intangible assets |  | 510 years



Goodwill



Goodwill represents the excess of the cost of acquisition over the fair
value of assets less liabilities of the acquired subsidiary, associated company or joint venture at the date of acquisition. Goodwill and fair value adjustments arising on the acquisition of a foreign entity have been treated as assets of the
reporting entity, and reported using the exchange rate at the time the transaction took place. Goodwill is amortized on a straight-line basis over its expected useful life. Expected useful lives vary between 5 and 20 years, depending upon the nature
of the acquisition. At each balance sheet date the expected useful lives are reviewed and, where they differ significantly from previous estimates, amortization periods are changed prospectively.



F-10



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At each balance sheet date the Group evaluates the carrying value of goodwill. An impairment is
charged to the income statement when the expected future operating cash flows derived from the cash generating units are less than the carrying value of the cash-generating unit.



The gain or loss on disposal of an entity includes the unamortized balance of goodwill.



Research and Development



Research and development costs are expensed as incurred, except for certain
development costs, which are capitalized when it is probable that a development project will be successful considering its commercial and technological feasibility, and only if the cost can be measured reliably. Capitalized development costs are
amortized on a systematic basis over their expected useful future lives, not exceeding five years.



Computer Software



Costs associated with maintaining computer software programs and costs related to the research phase of computer software development projects are recognized as an expense as incurred. However, development costs that are directly associated
with identifiable and unique software products controlled by the Group and have a probable economic benefit exceeding the cost beyond one year are recognized as intangible assets. Direct costs include staff costs of the software development team and
an appropriate portion of relevant overhead. Computer software development costs recognized as assets are amortized using the straight-line method over their useful lives.



Other Intangible Assets



Expenditure on acquired patents, trademarks and licenses is capitalized and amortized using the straight-line method over their useful lives. Intangible
assets are not revalued.



Property, Plant and Equipment



Property, plant and equipment acquired by Group companies are stated at
historical cost. Assets of acquired subsidiaries are stated at the fair values at the date of acquisition. Depreciation is calculated on a straight-line basis and the carrying value is adjusted for impairment charges, if any. The carrying value of
the property, plant and equipment on the balance sheet represents the cost less accumulated depreciation and any impairment charges.



Interest costs on borrowings to finance the construction of property, plant and equipment are capitalized during the period of time that is required to
complete and prepare the asset for its intended use. Other borrowing costs are expensed.



Land is not depreciated, but otherwise depreciation is based on the following expected useful lives:



|                              |  |            
|----------------------------- |  | -----------
|Buildings                     |  | 2540 years
|Heavy machinery               |  | 1520 years
|Light machinery and equipment |  | 515 years 



Expected useful lives
of long-lived assets are reviewed at each balance sheet date and, where they differ significantly from previous estimates, depreciation periods are changed prospectively.



Ordinary repairs and maintenance costs are charged to the income statement during the financial period in which they are
incurred. The cost of major renovations is included in the assets carrying amount when it is probable that the Group will derive future economic benefits in excess of the originally assessed standard of performance of the existing asset. Major
renovations are depreciated over the remaining useful lives of the related assets.



Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in operating profit. Assets to be disposed of are reported at the lower of the carrying amount
and the fair value less selling costs.



F-11



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Government Grants



Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and recognized as income
by reducing the depreciation charge of the asset they relate to. Other government grants are deferred and recognized on the income statement over the period necessary to match them with the costs they are intended to compensate.



Investment Property



Investment property includes real estate investments such as flats and other premises occupied by third parties.



Investment property is treated as a long-term investment and is stated at
historical cost. Depreciation is calculated on a straight-line basis and the carrying value is adjusted for impairment charges, if any. Useful lives are the same as for property, plant and equipment. The balance sheet value of investment property
reflects the cost less accumulated depreciation and any impairment charges.



Biological Assets



Biological assets (i.e.,
living trees) are measured at their fair value less estimated point-of-sale costs. The fair value of biological assets other than young seedling stands is based on discounted cash flows from continuous operations. The fair value of young seedling
stands is the actual reforestation cost of those stands. Continuous operations, the maintenance of currently existing seedling stands and the felling of forests during one rotation, are based on the Companys forest management guidelines. The
calculation takes into account the growth potential and environmental restrictions and other reservations of the forests. Felling revenues and maintenance costs are calculated on the basis of actual costs and prices, taking into account the
projection of future price development.



Periodic changes
resulting from growth, felling, prices, costs and other premise changes are included in operating profit in the income statement.



Financial Assets



Financial investments have been classified into trading, held-to-maturity and available-for-sale categories. The classification is dependent on the
purpose for which the investments were acquired. All investments are currently classified as available-for-sale investments and are included in non-current assets.



Purchases and sales of financial investments are recognized on the settlement date, which is the date that the asset is
delivered to or by the Group. The cost of purchase includes transaction costs. Available-for-sale investments are subsequently carried at fair value.



The fair values of listed investments are based on quoted closing prices. Unlisted equity securities, for which fair values cannot be measured reliably,
are recognized at cost less impairment.



Unrealized gains and
losses arising from changes in the fair value of securities classified as available-for-sale are recognized in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments in equity are
included in the income statement as gains and losses from investment securities.



Loans receivable originated by the Company that have a fixed maturity are measured at amortized cost using the effective interest method and those that do not have a fixed maturity are measured at cost. Loans
receivable are impaired if the carrying amount is greater than the estimated recoverable amount.



The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In
the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for
available-for-sale financial assets, the cumulative loss  measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss  is
removed from equity and recognized in the income statement.



F-12



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A previously recognized impairment loss is reversed when the impairment loss was caused by a specific
external event of an exceptional nature that is not expected to recur and subsequent external events have occurred which reverse the effect of that event.



Impairments



Property, plant and equipment and other non-current assets, including goodwill and intangible assets, are reviewed for potential impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable, mainly
independent, cash inflows. An impairment loss is the amount by which the carrying amount of the assets exceeds the recoverable amount. The recoverable amount is the higher of the assets net selling price and its value in use. The value in use
is determined by reference to discounted future net cash flows expected to be generated by the asset.



A previously recognized impairment loss on property, plant and equipment is reversed only if there has been a change in the estimates used to determine
the recoverable amount, however not to an extent higher than the carrying amount that would have been determined had no impairment loss been recognized in prior years.



A previously recognized impairment loss on goodwill is reversed when the impairment loss was caused by a specific external
event of an exceptional nature that is not expected to recur and subsequent external events have occurred which reverse the effect of that event.



Leases



Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the inception of the lease at the
lower of the fair value of the leased property or the present value of the minimum lease payments. Each lease payment is apportioned between the liability and finance charges. The corresponding rental obligations, net of finance charges, are
included in other long-term interest-bearing liabilities. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the
liability for each period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term.



Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as
operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.



Inventories



Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) method. The cost of finished
goods and work in progress comprises raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realizable value is the estimated selling price in the
ordinary course of business, less the costs of completion and selling expenses.



Trade Receivables



Trade receivables are
carried at their anticipated realizable value, which is the original invoice amount less an allowance for doubtful accounts. An allowance for doubtful accounts is made when there is objective evidence that the Group will not be able to collect all
amounts due according to the original terms of the receivables.



F-13



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Cash and Cash Equivalents



Cash and cash equivalents comprise cash on hand, deposits held at call with banks and other short-term highly liquid
investments with original maturities of three months or less. Bank overdrafts are included within borrowings in current liabilities on the balance sheet.



Treasury Shares



Where the Company or its subsidiaries purchases the Companys own equity share capital, the consideration paid including any attributable transaction
costs net of income taxes is deducted from total shareholders equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders equity.



Interest-Bearing Liabilities



Interest-bearing liabilities are classified as originated loans and are
recognized initially at the amount of proceeds received, net of transaction costs incurred. In subsequent periods, interest-bearing liabilities are stated at amortized cost using the effective yield method; any difference between proceeds (net of
transaction costs) and the redemption value is recognized in the income statement over the period of the interest-bearing liabilities.



Most long-term interest-bearing liabilities are designated as hedged items in a fair value hedge relationship. Fair value variations resulting from the
hedged interest rate risk are recorded to adjust the carrying amount of the hedged item and reported in the income statement under finance costs. If the hedge accounting is discontinued, the carrying amount of the hedged item is no longer adjusted
for fair value changes attributable to the hedged risk and the cumulative fair value adjustment recorded during the hedge relationship is amortized based on a new effective yield recalculation through the income statement under finance costs.



Employee Benefits



Pension Obligations



The Group operates a mixture of pension schemes in accordance with the local
conditions and practices in the countries in which it operates. Such benefit plans vary according to the customary benefit plans prevailing in the country concerned. Most of these programs are defined benefit pension schemes with retirement,
disability and termination income benefits. The retirement income benefits are generally a function of years of employment and final salary with the Company. Generally, the schemes are either funded through payments to insurance companies or to
trustee-administered funds as determined by periodic actuarial calculations. In addition, the Group also operates defined contribution pension arrangements.



For defined benefit plans, the liability in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance
sheet date minus the fair value of plan assets, together with adjustments for actuarial gains/losses and past service cost. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method and is measured
as the present value of the estimated future cash outflows using interest rates of government securities that have terms to maturity approximating the terms of the related liability. The cost of providing pensions is charged to the income statement
so as to spread the regular cost over the service lives of the employees. Actuarial gains and losses outside the corridor are recognized over the average remaining service lives of the employees concerned.



For defined contribution plans, contributions are paid to pension insurance
plans. Once the contributions have been paid, there are no further payment obligations. Contributions to defined contribution plans are charged to the income statement in the period to which the contributions relate.



F-14



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Other Post-Retirement Obligations



Some Group companies provide post-retirement healthcare benefits to their retirees. The entitlement to these benefits is
usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology similar to that
for defined benefit pension plans. Valuations of these obligations are carried out by independent qualified actuaries.



Equity Compensation Benefits



Share options are granted to key personnel. Holders of options have the right to subscribe shares at a price that is based on the weighted average share
prices on the Helsinki Stock Exchange during the periods defined in the share option plans. The fixed subscription prices will be reduced, on the respective record dates for dividend payments, by the amount of dividend declared after the period for
determining the subscription price has expired and before the shares are subscribed. When the options are exercised, the proceeds received, net of any transaction costs, are credited to share capital and the share premium reserve.



Provisions



Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, and it
is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement
is recognized as a separate asset but only when the reimbursement is virtually certain.



Restructuring Provisions



Restructuring
provisions are recognized in the period in which the Group becomes legally or constructively committed to payment. Employee termination benefits are recognized only after either an agreement has been made with the appropriate employee
representatives on the terms of redundancy and the numbers of employees affected, or after employees have been advised of the specific terms. Costs related to the ongoing activities of the Group are not provisioned in advance.



Environmental Remediation Provisions



Expenditures that result from remediation of an existing condition caused by
past operations and do not contribute to current or future revenues is expensed. Environmental remediation provisions are recognized based on current interpretations of environmental laws and regulations when it is likely that the liability has been
incurred and the amount of such liability can be reasonably estimated. Amounts provisioned do not include third-party recoveries.



Dividends



Dividends are recorded in the Groups financial statements in the period in which they are approved by the Groups shareholders.



Comparatives



Where necessary, comparative figures have been reclassified to conform to changes in presentation in the current year.



Earnings per Share



The basic earnings per share is computed using the weighted average number
of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of shares outstanding during the period plus the dilutive effect of convertible bonds, treasury shares and share options.



F-15



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



New IFRS Standards and Revised IAS Standards



In December 2003, International Financial Reporting Standards (IFRS) were amended as the IASB released revised IAS 32,
Financial Instruments: Disclosure and Presentation and IAS 39, Financial Instruments: Recognition and Measurement. These standards replace IAS 32 (revised 2000), and supersedes IAS 39 (revised 2000), and must be applied for annual periods beginning
on or after January 1, 2005. Under IAS 39 (revised) it is no longer possible to reverse impairment losses on available-for-sale equity instruments through profit or loss, i.e., any subsequent increase in fair value is recognized in equity. The
standard requires retrospective application, i.e., restatement of comparative information resulting in a reversal of a gain of 26 million in the 2004 profit and loss statement to fair value reserve in equity. Under IAS 39 (revised), no cash
flow hedge accounting is available on forecast intragroup transactions. On April 14, 2005, the IASB issued an amendment to the hedge accounting provisions of IAS 39 Financial Instruments: Recognition and Measurement. The IASB decided to allow the
foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in consolidated financial statements. The effective date for the amendment is January 1, 2006, although earlier application is encouraged. UPM has
applied the amendment from January 1, 2005.



In December 2003,
the IASB issued the revised IAS 21, The Effects of Changes in Foreign Exchange Rates, which requires the goodwill arising on the acquisition of a foreign operation to be expressed in the functional currency of the foreign operation and translated at
the closing rate. Currently, the Group records goodwill arising on the acquisition of a foreign entity using the exchange rate at the date of the transaction. The revised standard is effective for fiscal years beginning on or after January 1, 2005
for acquisitions occuring after that date. UPM does not expect the adoption of the revised standard to have a material impact on the Groups financial position, results of operations or cash flows.



In February 2004, the IASB issued IFRS 2, Share-based Payment. The standard
requires the recognition of share-based payment transactions in the financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the Company. Currently, UPM only has
share-based payment transactions with employees to be settled in equity instruments of the Company. The services received, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments granted. The
compensation is recognized as an expense in the profit and loss account over the service period. IFRS 2 is effective for fiscal years beginning on or after January 1, 2005 and applies to grants of shares, share options or other equity instruments
that were granted after November 7, 2002 and have not yet vested as of the effective date of the standard. The total fair value of the share options within the scope of IFRS 2 is 21 million as at January 1, 2005. The standard requires
retrospective application resulting in a share-based payment expense for the comparative years ended December 31, 2004 and December 31, 2003 of 12 million and 6 million, respectively.



In March 2004, the IASB issued IFRS 3, Business Combinations, and the revised
standards IAS 36, Impairment of Assets, and IAS 38, Intangible Assets. IFRS 3 is required to be applied to all business combinations for which the agreement date is on or after March 31, 2004. The standard requires that all business combinations be
accounted for under the purchase method, provides specific criteria for recognizing intangible assets acquired in a business combination, and prohibits the amortization of goodwill and instead requires it to be tested for impairment annually, in
accordance with the revised IAS 36. Any excess of acquirers interest in the net fair value of the acquirees identifiable assets, liabilities and contingent liabilities over cost is recognized immediately as a gain. Goodwill related to
acquisitions prior to March 31, 2004 continued to be amortized through December 31, 2004 as required under the IFRS 3 transition guidance, while goodwill related to acquisitions subsequent to March 31, 2004 is not amortized. Intangible assets with
definite useful lives will continue to be amortized over their respective estimated useful lives. Intangible assets with indefinite useful lives are not amortized. The revised standards IAS 36 and IAS 38 are effective for fiscal years beginning on
or after January 1, 2005. Amortization of acquired goodwill in 2004 totaled 100 million. These assets will not be amortized beginning from 2005.



In March 2004, the IASB issued IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, which addresses financial accounting and reporting
for the disposal of non-current assets. The standard supersedes IAS 35, Discontinuing Operations. IFRS 5 introduces the concept of a disposal group and adopts the classification held for sale. IFRS 5 retains the requirement to report
separately discontinued operations. An asset classified as held for sale, or included within a disposal group that is classified as held for sale, is not depreciated. IFRS 5 is effective for fiscal years beginning on or after January 1, 2005. UPM
does not expect the adoption of this standard to have a material impact on the Groups financial position, results of operations or cash flows.



F-16



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In December 2004, the IASB issued IFRIC Interpretation 3, Emission Rights, which specifies the
accounting for companies participating in government schemes aimed at reducing greenhouse gas emissions. It requires companies to account for the emission allowances they receive from governments as intangible assets, recorded initially at fair
value. It also requires companies, as they produce emissions, to recognize a liability for the obligation to deliver allowances to cover those emissions. This interpretation is applicable for periods beginning on or after March 1, 2005. Earlier
adoption is encouraged. UPM adopted IFRIC 3 in its Interim Report for January to March 2005. The impact on the Groups net income and financial position was not significant.



In December 2003, the IASB issued a revised IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, which
prescribes the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. This revised standard is
applicable for periods beginning on or after January 1, 2005. UPM adopted IAS 8 revised on January 1, 2005. UPM does not expect the adoption of this standard to have a material impact on the Groups financial position, results of operations or
cash flows.



|2. | CHANGE IN THE COMPARATIVE FIGURES  CASH AND CASH EQUIVALENTS
|-- | -------------------------------------------------------------



As a part of the Groups cash management strategy, the Group uses highly liquid, low risk instruments that have been classified as cash equivalents
in previous years. Those instruments such as certificates of deposits that have original maturities of more than three months have been separated from cash and cash equivalents during 2004 and reported in the balance sheet as available for
sale investments to reflect the characteristic of those instruments. The amounts in the cash flow statement have been changed to reflect the current classification of cash and cash equivalents and current available for sale investments.
Comparative information for 2003 and 2002 has been changed in the balance sheet and cash flow statement accordingly for 2003: 99 million, 2002: 50 million.



|3. | FINANCIAL RISK MANAGEMENT
|-- | -------------------------



Financial Risks



The objective of financial risk management is to protect the Group against unfavorable changes in financial markets and thus help to secure profitability.
The objectives and limits for financing activities are defined in the Group Treasury Policy approved by the companys Board of Directors.



In financial risk management, various financial instruments are used within the limits specified in the Group Treasury Policy. Only such instruments whose
market value and risk profile can be continuously and reliably monitored are used for this purpose.



Foreign Currency Risks



Management of foreign currency exposure is divided into two parts: that relating to foreign currency flows and that relating to balance sheet items denominated in foreign currency.



The first concerns the 12-month forecasted commercial foreign currency flows,
contracts longer than 12 months and their related hedging. Hedging of 50% of the net foreign currency flow for the 12 months ahead is considered neutral. The overall hedging rate may vary between 25 and 100%, and the hedging rates for individual
currencies between 0 and 100%. Most of the forwards made to hedge foreign currency flows meet the IFRS hedge accounting requirements. The table below shows the nominal values of the hedging instruments at December 31, 2004.



|         |  |                                      |     |  
|-------- |  | ------------------------------------ | --- | -
|         |  | Nominal values ofhedging instruments |    
|         |  | (In millions)                        |    
|Currency |  |                                      |     |  
|USD      |  |                                     | 565 |  
|GBP      |  |                                      | 399 |  
|CAD      |  |                                      | (56 | )
|SEK      |  |                                      | 74  |  
|DKK      |  |                                      | 49  |  
|JPY      |  |                                      | 76  |  



F-17



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|       |  |                                      |      
|------ |  | ------------------------------------ | -----
|       |  | Nominal values ofhedging instruments
|       |  | (In millions)                       
|NOK    |  |                                      | 32   
|CHF    |  |                                      | 27   
|Others |  |                                      | 47   
|       |  |                                      |      
|Total  |  |                                     | 1,213
|       |  |                                      |      



The Groups
financial results and competitiveness are also affected indirectly by changes in the values of the domestic currencies of its main competitors, principally the US dollar, the Canadian dollar, and the Swedish krona. Exposure to these risks is not
hedged. However, the Companys own production in the United States and Canada reduces this risk.



The balance sheet position comprises foreign currency denominated debts and receivables. According to the Group Treasury Policy, the aim is a fully hedged
position. At December 31, 2004 the balance sheet position was 25 million. (December 31, 2003: 5 million). Also the net of accounts receivable and accounts payable is hedged. Foreign currency risks associated with the shareholders
equity of foreign subsidiaries are not hedged.



Interest Rate Risks



The Groups net debt per currency corresponds to the
parent companys and subsidiaries loan portfolios in their home currencies.



The nominal values of the Groups interest-bearing net debts (including derivatives) by currency were at December 31, 2004 as follows:



|         |  |               |    
|-------- |  | ------------- | ---
|         |  | Amount       
|         |  | (In billions)
|Currency |  |               |    
|EUR      |  |              | 3.4
|USD      |  |               | 0.5
|CAD      |  |               | 0.6
|CNY      |  |               | 0.2
|Others   |  |               | 0.1
|         |  |               |    
|Total    |  |              | 4.8
|         |  |               |    



Management of interest
rate risks is based on the 12-month average duration of the net debt portfolio as defined in the Group Treasury Policy. This relatively short duration is based on the assumption that, on average, yield curves will be positive. This approach thus
reduces interest costs in the long term. The duration may deviate from the 12-month norm by +/6 months. At December 31, 2004, the average duration of the net debt portfolio was 10 months. (December 31, 2003 12 months). Most of the long term
loans and the interest rate derivatives related to them meet the IFRS hedge accounting requirements. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement.



Liquidity and Refinancing Risks



The Group seeks to maintain adequate liquidity under all circumstances by
means of efficient cash management and restricting investments to those that can be cashed in quickly.



In addition to cash funds of 142 million, at December 31, 2004 the Group had unused committed credit facilities amounting to 3.3 billion.



F-18



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Refinancing risks are minimized by ensuring that the loan portfolio has a balanced maturity schedule
and that loans have sufficiently long maturities. The average loan maturity at December 31, 2004 was 7.6 years (8.1 years at December 31, 2003).



| |  |  | The most important financial programs in use at present are:
| | - |  | ------------------------------------------------------------



| |  |  | Domestic commercial paper program, 1.0 billion
| | - |  | -----------------------------------------------



| |  |  | Euro commercial paper program, $500 million
| | - |  | -------------------------------------------



| |  |  | Belgian commercial paper program, 400 million
| | - |  | ----------------------------------------------



| |  |  | Medium Term Note program, 5.0 billion
| | - |  | --------------------------------------



| |  |  | Revolving credit facility, 2.0 billion (matures 2006)
| | - |  | ------------------------------------------------------



| |  |  | Revolving credit facility, 1.2 billion (matures 2008)
| | - |  | ------------------------------------------------------



Credit Risk



Potential concentrations of credit risk with respect to trade and other receivables are limited due to the large number and geographic dispersion of
companies that comprise the Groups customer base. Customer credit limits are established and monitored, and on-going evaluations of customers financial condition are performed. Most of the receivables are covered by credit risk
insurances.



Counterparty Risk



Counterparty risk is defined as the risk that a counterparty will be unable
to fulfill its contractual obligations. According to the Group Treasury Policy, derivative instruments and investments of cash funds may be made only with a counterparty who meets a certain standard of creditworthiness.



Derivatives Related to Commodity Price Risk Management



The Groups manufacturing process requires a significant amount of
electricity and recycled fiber. The Group manages the procurement and sales of electricity mainly to its own mills. The Group uses electricity forward contracts to manage price risks associated with the Groups electricity exposure, which is
the difference between the Groups electricity consumption and production. Recycled paper price risk management includes the use of recycled fiber derivatives.



|4. | SEGMENT INFORMATION
|-- | -------------------



The Group is organized on a worldwide basis into the following primary business segments:



| |  |  | Magazine Papers division
| | - |  | ------------------------



| |  |  | Newsprint division
| | - |  | ------------------



| |  |  | Fine and Speciality Papers division
| | - |  | -----------------------------------



| |  |  | Converting division
| | - |  | -------------------



| |  |  | Wood Products division
| | - |  | ----------------------



F-19



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Activities outside the segments are reported under Other operations.



Magazine Papers



Magazine papers have high mechanical pulp content and are generally used in magazines, newspaper supplements, catalogues and
direct mailings. The division manufactures both coated and uncoated papers. Coated magazine papers are mainly used in the manufacture of high-quality, multi-coated printed products including magazines, catalogues, brochures, direct mail advertising
and other advertising materials. Uncoated papers are mainly used for magazines, weekend newspaper supplements, catalogues, and flyers.



Newsprint



This division produces standard newsprint and machine-finished uncoated papers. The end-uses include daily newspapers, direct mail, telephone catalogues
and books.



Fine and Speciality Papers



This division produces a complete range of coated and uncoated woodfree
papers for graphic use and office communication. Fine papers are used for copying, non-impact printing, facsimile, direct mail advertising, brochures, and special interest magazines, while speciality papers include label papers, envelopes and
packaging papers.



Converting Division



This division produces self-adhesive labelstock, siliconized release
materials and industrial wrappings.



Wood Products Division



This division includes plywood manufacturing, sawmilling and the building
supplies trade.



Other Operations



This includes forest and energy resources in Finland, logistics operations
and real estate units, as well as the new ventures business unit. It also includes the share of net earnings of associated companies (mainly the chemical pulp company Metsä-Botnia) and the central administrative functions for the Group. The
sales of Other Operations comprises only sales outside the Group.



F-20



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Primary Reporting Format  Segment Data for the Year Ended December 31, 2004



|                                                  |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|------------------------------------------------- |  | -------------- | ----- | -- | --------- | - | ----- | ------------------------ |  | - | ---------- | - |  | ------------ | ----- | - | ------------------ | - | -------------- | - |  | ----- | ----- |  | - | ---- | - |  | - | ------ | -
|                                                  |  | MagazinePapers |       |    | Newsprint |   |       | Fine andSpecialityPapers |  |   | Converting |   |  | WoodProducts |       |   | Otheroperations(1) |   | Elimina- tions |   |  | Group |      
|                                                  |  | (In millions)  |      
|External sales                                    |  |               | 3,209 |    |           |  | 1,293 |                          |  |  | 2,000      |   |  |             | 1,367 |   |                    |  | 1,399          |   |  |      | 552   |  |  |     |   |  |  | 9,820  |  
|Internal sales                                    |  |                | 76    |    |           |   | 2     |                          |  |   | 275        |   |  |              | 42    |   |                    |   | 87             |   |  |       |      |  |   | (482 | ) |  |   |       |  
|                                                  |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|Total sales                                       |  |               | 3,285 |    |           |  | 1,295 |                          |  |  | 2,275      |   |  |             | 1,409 |   |                    |  | 1,486          |   |  |      | 552   |  |  | (482 | ) |  |  | 9,820  |  
|                                                  |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|Operating profit(2)                               |  |               | (78   | )  |           |  | (1    | )                        |  |  | 162        |   |  |             | 80    |   |                    |  | 107            |   |  |      | 369   |  |  |     |   |  |  | 639    |  
|                                                  |  |                |       |    |           |   |       |                         
|Share of results of associates and joint ventures |  |               |      |    |           |  |      |                          |  |  |           |   |  |             |      |   |                    |  |               |   |  |      | 64    |  |  |     |   |  |  | 64     |  
|Gains on available-for-sale investments, net      |  |                |      |    |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |               |   |  |       |      |  |   |     |   |  |   | 27     |  
|Finance costs, net                                |  |                |      |    |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |               |   |  |       |      |  |   |     |   |  |   | (130   | )
|Income taxes(3)                                   |  |                |      |    |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |               |   |  |       |      |  |   |     |   |  |   | 409    |  
|Minority interest                                 |  |                |      |    |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |               |   |  |       |      |  |   |     |   |  |   | (1     | )
|                                                  |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|Net profit                                        |  |               |      |    |           |  |      |                          |  |  |           |   |  |             |      |   |                    |  |               |   |  |      |      |  |  |     |   |  |  | 1,008  |  
|                                                  |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|Assets(4)                                         |  |               | 4,683 |    |           |  | 2,016 |                          |  |  | 2,871      |   |  |             | 762   |   |                    |  | 737            |   |  |      | 2,532 |  |  | (203 | ) |  |  | 13,398 |  
|Associates and joint ventures                     |  |                |      |    |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |               |   |  |       | 1,047 |  |   |     |   |  |   | 1,047  |  
|Unallocated assets                                |  |                |      |    |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |               |   |  |       |      |  |   |     |   |  |   | 1,432  |  
|                                                  |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|Total assets                                      |  |               | 4,683 |    |           |  | 2,016 |                          |  |  | 2,871      |   |  |             | 762   |   |                    |  | 737            |   |  |      | 3,579 |  |  |     |   |  |  | 15,877 |  
|                                                  |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|Liabilities(5)                                    |  |               | 198   |    |           |  | 111   |                          |  |  | 197        |   |  |             | 141   |   |                    |  | 90             |   |  |      | 228   |  |  | (203 | ) |  |  | 762    |  
|Unallocated liabilities                           |  |                |      |    |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |               |   |  |       |      |  |   |     |   |  |   | 7,453  |  
|                                                  |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|Total liabilities                                 |  |               |      |    |           |  |      |                          |  |  |           |   |  |             |      |   |                    |  |               |   |  |      |      |  |  |     |   |  |  | 8,215  |  
|                                                  |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|Other items                                       |  |                |       |    |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |                |   |  |       |       |  |   |      |   |  |   |        |  
|Depreciation and amortization                     |  |               | 460   |    |           |  | 224   |                          |  |  | 197        |   |  |             | 53    |   |                    |  | 52             |   |  |      | 38    |  |  |     |   |  |  | 1,024  |  
|Impairment charge                                 |  |                | 75    |    |           |   |      |                          |  |   | 2          |   |  |              |      |   |                    |   | 21             |   |  |       |      |  |   |     |   |  |   | 98     |  
|Capital expenditure                               |  |                | 149   |    |           |   | 74    |                          |  |   | 345        |   |  |              | 28    |   |                    |   | 30             |   |  |       | 60    |  |   |     |   |  |   | 686    |  
|Capital employed, December 31(6)                  |  |                | 4,485 |    |           |   | 1,905 |                          |  |   | 2,674      |   |  |              | 621   |   |                    |   | 647            |   |  |       | 3,351 |  |   | (680 | ) |  |   | 13,003 |  
|Capital employed, average                         |  |                | 4,754 |    |           |   | 2,002 |                          |  |   | 2,640      |   |  |              | 642   |   |                    |   | 748            |   |  |       |      |  |   |     |   |  |   | 12,907 |  
|Return on capital employed, %(7)                  |  |                | (1.6  | )% |           |   |      |                          |  |   | 6.1        | % |  |              | 12.5  | % |                    |   | 14.3           | % |  |       |      |  |   |     |   |  |   | 6.3    | %

---

|(1) | Sales include only sales outside the Group. Internal sales to segments amount to 1,506 million, consisting mainly of Forestry and Energy Departments in Finland.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The operating profit of the Magazine Papers segment includes expenses of 110 million relating to the closure of Miramichi pulp mill as well as income of 6 million from a
change in the Finnish pension system. The change in the pension system resulted in income of 2 million being booked to Newsprint, 3 million to Fine and Speciality Papers, and 2 million to Converting. The operating profit of the
Wood Products segment includes a capital gain of 110 million from the sale of Brooks Group, expenses totaling 34 million from restructuring arrangements made at Finnish sawmills and plywood mills, and income of 7 million from the
change in the pension system. Other Operations includes income of 249 million stemming from the change in Finlands TEL employment pension scheme, an 11 million provision for group restructuring expenses and a 19 million
provision for long-term wood procurement agreements in Great Britain.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Taxes include a tax benefit of 235 million due to a change in Finnish tax legislation, a benefit of 284 million resulting from a decrease in the German tax liability, as
well as tax income of 50 million in 2004, related to recognition of tax benefits of tax losses in Canada.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint
ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Segment liabilities include trade payables and advances received.
|--- | -----------------------------------------------------------------



|(6) | Capital employed is segment assets less segment liabilities. Other operations include the Forestry Department in Finland: 1,392 million and the Energy Department in Finland:
1,011 million. Eliminations include unallocated assets and unallocated non-interest-bearing liabilities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | The formula for calculation return on capital employed; segments: Operating profit/Capital employed (average) x 100, the Group: Profit before tax + interest expenses and other
finance costs/Balance sheet total  non-interest-bearing liabilities (average) x 100.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-21



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Primary Reporting Format  Segment Data for the Year Ended December 31, 2003



|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | -------------- | ----- | - | --------- | - | ----- | ------------------------ |  | - | ---------- | - |  | ------------ | ----- | - | ------------------ | - | ----- | -------------- |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                                  |  | MagazinePapers |       |   | Newsprint |   |       | Fine andSpecialityPapers |  |   | Converting |   |  | WoodProducts |       |   | Otheroperations(1) |   |       | Elimina- tions |  |   | Group |  
|                                                  |  | (In millions)  |      
|External sales                                    |  |               | 3,209 |   |           |  | 1,271 |                          |  |  | 2,000      |   |  |             | 1,331 |   |                    |  | 1,464 |                |  |  | 512   |   |  |  |       |   |  |  | 9,787  |  
|Internal sales                                    |  |                | 71    |   |           |   | 2     |                          |  |   | 244        |   |  |              | 39    |   |                    |   | 84    |                |  |   |      |   |  |   | (440   | ) |  |   |       |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|Total sales                                       |  |               | 3,280 |   |           |  | 1,273 |                          |  |  | 2,244      |   |  |             | 1,370 |   |                    |  | 1,548 |                |  |  | 512   |   |  |  | (440   | ) |  |  | 9,787  |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|Operating profit(2)                               |  |               | 50    |   |           |  | (8    | )                        |  |  | 206        |   |  |             | 43    |   |                    |  | 21    |                |  |  | 40    |   |  |  |       |   |  |  | 352    |  
|                                                  |  |                |       |   |           |   |       |                         
|Share of results of associates and joint ventures |  |               |      |   |           |  |      |                          |  |  |           |   |  |             |      |   |                    |  |      |                |  |  | 29    |   |  |  |       |   |  |  | 29     |  
|Gains on available-for-sale investments, net      |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |      |                |  |   |      |   |  |   |       |   |  |   | 127    |  
|Finance costs, net                                |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |      |                |  |   |      |   |  |   |       |   |  |   | (70    | )
|Income taxes                                      |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |      |                |  |   |      |   |  |   |       |   |  |   | (121   | )
|Minority interest                                 |  |                |       |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |      |                |  |   |      |   |  |   |       |   |  |   | 2      |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|Net profit                                        |  |               |      |   |           |  |      |                          |  |  |           |   |  |             |      |   |                    |  |      |                |  |  |      |   |  |  |       |   |  |  | 319    |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|Assets(3)                                         |  |               | 5,041 |   |           |  | 2,186 |                          |  |  | 2,695      |   |  |             | 762   |   |                    |  | 913   |                |  |  | 2,405 |   |  |  | (194   | ) |  |  | 13,808 |  
|Associates and joint ventures                     |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |      |                |  |   | 1,012 |   |  |   |       |   |  |   | 1,012  |  
|Unallocated assets                                |  |                |       |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |      |                |  |   |      |   |  |   |       |   |  |   | 1,771  |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|Total assets                                      |  |               | 5,041 |   |           |  | 2,186 |                          |  |  | 2,695      |   |  |             | 762   |   |                    |  | 913   |                |  |  | 3,417 |   |  |  |        |   |  |  | 16,591 |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|Liabilities(4)                                    |  |               | 194   |   |           |  | 115   |                          |  |  | 169        |   |  |             | 126   |   |                    |  | 132   |                |  |  | 230   |   |  |  | (194   | ) |  |  | 772    |  
|Unallocated liabilities                           |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |      |                |  |   |      |   |  |   |       |   |  |   | 8,790  |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|Total liabilities                                 |  |               |      |   |           |  |      |                          |  |  |           |   |  |             |      |   |                    |  |      |                |  |  |      |   |  |  |       |   |  |  | 9,562  |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|Other items                                       |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |       |                |  |   |       |   |  |   |        |   |  |   |        |  
|Depreciation and amortization                     |  |               | 458   |   |           |  | 222   |                          |  |  | 200        |   |  |             | 55    |   |                    |  | 51    |                |  |  | 62    |   |  |  |       |   |  |  | 1,048  |  
|Impairment charge                                 |  |                | 1     |   |           |   | 1     |                          |  |   |           |   |  |              | 1     |   |                    |   |      |                |  |   | (3    | ) |  |   |       |   |  |   |       |  
|Capital expenditure                               |  |                | 162   |   |           |   | 111   |                          |  |   | 303        |   |  |              | 31    |   |                    |   | 92    |                |  |   | 21    |   |  |   |       |   |  |   | 720    |  
|Capital employed, December 31(5)                  |  |                | 4,847 |   |           |   | 2,071 |                          |  |   | 2,526      |   |  |              | 636   |   |                    |   | 781   |                |  |   | 3,187 |   |  |   | (1,237 | ) |  |   | 12,811 |  
|Capital employed, average                         |  |                | 5,089 |   |           |   | 2,134 |                          |  |   | 2,621      |   |  |              | 690   |   |                    |   | 781   |                |  |   |      |   |  |   |       |   |  |   | 13,250 |  
|Return on capital employed, %(6)                  |  |                | 1.0   | % |           |   | (0.4  | )%                       |  |   | 7.9        | % |  |              | 6.2   | % |                    |   | 2.7   | %              |  |   |      |   |  |   |       |   |  |   | 5.2    | %

---

|(1) | Sales include only sales outside the Group. Internal sales to segments amount to 1,436 million consisting, mainly of the Forestry and Energy Departments in Finland.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Operating profit includes charges of 22 million related to the shutdown of Blandins two paper machines in the Magazine Papers segment and charges of 9 million
related to the shutdown of Voikkaa PM 17 in the Newsprint segment. Additionally, Other operations include charges related to the unrealized MACtac acquisition of 19 million, a loss of 6 million related to the disposal of the operations
of Rosenlew, and charges of 5 million related to the restructuring of forestry operations in Finland.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint
ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Segment liabilities include trade payables and advances received.
|--- | -----------------------------------------------------------------



|(5) | Capital employed is segment assets less segment liabilities. Other operations include the Forestry Department in Finland: 1,377 million and the Energy Department in Finland:
962 million. Eliminations include unallocated assets and unallocated non-interest-bearing liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | The formula for calculation return on capital employed; segments: Operating profit/Capital employed (average) x 100, the Group: Profit before tax + interest expenses and other
finance costs/Balance sheet total  non-interest-bearing liabilities (average) x 100.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-22



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Primary Reporting Format  Segment Data for the Year Ended December 31, 2002



|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | -------------- | ----- | - | --------- | - | ----- | ------------------------ |  | - | ---------- | - |  | ------------ | ----- | - | ------------------ | - | ------------- | - |  | ----- | ----- |  | - | ------ | - |  | - | ------ | -
|                                                  |  | MagazinePapers |       |   | Newsprint |   |       | Fine andSpecialityPapers |  |   | Converting |   |  | WoodProducts |       |   | Otheroperations(1) |   | Elimina-tions |   |  | Group |      
|                                                  |  | (In millions)  |      
|External sales                                    |  |               | 3,472 |   |           |  | 1,377 |                          |  |  | 2,138      |   |  |             | 1,497 |   |                    |  | 1,408         |   |  |      | 525   |  |  |       |   |  |  | 10,417 |  
|Internal sales                                    |  |                | 98    |   |           |   | 2     |                          |  |   | 308        |   |  |              | 42    |   |                    |   | 79            |   |  |       |      |  |   | (529   | ) |  |   |       |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|Total sales                                       |  |               | 3,570 |   |           |  | 1,379 |                          |  |  | 2,446      |   |  |             | 1,539 |   |                    |  | 1,487         |   |  |      | 525   |  |  | (529   | ) |  |  | 10,417 |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|Operating profit(2)                               |  |               | 177   |   |           |  | 121   |                          |  |  | 355        |   |  |             | 63    |   |                    |  | 32            |   |  |      | 55    |  |  |       |   |  |  | 803    |  
|                                                  |  |                |       |   |           |   |       |                         
|Share of results of associates and joint ventures |  |               |      |   |           |  |      |                          |  |  |           |   |  |             |      |   |                    |  |              |   |  |      | 80    |  |  |       |   |  |  | 80     |  
|Gains on available-for-sale investments, net      |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |              |   |  |       |      |  |   |       |   |  |   | 72     |  
|Finance costs, net                                |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |              |   |  |       |      |  |   |       |   |  |   | (245   | )
|Income taxes                                      |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |              |   |  |       |      |  |   |       |   |  |   | (212   | )
|Minority interest                                 |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |              |   |  |       |      |  |   |       |   |  |   | 2      |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|Net profit                                        |  |               |      |   |           |  |      |                          |  |  |           |   |  |             |      |   |                    |  |              |   |  |      |      |  |  |       |   |  |  | 500    |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|Assets(3)                                         |  |               | 5,303 |   |           |  | 2,406 |                          |  |  | 2,701      |   |  |             | 872   |   |                    |  | 864           |   |  |      | 2,378 |  |  | (102   | ) |  |  | 14,422 |  
|Associates and joint ventures                     |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |              |   |  |       | 1,095 |  |   |       |   |  |   | 1,095  |  
|Unallocated assets                                |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |              |   |  |       |      |  |   |       |   |  |   | 2,107  |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|Total assets                                      |  |               | 5,303 |   |           |  | 2,406 |                          |  |  | 2,701      |   |  |             | 872   |   |                    |  | 864           |   |  |      | 3,473 |  |  |       |   |  |  | 17,624 |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|Liabilities(4)                                    |  |               | 196   |   |           |  | 100   |                          |  |  | 157        |   |  |             | 143   |   |                    |  | 113           |   |  |      | 144   |  |  | (102   | ) |  |  | 751    |  
|Unallocated liabilities                           |  |                |      |   |           |   |      |                          |  |   |           |   |  |              |      |   |                    |   |              |   |  |       |      |  |   |       |   |  |   | 9,636  |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|Total liabilities                                 |  |               |      |   |           |  |      |                          |  |  |           |   |  |             |      |   |                    |  |              |   |  |      |      |  |  |       |   |  |  | 10,387 |  
|                                                  |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|Other items                                       |  |                |       |   |           |   |       |                          |  |   |            |   |  |              |       |   |                    |   |               |   |  |       |       |  |   |        |   |  |   |        |  
|Depreciation and amortization                     |  |               | 455   |   |           |  | 229   |                          |  |  | 194        |   |  |             | 59    |   |                    |  | 49            |   |  |      | 56    |  |  |       |   |  |  | 1,042  |  
|Impairment charge                                 |  |                | 74    |   |           |   | 5     |                          |  |   | 2          |   |  |              |      |   |                    |   | 2             |   |  |       |      |  |   |       |   |  |   | 83     |  
|Capital expenditure                               |  |                | 189   |   |           |   | 84    |                          |  |   | 159        |   |  |              | 68    |   |                    |   | 69            |   |  |       | 51    |  |   |       |   |  |   | 620    |  
|Capital employed, December 31(5)                  |  |                | 5,107 |   |           |   | 2,306 |                          |  |   | 2,544      |   |  |              | 729   |   |                    |   | 751           |   |  |       | 3,329 |  |   | (1,077 | ) |  |   | 13,689 |  
|Capital employed, average                         |  |                | 5,396 |   |           |   | 2,393 |                          |  |   | 2,657      |   |  |              | 794   |   |                    |   | 746           |   |  |       |      |  |   |       |   |  |   | 14,076 |  
|Return on capital employed, %(6)                  |  |                | 3.3   | % |           |   | 5.1   | %                        |  |   | 13.4       | % |  |              | 7.9   | % |                    |   | 4.3           | % |  |       |      |  |   |       |   |  |   | 7.4    | %

---

|(1) | Sales include only sales outside the Group. Internal sales to segments amount to 1,460 million, consisting mainly of the Forestry and Energy Departments in Finland.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Operating profit includes charges of 108 million related to the shutdown of Blandins two paper machines in the Magazine Papers segment, charges of 8 million
related to the rebuild of the Shotton RCF plant in the Newsprint segment, and a capital gain of 14 million on the sale of Walki Films unit in Other operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Segment assets include goodwill, other intangible assets, property, plant and equipment, investment property, biological assets and investments in associated companies and joint
ventures, investments in energy shares under available-for-sale investments, inventories and trade receivables.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Segment liabilities include trade payables and advances received.
|--- | -----------------------------------------------------------------



|(5) | Segments capital employed is segment assets less segment liabilities. Other operations include the Forestry Department in Finland: 1,366 million, and the Energy
Department in Finland: 955 million. Eliminations include unallocated assets and unallocated non-interest bearing liabilities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | The formula for calculation return on capital employed; segments: Operating profit/Capital employed (average) x 100, the Group: Profit before tax + interest expenses and other
finance costs/Balance sheet total  non-interest-bearing liabilities (average) x 100.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-23



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Personnel (Average) by Segment



|                           |  |                         |  |        |  |       
|-------------------------- |  | ----------------------- |  | ------ |  | ------
|                           |  | Year ended December 31,
|                           |  | 2004                    |  | 2003   |  | 2002  
|Magazine Papers            |  | 9,125                   |  | 9,180  |  | 9,635 
|Newsprint                  |  | 3,631                   |  | 3,843  |  | 3,914 
|Fine and Speciality Papers |  | 6,933                   |  | 6,827  |  | 6,816 
|Converting                 |  | 4,675                   |  | 4,755  |  | 4,979 
|Wood Products              |  | 7,503                   |  | 7,803  |  | 7,862 
|Other operations           |  | 2,948                   |  | 3,343  |  | 3,660 
|                           |  |                         |  |        |  |       
|Total                      |  | 34,815                  |  | 35,751 |  | 36,866
|                           |  |                         |  |        |  |       
|Personnel at year end      |  | 33,433                  |  | 34,482 |  | 35,579



Secondary Reporting Format



External Sales by Destination



|                         |  |                         |       |      |   |       |  |   |       
|------------------------ |  | ----------------------- | ----- | ---- | - | ----- |  | - | ------
|                         |  | Year ended December 31,
|                         |  | 2004                    |       | 2003 |   | 2002 
|                         |  | (In millions)          
|Germany                  |  |                        | 1,543 |      |  | 1,550 |  |  | 1,803 
|Great Britain            |  |                         | 1,295 |      |   | 1,216 |  |   | 1,369 
|Finland                  |  |                         | 1,029 |      |   | 1,090 |  |   | 942   
|France                   |  |                         | 710   |      |   | 725   |  |   | 850   
|Other EU countries(1)    |  |                         | 2,291 |      |   | 2,041 |  |   | 2,151 
|Other European countries |  |                         | 422   |      |   | 775   |  |   | 800   
|United States            |  |                         | 1,323 |      |   | 1,209 |  |   | 1,269 
|Canada                   |  |                         | 143   |      |   | 113   |  |   | 213   
|Rest of world            |  |                         | 1,064 |      |   | 1,068 |  |   | 1,020 
|                         |  |                         |       |      |   |       |  |   |       
|Total                    |  |                        | 9,820 |      |  | 9,787 |  |  | 10,417
|                         |  |                         |       |      |   |       |  |   |       

---

|(1) | 21 countries in 2004, 11 countries in 2003 and 2002.
|--- | ----------------------------------------------------



Total External Assets by Country



|                         |  |                         |        |      |   |        |  |   |       
|------------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                         |  | Year ended December 31,
|                         |  | 2004                    |        | 2003 |   | 2002  
|                         |  | (In millions)          
|Germany                  |  |                        | 2,958  |      |  | 3,153  |  |  | 3,349 
|Great Britain            |  |                         | 668    |      |   | 667    |  |   | 731   
|Finland                  |  |                         | 8,088  |      |   | 8,492  |  |   | 8,860 
|France                   |  |                         | 624    |      |   | 598    |  |   | 676   
|Other EU countries(1)    |  |                         | 940    |      |   | 1,072  |  |   | 1,189 
|Other European countries |  |                         | 107    |      |   | 152    |  |   | 95    
|United States            |  |                         | 738    |      |   | 827    |  |   | 987   
|Canada                   |  |                         | 888    |      |   | 952    |  |   | 982   
|Rest of world            |  |                         | 866    |      |   | 678    |  |   | 755   
|                         |  |                         |        |      |   |        |  |   |       
|Total                    |  |                        | 15,877 |      |  | 16,591 |  |  | 17,624
|                         |  |                         |        |      |   |        |  |   |       

---

|(1) | 21 countries in 2004, 11 countries in 2003 and 2002.
|--- | ----------------------------------------------------



F-24



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Capital Expenditure by Country



|                         |  |                         |     |      |   |      |  |   |    
|------------------------ |  | ----------------------- | --- | ---- | - | ---- |  | - | ---
|                         |  | Year ended December 31,
|                         |  | 2004                    |     | 2003 |   | 2002
|                         |  | (In millions)          
|Germany                  |  |                        | 49  |      |  | 40   |  |  | 41 
|Great Britain            |  |                         | 43  |      |   | 73   |  |   | 40 
|Finland                  |  |                         | 329 |      |   | 427  |  |   | 396
|France                   |  |                         | 11  |      |   | 13   |  |   | 20 
|Russia                   |  |                         | 9   |      |   | 37   |  |   | 20 
|Other European countries |  |                         | 9   |      |   | 22   |  |   | 16 
|China                    |  |                         | 188 |      |   | 52   |  |   | 14 
|North America            |  |                         | 32  |      |   | 30   |  |   | 44 
|Rest of world            |  |                         | 16  |      |   | 26   |  |   | 29 
|                         |  |                         |     |      |   |      |  |   |    
|Total                    |  |                        | 686 |      |  | 720  |  |  | 620
|                         |  |                         |     |      |   |      |  |   |    



|5. | ACQUISITIONS AND DISPOSALS
|-- | --------------------------



In 2004, 2003 and 2002, the Group made only some minor acquisitions. The total consideration paid was 10 million in 2004, 14 million in 2003
and 12 million in 2002.



In August 2004, UPM sold Brooks
Group Limited, the Irish building material merchant, for 213 million. The capital gain from the sale amounted to 110 million.



In September 2003, UPM sold the Rosenlew flexible intermediate bulk container (FIBC) operations with an after-tax loss of 4 million.



In October 2002, the Group sold its Walki Films packaging films business. The
pre-tax gain on disposal was 14 million.



None of these
disposals are classified as discontinued operations.



Assets and Liabilities
Arising from the Acquisition



|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|------------------------------------------------ |  | ----------------------- | --- | - | ---- | - | --- | ---- |  | - | --- | -
|                                                 |  | Year ended December 31, |    
|                                                 |  | 2004                    |     |   | 2003 |   |     | 2002 | 
|                                                 |  | (In millions)           |    
|Cash and cash equivalents                        |  |                        | 9   |   |      |  |    |      |  |  | 2   |  
|Other intangible assets                          |  |                         | 1   |   |      |   | 4   |      |  |   |    |  
|Property, plant and equipment                    |  |                         |    |   |      |   | 3   |      |  |   | 37  |  
|Inventories                                      |  |                         | 8   |   |      |   | 2   |      |  |   |    |  
|Receivables                                      |  |                         | 14  |   |      |   |    |      |  |   | 2   |  
|Borrowings                                       |  |                         | (22 | ) |      |   | (3  | )    |  |   | (30 | )
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|Fair value of net assets acquired                |  |                         | 10  |   |      |   | 6   |      |  |   | 11  |  
|Goodwill                                         |  |                         |    |   |      |   | 8   |      |  |   | 1   |  
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|Total purchase price                             |  |                        | 10  |   |      |  | 14  |      |  |  | 12  |  
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|Less:                                            |  |                         |     |   |      |   |     |      |  |   |     |  
|Cash and cash equivalents in subsidiary acquired |  |                         | (9  | ) |      |   |    |      |  |   | (2  | )
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|Cash flow on acquisition                         |  |                        | (1  | ) |      |  | (14 | )    |  |  | (10 | )
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  



F-25



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Net Assets and Liabilities of Disposals



|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|------------------------------------------------ |  | ----------------------- | --- | - | ---- | - | --- | ---- |  | - | --- | -
|                                                 |  | Year ended December 31, |    
|                                                 |  | 2004                    |     |   | 2003 |   |     | 2002 | 
|                                                 |  | (In millions)           |    
|Cash and cash equivalents                        |  |                        | 28  |   |      |  | 5   |      |  |  | 1   |  
|Property, plant and equipment                    |  |                         | 19  |   |      |   | 3   |      |  |   | 3   |  
|Inventories                                      |  |                         | 31  |   |      |   | 7   |      |  |   | 12  |  
|Receivables                                      |  |                         | 70  |   |      |   | 10  |      |  |   | 19  |  
|Payables                                         |  |                         | (45 | ) |      |   | (19 | )    |  |   | (35 | )
|Borrowings                                       |  |                         |    |   |      |   |    |      |  |   | (1  | )
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|                                                 |  |                        | 103 |   |      |  | 6   |      |  |  | (1  | )
|Gain/loss on disposal                            |  |                        | 110 |   |      |  | (6  | )    |  |  | 14  |  
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|Total consideration                              |  |                        | 213 |   |      |  |    |      |  |  | 13  |  
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|Satisfied by cash and cash equivalents           |  |                        | 213 |   |      |  |    |      |  |  | 13  |  
|Cash and cash equivalents in subsidiary disposed |  |                         | (28 | ) |      |   | (5  | )    |  |   | (1  | )
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  
|Net cash inflow arising on disposals             |  |                        | 185 |   |      |  | (5  | )    |  |  | 12  |  
|                                                 |  |                         |     |   |      |   |     |      |  |   |     |  



|6. | OTHER OPERATING INCOME
|-- | ----------------------



|                                       |  |                         |     |      |   |      |  |   |   
|-------------------------------------- |  | ----------------------- | --- | ---- | - | ---- |  | - | --
|                                       |  | Year ended December 31,
|                                       |  | 2004                    |     | 2003 |   | 2002
|                                       |  | (In millions)          
|Gains on sale of non-current assets(1) |  |                        | 142 |      |  | 22   |  |  | 51
|Rental income, investment property     |  |                         | 16  |      |   | 20   |  |   | 22
|Rental income, other                   |  |                         | 6   |      |   | 6    |  |   | 7 
|Other                                  |  |                         | 4   |      |   | 10   |  |   | 11
|                                       |  |                         |     |      |   |      |  |   |   
|                                       |  |                        | 168 |      |  | 58   |  |  | 91
|                                       |  |                         |     |      |   |      |  |   |   

---

|(1) | Year 2004 includes capital gains of 110 million from the sale of Brooks Group.
|--- | -------------------------------------------------------------------------------



F-26



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|7. | COSTS AND EXPENSES
|-- | ------------------



|                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------ |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                             |  | Year ended December 31, |      
|                                                             |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|                                                             |  | (In millions)           |      
|Change in inventories of finished goods and work in progress |  |                        | (36   | ) |      |  | 39    |      |  |  | (47   | )
|Production for own use                                       |  |                         | (44   | ) |      |   | (47   | )    |  |   | (51   | )
|                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                             |  |                        | (80   | ) |      |  | (8    | )    |  |  | (98   | )
|                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                             |  |                         |      
|Materials and services                                       |  |                         |       |   |      |   |       |      |  |   |       |  
|Raw materials, consumables and goods                         |  |                         |       |   |      |   |       |      |  |   |       |  
|Purchased during the period                                  |  |                        | 4,737 |   |      |  | 4,472 |      |  |  | 4,531 |  
|Change in inventories                                        |  |                         | (29   | ) |      |   | (15   | )    |  |   | (31   | )
|Biological assets harvested during the period                |  |                         | 42    |   |      |   | 43    |      |  |   | 42    |  
|Fair value change of biological assets                       |  |                         | (57   | ) |      |   | (56   | )    |  |   | (39   | )
|External services(1)                                         |  |                         | 820   |   |      |   | 961   |      |  |   | 863   |  
|                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                             |  |                        | 5,513 |   |      |  | 5,405 |      |  |  | 5,366 |  
|                                                             |  |                         |      
|Personnel expenses                                           |  |                         |       |   |      |   |       |      |  |   |       |  
|Salaries and fees                                            |  |                         |       |   |      |   |       |      |  |   |       |  
|Salaries of board of directors and managing directors        |  |                        | 15    |   |      |  | 17    |      |  |  | 20    |  
|Other salaries                                               |  |                         | 1,310 |   |      |   | 1,285 |      |  |   | 1,349 |  
|                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                             |  |                        | 1,325 |   |      |  | 1,302 |      |  |  | 1,369 |  
|                                                             |  |                         |      
|Indirect employee costs                                      |  |                         |       |   |      |   |       |      |  |   |       |  
|Pension costs-defined benefit plans (Note 29)                |  |                        | 62    |   |      |  | 62    |      |  |  | 111   |  
|Change in the Finnish pension system(2)                      |  |                         | (269  | ) |      |   |      |      |  |   |      |  
|Pension costs-defined contribution plans                     |  |                         | 149   |   |      |   | 145   |      |  |   | 122   |  
|Other post-employment benefits (Note 29)                     |  |                         | 2     |   |      |   | (4    | )    |  |   | 4     |  
|Other indirect employee costs(3)                             |  |                         | 178   |   |      |   | 182   |      |  |   | 186   |  
|                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                             |  |                        | 122   |   |      |  | 385   |      |  |  | 423   |  
|                                                             |  |                         |      
|Other operating costs and expenses                           |  |                         |       |   |      |   |       |      |  |   |       |  
|Rents and lease expenses                                     |  |                        | 62    |   |      |  | 50    |      |  |  | 61    |  
|Losses on sale of non-current assets                         |  |                         | 4     |   |      |   | 3     |      |  |   | 12    |  
|Other operating expenses(4)                                  |  |                         | 1,281 |   |      |   | 1,308 |      |  |   | 1,447 |  
|                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                             |  |                        | 1,347 |   |      |  | 1,361 |      |  |  | 1,520 |  
|                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|Costs and expenses, total                                    |  |                        | 8,227 |   |      |  | 8,445 |      |  |  | 8,580 |  
|                                                             |  |                         |       |   |      |   |       |      |  |   |       |  

---

|(1) | External services comprise mainly distribution costs of products sold.
|--- | ----------------------------------------------------------------------



|(2) | Changes were made to Finlands TEL employment pension scheme in 2004. This resulted in a decrease of 269 million in the pension liability.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Other indirect employee costs include primarily other statutory social costs, excluding pension costs.
|--- | ------------------------------------------------------------------------------------------------------



|(4) | Other operating expenses include, among others, energy and maintenance costs, costs paid for services and for administration.
|--- | -----------------------------------------------------------------------------------------------------------------------------



The research and development costs included in costs and expenses were
47 million (2003: 48 million and 2002: 46 million).



Remuneration Paid to the Members of the Board of Directors and the Executive Team



During 2004 the 9 members of the Board of Directors were paid fees totaling 918,000, of which 356,000 was paid in the form of UPM shares. The
13 members of the Executive Team were paid salaries and fringe benefits totaling about 4.6 million, of which 8% were bonuses. According to the Companys performance-related and incentive pay scheme, executives can be paid a
performance-related reward amounting to not more than twelve months salary. The combined value of President and CEO Jussi Pesonens salary, fringe benefits and other remuneration in 2004 was 665,000 (in 2003 the corresponding total
for Juha Niemelä was 1,089,000).



On January 29,
2004 the Companys Board of Directors appointed Senior Executive Vice President and COO Jussi Pesonen as the Groups new President and CEO. Mr. Pesonens monthly salary is 45,000, which includes housing and telephone benefits.
In addition, he has a company car as a fringe benefit.



Besides
salaries and bonuses the members of the Executive team are also entitled to participate in the Companys stock option plans.



The managing Directors agreed retirement age is 60 years. The retirement age of the members of the Executive Team is 6063 years, depending on
agreements. The costs of lowering the retirement age or supplementing statutory pension security are generally covered by voluntary pension insurance. In 2004 the total amount of pension expenses relating to the pension plans of the members of the
Executive Team was 1.2 million (2.3 million in 2003).



Members of the Executive Team have negotiated certain benefits upon the termination of their service contracts prior to the stated expiration date of such service contracts. If UPM-Kymmene Corporation gives notice of termination to Jussi
Pesonen, the



F-27



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



President and CEO, a severance compensation of 24 months fixed salary will be paid, in addition to the six months salary required to be paid
during the notice period for his termination. For other members of the Executive Team, the period for additional severance compensation is 12 months in addition to the six months salary for the notice period.



If there is a change of control in UPM-Kymmene Corporation (as defined in the
Key Personnel Stock Options Terms and Conditions, authorized by the annual general shareholders meeting of March 19, 2002), each member of the Executive Team may terminate such executives service contracts within one month or, in the
case of Jussi Pesonen, within three months, of the closing of the trigger event for the change of control and receive compensation equivalent to such executives 24 months fixed salary.



|8. | DEPRECIATION, AMORTIZATION AND IMPAIRMENT CHARGES
|-- | -------------------------------------------------



|                                                         |  |                         |       |      |   |       |      |  |   |      
|-------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | ---- |  | - | -----
|                                                         |  | Year ended December 31,
|                                                         |  | 2004                    |       | 2003 |   |       | 2002
|                                                         |  | (In millions)          
|Depreciation on property, plant and equipment            |  |                         |       |      |   |       |      |  |   |      
|Buildings                                                |  |                        | 104   |      |  | 106   |      |  |  | 108  
|Machinery and equipment                                  |  |                         | 717   |      |   | 730   |      |  |   | 730  
|Other tangible assets                                    |  |                         | 36    |      |   | 46    |      |  |   | 43   
|                                                         |  |                         |       |      |   |       |      |  |   |      
|                                                         |  |                        | 857   |      |  | 882   |      |  |  | 881  
|                                                         |  |                         |      
|Depreciation on investment property                      |  |                         |       |      |   |       |      |  |   |      
|Buildings                                                |  |                        | 1     |      |  | 2     |      |  |  | 2    
|                                                         |  |                         |      
|Amortization of intangible assets                        |  |                         |       |      |   |       |      |  |   |      
|Intangible rights                                        |  |                        | 11    |      |  | 10    |      |  |  | 10   
|Goodwill                                                 |  |                         | 100   |      |   | 102   |      |  |   | 102  
|Other capitalized expenditure                            |  |                         | 56    |      |   | 52    |      |  |   | 47   
|                                                         |  |                         |       |      |   |       |      |  |   |      
|                                                         |  |                        | 167   |      |  | 164   |      |  |  | 159  
|                                                         |  |                         |      
|Impairment charges of property, plant and equipment      |  |                         |       |      |   |       |      |  |   |      
|Land areas                                               |  |                        |      |      |  | (8    | )    |  |  |     
|Buildings                                                |  |                         | 18    |      |   | 1     |      |  |   | 13   
|Machinery and equipment                                  |  |                         | 78    |      |   | 3     |      |  |   | 70   
|Other tangible assets                                    |  |                         | 1     |      |   |      |      |  |   |     
|                                                         |  |                         |       |      |   |       |      |  |   |      
|                                                         |  |                        | 97    |      |  | (4    | )    |  |  | 83   
|                                                         |  |                         |      
|Impairment of intangible assets                          |  |                         |       |      |   |       |      |  |   |      
|Other capitalized expenditure                            |  |                        |      |      |  | 4     |      |  |  |     
|                                                         |  |                         |       |      |   |       |      |  |   |      
|Depreciation, amortization and impairment charges, total |  |                        | 1,122 |      |  | 1,048 |      |  |  | 1,125
|                                                         |  |                         |       |      |   |       |      |  |   |      



In 2004, the
impairments of tangible fixed assets includes 75 million relating to the closure of the Miramichi pulp mill in Canada and 21 million relating to restructuring of the wood product industry in Finland. No further impairments are expected
related to the restructurings.



The impairment charge in 2002
for property, plant and equipment includes 71 million related to the shut-down of two paper machines at the Blandin mill in the U.S. and 5 million related to the rebuild of the RCF plant at the Shotton mill in the U.K.



F-28



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|9. | SHARE OF RESULTS OF ASSOCIATED COMPANIES AND JOINT VENTURES BEFORE TAXES
|-- | ------------------------------------------------------------------------



|                   |  |                         |    |   |      |   |     |      |  |   |     |  
|------------------ |  | ----------------------- | -- | - | ---- | - | --- | ---- |  | - | --- | -
|                   |  | Year ended December 31, |   
|                   |  | 2004                    |    |   | 2003 |   |     | 2002 | 
|                   |  | (In millions)           |   
|Oy Metsä-Botnia Ab |  |                        | 67 |   |      |  | 37  |      |  |  | 70  |  
|Pohjolan Voima Oy  |  |                         | (9 | ) |      |   | (23 | )    |  |   | (13 | )
|Others             |  |                         | 6  |   |      |   | 15  |      |  |   | 23  |  
|                   |  |                         |    |   |      |   |     |      |  |   |     |  
|                   |  |                        | 64 |   |      |  | 29  |      |  |  | 80  |  
|                   |  |                         |    |   |      |   |     |      |  |   |     |  



|10. | GAINS ON AVAILABLE-FOR-SALE INVESTMENTS, NET
|--- | --------------------------------------------



|                                         |  |                         |    |      |   |     |      |  |   |   
|---------------------------------------- |  | ----------------------- | -- | ---- | - | --- | ---- |  | - | --
|                                         |  | Year ended December 31,
|                                         |  | 2004                    |    | 2003 |   |     | 2002
|                                         |  | (In millions)          
|Fair value gains and losses on disposals |  |                        | 1  |      |  | 153 |      |  |  | 72
|Impairment reversal/loss                 |  |                         | 26 |      |   | (26 | )    |  |   |  
|                                         |  |                         |    |      |   |     |      |  |   |   
|Total                                    |  |                        | 27 |      |  | 127 |      |  |  | 72
|                                         |  |                         |    |      |   |     |      |  |   |   



|11. | FINANCE COSTS
|--- | -------------



|                                                                           |  |                         |      |   |      |   |      |      |  |   |      |  
|-------------------------------------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                           |  | Year ended December 31, |     
|                                                                           |  | 2004                    |      |   | 2003 |   |      | 2002 | 
|                                                                           |  | (In millions)           |     
|Interest expenses                                                          |  |                        | (202 | ) |      |  | (235 | )    |  |  | (307 | )
|Interest income                                                            |  |                         | 32   |   |      |   | 33   |      |  |   | 25   |  
|Dividend income from available-for-sale investments                        |  |                         | 7    |   |      |   | 18   |      |  |   | 21   |  
|Exchange gains and losses                                                  |  |                         | 48   |   |      |   | 95   |      |  |   | (3   | )
|Fair value gains and losses on derivative financial instruments(1)         |  |                         |     |   |      |   | 12   |      |  |   | 28   |  
|Gains and losses on sale of associated companies and joint ventures shares |  |                         | (6   | ) |      |   | 19   |      |  |   | 12   |  
|Other financial income                                                     |  |                         | 7    |   |      |   | 6    |      |  |   | 2    |  
|Other financial expenses                                                   |  |                         | (16  | ) |      |   | (18  | )    |  |   | (23  | )
|                                                                           |  |                         |      |   |      |   |      |      |  |   |      |  
|Total                                                                      |  |                        | (130 | ) |      |  | (70  | )    |  |  | (245 | )
|                                                                           |  |                         |      |   |      |   |      |      |  |   |      |  

---

|(1) | The fair value hedge ineffectiveness, net was 12, 22 and (13) million in 2004, 2003 and 2002, respectively.
|--- | --------------------------------------------------------------------------------------------------------------



The Aggregate Foreign Exchange Gains and Losses Included in the Consolidated Income
Statement



|                    |  |                         |    |      |   |     |      |  |   |     |  
|------------------- |  | ----------------------- | -- | ---- | - | --- | ---- |  | - | --- | -
|                    |  | Year ended December 31, |   
|                    |  | 2004                    |    | 2003 |   |     | 2002 | 
|                    |  | (In millions)           |   
|Sales               |  |                        | 11 |      |  | (32 | )    |  |  | (39 | )
|Costs and expenses  |  |                         | 2  |      |   | (1  | )    |  |   | 1   |  
|Net financial items |  |                         | 48 |      |   | 95  |      |  |   | (3  | )
|                    |  |                         |    |      |   |     |      |  |   |     |  
|Total               |  |                        | 61 |      |  | 62  |      |  |  | (41 | )
|                    |  |                         |    |      |   |     |      |  |   |     |  



F-29



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|12. | INCOME TAXES
|--- | ------------



|                                              |  |                                    |      |   |      |   |      |      |  |   |      |  
|--------------------------------------------- |  | ---------------------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                              |  | Year ended December 31,            |     
|                                              |  | 2004                               |      |   | 2003 |   |      | 2002 | 
|                                              |  | (In millions, except for tax rate) |     
|Major components of tax expenses              |  |                                    |      |   |      |   |      |      |  |   |      |  
|Current tax expense                           |  |                                   | 118  |   |      |  | 186  |      |  |  | 271  |  
|Change in deferred taxes (Note 28)            |  |                                    | (533 | ) |      |   | (72  | )    |  |   | (83  | )
|Share of tax of associates                    |  |                                    | 6    |   |      |   | 7    |      |  |   | 24   |  
|                                              |  |                                    |      |   |      |   |      |      |  |   |      |  
|                                              |  |                                   | (409 | ) |      |  | 121  |      |  |  | 212  |  
|                                              |  |                                    |      |   |      |   |      |      |  |   |      |  
|                                              |  |                                    |     
|Income tax reconciliation                     |  |                                    |      |   |      |   |      |      |  |   |      |  
|Profit before tax                             |  |                                   | 600  |   |      |  | 438  |      |  |  | 710  |  
|Computed tax at Finnish statutory rate of 29% |  |                                    | 174  |   |      |   | 127  |      |  |   | 206  |  
|Difference between Finnish and foreign rates  |  |                                    | (20  | ) |      |   | (20  | )    |  |   | (17  | )
|Non-deductible expenses and tax exempt income |  |                                    | (11  | ) |      |   | 7    |      |  |   | (12  | )
|Non-deductible purchase price difference      |  |                                    | 37   |   |      |   | 32   |      |  |   | 37   |  
|Tax loss with no tax benefit(1)               |  |                                    | 8    |   |      |   | 14   |      |  |   | 7    |  
|Undistributed profits of associated companies |  |                                    |     |   |      |   | (11  | )    |  |   | 1    |  
|Change in tax legislation(1)                  |  |                                    | (246 | ) |      |   | 7    |      |  |   | (2   | )
|Other(1)                                      |  |                                    | (351 | ) |      |   | (35  | )    |  |   | (8   | )
|                                              |  |                                    |      |   |      |   |      |      |  |   |      |  
|Income tax expense                            |  |                                   | (409 | ) |      |  | 121  |      |  |  | 212  |  
|                                              |  |                                    |      |   |      |   |      |      |  |   |      |  
|                                              |  |                                    |     
|Effective tax rate(1)                         |  |                                    | 26.7 | % |      |   | 27.6 | %    |  |   | 29.9 | %



|(1) | Taxes for 2004 include a tax benefit of 235 million stemming from a change in Finnish tax legislation, a tax benefit of 284 million owing to a decrease in the German tax
liability, as well as tax income of 50 million in 2004, related to recognition of tax benefits of tax losses in Canada. These amounts have been excluded in computing the effective tax rate for 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. | EARNINGS PER SHARE
|--- | ------------------



|                                                                                                                              |  |                                                               |         |      |   |         |  |   |        
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                                                                                              |  | Year ended December 31,                                      
|                                                                                                                              |  | 2004                                                          |         | 2003 |   | 2002   
|                                                                                                                              |  | (In millions, except for share amountsand earnings per share)
|Net profit attributable to shareholders                                                                                       |  |                                                              | 1,008   |      |  | 319     |  |  | 500    
|Average weighted number of shares (in thousands)                                                                              |  |                                                               | 523,641 |      |   | 523,130 |  |   | 518,935
|Basic earnings per share,                                                                                                    |  |                                                              | 1.93    |      |   | 0.61    |  |   | 0.96   
|                                                                                                                              |  |                                                               |        
|For the diluted earnings per share the number of shares is adjusted by the effect of convertible bond loan and share options. |  |                                                               |         |      |   |         |  |   |        
|                                                                                                                              |  |                                                               |        
|Net profit attributable to shareholders                                                                                       |  |                                                              | 1,008   |      |  | 319     |  |  | 500    
|Adjustments to the net profit                                                                                                 |  |                                                               |        |      |   |        |  |   | 2      
|                                                                                                                              |  |                                                               |         |      |   |         |  |   |        
|                                                                                                                              |  |                                                               |        
|Net profit used to determine diluted earnings per share                                                                       |  |                                                              | 1,008   |      |  | 319     |  |  | 502    
|                                                                                                                              |  |                                                               |        
|Average weighted number of shares (in thousands)                                                                              |  |                                                               | 523,641 |      |   | 523,130 |  |   | 518,935
|Effect of convertible bond loan (in thousands)                                                                                |  |                                                               |        |      |   | 449     |  |   | 4,980  
|Effect of options (in thousands)                                                                                              |  |                                                               | 2,606   |      |   | 675     |  |   | 1,867  
|                                                                                                                              |  |                                                               |         |      |   |         |  |   |        
|Average weighted number of shares for diluted earnings per share (in thousands)                                               |  |                                                               | 526,247 |      |   | 524,254 |  |   | 525,782
|                                                                                                                              |  |                                                               |        
|Diluted earnings per share,                                                                                                  |  |                                                              | 1.92    |      |  | 0.61    |  |  | 0.96   



F-30



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|14. | DIVIDEND PER SHARE
|--- | ------------------



At the Annual General Meeting on March 24, 2004, a dividend in respect of 2003 of 0.75 per share, amounting to a total dividend of 393
million, was approved.



After giving effect to the bonus issue
in 2003, the dividends declared in respect of 2002 and 2001 (paid in 2003 and 2002) were 0.75 and 0.75 per share, totaling 390 million and 388 million, respectively.



|15. | GOODWILL
|--- | --------



|                                                       |  |                    |       |   |      |   |       |  
|------------------------------------------------------ |  | ------------------ | ----- | - | ---- | - | ----- | -
|                                                       |  | As at December 31, |      
|                                                       |  | 2004               |       |   | 2003 |  
|                                                       |  | (In millions)      |      
|Acquisition cost at January 1                          |  |                   | 2,031 |   |      |  | 2,014 |  
|Additions                                              |  |                    |      |   |      |   | 20    |  
|Disposals                                              |  |                    | (7    | ) |      |   | (3    | )
|                                                       |  |                    |       |   |      |   |       |  
|Acquisition cost at December 31                        |  |                   | 2,024 |   |      |  | 2,031 |  
|                                                       |  |                    |       |   |      |   |       |  
|                                                       |  |                   
|Accumulated amortization and impairment at January 1   |  |                    | (368  | ) |      |   | (269  | )
|Amortization                                           |  |                    | (100  | ) |      |   | (102  | )
|Disposals                                              |  |                    | 4     |   |      |   | 3     |  
|                                                       |  |                    |       |   |      |   |       |  
|Accumulated amortization and impairment at December 31 |  |                   | (464  | ) |      |  | (368  | )
|                                                       |  |                    |       |   |      |   |       |  
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 1,663 |   |      |  | 1,745 |  
|Carrying value at December 31                          |  |                    | 1,560 |   |      |   | 1,663 |  



F-31



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|16. | OTHER INTANGIBLE ASSETS
|--- | -----------------------



|                                                       |  |                    |     |   |      |   |     |  
|------------------------------------------------------ |  | ------------------ | --- | - | ---- | - | --- | -
|                                                       |  | As at December 31, |    
|                                                       |  | 2004               |     |   | 2003 |  
|                                                       |  | (In millions)      |    
|Intangible rights                                      |  |                    |     |   |      |   |     |  
|Acquisition cost at January 1                          |  |                   | 348 |   |      |  | 355 |  
|Additions                                              |  |                    | 8   |   |      |   | 12  |  
|Disposals                                              |  |                    | (2  | ) |      |   | (2  | )
|Reclassifications                                      |  |                    | 10  |   |      |   | (13 | )
|Translation differences                                |  |                    | (2  | ) |      |   | (4  | )
|                                                       |  |                    |     |   |      |   |     |  
|Acquisition cost at December 31                        |  |                   | 362 |   |      |  | 348 |  
|                                                       |  |                   
|Accumulated amortization and impairment at January 1   |  |                   | (86 | ) |      |  | (86 | )
|Amortization                                           |  |                    | (11 | ) |      |   | (10 | )
|Disposals                                              |  |                    | 2   |   |      |   | 1   |  
|Reclassifications                                      |  |                    |    |   |      |   | 9   |  
|                                                       |  |                    |     |   |      |   |     |  
|Accumulated amortization and impairment at December 31 |  |                   | (95 | ) |      |  | (86 | )
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 262 |   |      |  | 269 |  
|Carrying value at December 31                          |  |                    | 267 |   |      |   | 262 |  



F-32



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                       |  |                    |      |   |      |   |      |  
|------------------------------------------------------ |  | ------------------ | ---- | - | ---- | - | ---- | -
|                                                       |  | As at December 31, |     
|                                                       |  | 2004               |      |   | 2003 |  
|                                                       |  | (In millions)      |     
|Other capitalized expenditure                          |  |                    |      |   |      |   |      |  
|Acquisition cost at January 1                          |  |                   | 380  |   |      |  | 340  |  
|Additions                                              |  |                    | 68   |   |      |   | 51   |  
|Disposals                                              |  |                    | (11  | ) |      |   | (31  | )
|Reclassifications                                      |  |                    | 8    |   |      |   | 25   |  
|Acquisitions through business combinations             |  |                    | 1    |   |      |   |     |  
|Translation differences                                |  |                    | (1   | ) |      |   | (5   | )
|                                                       |  |                    |      |   |      |   |      |  
|Acquisition cost at December 31                        |  |                    | 445  |   |      |   | 380  |  
|                                                       |  |                   
|Accumulated amortization and impairment at January 1   |  |                   | (206 | ) |      |  | (173 | )
|Amortization                                           |  |                    | (66  | ) |      |   | (51  | )
|Impairment charges                                     |  |                    |     |   |      |   | (4   | )
|Disposals                                              |  |                    | 7    |   |      |   | 28   |  
|Reclassifications                                      |  |                    | 3    |   |      |   | (9   | )
|Translation differences                                |  |                    | 1    |   |      |   | 3    |  
|                                                       |  |                    |      |   |      |   |      |  
|Accumulated amortization and impairment at December 31 |  |                   | (261 | ) |      |  | (206 | )
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 174  |   |      |  | 167  |  
|Carrying value at December 31                          |  |                    | 184  |   |      |   | 174  |  
|                                                       |  |                   
|Advance payments and construction in progress          |  |                    |      |   |      |   |      |  
|Acquisition cost at January 1                          |  |                   | 86   |   |      |  | 104  |  
|Additions                                              |  |                    | 5    |   |      |   | 5    |  
|Disposals                                              |  |                    | (16  | ) |      |   | (15  | )
|Reclassifications                                      |  |                    | (7   | ) |      |   | (8   | )
|                                                       |  |                    |      |   |      |   |      |  
|Acquisition cost at December 31                        |  |                   | 68   |   |      |  | 86   |  
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 86   |   |      |  | 104  |  
|Carrying value at December 31                          |  |                    | 68   |   |      |   | 86   |  
|                                                       |  |                    |      |   |      |   |      |  
|Total other intangible assets                          |  |                   | 519  |   |      |  | 522  |  
|                                                       |  |                    |      |   |      |   |      |  



Intangible rights include 123
million in respect of the water rights of power plants acquired under finance lease agreements (2003: 168 million).



|17. | PROPERTY, PLANT AND EQUIPMENT
|--- | -----------------------------



|                                |  |                   |     |   |      |   |     |  
|------------------------------- |  | ----------------- | --- | - | ---- | - | --- | -
|                                |  | As atDecember 31, |    
|                                |  | 2004              |     |   | 2003 |  
|                                |  | (In millions)     |    
|Land and water areas            |  |                   |     |   |      |   |     |  
|Acquisition cost at January 1   |  |                  | 369 |   |      |  | 376 |  
|Additions                       |  |                   | 4   |   |      |   | 7   |  
|Disposals                       |  |                   | (14 | ) |      |   | (12 | )
|Reclassifications               |  |                   | 3   |   |      |   |    |  
|Translation differences         |  |                   |    |   |      |   | (2  | )
|                                |  |                   |     |   |      |   |     |  
|Acquisition cost at December 31 |  |                  | 362 |   |      |  | 369 |  



F-33



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                       |  |                    |        |   |      |   |        |  
|------------------------------------------------------ |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                                       |  | As at December 31, |       
|                                                       |  | 2004               |        |   | 2003 |  
|                                                       |  | (In millions)      |       
|Accumulated depreciation and impairment at January 1   |  |                   | (11    | ) |      |  | (21    | )
|Disposals                                              |  |                    |       |   |      |   | 2      |  
|Impairment                                             |  |                    |       |   |      |   | 8      |  
|                                                       |  |                    |        |   |      |   |        |  
|Accumulated depreciation and impairment at December 31 |  |                   | (11    | ) |      |  | (11    | )
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 358    |   |      |  | 355    |  
|Carrying value at December 31                          |  |                    | 351    |   |      |   | 358    |  
|                                                       |  |                   
|Buildings                                              |  |                    |        |   |      |   |        |  
|Acquisition cost at January 1                          |  |                   | 3,052  |   |      |  | 3,036  |  
|Additions                                              |  |                    | 51     |   |      |   | 60     |  
|Acquisitions through business combinations             |  |                    | 2      |   |      |   | 2      |  
|Disposals                                              |  |                    | (46    | ) |      |   | (33    | )
|Reclassifications                                      |  |                    | 44     |   |      |   | 28     |  
|Translation differences                                |  |                    | (11    | ) |      |   | (41    | )
|                                                       |  |                    |        |   |      |   |        |  
|Acquisition cost at December 31                        |  |                   | 3,092  |   |      |  | 3,052  |  
|                                                       |  |                   
|Accumulated depreciation and impairment at January 1   |  |                   | (1,219 | ) |      |  | (1,158 | )
|Depreciation                                           |  |                    | (104   | ) |      |   | (105   | )
|Impairment                                             |  |                    | (18    | ) |      |   | (1     | )
|Disposals                                              |  |                    | 21     |   |      |   | 33     |  
|Reclassifications                                      |  |                    | 1      |   |      |   | (2     | )
|Translation differences                                |  |                    | 3      |   |      |   | 14     |  
|                                                       |  |                    |        |   |      |   |        |  
|Accumulated depreciation and impairment at December 31 |  |                   | (1,316 | ) |      |  | (1,219 | )
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 1,833  |   |      |  | 1,878  |  
|Carrying value at December 31                          |  |                    | 1,776  |   |      |   | 1,833  |  
|                                                       |  |                   
|Machinery and equipment                                |  |                    |        |   |      |   |        |  
|Acquisition cost at January 1                          |  |                   | 12,669 |   |      |  | 12,636 |  
|Additions                                              |  |                    | 253    |   |      |   | 373    |  
|Acquisitions through business combinations             |  |                    | 3      |   |      |   | 2      |  
|Disposals                                              |  |                    | (234   | ) |      |   | (252   | )
|Reclassifications                                      |  |                    | 236    |   |      |   | 148    |  
|Translation differences                                |  |                    | (71    | ) |      |   | (238   | )
|                                                       |  |                    |        |   |      |   |        |  
|Acquisition cost at December 31                        |  |                   | 12,856 |   |      |  | 12,669 |  
|                                                       |  |                   
|Accumulated depreciation and impairment at January 1   |  |                   | (7,323 | ) |      |  | (6,966 | )
|Depreciation                                           |  |                    | (710   | ) |      |   | (724   | )
|Impairment                                             |  |                    | (77    | ) |      |   | (3     | )
|Disposals                                              |  |                    | 234    |   |      |   | 246    |  
|Reclassifications                                      |  |                    | 4      |   |      |   | 5      |  
|Translation differences                                |  |                    | 32     |   |      |   | 119    |  
|                                                       |  |                    |        |   |      |   |        |  
|Accumulated depreciation and impairment at December 31 |  |                   | (7,840 | ) |      |  | (7,323 | )
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 5,346  |   |      |  | 5,670  |  
|Carrying value at December 31                          |  |                    | 5,016  |   |      |   | 5,346  |  



F-34



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                       |  |                    |       |   |      |   |       |  
|------------------------------------------------------ |  | ------------------ | ----- | - | ---- | - | ----- | -
|                                                       |  | As at December 31, |      
|                                                       |  | 2004               |       |   | 2003 |  
|                                                       |  | (In millions)      |      
|Other tangible assets                                  |  |                    |       |   |      |   |       |  
|Acquisition cost at January 1                          |  |                   | 820   |   |      |  | 827   |  
|Additions                                              |  |                    | 26    |   |      |   | 22    |  
|Disposals                                              |  |                    | (11   | ) |      |   | (20   | )
|Reclassifications                                      |  |                    | 12    |   |      |   | (3    | )
|Translation differences                                |  |                    | (2    | ) |      |   | (6    | )
|                                                       |  |                    |       |   |      |   |       |  
|Acquisition cost at December 31                        |  |                   | 845   |   |      |  | 820   |  
|                                                       |  |                   
|Accumulated depreciation and impairment at January 1   |  |                   | (599  | ) |      |  | (577  | )
|Depreciation                                           |  |                    | (36   | ) |      |   | (43   | )
|Disposals                                              |  |                    | 11    |   |      |   | 15    |  
|Reclassifications                                      |  |                    | 1     |   |      |   | 3     |  
|Impairment                                             |  |                    | (1    | ) |      |   |      |  
|Translation differences                                |  |                    | 2     |   |      |   | 3     |  
|                                                       |  |                    |       |   |      |   |       |  
|Accumulated depreciation and impairment at December 31 |  |                   | (622  | ) |      |  | (599  | )
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 221   |   |      |  | 250   |  
|Carrying value at December 31                          |  |                    | 223   |   |      |   | 221   |  
|                                                       |  |                   
|Advance payments and construction in progress          |  |                    |       |   |      |   |       |  
|Acquisition cost at January 1                          |  |                   | 367   |   |      |  | 236   |  
|Additions                                              |  |                    | 228   |   |      |   | 381   |  
|Disposals                                              |  |                    | (6    | ) |      |   | (47   | )
|Reclassifications                                      |  |                    | (330  | ) |      |   | (198  | )
|Translation differences                                |  |                    | (4    | ) |      |   | (5    | )
|                                                       |  |                    |       |   |      |   |       |  
|Acquisition cost at December 31                        |  |                   | 255   |   |      |  | 367   |  
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 367   |   |      |  | 236   |  
|Carrying value at December 31                          |  |                    | 255   |   |      |   | 367   |  
|                                                       |  |                    |       |   |      |   |       |  
|Total property, plant and equipment                    |  |                   | 7,621 |   |      |  | 8,125 |  
|                                                       |  |                    |       |   |      |   |       |  



In 2004, additions
included assets of 8 million acquired under finance lease arrangements (2003: 85 million).



F-35



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Finance Lease Arrangements



Property, plant and equipment includes property that is acquired under finance lease and sale and leaseback contracts:



|                                              |  |                    |      |   |      |   |      |  
|--------------------------------------------- |  | ------------------ | ---- | - | ---- | - | ---- | -
|                                              |  | As at December 31, |     
|                                              |  | 2004               |      |   | 2003 |  
|                                              |  | (In millions)      |     
|Land and water areas                          |  |                    |      |   |      |   |      |  
|Acquisition cost                              |  |                   | 1    |   |      |  | 1    |  
|Accumulated depreciation                      |  |                    |     |   |      |   |     |  
|                                              |  |                    |      |   |      |   |      |  
|Carrying value at December 31                 |  |                   | 1    |   |      |  | 1    |  
|                                              |  |                   
|Buildings                                     |  |                    |      |   |      |   |      |  
|Acquisition cost                              |  |                   | 28   |   |      |  | 57   |  
|Accumulated depreciation                      |  |                    | (9   | ) |      |   | (15  | )
|                                              |  |                    |      |   |      |   |      |  
|Carrying value at December 31                 |  |                   | 19   |   |      |  | 42   |  
|                                              |  |                   
|Machinery and equipment                       |  |                    |      |   |      |   |      |  
|Acquisition cost                              |  |                   | 424  |   |      |  | 347  |  
|Accumulated depreciation                      |  |                    | (225 | ) |      |   | (216 | )
|                                              |  |                    |      |   |      |   |      |  
|Carrying value at December 31                 |  |                   | 199  |   |      |  | 131  |  
|                                              |  |                   
|Advance payments and construction in progress |  |                    |      |   |      |   |      |  
|Acquisition cost                              |  |                   |     |   |      |  | 85   |  
|                                              |  |                    |      |   |      |   |      |  
|Carrying value at December 31                 |  |                   |     |   |      |  | 85   |  
|                                              |  |                    |      |   |      |   |      |  
|Total leased assets                           |  |                   | 219  |   |      |  | 259  |  
|                                              |  |                    |      |   |      |   |      |  



There is no property,
plant and equipment leased to third parties under operating lease.



Capitalized Borrowing Costs



Interest expense
amounting to 7 million, 5 million and 7 million have been capitalized during the years ended December 31, 2004, 2003 and 2002, respectively. Amortization of capitalized interest was 16 million, 18 million and 19
million for each of the years ended December 31, 2004, 2003 and 2002, respectively. The net capitalized interest cost charged to the income statement in connection with assets sold was nil, 5 million and 3 million for the years ended
December 31, 2004, 2003 and 2002, respectively. The average interest rate used was 2.6%, 3.0% and 3.7% for the years 2004, 2003 and 2002, respectively, which represents the costs of the loans used to finance the projects.



F-36



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|18. | INVESTMENT PROPERTY
|--- | -------------------



|                                                       |  |                    |     |   |      |   |     |  
|------------------------------------------------------ |  | ------------------ | --- | - | ---- | - | --- | -
|                                                       |  | As at December 31, |    
|                                                       |  | 2004               |     |   | 2003 |  
|                                                       |  | (In millions)      |    
|Acquisition cost at January 1                          |  |                   | 90  |   |      |  | 102 |  
|Additions                                              |  |                    | 6   |   |      |   | 4   |  
|Disposals                                              |  |                    | (9  | ) |      |   | (12 | )
|Reclassifications                                      |  |                    | (5  | ) |      |   | (4  | )
|                                                       |  |                    |     |   |      |   |     |  
|Acquisition cost at December 31                        |  |                   | 82  |   |      |  | 90  |  
|                                                       |  |                    |     |   |      |   |     |  
|Accumulated depreciation and impairment at January 1   |  |                   | (48 | ) |      |  | (52 | )
|Depreciation                                           |  |                    | (1  | ) |      |   | (2  | )
|Disposals                                              |  |                    | 1   |   |      |   | 2   |  
|Reclassifications                                      |  |                    | 4   |   |      |   | 4   |  
|                                                       |  |                    |     |   |      |   |     |  
|Accumulated depreciation and impairment at December 31 |  |                   | (44 | ) |      |  | (48 | )
|                                                       |  |                   
|Carrying value at January 1                            |  |                   | 42  |   |      |  | 50  |  
|Carrying value at December 31                          |  |                   | 38  |   |      |  | 42  |  



Investment property
includes real estate investments such as flats and other premises occupied by third parties. The fair value of these flats at December 31, 2004 was 30 million (2003: 38 million). At December 31, 2004 approximately 84% (2003: 77%) of
flats were state-subsidized buildings, for which certain restrictions exist for sale. The fair value of other premises at December 31, 2004 was 9 million (2003: 12 million).



The amounts recognized in the income statement:



|                                                                                         |  |                    |    |      |   |   
|---------------------------------------------------------------------------------------- |  | ------------------ | -- | ---- | - | --
|                                                                                         |  | As at December 31,
|                                                                                         |  | 2004               |    | 2003
|                                                                                         |  | (In millions)     
|Rental income                                                                            |  |                   | 16 |      |  | 20
|Direct operating expenses arising from investment properties that generate rental income |  |                    | 8  |      |   | 11



All lease contracts
can be cancelled during a normal period of time. Rent increase is possible once a year and is based mainly on the cost-of-living index or the real estate maintenance index.



There were no contractual obligations for future repair and maintenance or purchase of investment property.



All assets under investment property are leased to third parties under
operating lease contracts.



F-37



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|19. | BIOLOGICAL ASSETS
|--- | -----------------



|                                                     |  |                    |       |   |      |   |       |  
|---------------------------------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | -
|                                                     |  | As at December 31, |      
|                                                     |  | 2004               |       |   | 2003 |  
|                                                     |  | (In millions)      |      
|At January 1                                         |  |                   | 1,127 |   |      |  | 1,129 |  
|Purchases during the period                          |  |                    | 11    |   |      |   | 2     |  
|Sales during the period                              |  |                    | (9    | ) |      |   | (8    | )
|Harvested during the period                          |  |                    | (42   | ) |      |   | (43   | )
|Gains and losses arising from changes in fair values |  |                    | 57    |   |      |   | 56    |  
|Translation differences                              |  |                    | (1    | ) |      |   | (9    | )
|                                                     |  |                    |       |   |      |   |       |  
|At December 31                                       |  |                   | 1,143 |   |      |  | 1,127 |  
|                                                     |  |                    |       |   |      |   |       |  



|20. | INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
|--- | --------------------------------------------



|                            |  |                    |       |   |      |   |       |  
|--------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | -
|                            |  | As at December 31, |      
|                            |  | 2004               |       |   | 2003 |  
|                            |  | (In millions)      |      
|At January 1                |  |                   | 1,012 |   |      |  | 1,095 |  
|Increases                   |  |                    | 40    |   |      |   | 2     |  
|Decreases                   |  |                    | (26   | ) |      |   | (2    | )
|Share of results before tax |  |                    | 64    |   |      |   | 29    |  
|Income taxes                |  |                    | (6    | ) |      |   | (7    | )
|Dividend received           |  |                    | (33   | ) |      |   | (53   | )
|Subsidiary transfers        |  |                    | (1    | ) |      |   | (43   | )
|Translation differences     |  |                    | (3    | ) |      |   | (9    | )
|                            |  |                    |       |   |      |   |       |  
|At December 31              |  |                   | 1,047 |   |      |  | 1,012 |  
|                            |  |                    |       |   |      |   |       |  



Investments in
associated companies at December 31, 2004 include goodwill of 39 million of which 37 million relates to Pohjolan Voima Oys shares (2003: 35 million of which 32 million relates to Pohjolan Voima Oys shares).



|                                                                                |  |                    |    |      |   |   
|------------------------------------------------------------------------------- |  | ------------------ | -- | ---- | - | --
|                                                                                |  | As at December 31,
|                                                                                |  | 2004               |    | 2003
|                                                                                |  | (In millions)     
|Sales and lease back agreements included in investments in associated companies |  |                    |    |      |   |   
|Acquisition cost at January 1                                                   |  |                   | 13 |      |  | 13
|Accumulated increases                                                           |  |                    | 6  |      |   | 5 
|                                                                                |  |                    |    |      |   |   
|Carrying value at December 31                                                   |  |                   | 19 |      |  | 18
|                                                                                |  |                    |    |      |   |   



F-38



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Associated Companies and Joint Ventures



|                                                    |  |                         |   |  |               |      
|--------------------------------------------------- |  | ----------------------- | - |  | ------------- | -----
|                                                    |  | Group holdingpercentage |   |  | Carryingvalue
|                                                    |  |                         |   |  | (In millions)
|Associated companies                                |  |                         |   |  |               |      
|Austria Papier Recycling Ges.m.b.H., AT             |  | 33.32                   | % |  |              |     
|Circel Grundstücks - und Vermögensverwaltung AG, DE |  | 32.52                   |   |  |               | 1    
|Corenso United Oy Ltd, FI                           |  | 29.00                   |   |  |               | 14   
|Oy Finnish Peroxides Ab, FI                         |  | 25.00                   |   |  |               | 5    
|Kaygee Papers Private Limited, IN                   |  | 50.00                   |   |  |               | 1    
|Oy Keskuslaboratorio-Centrallaboratorium Ab, FI     |  | 38.65                   |   |  |               | 1    
|Oy Metsä-Botnia Ab, FI                              |  | 47.00                   |   |  |               | 497  
|Paperinkeräys Oy, FI                                |  | 22.98                   |   |  |               | 3    
|Pohjolan Voima Oy, FI(1)                            |  | 40.97                   |   |  |               | 474  
|Powest Oy, FI                                       |  | 51.11                   |   |  |               | 8    
|RETS Timber Oy Ltd, FI                              |  | 50.00                   |   |  |               |     
|Steveco Oy, FI                                      |  | 34.32                   |   |  |               | 9    
|Oy Transfennica Ab, FI                              |  | 27.14                   |   |  |               |     
|Other                                               |  |                         |   |  |               | 9    
|                                                    |  |                         |   |  |               |      
|At December 31                                      |  |                         |   |  |              | 1,022
|                                                    |  |                         |   |  |               |      



|(1) | The Group holding percentage has been calculated excluding D2 and D7 share series (Wisa Power Oy, Jämsäkosken Voima Oy) which have been consolidated as subsidiaries.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pohjolan Voima Oy (PVO) holds a
57.2% shareholding in Teollisuuden Voima Oy (TVO), which owns and operates nuclear powers plants in Olkiluoto, Finland. The operation of a nuclear power plant involves potential costs and liabilities related to decommissioning and
dismantling of the nuclear power plant and storage and disposal of spent fuel, and is governed by international, European Union and local nuclear regulatory regimes. Pursuant to the Nuclear Liability Act, the operator of a nuclear facility is
strictly liable for damage resulting from a nuclear incident at the operators installation or occurring in the course of transporting nuclear fuels. Shareholders of power companies that own and operate nuclear power plants are not subject to
liability under the Nuclear Liability Act. In Finland, the future costs of conditioning, storage and final disposal of spent fuel, management of low and intermediate level radioactive waste and nuclear power plant decommissioning are the
responsibility of the operator. Reimbursements of the operators costs related to decommissioning and dismantling of the power plant and storage and disposal of spent fuel are provided for by state-established funds funded by annual
contributions from nuclear power plant operators. Pursuant to PVO and TVO shareholders agreements, the Group bears its proportionate share of the costs related to decommissioning and dismantling of the nuclear power plant and storage and
disposal of spent fuel through the price of electricity acquired from PVO. The contributions to such funds are intended to be sufficient to cover estimated future costs. If the actual costs deviate from fund provisions, the Group would be affected
accordingly. The Group has accounted for the contributions to the fund according to IFRIC 5 (Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds).



F-39



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                       |  |                                   |   |  |               |      
|------------------------------------------------------ |  | --------------------------------- | - |  | ------------- | -----
|                                                       |  | Group holdingpercentage           |   |  | Carryingvalue
|                                                       |  | (In millions, except percentages)
|Joint ventures                                         |  |                                   |   |  |               |      
|Compania Forestal Oriental S.A., UA                    |  | 38.38                             | % |  |              | 20   
|Kainuun Voima Oy, FI                                   |  | 50.00                             |   |  |               | 5    
|                                                       |  |                                   |   |  |               |      
|                                                       |  |                                   |   |  |               | 25   
|                                                       |  |                                   |   |  |               |      
|Associated companies and joint ventures at December 31 |  |                                   |   |  |              | 1,047
|                                                       |  |                                   |   |  |               |      



The amounts
representing the Groups share of the assets and liabilities and sales and results of the joint ventures that have been accounted for using the equity method are presented in the table below.



|                                                                              |  |                                     |     |   |      |   |     |  
|----------------------------------------------------------------------------- |  | ----------------------------------- | --- | - | ---- | - | --- | -
|                                                                              |  | Year ended December 31,             |    
|                                                                              |  | 2004                                |     |   | 2003 |  
|                                                                              |  | (In millions, except employee data) |    
|The amount of assets and liabilities related to investments in joint ventures |  |                                     |     |   |      |   |     |  
|Non-current assets                                                            |  |                                    | 75  |   |      |  | 67  |  
|Current assets                                                                |  |                                     | 7   |   |      |   | 7   |  
|Non-current liabilities                                                       |  |                                     | (28 | ) |      |   | (31 | )
|Current liabilities                                                           |  |                                     | (27 | ) |      |   | (15 | )
|                                                                              |  |                                     |     |   |      |   |     |  
|Net assets                                                                    |  |                                    | 27  |   |      |  | 28  |  
|                                                                              |  |                                     |     |   |      |   |     |  
|The income and expenses related to investments in joint ventures              |  |                                     |     |   |      |   |     |  
|Sales                                                                         |  |                                    | 20  |   |      |  | 17  |  
|Expenses                                                                      |  |                                     | (20 | ) |      |   | (18 | )
|                                                                              |  |                                     |     |   |      |   |     |  
|Net profit                                                                    |  |                                    |    |   |      |  | (1  | )
|                                                                              |  |                                     |     |   |      |   |     |  
|The average number of employees in the joint ventures                         |  |                                     | 242 |   |      |   | 210 |  



Transactions and Balances with
Associates and Joint Ventures



|                                                           |  |                         |     |   |      |   |     |  
|---------------------------------------------------------- |  | ----------------------- | --- | - | ---- | - | --- | -
|                                                           |  | Year ended December 31, |    
|                                                           |  | 2004                    |     |   | 2003 |  
|                                                           |  | (In millions)           |    
|Sales to associates and joint ventures                     |  |                        | 50  |   |      |  | 15  |  
|Purchases from associates and joint ventures               |  |                         | 539 |   |      |   | 509 |  
|Non-current receivables from associates and joint ventures |  |                         | 11  |   |      |   | 10  |  
|Receivables from associates and joint ventures             |  |                         | 20  |   |      |   | 23  |  
|Payables to associates and joint ventures                  |  |                         | 132 |   |      |   | 37  |  
|                                                           |  |                        
|Loan receivables from associates and joint ventures (1)    |  |                         |     |   |      |   |     |  
|At January 1                                               |  |                         | 14  |   |      |   | 16  |  
|Withdrawals                                                |  |                         | 1   |   |      |   | 4   |  
|Repayments                                                 |  |                         | (1  | ) |      |   | (6  | )
|                                                           |  |                         |     |   |      |   |     |  
|At December 31                                             |  |                        | 14  |   |      |  | 14  |  
|                                                           |  |                         |     |   |      |   |     |  

---

|(1) | Loans to associated companies and joint ventures include current and non-current loan receivables.
|--- | --------------------------------------------------------------------------------------------------



F-40



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The interest rates of the associated company receivables are based on market rates. As at December
31, 2004 12 million of the loans mature by the end of 2007, and 2 million by the end of 2010.



|21. | AVAILABLE-FOR-SALE INVESTMENTS
|--- | ------------------------------



|                          |  |                         |     |   |      |   |      |  
|------------------------- |  | ----------------------- | --- | - | ---- | - | ---- | -
|                          |  | Year ended December 31, |    
|                          |  | 2004                    |     |   | 2003 |  
|                          |  | (In millions)           |    
|At January 1              |  |                        | 353 |   |      |  | 546  |  
|Increases                 |  |                         | 13  |   |      |   | 10   |  
|Decreases                 |  |                         | (36 | ) |      |   | (181 | )
|Changes in fair values(1) |  |                         | 39  |   |      |   | 2    |  
|Impairments               |  |                         |    |   |      |   | (26  | )
|Other changes             |  |                         | (3  | ) |      |   | 2    |  
|                          |  |                         |     |   |      |   |      |  
|At December 31            |  |                        | 366 |   |      |  | 353  |  
|                          |  |                         |     |   |      |   |      |  

---

|(1) | Changes in fair values include 26 million due to reversal of impairments.
|--- | --------------------------------------------------------------------------



Available-for-sale investments, comprising principally of equity securities in listed companies and investments in unlisted
equity shares, are fair valued, except in the case of certain unlisted equities, where the fair value cannot be measured reliably. Such unlisted equities are carried at cost, less impairment. The fair value of the shares in Kemijoki Oy cannot be
reliably measured as the majority of the shares is owned by the state of Finland and some municipal institutions. There is not an active market for these shares.



Fair value of equity investments traded in active markets is 233 million in 2004 and 197 million in 2003.



Fair value for equity investments traded in active markets is
determined by using exchange quoted closing prices.



Principal
Available-for-sale Investments



|                                                                     |  |                 |  |                         |   |  |               |    
|-------------------------------------------------------------------- |  | --------------- |  | ----------------------- | - |  | ------------- | ---
|                                                                     |  | Number ofshares |  | Group holdingpercentage |   |  | Carryingvalue
|                                                                     |  |                 |  |                         |   |  | (In millions)
|Kemijoki Oy                                                          |  | 100,797         |  | 4.13                    | % |  |              | 106
|Metso Corporation (listed company)                                   |  | 19,922,115      |  | 14.62                   | % |  |               | 232
|Other                                                                |  |                 |  |                         |   |  |               | 28 
|                                                                     |  |                 |  |                         |   |  |               |    
|Carrying value of available-for-sale investments at December 31 2004 |  |                 |  |                         |   |  |              | 366
|                                                                     |  |                 |  |                         |   |  |               |    



F-41



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|22. | NON-CURRENT RECEIVABLES
|--- | -----------------------



|                                       |  |                    |     |      |   |    
|-------------------------------------- |  | ------------------ | --- | ---- | - | ---
|                                       |  | As at December 31,
|                                       |  | 2004               |     | 2003
|                                       |  | (In millions)     
|Loans to associates and joint ventures |  |                   | 11  |      |  | 11 
|Other loans receivables                |  |                    | 47  |      |   | 70 
|Derivative financial instruments       |  |                    | 182 |      |   | 163
|                                       |  |                    |     |      |   |    
|At December 31                         |  |                   | 240 |      |  | 244
|                                       |  |                    |     |      |   |    



The carrying value is
considered to approximate the fair value.



There were no loans
granted to the Executive Team or managing director at December 31, 2004 or 2003.



|23. | OTHER NON-CURRENT ASSETS
|--- | ------------------------



|                                |  |                    |    |      |   |   
|------------------------------- |  | ------------------ | -- | ---- | - | --
|                                |  | As at December 31,
|                                |  | 2004               |    | 2003
|                                |  | (In millions)     
|Defined benefit plans (Note 29) |  |                   | 21 |      |  | 18
|Other non-current assets        |  |                    | 1  |      |   |  
|                                |  |                    |    |      |   |   
|At December 31                  |  |                   | 22 |      |  | 18
|                                |  |                    |    |      |   |   



|24. | INVENTORIES
|--- | -----------



|                              |  |                    |       |      |   |      
|----------------------------- |  | ------------------ | ----- | ---- | - | -----
|                              |  | As at December 31,
|                              |  | 2004               |       | 2003
|                              |  | (In millions)     
|Raw materials and consumables |  |                   | 461   |      |  | 494  
|Work in progress              |  |                    | 42    |      |   | 39   
|Finished products and goods   |  |                    | 604   |      |   | 579  
|Advance payments              |  |                    | 31    |      |   | 32   
|                              |  |                    |       |      |   |      
|At December 31                |  |                   | 1,138 |      |  | 1,144
|                              |  |                    |       |      |   |      



|25. | TRADE AND OTHER RECEIVABLES
|--- | ---------------------------



|                                 |  |                    |       |      |   |      
|-------------------------------- |  | ------------------ | ----- | ---- | - | -----
|                                 |  | As at December 31,
|                                 |  | 2004               |       | 2003
|                                 |  | (In millions)     
|Trade receivables                |  |                   | 1,261 |      |  | 1,065
|Loan receivables                 |  |                    | 13    |      |   | 13   
|Other receivables                |  |                    | 158   |      |   | 188  
|Derivative financial instruments |  |                    | 79    |      |   | 90   
|Trading investments              |  |                    |      |      |   | 1    
|Prepayments and accrued income   |  |                    | 76    |      |   | 82   
|                                 |  |                    |       |      |   |      
|At December 31                   |  |                   | 1,587 |      |  | 1,439
|                                 |  |                    |       |      |   |      



F-42



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Doubtful Accounts Receivable



Trade receivables are recorded net of the following allowances for doubtful accounts:



|               |  |                    |    |   |      |   |     |  
|-------------- |  | ------------------ | -- | - | ---- | - | --- | -
|               |  | As at December 31, |   
|               |  | 2004               |    |   | 2003 |  
|               |  | (In millions)      |   
|At January 1   |  |                   | 4  |   |      |  | 10  |  
|Additions      |  |                    | 5  |   |      |   | 7   |  
|Deductions     |  |                    | (7 | ) |      |   | (13 | )
|               |  |                    |    |   |      |   |     |  
|At December 31 |  |                   | 2  |   |      |  | 4   |  
|               |  |                    |    |   |      |   |     |  



Main Items Included in Prepayments
and Accrued Income



|                   |  |                    |    |      |   |   
|------------------ |  | ------------------ | -- | ---- | - | --
|                   |  | As at December 31,
|                   |  | 2004               |    | 2003
|                   |  | (In millions)     
|Personnel expenses |  |                   | 5  |      |  | 7 
|Interest income    |  |                    | 2  |      |   | 13
|Indirect taxes     |  |                    | 5  |      |   | 23
|Other items        |  |                    | 64 |      |   | 39
|                   |  |                    |    |      |   |   
|At December 31     |  |                   | 76 |      |  | 82
|                   |  |                    |    |      |   |   



The carrying value is
considered to approximate the fair value.



Asset Securitization



In JanuaryMarch 2004, the Group terminated its
asset securitization programmes. Some Group companies in Great Britain, France, Italy and Germany had made agreements with third parties concerning their receivables (asset securitization). The Group companies in question had agreed to sell the
ownership right to specified trade receivables on a continuous and irrevocable basis. The value of the receivables sold on the basis of the asset securitization agreement at December 31, 2003 was 179 million and it is presented on the
consolidated balance sheet as a decrease in trade receivables.



Increases and decreases in trade receivables are reported on the consolidated cash flow statement as cash generated from operations.



|26. | AVAILABLE-FOR-SALE INVESTMENTS
|--- | ------------------------------



The available-for-sale investments comprise of certificates of deposits with original maturities over three months.



F-43



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|27. | SHARE CAPITAL, SHARE PREMIUM RESERVE AND FAIR VALUE AND OTHER RESERVES
|--- | ----------------------------------------------------------------------



Share Capital and Share Premium Reserve



|                          |  |                                        |  |               |     |              |   |       |  |   |      
|------------------------- |  | -------------------------------------- |  | ------------- | --- | ------------ | - | ----- |  | - | -----
|                          |  | Number ofshares                        |  | Share capital |     | Sharepremium |   | Total
|                          |  | (In millions, except number of shares)
|At January 1, 2003        |  | 260,116                                |  |              | 442 |              |  | 704   |  |  | 1,146
|Share issue               |  | 261,790                                |  |               | 445 |              |   |      |  |   | 445  
|Convertible bond loan     |  | 1,673                                  |  |               | 3   |              |   | 33    |  |   | 36   
|                          |  |                                        |  |               |     |              |   |       |  |   |      
|At December 31, 2003      |  | 523,579                                |  |              | 890 |              |  | 737   |  |  | 1,627
|                          |  |                                        |  |               |     |              |   |       |  |   |      
|Exercise of share options |  | 741                                    |  |               | 1   |              |   | 8     |  |   | 9    
|                          |  |                                        |  |               |     |              |   |       |  |   |      
|At December 31, 2004      |  | 524,320                                |  |              | 891 |              |  | 745   |  |  | 1,636
|                          |  |                                        |  |               |     |              |   |       |  |   |      



Under the articles of
association of the Company, the authorized share capital may not be less than 750,000,000 or more than 3,000,000,000. As of December 31, 2004 the issued share capital was 891,344,428.40 consisting of 524,320,252 fully-paid shares.
The counter value of each share is 1.70 and each of the shares entitles its holder to one vote. The shares are in book-entry format.



Authorizations to Increase Share Capital



On March 24, 2004, the Annual General Meeting authorized the Board of Directors to decide to increase the companys share capital by issuing new
shares and/or convertible bonds in one or more issues. The number of shares carrying an equivalent value of 1.70 per share available for subscription under this authorization may not exceed 104,715,000 and the share capital may be increased by
a maximum total amount of 178,015,500.00. Under the same authorization, the number of shares may rise by 20.00%. The authorization was not used during 2004. In 2004, 336,271 class A share options and 99,400 B share options were exercised
to subscribe 871,342 shares, of which 741,322 were recorded in the Trade Registry before the end of 2004. If all 7,128,658 shares are subscribed under the 3,564,329 share options issued in 1998, together with all 15,200,000 shares that can be
subscribed under the 7,600,000 share options issued in 2002, the number of the companys shares will increase by a total of 22,328,658 shares, i.e., by 4.26%.



The shares available for subscription under the Boards authorization and through the exercise of options may increase
the total number of the companys shares by 24.22%, i.e., by 127,043,658 shares, to 651,493,930 shares, and the share capital by 215,974,218.60 to 1,107,539,681.00.



Bonus Issue



On March 19, 2003, the annual general meeting of shareholders resolved to increase the share capital by a bonus issue of the amount of
445,042,090.50 from 445,042,090.50 to 890,084,181.00. In the bonus issue, the shareholders of the Company were, free of charge, given one new share for one old share. A total of 261,789,465 new shares were issued. An amount
corresponding to the increase of the share capital was transferred from the legal reserve to the share capital. The new shares are entitled to any further dividends paid by the Company. The terms and conditions of the Companys year 1998 and
2002 stock options have been amended in a way that the proportional amount of the shares to be subscribed with the stock options will remain unchanged in respect of the share capital.



Convertible Bond Loan



In December 2002, the Company announced that it would redeem all unconverted subordinated convertible bonds of the issue of 161 million, launched in
1994 outstanding. Between January 2, 2003 and February 18, 2003 (the last day a holder could have converted such convertible bonds into shares) approximately 36 million in principal amount of such convertible bonds were converted into
3,346,980 of the shares, adjusted by the bonus issue of March 2003. The redemption date was February 28, 2003. A total of 3,627,815.16 in principal amount of the convertible bonds was redeemed.



F-44



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Treasury Shares



As of December 31, 2004 and as of December 31, 2003, none of the shares were held as treasury shares.



Redemption Clause



Under §12 of UPM-Kymmene Corporations Articles of Association, a shareholder who alone or jointly with another
shareholder owns 33 1/3 per cent or 50 per cent or more of all the companys shares or their associated voting rights shall, at the request of other shareholders, be liable to redeem in the manner prescribed in §12 their shares and any
securities that, under the Companies Act, carry the right to such shares.



Fair Value and Other Reserves



|                                                     |  |                    |     |      |   |    
|---------------------------------------------------- |  | ------------------ | --- | ---- | - | ---
|                                                     |  | As at December 31,
|                                                     |  | 2004               |     | 2003
|                                                     |  | (In millions)     
|Fair value reserve of available-for-sale investments |  |                   | 13  |      |  |   
|Hedging reserve                                      |  |                    | 44  |      |   | 32 
|Legal reserve                                        |  |                    | 227 |      |   | 226
|                                                     |  |                    |     |      |   |    
|At December 31                                       |  |                   | 284 |      |  | 258
|                                                     |  |                    |     |      |   |    



Distributable Funds December 31



|                                                                                                 |  |                        |        |  
|------------------------------------------------------------------------------------------------ |  | ---------------------- | ------ | -
|                                                                                                 |  | As at December 31,2004 |       
|                                                                                                 |  | (In millions)          |       
|Retained earnings                                                                                |  |                       | 4,762  |  
|Net profit for the period                                                                        |  |                        | 1,008  |  
|Translation differences                                                                          |  |                        | (55    | )
|Portion of accumulated depreciation and voluntary provisions recorded in shareholders equity(1) |  |                        | (1,293 | )
|                                                                                                 |  |                        |        |  
|                                                                                                 |  |                       | 4,422  |  
|                                                                                                 |  |                        |        |  

---

|(1) | Under the Finnish legislation the calculated equity part of untaxed reserves and accumulated depreciation difference is not distributable to shareholders.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



F-45



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|28. | DEFERRED INCOME TAXES
|--- | ---------------------



Reconciliation of the Movements of Deferred Tax Assets and Liabilities Balances During the Period



|                                                                                      |  |                     |       |   |                           |   |      |                               |  |                        |   |  |                       |    |   |  |   |       |  
|------------------------------------------------------------------------------------- |  | ------------------- | ----- | - | ------------------------- | - | ---- | ----------------------------- |  | ---------------------- | - |  | --------------------- | -- | - |  | - | ----- | -
|                                                                                      |  | As atJanuary 1,2004 |       |   | Charged inincomestatement |   |      | Charged inshareholdersequity |  | Translationdifferences |   |  | As atDecember 31,2004 |   
|                                                                                      |  | (In millions)       |      
|Deferred tax assets                                                                   |  |                     |       |   |                           |   |      |                               |  |                        |   |  |                       |    |   |  |   |       |  
|Retirement benefit and other provisions                                               |  |                    | 185   |   |                           |  | (80  | )                             |  |                       |  |  |                      |   |   |  |  | 105   |  
|Book over tax depreciation                                                            |  |                     | 101   |   |                           |   | 33   |                               |  |                        |  |  |                       |   |   |  |   | 134   |  
|Tax losses and tax credits carried forward                                            |  |                     | 203   |   |                           |   | 40   |                               |  |                        |  |  |                       |   |   |  |   | 243   |  
|Other temporary differences                                                           |  |                     | 139   |   |                           |   | (80  | )                             |  |                        |  |  |                       |   |   |  |   | 59    |  
|                                                                                      |  |                     |       |   |                           |   |      |                               |  |                        |   |  |                       |    |   |  |   |       |  
|Total deferred tax assets                                                             |  |                     | 628   |   |                           |   | (87  | )                             |  |                        |  |  |                       |   |   |  |   | 541   |  
|Offset against deferred tax liabilities(1)                                            |  |                     | (225  | ) |                           |   | (20  | )                             |  |                        |  |  |                       |   |   |  |   | (245  | )
|                                                                                      |  |                     |       |   |                           |   |      |                               |  |                        |   |  |                       |    |   |  |   |       |  
|Net deferred tax assets                                                               |  |                    | 403   |   |                           |  | (107 | )                             |  |                       |  |  |                      |   |   |  |  | 296   |  
|                                                                                      |  |                     |       |   |                           |   |      |                               |  |                        |   |  |                       |    |   |  |   |       |  
|Deferred tax liabilities                                                              |  |                     |       |   |                           |   |      |                               |  |                        |   |  |                       |    |   |  |   |       |  
|Tax over book depreciation                                                            |  |                    | 900   |   |                           |  | (83  | )                             |  |                       |  |  |                      | (5 | ) |  |  | (812  | )
|Undistributed profits of associated companies                                         |  |                     | 93    |   |                           |   | (93  | )                             |  |                        |  |  |                       |   |   |  |   |      |  
|Fair value adjustments of net assets acquired and biological assets                   |  |                     | 768   |   |                           |   | (444 | )                             |  |                        |  |  |                       | (4 | ) |  |   | 320   |  
|Fair valuation of available-for-sale investments and derivative financial instruments |  |                     | 19    |   |                           |   | (6   | )                             |  |                        | 2 |  |                       |   |   |  |   | 15    |  
|Other temporary differences                                                           |  |                     | 24    |   |                           |   | 6    |                               |  |                        |  |  |                       |   |   |  |   | 30    |  
|                                                                                      |  |                     |       |   |                           |   |      |                               |  |                        |   |  |                       |    |   |  |   |       |  
|Total deferred tax liability                                                          |  |                     | 1,804 |   |                           |   | (620 | )                             |  |                        | 2 |  |                       | (9 | ) |  |   | 1,177 |  
|Offset against deferred tax assets(1)                                                 |  |                     | (225  | ) |                           |   | (20  | )                             |  |                        |  |  |                       |   |   |  |   | (245  | )
|                                                                                      |  |                     |       |   |                           |   |      |                               |  |                        |   |  |                       |    |   |  |   |       |  
|Net deferred tax liabilities                                                          |  |                    | 1,579 |   |                           |  | (640 | )                             |  |                       | 2 |  |                      | (9 | ) |  |  | 932   |  
|                                                                                      |  |                     |       |   |                           |   |      |                               |  |                        |   |  |                       |    |   |  |   |       |  
|Deferred tax liabilities, net                                                         |  |                    | 1,176 |   |                           |  | (533 | )                             |  |                       | 2 |  |                      | (9 | ) |  |  | 636   |  

---

|(1) | Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred
income taxes relate to the same fiscal authority.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-46



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Reconciliation of the Movements of Deferred Tax Assets and Liabilities Balances During the Period



|                                                                                      |  |                     |       |   |                           |   |     |                               |  |   |                        |   |  |                       |    |   |  |   |       |  
|------------------------------------------------------------------------------------- |  | ------------------- | ----- | - | ------------------------- | - | --- | ----------------------------- |  | - | ---------------------- | - |  | --------------------- | -- | - |  | - | ----- | -
|                                                                                      |  | As atJanuary 1,2003 |       |   | Charged inincomestatement |   |     | Charged inshareholdersequity |  |   | Translationdifferences |   |  | As atDecember 31,2003 |   
|                                                                                      |  | (In millions)       |      
|Deferred tax assets                                                                   |  |                     |       |   |                           |   |     |                               |  |   |                        |   |  |                       |    |   |  |   |       |  
|Retirement benefit and other provisions                                               |  |                    | 197   |   |                           |  | (12 | )                             |  |  |                       |   |  |                      |   |   |  |  | 185   |  
|Book over tax depreciation                                                            |  |                     | 85    |   |                           |   | 16  |                               |  |   |                       |   |  |                       |   |   |  |   | 101   |  
|Tax losses and tax credits carried forward                                            |  |                     | 100   |   |                           |   | 103 |                               |  |   |                       |   |  |                       |   |   |  |   | 203   |  
|Other temporary differences                                                           |  |                     | 203   |   |                           |   | (64 | )                             |  |   |                       |   |  |                       |   |   |  |   | 139   |  
|                                                                                      |  |                     |       |   |                           |   |     |                               |  |   |                        |   |  |                       |    |   |  |   |       |  
|Total deferred tax assets                                                             |  |                     | 585   |   |                           |   | 43  |                               |  |   |                       |   |  |                       |   |   |  |   | 628   |  
|Offset against deferred tax liabilities(1)                                            |  |                     | (185  | ) |                           |   | (40 | )                             |  |   |                       |   |  |                       |   |   |  |   | (225  | )
|                                                                                      |  |                     |       |   |                           |   |     |                               |  |   |                        |   |  |                       |    |   |  |   |       |  
|Net deferred tax assets                                                               |  |                    | 400   |   |                           |  | 3   |                               |  |  |                       |   |  |                      |   |   |  |  | 403   |  
|                                                                                      |  |                     |       |   |                           |   |     |                               |  |   |                        |   |  |                       |    |   |  |   |       |  
|Deferred tax liabilities                                                              |  |                     |       |   |                           |   |     |                               |  |   |                        |   |  |                       |    |   |  |   |       |  
|Tax over book depreciation                                                            |  |                    | 868   |   |                           |  | 38  |                               |  |  |                       |   |  |                      | (6 | ) |  |  | 900   |  
|Undistributed profits of associated companies                                         |  |                     | 104   |   |                           |   | (11 | )                             |  |   |                       |   |  |                       |   |   |  |   | 93    |  
|Fair value adjustments of net assets acquired and biological assets                   |  |                     | 822   |   |                           |   | (54 | )                             |  |   |                       |   |  |                       |   |   |  |   | 768   |  
|Fair valuation of available-for-sale investments and derivative financial instruments |  |                     | 52    |   |                           |   | (7  | )                             |  |   | (26                    | ) |  |                       |   |   |  |   | 19    |  
|Other temporary differences                                                           |  |                     | 19    |   |                           |   | 5   |                               |  |   |                       |   |  |                       |   |   |  |   | 24    |  
|                                                                                      |  |                     |       |   |                           |   |     |                               |  |   |                        |   |  |                       |    |   |  |   |       |  
|Total deferred tax liability                                                          |  |                     | 1,865 |   |                           |   | (29 | )                             |  |   | (26                    | ) |  |                       | (6 | ) |  |   | 1,804 |  
|Offset against deferred tax assets(1)                                                 |  |                     | (185  | ) |                           |   | (40 | )                             |  |   |                       |   |  |                       |   |   |  |   | (225  | )
|                                                                                      |  |                     |       |   |                           |   |     |                               |  |   |                        |   |  |                       |    |   |  |   |       |  
|Net deferred tax liabilities                                                          |  |                    | 1,680 |   |                           |  | (69 | )                             |  |  | (26                    | ) |  |                      | (6 | ) |  |  | 1,579 |  
|                                                                                      |  |                     |       |   |                           |   |     |                               |  |   |                        |   |  |                       |    |   |  |   |       |  
|Deferred tax liabilities, net                                                         |  |                    | 1,280 |   |                           |  | (72 | )                             |  |  | (26                    | ) |  |                      | (6 | ) |  |  | 1,176 |  

---

|(1) | Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred
income taxes relate to the same fiscal authority.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
deferred income tax charged to equity during the years:



|                               |  |               |   |      |   |     |  
|------------------------------ |  | ------------- | - | ---- | - | --- | -
|                               |  | 2004          |   | 2003 |  
|                               |  | (In millions) |  
|Cash flow hedges               |  |              | 2 |      |  | 13  |  
|Available-for-sale investments |  |               |  |      |   | (39 | )
|                               |  |               |   |      |   |     |  
|Total                          |  |              | 2 |      |  | (26 | )
|                               |  |               |   |      |   |     |  



At December 31, 2004,
the net operating loss carry-forwards for which the Group has recorded a deferred tax asset amounted to 646 million (of which 244 million, 145 million and 98 million were attributable to the German, French and Canadian
subsidiaries, respectively) and at December 31, 2003 it was 529 million (of which 164 million and 193 million were attributable to the German and French subsidiaries, respectively). The Group has recorded deferred tax assets for
the additional 98 million of net operating losses attributable to the Canadian subsidiary due to a clarification of a tax ruling. In France net operating loss carry-forwards do not expire. In other countries net operating loss carry-forwards
expire at various dates and in varying amounts. The net operating loss carry-forwards related to the Canadian subsidiary are recognized pursuant to the tax planning strategy described below.



The operating loss carry-forwards for which no deferred tax assets are
recognized due to uncertainty of the utilization of these loss carry-forwards amounted to 77 million in 2004 (145 million in 2003). These operating loss carry-forwards are mainly attributable to Canadian subsidiaries. The capital loss
carry-forwards for which no deferred tax asset is recognized due to uncertainty of the utilization of these loss carry-forwards amounted to 62 million in 2004 and 2003. These capital loss carry-forwards are attributable to Canadian
subsidiaries. Management believes it is more likely than not that these deferred tax assets will not be realized as reductions of qualifying future taxable income or by utilizing the tax planning strategy described below.



The Group has recognized deferred tax asset of 129 million in 2004
(96 million in 2003) relating to book over tax depreciation in Canada. The Group has considered projected taxable income and a prudent and feasible tax planning strategy in making this assessment. These deferred tax assets do not expire. The
Group has recorded additional deferred tax assets of 19 million relating to book over tax depreciation in Canada due to a clarification of a tax ruling. In April 2005, the Supreme Administrative Court of Finland affirmed that any reduction of
share capital of a subsidiary is treated in a similar way as the sale of shares (i.e., as a tax free/non deductible transaction in the taxation of a Finnish parent company). Prior to this ruling it was unclear whether the change in the Finnish tax
legislation, passed in December 2004 and effective starting January 1, 2005, would allow tax free repatriation of capital contributions. Based on this ruling, the Group has committed to implement a prudent and feasible tax planning strategy to
utilize the deferred tax assets of the Groups Canadian subsidiary arising from net operating losses, generated after the acquisition in late 2000, and the deferred tax assets arising from book over tax depreciation. The tax planning strategy
intends to generate sufficient taxable income against which the deferred tax assets may be utilized.





F-47



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In connection with the acquisition of Haindl in 2001, a new tax basis was determined for acquired net
assets. In 2003 the Group had a contingent tax benefit, which was not recorded due to the uncertainty of the tax treatment in Germany. As the uncertainty regarding the tax treatment has now been removed, the Group has recorded in 2004 284
million as a reduction of deferred tax liability.



In addition,
the Group has recorded in 2004 235 million as a reduction in deferred tax liabilities net of deferred tax assets resulting from the change in capital gains taxation and, effective as of the beginning of 2005, from the decrease of Finnish
corporate tax rate from 29% to 26%.



No deferred tax liability
has been recognized for the undistributed profits of Finnish subsidiaries and associated companies as, such earnings are transferred to the Group without any tax consequences.



In addition the Group does not provide for deferred tax liability on undistributed earnings of non-Finnish subsidiaries to
the extent that such earnings are intended to be permanently reinvested in those operations.



|29. | RETIREMENT BENEFIT OBLIGATIONS
|--- | ------------------------------



The Group operates a number of defined benefit and contribution plans throughout the world.



The most significant pension plan in Finland is the statutory Finnish employee pension scheme (TEL) according to which
benefits are directly linked to the employees earnings. The TEL pension scheme is mainly arranged with insurance companies. Less than 10% of the TEL scheme is arranged through the Companys own funds.



The disability portion of the Finnish TEL scheme has been accounted for as a
defined plan. Following changes in the Finnish TEL scheme, the disability pensions arranged with insurance companies will change from a defined benefit to a defined contribution plan beginning from January 1, 2006. As the change was enacted in 2004
the Companys pension liability decreased by 246 million in 2004. The pension liability also decreased by 23 million due to other changes in the TEL pension scheme effective from January 1, 2005.



The foreign plans include both defined contribution and defined benefit
plans.



The Group also funds certain other post-employment
benefits in North America relating to retirement medical and life insurance programmes.



Pensions and Other Post-Employment Benefit Provisions



|                                         |  |                    |     |      |   |    
|---------------------------------------- |  | ------------------ | --- | ---- | - | ---
|                                         |  | As at December 31,
|                                         |  | 2004               |     | 2003
|                                         |  | (In millions)     
|Defined benefit pension plans            |  |                   | 343 |      |  | 602
|Other post-employment benefits           |  |                    | 20  |      |   | 21 
|                                         |  |                    |     |      |   |    
|Carrying value at December 31            |  |                   | 363 |      |  | 623
|                                         |  |                    |     |      |   |    
|Other long-term employee benefits        |  |                   | 23  |      |  | 9  
|Overfunded plan shown as asset (Note 23) |  |                    | 21  |      |   | 18 
|                                         |  |                    |     |      |   |    
|Total liability in balance sheet         |  |                   | 407 |      |  | 650
|                                         |  |                    |     |      |   |    



F-48



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DEFINED BENEFIT PLANS



The amounts recognized in the balance sheet:



|                                        |  |                    |      |   |      |   |      |  
|--------------------------------------- |  | ------------------ | ---- | - | ---- | - | ---- | -
|                                        |  | As at December 31, |     
|                                        |  | 2004               |      |   | 2003 |  
|                                        |  | (In millions)      |     
|Present value of funded obligations     |  |                   | 614  |   |      |  | 631  |  
|Present value of unfunded obligations   |  |                    | 349  |   |      |   | 514  |  
|Fair value of plan assets               |  |                    | (511 | ) |      |   | (510 | )
|Unrecognized actuarial gains and losses |  |                    | (109 | ) |      |   | (33  | )
|                                        |  |                    |      |   |      |   |      |  
|Total liability                         |  |                   | 343  |   |      |  | 602  |  
|                                        |  |                    |      |   |      |   |      |  



The amounts recognized in the
income statement:



|                                                          |  |                         |      |   |      |   |     |  
|--------------------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | --- | -
|                                                          |  | Year ended December 31, |     
|                                                          |  | 2004                    |      |   | 2003 |  
|                                                          |  | (In millions)           |     
|Current service cost                                      |  |                        | 35   |   |      |  | 34  |  
|Interest cost                                             |  |                         | 61   |   |      |   | 60  |  
|Expected return on plan assets                            |  |                         | (32  | ) |      |   | (33 | )
|Net actuarial gains and losses recognized during the year |  |                         | (4   | ) |      |   | (1  | )
|Past service cost                                         |  |                         | (26  | ) |      |   |    |  
|Settlements                                               |  |                         | 8    |   |      |   | 2   |  
|Curtailment                                               |  |                         | (249 | ) |      |   |    |  
|                                                          |  |                         |      |   |      |   |     |  
|Total included in personnel expenses                      |  |                        | (207 | ) |      |  | 62  |  
|                                                          |  |                         |      |   |      |   |     |  



The actual return on
plan assets was 40 million in 2004 (2003: 42 million).



F-49



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Balance sheet reconciliation



|                                                |  |                    |      |   |      |   |     |  
|----------------------------------------------- |  | ------------------ | ---- | - | ---- | - | --- | -
|                                                |  | As at December 31, |     
|                                                |  | 2004               |      |   | 2003 |  
|                                                |  | (In millions)      |     
|Net liability at January 1                      |  |                   | 602  |   |      |  | 607 |  
|Translation differences                         |  |                    | (1   | ) |      |   | (1  | )
|Net expenses recognized in the income statement |  |                    | (207 | ) |      |   | 62  |  
|Contributions paid                              |  |                    | (51  | ) |      |   | (66 | )
|                                                |  |                    |      |   |      |   |     |  
|Net liability at December 31                    |  |                   | 343  |   |      |  | 602 |  
|                                                |  |                    |      |   |      |   |     |  



OTHER POST-EMPLOYMENT BENEFITS



The amounts recognized in the balance sheet:



|                                        |  |                    |    |   |      |   |    |  
|--------------------------------------- |  | ------------------ | -- | - | ---- | - | -- | -
|                                        |  | As at December 31, |   
|                                        |  | 2004               |    |   | 2003 |  
|                                        |  | (In millions)      |   
|Present value of unfunded obligations   |  |                   | 24 |   |      |  | 27 |  
|Unrecognized actuarial gains and losses |  |                    | (4 | ) |      |   | (6 | )
|                                        |  |                    |    |   |      |   |    |  
|Liability in the balance sheet          |  |                   | 20 |   |      |  | 21 |  
|                                        |  |                    |    |   |      |   |    |  



The amounts recognized in the
income statement:



|                                     |  |                         |   |      |   |    |  
|------------------------------------ |  | ----------------------- | - | ---- | - | -- | -
|                                     |  | Year ended December 31, |  
|                                     |  | 2004                    |   | 2003 |  
|                                     |  | (In millions)           |  
|Current service cost                 |  |                        | 1 |      |  | 1  |  
|Interest cost                        |  |                         | 1 |      |   | 2  |  
|Past service cost                    |  |                         |  |      |   | (8 | )
|Curtailment                          |  |                         |  |      |   | 1  |  
|                                     |  |                         |   |      |   |    |  
|Total included in personnel expenses |  |                        | 2 |      |  | (4 | )
|                                     |  |                         |   |      |   |    |  



Balance sheet reconciliation



|                                                |  |                         |    |   |      |   |    |  
|----------------------------------------------- |  | ----------------------- | -- | - | ---- | - | -- | -
|                                                |  | Year ended December 31, |   
|                                                |  | 2004                    |    |   | 2003 |  
|                                                |  | (In millions)           |   
|Net liability at January 1                      |  |                        | 21 |   |      |  | 33 |  
|Translation differences                         |  |                         | (1 | ) |      |   | (6 | )
|Net expenses recognized in the income statement |  |                         | 2  |   |      |   | (4 | )
|Contributions paid                              |  |                         | (2 | ) |      |   | (2 | )
|                                                |  |                         |    |   |      |   |    |  
|Net liability at December 31                    |  |                        | 20 |   |      |  | 21 |  
|                                                |  |                         |    |   |      |   |    |  



F-50



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Defined benefit plans: the principal actuarial assumptions used as at December 31



|                                                  |  |                                 |   |  |        |   |  |         |   |  |      |   |  |               |   |  |       |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------------------------- |  | ------------------------------- | - |  | ------ | - |  | ------- | - |  | ---- | - |  | ------------- | - |  | ----- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                                  |  | Finland                         |   |  | Canada |   |  | Germany |   |  | USA  |   |  | Great Britain |   |  | Other |  
|                                                  |  | 2004                            |   |  | 2003   |   |  | 2004    |   |  | 2003 |   |  | 2004          |   |  | 2003  |   |  | 2004 |   |  | 2003 |   |  | 2004 |   |  | 2003 |   |  | 2004 |   |  | 2003 |  
|                                                  |  | (Percent, except working years) |  
|Discount rate                                     |  | 5.00                            | % |  | 5.25   | % |  | 5.75    | % |  | 6.00 | % |  | 5.00          | % |  | 5.25  | % |  | 5.42 | % |  | 5.45 | % |  | 5.25 | % |  | 5.50 | % |  | 5.08 | % |  | 5.13 | %
|Expected return on plan assets                    |  | 5.15                            |   |  | 5.25   |   |  | 7.50    |   |  | 7.50 |   |  | 5.75          |   |  | 6.00  |   |  | 4.89 |   |  | 4.78 |   |  | 7.22 |   |  | 7.50 |   |  | 6.50 |   |  | 5.59 |  
|Future salary increases                           |  | 3.75                            |   |  | 3.75   |   |  | 3.28    |   |  | 3.05 |   |  | 2.50          |   |  | 3.00  |   |  | 3.50 |   |  | 3.50 |   |  | 3.75 |   |  | 3.75 |   |  | 2.61 |   |  | 2.69 |  
|Future pension increases                          |  | N/A                             |   |  | N/A    |   |  | 3.25    |   |  | 3.00 |   |  | 1.50          |   |  | 1.50  |   |  | 3.00 |   |  | 3.00 |   |  | 2.50 |   |  | 2.75 |   |  | 1.68 |   |  | 1.59 |  
|Expected average remaining working years of staff |  | 15.0                            |   |  | 15.0   |   |  | 12.4    |   |  | 13.0 |   |  | 18.7          |   |  | 18.7  |   |  | 10.5 |   |  | 15.0 |   |  | 18.4 |   |  | 16.6 |   |  | 12.4 |   |  | 15.2 |  



The assumed health
care cost trend rate used in measuring the accumulated post-retirement benefit obligation for U.S. plans was 11.0% in 2004, 12.0% in 2003, declining to 5.0% by the year 2011 and remaining at that level thereafter.



The amounts of pension and other post-employment benefit plans recognized in the balance
sheet as at December 31, 2004



|                                        |  |               |      |   |        |   |      |         |  |   |     |   |  |               |     |   |       |   |      |       |  |   |     |   |  |   |      |  
|--------------------------------------- |  | ------------- | ---- | - | ------ | - | ---- | ------- |  | - | --- | - |  | ------------- | --- | - | ----- | - | ---- | ----- |  | - | --- | - |  | - | ---- | -
|                                        |  | Finland       |      |   | Canada |   |      | Germany |  |   | USA |   |  | Great Britain |     |   | Other |   |      | Total | 
|                                        |  | (In millions) |     
|Present value of funded obligations     |  |              | 167  |   |        |  | 152  |         |  |  | 3   |   |  |              | 38  |   |       |  | 231  |       |  |  | 23  |   |  |  | 614  |  
|Present value of unfunded obligations   |  |               | 11   |   |        |   | 19   |         |  |   | 280 |   |  |               | 21  |   |       |   |     |       |  |   | 42  |   |  |   | 373  |  
|Fair value of plan assets               |  |               | (186 | ) |        |   | (115 | )       |  |   | (2  | ) |  |               | (35 | ) |       |   | (152 | )     |  |   | (21 | ) |  |   | (511 | )
|Unrecognized actuarial gains and losses |  |               | 1    |   |        |   | (19  | )       |  |   | (7  | ) |  |               | (5  | ) |       |   | (81  | )     |  |   | (2  | ) |  |   | (113 | )
|                                        |  |               |      |   |        |   |      |         |  |   |     |   |  |               |     |   |       |   |      |       |  |   |     |   |  |   |      |  
|Liability in the balance sheet          |  |              | (7   | ) |        |  | 37   |         |  |  | 274 |   |  |              | 19  |   |       |  | (2   | )     |  |  | 42  |   |  |  | 363  |  
|                                        |  |               |      |   |        |   |      |         |  |   |     |   |  |               |     |   |       |   |      |       |  |   |     |   |  |   |      |  



In Finland, the plan
assets include a loan receivable of 174 million issued (2003: 167 million) by the companys own fund.



The amounts of pension and other post-employment benefit plans recognized in the balance sheet as at December 31, 2003



|                                        |  |               |      |   |        |   |      |         |  |   |     |   |  |               |     |   |       |   |      |       |  |   |     |   |  |   |      |  
|--------------------------------------- |  | ------------- | ---- | - | ------ | - | ---- | ------- |  | - | --- | - |  | ------------- | --- | - | ----- | - | ---- | ----- |  | - | --- | - |  | - | ---- | -
|                                        |  | Finland       |      |   | Canada |   |      | Germany |  |   | USA |   |  | Great Britain |     |   | Other |   |      | Total | 
|                                        |  | (In millions) |     
|Present value of funded obligations     |  |              | 192  |   |        |  | 152  |         |  |  | 2   |   |  |              | 42  |   |       |  | 205  |       |  |  | 38  |   |  |  | 631  |  
|Present value of unfunded obligations   |  |               | 188  |   |        |   | 17   |         |  |   | 273 |   |  |               | 24  |   |       |   |     |       |  |   | 39  |   |  |   | 541  |  
|Fair value of plan assets               |  |               | (182 | ) |        |   | (115 | )       |  |   | (1  | ) |  |               | (40 | ) |       |   | (139 | )     |  |   | (33 | ) |  |   | (510 | )
|Unrecognized actuarial gains and losses |  |               | 67   |   |        |   | (21  | )       |  |   | (6  | ) |  |               | (5  | ) |       |   | (74  | )     |  |   |    |   |  |   | (39  | )
|                                        |  |               |      |   |        |   |      |         |  |   |     |   |  |               |     |   |       |   |      |       |  |   |     |   |  |   |      |  
|Liability in the balance sheet          |  |              | 265  |   |        |  | 33   |         |  |  | 268 |   |  |              | 21  |   |       |  | (8   | )     |  |  | 44  |   |  |  | 623  |  
|                                        |  |               |      |   |        |   |      |         |  |   |     |   |  |               |     |   |       |   |      |       |  |   |     |   |  |   |      |  



F-51



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|30. | PROVISIONS
|--- | ----------



|                                                           |  |                          |    |   |                          |   |    |                          |  |   |                       |   |  |               |    |   |       |   |    |       |  |   |     |   |  |   |     |  
|---------------------------------------------------------- |  | ------------------------ | -- | - | ------------------------ | - | -- | ------------------------ |  | - | --------------------- | - |  | ------------- | -- | - | ----- | - | -- | ----- |  | - | --- | - |  | - | --- | -
|                                                           |  | Closure andrestructuring |    |   | Reforestationobligations |   |    | Environmentalobligations |  |   | Terminationprovisions |   |  | Taxprovisions |    |   | Other |   |    | Total | 
|                                                           |  | (In millions)            |   
|At January 1, 2003                                         |  |                         | 16 |   |                          |  | 6  |                          |  |  | 7                     |   |  |              | 29 |   |       |  | 2  |       |  |  | 44  |   |  |  | 104 |  
|Translation difference                                     |  |                          | (2 | ) |                          |   |   |                          |  |   | (1                    | ) |  |               |   |   |       |   |   |       |  |   | (1  | ) |  |   | (4  | )
|Additional provisions and increases to existing provisions |  |                          | 3  |   |                          |   | 5  |                          |  |   | 4                     |   |  |               | 18 |   |       |   | 12 |       |  |   | 3   |   |  |   | 45  |  
|Utilized during year                                       |  |                          | (8 | ) |                          |   | (6 | )                        |  |   | (1                    | ) |  |               | (3 | ) |       |   |   |       |  |   | (9  | ) |  |   | (27 | )
|Unused amounts reversed                                    |  |                          | (1 | ) |                          |   |   |                          |  |   |                      |   |  |               |   |   |       |   | (1 | )     |  |   | (13 | ) |  |   | (15 | )
|                                                           |  |                          |    |   |                          |   |    |                          |  |   |                       |   |  |               |    |   |       |   |    |       |  |   |     |   |  |   |     |  
|At December 31, 2003                                       |  |                         | 8  |   |                          |  | 5  |                          |  |  | 9                     |   |  |              | 44 |   |       |  | 13 |       |  |  | 24  |   |  |  | 103 |  
|                                                           |  |                          |    |   |                          |   |    |                          |  |   |                       |   |  |               |    |   |       |   |    |       |  |   |     |   |  |   |     |  
|At January 1, 2004                                         |  |                         | 8  |   |                          |  | 5  |                          |  |  | 9                     |   |  |              | 44 |   |       |  | 13 |       |  |  | 24  |   |  |  | 103 |  
|Translation difference                                     |  |                          |   |   |                          |   |   |                          |  |   |                      |   |  |               |   |   |       |   |   |       |  |   |    |   |  |   |    |  
|Additional provisions and increases to existing provisions |  |                          | 23 |   |                          |   | 4  |                          |  |   | 12                    |   |  |               | 26 |   |       |   | 23 |       |  |   | 31  |   |  |   | 119 |  
|Utilized during year                                       |  |                          | (2 | ) |                          |   | (5 | )                        |  |   | (1                    | ) |  |               | (9 | ) |       |   | (9 | )     |  |   | (14 | ) |  |   | (40 | )
|Unused amounts reversed                                    |  |                          |   |   |                          |   |   |                          |  |   | (1                    | ) |  |               |   |   |       |   | (4 | )     |  |   |    |   |  |   | (5  | )
|                                                           |  |                          |    |   |                          |   |    |                          |  |   |                       |   |  |               |    |   |       |   |    |       |  |   |     |   |  |   |     |  
|At December 31, 2004                                       |  |                         | 29 |   |                          |  | 4  |                          |  |  | 19                    |   |  |              | 61 |   |       |  | 23 |       |  |  | 41  |   |  |  | 177 |  
|                                                           |  |                          |    |   |                          |   |    |                          |  |   |                       |   |  |               |    |   |       |   |    |       |  |   |     |   |  |   |     |  



Provisions



In September 2004, the Group announced the closure of the old and
uncompetitive 240,000 tons capacity Miramichi pulp mill. The pulp mill was closed down in December 2004. The restructuring arrangements made at the mill also included rationalization of paper production and wood procurement. Due to this
restructuring arrangement within the Magazine Papers Division, personnel costs of 14 million were booked under termination provisions, other costs of 9 million, primarily relating to the dismantling of the pulp mill, were recorded in
closure and restructuring provisions, and pension costs of 6.1 million were recorded in accrued personnel expenses (Note 33). In the income statement, the personnel and pension costs are included in personnel expenses, and the dismantling and
other costs in other operating costs and expenses. The restructuring provisions are expected to be fully utilized by the end of 2005.



In October 2004, the Groups Finnish wood products business was restructured. As a consequence of this restructuring arrangement, the Groups
production of sawn timber will fall by about 400,000 cubic meters and its birch plywood production by about 70,000 cubic meters a year. The number of employees will fall by about 670 as a result of the production cutbacks. Aureskoski sawmill and
Viiala plywood mill were closed at the end of 2004, and Kuopio plywood mill is scheduled for closure in the second half of 2005. The production of sawn timber at Alholma and Kajaani will fall by about a third. Staff functions are also adjusted.
Relating to this restructuring within the Wood Products Division, pension costs of 4 million were recorded under termination provisions, and other charges of 5 million, primarily relating to the dismantling of the mills, were recognized
in closure and restructuring provisions. In the income statement, the personnel costs are included in personnel expenses, and the dismantling and other costs in other operating costs and expenses. The restructuring provisions related to other
charges are expected to be fully utilized by the end of 2005, and the activities related to pensions by the end of 2006.



As a result of these restructurings, impairment charges of 75 million and 21 million were incurred relating to Miramichi and the wood products
business, respectively. (Note 8)



In 2004, other charges to the
closure and restructuring provisions are primarily related to the termination of certain sales contracts. Other termination provisions of 8 million (2003: 18 million) include mainly unemployment and disability provisions in several
units.



Additionally, charges of 19 million relating to
long-term wood supply contracts in the U.K. and charges of 11 million relating to changes in group structure were recorded in other provisions. Environmental obligations include charges relating to idled production and landfill sites.



F-52



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|31. | INTEREST-BEARING LIABILITIES
|--- | ----------------------------



|                                               |  |                    |       |      |   |      
|---------------------------------------------- |  | ------------------ | ----- | ---- | - | -----
|                                               |  | As at December 31,
|                                               |  | 2004               |       | 2003
|                                               |  | (In millions)     
|Non-current interest-bearing liabilities       |  |                    |       |      |   |      
|Bond loans                                     |  |                   | 2,648 |      |  | 2,893
|Loans from financial institutions              |  |                    | 645   |      |   | 708  
|Pension loans                                  |  |                    | 511   |      |   | 588  
|Trade payables                                 |  |                    | 12    |      |   | 13   
|Finance lease liabilities                      |  |                    | 341   |      |   | 426  
|Derivative financial instruments               |  |                    | 112   |      |   | 87   
|Accrued expenses and deferred income           |  |                    | 1     |      |   | 3    
|Other liabilities                              |  |                    | 154   |      |   | 193  
|                                               |  |                    |       |      |   |      
|Total liability                                |  |                   | 4,424 |      |  | 4,911
|                                               |  |                   
|Current interest-bearing liabilities           |  |                    |       |      |   |      
|Current portion of long-term debt (repayments) |  |                   | 403   |      |  | 253  
|Short-term loans                               |  |                    | 68    |      |   | 277  
|Bills of exchange payable                      |  |                    | 1     |      |   | 9    
|Accruals                                       |  |                    | 55    |      |   | 137  
|Other liabilities(1)                           |  |                    | 390   |      |   | 194  
|                                               |  |                    |       |      |   |      
|                                               |  |                   | 917   |      |  | 870  
|                                               |  |                    |       |      |   |      
|Total interest-bearing liabilities             |  |                   | 5,341 |      |  | 5,781
|                                               |  |                    |       |      |   |      

---

|(1) | Includes issued commercial papers of 226 million in 2004 (2003: 153 million).
|--- | -------------------------------------------------------------------------------



Maturity of Non-Current Interest-Bearing Liabilities



|                                         |  |               |     |      |   |      |  |      |     |      |   |       |  |       |     |  |   |       |  |   |       |  
|---------------------------------------- |  | ------------- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | ----- |  | ----- | --- |  | - | ----- |  | - | ----- | -
|                                         |  | 2005          |     | 2006 |   | 2007 |  | 2008 |     | 2009 |   | 2010+ |  | Total |    
|                                         |  | (In millions) |    
|Bond loans                               |  |              | 144 |      |  | 115  |  |     | 186 |      |  | 88    |  |      | 275 |  |  | 1,984 |  |  | 2,792 |  
|Loans from financial institutions        |  |               | 144 |      |   | 307  |  |      | 39  |      |   | 130   |  |       | 11  |  |   | 158   |  |   | 789   |  
|Pension loans                            |  |               | 87  |      |   | 87   |  |      | 87  |      |   | 87    |  |       | 47  |  |   | 203   |  |   | 598   |  
|Trade payables                           |  |               | 1   |      |   | 1    |  |      |    |      |   | 1     |  |       | 1   |  |   | 9     |  |   | 13    |  
|Finance lease liabilities                |  |               | 25  |      |   | 90   |  |      | 10  |      |   | 10    |  |       | 140 |  |   | 91    |  |   | 366   |  
|Derivative financial instruments         |  |               |    |      |   | 2    |  |      | 46  |      |   |      |  |       |    |  |   | 64    |  |   | 112   |  
|Accrued expenses and deferred income     |  |               |    |      |   | 1    |  |      |    |      |   |      |  |       |    |  |   |      |  |   | 1     |  
|Other liabilities                        |  |               | 2   |      |   | 7    |  |      | 3   |      |   | 3     |  |       | 3   |  |   | 138   |  |   | 156   |  
|                                         |  |               |     |      |   |      |  |      |     |      |   |       |  |       |     |  |   |       |  |   |       |  
|                                         |  |              | 403 |      |  | 610  |  |     | 371 |      |  | 319   |  |      | 477 |  |  | 2,647 |  |  | 4,827 |  
|                                         |  |               |     |      |   |      | 
|Current portion of long-term debt        |  |               |     |      |   |      |  |      |     |      |   |       |  |       |     |  |   |       |  |   | (403  | )
|                                         |  |               |     |      |   |      |  |      |     |      |   |       |  |       |     |  |   |       |  |   |       |  
|Non-current interest-bearing liabilities |  |               |     |      |   |      |  |      |     |      |   |       |  |       |     |  |   |       |  |  | 4,424 |  
|                                         |  |               |     |      |   |      |  |      |     |      |   |       |  |       |     |  |   |       |  |   |       |  



F-53



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Bond Loans in Interest-Bearing Liabilities



|                              |  |               |   |  |                 |  |                          |  |                    |       |  |   |      
|----------------------------- |  | ------------- | - |  | --------------- |  | ------------------------ |  | ------------------ | ----- |  | - | -----
|                              |  | Interestrate% |   |  | Currencyof bond |  | Nominal valueissued      |  | As at December 31,
|                              |  |               |   |  | 2004            |  | 2003                    
|                              |  |               |   |  |                 |  | (In millionsof currency) |  | (In millions)     
|Fixed rate                    |  |               |   |  |                 |  |                          |  |                    |       |  |   |      
|19952005                     |  | 7.720         | % |  | USD             |  | 155                      |  |                   | 113   |  |  | 130  
|19972007                     |  | 6.875         |   |  | USD             |  | 215                      |  |                    | 165   |  |   | 187  
|19972007                     |  | 6.880         |   |  | EUR             |  | 102                      |  |                    | 107   |  |   | 109  
|19972027                     |  | 7.450         |   |  | USD             |  | 375                      |  |                    | 306   |  |   | 330  
|19992009                     |  | 6.350         |   |  | EUR             |  | 250                      |  |                    | 271   |  |   | 268  
|20002030                     |  | 3.550         |   |  | JPY             |  | 10,000                   |  |                    | 31    |  |   | 49   
|20012006                     |  | 0.962         |   |  | JPY             |  | 2,000                    |  |                    | 14    |  |   | 11   
|20012007                     |  | 6.875         |   |  | USD             |  | 10                       |  |                    | 8     |  |   | 8    
|20022005                     |  | 0.100         |   |  | EUR             |  | 30                       |  |                    | 32    |  |   | 31   
|20022007                     |  | 0.869         |   |  | JPY             |  | 2,000                    |  |                    | 14    |  |   | 13   
|20022012                     |  | 6.125         |   |  | EUR             |  | 600                      |  |                    | 649   |  |   | 631  
|20022014                     |  | 5.625         |   |  | USD             |  | 500                      |  |                    | 357   |  |   | 389  
|20022017                     |  | 6.625         |   |  | GBP             |  | 250                      |  |                    | 360   |  |   | 358  
|20032018                     |  | 5.500         |   |  | USD             |  | 250                      |  |                    | 181   |  |   | 195  
|                              |  |               |   |  |                 |  |                          |  |                    |       |  |   |      
|                              |  |               |   |  |                 |  |                          |  |                   | 2,608 |  |  | 2,709
|                              |  |               |   |  |                
|Floating-rate                 |  |               |   |  |                 |  |                          |  |                    |       |  |   |      
|20022008                     |  | 2.995         | % |  | EUR             |  | 39                       |  |                   | 39    |  |  | 39   
|20022008                     |  | 2.734         |   |  | EUR             |  | 50                       |  |                    | 50    |  |   | 50   
|20022010                     |  | 3.013         |   |  | EUR             |  | 59                       |  |                    | 59    |  |   | 59   
|20022012                     |  | 3.034         |   |  | EUR             |  | 25                       |  |                    | 25    |  |   | 25   
|20022012                     |  | 3.134         |   |  | EUR             |  | 11                       |  |                    | 11    |  |   | 11   
|                              |  |               |   |  |                 |  |                          |  |                    |       |  |   |      
|                              |  |               |   |  |                 |  |                          |  |                   | 184   |  |  | 184  
|                              |  |               |   |  |                 |  |                          |  |                    |       |  |   |      
|Bond loans, total             |  |               |   |  |                 |  |                          |  |                   | 2,792 |  |  | 2,893
| current portion             |  |               |   |  |                 |  |                          |  |                    | 144   |  |   |     
|                              |  |               |   |  |                 |  |                          |  |                    |       |  |   |      
|Bond loans, long-term portion |  |               |   |  |                 |  |                          |  |                   | 2,648 |  |  | 2,893
|                              |  |               |   |  |                 |  |                          |  |                    |       |  |   |      



Fair Value Hedge of the Long-Term
Interest-Bearing Liabilities



Fair value hedge accounting
in accordance with IAS 39 results in a cumulative fair value adjustment totalling 89 million (2003: 114 million), which has increased the carrying amounts of the liabilities. Accordingly, the positive fair value of the hedging
instruments excluding accrued interest amount to 174 million (2003: 162 million) in assets and negative fair value of 64 million in liabilities (2003: 38 million). The carrying amounts of the hedged liabilities and the fair
values of the hedging instruments are included in the net interest bearing liabilities. The effect of the fair value hedge ineffectiveness on the income statement was 12 million (2003: 22 million).



The Interest Rate Ranges of Interest-Bearing Liabilities



|                                  |  |                    |   |  |           |  
|--------------------------------- |  | ------------------ | - |  | --------- | -
|                                  |  | As at December 31, |  
|                                  |  | 2004               |   |  | 2003      |  
|Loans from financial institutions |  | 2.156.00          | % |  | 1.666.03 | %
|Pension loans                     |  | 3.255.50          |   |  | 3.255.50 |  
|Finance lease liabilities         |  | 3.506.90          |   |  | 3.506.90 |  



F-54



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Interest Rate Swaps



The Group uses interest rate swap agreements to hedge the interest rate risk relating to long-term loans.



At December 31, 2004 the fixed interest rates varied from 0.1% to 8.0% (0.1%
to 9.12% in 2003) and the floating rates varied from 1.08% to 6.18% (1.0% to 5.17% in 2003).



NET INTEREST-BEARING LIABILITIES



|                                               |  |                    |       |      |   |      
|---------------------------------------------- |  | ------------------ | ----- | ---- | - | -----
|                                               |  | As at December 31,
|                                               |  | 2004               |       | 2003
|                                               |  | (In millions)     
|Interest-bearing liabilities, total            |  |                   | 5,341 |      |  | 5,781
|                                               |  |                   
|Interest-bearing receivables                   |  |                    |       |      |   |      
|Non-current                                    |  |                    |       |      |   |      
|Loans receivable                               |  |                    | 49    |      |   | 72   
|Available-for-sale investments (listed shares) |  |                    | 234   |      |   | 197  
|Derivatives                                    |  |                    | 174   |      |   | 162  
|Other receivables                              |  |                    | 8     |      |   | 9    
|                                               |  |                    |       |      |   |      
|                                               |  |                   | 465   |      |  | 440  
|Current                                        |  |                    |       |      |   |      
|Loans receivable                               |  |                    | 10    |      |   | 10   
|Trade receivables                              |  |                    | 9     |      |   | 20   
|Available-for-sale investments                 |  |                    | 98    |      |   | 99   
|Cash and cash equivalents                      |  |                    | 142   |      |   | 338  
|                                               |  |                    |       |      |   |      
|                                               |  |                   | 259   |      |  | 467  
|                                               |  |                    |       |      |   |      
|Interest-bearing receivables, total            |  |                   | 724   |      |  | 907  
|                                               |  |                    |       |      |   |      
|Net interest-bearing liabilities               |  |                   | 4,617 |      |  | 4,874
|                                               |  |                    |       |      |   |      



Convertible Bond Loan



The subordinated convertible bond issue was launched on
February 25, 1994 in the amount of 161 million. The bonds had a maturity of 10 years and carried a coupon of 6.5%. The Company had the right to terminate the issue from March 25, 1998 onwards and to repay the loan, with accrued interest, in
full. Bondholders had the right to convert their bonds during the period April 1, 1994 to March 25, 2004, and each 1,682 bond entitled the holder to subscribe to 78 shares of the Company, before the bonus issue adjustment in 2003. The
calculated conversion share price was 21.56 and the maximum potential increase in the share capital due to conversion of the bonds was 12.7 million (7,488,000 shares). As of December 31, 2002, a total of 5,646,264 shares had been
subscribed through conversion under the issue, of which 1,398,150 shares were subscribed during 2002.



In December 2002, the Company decided to exercise its right, under the terms and conditions of the issue, to redeem all unconverted bonds with a value of
40 million. By the redemption, on February 28, 2003 the total amount of conversions during the years 1994 to 2003 was 157,832,624.79 and the number of shares converted 7,319,754 corresponding to 14,639,508 shares after the bonus issue.
The remaining amount of the bonds (3,627,815.16) was redeemed on the redemption date. According to the terms of the bonds, holders of new shares subscribed under the issue in 2003 are entitled to receive dividends for the first time for the 2003
financial period.



F-55



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Finance Lease Liabilities



The company has sold and then leased back certain power plants and certain tangible assets under long-term agreements and
uses the electrical power generated by these plants in its own production. These leases contain renewal and/or purchase options. Payments are generally made over 10 to 20 years and, as of December 31, 2004, are due through 2015.



In December 2004, UPM exercised its option and redeemed two of its leased
power plants and the lease liability decreased by 65 million.



In addition the Group leases certain tangible assets, including buildings, machinery and equipment, under long-term arrangement.



Finance lease liabilities  minimum lease payments



|                                                                       |  |                    |     |   |      |   |      |  
|---------------------------------------------------------------------- |  | ------------------ | --- | - | ---- | - | ---- | -
|                                                                       |  | As at December 31, |    
|                                                                       |  | 2004               |     |   | 2003 |  
|                                                                       |  | (In millions)      |    
|Not later than 1 year                                                  |  |                   | 43  |   |      |  | 64   |  
|12 years                                                              |  |                    | 108 |   |      |   | 46   |  
|23 years                                                              |  |                    | 21  |   |      |   | 111  |  
|34 years                                                              |  |                    | 21  |   |      |   | 24   |  
|45 years                                                              |  |                    | 150 |   |      |   | 24   |  
|Later than 5 years                                                     |  |                    | 103 |   |      |   | 330  |  
|                                                                       |  |                    |     |   |      |   |      |  
|                                                                       |  |                   | 446 |   |      |  | 599  |  
|Future finance charges                                                 |  |                    | (80 | ) |      |   | (134 | )
|                                                                       |  |                    |     |   |      |   |      |  
|Finance lease liabilities  the present value of minimum lease payment |  |                   | 366 |   |      |  | 465  |  
|                                                                       |  |                    |     |   |      |   |      |  



Finance lease liabilities 
the present value of minimum lease payments



|                      |  |                    |     |      |   |    
|--------------------- |  | ------------------ | --- | ---- | - | ---
|                      |  | As at December 31,
|                      |  | 2004               |     | 2003
|                      |  | (In millions)     
|Not later than 1 year |  |                   | 41  |      |  | 60 
|12 years             |  |                    | 97  |      |   | 41 
|23 years             |  |                    | 18  |      |   | 93 
|34 years             |  |                    | 17  |      |   | 19 
|45 years             |  |                    | 117 |      |   | 18 
|Later than 5 years    |  |                    | 76  |      |   | 234
|                      |  |                    |     |      |   |    
|                      |  |                   | 366 |      |  | 465
|                      |  |                    |     |      |   |    



|32. | OTHER LIABILITIES
|--- | -----------------



|                                 |  |                    |    |      |   |   
|-------------------------------- |  | ------------------ | -- | ---- | - | --
|                                 |  | As at December 31,
|                                 |  | 2004               |    | 2003
|                                 |  | (In millions)     
|Derivative financial instruments |  |                   |   |      |  | 59
|Other                            |  |                    | 26 |      |   | 20
|                                 |  |                    |    |      |   |   
|                                 |  |                   | 26 |      |  | 79
|                                 |  |                    |    |      |   |   



F-56



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|33. | TRADE AND OTHER PAYABLES
|--- | ------------------------



|                                             |  |                    |       |      |   |      
|-------------------------------------------- |  | ------------------ | ----- | ---- | - | -----
|                                             |  | As at December 31,
|                                             |  | 2004               |       | 2003
|                                             |  | (In millions)     
|Advances received                            |  |                   | 36    |      |  | 34   
|Trade payables                               |  |                    | 683   |      |   | 694  
|Amounts due to associates and joint ventures |  |                    | 22    |      |   | 29   
|Accrued expenses and deferred income         |  |                    | 318   |      |   | 253  
|Derivative financial instruments             |  |                    | 57    |      |   | 51   
|Other current liabilities                    |  |                    | 140   |      |   | 208  
|                                             |  |                    |       |      |   |      
|                                             |  |                   | 1,256 |      |  | 1,269
|                                             |  |                    |       |      |   |      



Main items included in accrued
expenses and deferred income



|                   |  |                    |     |      |   |    
|------------------ |  | ------------------ | --- | ---- | - | ---
|                   |  | As at December 31,
|                   |  | 2004               |     | 2003
|                   |  | (In millions)     
|Personnel expenses |  |                   | 202 |      |  | 207
|Interest expenses  |  |                    | 22  |      |   | 15 
|Indirect taxes     |  |                    | 8   |      |   | 9  
|Other items        |  |                    | 86  |      |   | 22 
|                   |  |                    |     |      |   |    
|                   |  |                   | 318 |      |  | 253
|                   |  |                    |     |      |   |    



The carrying value is
considered to approximate the fair value.



|34. | DERIVATIVE FINANCIAL INSTRUMENTS
|--- | --------------------------------



Derivative Financial Instruments are recorded on the balance sheet at their fair values, defined as the amount at which the instruments could be exchanged
between willing parties in a current transaction, other than in a liquidation or forced sale.



The fair values of such financial items have been estimated on the following basis:



| |  |  | Interest forward rate agreements and futures contracts are fair valued based on quoted market rates as at the balance sheet date.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Forward foreign exchange contracts are fair valued based on the contract forward rates in effect as at the balance sheet date.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Foreign currency options are fair valued based on quoted market rates as at the balance sheet date.
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Interest and currency swap agreements are fair valued based on discounted cash flow analyses.
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Commodity derivatives are fair valued based on quoted market rates as at the balance sheet date.
| | - |  | ------------------------------------------------------------------------------------------------



F-57



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Net fair values of derivative financial instruments



|                        |  |                     |     |                     |   |      |                |  |   |                |   |  |   |      |  
|----------------------- |  | ------------------- | --- | ------------------- | - | ---- | -------------- |  | - | -------------- | - |  | - | ---- | -
|                        |  | As at December 31,  |    
|                        |  | 2004                |     | 2004                |   |      | 2004           |  |   | 2003           |  
|                        |  | Positivefair values |     | Negativefair values |   |      | Netfair values |  |   | Netfair values |  
|                        |  | (In millions)       |    
|Interest rate swaps(1)  |  |                    | 232 |                     |  | (4   | )              |  |  | 228            |   |  |  | 214  |  
|Forward contracts(2)    |  |                     | 79  |                     |   | (16  | )              |  |   | 63             |   |  |   | 30   |  
|Interest rate options   |  |                     |    |                     |   | (2   | )              |  |   | (2             | ) |  |   | (3   | )
|Cross currency swaps(3) |  |                     |    |                     |   | (163 | )              |  |   | (163           | ) |  |   | (120 | )
|Commodity contracts     |  |                     | 7   |                     |   |     |                |  |   | 7              |   |  |   | 1    |  
|                        |  |                     |     |                     |   |      |                |  |   |                |   |  |   |      |  
|                        |  |                    | 318 |                     |  | (185 | )              |  |  | 133            |   |  |  | 122  |  
|                        |  |                     |     |                     |   |      |                |  |   |                |   |  |   |      |  

---

|(1) | Out of the interest rate swaps, fair value of 232 million was designated for fair value hedges of long-term borrowings as at December 31, 2004 (221 million as at
December 31, 2003).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Out of the foreign exchange forward contracts, fair value of 58 million was designated for cash flow hedges as at December 31, 2004 (45 million as at December 31, 2003)
and reported in fair value and other reserves, net of tax 44 million (32 million as at December 31, 2003). The qualification for cash-flow hedge accounting according to IAS 39 were met for agreements made in February 2003 or later.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Out of the cross currency swaps, fair value of (119) million was designated for fair value hedges of long-term borrowings as at December 31, 2004 ((74) million as at
December 31, 2003).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Positive and negative fair
values of financial instruments are shown under other non-current receivables, trade and other receivables, interest-bearing liabilities and trade and other payables.



F-58



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|35. | PRINCIPAL SUBSIDIARIES AS AT DECEMBER 31, 2004
|--- | ----------------------------------------------



|                                                    |  |               |    
|--------------------------------------------------- |  | ------------- | ---
|Name of the subsidiary, country of incorporation    |  | Group holding |    
|Blandin Paper Company, US                           |  | 100.00        | %  
|Oy Botnia Shipping Ab, FI                           |  | 100.00        |    
|ZAO Chudovo-RWS, RU                                 |  | 60.00         |    
|Jämsänkosken Voima Oy, FI                           |  |               | (1)
|Lignis GmbH & Co. KG, DE                            |  | 24.00         | (1)
|Lohja Papierprodukte GmbH, DE                       |  | 100.00        |    
|Loparex B.V., NL                                    |  | 100.00        |    
|Loparex Hong Kong Ltd, CN                           |  | 100.00        |    
|Loparex Inc., US                                    |  | 100.00        |    
|Loparex Ltd, GB                                     |  | 100.00        |    
|Loparex Oy, FI                                      |  | 100.00        |    
|Nordland Papier GmbH, DE                            |  | 100.00        |    
|Norfolk House Management Ltd, GB                    |  | 95.00         |    
|NorService GmbH, DE                                 |  | 100.00        |    
|Nortrans Speditions GmbH, DE                        |  | 100.00        |    
|ZAO Pestovo Novo, RU                                |  | 100.00        |    
|AS Puukeskus, EE                                    |  | 100.00        |    
|Puukeskus Oy, FI                                    |  | 100.00        |    
|Raflatac AB, SE                                     |  | 100.00        |    
|Raflatac Canada Inc., CA                            |  | 100.00        |    
|Raflatac CZ s.r.o., CZ                              |  | 100.00        |    
|Raflatac GmbH, DE                                   |  | 100.00        |    
|Raflatac Handels GmbH, AT                           |  | 100.00        |    
|Raflatac Iberica S.A., ES                           |  | 100.00        |    
|Raflatac Inc., US                                   |  | 100.00        |    
|Raflatac Italia s.r.l., IT                          |  | 100.00        |    
|Raflatac Ltd, GB                                    |  | 100.00        |    
|Raflatac Mexico S.A. de C.V., ME                    |  | 100.00        |    
|Raflatac Oy, FI                                     |  | 100.00        |    
|Raflatac Papirfeldolgozo Kft, HU                    |  | 100.00        |    
|Raflatac Polska Sp. z o.o., PL                      |  | 100.00        |    
|Raflatac Shanghai Co. Ltd, CN                       |  | 100.00        |    
|Raflatac South Africa (Pty) Ltd, ZA                 |  | 100.00        |    
|Raflatac S.A., FR                                   |  | 100.00        |    
|Raflatac (M) SDN BHD, MY                            |  | 100.00        |    
|Raflatac (Oceania) Pty Ltd, AU                      |  | 100.00        |    
|Raflatac (S) Pte Ltd, SG                            |  | 100.00        |    
|Raflatac (Thailand) Co., Ltd, TH                    |  | 100.00        |    
|Oy Rauma Stevedoring Ltd, FI                        |  | 100.00        |    
|STAG-SCA Frischholz GmbH, AT                        |  | 66.64         |    
|Steyrermühl Sägewerksgesellschaft m.b.H. Nfg KG, AT |  | 100.00        |    
|Stracel S.A.S., FR                                  |  | 100.00        |    
|Tilhill Forestry Ltd, GB                            |  | 100.00        |    
|UPM-Asunnot Oy, FI                                  |  | 100.00        |    
|UPM Rafsec Oy, FI                                   |  | 100.00        |    
|UPM Sähkönsiirto Oy, FI                             |  | 100.00        |    
|UPM Tehdasmittaus Oy, FI                            |  | 100.00        |    
|UPM-Kymmene AB, SE                                  |  | 100.00        |    
|UPM-Kymmene AG, CH                                  |  | 100.00        |    
|UPM-Kymmene AS, NO                                  |  | 100.00        |    



F-59



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                   |  |               |    
|-------------------------------------------------- |  | ------------- | ---
|Name of the subsidiary, country of incorporation   |  | Group holding |    
|UPM-Kymmene Asia Pacific Pte Ltd., SG              |  | 100.00        | %  
|UPM-Kymmene Austria GmbH, AT                       |  | 100.00        |    
|UPM-Kymmene A/S, DK                                |  | 100.00        |    
|UPM-Kymmene B.V., NL                               |  | 100.00        |    
|UPM-Kymmene Comercializacao de Papel, Lda, PT      |  | 100.00        |    
|UPM-Kymmene Forest AS, EE                          |  | 100.00        |    
|UPM-Kymmene France S.A.S., FR                      |  | 100.00        |    
|UPM-Kymmene Inc., US                               |  | 100.00        |    
|UPM-Kymmene Japan K.K., JP                         |  | 100.00        |    
|UPM-Kymmene Loulay S.A., FR                        |  | 100.00        |    
|UPM-Kymmene Miramichi Inc., CA                     |  | 100.00        |    
|UPM-Kymmene NV/SA, BE                              |  | 99.60         |    
|UPM-Kymmene Otepää AS, EE                          |  | 100.00        |    
|UPM-Kymmene Papier GmbH & Co. KG, DE               |  | 100.00        |    
|UPM-Kymmene Pty. Ltd, AU                           |  | 100.00        |    
|UPM-Kymmene Sales GmbH, DE                         |  | 100.00        |    
|UPM-Kymmene Sp. z o.o., PL                         |  | 100.00        |    
|UPM-Kymmene Srl., IT                               |  | 100.00        |    
|UPM-Kymmene S.A., ES                               |  | 100.00        |    
|UPM-Kymmene Wood Ab, SE                            |  | 100.00        |    
|UPM-Kymmene Wood A/S, DK                           |  | 99.93         |    
|UPM-Kymmene Wood B.V., NL                          |  | 100.00        |    
|UPM-Kymmene Wood GmbH, DE                          |  | 100.00        |    
|UPM-Kymmene Wood Ltd, GB                           |  | 100.00        |    
|UPM-Kymmene Wood Oy, FI                            |  | 100.00        |    
|UPM-Kymmene Wood S.A., ES                          |  | 100.00        |    
|UPM-Kymmene Wood S.A., FR                          |  | 99.99         |    
|UPM-Kymmene Wood S.r.l., IT,                       |  | 100.00        |    
|UPM-Kymmene (Changshu) Paper Industry Co., Ltd, CN |  | 100.00        |    
|UPM-Kymmene (Shanghai) Trading Co., CN             |  | 100.00        |    
|UPM-Kymmene (UK) Ltd, GB                           |  | 100.00        |    
|Walki Wisa Converflex Ab, SE                       |  | 51.60         |    
|Walki Wisa GmbH, DE                                |  | 100.00        |    
|Walki Wisa Ltd, GB                                 |  | 100.00        |    
|Walki Wisa Oy, FI                                  |  | 100.00        |    
|Werla Insurance Company Ltd, GB                    |  | 100.00        |    
|Wisapower Oy, FI                                   |  |               | (1)

---

The table presents subsidiaries with sales exceeding
2 million.



|(1) | Jämsänkosken Voima Oy and Wisapower Oy are owned by Pohjolan Voima Oy, in which UPM has a controlling interest. UPM also has a controlling interest in Lignis GmbH &
Co. KG
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|36. | EQUITY COMPENSATION BENEFITS
|--- | ----------------------------



Share Options Granted to Key Personnel



The Class A and Class B share options were issued pursuant to the management incentive program approved by the annual general meeting of shareholders in
1998 and the Class D share options and Class share options were issued pursuant to a management incentive program approved by the annual general meeting of shareholders in 2002. Each share option is exercisable for two shares.



F-60



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On March 25, 1998, the shareholders approved the issuance to key personnel worldwide of 6,000,000
share options, each option conferring a right to subscribe for two shares. The share options comprised three classes with 2,000,000 share options in each class. In March 2002, the two million Class C share options were cancelled. Class A share
options have been exercisable since April 1, 2001 and will be exercisable through April 30, 2005 at an exercise price of 30.95 per share, without giving effect to the bonus issue, and 30.95 per two shares, after giving effect to the
bonus issue. Class B share options are exercisable from April 1, 2003 through April 30, 2005 at an exercise price of 35.99 per share, without giving effect to the bonus issue, and 35.99 per two shares, after giving effect to the bonus
issue. The exercise price for the share options is reduced by the amount of dividends distributed (without any corporate tax credit) after May 1, 1998 and before the date of the share subscription. As a result of the share subscriptions with the
1998 share options, the share capital may be increased by a maximum of 13,600,000.



On March 19, 2002, the shareholders authorized the issuance of 7,600,000 share options to key personnel. Each share option entitles its holder to subscribe for two shares of UPM-Kymmene share. Half of the share
options are marked with the symbol 2002D, while the other half are marked 2002E. Those share options marked 2002D may be exercised between April 1, 2004 and April 30, 2007 while those share options marked 2002E may be exercised between April 1, 2005
and April 30, 2008. The share subscription price for the share options marked 2002D is 43.90 per two shares and the share subscription price for the share options marked 2002E is 14.27 per share. The share subscription price of share
options 2002D and 2002E will, as per the dividend record date be reduced by the amount of the dividend decided after the end of the period for determination of the subscription price but before share subscription. As a result of the share
subscriptions with the 2002 share options, the share capital may be increased by a maximum of 25,840,000.



On March 19, 2003, the annual general meeting of shareholders resolved to increase the Companys share capital by a bonus issue. The shareholders of
the Company were, free of charge, given one new share for one old share. A total of 261,789,465 new shares were issued. The terms and conditions of the Companys year 1998 and 2002 share options have been amended in a way that the proportional
amount of the shares to be subscribed with the share options will remain unchanged in respect of the share capital.



The Group has accrued the social security expenses relating to these option programmes.



Movements in the Number of Share Options Granted



|               |  |                    |   |  |            |  
|-------------- |  | ------------------ | - |  | ---------- | -
|               |  | As at December 31, |  
|               |  | 2004               |   |  | 2003       |  
|At January 1   |  | 11,071,700         |   |  | 7,582,000  |  
|Granted        |  | 330,200            |   |  | 3,591,000  |  
|Returned       |  | (174,200           | ) |  |           |  
|Exercised(1)   |  | (435,671           | ) |  | (101,300   | )
|               |  |                    |   |  |            |  
|At December 31 |  | 10,792,029         |   |  | 11,071,700 |  
|               |  |                    |   |  |            |  

---

|(1) | During September 17 to December 30, 2004, 336,271 class A share options and 99,400 B share options were exercised to subscribe 871,342 shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



Outstanding Share Options as at December 31, 2004



|                    |  |      |           |                   |             |                |        |                 |             |                 |  |            |  |                    |  |         
|------------------- |  | ---- | --------- | ----------------- | ----------- | -------------- | ------ | --------------- | ----------- | --------------- |  | ---------- |  | ------------------ |  | --------
|                    |  | Type |           | Exercise price(1) |             | No. of options |        | Exercise period |             | Vestingschedule
|Plan/year of launch |  |      | January 1 |                   | December 31 |                | Issued |                 | Outstanding |                 | 
|2002/2003           |  | E    |           |                  | 14.27       |                |       | 13.52           |             | 3,800,000       |  | 3,758,200  |  | 1.4.200530.4.2008 |  | 1.4.2005
|2002/2002           |  | D    |           |                   | 42.40       |                |        | 40.90           |             | 3,800,000       |  | 3,629,500  |  | 1.4.200430.4.2007 |  | vested  
|1998/1998           |  | B    |           |                   | 28.25       |                |        | 26.75           |             | 2,000,000       |  | 1,843,100  |  | 1.4.200330.4.2005 |  | vested  
|1998/1998           |  | A    |           |                   | 23.21       |                |        | 21.71           |             | 2,000,000       |  | 1,561,229  |  | 1.4.200130.4.2005 |  | vested  
|                    |  |      |           |                   |             |                |        |                 |             |                 |  |            |  |                    |  |         
|                    |  |      |           |                   |             |                |        |                 |             | 11,600,000      |  | 10,792,029 |  |                    |  |         

---

|(1) | The exercise prices for A, B and D options are per two shares and the exercise price for E options is per one share.
|--- | --------------------------------------------------------------------------------------------------------------------



F-61



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|37. | RELATED PARTY TRANSACTIONS
|--- | --------------------------



The Group holds a 47% interest in Oy Metsä-Botnia Ab (Metsä-Botnia), a joint venture between M-real Oyj (M-real) and
Metsäliitto Group. M-real is a Finnish paper producer, and Metsäliitto Group is a co-operative organization of Finnish forest owners. Metsäliitto Group is also the controlling shareholder of M-real. Chemical pulp produced by
Metsä-Botnia is sold to the Group and to M-real at the market price less certain transportation and other costs. In 2004 and 2003, the Groups chemical pulp entitlement with respect to the production of Metsä-Botnia was 1.1 million
tons per year. Total purchases of chemical pulp from Metsä-Botnia amounted to 238 million in 2004 and 226 million in 2003.



The Group obtains most of the energy for its production units in Finland through the Groups owned and leased power plants, as well as through
ownership in power companies which entitle it to receive electricity and heat from those companies. A significant volume of the Groups electricity procurement comes from Pohjolan Voima Oy, a Finnish power producer in which the Group holds a
40.97% equity interest and Kemijoki Oy, a Finnish hydropower producer in which the Group holds a 4.13% equity interest. Pohjolan Voima Oy is also a majority shareholder in Teollisuuden Voima Oy, one of Finlands two nuclear power companies.
Such purchases of electricity totaled 198 million in 2004 and 181 million in 2003. In accordance with the power companies respective articles of association and related shareholder agreements, the prices paid by the Group to the
power companies are based on production costs, which are generally lower than market prices. Internal sales to the Groups segments are priced at the prevailing market price.



Approximately 10 to 15% of the Groups research and development activities is conducted by Oy
Keskuslaboratorio-Centrallaboratorium Ab (the Finnish Pulp and Paper Research Institute or FPPRI), in which the Group is one of four corporate owners with a 38.65% interest. The ownership in FPPRI provides the Group with fundamental
research information regarding the Groups main raw materials, major manufacturing processes and key product attributes. In addition to joint research at FPPRI, the Group also utilizes the institute for contract research in connection with
product and process development. These services are provided on an arms-length basis and upon terms that the Group believes to be customary within the industry and generally no less favorable than would be available from unrelated third
parties.



The Group purchases logistics and transport services
from certain associated companies, the most significant of which is Oy Transfennica Ab, in which the Group holds 27.14% interest. Oy Transfennica Ab is a Finnish shipping company engaged in the transport of cargo, primarily paper and other forest
products, between Finland and the main European trading ports. Such purchases amounted to 20 million in 2004 and 19 million in 2003. These purchases were made on an arms-length basis and upon terms that the Group believes to be
customary within the industry and generally no less favorable than would be available from unrelated third parties.



The Group purchases raw materials from certain associated companies, the most significant of which is Paperinkeräys Oy, a Finnish company in which
the Group has a 22.98% interest engaged in the procurement, processing and transport of recovered paper. Aggregate raw material purchases from associated companies amounted to 15 million in 2004 and 14 million in 2003. Recovered paper is
sold to the Group and other shareholders of Paperinkeräys Oy at a price which is determined using a contractual formula that takes into account the world market prices for recovered paper and the prices of other fiber raw materials, as well as
costs relating to paper recovery. In Austria, the Group has a similar arrangement concerning recovered paper, which is purchased from Austria Paper Recycling G.m.b.H., a company in which the Group owns a 33.32% equity interest. The aggregate
recovered paper purchases amounted to 12 million in 2004 and 11 million in 2003.



In Finland, UPM has a pension foundation (Kymin Eläkesäätiö), which is a separate legal entity. The pensions of about 7% of the Groups Finnish employees have been arranged by the foundation.
The contributions paid by UPM to the foundation amounted to 19 million in 2004, and 15 million in 2003. The foundation manages and invests the contributions for the employee benefit plans. The Group is entitled to borrow amounts from its
pension funds. As of December 31, 2004 and 2003, the Groups long-term borrowings from its pension funds were 174 and 167, respectively. Interest expense paid on such borrowings amounted to 6 million in 2004, 5 million
in 2003 and 6 million in 2002.



F-62



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|38. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------



Contingent Liabilities



The Group is a defendant or plaintiff in a number of legal proceedings incidental to its operations. These lawsuits primarily involve claims arising out
of commercial law issues.



In August 2003, the Company received
a grand jury subpoena in connection with the U.S. Department of Justice Antitrust Divisions investigation into the U.S. labelstock industry. The company is responding to the subpoena as required.



Following internal investigations into competitive practices, UPM decided on
January 15, 2004 to approach the competition authorities in the European Union, the United States and Canada. The competition authorities have started investigations into alleged antitrust activities and consequently the EU, several of its member
states, and the Canadian authorities have informed UPM that it has received conditional full immunity with respect to certain conduct disclosed to the authorities. The US Department of Justice has not decided on immunity, which is pending and
available.



The company has also been named as a defendant in
several class-action lawsuits against labelstock and magazine paper manufacturers in the United States.



In May 2004, UPM received a European Commission Statement of Objection concerning alleged antitrust activities in the market for plastic industrial sacks.
The company manufactured plastic industrial sacks until December 2000. The annual sales of the operations under investigation amounted to 11 million. UPM has responded and will respond to the Statement of Objection as requested by the
Commission.



All of the above litigation matters may last
several years.



No provisions have been made in relation to
these investigations.



Except for the proceedings described
above, the Group has not been involved in any legal, administrative or arbitration proceedings which management would expect to have a material adverse effect on the financial condition or results of operations of the Group, nor, so far as
management is aware, are any such legal, administrative or arbitration proceedings either pending or threatened.



Commitments



In the normal course of business, UPM-Kymmene Corporation and certain of its subsidiaries enter into various agreements providing financial or performance
assurance to third parties on behalf of those subsidiaries. These agreements are entered into with financial institutions and other credit grantors primarily to support or enhance the creditworthiness otherwise achieved by a subsidiary on a
stand-alone basis, thereby facilitating the availability of sufficient credit to accomplish the subsidiaries intended business purposes. The maximum amount of future payments by UPM-Kymmene Corporation on behalf of its subsidiaries under these
guarantees are disclosed in the table below under guarantees on own behalf caption.



The Group has also entered into various agreements to provide financial or performance assurance to third parties on behalf of certain affiliates and
other third parties. These agreements are entered into primarily to support or enhance the creditworthiness otherwise achieved by these related parties and entities on a stand-alone basis. The Group has no collateral or other recourse provisions
related to these guarantees. The maximum amounts of future payments by UPM-Kymmene Corporation on behalf of its associated companies under these guarantees are disclosed in the table below under guarantees on behalf of associated
companies caption.



In the normal course of business,
certain subsidiaries of UPM-Kymmene Corporation mainly in Germany grant commercial guarantees to their customers to facilitate the customers to finance purchases of goods from the subsidiary. The Group has no collateral but these commercial
guarantees are covered by the Groups credit risk insurance. These guarantees mature within one year. The maximum potential amount of future payments under these guarantees amounted to 11 million and 8 million as at December 31,
2004 and 2003, respectively, and they are included in the amounts disclosed in Other Commitments in the table.



F-63



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Commitments



|                                                     |  |                    |     |      |   |    
|---------------------------------------------------- |  | ------------------ | --- | ---- | - | ---
|                                                     |  | As at December 31,
|                                                     |  | 2004               |     | 2003
|                                                     |  | (In millions)     
|On own behalf                                        |  |                    |     |      |   |    
|Pledges given                                        |  |                   |    |      |  |   
|Mortgages                                            |  |                    | 111 |      |   | 178
|Guarantees                                           |  |                    | 20  |      |   | 20 
|                                                     |  |                   
|On behalf of associated companies and joint ventures |  |                    |     |      |   |    
|Pledges given                                        |  |                    |    |      |   |   
|Mortgages                                            |  |                    |    |      |   |   
|Guarantees                                           |  |                    | 44  |      |   | 41 
|                                                     |  |                   
|On behalf of others                                  |  |                    |     |      |   |    
|Pledges given                                        |  |                    |    |      |   |   
|Mortgages                                            |  |                    |    |      |   |   
|Guarantees                                           |  |                    | 10  |      |   | 7  
|                                                     |  |                   
|Other commitments, own                               |  |                    |     |      |   |    
|Operating leases, due within 12 months               |  |                    | 23  |      |   | 24 
|Operating leases, due after 12 months                |  |                    | 82  |      |   | 65 
|Other commitments                                    |  |                    | 18  |      |   | 23 
|                                                     |  |                    |     |      |   |    
|Total                                                |  |                   | 308 |      |  | 358
|                                                     |  |                    |     |      |   |    



|                  |  |                    |     |      |   |    
|----------------- |  | ------------------ | --- | ---- | - | ---
|                  |  | As at December 31,
|                  |  | 2004               |     | 2003
|                  |  | (In millions)     
|Mortgages         |  |                   | 111 |      |  | 178
|Guarantees        |  |                    | 74  |      |   | 68 
|Operating leases  |  |                    | 105 |      |   | 89 
|Other commitments |  |                    | 18  |      |   | 23 
|                  |  |                    |     |      |   |    
|Total             |  |                   | 308 |      |  | 358
|                  |  |                    |     |      |   |    



Property under
mortgages given as collateral for own commitments include industrial estates and forestland.



Operating lease commitments  where a Group company is the lessee



The Group leases office, manufacturing and warehouse space under various non-cancelable operating leases.



Certain contracts contain renewal options for various periods of time



The future costs for contracts exceeding one year and for non-cancelable
operating leasing contracts



|                 |  |                    |     |      |   |   
|---------------- |  | ------------------ | --- | ---- | - | --
|                 |  | As at December 31,
|                 |  | 2004               |     | 2003
|                 |  | (In millions)     
|Less than 1 year |  |                   | 23  |      |  | 24
|12 years        |  |                    | 22  |      |   | 19
|23 years        |  |                    | 14  |      |   | 16
|34 years        |  |                    | 12  |      |   | 12
|45 years        |  |                    | 10  |      |   | 9 
|Over 5 years     |  |                    | 24  |      |   | 9 
|                 |  |                    |     |      |   |   
|                 |  |                   | 105 |      |  | 89
|                 |  |                    |     |      |   |   



F-64



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Joint ventures



|                                                                              |  |                    |    |      |   |   
|----------------------------------------------------------------------------- |  | ------------------ | -- | ---- | - | --
|                                                                              |  | As at December 31,
|                                                                              |  | 2004               |    | 2003
|                                                                              |  | (In millions)     
|Proportionate interest in joint ventures commitments                         |  |                   | 42 |      |  | 42
|Contingent liabilities relating to the Groups interest in the joint ventures |  |                    | 11 |      |   | 11



Capital commitments at the
balance sheet date but not recognized in the financial statements; major commitments listed below



|                                     |  |            |      |                              |      |     |  |   |    
|------------------------------------ |  | ---------- | ---- | ---------------------------- | ---- | --- |  | - | ---
|                                     |  | Total cost |      | Commitment as atDecember 31,
|                                     |  |            | 2004 |                              | 2003
|Changshu paper machine project       |  |           | 390  |                              |     | 167 |  |  | 345
|New power plant, Shotton             |  |            | 60   |                              |      | 60  |  |   |   
|Tervasaari PM 8, additional capacity |  |            | 64   |                              |      | 51  |  |   |   
|New coater line, Raflatac, Fletcher  |  |            | 32   |                              |      | 29  |  |   |   
|New power plant, Rauma               |  |            | 20   |                              |      | 20  |  |   |   



|39. | FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
|--- | ------------------------------------------------------------------



Reconciliation of profit for 2003 and 2002



|                                                            |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|----------------------------------------------------------- |  | ---------------------- |  | -------- | ---------------------- |  | -------------------------- | - |  | -------- | - |  | ------- | - |  | -------------------------- | - |  | -------- | -
|                                                            |  | Year ended 31 December |  |          | Year ended 31 December | 
|                                                            |  | Note                   |  | FAS*2003 |                        |  | Effect oftransitionto IFRS |   |  | IFRS2003 |   |  | FAS2002 |   |  | Effect oftransitionto IFRS |   |  | IFRS2002 |  
|Sales                                                       |  | 1                      |  | 9,948    |                        |  | (161                       | ) |  | 9,787    |   |  | 10,475  |   |  | (58                        | ) |  | 10,417   |  
|Other operating income                                      |  | 2                      |  | 220      |                        |  | (162                       | ) |  | 58       |   |  | 155     |   |  | (64                        | ) |  | 91       |  
|Costs and expenses                                          |  | 3                      |  | (8,480   | )                      |  | 35                         |   |  | (8,445   | ) |  | (8,610  | ) |  | 30                         |   |  | (8,580   | )
|Share of results of associated companies                    |  | 4                      |  | 22       |                        |  | (22                        | ) |  |         |   |  | 60      |   |  | (60                        | ) |  |         |  
|Depreciation, amortization and impairment charges           |  | 5                      |  | (926     | )                      |  | (122                       | ) |  | (1,048   | ) |  | (1,018  | ) |  | (107                       | ) |  | (1,125   | )
|                                                            |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|Operating profit                                            |  |                        |  | 784      |                        |  | (432                       | ) |  | 352      |   |  | 1,062   |   |  | (259                       | ) |  | 803      |  
|                                                            |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|Share of results of associated companies and joint ventures |  | 4                      |  | 3        |                        |  | 26                         |   |  | 29       |   |  |        |   |  | 80                         |   |  | 80       |  
|Gains on available-for-sale investments, net                |  | 6                      |  |         |                        |  | 127                        |   |  | 127      |   |  |        |   |  | 72                         |   |  | 72       |  
|Finance costs, net                                          |  | 7                      |  | (228     | )                      |  | 158                        |   |  | (70      | ) |  | (273    | ) |  | 28                         |   |  | (245     | )
|                                                            |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|Profit before tax                                           |  |                        |  | 559      |                        |  | (121                       | ) |  | 438      |   |  | 789     |   |  | (79                        | ) |  | 710      |  
|                                                            |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|Income taxes                                                |  | 8                      |  | (193     | )                      |  | 72                         |   |  | (121     | ) |  | (241    | ) |  | 29                         |   |  | (212     | )
|                                                            |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|Profit after tax                                            |  |                        |  | 366      |                        |  | (49                        | ) |  | 317      |   |  | 548     |   |  | (50                        | ) |  | 498      |  
|                                                            |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|Minority interest                                           |  |                        |  | 2        |                        |  |                           |   |  | 2        |   |  | 2       |   |  |                           |   |  | 2        |  
|                                                            |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|Net profit for the period                                   |  |                        |  | 368      |                        |  | (49                        | ) |  | 319      |   |  | 550     |   |  | (50                        | ) |  | 500      |  
|                                                            |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|Earnings per share                                          |  |                        |  |          |                        |  |                            |   |  |          |   |  |         |   |  |                            |   |  |          |  
|Basic earnings per share,                                  |  |                        |  | 0.70     |                        |  | (0.09                      | ) |  | 0.61     |   |  | 1.06    |   |  | (0.10                      | ) |  | 0.96     |  
|Diluted earnings per share,                                |  |                        |  | 0.70     |                        |  | (0.09                      | ) |  | 0.61     |   |  | 1.05    |   |  | (0.09                      | ) |  | 0.96     |  

---

|* | As reported under Finnish Accounting Standards (FAS)
|- | ----------------------------------------------------



F-65



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Reconciliation of Balance sheet and Shareholders equity at 31.12.2003, 31.12.2002 and 1.1.2002



|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|------------------------------------------------------ |  | ---- |  | ------------- |  | -------------------------- | - |  | -------------- |  | ------------- |  | -------------------------- | - |  | ------------- |  | ------------- |  | -------------------------- | - |  | ------------
| million                                              |  | Note |  | FAS31.12.2003 |  | Effect oftransitionto IFRS |   |  | IFRS31.12.2003 |  | FAS31.12.2002 |  | Effect oftransitionto IFRS |   |  | IFRS31.122002 |  | FAS31.12.2001 |  | Effect oftransitionto IFRS |   |  | IFRS1.1.2002
|ASSETS                                                 |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Non-current assets                                     |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Goodwill                                               |  | 9    |  | 1,894         |  | (231                       | ) |  | 1,663          |  | 1,987         |  | (242                       | ) |  | 1,745         |  | 2,086         |  | (252                       | ) |  | 1,834       
|Other intangible assets                                |  | 10   |  | 348           |  | 174                        |   |  | 522            |  | 364           |  | 176                        |   |  | 540           |  | 339           |  | 205                        |   |  | 544         
|Property, plant and equipment                          |  | 11   |  | 7,846         |  | 279                        |   |  | 8,125          |  | 8,253         |  | 136                        |   |  | 8,389         |  | 8,934         |  | 220                        |   |  | 9,154       
|Investment property                                    |  | 12   |  |              |  | 42                         |   |  | 42             |  |              |  | 50                         |   |  | 50            |  |              |  | 36                         |   |  | 36          
|Biological assets                                      |  | 13   |  |              |  | 1,127                      |   |  | 1,127          |  |              |  | 1,129                      |   |  | 1,129         |  |              |  | 1,142                      |   |  | 1,142       
|Investments in associated companies and joint ventures |  | 14   |  | 929           |  | 83                         |   |  | 1,012          |  | 965           |  | 130                        |   |  | 1,095         |  | 935           |  | 144                        |   |  | 1,079       
|Available-for-sale investments                         |  | 15   |  | 392           |  | (39                        | ) |  | 353            |  | 405           |  | 141                        |   |  | 546           |  | 425           |  | 444                        |   |  | 869         
|Treasury shares                                        |  |      |  |              |  |                           |   |  |               |  |              |  |                           |   |  |              |  | 38            |  | (38                        | ) |  |            
|Non-current receivables                                |  | 16   |  | 77            |  | 167                        |   |  | 244            |  | 137           |  | 288                        |   |  | 425           |  | 117           |  | 62                         |   |  | 179         
|Deferred tax assets                                    |  | 17   |  |              |  | 403                        |   |  | 403            |  |              |  | 400                        |   |  | 400           |  |              |  | 424                        |   |  | 424         
|Other non-current assets                               |  |      |  |              |  | 18                         |   |  | 18             |  |              |  | 17                         |   |  | 17            |  |              |  | 39                         |   |  | 39          
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|                                                       |  |      |  | 11,486        |  | 2,023                      |   |  | 13,509         |  | 12,111        |  | 2,225                      |   |  | 14,336        |  | 12,874        |  | 2,426                      |   |  | 15,300      
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Current assets                                         |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Inventories                                            |  | 18   |  | 1,217         |  | (73                        | ) |  | 1,144          |  | 1,288         |  | (64                        | ) |  | 1,224         |  | 1,289         |  | (44                        | ) |  | 1,245       
|Trade and other receivables                            |  | 19   |  | 1,426         |  | 174                        |   |  | 1,600          |  | 1,550         |  | 65                         |   |  | 1,615         |  | 1,845         |  | (9                         | ) |  | 1,854       
|Cash and cash equivalents                              |  | 20   |  | 388           |  | (50                        | ) |  | 338            |  | 425           |  | 24                         |   |  | 449           |  | 423           |  | 97                         |   |  | 520         
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|                                                       |  |      |  | 3,031         |  | 51                         |   |  | 3,082          |  | 3,263         |  | 25                         |   |  | 3,288         |  | 3,557         |  | 62                         |   |  | 3,619       
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Total assets                                           |  |      |  | 14,517        |  | 2,074                      |   |  | 16,591         |  | 15,374        |  | 2,250                      |   |  | 17,624        |  | 16,431        |  | 2,488                      |   |  | 18,919      
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|EQUITY AND LIABILITIES                                 |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Capital and reserves                                   |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Share capital                                          |  |      |  | 890           |  |                           |   |  | 890            |  | 442           |  |                           |   |  | 442           |  | 442           |  |                           |   |  | 442         
|Share premium reserve                                  |  |      |  | 687           |  | 50                         |   |  | 737            |  | 654           |  | 50                         |   |  | 704           |  | 624           |  | 50                         |   |  | 674         
|Fair value and other reserves                          |  |      |  | 591           |  | (375                       | ) |  | 216            |  | 1,036         |  | (207                       | ) |  | 829           |  | 1,076         |  | 22                         |   |  | 1,098       
|Retained earnings                                      |  |      |  | 4,701         |  | 453                        |   |  | 5,154          |  | 4,788         |  | 441                        |   |  | 5,229         |  | 4,668         |  | 460                        |   |  | 5,128       
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|                                                       |  | 21   |  | 6,869         |  | 128                        |   |  | 6,997          |  | 6,920         |  | 284                        |   |  | 7,204         |  | 6,810         |  | 532                        |   |  | 7,342       
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Minority interest                                      |  |      |  | 32            |  |                           |   |  | 32             |  | 33            |  |                           |   |  | 33            |  | 28            |  |                           |   |  | 28          
|                                                       |  |      |  |               |  |                            |   |  |                | 
|Non-current liabilities                                |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Deferred tax liabilities                               |  | 22   |  | 644           |  | 935                        |   |  | 1,579          |  | 645           |  | 1,035                      |   |  | 1,680         |  | 666           |  | 1,195                      |   |  | 1,861       
|Retirement benefit obligations                         |  | 23   |  | 342           |  | 308                        |   |  | 650            |  | 339           |  | 321                        |   |  | 660           |  | 299           |  | 333                        |   |  | 632         
|Provisions                                             |  |      |  | 68            |  | 35                         |   |  | 103            |  | 111           |  | (7                         | ) |  | 104           |  | 114           |  | 11                         |   |  | 125         
|Interest-bearing liabilities                           |  | 24   |  | 4,241         |  | 670                        |   |  | 4,911          |  | 5,105         |  | 520                        |   |  | 5,625         |  | 4,898         |  | 265                        |   |  | 5,163       
|Other liabilities                                      |  | 24   |  | 33            |  | 46                         |   |  | 79             |  | 34            |  | 1                          |   |  | 35            |  | 15            |  | (9                         | ) |  | 6           
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|                                                       |  |      |  | 5,328         |  | 1,994                      |   |  | 7,322          |  | 6,234         |  | 1,870                      |   |  | 8,104         |  | 5,992         |  | 1,795                      |   |  | 7,787       
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Current liabilities                                    |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Current interest-bearing liabilities                   |  | 24   |  | 852           |  | 18                         |   |  | 870            |  | 784           |  | 42                         |   |  | 826           |  | 1,821         |  | 148                        |   |  | 1,969       
|Trade and other payables                               |  |      |  | 1,436         |  | (66                        | ) |  | 1,370          |  | 1,403         |  | 54                         |   |  | 1,457         |  | 1,780         |  | 13                         |   |  | 1,793       
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|                                                       |  |      |  | 2,288         |  | (48                        | ) |  | 2,240          |  | 2,187         |  | 96                         |   |  | 2,283         |  | 3,601         |  | 161                        |   |  | 3,762       
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Total liabilities                                      |  |      |  | 7,616         |  | 1,946                      |   |  | 9,562          |  | 8,421         |  | 1,966                      |   |  | 10,387        |  | 9,593         |  | 1,956                      |   |  | 11,549      
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             
|Total equity and liabilities                           |  |      |  | 14,517        |  | 2,074                      |   |  | 16,591         |  | 15,374        |  | 2,250                      |   |  | 17,624        |  | 16,431        |  | 2,488                      |   |  | 18,919      
|                                                       |  |      |  |               |  |                            |   |  |                |  |               |  |                            |   |  |               |  |               |  |                            |   |  |             



Notes and additional information to
the reconciliations



|1. | SALES
|-- | -----



Under IFRS the real estate sales are reclassified from sales to other operating income and to costs and expenses, decreasing FAS reported sales by approximately 45 million in both 2003 and 2002.



In addition the sales in 2003 are reduced under IFRS due the required
accounting treatment of cash flow hedging instruments, which did not qualify for special hedge accounting treatment under IFRS (refer to Footnote 1 in Note 7). These hedging results are reported in financial items in 2003 and 2002. The qualification
for hedge accounting according to IAS 39 were met for agreements



F-66



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



made in February 2003 or later. To the extent those hedges are effective, the changes in fair values are deferred in shareholders equity and will be
recorded in sales when the external sales take place.



|2. | OTHER OPERATING INCOME
|-- | ----------------------



Other operating income reported under IFRS is lower than as reported under FAS primarily because under FAS other operating income included gains on the
divestment of listed shares amounting to 167 million in 2003 and 81 million in 2002. Under IFRS these gains are reported as a separate line item beneath operating profit (refer to Note 6 below).



The reduction in other operating income reported under IFRS is partly offset
by the reclassification of real estate sales (refer to Note 1 above).



|3. | COSTS AND EXPENSES
|-- | ------------------



The decrease in costs and expenses is mainly due to required accounting treatment for sale and leaseback arrangements that under IFRS are determined to
result in a finance lease. Under IFRS rental payments amounting to approximately 20 million in both 2003 and 2002 in respect of such sale and leaseback arrangements have been reversed from costs and expenses reported under FAS and are divided
between the interest element which is recognised in financial items and the capital element which reduces the finance lease obligation under IFRS.



In costs and expenses are fair value gains from the changes in prices and physical change of living trees amounting to 56 million in 2003 (39
million in 2002). In addition, biological assets carried at their fair value of 43 million were harvested during 2003 (42 million during 2002) and these amounts are reflected as part of costs and expenses.



|4. | SHARE OF RESULT OF ASSOCIATED COMPANIES AND JOINT VENTURES
|-- | ----------------------------------------------------------



Under FAS the share of results of associated companies after tax has been included in operating profit. Under IFRS the share of results of associated
companies and joint ventures before taxes is reported after operating profit and the share of taxes of associated companies and joint ventures is reported in taxes.



|5. | DEPRECIATION, AMORTISATION AND IMPAIRMENT CHARGES
|-- | -------------------------------------------------



As referred to in Note 9, the retrospective application of IAS 22 to business combinations resulted in increases in the carrying values of property, plant
and equipment. Although this was partly offset by decreases in goodwill the relative differences in expected useful lives resulted in a net increase in depreciation and amortisation charges of 81 million in 2003 and 84 million in 2002.



In addition there was a further increase in depreciation
charges due to the capitalisation of interest amounting to 22 million in both 2003 and 2002.



|6. | GAINS ON AVAILABLE-FOR-SALE INVESTMENTS, NET
|-- | --------------------------------------------



In connection with the disposals of available-for-sale investments, fair value gains net of losses of 153 million in 2003 and 72 million in
2002 were realized.



In 2003 an impairment loss was recognised
on certain listed securities amounting to 26 million.



F-67



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|7. | FINANCE COSTS, NET
|-- | ------------------



|                                                                           |  |                        |   |  |                            |   |  |           |   |  |          |   |  |                            |   |  |           |  
|-------------------------------------------------------------------------- |  | ---------------------- | - |  | -------------------------- | - |  | --------- | - |  | -------- | - |  | -------------------------- | - |  | --------- | -
|                                                                           |  | Year ended 31 December |   |  | Year ended 31 December     |  
| million                                                                  |  | FAS 2003               |   |  | Effect oftransitionto IFRS |   |  | IFRS 2003 |   |  | FAS 2002 |   |  | Effect oftransitionto IFRS |   |  | IFRS 2002 |  
|Interest expenses                                                          |  | (219                   | ) |  | (16                        | ) |  | (235      | ) |  | (286     | ) |  | (21                        | ) |  | (307      | )
|Interest income                                                            |  | 16                     |   |  | 17                         |   |  | 33        |   |  | 25       |   |  |                           |   |  | 25        |  
|Dividend income                                                            |  | 18                     |   |  |                           |   |  | 18        |   |  | 21       |   |  |                           |   |  | 21        |  
|Exchange and fair value gains and losses1)                                 |  | (28                    | ) |  | 135                        |   |  | 107       |   |  | 2        |   |  | 23                         |   |  | 25        |  
|Gains and losses on sale of associated companies and joint ventures shares |  |                       |   |  | 19                         |   |  | 19        |   |  |         |   |  | 12                         |   |  | 12        |  
|Other financial income                                                     |  | 6                      |   |  |                           |   |  | 6         |   |  | 2        |   |  |                           |   |  | 2         |  
|Other financial expenses                                                   |  | (21                    | ) |  | 3                          |   |  | (18       | ) |  | (37      | ) |  | 14                         |   |  | (23       | )
|                                                                           |  |                        |   |  |                            |   |  |           |   |  |          |   |  |                            |   |  |           |  
|Total                                                                      |  | (228                   | ) |  | 158                        |   |  | (70       | ) |  | (273     | ) |  | 28                         |   |  | (245      | )
|                                                                           |  |                        |   |  |                            |   |  |           |   |  |          |   |  |                            |   |  |           |  

---

|1) | Under IFRS exchange and fair value gains and losses differ from FAS primarily because cash flow hedges not qualifying for special hedge accounting treatment have been transferred
from sales to finance costs.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | INCOME TAXES
|-- | ------------



The effective tax rate under IFRS is 27.6% in 2003 and 29.8% in 2002 and under FAS 34.5% in 2003 and 30.5% in 2002. Under FAS deferred taxes have not been
provided on unremitted earnings of associated companies and on certain purchase accounting differences which mainly explains the decrease in the effective tax rate under IFRS.



|9. | GOODWILL
|-- | --------



Goodwill has reduced on transition to IFRS primarily because under FAS goodwill has been determined as the difference between the purchase price and the book values of the net assets acquired, whereas under IFRS it is
a requirement to make certain purchase price adjustments such that assets and liabilities are recognized at their fair value at the date of acquisition. Such purchase price adjustments under IFRS have reduced goodwill by 309 million as at the
date of transition.



In addition, under FAS certain significant
business combinations were accounted for using the pooling of interest method. Under IFRS these business combinations were required to be accounted for as acquisitions using the purchase method. Accordingly under IFRS the amount by which the
purchase price exceeded the fair value of the identifiable assets and liabilities of those acquired businesses at the date of acquisition increased goodwill by 57 million as at the date of transition.



The reduction in the transition adjustments at the end of 2003 and 2002 is
due to amortisation.



|10. | OTHER INTANGIBLE ASSETS
|--- | -----------------------



As a result of the change in accounting treatment of certain business combinations (refer Note 9 above) certain other intangible assets, mainly related to
technology and patents, have been recognized.



|11. | PROPERTY, PLANT AND EQUIPMENT
|--- | -----------------------------



As a result of change in accounting treatment of certain business combinations (refer to Note 9 above) the carrying values of certain property, plant and
equipment were increased by 1,699 million at the end of 2003, 1,775 million at December 31, 2002 and 1,853 million at January 1, 2002.



Revaluations of timberlands recorded under FAS, 567 million at the end of 2003 and 2002 and at January 1, 2002, have been reversed.



F-68



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Living trees with a carrying value under IFRS of 1,209 million at the end of 2003, 1,207
million at December 31, 2002 and 1,224 million at January 1, 2002 were reclassified from property, plant and equipment to biological assets.



Other increases on transition to IFRS arise as a result of the capitalization of interest of property under construction and finance lease and sale
leaseback arrangements as well as reclassification of inventories (refer to Note 18).



|12. | INVESTMENT PROPERTY
|--- | -------------------



Under FAS real estate investments were classified as either inventories or as part of property, plant and equipment. Under IFRS such property has been
reclassified as investment property in accordance with IAS 40.



|13. | BIOLOGICAL ASSETS
|--- | -----------------



Biological assets (i.e. living trees) are initially recognized at cost which necessitated a reclassification of the carrying values of timberlands that in
accordance with FAS had previously been included as part of property, plant and equipment. In accordance with IAS 41 biological assets are carried at their fair value less estimated point-of-sale costs. At the end of 2003, the value of biological
assets was 1,093 million in Finland and 34 million in other countries.



|14. | INVESTMENTS IN ASSOCIATED COMPANIES AND JOINT VENTURES
|--- | ------------------------------------------------------



The carrying values of investments in associated companies and joint ventures differ between FAS and IFRS because although IFRS also requires that as at
the date of acquisition the investment should initially be recorded at cost, the difference between cost and the Groups share of the fair values of the net identifiable assets of the associated company is accounted for in accordance with IAS
22. Consequently there were certain increases in the fair values of net identifiable assets of associated companies and joint ventures as at the acquisition of the investment primarily related to certain energy assets of associated companies.



|15. | AVAILABLE-FOR-SALE INVESTMENTS
|--- | ------------------------------



The available-for-sale investments recognised under IFRS primarily consist of listed companies and other companies shares.



|16. | NON-CURRENT RECEIVABLES
|--- | -----------------------



The increase in non-current receivables is primarily due to derivative financial instruments that are measured at fair value and recognized on the balance
sheet. Most of the long-term derivative contracts are designated as hedging instruments in a fair value hedge relationship.



|17. | DEFERRED TAX ASSETS
|--- | -------------------



Under FAS deferred tax assets amounting to 306 million at the end of 2003, 320 million at December 31, 2002 and 371 million at January
1, 2002 were netted against deferred tax liabilities. Under IFRS, part of these deferred tax assets did not meet the criteria for offset as set out in IAS 12 and are consequently presented on a gross basis.



The remaining increase in deferred tax assets on transition to IFRS results
primarily from the recognition of deferred tax assets on temporary differences in respect of defined benefit pension liabilities (refer to Note 23 below).



|18. | INVENTORIES
|--- | -----------



As referred to in Note 12 above certain real estate holdings were accounted for as inventories under FAS. Under IFRS these real estate holdings have been reclassified as investment property, property, plant and
equipment and available-for-sale investments.



|19. | TRADE AND OTHER RECEIVABLES
|--- | ---------------------------



The increase in trade and other receivables is primarily due to short-term derivative financial instruments that are measured at fair value and recognized
on the balance sheet.



F-69



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|20. | CASH AND CASH EQUIVALENTS
|--- | -------------------------



Under FAS certain short-term deposits and bank overdrafts have been included in cash and cash equivalents. Under IFRS, short-term certificates of deposits
with original maturities of more than three months have been separated from cash and cash equivalents, and bank overdrafts which did not meet the criteria for offset have been reclassified as current interest-bearing liabilities.



|21. | CAPITAL AND RESERVES
|--- | --------------------



|                                               |  |              |   |  |                     |  |              |   |  |                    |   |  |                |   |  |                           |   |  |                  |   |  |       |  
|---------------------------------------------- |  | ------------ | - |  | ------------------- |  | ------------ | - |  | ------------------ | - |  | -------------- | - |  | ------------------------- | - |  | ---------------- | - |  | ----- | -
| million                                      |  | Sharecapital |   |  | Sharepremiumreserve |  | Legalreserve |   |  | Revaluationreserve |   |  | Treasuryshares |   |  | Fairvalueandotherreserves |   |  | Retainedearnings |   |  | Total |  
|Capital and reserves at 31 December 2001, FAS  |  | 442          |   |  | 624                 |  | 672          |   |  | 366                |   |  | 38             |   |  |                          |   |  | 4,668            |   |  | 6,810 |  
|Effect of transition to IFRS1)                 |  |             |   |  | 50                  |  | (672         | ) |  | (366               | ) |  | (38            | ) |  | 1,098                     |   |  | 460              |   |  | 532   |  
|Capital and reserves at 1 January 2002, IFRS   |  | 442          |   |  | 674                 |  |             |   |  |                   |   |  |               |   |  | 1,098                     |   |  | 5,128            |   |  | 7,342 |  
|Equity component of convertible bond loan      |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  | (30                       | ) |  |                 |   |  | (30   | )
|Convertible bond loan 1994                     |  | 2            |   |  | 28                  |  |             |   |  |                   |   |  |               |   |  |                          |   |  |                 |   |  | 30    |  
|Translation differences and other items        |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  | (43                       | ) |  | (11              | ) |  | (54   | )
|Cancellation of UPM-Kymmene Corporation shares |  | (2           | ) |  | 2                   |  |             |   |  |                   |   |  |               |   |  |                          |   |  |                 |   |  |      |  
|Cash flow hedges                               |  |              |   |  |                     |  |              |   |  |                    |   |  |                |   |  |                           |   |  |                  |   |  |       |  
|recorded in shareholders equity               |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  |                          |   |  |                 |   |  |      |  
|transferred to income statement                |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  | 12                        |   |  |                 |   |  | 12    |  
|Available-for-sale investments                 |  |              |   |  |                     |  |              |   |  |                    |   |  |                |   |  |                           |   |  |                  |   |  |       |  
|gains/losses arising from fair valuation       |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  | (208                      | ) |  |                 |   |  | (208  | )
|transferred to income statement                |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  |                          |   |  |                 |   |  |      |  
|Dividend paid                                  |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  |                          |   |  | (388             | ) |  | (388  | )
|Net profit for the period                      |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  |                          |   |  | 500              |   |  | 500   |  
|                                               |  |              |   |  |                     |  |              |   |  |                    |   |  |                |   |  |                           |   |  |                  |   |  |       |  
|Balance at 31 December 2002, IFRS              |  | 442          |   |  | 704                 |  |             |   |  |                   |   |  |               |   |  | 829                       |   |  | 5,229            |   |  | 7,204 |  
|                                               |  |              |   |  |                     |  |              |   |  |                    |   |  |                |   |  |                           |   |  |                  |   |  |       |  
|Share issue                                    |  | 445          |   |  |                    |  |             |   |  |                   |   |  |               |   |  | (445                      | ) |  |                 |   |  |      |  
|Convertible bond loan 1994                     |  | 3            |   |  | 33                  |  |             |   |  |                   |   |  |               |   |  | (36                       | ) |  |                 |   |  |      |  
|Translation differences and other items        |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  | (66                       | ) |  | (4               | ) |  | (70   | )
|Cash flow hedges                               |  |              |   |  |                     |  |              |   |  |                    |   |  |                |   |  |                           |   |  |                  |   |  |       |  
|recorded in shareholders equity               |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  | 32                        |   |  |                 |   |  | 32    |  
|transferred to income statement                |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  |                          |   |  |                 |   |  |      |  
|Available-for-sale investments                 |  |              |   |  |                     |  |              |   |  |                    |   |  |                |   |  |                           |   |  |                  |   |  |       |  
|gains/losses arising from fair valuation       |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  | 2                         |   |  |                 |   |  | 2     |  
|transferred to income statement                |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  | (100                      | ) |  |                 |   |  | (100  | )
|Dividend paid                                  |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  |                          |   |  | (390             | ) |  | (390  | )
|Net profit for the period                      |  |             |   |  |                    |  |             |   |  |                   |   |  |               |   |  |                          |   |  | 319              |   |  | 319   |  
|                                               |  |              |   |  |                     |  |              |   |  |                    |   |  |                |   |  |                           |   |  |                  |   |  |       |  
|Balance at 31 December 2003, IFRS              |  | 890          |   |  | 737                 |  |             |   |  |                   |   |  |               |   |  | 216                       |   |  | 5,154            |   |  | 6,997 |  
|                                               |  |              |   |  |                     |  |              |   |  |                    |   |  |                |   |  |                           |   |  |                  |   |  |       |  

---

|1) | The most significant items, net of taxes, in the difference of 532 million between shareholders equity under FAS and IFRS at the date of transition to IFRS on
January 1, 2002 are as follows: business combinations, excluding biological assets and available-for-sale shares, 595 million, fair valuation of biological assets net of revaluations of timberland reversed 152 million, other revaluations
(116) million, employee benefit obligations (202) million, capitalised finance leases (153) million, fair valuation of available-for-sale shares 307 million and other items (51) million.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|22. | DEFERRED TAX LIABILITIES
|--- | ------------------------



As stated in Note 17, certain deferred tax assets which were previously offset against deferred tax liabilities under FAS have been reclassified as
non-current assets and deferred tax liabilities have increased accordingly.



Restatement of business combinations (as further explained in Note 9) have resulted in the recognition of additional deferred tax liabilities of 719 million at December 31, 2003, 762 million at December
31, 2002 and 804 million at January 1, 2002 on transition to IFRS. The remaining change of deferred tax liabilities is due to the tax effect of other IFRS adjustments.



F-70



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|23. | RETIREMENT BENEFIT OBLIGATIONS
|--- | ------------------------------



Under FAS the retirement benefit obligations are generally recorded in accordance with local accounting practices in the countries in which employees are
provided with such benefits. On transition to IFRS additional retirement benefit obligations were recognized for certain defined benefit plans, especially in Finland. In accordance with IFRS 1, the Group elected to recognise all cumulative actuarial
gains and losses for all plans at the date of transition to IFRS.



|24. | INTEREST-BEARING AND OTHER LIABILITIES
|--- | --------------------------------------



The recognition under IFRS of certain finance lease obligations, primarily in respect of the sale and leaseback transactions referred to in Note 3 above,
increased interest bearing liabilities by 373 million at the end of 2003, 292 million at December 31, 2002 and 294 million at January 1, 2002.



As referred to in Note 20, bank overdrafts 46 million at the end of 2003, 74 million at December 31, 2002 and 146 million at January
1, 2002 were reclassified to current interest-bearing liabilities under IFRS.



Under IFRS derivative financial instruments are measured at fair value, which increased the long-term interest bearing liabilities reported under FAS by 87 million at the end of 2003, 46 million at
December 31, 2002 and 20 million at January 1, 2002 and long-term non-interest bearing liabilities reported under FAS by 59 million at the end of 2003, 11 million at December 31, 2002 and 1 million at January 1, 2002.



In addition, under IFRS most of the long-term borrowings are
designated as hedged items in a fair value hedge relationship and are subject to fair value adjustments of the hedged interest rate risk. The fair value adjustments amounted to 97 million at the end of 2003, 216 million at December 31,
2002 and 39 million at January 1, 2002.



Cash Flow Reconciliation



Under IFRS, the net cash provided by operating activities
was 1,258 million and 1,418 million, and, under FAS, 1,264 million and 1,429 million in 2003 and 2002, respectively. Under IFRS, the net cash used in investing activities was 373 million and 441 million, and under
FAS, 352 million and 441 million in 2003 and 2002, respectively. The cash flow differences are due to IFRS adjustments among operating, investing and financing cash flows. Under IFRS, the net cash used in financing activities was
964 million and 1,032 million, and under FAS, 918 million and 997 million in 2003 and 2002, respectively. The difference is primarily due to classification of cash and cash equivalents.



|40. | SUMMARY OF DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



The Groups consolidated financial statements are prepared in
accordance with International Financial Reporting Standards (IFRS), which differs in certain respects from accounting principles generally accepted in the United States (U.S. GAAP). Such differences include methods for
measuring and presenting the amounts shown in the consolidated financial statements, as well as additional disclosures required by U.S. GAAP. The financial statements in accordance with U.S. GAAP have been restated for 2003. See note (40.I (j)) for
additional information relating to this restatement.



|I. | Reconciliation of Profit and Shareholders Equity
|-- | -------------------------------------------------



The following is a summary of the significant adjustments to profit and shareholders equity required when reconciling such amounts recorded in the
Groups consolidated financial statements under IFRS to the corresponding amounts in accordance with U.S. GAAP. The weighted average number of shares for 2002 has been restated to reflect the bonus issue as if it had occurred as of the
beginning of each period presented (see Note 27 of the consolidated financial statements).



F-71



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Reconciliation of Profit



|                                                                                                                                                    |  |                                               |         |   |                |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | -------------- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                                    |  | Year ended December 31,                       |        
|                                                                                                                                                    |  | 2004                                          |         |   | 2003(Restated) |   |         | 2002 | 
|                                                                                                                                                    |  | (In millions, except shareand per share data) |        
|Profit in accordance with IFRS                                                                                                                      |  |                                              | 1,008   |   |                |  | 319     |      |  |  | 500     |  
|U.S. GAAP adjustments:                                                                                                                              |  |                                               |         |   |                |   |         |      |  |   |         |  
|Business combinations, net (a)                                                                                                                      |  |                                               | (6      | ) |                |   | (7      | )    |  |   | (7      | )
|Reversal of goodwill amortization (b)                                                                                                               |  |                                               | 102     |   |                |   | 106     |      |  |   | 106     |  
|Finance lease (c)                                                                                                                                   |  |                                               | 3       |   |                |   | 3       |      |  |   |        |  
|Forest assets (d)                                                                                                                                   |  |                                               | (26     | ) |                |   | (14     | )    |  |   | (1      | )
|Available-for-sale investments (e)                                                                                                                  |  |                                               | (26     | ) |                |   |        |      |  |   |        |  
|Employee benefits (f)                                                                                                                               |  |                                               | (270    | ) |                |   | (28     | )    |  |   | 18      |  
|Derivative financial instruments (g)                                                                                                                |  |                                               |        |   |                |   | 12      |      |  |   | 25      |  
|Compensation cost (h)                                                                                                                               |  |                                               | (31     | ) |                |   | (2      | )    |  |   | 8       |  
|Change in estimates of the tax basis of acquired assets (i)                                                                                         |  |                                               | (284    | ) |                |   |        |      |  |   |        |  
|Share of results of associated companies (j)                                                                                                        |  |                                               | (6      | ) |                |   | 16      |      |  |   | 0       |  
|Deferred tax effect of U.S. GAAP adjustments                                                                                                        |  |                                               | 110     |   |                |   | 4       |      |  |   | (21     | )
|                                                                                                                                                    |  |                                               |         |   |                |   |         |      |  |   |         |  
|Net income in accordance with US GAAP before cumulative effect of change in accounting principle                                                    |  |                                               | 574     |   |                |   | 409     |      |  |   | 628     |  
|Out of which:                                                                                                                                       |  |                                               |         |   |                |   |         |      |  |   |         |  
|Income from continuing operations                                                                                                                   |  |                                               | 458     |   |                |   | 404     |      |  |   | 606     |  
|Income (loss) from discontinued operations, net of tax expense of 1 million, tax benefit of 1 million and tax expense of 8
million, respectively |  |                                               | 116     |   |                |   | 5       |      |  |   | 22      |  
|                                                                                                                                                    |  |                                               |         |   |                |   |         |      |  |   |         |  
|Net income in accordance with US GAAP before cumulative effect of change in accounting principle                                                    |  |                                               | 574     |   |                |   | 409     |      |  |   | 628     |  
|Cumulative effect of change in accounting principle, net of taxes of 26 million (j)                                                                |  |                                               |        |   |                |   | 64      |      |  |   |        |  
|Net income in accordance with U.S. GAAP                                                                                                             |  |                                              | 574     |   |                |  | 473     |      |  |  | 628     |  
|                                                                                                                                                    |  |                                               |         |   |                |   |         |      |  |   |         |  
|Earnings per share in accordance with U.S. GAAP: (k)                                                                                                |  |                                               |         |   |                |   |         |      |  |   |         |  
|Basic earnings per share                                                                                                                            |  |                                              | 1.10    |   |                |  | 0.90    |      |  |  | 1.21    |  
|Income from continuing operations                                                                                                                   |  |                                               | 0.88    |   |                |   | 0.77    |      |  |   | 1.17    |  
|Income from discontinued operations                                                                                                                 |  |                                               | 0.22    |   |                |   | 0.01    |      |  |   | 0.04    |  
|Cumulative effect of change in accounting principle (j)                                                                                             |  |                                               |        |   |                |   | 0.12    |      |  |   |        |  
|Diluted earnings per share                                                                                                                          |  |                                               | 1.09    |   |                |   | 0.90    |      |  |   | 1.20    |  
|Income from continuing operations                                                                                                                   |  |                                               | 0.87    |   |                |   | 0.77    |      |  |   | 1.16    |  
|Income from discontinued operations                                                                                                                 |  |                                               | 0.22    |   |                |   | 0.01    |      |  |   | 0.04    |  
|Cumulative effect of change in accounting principle                                                                                                 |  |                                               |        |   |                |   | 0.12    |      |  |   |        |  
|Basic weighted average number of shares (thousands)                                                                                                 |  |                                               | 523,641 |   |                |   | 523,130 |      |  |   | 518,935 |  
|Diluted weighted average number of shares (thousands)                                                                                               |  |                                               | 526,247 |   |                |   | 524,254 |      |  |   | 525,782 |  



F-72



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Reconciliation of Shareholders Equity



|                                                             |  |                    |       |   |                |   |       |  
|------------------------------------------------------------ |  | ------------------ | ----- | - | -------------- | - | ----- | -
|                                                             |  | As of December 31, |      
|                                                             |  | 2004               |       |   | 2003(Restated) |  
|                                                             |  | (In millions)      |      
|Shareholders equity in accordance with IFRS (2004 restated) |  |                   | 7,636 |   |                |  | 6,997 |  
|U.S. GAAP adjustments:                                       |  |                    |       |   |                |   |       |  
|Business combinations, net (a)                               |  |                    | (70   | ) |                |   | (55   | )
|Reversal of goodwill amortization (b)                        |  |                    | 318   |   |                |   | 216   |  
|Finance lease (c)                                            |  |                    | 6     |   |                |   | 3     |  
|Forest assets (d)                                            |  |                    | (37   | ) |                |   | (11   | )
|Employee benefits (f)                                        |  |                    | (283  | ) |                |   | 3     |  
|Compensation cost (h)                                        |  |                    | 2     |   |                |   | 1     |  
|Change in estimates of the tax basis of acquired assets (i)  |  |                    | (284  | ) |                |   |      |  
|Share of results of associated companies (j)                 |  |                    | 100   |   |                |   | 106   |  
|Deferred tax effect of U.S. GAAP adjustments                 |  |                    | 88    |   |                |   | (22   | )
|                                                             |  |                    |       |   |                |   |       |  
|Shareholders equity in accordance with U.S. GAAP            |  |                   | 7,476 |   |                |  | 7,238 |  
|                                                             |  |                    |       |   |                |   |       |  



|(a) | Business Combinations
|--- | ---------------------



Cost of Acquisition



Under IFRS, equity shares issued as purchase consideration in a business combination are valued based on the weighted average trading price of the shares
shortly before and after the date of the exchange transaction, which is the date when the Group obtains control over the aquirees net assets and operations.



Under U.S. GAAP, such equity shares are valued based on the average share price shortly before and after the acquisition is
publicly announced.



Intangible Assets



Under IFRS, customer relationships are not separately recognized at
acquisition but are included within goodwill and amortized accordingly.



Under U.S. GAAP, customer relationships are fair valued at acquisition and recognized within intangible rights separately from goodwill, and amortized accordingly.



Restructuring provisions



Under IFRS, certain indemnities to be paid to collaboration partners in connection with the termination of sales agreements of acquired businesses were
expensed as incurred, as they did not meet the criteria for recognizing a provision at acquisition.



Under U.S. GAAP, these costs met the required criteria for pre-acquisition accounting and the Group recognized a liability in the purchase price
allocation of the acquisition cost and adjust the goodwill accordingly.



Translation of Goodwill



Under IFRS, the Group
records goodwill arising on the acquisition of foreign subsidiaries at the corporate level based on historical foreign exchange rates prevailing at the acquisition date.



F-73



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Under U.S. GAAP, goodwill is pushed down to the subsidiary and maintained in the original foreign
currency. At each balance sheet date, the goodwill is translated at the closing foreign exchange rate, with gains and losses recorded as a component of shareholders equity.



The total impact of all business combinations adjustments on the reconciliations of net income and shareholders
equity to U.S. GAAP is summarized below:



|                                             |  |                         |      |   |      |   |     |      |  |   |     |  
|-------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | --- | ---- |  | - | --- | -
|                                             |  | Year ended December 31, |     
|                                             |  | 2004                    |      |   | 2003 |   |     | 2002 | 
|                                             |  | (In millions)           |     
|Net income                                   |  |                         |      |   |      |   |     |      |  |   |     |  
|Amortization of intangible assets            |  |                        | (10  | ) |      |  | (11 | )    |  |  | (10 | )
|Depreciation of property, plan and equipment |  |                         |     |   |      |   |    |      |  |   | (1  | )
|Deferred taxes                               |  |                         | 4    |   |      |   | 4   |      |  |   | 4   |  
|                                             |  |                         |      |   |      |   |     |      |  |   |     |  
|Total                                        |  |                        | (6   | ) |      |  | (7  | )    |  |  | (7  | )
|                                             |  |                         |      |   |      |   |     |      |  |   |     |  
|Shareholders equity                         |  |                         |      |   |      |   |     |      |  |   |     |  
|Goodwill                                     |  |                        | (106 | ) |      |  | (95 | )    |  |   |     |  
|Other intangible assets                      |  |                         | 85   |   |      |   | 95  |      |  |   |     |  
|Property, plant and equipment                |  |                         | (26  | ) |      |   | (27 | )    |  |   |     |  
|Deferred tax liabilities                     |  |                         | (23  | ) |      |   | (28 | )    |  |   |     |  
|                                             |  |                         |      |   |      |   |     |      |  |   |     |  
|Total                                        |  |                        | (70  | ) |      |  | (55 | )    |  |   |     |  
|                                             |  |                         |      |   |      |   |     |      |  |   |     |  



|(b) | Reversal of Goodwill Amortization
|--- | ---------------------------------



Under IFRS, goodwill is amortized over its estimated useful life. Under U.S. GAAP, prior to 2002, goodwill was amortized over its useful life with the
exception of goodwill arising on acquisitions made after June 30, 2001, which was not amortized as required by the transition provisions of SFAS No. 141, Business Combinations (FAS 141). Further, effective January 1, 2002, in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets (FAS 142), the Group discontinued amortization of goodwill. As a result, the goodwill amortization recorded under IFRS is reversed under U.S. GAAP.



|(c) | Finance Lease
|--- | -------------



UPM entered into a lease arrangement for the financing of certain equipment for a power plant in Finland. Under IFRS, the arrangement is accounted for as
a finance lease as of the date the construction started in 2003, interest expense has been recognized in the income statement on the finance lease liability through the end of the contractual lease term, which starts in 2005.



Under U.S. GAAP, UPM is considered the owner of the leased assets during the
construction period and the equipment is accounted for as an asset and a lease liability with the interest expense recognized for IFRS reversed during the construction period. At the beginning of the lease term in 2005, the leased equipment is
considered to be sold and leased back. Due to the Groups continuing involvement with the equipment, the lease will be classified as a financing lease.



|(d) | Forest Assets
|--- | -------------



Under IFRS, biological assets (i.e., living trees) are measured at their fair value less estimated point-of-sale costs. The fair value of biological
assets, other than young seedling stands, is based on discounted cash flows from continuous operations. The fair value of young seedling stands is based on the actual reforestation cost of those stands. The land on which the trees grow is recorded
at cost. Periodic changes resulting from growth, felling, prices, costs and other premise changes are included in the operating profit in the profit and loss statement.



For purposes of U.S. GAAP, forest assets are recorded at the lower of cost or estimated market value. Cost includes all
expenditures incurred upon acquisition of the forests (excluding land costs) plus reforestation and forestry development costs less



F-74



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



depletions. Revaluations are not allowed under U.S. GAAP. As a result, the fair market values recorded under IFRS are reversed under US GAAP. Capitalized
costs related to forest assets harvested each year are taken to the profit and loss account as depletions.



Under U.S. GAAP, capitalized reforestation costs were 16 million, 15 million and 15 million and depletion of forest assets was 12
million, 9 million and 9 million during the years ended December 31, 2004, 2003 and 2002, respectively.



|(e) | Available-For-Sale Investments
|--- | ------------------------------



Under both IFRS and U.S. GAAP, the Group recorded an impairment loss of 26 million in 2003 for an available-for-sale investment with a significant
and prolonged decline in the fair value that was considered to be other than temporary. In 2004, under IFRS, the impairment loss was reversed through the income statement resulting in a gain of 26 million.



Under U.S. GAAP, in 2004, the subsequent increase in the fair value of the
available-for sale investments is included entirely as a separate component of shareholders equity (other comprehensive income) resulting in an adjustment of 26 million in the determination of the net income under U.S. GAAP.



Available-for-sale investments in accordance with U.S. GAAP are summarized
as follows:



|                  |  |               |     |                             |   |                              |  |             |   |  |   |    
|----------------- |  | ------------- | --- | --------------------------- | - | ---------------------------- |  | ----------- | - |  | - | ---
|                  |  | U.S. GAAPcost |     | Grossunrealizedholdinggains |   | Grossunrealizedholdinglosses |  | MarketValue
|                  |  |               |     | (In millions)               |   |                             
|December 31, 2004 |  |              | 326 |                             |  | 40                           |  |            |  |  |  | 366
|December 31, 2003 |  |               | 353 |                             |   |                             |  |             |  |  |   | 353



Proceeds from sales of
available-for-sale investments were 38 million, 181 million and 83 million during the years ended December 31, 2004, 2003 and 2002, respectively. Gross gains of 1 million, 150 million and 73 million and gross
losses of nil million, 1 million, and nil million were realized on those sales during the years ended December 31, 2004, 2003 and 2002 respectively.



|(f) | Employee Benefits
|--- | -----------------



Under IFRS and U.S. GAAP, pension expense is based upon a specified methodology that includes a designated actuarial approach and reflects the concept of
accrual accounting. Under U.S. GAAP, pension expense is recorded on a full accrual basis and reflected in the statement of profit and loss over the working lives of the employees provided with such benefits. The economic and demographic assumptions
used in calculating pension expense are required to be reviewed and updated periodically to the extent that local market economic conditions and demographics change. Furthermore, under U.S. GAAP, an additional minimum pension liability is recorded
for plans where the accumulated benefit obligation exceeds the fair value of the plan assets. For these plans, an intangible asset is recorded up to the extent of unrecognized past service costs. The balance is recorded as a separate component of
shareholders equity (other comprehensive income), net of applicable income taxes. Under U.S. GAAP, the Group has estimated the effect on net income and shareholders equity assuming the application of Statement of Financial Accounting
Standards (SFAS) No. 87: Employers Accounting for Pensions as of January 1, 1994. (The adoption of SFAS No. 87 on the actual effective date of January 1, 1989 was not feasible). As of January 1, 1994, an unrecognized
transition obligation was recorded and is being amortized over the then average future working lifetime of employee participants commencing January 1, 1989, with appropriate adjustments for business combinations subsequent to 1988.



The Group uses a December 31 measurement date for its pension and other
post-retirement benefit plans.



Following changes in the
Finnish TEL scheme, under IFRS, the disability pensions arranged with insurance companies will change from a defined benefit to a defined contribution plan beginning from January 1, 2006 as the insurance premiums paid to insurance companies are the
funding mechanism for the liability. As the change was enacted in 2004, the Companys pension liability decreased by 246 million in 2004. IFRS provides that the use of insurance premiums to fund benefits should be accounted for using
defined contribution accounting so long as the company retains no ongoing legal or constructive obligations, under any circumstances.



F-75



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



U.S. GAAP does not contain a similar provision to IFRS regarding insurance premiums. The costs and
benefits are determined without regard to how an employer finances the plan. The reconciling adjustment is a reversal of the reduction of the pension liability recorded as an income under IFRS as the defined benefit accounting remains for U.S. GAAP.



Net periodic benefit cost in accordance with U.S. GAAP for the
years ended December 31, 2004, 2003 and 2002 is comprised of the following:



|                               |  |                              |     |   |                              |   |     |                              |  |   |         |   |  |          |     |   |         |   |    |   |  |   |     |  
|------------------------------ |  | ---------------------------- | --- | - | ---------------------------- | - | --- | ---------------------------- |  | - | ------- | - |  | -------- | --- | - | ------- | - | -- | - |  | - | --- | -
|                               |  | Year ended December 31, 2004 |     |   | Year ended December 31, 2003 |   |     | Year ended December 31, 2002 | 
|                               |  | Domestic                     |     |   | Foreign                      |   |     | Domestic                     |  |   | Foreign |   |  | Domestic |     |   | Foreign |  
|                               |  |                              |     |   |                              |   |     | (In millions)                |  |   |         |   |  |          |    
|Service cost                   |  |                             | 17  |   |                              |  | 19  |                              |  |  | 16      |   |  |         | 19  |   |         |  | 32 |   |  |  | 21  |  
|Interest cost                  |  |                              | 20  |   |                              |   | 42  |                              |  |   | 20      |   |  |          | 41  |   |         |   | 22 |   |  |   | 42  |  
|Expected return on plan assets |  |                              | (10 | ) |                              |   | (22 | )                            |  |   | (10     | ) |  |          | (23 | ) |         |   | (9 | ) |  |   | (33 | )
|Amortization                   |  |                              | (9  | ) |                              |   | 17  |                              |  |   | 5       |   |  |          | 2   |   |         |   | 7  |   |  |   | 2   |  
|FAS 88 events                  |  |                              |    |   |                              |   | 3   |                              |  |   |        |   |  |          | 16  |   |         |   |   |   |  |   | 1   |  
|                               |  |                              |     |   |                              |   |     |                              |  |   |         |   |  |          |     |   |         |   |    |   |  |   |     |  
|Net periodic benefit cost      |  |                             | 18  |   |                              |  | 59  |                              |  |  | 31      |   |  |         | 55  |   |         |  | 52 |   |  |  | 33  |  
|                               |  |                              |     |   |                              |   |     |                              |  |   |         |   |  |          |     |   |         |   |    |   |  |   |     |  



F-76



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                                                                                                                              |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---- | - | ----------------------- | - | ---- | -------- |  | - | ------- | - |  | - | ---- | -
|                                                                                                                                                                                              |  | As of December 31, 2004    |      |   | As of December 31, 2003 |  
|                                                                                                                                                                                              |  | Domestic                   |      |   | Foreign                 |   |      | Domestic |  |   | Foreign |  
|                                                                                                                                                                                              |  | (In million, except rates) |     
|Change in benefit obligation                                                                                                                                                                  |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Benefit obligation as of beginning of year                                                                                                                                                    |  |                           | 380  |   |                         |  | 783  |          |  |  | 367     |   |  |  | 761  |  
|Service cost                                                                                                                                                                                  |  |                            | 17   |   |                         |   | 19   |          |  |   | 16      |   |  |   | 19   |  
|Interest cost                                                                                                                                                                                 |  |                            | 20   |   |                         |   | 42   |          |  |   | 20      |   |  |   | 41   |  
|Employee contributions                                                                                                                                                                        |  |                            |     |   |                         |   | 4    |          |  |   |        |   |  |   | 4    |  
|FAS 88 events                                                                                                                                                                                 |  |                            |     |   |                         |   | (4   | )        |  |   |        |   |  |   | (64  | )
|Plan amendments                                                                                                                                                                               |  |                            | (27  | ) |                         |   | 1    |          |  |   |        |   |  |   | (9   | )
|Divestitures                                                                                                                                                                                  |  |                            |     |   |                         |   | (21  | )        |  |   |        |   |  |   |     |  
|Other adjustments                                                                                                                                                                             |  |                            | (3   | ) |                         |   |     |          |  |   | 3       |   |  |   | 39   |  
|Actuarial loss (gain)                                                                                                                                                                         |  |                            | (55  | ) |                         |   | 39   |          |  |   | (7      | ) |  |   | 52   |  
|Benefit paid                                                                                                                                                                                  |  |                            | (20  | ) |                         |   | (33  | )        |  |   | (19     | ) |  |   | (30  | )
|Foreign currency effect                                                                                                                                                                       |  |                            |     |   |                         |   | (9   | )        |  |   |        |   |  |   | (30  | )
|                                                                                                                                                                                              |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Benefit obligation as of end of year                                                                                                                                                          |  |                           | 312  |   |                         |  | 821  |          |  |  | 380     |   |  |  | 783  |  
|                                                                                                                                                                                              |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|                                                                                                                                                                                              |  |                            |      |  
|Change in fair value of plan assets                                                                                                                                                           |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Fair value of plan assets as of beginning of year                                                                                                                                             |  |                           | 182  |   |                         |  | 328  |          |  |  | 174     |   |  |  | 316  |  
|Actual return on plan assets                                                                                                                                                                  |  |                            | 8    |   |                         |   | 32   |          |  |   | 5       |   |  |   | 37   |  
|Employer contribution                                                                                                                                                                         |  |                            | 19   |   |                         |   | 34   |          |  |   | 18      |   |  |   | 50   |  
|Employee contributions                                                                                                                                                                        |  |                            |     |   |                         |   | 4    |          |  |   |        |   |  |   | 4    |  
|FAS 88 events                                                                                                                                                                                 |  |                            |     |   |                         |   | (1   | )        |  |   |        |   |  |   | (64  | )
|Divestitures                                                                                                                                                                                  |  |                            |     |   |                         |   | (18  | )        |  |   |        |   |  |   |     |  
|Other adjustments                                                                                                                                                                             |  |                            | (3   | ) |                         |   |     |          |  |   | 4       |   |  |   | 35   |  
|Benefits paid                                                                                                                                                                                 |  |                            | (20  | ) |                         |   | (33  | )        |  |   | (19     | ) |  |   | (30  | )
|Foreign currency effect                                                                                                                                                                       |  |                            |     |   |                         |   | (9   | )        |  |   |        |   |  |   | (20  | )
|                                                                                                                                                                                              |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Fair value of plan assets as of end of the year                                                                                                                                               |  |                           | 186  |   |                         |  | 337  |          |  |  | 182     |   |  |  | 328  |  
|                                                                                                                                                                                              |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|                                                                                                                                                                                              |  |                            |      |  
|Funded status                                                                                                                                                                                 |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Funded status as of end of year                                                                                                                                                               |  |                           | (126 | ) |                         |  | (484 | )        |  |  | (198    | ) |  |  | (455 | )
|Unrecognized transition obligation                                                                                                                                                            |  |                            |     |   |                         |   | 1    |          |  |   |        |   |  |   | 2    |  
|Unrecognized prior service cost                                                                                                                                                               |  |                            | (81  | ) |                         |   |     |          |  |   | (62     | ) |  |   | (2   | )
|Unrecognized actuarial loss (gain)                                                                                                                                                            |  |                            | (16  | ) |                         |   | 169  |          |  |   | 37      |   |  |   | 166  |  
|                                                                                                                                                                                              |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Accrued benefit cost                                                                                                                                                                          |  |                           | (223 | ) |                         |  | (314 | )        |  |  | (223    | ) |  |  | (289 | )
|                                                                                                                                                                                              |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|                                                                                                                                                                                              |  |                            |      |  
|Amounts recognized in the consolidated balance sheet                                                                                                                                          |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Accrued benefit liability                                                                                                                                                                     |  |                           | (298 | ) |                         |  | (425 | )        |  |  | (298    | ) |  |  | (387 | )
|Prepaid benefit cost                                                                                                                                                                          |  |                            | 75   |   |                         |   |     |          |  |   | 75      |   |  |   |     |  
|Intangible assets                                                                                                                                                                             |  |                            |     |   |                         |   | 1    |          |  |   |        |   |  |   | 1    |  
|Accumulated other comprehensive income                                                                                                                                                        |  |                            |     |   |                         |   | 110  |          |  |   |        |   |  |   | 97   |  
|                                                                                                                                                                                              |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Net amount recognized                                                                                                                                                                         |  |                           | (223 | ) |                         |  | (314 | )        |  |  | (223    | ) |  |  | (289 | )
|                                                                                                                                                                                              |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Accumulated benefit obligation, projected benefit obligation and fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets is as follows: |  |                            |      |   |                         |   |      |          |  |   |         |   |  |   |      |  
|Accumulated benefit obligation                                                                                                                                                                |  |                           | 104  |   |                         |  | 694  |          |  |  | 125     |   |  |  | 630  |  
|Projected benefit obligation                                                                                                                                                                  |  |                            | 144  |   |                         |   | 779  |          |  |   | 188     |   |  |   | 721  |  
|Fair value of plan asset                                                                                                                                                                      |  |                            |     |   |                         |   | 317  |          |  |   |        |   |  |   | 295  |  



F-77



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                                          |  |                            |   |  |                         |   |  |          |   |  |         |  
|--------------------------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ----------------------- | - |  | -------- | - |  | ------- | -
|                                                                                                          |  | As of December 31, 2004    |   |  | As of December 31, 2003 |  
|                                                                                                          |  | Domestic                   |   |  | Foreign                 |   |  | Domestic |   |  | Foreign |  
|                                                                                                          |  | (In million, except rates) |  
|Weighted average rate assumptions used in determining pension costs and the projected benefit obligation. |  |                            |   |  |                         |   |  |          |   |  |         |  
|Discount rate                                                                                             |  | 5.00                       | % |  | 5.27                    | % |  | 5.25     | % |  | 5.51    | %
|Expected rate of compensation increase                                                                    |  | 3.75                       | % |  | 2.94                    | % |  | 3.75     | % |  | 3.16    | %
|Expected return on plans assets                                                                           |  | 5.15                       | % |  | 7.01                    | % |  | 5.25     | % |  | 6.99    | %



For foreign plans, the
assumption for the weighted average expected return on plan assets is based on each asset class, long-term historical return, the target asset allocation of each Plan and a normal equity risk premium. For domestic plans, the assumption for the
weighted average expected return on plan assets is based on the target asset allocation. Domestic plan assets include 174 million and 167 million assets as at December 31, 2004 and 2003, respectively which are re-borrowed by the Group.



The borrowing rate is fixed to the Finnish statutory
employment pension scheme (TEL) interest rate, which was 5% in 2004. This rate fluctuates during the year, but in the long run the expected return of the domestic plan assets is considered to be at least 5%, which is the discount rate.



The above amounts for foreign pension plans include certain other
post-retirement benefits, which are not significant to the Group.



The accumulated benefit obligation for the domestic pension plans was 266 million and 299 million, and for the foreign pension plans 707 million and 658 million as of December 31, 2004 and December 31, 2003,
respectively.



For plans where the benefit obligation is in
excess of the plan assets, the aggregate benefit obligation is 947 million and 1,143 million for 2004 and 2003, respectively, and the aggregate fair value of plan assets is 317 million and 489 million for 2004 and 2003,
respectively.



The increase in the minimum liability included
in other comprehensive income for the foreign plans is 13 million and 14 million as of December 31, 2004 and 2003, respectively. No additional minimum liability has been recorded for the domestic plans.



Plan Assets



The Groups pension plan weighted average asset allocation at December 31, 2004 and 2003, by asset category, are as
follows:



|                  |  |                         |   |  |                         |   |  |          |   |  |         |  
|----------------- |  | ----------------------- | - |  | ----------------------- | - |  | -------- | - |  | ------- | -
|                  |  | As of December 31, 2004 |   |  | As of December 31, 2003 |  
|                  |  | Domestic                |   |  | Foreign                 |   |  | Domestic |   |  | Foreign |  
|Assets Category:  |  |                         |   |  |                         |   |  |          |   |  |         |  
|Equity securities |  | 0                       | % |  | 59                      | % |  | 0        | % |  | 56      | %
|Debt securities   |  | 89                      |   |  | 16                      |   |  | 89       |   |  | 16      |  
|Real estate       |  | 11                      |   |  | 4                       |   |  | 11       |   |  | 4       |  
|Money Market      |  | 0                       |   |  | 0                       |   |  | 0        |   |  | 1       |  
|Bonds             |  | 0                       |   |  | 21                      |   |  | 0        |   |  | 23      |  
|                  |  |                         |   |  |                         |   |  |          |   |  |         |  
|Total             |  | 100                     | % |  | 100                     | % |  | 100      | % |  | 100     | %
|                  |  |                         |   |  |                         |   |  |          |   |  |         |  



F-78



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The purpose of the investment policy is to ensure that the assets are invested at all times in a
prudent manner with regard to the nature of the liabilities of the Plans, appropriate investment return within an accepted risk level according to each plan, diversification measures conducive to the overall reduction risk in respect of each Plan,
and all other relevant factors in respect of each Plan. The long-term investment return of all assets is taken into account when assessing investment profitability. The weighted average target asset allocation is as follows:



|                  |  |          |   |  |         |  
|----------------- |  | -------- | - |  | ------- | -
|                  |  | Domestic |   |  | Foreign |  
|Assets Category:  |  |          |   |  |         |  
|Equity securities |  | 0        | % |  | 60      | %
|Debt securities   |  | 89       |   |  | 15      |  
|Real estate       |  | 11       |   |  | 5       |  
|Money Market      |  | 0        |   |  | 0       |  
|Bonds             |  | 0        |   |  | 20      |  
|                  |  |          |   |  |         |  
|Total             |  | 100      | % |  | 100     | %
|                  |  |          |   |  |         |  



Cash Flows



The Group expects to make contributions of 18 million to its domestic
pension plans and 37 million to its foreign plans in 2005.



The following estimated future benefits, which reflect expected future service, as appropriate, are expected to be paid:



|                |  |               |    |         |   |    
|--------------- |  | ------------- | -- | ------- | - | ---
|                |  | Domestic      |    | Foreign
|                |  | (In millions)
|2005            |  |              | 19 |         |  | 35 
|2006            |  |               | 18 |         |   | 33 
|2007            |  |               | 17 |         |   | 35 
|2008            |  |               | 17 |         |   | 37 
|2009            |  |               | 17 |         |   | 40 
|Years 2010-2014 |  |               | 76 |         |   | 222



Termination of Pension Plans



The Group is in the process of terminating most of its
defined benefit plans in the United States related to its Blandin operations. During 2003, the appropriate government approvals were obtained for the termination of the Blandin Hourly Plan and all of the assets in that plan were distributed in late
2003. On this basis, settlement accounting for U.S. GAAP was applied in 2003 for the Blandin Hourly Plan and, consequently, the acceleration of the recognition of unrecognized losses. The Blandin Salaried Plan is still in the process of being
terminated. The assets have not yet been distributed pending receipt of appropriate government approval. The Blandin Hourly and Salaried Plans include the following elements:



|                                                     |  |                         |     |   |      |   |     |  
|---------------------------------------------------- |  | ----------------------- | --- | - | ---- | - | --- | -
|                                                     |  | Year Ended December 31, |    
|                                                     |  | 2004                    |     |   | 2003 |  
|                                                     |  | (In millions)           |    
|Funded Status at end of year                         |  |                         |     |   |      |   |     |  
|Projected benefit obligation                         |  |                        | (33 | ) |      |  | (38 | )
|Accumulated benefit obligation                       |  |                         | (33 | ) |      |   | (38 | )
|Fair Value of plan assets                            |  |                         | 31  |   |      |   | 36  |  
|                                                     |  |                         |     |   |      |   |     |  
|(Unfunded) Funded Status                             |  |                        | (2  | ) |      |  | (2  | )
|                                                     |  |                         |     |   |      |   |     |  
|Amounts recognized in the consolidated balance sheet |  |                         |     |   |      |   |     |  
|(Unfunded) Funded Status                             |  |                        | (2  | ) |      |  | (2  | )
|Unrecognized net loss                                |  |                         | 21  |   |      |   | 23  |  
|Pre-paid benefit cost                                |  |                         | 19  |   |      |   | 21  |  
|Additional minimum liability                         |  |                         | (21 | ) |      |   | (23 | )
|                                                     |  |                         |     |   |      |   |     |  
|Net amount recognized                                |  |                        | (2  | ) |      |  | (2  | )
|                                                     |  |                         |     |   |      |   |     |  



F-79



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Under U.S. GAAP, at the date of the settlement, both the pension benefit obligation, based on the
cost of annuities, and plan assets must be remeasured at the fair value. The gain or loss resulting from the remeasurement (i.e., the increase or decrease in the pension benefit obligation and plan assets) is an actuarial gain or loss that is
included in unrecognized net gain or loss prior to effecting settlement accounting. The gain or loss on a settlement is recognized when the event of settlement occurs.



|(g) | Derivative Financial Instruments
|--- | --------------------------------



The Group uses forward exchange contracts to manage its foreign currency exposure that arises from forecasted future cash flows. Previously under Finnish
GAAP, the Group deferred gains and losses from these transactions. As of January 1, 2002, at the date of transition to IFRS, which was the date of the initial application of IAS 39, the Group deferred an unrealized hedging loss in equity as the
hedged forecasted transactions were expected to occur. The deferred hedging loss was realized in the income statement during 2002 when the forecasted transactions occurred.



Under U.S. GAAP on January 1, 2001, the Group adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133). As of December 31, 2001, the Group had not met the SFAS 133 cash flow hedge accounting criteria and recorded a loss in the determination of U.S. GAAP net income for those unrealized forward exchange contracts. As this loss
was recognized in 2002 in the IFRS income statement, the adjustment reverses the loss in 2002 as it was previously recognized in 2001 for U.S. GAAP.



The Group has met the cash-flow hedge accounting criteria both for IFRS and U.S. GAAP purposes for forecasted future currency flows since February 2003.
Since then the changes in the fair values of new forward exchange contracts designated as cash flow hedges are deferred in equity and recycled to profit and loss as the actual Group external sales take place.



Under IFRS, the Group has applied hedge accounting for all third party
forward contracts that the euro-functional consolidated parent company has entered into on behalf of the Canadian dollar-functional subsidiary. These forward exchange contracts are designated as cash flow hedges of forecasted future sales of the
Canadian subsidiary denominated in USD beginning in February 2003 and the unrealized gains and losses on the cash flow hedges are deferred in equity.



Under U.S. GAAP, these forward exchange contracts are not accounted for under hedge accounting as they are not hedges against the Groups functional
currency. The unrealized gains and losses of the forward exchange contracts have been included in the determination of net income for 2004 and 2003. The realized results for these hedging instruments for 2004 amounted to 7 million and have
been reclassified from sales to other income and expenses under U.S. GAAP (refer to paragraph (o)).



|(h) | Compensation Cost
|--- | -----------------



As described in the note 36 (Equity Compensation Benefits) of the consolidated financial statements, the Group has four classes of options; A, B, D and E
that are granted to the Groups key personnel.



F-80



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock option activity is as follows:



|                                |  |              |   |  |                               |  |                                        
|------------------------------- |  | ------------ | - |  | ----------------------------- |  | ---------------------------------------
|                                |  | StockOptions |   |  | WeightedAverageExercise Price |  | WeightedAverageRemainingContractualLife
|                                |  | (Number)     |   |  | (In currency)                 |  | (Months)                               
|Balance on December 31, 2001    |  | 3,870,000    |   |  | 14.38                         |  | 40                                     
|Granted                         |  | 3,738,500    |   |  | 21.95                         |  |                                        
|Forfeited                       |  | (26,500      | ) |  | 14.87                         |  |                                        
|                                |  |              |   |  |                               |  |                                        
|Balance on December 31, 2002    |  | 7,582,000    |   |  | 18.46                         |  | 40                                     
|Granted                         |  | 3,591,000    |   |  | 14.40                         |  |                                        
|Forfeited                       |  | (101,300     | ) |  | 21.20                         |  |                                        
|                                |  |              |   |  |                               |  |                                        
|Balance on December 31, 2003    |  | 11,071,700   |   |  | 16.55                         |  | 36                                     
|Granted                         |  | 330,200      |   |  | 13.52                         |  |                                        
|Forfeited                       |  | (174,200     | ) |  | 16.24                         |  |                                        
|Exercised                       |  | (435,671     | ) |  | 11.42                         |  |                                        
|                                |  |              |   |  |                               |  |                                        
|Balance on December 31, 2004(1) |  | 10,792,029   |   |  | 16.16                         |  | 29                                     
|                                |  |              |   |  |                               |  |                                        

---

|(1) | As of December 31, 2004, 1,998,100 stock options with a weighted average exercise price of 12.01 had been traded on the Helsinki Stock Exchange (2003: 1,036,000, weighted
average exercise price of 12.74) and remained unexercised.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under IFRS, the Group does not recognize compensation expense for stock options granted. Under U.S. GAAP, compensation expense associated with stock options granted, in consideration for employee services received, is
recognized based on the difference between the quoted market price of the companys shares at the end of each reporting period and the current exercise price of each stock option, until the earlier of the exercise date and the date of sale on
the Helsinki Stock Exchange if applicable. Changes in the quoted market price are reflected as an adjustment to deferred compensation and compensation expense in the periods in which the changes occur until the final exercise price is known.
Following the recognition provisions of Accounting Principles Board Opinion No. 25: Accounting for Stock Issued to Employees, compensation cost recognized under U.S. GAAP was 32 million and 3 million for the years ended December
31, 2004 and 2003, respectively, and compensation income was 8 million for 2002.



Under IFRS, the Group assesses at each balance sheet date the amount of social security provisions for the share options. The provision is based on the amount that the Group would be liable to pay for the granted
options if the options were sold or exercised by the employees. The provision is calculated based on the value of the options, which is the difference between the market price of a share and the exercise prices of the options. Under U.S. GAAP the
social security costs are expensed as the options are sold or exercised. This results in an adjustment of 1 million, 1 million and nil for the three years ended December 31, 2004, 2003 and 2002, respectively.



F-81



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During 2004, 2003 and 2002, if the Group had determined compensation expense based on the fair value
at the grant date for its stock options under FAS 123, the Groups earnings would have been increased or decreased to the pro forma amount indicated below (inclusive of tax effects):



|                   |  |                                      |      |                |   |      |  |   |     
|------------------ |  | ------------------------------------ | ---- | -------------- | - | ---- |  | - | ----
|                   |  | 2004                                 |      | 2003(Restated) |   | 2002
|                   |  | (In millions, except per share data)
|Net income         |  |                                      |      |                |   |      |  |   |     
|As reported        |  |                                     | 574  |                |  | 473  |  |  | 628 
|Pro forma          |  |                                      | 587  |                |   | 442  |  |   | 603 
|Earnings per share |  |                                      |      |                |   |      |  |   |     
|As reported:       |  |                                      |      |                |   |      |  |   |     
|Basic              |  |                                      | 1.10 |                |   | 0.90 |  |   | 1.21
|Diluted            |  |                                      | 1.09 |                |   | 0.90 |  |   | 1.20
|Pro forma:         |  |                                      |      |                |   |      |  |   |     
|Basic              |  |                                      | 1.12 |                |   | 0.84 |  |   | 1.16
|Diluted            |  |                                      | 1.12 |                |   | 0.84 |  |   | 1.15



For this purpose, the
fair value of the stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model under the minimum value method with the following weighted-average assumptions:



|                        |  |      |   |  |      |   |  |      |  
|----------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                        |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Risk Free interest rate |  | 3.28 | % |  | 2.31 | % |  | 4.59 | %
|Expected dividend yield |  | 0    | % |  | 0    | % |  | 0    | %
|Expected volatility     |  | 32   | % |  | 33   | % |  | 37   | %
|Expected life (years)   |  | 4    |   |  | 3    |   |  | 4    |  



The weighted average
fair value of stock options granted was 5.93 in 2004, 2.48 in 2003 and 6.98 in 2002. The assumed forfeiture is 7.65% for the grants in 2004 and 0% for the grants in 2003 and 2002.



|(i) | Change in estimates of the tax basis of acquired assets
|--- | -------------------------------------------------------



In connection with the acquisition of Haindl in November 2001, a new tax basis was determined for acquired net assets located in Germany. As a result, a
portion of the total goodwill could be deductible for tax purposes. Prior to 2004, uncertainty of the tax treatment in Germany of the tax bases resulted in the Group recording a tax provision for the tax benefit taken for the acquired net assets and
tax deductible portion of the goodwill. In 2004, the uncertainty regarding the tax treatment was removed and, under IFRS, the Group has recorded 284 million as a reduction of the deferred tax liability and a corresponding release of the tax
provision.



Under U.S. GAAP, goodwill was reduced with a
corresponding release of the tax provisions for the acquired net assets and the tax deductible portion of goodwill. As of 31 December 2004, tax deductible goodwill amounted to 440 million and the related deferred tax liability amounted to
34 million.



|(j) | Share of results of associated companies
|--- | ----------------------------------------



The Groups share of results in associated companies is determined using the equity method and is based on the financial statements of the investees
prepared in accordance with IFRS. The U.S. GAAP share of results of associated companies is adjusted to reflect differences between IFRS and U.S. GAAP relating to the associates.



The disability pensions of Finnish associated companies have been accounted for using defined benefit accounting under IFRS
while under U.S. GAAP defined benefit accounting is applied. See note (f) Employee benefits.



The Groups associated company, Pohjolan Voima Oy (PVO), holds an equity investment in Teollisuuden Voima Oy (TVO), which owns and operates nuclear power plants in Olkiluoto, Finland. The
operation of a nuclear power plant involves potential costs and liabilities related to the decommissioning and dismantling of the nuclear power plant and the storage and disposal of spent fuel, and is governed by international, European Union and
local nuclear regulatory regimes. Pursuant to the Finnish Nuclear Liability Act, the operator of a nuclear facility is strictly liable for damage resulting from a nuclear incident at the operators installation or occurring in the course of
transporting nuclear fuels. Shareholders of power companies that own and operate nuclear power plants are not subject to liability under the Nuclear Liability Act. In Finland, the future costs of conditioning, storage and final



F-82



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



disposal of spent fuel, management of low and intermediate level radioactive waste and nuclear power plant decommissioning are the responsibility of the
operator. Reimbursements of the operators costs related to decommissioning and dismantling of the power plant and storage and disposal of spent fuel are provided for by state-established funds funded by annual contributions from nuclear power
plant operators.



Under IFRS, the Group recognizes the equity
impact of accounting for the liability related to the nuclear power plants at TVO, capitalizing that cost as an asset to be depreciated over the remaining life of the nuclear power plants, and capitalizing the contributions paid to the
state-established fund up to the amount of the liability. The remaining contributions and changes in fair value of the fund, over the amount of the liability, are recorded to the income statement.



Under U.S. GAAP, prior to the adoption of FAS 143, Accounting for Asset
Retirement Obligations (FAS 143), the Group has recorded the equity impact of TVO accounting for the contributions paid to the state-established funds capitalized as a fund asset, of the value of the fund asset adjusted for
realized and unrealized changes in value, and of the total estimated liability accumulated ratably over the life of the nuclear power plant.



As of 1 January 2003, the Group should have changed their method of accounting for asset retirement obligations and should have recorded the equity impact
of adopting FAS 143 in accounting for the TVOs nuclear power plants. The 2003 accounts have been restated to reflect the Groups equity impact for the cumulative effect of the change in accounting principle upon adoption of FAS 143 of
64 million, net of taxes, and the impact of recording the 2003 activity of 11 million, net of taxes, (0.02 additional income per basic and diluted earnings per share) for a total adjustment of 75 million, net of taxes,
(0.14 additional income per basic and diluted earnings per share).



Upon adoption of FAS 143, the Group recorded the equity impact of TVO accounting for the liability for the asset retirement obligations adjusted for the cumulative accretion as of the adoption date, those costs
capitalized as an increase to the carrying amount of the nuclear power plant, to be depreciated over the life of the nuclear power plant, and the accumulated depreciation on that asset retirement cost.



The following table presents the pro forma effects of the application of FAS
143 as if the statement had been applied by PVO and TVO effective December 31, 2002:



|                                                     |  |            
|---------------------------------------------------- |  | -----------
|                                                     |  | 2002       
|                                                     |  | (pro forma)
|Reported income before adopting FAS 143              |  | 628        
|Earnings effect of adopting FAS 143                  |  | 5          
|                                                     |  |            
|Pro forma net income                                 |  | 633        
|                                                     |  |            
|Pro forma basic earnings per share under U.S. GAAP   |  | 1.22       
|                                                     |  |            
|Pro forma diluted earnings per share under U.S. GAAP |  | 1.20       
|                                                     |  |            



Subsequent to the
adoption of FAS 143, the reconciling adjustment represents differences related to the discount rate applied and the treatment of the fund asset.



F-83



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(k) | Earnings per Share
|--- | ------------------



In accordance with both IFRS and U.S. GAAP, basic EPS is computed by dividing income available to common shareholders by the weighted average number of
common shares outstanding for the year. The computation of diluted EPS is similar to basic EPS, except that it assumes the potentially dilutive securities, such as convertible bonds, were converted to shares as of the beginning of the year. The EPS
calculations for 2002 have been restated to reflect the bonus issue as if it had occurred as of the beginning of the period (see Note 27). EPS has been calculated on a U.S. GAAP basis for the years ended December 31, 2004, 2003 and 2002 as follows:



|                                                                                                   |  |                                      |         |              |   |         |  |   |        
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | ------------ | - | ------- |  | - | -------
|                                                                                                   |  | Year Ended December 31,             
|                                                                                                   |  | 2004                                 |         | 2003Restated |   | 2002   
|                                                                                                   |  | (In millions, except per share data)
|Numerator for basic EPS  income available to common shareholders                                  |  |                                     | 574     |              |  | 473     |  |  | 628    
|Effect of dilutive securities:                                                                     |  |                                      |         |              |   |         |  |   |        
|Convertible bond loan                                                                              |  |                                      |        |              |   |        |  |   | 2      
|Numerator for diluted EPS  income available to common shareholders after assumed conversions      |  |                                      | 574     |              |   | 473     |  |   | 630    
|Denominator for basic EPS  weighted average shares (thousands)                                    |  |                                      | 523,641 |              |   | 523,130 |  |   | 518,935
|Effect of dilutive securities (thousands):                                                         |  |                                      |         |              |   |         |  |   |        
|Convertible bond loan                                                                              |  |                                      |        |              |   | 449     |  |   | 4,980  
|Share stock options                                                                                |  |                                      | 2,606   |              |   | 675     |  |   | 1,867  
|Denominator for diluted EPS  adjusted weighted average shares and assumed conversions (thousands) |  |                                      | 526,247 |              |   | 524,254 |  |   | 525,782
|EPS:                                                                                               |  |                                      |         |              |   |         |  |   |        
|Basic                                                                                              |  |                                      | 1.10    |              |   | 0.90    |  |   | 1.21   
|Diluted                                                                                            |  |                                      | 1.09    |              |   | 0.90    |  |   | 1.20   



|(l) | Consolidated Statement of Comprehensive Income
|--- | ----------------------------------------------



Comprehensive income measured in accordance with U.S. GAAP for the years ended December 31, 2004, 2003 and 2002 is as follows:



|                                                                                                                               |  |                         |      |   |              |   |      |      |  |   |      |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ---- | - | ------------ | - | ---- | ---- |  | - | ---- | -
|                                                                                                                               |  | Year ended December 31, |     
|                                                                                                                               |  | 2004                    |      |   | 2003Restated |   |      | 2002 | 
|                                                                                                                               |  | (In millions)           |     
|Net income in accordance with U.S. GAAP                                                                                        |  |                        | 574  |   |              |  | 473  |      |  |  | 628  |  
|Other comprehensive income                                                                                                     |  |                         |      |   |              |   |      |      |  |   |      |  
|Unrealized holding gains (net of income taxes of 0 million in 2004, 38 million in 2003 and 86 million in
2002)              |  |                         | 40   |   |              |   | (97  | )    |  |   | (211 | )
|Unrealized cash flow hedges (net of income taxes of (2) million in 2004, (10) million in 2003 and 0 million in
2002)        |  |                         | 12   |   |              |   | 26   |      |  |   |     |  
|Foreign currency translation adjustments                                                                                       |  |                         | (23  | ) |              |   | (127 | )    |  |   | (181 | )
|Additional minimum pension liability (net of income taxes of 4 million in 2004, 0 million in 2003 and 24 million in
2002)   |  |                         | (9   | ) |              |   | (14  | )    |  |   | (35  | )
|                                                                                                                               |  |                         |      |   |              |   |      |      |  |   |      |  
|Comprehensive income in accordance with U.S. GAAP                                                                              |  |                        | 594  |   |              |  | 261  |      |  |  | 201  |  
|                                                                                                                               |  |                         |      |   |              |   |      |      |  |   |      |  
|Accumulated other comprehensive income                                                                                         |  |                         |      |   |              |   |      |      |  |   |      |  
|Unrealized holding gains (net of income taxes of 0 million in 2004, 0 million in 2003 and (38) in 2002)                     |  |                         | 40   |   |              |   |     |      |  |   | 97   |  
|Unrealized cash flow hedges (net of income taxes of (12) million in 2004, (10) million in 2003 and 0 million in
2002)       |  |                         | 38   |   |              |   | 26   |      |  |   |     |  
|Foreign currency translation adjustments                                                                                       |  |                         | (228 | ) |              |   | (205 | )    |  |   | (78  | )
|Additional minimum pension liability (net of income taxes of 37 million in 2004, 33 million in 2003 and 33 million in
2002) |  |                         | (73  | ) |              |   | (64  | )    |  |   | (50  | )
|                                                                                                                               |  |                         |      |   |              |   |      |      |  |   |      |  
|                                                                                                                               |  |                        | (223 | ) |              |  | (243 | )    |  |  | (31  | )
|                                                                                                                               |  |                         |      |   |              |   |      |      |  |   |      |  



|(m) | Classification Differences
|--- | --------------------------



Under IFRS, the Group classifies gains on sale of fixed assets as a component of operating profit. Under U.S. GAAP, these items would be classified as a
component of non-operating profit.



F-84



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Under IFRS, the Group classifies realized and unrealized gains and losses on foreign currency
denominated transactions in sales, costs and expenses and financial income and expenses, as appropriate. In accordance with U.S. GAAP, realized and unrealized gains and losses on foreign currency denominated transactions would be classified as a
component of other income (expense), net.



The aggregate
foreign exchange gains (losses) included in the profit and loss account are as follows for the years ended December 31, 2004, 2003 and 2002:



|                                |  |                         |     |   |      |   |     |      |  |   |     |  
|------------------------------- |  | ----------------------- | --- | - | ---- | - | --- | ---- |  | - | --- | -
|                                |  | Year Ended December 31, |    
|                                |  | 2004                    |     |   | 2003 |   |     | 2002 | 
|                                |  | (In millions)           |    
|Classification under IFRS:      |  |                         |     |   |      |   |     |      |  |   |     |  
|Sales                           |  |                        | (15 | ) |      |  | (32 | )    |  |  | (39 | )
|Costs and expenses              |  |                         | 2   |   |      |   | (1  | )    |  |   | 1   |  
|Financial income and expenses   |  |                         | 21  |   |      |   | 129 |      |  |   | (58 | )
|                                |  |                         |     |   |      |   |     |      |  |   |     |  
|Classification under U.S. GAAP: |  |                         |     |   |      |   |     |      |  |   |     |  
|Other income (expense), net     |  |                        | 8   |   |      |  | 96  |      |  |  | (96 | )
|                                |  |                         |     |   |      |   |     |      |  |   |     |  



Under IFRS, the Group
applies hedge accounting for certain forward contracts (as explained in paragraph (g) above) that resulted in a gain included in net sales of 7 million, 0 million and 0 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Under U.S. GAAP, hedge accounting is not applied, and therefore, these amounts would be classified as financial income.



Consolidated Balance Sheet



In addition to the classification differences previously discussed in this section, other differences exist in the balance sheet classification between
IFRS and U.S. GAAP.



Under IFRS, the Group classifies advance
payments on stocks as a component of stocks. In accordance with U.S. GAAP, advance payments due within one year would generally be classified as a component of other current assets.



|II. | Additional Disclosures
|--- | ----------------------



The following disclosures are included to comply with the United States Securities and Exchange Commissions regulations for foreign registrants. As
indicated, certain disclosures are presented on a IFRS measurement basis.



|(a) | Goodwill and Other Intangible Assets
|--- | ------------------------------------



In June 2001, the Financial Accounting Standards Board issued FAS 142. This statement addresses financial accounting and reporting for goodwill and other
intangible assets. The Group adopted FAS 142 prospectively as of January 1, 2002. Under this standard, goodwill and other intangible assets that are deemed to have an indefinite life are no longer amortized. Separate intangible assets with finite
lives continue to be amortized over their useful lives. Indefinite-lived assets are tested for impairment on an annual basis by applying a fair-value-based test. Goodwill is tested for impairment on an annual basis based on a two-step test. The
first step requires a comparison of the fair value of each of the Groups reporting units and the carrying amounts of net assets including goodwill related to each reporting unit. If the carrying amount exceeds a units fair value, the
second step of the impairment test is performed to measure the amount of impairment loss, if any. As of January 1, 2002, the Group performed the transitional impairment test under FAS 142 and compared the carrying amount for each reporting unit to
its fair value, which was determined based on discounted cash flows. Upon completion of the transitional test, the Group determined that there was no impairment of goodwill as of January 1, 2002. The Group also completed the annual impairment test
required by FAS 142 as of September 30, 2004, 2003 and 2002, which also resulted in no impairment charges.



F-85



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2003
measured on a U.S. GAAP basis and allocated by reportable segment, are as follows:



|                                |  |               |       |   |           |   |      |                       |  |   |                     |   |  |              |    |   |                 |   |       |   |  |   |   |  |   |       |  
|------------------------------- |  | ------------- | ----- | - | --------- | - | ---- | --------------------- |  | - | ------------------- | - |  | ------------ | -- | - | --------------- | - | ----- | - |  | - | - |  | - | ----- | -
|                                |  | MagazinePaper |       |   | Newsprint |   |      | Fine &SpecialityPaper |  |   | ConvertingMaterials |   |  | WoodProducts |    |   | OtherOperations |   | Total |  
|                                |  | (In millions) |      
|Balance as of January 1, 2003   |  |              | 1,034 |   |           |  | 529  |                       |  |  | 146                 |   |  |             | 77 |   |                 |  | 31    |   |  |  | 6 |  |  | 1,823 |  
|Acquisitions                    |  |               | 5     |   |           |   | 6    |                       |  |   |                    |   |  |              |   |   |                 |   | 13    |   |  |   | 1 |  |   | 25    |  
|Translation adjustments         |  |               | (36   | ) |           |   |     |                       |  |   | (16                 | ) |  |              | (6 | ) |                 |   |      |   |  |   |  |  |   | (58   | )
|Disposals                       |  |               |      |   |           |   |     |                       |  |   |                    |   |  |              |   |   |                 |   | (1    | ) |  |   |  |  |   | (1    | )
|                                |  |               |       |   |           |   |      |                       |  |   |                     |   |  |              |    |   |                 |   |       |   |  |   |   |  |   |       |  
|Balance as of December 31, 2003 |  |              | 1,003 |   |           |  | 535  |                       |  |  | 130                 |   |  |             | 71 |   |                 |  | 43    |   |  |  | 7 |  |  | 1,789 |  
|                                |  |               |       |   |           |   |      |                       |  |   |                     |   |  |              |    |   |                 |   |       |   |  |   |   |  |   |       |  
|Balance as of January 1, 2004   |  |              | 1,003 |   |           |  | 535  |                       |  |  | 130                 |   |  |             | 71 |   |                 |  | 43    |   |  |  | 7 |  |  | 1,789 |  
|Acquisition                     |  |               |      |   |           |   |     |                       |  |   |                    |   |  |              | 1  |   |                 |   | 3     |   |  |   |  |  |   | 4     |  
|Translation adjustments         |  |               | (3    | ) |           |   |     |                       |  |   | (5                  | ) |  |              | (2 | ) |                 |   |      |   |  |   |  |  |   | (10   | )
|Disposals                       |  |               |      |   |           |   |     |                       |  |   |                    |   |  |              | (3 | ) |                 |   | (2    | ) |  |   |  |  |   | (5    | )
|Decrease (see note 40.I (i))    |  |               | (112  | ) |           |   | (146 | )                     |  |   |                    |   |  |              |   |   |                 |   |      |   |  |   |  |  |   | (258  | )
|                                |  |               |       |   |           |   |      |                       |  |   |                     |   |  |              |    |   |                 |   |       |   |  |   |   |  |   |       |  
|Balance as of December 31, 2004 |  |              | 888   |   |           |  | 389  |                       |  |  | 125                 |   |  |             | 67 |   |                 |  | 44    |   |  |  | 7 |  |  | 1,520 |  
|                                |  |               |       |   |           |   |      |                       |  |   |                     |   |  |              |    |   |                 |   |       |   |  |   |   |  |   |       |  



The following
disclosure relates to the Groups other intangibles and has been prepared on a U.S. GAAP measurement basis:



|                                                                                                                                   |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --- | ----------------------- | - | ------------------- |  | ----------------------- | --- |  | - | ---
|                                                                                                                                   |  | As of December 31, 2004 |     | As of December 31, 2003
|                                                                                                                                   |  | GrossCarryingAmount     |     | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|                                                                                                                                   |  | (In millions)          
|Subject to amortization:                                                                                                           |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|Customer relationships                                                                                                             |  |                        | 118 |                         |  | 33                  |  |                        | 118 |  |  | 22 
|Technology                                                                                                                         |  |                         | 112 |                         |   | 62                  |  |                         | 112 |  |   | 42 
|Patents                                                                                                                            |  |                         | 41  |                         |   | 11                  |  |                         | 47  |  |   | 9  
|Software                                                                                                                           |  |                         | 262 |                         |   | 141                 |  |                         | 182 |  |   | 112
|Intangible rights                                                                                                                  |  |                         | 213 |                         |   | 140                 |  |                         | 207 |  |   | 121
|                                                                                                                                   |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|Total                                                                                                                              |  |                        | 746 |                         |  | 387                 |  |                        | 666 |  |  | 306
|                                                                                                                                   |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|Not subject to amortization:                                                                                                       |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|Rights to use water                                                                                                                |  |                         | 178 |                         |   |                    |  |                         | 168 |  |   |   
|                                                                                                                                   |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|Total                                                                                                                              |  |                        | 924 |                         |  | 387                 |  |                        | 834 |  |  | 306
|                                                                                                                                   |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|Under U.S. GAAP, intangible assets include customer relationships and do not include advance payments or construction in
progress. |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|                                                                                                                                   |  |                         |     |                        
|Amortization expense:                                                                                                              |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|For year ended December 31, 2004                                                                                                   |  |                        | 78  |                         |   |                     |  |                         |     |  |   |    
|Estimated amortization expense:                                                                                                    |  |                         |     |                         |   |                     |  |                         |     |  |   |    
|For year ended December 31, 2005                                                                                                   |  |                         | 78  |                         |   |                     |  |                         |     |  |   |    
|For year ended December 31, 2006                                                                                                   |  |                         | 73  |                         |   |                     |  |                         |     |  |   |    
|For year ended December 31, 2007                                                                                                   |  |                         | 59  |                         |   |                     |  |                         |     |  |   |    
|For year ended December 31, 2008                                                                                                   |  |                         | 39  |                         |   |                     |  |                         |     |  |   |    
|For year ended December 31, 2009                                                                                                   |  |                         | 27  |                         |   |                     |  |                         |     |  |   |    



|(b) | Discontinued Operations
|--- | -----------------------



The Group applies SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144) and EITF 03-13 Applying the
Conditions in Paragraph 42 of FAS 144 in Determining Whether to Report Discontinued Operations. These



F-86



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



address financial accounting and reporting for the impairment or disposal of long-lived assets, as well as the reporting of discontinued operations. FAS 144
requires a component of an entity that either has been disposed of or is classified as held for sale to be reported as discontinued operations if (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing
operations of the Group as a result of the disposal transaction; and (b) the Group will not have any significant continuing involvement in the operations of the component after the disposal transaction. A component of an entity comprises operations
and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an
asset group.



In accordance with IFRS the Group classifies a
discontinuing operation as a component of an entity, which (a) pursuant to a single plan, the entity is disposing of in its entirety, (b) represents a separate major line of business or geographical activity and (c) can be distinguished
operationally and for financial reporting purposes.



The
following transactions are classified as discontinued operations under U.S. GAAP. However, as none of these transactions represent a major line of business, they have not been classified as discontinuing operations under IFRS.



Brooks Group Ltd



As discussed in Note 5, the Group sold the Irish building materials merchant, Brooks Group Limited, to Wolseley Group in
August 2004. Brooks Group is the leading builders merchant chain for wood based products in Ireland. Brooks Group was previously reported in the Wood Products reportable segment. Under IFRS, the results from operations and sale of Brooks Group
have been classified as part of income from continuing operations. Under U.S. GAAP, Brooks Group should be classified as a discontinued operation in the statement of income. Net income and earnings per share under U.S. GAAP for prior years have been
reclassified to reflect Brooks Group as a discontinued operation. The revenues associated with the discontinued operations were 143 million, 195 million and 208 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The pretax income associated with the discontinued operations was 7 million, 9 million and 10 million for the years ended December 31, 2004, 2003 and 2002, respectively. As discussed in Note 6, the nontaxable gain on
disposal associated with the discontinued operations was 110 million for the year ended December 31, 2004. For the years ended December 31, 2004, 2003 and 2002, the intercompany sales to Brooks Group consisted of 8 million, 12
million and 18 million, respectively. After the disposal, UPM will have minor involvement with Brooks Group as a supplier of wood products in the normal course of business.



Rosenlew



In August 2003, the Group sold its Rosenlew flexible intermediate bulk container operations to management and an international group of investors, of
which the largest shareholder is 3i Group plc. Rosenlews production plants are located in Belgium, Finland, France, Portugal and in the U.S. Rosenlew was previously reported in the Other Operations reportable segment. Under IFRS, the results
from operations and sale of Rosenlew have been classified as part of income from continuing operations. Under U.S. GAAP Rosenlew should be classified as a discontinued operation in the statements of income. Net income and earnings per share under
U.S. GAAP for prior years have been reclassified to reflect Rosenlew as a discontinued operation. The revenues associated with the discontinued operations were 18 million, 40 million and 42 million for the years ended December 31,
2003, 2002 and 2001, respectively. The pretax income associated with the discontinued operations were 1 million, 1 million and (6) million for the years ended 2003, 2002 and 2001, respectively. The loss on disposal, net of a tax
benefit of 2 million, associated with the discontinued operations was 4 million for the year ended December 31, 2003. For the years ended December 31, 2003 and 2002, there were no intercompany sales to Rosenlew.



Walki Films



In October 2002, the Group sold its Walki Films packaging films business to Bemis Company Inc. The Walki Films business
comprised the manufacturing of vacuum and modified atmosphere plastic films with operations in Finland and France. Walki Films was previously reported in Converting Materials reportable segment. Under IFRS, the results from operations and sale of
Walki Films have been classified as part of income from continuing operations. Under U.S. GAAP Walki Films should be classified as a discontinued operation in the statements of income. Net income and earnings per share under U.S. GAAP for prior
years have been reclassified to reflect Walki Films as a discontinued operation. The revenues associated with the discontinued operations were 105 million and 123 million for the years ended December 31, 2002 and 2001, respectively. The
pretax income associated with the discontinued operations were 5 million and 5 million for each of the years ended December 31, 2002 and 2001, respectively. The



F-87



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



gain on disposal, net of tax expense of 5 million, associated with the discontinued operations was 9 million for the year ended December 31,
2002. For the year ended December 31, 2002, the intercompany sales to Walki Films consisted of 2 million.



The assets and liabilities associated with the discontinued operations included on the consolidated balance sheets at December 31, 2003 are as follows:



|                                     |  |                        |   
|------------------------------------ |  | ---------------------- | --
|                                     |  | As ofDecember 31, 2003
|                                     |  | (In millions)         
|Assets                               |  |                        |   
|Cash and bank                        |  |                       | 5 
|Accounts receivable                  |  |                        | 43
|Other receivables                    |  |                        | 2 
|Inventory                            |  |                        | 28
|Tangible assets                      |  |                        | 19
|                                     |  |                        |   
|Total assets                         |  |                       | 97
|                                     |  |                        |   
|Liabilities                          |  |                        |   
|Accounts payable                     |  |                       | 30
|Accrued expenses and deferred income |  |                        | 5 
|Other current liabilities            |  |                        | 25
|                                     |  |                        |   
|Total liabilities                    |  |                       | 60
|                                     |  |                        |   



|(c) | Income Taxes
|--- | ------------



The Groups profit before income taxes and minority interest under IFRS for the years ended December 31, 2004, 2003 and 2002 consists of the
following:



|                                                         |  |                         |      |   |      |   |      |      |  |   |      |  
|-------------------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                         |  | Year Ended December 31, |     
|                                                         |  | 2004                    |      |   | 2003 |   |      | 2002 | 
|                                                         |  | (In millions)           |     
|Profit (loss) before income taxes and minority interest: |  |                         |      |   |      |   |      |      |  |   |      |  
|Domestic                                                 |  |                        | 817  |   |      |  | 557  |      |  |  | 826  |  
|Foreign                                                  |  |                         | (217 | ) |      |   | (119 | )    |  |   | (116 | )
|                                                         |  |                         |      |   |      |   |      |      |  |   |      |  
|                                                         |  |                        | 600  |   |      |  | 438  |      |  |  | 710  |  
|                                                         |  |                         |      |   |      |   |      |      |  |   |      |  



F-88



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Groups income tax expense under IFRS for the years ended December 31, 2004, 2003 and 2002
consists of the following:



|                                 |  |                         |      |   |      |   |     |      |  |   |     |  
|-------------------------------- |  | ----------------------- | ---- | - | ---- | - | --- | ---- |  | - | --- | -
|                                 |  | Year Ended December 31, |     
|                                 |  | 2004                    |      |   | 2003 |   |     | 2002 | 
|                                 |  | (In millions)           |     
|Current:                         |  |                         |      |   |      |   |     |      |  |   |     |  
|Domestic                         |  |                        | 96   |   |      |  | 166 |      |  |  | 205 |  
|Foreign                          |  |                         | 22   |   |      |   | 20  |      |  |   | 66  |  
|                                 |  |                         |      |   |      |   |     |      |  |   |     |  
|                                 |  |                        | 118  |   |      |  | 186 |      |  |  | 271 |  
|Deferred:                        |  |                         |      |   |      |   |     |      |  |   |     |  
|Domestic                         |  |                        | (191 | ) |      |  | (30 | )    |  |  | 1   |  
|Foreign                          |  |                         | (342 | ) |      |   | (42 | )    |  |   | (84 | )
|                                 |  |                         |      |   |      |   |     |      |  |   |     |  
|                                 |  |                        | (533 | ) |      |  | (72 | )    |  |  | (83 | )
|Share of tax of associates       |  |                         |      |   |      |   |     |      |  |   |     |  
|Domestic                         |  |                         | 6    |   |      |   | 7   |      |  |   | 24  |  
|                                 |  |                         |      |   |      |   |     |      |  |   |     |  
|Total provision for income taxes |  |                        | (409 | ) |      |  | 121 |      |  |  | 212 |  
|                                 |  |                         |      |   |      |   |     |      |  |   |     |  



Current income tax
expense is stated after the benefit arising from the utilization of loss carry-forwards amounting to 20 million, 21 million and 29 million in 2004, 2003 and 2002, respectively.



F-89



---

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The tax effects of the temporary differences and carry-forwards that give rise to significant
portions of the Groups deferred tax liabilities and assets under IFRS as of December 31, 2004 and 2003 are as follows:



|                                                                                      |  |                         |        |   |      |   |        |  
|------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                                                                                      |  | Year Ended December 31, |       
|                                                                                      |  | 2004                    |        |   | 2003 |  
|                                                                                      |  | (In millions)           |       
|Deferred tax assetscurrent:                                                          |  |                         |        |   |      |   |        |  
|Retirement benefit and other provisions                                               |  |                        | 16     |   |      |  | 30     |  
|Intercompany profit inventory                                                         |  |                         | 15     |   |      |   | 18     |  
|                                                                                      |  |                         |        |   |      |   |        |  
|Total deferred tax assetscurrent                                                     |  |                        | 31     |   |      |  | 48     |  
|                                                                                      |  |                        
|Deferred tax assetsnon-current:                                                      |  |                         |        |   |      |   |        |  
|Retirement benefit and other provisions                                               |  |                        | 74     |   |      |  | 137    |  
|Book over tax depreciation                                                            |  |                         | 134    |   |      |   | 101    |  
|Tax losses and tax credits carried forward                                            |  |                         | 282    |   |      |   | 264    |  
|Finance leases                                                                        |  |                         | 59     |   |      |   | 64     |  
|Other temporary differences                                                           |  |                         |       |   |      |   | 75     |  
|                                                                                      |  |                         |        |   |      |   |        |  
|Total deferred tax assetsnon-current                                                 |  |                        | 549    |   |      |  | 641    |  
|Valuation allowance                                                                   |  |                         | (39    | ) |      |   | (61    | )
|                                                                                      |  |                         |        |   |      |   |        |  
|Total deferred tax assets                                                             |  |                        | 541    |   |      |  | 628    |  
|                                                                                      |  |                         |        |   |      |   |        |  
|Deferred tax liabilitiescurrent:                                                     |  |                         |        |   |      |   |        |  
|Fair valuation of available-for-sale investments and derivative financial instruments |  |                        | (15    | ) |      |  | (19    | )
|Other temporary differences                                                           |  |                         | (3     | ) |      |   |       |  
|                                                                                      |  |                         |        |   |      |   |        |  
|Total deferred tax liabilitiescurrent                                                |  |                        | (18    | ) |      |  | (19    | )
|                                                                                      |  |                        
|Deferred tax liabilitiesnon-current:                                                 |  |                         |        |   |      |   |        |  
|Depreciation difference and untaxed reserves                                          |  |                        | (812   | ) |      |  | (900   | )
|Undistributed profits of associated companies                                         |  |                         |       |   |      |   | (93    | )
|Fair value adjustments of biological assets                                           |  |                         | (203   | ) |      |   | (221   | )
|Fair value adjustments of net assets acquired                                         |  |                         | (117   | ) |      |   | (547   | )
|Other temporary differences                                                           |  |                         | (27    | ) |      |   | (24    | )
|                                                                                      |  |                         |        |   |      |   |        |  
|Total deferred tax liabilitiesnon-current                                            |  |                        | (1,159 | ) |      |  | (1,785 | )
|                                                                                      |  |                         |        |   |      |   |        |  
|Net deferred tax liability                                                            |  |                        | (1,177 | ) |      |  | (1,804 | )
|                                                                                      |  |                         |        |   |      |   |        |  
|                                                                                      |  |                        | (636   | ) |      |  | (1,176 | )
|                                                                                      |  |                         |        |   |      |   |        |  



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(d) | Associated Companies
|--- | --------------------



The following table sets forth summarized unaudited financial information of Oy Metsä-Botnia Ab and Pohjolan Voima Oy on an aggregate basis under
U.S. GAAP:



|                        |  |                    |       |                |   |      
|----------------------- |  | ------------------ | ----- | -------------- | - | -----
|                        |  | As of December 31,
|                        |  | 2004               |       | 2003(Restated)
|                        |  | (In millions)     
|Balance sheet data      |  |                    |       |                |   |      
|Current assets          |  |                   | 627   |                |  | 586  
|Non-current assets      |  |                    | 2,851 |                |   | 2,803
|Current liabilities     |  |                    | 331   |                |   | 346  
|Non-current liabilities |  |                    | 928   |                |   | 874  
|Minority interests      |  |                    | 34    |                |   | 38   



|                                                     |  |                         |       |                |   |       |  |   |      
|---------------------------------------------------- |  | ----------------------- | ----- | -------------- | - | ----- |  | - | -----
|                                                     |  | Year Ended December 31,
|                                                     |  | 2004                    |       | 2003(Restated) |   | 2002 
|                                                     |  | (In millions)          
|Profit and loss statement data                       |  |                         |       |                |   |       |  |   |      
|Net sales                                            |  |                        | 1,629 |                |  | 1,560 |  |  | 1,704
|Operating income                                     |  |                         | 136   |                |   | 61    |  |   | 201  
|Cumulative effect of change in accounting principles |  |                         |      |                |   | 222   |  |   |     
|Net income                                           |  |                         | 93    |                |   | 275   |  |   | 115  



Receivables from
associated companies are recorded net of the following value adjustments:



|                  |  |                            |    |           |   |            |  |                      |    |  |   |  
|----------------- |  | -------------------------- | -- | --------- | - | ---------- |  | -------------------- | -- |  | - | -
|                  |  | Balance atBeginningof Year |    | Additions |   | Deductions |  | Balanceat Endof Year
|                  |  | (In millions)             
|December 31, 2004 |  |                           | 2  |           |  |           |  |                     | 2  |  |  | 
|December 31, 2003 |  |                            | 5  |           |   |           |  |                      | 3  |  |   | 2
|December 31, 2002 |  |                            | 44 |           |   |           |  |                      | 39 |  |   | 5



Dividends received
from associated companies were 33 million, 53 million and 47 million for the years ended December 31, 2004, 2003 and 2002, respectively.



|(e) | Fair value of Long-Term Loans
|--- | -----------------------------



The following presents the carrying amounts and estimated fair values under IFRS of the Groups certain long-term loans (including the current
portion) as of December 31, 2004 and 2003:



|                                  |  |                    |       |           |   |               |  |           |       |  |   |      
|--------------------------------- |  | ------------------ | ----- | --------- | - | ------------- |  | --------- | ----- |  | - | -----
|                                  |  | As of December 31,
|                                  |  | 2004               |       | 2003     
|                                  |  | CarryingValue      |       | FairValue |   | CarryingValue |  | FairValue
|                                  |  | (In millions)     
|Bond loans                        |  |                   | 2,792 |           |  | 3,002         |  |          | 2,893 |  |  | 2,950
|Loans from financial institutions |  |                    | 789   |           |   | 807           |  |           | 836   |  |   | 687  
|Pension loans                     |  |                    | 598   |           |   | 603           |  |           | 673   |  |   | 671  



Fair values of
long-term loans in the table above have been estimated as follows:



| |  |  | The fair value of the quoted long term loans, including the current portion, is based on the quoted market value as of December 31.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| |  |  | The fair value of fixed rate and market-based floating rate long-term loans, including the current portion, is estimated using the expected future payments discounted at market
interest rates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f) | Other Accounting Policies and Disclosures
|--- | -----------------------------------------



Derivative Financial Instruments



As explained further in Note 3 to the consolidated financial statements, the Group uses derivative financial instruments for the purposes of hedging
foreign currency exposures and managing interest rate risks which exist as part of its on-going international business operations. The Groups financial policy is to use derivatives only for purposes of financial risk management, and leveraged
transactions or structured securities.



Derivative financial
instruments expose the Group to credit risk arising from the potential inability of counterparties to perform under the terms of the contracts. Options written do not give rise to counterparty credit risk since they obligate the Group (not its
counterparty) to perform. The Group attempts to limit its exposure to credit risk arising from the use of these financial instruments by dealing only with counterparty banks and financial institutions in accordance with the provisions of the
Groups financial policy as approved by the Board of Directors. Collateral or other security is generally not required except where it is common market practice.



Supply Risk



The Groups manufacturing operations depend upon obtaining adequate supplies of appropriate raw materials in a timely manner. Certain Group companies
may at times be substantially dependent on a limited number of suppliers of key resources due to availability, locale, price, quality and other considerations. Also, from time to time, suppliers may extend lead times, limit supplies or increase
prices due to capacity constraints or other factors.



As a
result, self-sufficiency in key resources is vital to the Groups operations and the Group attempts to mitigate supply risk by producing many of its necessary resources in-house or obtaining them through associated companies. In addition, the
Group works closely with its key suppliers around the world to ensure that adequate supplies are available for its use.



If the Group were unable to obtain adequate supplies of raw materials in a timely manner, or if there were significant increases in the costs of raw
materials, the Groups results of operations could be adversely affected in the short term.



Reclassifications



Certain reclassifications have been made to prior year amounts to conform with the current year presentation.



|(g) | New Accounting Standards
|--- | ------------------------



In March 2004, the EITF reached consensus on Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments (EITF 03-01). EITF 03-01 provides guidance on other-than-temporary impairment models for marketable debt and equity securities and non-marketable securities accounted for under the cost method. On September 30, 2004,
the FASB issued FSP 03-01-1, Effective date of Paragraphs 10-20 of EITF 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, delaying the effective date for the recognition and measurement
guidance in EITF 03-01, until certain implementation issues are addressed and a final FSP is issued. The disclosure requirements in EITF 03-01 remain effective. UPM has complied with the disclosure requirements for the years ended December 31, 2004,
2003 and 2002.



In November 2004, the FASB issued FASB
Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, clarifying the existing requirements in ARB No. 43 regarding normal capacity, spoilage costs and idle capacity costs. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The adoption of FAS 151 will not have an impact on UPMs consolidated results or financial position, since the key elements are already applied in UPMs consolidated
financial statements under U.S. GAAP.



In December 2004, the
FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payments (FAS 123R). The statement requires the measurements and recognition of the cost of employee services received in exchange for an award of equity
instruments based on fair value of the award at the grant-date. The cost is recognized over the period during which an employee is



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



required to provide service in exchange for the award. The standard supersedes ABP 25, Accounting for Stock issued to Employees, and prohibits the use of the
intrinsic value method of accounting for share-based payment transactions. FAS 123R is effective as of the beginning of the annual reporting period that begins after June 15, 2005; however, early application is possible. UPM intends to
adopt the revised standard as of January 1, 2005. The Group is currently estimating the impact of adopting FAS 123R on the financial statements.



In September 2004, the EITF issued the consensus reached on issue No 04-10, Determining Whether to Aggregate Operating Segments That Do Meet the
Quantitative Thresholds. The issue addressed how an entity should evaluate the aggregation criteria in paragraph 17 of Statement 131, Disclosures about segments of an Enterprise and Related Information, when determining whether
operating segments that do not meet the quantitative thresholds may be aggregated in accordance with paragraph 19 of Statement 131. The Group is currently estimating the impact of adopting EITF 04-10 on the financial statements.



In December 2004, the FASB issued FAS 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29 (FAS 153). Based on the guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, exchanges of nonmonetary assets were measured based on the fair value of the
assets exchanges. The guidance in APB 29 included certain exceptions to that principle. FAS 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replace it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FAS 153 will be effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe that the implementation if this standard will have a material impact on our financial position, results of operations or cash flows.



|(h) | Subsequent Events
|--- | -----------------



Additionally on February 1, 2005, UPM made decisions on significant investments in Germany and France. UPM will rebuild two paper machines at its Nordland
and Docelles paper mills. At Nordland paper mill in Germany, UPM will invest approximately 82 million in rebuilding paper machine 3. After the investment, the production capacity will be 340,000 tons. At Docelles paper mill in France, UPM will
invest approximately 26 million in rebuilding paper machine 1. After the investment, the production capacity will be 155,000 tons. The rebuilds will be completed in the third quarter of 2006. UPM will also build a power plant at its Chapelle
Darblay mill in France, to annually combust 160,000 tons of energy wood available in the region and all the sludge produced in its recovered paper recycling process. The total investment cost is 75 million. The power plant will start-up in the
first quarter of 2007.



On March 7, 2005 the Group decided to
launch an accelerated bookbuilt offering of 19.9 million shares of Metso Corporation, representing approximately 14.6% of the outstanding share capital of Metso. The offering was completed on March 8, 2005. The shares were sold at 14.30 per
share and the net proceeds received form the sale was 282 million. The Group booked 89 million tax-free capital gain after operating profit during the first quarter of 2005. Following the placement, the Group no longer holds any shares
of Metso Corporation.



On March 7, 2005 Metsä-Botnia
decided to invest USD 1.1 billion in a pulp mill in Uruguay with an annual capacity of 1 million tons. The project received all necessary environmental permits in mid-February, 2005 from Uruguays environmental authority, and the final decision
to proceed was made at the beginning of March. The pulp mill is expected to begin production in the second half of 2007. We will participate in Metsä-Botnias pulp mill project in Uruguay with a US$ 67 million (51 million) direct
capital investment. In connection with the pulp mill investment decision, to ensure the stability of Metsä-Botnias ownership base, Metsä-Botnias owners, UPM, M-real and Metsäliitto have agreed that Metsä-Botnias
shareholders will offer their shares to other shareholders in case of a possible change in their share or vote majority.



On February 1, 2005, the Group announced that the company will initiate to buy back a maximum of 10 million of its own shares as decided by the Annual
General Meeting on March 24, 2004. In February-March, 2005, the company purchased back 8,000,000 own shares at a total cost of 136.6 million.



On March 31, 2005, the shareholders approved the proposal of the Board of Directors for a dividend of 0.75 per share for the financial year 2004
that will be paid on April 12, 2005.



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On March 31, 2005, the Board of Directors proposal to reduce the share capital by invalidating
8,000,000 own shares held by the Company was approved. The companys share capital will be reduced by 13.6 million. The invalidation was entered in the trade register on April 12, 2005.



On March 31, 2005, the proposal by the Board of Directors on the buy-back of
the companys own shares was approved. A minimum of 100 and a maximum of 25,000,000 own shares will be bought back. The Annual General Meeting authorized the Board of Directors to decide on the disposal of the own shares bought back. By May 6,
2005, the Company had bought back 900,000 shares.



On March 31,
2005, the proposal by the Board of Directors to authorize the Board of Directors to decide on increasing the share capital through one or several issuances of new shares and/or one or several convertible bond issues was approved. On the basis of
such issues of new shares or convertible bond loans, the share capital can be increased by a maximum of 178,015,500, representing 104,715,000 new shares with a book value (equivalent value) of 1.70 per share.



On March 31, 2005, the proposal by the Board of Directors to issue share
options to the key personnel of the UPM Group was approved. The number of share options issued will be 9,000,000, conferring entitlement to subscribe a maximum of 9,000,000 UPM-Kymmene Corporations shares.



In April 2005, a total of 6,800,858 shares were exercised with our Class A
and Class B stock options. The increase of 11,561,458.60 in our share capital will be entered in the trade register in May, 2005. After the registration, the number of shares will be 523,251,130, and the share capital will amount to
889,526,921.00.



The labour agreement between the Finnish
Paper Workers Union and the Finnish Forest Industries Federation expired on February 15, 2005. On March 30, 2005, the Finnish Paper Workers Union declared an overtime ban in the sector. Since then there have been several illegal strikes
or other shutdowns.



Because a new collective agreement has not
been concluded, the paper workers started a two-day strike on May 15, 2005. The member companies of the Finnish Forest Industries Federation have started a lockout at all Finnish pulp and paper mills on May 18, 2005 and ending on June 1, 2005. In
addition, Finnish Forest Industries Federation has declared another two-week lockout ending on June 15. The lockouts cover all of UPMs Finnish pulp and paper mills and converting units. UPMs production plants could be shut down for a
maximum of four weeks. During that time, the Finnish Paper Workers Union employees affected by the lockout will not be paid their salaries. The lockout will be called off should a settlement be reached. The State Conciliator has assumed
responsibility for chairing the negotiations between parties. UPM is estimating the strike and lockout period to cause losses of approximately 4 million per day.





F-94