##### Table of Contents

As filed with the Securities and Exchange Commission on June 21, 2004

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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, 2003
|- |  | --------------------------------------------------------------------------------------------------------------------------------



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, 2003: 523,578,930



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     |  | v                                                         
|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   
|             |  | Organization                                               |  | 8   
|Item 5.      |  | Operating and Financial Review and Prospects               |  | 29  
|             |  | Recent Developments                                        |  | 36  
|             |  | Currency Fluctuations and Introduction of the Euro         |  | 38  
|             |  | Results of Operations                                      |  | 39  
|             |  | Capital Expenditures                                       |  | 49  
|             |  | Holdings in Stock Exchange Listed Securities               |  | 50  
|             |  | Inflation                                                  |  | 50  
|Item 6.      |  | Directors, Senior Management and Employees                 |  | 50  
|             |  | Board of Directors                                         |  | 50  
|             |  | Executive Team                                             |  | 53  
|             |  | Compensation of Directors and Officers                     |  | 56  
|             |  | Board Practices                                            |  | 56  
|             |  | Employees                                                  |  | 57  
|             |  | Share Ownership                                            |  | 58  
|Item 7.      |  | Major Shareholders and Related Party Transactions          |  | 60  
|             |  | Major Shareholders                                         |  | 60  
|             |  | Related Party Transactions                                 |  | 61  
|Item 8.      |  | Financial Information                                      |  | 62  
|             |  | Consolidated Financial Statements                          |  | 62  
|             |  | Other Financial Information                                |  | 62  
|             |  | Significant Changes                                        |  | 64  
|Item 9.      |  | The Offer and Listing                                      |  | 64  
|             |  | Nature of Trading Markets                                  |  | 64  
|             |  | Trading and Settlement on the Helsinki Exchanges           |  | 66  
|             |  | Regulation of the Finnish Securities Market                |  | 66  
|             |  | The Finnish Book-Entry Securities System                   |  | 67  
|Item 10.     |  | Additional Information                                     |  | 68  
|             |  | Authorized Share Capital                                   |  | 68  
|             |  | Memorandum and Articles of Association                     |  | 69  
|             |  | Material Contracts                                         |  | 71  
|             |  | Exchange Controls                                          |  | 72  
|             |  | Taxation                                                   |  | 72  
|             |  | Documents on Display                                       |  | 77  
|Item 11.     |  | Quantitative and Qualitative Disclosures about Market Risk |  | 77  
|             |  | Market-sensitive Instruments and Financial Risk Management |  | 77  
|             |  | Foreign Currency Exposure                                  |  | 78  
|             |  | Interest Rate Risk                                         |  | 78  
|             |  | Equity Price Risk                                          |  | 78  
|Item 12.     |  | Description of Securities Other than Equity Securities     |  | 78  



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|          |  |                                                                              |  |     
|--------- |  | ---------------------------------------------------------------------------- |  | ----
|          |  |                                                                              |  | Page
|PART II   |  | 79                                                                          
|Item 13.  |  | Defaults, Dividend Arrearages and Delinquencies                              |  | 79  
|Item 14.  |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 79  
|Item 15.  |  | Controls and Procedures                                                      |  | 79  
|Item 16.  |  | [Reserved]                                                                   |  | 79  
|Item 16A. |  | Audit Committee Financial Expert                                             |  | 79  
|Item 16B. |  | Code of Ethics                                                               |  | 79  
|Item 16C. |  | Principle Accounting Fees and Services                                       |  | 79  
|Item 16D. |  | Exemptions from the Listing Standards for Audit Committee                    |  | 80  
|Item 16E. |  | Purchases of Equity Securities by the Issuer and Affiliated Purchases        |  | 80  
|PART III  |  | 81                                                                          
|Item 17.  |  | Financial Statements                                                         |  | 81  
|Item 18.  |  | Financial Statements                                                         |  | 81  
|Item 19.  |  | Exhibits                                                                     |  | 81  



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##### Table of Contents

INTRODUCTION



In this annual
report, 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 (UPM) had been a paper and forest products subsidiary of Repola.



FINANCIAL AND OTHER INFORMATION



We produce financial statements in accordance with Finnish generally accepted accounting principles (Finnish GAAP), which vary in certain
respects from the U.S. generally accepted accounting principles (U.S. GAAP). Reconciliation of certain amounts to U.S. GAAP is set forth in Note 23 of the notes to the consolidated financial statements included elsewhere in this annual
report.



The financial information set forth in a number of
tables herein has been rounded to the nearest whole number or the nearest decimal. Accordingly, in certain instances, the sum of the numbers in a column may not conform exactly to the total figure given for that column.



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



In 2001, we reorganized our operating segments and created a new organizational structure which was implemented as of January 1, 2002. Accordingly, all the segment information for prior years in this annual report has been restated to
conform to our current operating structure.



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 (loss) before extraordinary items plus interest
expenses and other financial expenses, divided by (b) the balance sheet total minus non-interest-bearing liabilities and treasury shares (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).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Operating profit excluding amortization of goodwill and non-recurring items for the operating divisions of the Group equals operating profit before amortization of
goodwill, before gains and losses from sale of shares and fixed assets, before write-downs and before restructuring expenses. We use operating profit excluding amortization of goodwill and non-recurring items as a non-GAAP measure for
the financial performance of our respective business areas. Management believes that, besides operating profit, operating profit excluding amortization of goodwill and non-recurring items is also a measure commonly reported and widely used by
analysts, investors and other interested parties in the paper industry. Accordingly, operating profit excluding amortization of goodwill and non-recurring items is presented to enhance the understanding of our historical operating performance.
Operating profit excluding amortization of goodwill and non-recurring items, however, should not be considered as an alternative to operating profit as an indicator of our operating performance. Operating profit excluding amortization of goodwill
and non-recurring items is not a measure of financial performance under Finnish GAAP or U.S. GAAP and may not be comparable to other similarly titled measures for other companies. Operating profit excluding amortization of goodwill and non-recurring
items is not meant to be predictive of potential future results.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



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



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EURO PRESENTATION



In connection with the introduction of a single European currency (the euro or ) on January 1,
1999, we began publishing our consolidated financial statements in euros, for periods beginning on January 1, 1999. We published our consolidated financial statements for the year ended December 31, 1998 in Finnish markkas and references to
Finnish markkas or FIM are references to the former lawful currency of Finland. Translations of Finnish markka amounts into euros have been made at the rate of 1.00 = FIM 5.94573, the irrevocable conversion rate
effective as from January 1, 1999, which was set by the member states of the European Union. As of January 1, 1999, after becoming a denomination of the euro, the exchange rate of the Finnish markka to other currencies could only be derived based on
the exchange rates quoted for the euro against such other currencies.



U.S. DOLLAR PRESENTATION



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, 2003 of 1.00 = U.S.$1.2597 (U.S.$1.00 = 0.7938). On June 14, 2004, the rate was 1.00
= U.S.$1.2073 (U.S.$1.00 = 0.8283). 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, 1999 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.



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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.           
|                  | 
|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 fiber which can be recycled 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 self-adhesive 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 ten percent 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 self-adhesive 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.                                                                                                                                                                                                                                                                                                                                                                            



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|                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|MFS                                |  | Uncoated, machine-calendared specialty paper, containing mechanical pulp and recycled fiber as raw material. MFS is suitable for newspaper inserts, newspapers, magazines, books and
directories.                                                                                                                                                                                                                                          
|                                   | 
|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.                                                                                                                                                                                                                                                                                                                         
|                                   | 
|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.                                                                                                                                                                                                                                                                                                                       
|                                   | 
|Recovered paper                    |  | Paper and board recovered for secondary use.                                                                                                                                                                                                                                                                                                                                                                                               
|                                   | 
|Recycled fiber                     |  | Fiber extracted from recovered paper.                                                                                                                                                                                                                                                                                                                                                                                                      
|                                   | 
|Release paper                      |  | In self-adhesive 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 grade also produced by UPM contains recycled fiber in its
furnish.
|                                   | 
|Self-adhesive label stock          |  | Face and base materials laminated together for manufacturers of price and product labels, as well as labels used in automatic data processing. Self-adhesive label stock is also known as
pressure sensitive paper.                                                                                                                                                                                                                        
|                                   | 
|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.                                                                                                                                                                                                                                                                                                                                                                                                                          



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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 five years in the period ended December 31, 2003. The selected consolidated financial data presented below as of and for each of the five years in the period
ended December 31, 2003 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, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 and the related notes are included elsewhere in this annual report.



Our consolidated financial statements for periods ending prior to January 1, 1999 have been prepared in Finnish markkas and
translated into euros at the January 1, 1999 irrevocable conversion rate of 1.00 = FIM 5.94573. The selected consolidated financial data depicts the same trends as would have been presented if we had continued to present such data in the
currency that was previously used. The selected consolidated financial data for periods prior to January 1, 1999 may not necessarily be comparable to that of other companies reporting in euros that restated amounts from a currency other than the
Finnish markka.



Solely for your convenience, we have included
in the following table U.S. dollar amounts for the year ended December 31, 2003 which we have obtained by converting amounts in euros at the rate of 1.00 = U.S.$1.2597 (U.S.$1.00 = 0.7938), the Noon Buying Rate for the euro in effect on
December 31, 2003, the last trading day in that year. On June 14, 2004, the Noon Buying Rate for the euro was 1.00 = U.S.$1.2073 (U.S.$1.00 = 0.8283).



Our consolidated financial statements are prepared in accordance with Finnish GAAP, which differs in certain significant
respects from U.S. GAAP. Reconciliation of certain amounts to U.S. GAAP is set forth in Note 23 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.



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|                                                  |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|------------------------------------------------- |  | ----------------------------------------- | - |  | ------- | - |  | ------- | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                                  |  | As of and for the year ended December 31, |  
|                                                  |  | 2003                                      |   |  | 2003    |   |  | 2002    |   |  | 2001    |   |  | 2000    |   |  | 1999    |  
|                                                  |  | (U.S.$)                                   |   |  | ()     |   |  | ()     |   |  | ()     |   |  | ()     |   |  | ()     |  
|                                                  |  | (In millions, except per share data)      |  
|INCOME STATEMENT DATA                             |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Amounts in accordance with Finnish GAAP           |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Turnover (net sales)                              |  | 12,531                                    |   |  | 9,948   |   |  | 10,475  |   |  | 9,918   |   |  | 9,583   |   |  | 8,261   |  
|Operating profit                                  |  | 988                                       |   |  | 784     |   |  | 1,062   |   |  | 1,614   |   |  | 1,860   |   |  | 1,573   |  
|Profit before extraordinary items                 |  | 704                                       |   |  | 559     |   |  | 789     |   |  | 1,333   |   |  | 1,717   |   |  | 1,398   |  
|Profit before taxes                               |  | 704                                       |   |  | 559     |   |  | 789     |   |  | 1,333   |   |  | 1,859   |   |  | 1,398   |  
|Net income                                        |  | 464                                       |   |  | 368     |   |  | 550     |   |  | 955     |   |  | 1,366   |   |  | 994     |  
|Amounts in accordance with U.S. GAAP              |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Turnover (net sales)                              |  | 12,423                                    |   |  | 9,862   |   |  | 10,502  |   |  | 9,924   |   |  | 9,661   |   |  | 8,289   |  
|Net income                                        |  | 501                                       |   |  | 398     |   |  | 628     |   |  | 880     |   |  | 1,367   |   |  | 866     |  
|BALANCE SHEET DATA                                |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Amounts in accordance with Finnish GAAP           |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Total assets                                      |  | 18,287                                    |   |  | 14,517  |   |  | 15,374  |   |  | 16,431  |   |  | 13,113  |   |  | 11,580  |  
|Current liabilities                               |  | 2,882                                     |   |  | 2,288   |   |  | 2,187   |   |  | 3,601   |   |  | 2,374   |   |  | 2,192   |  
|Non-current liabilities                           |  | 5,384                                     |   |  | 4,274   |   |  | 5,139   |   |  | 4,913   |   |  | 3,702   |   |  | 2,888   |  
|Deferred tax liability                            |  | 811                                       |   |  | 644     |   |  | 645     |   |  | 666     |   |  | 732     |   |  | 827     |  
|Total liabilities                                 |  | 9,077                                     |   |  | 7,206   |   |  | 7,971   |   |  | 9,180   |   |  | 6,808   |   |  | 5,907   |  
|Provisions                                        |  | 516                                       |   |  | 410     |   |  | 450     |   |  | 413     |   |  | 130     |   |  | 115     |  
|Minority interest                                 |  | 40                                        |   |  | 32      |   |  | 33      |   |  | 28      |   |  | 19      |   |  | 22      |  
|Share capital                                     |  | 1,121                                     |   |  | 890     |   |  | 442     |   |  | 442     |   |  | 437     |   |  | 448     |  
|Shareholders equity                              |  | 8,653                                     |   |  | 6,869   |   |  | 6,920   |   |  | 6,810   |   |  | 6,156   |   |  | 5,536   |  
|Amounts in accordance with U.S. GAAP              |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Total assets                                      |  | 21,096                                    |   |  | 16,747  |   |  | 17,594  |   |  | 18,945  |   |  | 15,445  |   |  | 14,244  |  
|Long-term debt                                    |  | 6,014                                     |   |  | 4,774   |   |  | 5,624   |   |  | 5,705   |   |  | 3,979   |   |  | 3,177   |  
|Shareholders equity                              |  | 9,023                                     |   |  | 7,163   |   |  | 7,328   |   |  | 7,493   |   |  | 7,157   |   |  | 6,810   |  
|OTHER DATA                                        |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Amounts in accordance with Finnish GAAP           |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Net cash flow from operating activities           |  | 1,592                                     |   |  | 1,264   |   |  | 1,429   |   |  | 1,645   |   |  | 1,639   |   |  | 1,264   |  
|Net cash flow used in investing activities        |  | (443                                      | ) |  | (352    | ) |  | (441    | ) |  | (2,854  | ) |  | (329    | ) |  | (82     | )
|Net cash flow (used in)/from financing activities |  | (1,156                                    | ) |  | (918    | ) |  | (997    | ) |  | 1,399   |   |  | (1,398  | ) |  | (1,282  | )
|Capital expenditures(1)                           |  | 781                                       |   |  | 620     |   |  | 613     |   |  | 3,850   |   |  | 2,175   |   |  | 609     |  
|Earnings per share                                |  | 0.88                                      |   |  | 0.70    |   |  | 1.06    |   |  | 1.93    |   |  | 2.38    |   |  | 1.88    |  
|Dividends per share(2)                            |  | 0.90                                      |   |  | 0.75    |   |  | 0.75    |   |  | 0.75    |   |  | 0.75    |   |  | 1.08    |  
|Amounts in accordance with U.S. GAAP              |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Basic earnings per share                          |  | 0.96                                      |   |  | 0.76    |   |  | 1.21    |   |  | 1.77    |   |  | 2.66    |   |  | 1.64    |  
|Diluted earnings per share                        |  | 0.96                                      |   |  | 0.76    |   |  | 1.20    |   |  | 1.75    |   |  | 2.63    |   |  | 1.62    |  
|Number of shares                                  |  |                                           |   |  |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Basic number of shares (1,000s)                  |  | 523.130                                   |   |  | 523.130 |   |  | 518.935 |   |  | 495.784 |   |  | 513.634 |   |  | 528.035 |  
|Diluted number of shares (1,000s)                |  | 524.254                                   |   |  | 524.254 |   |  | 525.782 |   |  | 503.984 |   |  | 522.286 |   |  | 539.712 |  

---

|(1) |  | In 2000, the definition of capital expenditures was revised to include purchased businesses. Amount for the year 1999 has been restated to conform to the current practice regarding
the inclusion of purchased businesses.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In conformity with the exchange rate set forth in Dividends below, the dividend amount for 2003 was translated into U.S. dollars at the Noon Buying Rate of
1.00 = U.S.$1.2008 in effect on April 5, 2004.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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)
|1999(2) |  | 1.08 |  | 1.02    
|2000    |  | 0.75 |  | 0.67    
|2001    |  | 0.75 |  | 0.66    
|2002    |  | 0.75 |  | 0.82    
|2003    |  | 0.75 |  | 0.90    

---

|(1) |  | The dividend amount for year 2003 was declared in euros and translated into U.S. dollars at the Noon Buying Rate in effect on April 5, 2004, when the dividend was paid. The dividend
amounts for years 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. Dividend amount in respect of year 1999 was declared in FIM and
restated in euros using the irrevocable conversion rate of 1.00 = FIM 5.94573 and translated into U.S. dollars at the respective Noon Buying Rate in effect on the date of payment of such dividend.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes an ordinary dividend of 0.63 and an extra dividend of 0.45.
|--- |  | ----------------------------------------------------------------------



Under the Finnish Companies Act (the 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, 2003, the amounts of the Companys and the
Groups distributable funds were 3,062 million (U.S.$3,857 million) and 3,265 million (U.S.$4,113 million), respectively.



Dividends paid to holders of the shares (in the form of shares and American depository shares (ADSs)) who are non-residents of Finland will
generally be subject to Finnish withholding tax at a rate of 29%. 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.



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##### Table of Contents

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 the year 2004 until the latest practicable date, and for each of the last six months and the period from the beginning of June 2004 until the latest practicable date (expressed in euros per one U.S. dollar):



Euros per U.S. Dollar



|                       |  |         |  |        |  |        |  |           
|---------------------- |  | ------- |  | ------ |  | ------ |  | ----------
|Year                   |  | Average |  | High   |  | Low    |  | Period End
|1999                   |  | 0.9455  |  | 0.9984 |  | 0.8466 |  | 0.9930    
|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 (through June 14) |  | 0.8139  |  | 0.8470 |  | 0.7785 |  | 0.8275    



|                       |  |        |  |       
|---------------------- |  | ------ |  | ------
|                       |  | High   |  | Low   
|2003                   |  |        |  |       
|December               |  | 0.8360 |  | 0.7928
|2004                   |  |        |  |       
|January                |  | 0.8083 |  | 0.7785
|February               |  | 0.8052 |  | 0.7797
|March                  |  | 0.8265 |  | 0.8035
|April                  |  | 0.8457 |  | 0.8087
|May                    |  | 0.8470 |  | 0.8154
|June (through June 14) |  | 0.8326 |  | 0.8124



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 the year 2004 until the latest practicable date, and for each of the last six months and the period from the beginning of June 2004
until the latest practicable date (expressed in U.S. dollars per one euro):



U.S. Dollars per Euro



|                       |  |         |  |        |  |        |  |           
|---------------------- |  | ------- |  | ------ |  | ------ |  | ----------
|Year                   |  | Average |  | High   |  | Low    |  | Period End
|1999                   |  | 1.0576  |  | 1.1812 |  | 1.0016 |  | 1.0070    
|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 (through June 14) |  | 1.2287  |  | 1.2845 |  | 1.1807 |  | 1.2085    



|                       |  |        |  |       
|---------------------- |  | ------ |  | ------
|                       |  | High   |  | Low   
|2003                   |  |        |  |       
|December               |  | 1.2613 |  | 1.1962
|2004                   |  |        |  |       
|January                |  | 1.2845 |  | 1.2371
|February               |  | 1.2826 |  | 1.2420
|March                  |  | 1.2445 |  | 1.2099
|April                  |  | 1.2366 |  | 1.1825
|May                    |  | 1.2264 |  | 1.1807
|June (through June 14) |  | 1.2309 |  | 1.2010



Our shares trade on
the Helsinki Securities and Derivatives Exchange, Clearing House Ltd (the Helsinki Exchanges) in euros. 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 Exchanges 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.



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##### Table of Contents

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Currency Fluctuations and Introduction of the Euro and Item 11. Quantitative and Qualitative Disclosures about Market RiskForeign Currency
Exposure.



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Industry Overview.



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Industry Overview.



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 the 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.



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##### Table of Contents

We are subject to significant environmental regulation.



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 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, with our ten largest customers accounting for somewhat less than 15% and largest approximately two percent of our turnover in 2003, 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. 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 facilities we own. We are also the largest private owner of forest land 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



6



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##### Table of Contents

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. 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, our reporting currency from the beginning of 1999, 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Currency Fluctuations and Introduction of the Euro 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.



Risks of nonpayment or nonperformance by customers are important considerations of the Company. 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 2003, 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 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.



7



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##### Table of Contents

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 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 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.



UPM has directed the Companys 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 has also decided to approach competition law authorities to disclose any conduct that has not comported with applicable competition laws. UPM has
also strengthened its competition law compliance programs. It has created a European Union Competition Law Compliance Manual and has begun a comprehensive competition law training program for all its employees. Seven hundred of the most senior
Company employees have been trained to date and have individually confirmed their compliance with the competition laws. Internal audits have been expanded to include competition law issues and a variety of other internal controls have been
implemented. Pursuant to the continuing investigation, the Company has also made organizational and personnel changes. As the investigation continues, additional such changes may be made.



During 2004, UPM and its subsidiaries have been cooperating 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 is cooperating fully with the 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 federal 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 has 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 will respond to the Statement of Objection as the Commission has requested.



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-00130 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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##### Table of Contents

Development of the Company



On April 30, 1996, UPM-Kymmene Corporation was formed through the merger of Kymmene and Repola. The two companies have
operated as one since November 1995, following the approval of the merger by the extraordinary shareholders meetings of both companies and by the European Union Commission.



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.



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Haindl Acquisition.



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 up a new self-adhesive label stock factory in North Carolina in the fall of 2001 and through targeted 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 business area, we have taken steps to strengthen our position through both acquisitions and investments. Recent
investments have been concentrated to Russia, partly to improve our wood fiber raw material sourcing.



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



9



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##### Table of Contents

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 IT 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.



Business Overview



UPM is one of the worlds leading papermakers with annual production capacity of 12.0 million tons and the largest producer of magazine papers. Our
core businesses are the production, sales and marketing of magazine papers, newsprint, fine papers and speciality papers, 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 81% of our turnover in 2003. In 2003, our total turnover was 9.9 billion (U.S.$12.5 billion) and, at December 31, 2003, our total assets amounted to 14.5 billion (U.S.$18.3 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



10



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##### Table of Contents

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 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, we have a further segment, called Other Operations, which consists of our Finnish forest and energy departments,
our share of the chemical pulp associated company Oy Metsä-Botnia Ab (Metsä-Botnia), Rafsec (a unit developing smart labels based on radio frequency technology), our real estate units in Finland, logistics services and the
central administrative functions for the Group.



The following
tables set forth the percentages of our turnover of 9.9 billion, 10.5 billion and 9.9 billion in 2003, 2002 and 2001, respectively, by division and market area:



|                           |  |                                   |   |  |      |   |  |      |  
|-------------------------- |  | --------------------------------- | - |  | ---- | - |  | ---- | -
|                           |  | 2003                              |   |  | 2002 |   |  | 2001 |  
|                           |  | (Percentage of Group turnover(1)) |  
|Division                   |  |                                   |   |  |      |   |  |      |  
|Magazine papers            |  | 32                                | % |  | 32   | % |  | 34   | %
|Newsprint                  |  | 12                                |   |  | 13   |   |  | 10   |  
|Fine and speciality papers |  | 22                                |   |  | 22   |   |  | 23   |  
|Converting                 |  | 13                                |   |  | 14   |   |  | 14   |  
|Wood products              |  | 15                                |   |  | 14   |   |  | 14   |  
|Other operations(2)        |  | 6                                 |   |  | 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.
|--- |  | ------------------------------------------------------



|                               |  |                                |   |  |      |   |  |      |  
|------------------------------ |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                               |  | 2003                           |   |  | 2002 |   |  | 2001 |  
|                               |  | (Percentage of Group turnover) |  
|Market area                    |  |                                |   |  |      |   |  |      |  
|European Union countries:      |  |                                |   |  |      |   |  |      |  
|Germany                        |  | 16                             | % |  | 17   | % |  | 16   | %
|United Kingdom                 |  | 12                             |   |  | 13   |   |  | 14   |  
|Finland                        |  | 11                             |   |  | 9    |   |  | 10   |  
|France                         |  | 7                              |   |  | 8    |   |  | 9    |  
|Other European Union countries |  | 21                             |   |  | 21   |   |  | 20   |  
|                               |  |                                |   |  |      |   |  |      |  
|Total European Union countries |  | 67                             |   |  | 68   |   |  | 69   |  
|Other European countries       |  | 8                              |   |  | 8    |   |  | 7    |  
|U.S. and Canada                |  | 14                             |   |  | 14   |   |  | 15   |  
|Asia                           |  | 6                              |   |  | 5    |   |  | 6    |  
|Other countries(1)             |  | 5                              |   |  | 5    |   |  | 3    |  
|                               |  |                                |   |  |      |   |  |      |  
|Total                          |  | 100                            | % |  | 100  | % |  | 100  | %
|                               |  |                                |   |  |      |   |  |      |  

---

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



11



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##### Table of Contents

Paper Divisions



We manufacture a comprehensive range of different papers. 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, Great Britain, France, Austria, the United States, Canada and China. Our papermaking capacity is approximately
12 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 5.6 million tonnes, we
are the worlds largest manufacturer of magazine paper. We have 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. Most of this newsprint is sold on the markets of Europe, where we have a share of just under one-fifth.



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 UPMs fine papers are in
Europe and in Asia, particularly in the growing Chinese market. UPM is a leading supplier of fine papers in Europe. Our speciality papers comprise face and release papers for self-adhesive labels, white and brown sack and kraft papers, and white and
tinted envelope papers. We are the worlds largest producer of label papers and Europes leading producer of envelope papers. We are also one of Europes biggest suppliers of packaging papers.



The following table sets forth the paper divisions 2003 turnover by
division and by geographic market:



|                  |  |                                         |       |         |     |   |           |   |         |  |     |                            |  |         |       |  |     |  
|----------------- |  | --------------------------------------- | ----- | ------- | --- | - | --------- | - | ------- |  | --- | -------------------------- |  | ------- | ----- |  | --- | -
|                  |  | Magazine Papers                         |       | Percent |     |   | Newsprint |   | Percent |  |     | Fine and Speciality Papers |  | Percent |      
|                  |  | ( in millions, except for percentages) |      
|Europe            |  |                                        | 2,098 |         | 63  | % |           |  | 1,060   |  | 82  | %                          |  |        | 1,779 |  | 78  | %
|U.S. and Canada   |  |                                         | 938   |         | 28  |   |           |   | 79      |  | 6   |                            |  |         | 88    |  | 4   |  
|Rest of the world |  |                                         | 284   |         | 9   |   |           |   | 156     |  | 12  |                            |  |         | 411   |  | 18  |  
|                  |  |                                         |       |         |     |   |           |   |         |  |     |                            |  |         |       |  |     |  
|Total             |  |                                        | 3,320 |         | 100 | % |           |  | 1,295   |  | 100 | %                          |  |        | 2,278 |  | 100 | %
|                  |  |                                         |       |         |     |   |           |   |         |  |     |                            |  |         |       |  |     |  



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, 2003:



|                                |  |                            |  |                   |  |                 |    
|------------------------------- |  | -------------------------- |  | ----------------- |  | --------------- | ---
|                                |  | Capacity (1,000
tons/year) |  | European position |  | Global position |    
|Magazine papers                 |  | 5,580                      |  | 1                 |  | 1               |    
|Newsprint                       |  | 2,775                      |  | 2                 |  | 5               |    
|Fine paper                      |  | 2,670                      |  | 3                 |  | 9               |    
|                                |  |                            |  |                   |  |                 |    
|Printing papers, total          |  | 11,025                     |  |                  |  |                |    
|Label papers                    |  | 340                        |  | 1                 |  | 1               |    
|Envelope papers                 |  | 220                        |  | 1                 |  |                |    
|Packaging papers                |  | 315                        |  | 3                 |  |                |    
|Papers from Converting Division |  | 65                         |  |                  |  |                |    
|                                |  |                            |  |                   |  |                 |    
|Papers, total                   |  | 11,965                     |  | 2                 |  | 3               | (1)
|                                |  |                            |  |                   |  |                 |    

---

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



Magazine Papers Division



The Magazine Papers Division accounted for approximately 32% of our 2003 turnover, making it our largest business division.



As of December 31, 2003, we were the worlds largest producer of
magazine paper, with an annual capacity of approximately 5.6 million tons, representing approximately one-fifth of the global magazine paper capacity.



12



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##### Table of Contents

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,                                                   
|                                                              |  | 2003                                                                       |  | 2002  |  | 2001 
|                                                              |  | ( in millions, except for  percentages and personnel and production data)
|Magazine Papers                                               |  |                                                                            |  |       |  |      
|Turnover                                                      |  | 3,320                                                                      |  | 3,577 |  | 3,548
|Operating profit                                              |  | 153                                                                        |  | 225   |  | 598  
|excluding amortization of goodwill and non-recurring items(1) |  | 211                                                                        |  | 411   |  | 644  
|Capital employed (average)                                    |  | 4,923                                                                      |  | 5,253 |  | 4,380
|ROCE (%)                                                      |  | 3.1                                                                        |  | 4.3   |  | 13.7 
|excluding amortization of goodwill and non-recurring items    |  | 4.3                                                                        |  | 7.8   |  | 14.7 
|Capital expenditure and acquisitions                          |  | 162                                                                        |  | 188   |  | 1,556
|Personnel at December 31                                      |  | 8,887                                                                      |  | 9,325 |  | 9,317
|Deliveries (tons in 000s)                                    |  | 4,822                                                                      |  | 4,618 |  | 3,964
|Capacity utilization rate (%)                                 |  | 87                                                                         |  | 85    |  | 84   

---

|(1) |  | Operating profit excluding amortization of goodwill and non-recurring items for 2003, 2002 and 2001 excludes amortization of goodwill of 58 million, 58 million and
26 million, respectively, and non-recurring charges for 2002 and 2001 of 128 million and 20 million relating to Blandin, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Magazine Papers Division comprises the Groups magazine paper machines, the Kaukas and Miramichi pulp mills and
Miramichis sawmills. The acquisition of Haindl in late 2001 brought the division four additional paper machines. (See Item 5.Recent Acquisition and Divestitures)



Typically, magazine papers have a 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 January 2003, we closed two coated magazine paper machines at our Blandin Mill in the United States. These machines were built in 1931 and 1963,
respectively, and had a combined production capacity of 157,000 tons/year. In 2003, we completed modernization work on one of our mills at Rauma for a total cost of 64 million. We also announced plans in 2003 to rebuild another paper machine
at Rauma and an SC magazine paper machine at Jämsänkoski, which are expected to cost 30 million and 24 million, respectively.



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. Various companies in Europe compete



13



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with us 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 12% of our 2003 turnover. The division has approximately 2.8 million tons of annual production capacity, which is approximately one-fourth of Western Europes total newsprint capacity. As of December 31, 2003, it was
the second largest manufacturer of newsprint in Western Europe and fifth largest in the world. The mills of this division also produce paper for certain other products, including 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,                                                  
|                                                              |  | 2003                                                                      |  | 2002  |  | 2001 
|                                                              |  | ( in millions, except for percentages and personnel and production data)
|Newsprint                                                     |  |                                                                           |  |       |  |      
|Turnover                                                      |  | 1,295                                                                     |  | 1,381 |  | 1,058
|Operating profit                                              |  | 54                                                                        |  | 162   |  | 211  
|excluding amortization of goodwill and non-recurring items(1) |  | 105                                                                       |  | 212   |  | 214  
|Capital employed (average)                                    |  | 2,124                                                                     |  | 2,368 |  | 984  
|ROCE (%)                                                      |  | 2.5                                                                       |  | 6.8   |  | 21.4 
|excluding amortization of goodwill and non-recurring items    |  | 4.9                                                                       |  | 9.0   |  | 21.7 
|Capital expenditure and acquisitions                          |  | 109                                                                       |  | 84    |  | 1,503
|Personnel (at December 31)                                    |  | 3,785                                                                     |  | 3,826 |  | 3,842
|Deliveries (tons in 000s)                                    |  | 2,587                                                                     |  | 2,467 |  | 1,667
|Capacity utilization rate (%)                                 |  | 90                                                                        |  | 88    |  | 89   

---

|(1) |  | Operating profit excluding amortization of goodwill and non-recurring items for 2003, 2002 and 2001 excludes amortization of goodwill of 42 million, 42 million and
3 million, respectively, and, for 2003 and 2002, non-recurring charges of 9 million related to the planned close-down of the paper machine 17 at Voikkaa and 8 million related to the closing of the mechanical pulp mill at Shotton,
respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Newsprint Division comprises
the Groups newsprint machines. The Haindl acquisition added four paper machines to the division. (See Item 5.Recent Acquisitions and Diventitures)



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. Typically, such publishers have had a long-term relationship with us lasting a number of years or, in some cases, decades. Supply contracts with most of such
publishers are negotiated annually by the parties.



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 1.7 million tons of waste paper in 2003. We completed a 127 million
expansion of the deinking plant at Shotton in November 2003. Following this expansion, the recycled fiber content in our newsprint production is approximately 75%.



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. Various companies in Europe compete with us in the manufacture of newsprint. These competitors include Stora Enso, Norske Skog, Holmen AB, Myllykoski and



14



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##### Table of Contents

Svenska Cellulosa Aktiebolaget SCA (publ). In addition, the aggregate annual exports of newsprint by Canadian producers to Europe amounted to approximately
eight percent of the European market and such producers compete with us. Russian producers are also exporting newsprint to Western Europe in greater volumes than before, accounting for approximately four percent of the European market in 2003.



Fine and Speciality Papers Division



The Fine and Speciality Papers Division accounted for approximately 22% of
our 2003 turnover. Besides uncoated and coated fine paper, the division includes speciality papers, which are comprised of label papers, envelope papers and packaging papers.



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



|                                                              |  |                                                                          |  |       |  |      
|------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | ----- |  | -----
|                                                              |  | Year ended December 31,                                                 
|                                                              |  | 2003                                                                     |  | 2002  |  | 2001 
|                                                              |  | ( in millions, except for percentagesand personnel and production data)
|Fine and Speciality Papers                                    |  |                                                                          |  |       |  |      
|Turnover                                                      |  | 2,278                                                                    |  | 2,449 |  | 2,362
|Operating profit                                              |  | 241                                                                      |  | 359   |  | 336  
|excluding amortization of goodwill and non-recurring items(1) |  | 246                                                                      |  | 364   |  | 341  
|Capital employed (average)                                    |  | 2,471                                                                    |  | 2,628 |  | 2,602
|ROCE (%)                                                      |  | 9.8                                                                      |  | 13.7  |  | 12.9 
|excluding amortization of goodwill and non-recurring items    |  | 10.0                                                                     |  | 13.9  |  | 13.1 
|Capital expenditure and acquisitions                          |  | 206                                                                      |  | 153   |  | 391  
|Personnel at December 31                                      |  | 6,654                                                                    |  | 6,611 |  | 6,635
|Deliveries (fine papers) (tons in 000s)                      |  | 2,879                                                                    |  | 2,774 |  | 2,546
|Capacity utilization rate (%)                                 |  | 88                                                                       |  | 89    |  | 87   

---

|(1) |  | Operating profit excluding amortization of goodwill and non-recurring items for 2003, 2002 and 2001 excludes amortization of goodwill of 5 million each year.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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, 2003, our fine paper business, with a production capacity of approximately 2.7 million tons per year, had the third-leading market
position in Western Europe and ninth in the world. We were the largest label paper producer in the world and the largest envelope paper producer in Western Europe. In packaging papers, we were the third largest producer overall in Western Europe.



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.



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. The mills capacity for coated fine paper will be raised at the same time. This investment is expected to cost approximately 450 million, and is scheduled to start-up in mid-2005.
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 turnover 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.



15



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##### Table of Contents

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 nine paper machines totals approximately 0.9 million tons per year.



We are the leading supplier of label papers to the self-adhesive labelstock
business in Western Europe with a market share of one-third in the year 2003. The label papers unit produces face and release papers utilizing three paper machines in Finland with a total capacity of approximately 0.34 million tons per year. We
completed modernization work on the label paper machine at Jämsänkoski during 2003. The 46 million investment improved paper quality and raised production capacity from 110,000 tons/year to 140,000 tons/year.



Our envelope papers unit is Western Europes leading manufacturer of
envelope paper with one paper machine in Finland and one in France with a total production capacity of approximately 0.22 million tons per year. The unit produces both white and tinted envelope paper.



The packaging papers unit produces brown sack as well as white and brown
kraft papers with a total production capacity of approximately 0.32 million tons per year. Sack and kraft papers are produced in Finland on two machines.



Converting Division



The Converting Division accounted for approximately 13% of our 2003 turnover. Our Converting Division manufactures self-adhesive labelstock (through our
Raflatac subsidiary), siliconized papers (through our Loparex subsidiary) and industrial wrappings (through our Walki Wisa subsidiary). We were the second largest producer of self-adhesive labelstock in Western Europe and in the world as of December
31, 2003. In siliconized paper, we were the largest producer in the world. In industrial wrappings, we were the largest producer in Western Europe.



The following table sets forth the industry position of the Converting Division as of December 31, 2003:



|                                    |  |                   |  |                
|----------------------------------- |  | ----------------- |  | ---------------
|                                    |  | European position |  | Global position
|Self-adhesive 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,                                                  
|                                                              |  | 2003                                                                      |  | 2002  |  | 2001 
|                                                              |  | ( in millions, except for percentages and personnel and production data)
|Turnover                                                      |  | 1,374                                                                     |  | 1,541 |  | 1,480
|Operating profit                                              |  | 43                                                                        |  | 70    |  | 46   
|excluding amortization of goodwill and non-recurring items(1) |  | 52                                                                        |  | 75    |  | 62   
|Capital employed (average)                                    |  | 688                                                                       |  | 786   |  | 801  
|ROCE (%)                                                      |  | 6.3                                                                       |  | 8.9   |  | 5.8  
|excluding amortization of goodwill and non-recurring items    |  | 7.6                                                                       |  | 9.5   |  | 7.7  
|Capital expenditure and acquisitions                          |  | 31                                                                        |  | 68    |  | 215  
|Paper production (tons in 000s)                              |  | 54                                                                        |  | 59    |  | 49   
|Personnel (at December 31)                                    |  | 4,558                                                                     |  | 4,694 |  | 4,872

---

|(1) |  | Operating profit excluding amortization of goodwill and non-recurring items for 2003, 2002 and 2001 excludes amortization of goodwill of 5 million each year and, for 2003 and
2001, non-recurring charges of 4 million and 11 million, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



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##### Table of Contents

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



|              |  |                         |       |   |      |   |       |      |  |   |       |  
|------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|              |  | Year ended December 31, |      
|              |  | 2003                    |       |   | 2002 |   |       | 2001 | 
|              |  | ( in millions)         |      
|Raflatac      |  |                        | 736   |   |      |  | 736   |      |  |  | 667   |  
|Loparex       |  |                         | 334   |   |      |   | 389   |      |  |   | 375   |  
|Walki Wisa    |  |                         | 305   |   |      |   | 318   |      |  |   | 323   |  
|Sold units(1) |  |                         | 4     |   |      |   | 105   |      |  |   | 123   |  
|Internal      |  |                         | (5    | ) |      |   | (7    | )    |  |   | (8    | )
|              |  |                         |       |   |      |   |       |      |  |   |       |  
|Total         |  |                        | 1,374 |   |      |  | 1,541 |      |  |  | 1,480 |  
|              |  |                         |       |   |      |   |       |      |  |   |       |  

---

|(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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Raflatac business unit, which is one of Western Europes leading producers of self-adhesive labelstock, has production facilities in four European countries as well as in the United States, Australia,
Malaysia, China and South Africa. Raflatacs products are used by manufacturers of price, product and automatic data processing labels.



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 the global leader with a 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 the start-up of a new production line in China scheduled for the third quarter of 2004.



Walki Wisa produces coated and laminated packaging materials and industrial wrappings in five mills in Finland, Germany, the United Kingdom, China and the
United States. 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 2003 turnover by geographic market:



|                         |  |               |       |                              |     |  
|------------------------ |  | ------------- | ----- | ---------------------------- | --- | -
|                         |  |  in millions |       | Percent of division turnover |    
|Finland                  |  |               | 77    |                              | 6   |  
|Other European countries |  |               | 868   |                              | 63  |  
|U.S. and Canada          |  |               | 317   |                              | 23  |  
|Rest of the world        |  |               | 112   |                              | 8   |  
|                         |  |               |       |                              |     |  
|Total                    |  |              | 1,374 |                              | 100 | %
|                         |  |               |       |                              |     |  



Our main markets for
converting products are the European Union countries, which together accounted for approximately 60% of total sales of converting materials to third parties in 2003. Other European countries accounted for approximately ten percent of our 2003
turnover and the U.S. and Canada for approximately 23% of our 2003 turnover. We face competition from a large number of companies in each of the converting business segments in which we operate.



Wood Products Division



As of December 31, 2003, 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.



17



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##### Table of Contents

The following table sets forth the annual capacity and industry position of our Wood Products
Divisions manufacturing business units as of December 31, 2003:



|              |  |                          |  |                 
|------------- |  | ------------------------ |  | ----------------
|              |  | Capacity (1,000 m3/year) |  | Europeanposition
|Plywood       |  | 1,150                    |  | 1               
|Sawmilling(1) |  | 2,800                    |  | 3               

---

|(1) |  | Including the Canadian sawmills with an annual sawn timber capacity of approximately 183,000 cubic meters reported in the Magazine Papers Division, and the annual capacity of
300,000 cubic meters at our new Pestovo saw mill, which started in the Spring 2004.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                           |  |                                                                           |  |       |  |      
|-------------------------- |  | ------------------------------------------------------------------------- |  | ----- |  | -----
|                           |  | Year ended December 31,                                                  
|                           |  | 2003                                                                      |  | 2002  |  | 2001 
|                           |  | ( in millions, except for percentages and personnel and production data)
|Turnover                   |  | 1,552                                                                     |  | 1,489 |  | 1,463
|Operating profit           |  | 29                                                                        |  | 37    |  | 27   
|Capital employed (average) |  | 777                                                                       |  | 742   |  | 664  
|ROCE (%)                   |  | 3.7                                                                       |  | 5.0   |  | 4.1  
|Capital expenditure        |  | 91                                                                        |  | 69    |  | 137  
|Production (in 1,000 m3)   |  |                                                                           |  |       |  |      
|Sawn timber                |  | 2,274                                                                     |  | 2,051 |  | 1,856
|Plywood                    |  | 936                                                                       |  | 905   |  | 786  
|Personnel (at December 31) |  | 7,711                                                                     |  | 7,577 |  | 7,865



The Wood Products
Division accounted for approximately 15% of our 2003 turnover.



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 energy at our mills. In January 2004, we merged two of our subsidiaries in our Wood Products Division, Schauman Wood Oy
and United Sawmills Ltd., which merger does not affect the overall makeup of the business units described above.



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



|                         |  |                         |       |   |      |   |       |      |  |   |       |  
|------------------------ |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                         |  | Year ended December 31, |      
|                         |  | 2003                    |       |   | 2002 |   |       | 2001 | 
|                         |  | ( in millions)         |      
|Plywood                  |  |                        | 529   |   |      |  | 538   |      |  |  | 522   |  
|Sawmilling               |  |                         | 499   |   |      |   | 459   |      |  |   | 434   |  
|Building supplies trade  |  |                         | 650   |   |      |   | 615   |      |  |   | 621   |  
|Internal sales and other |  |                         | (126  | ) |      |   | (123  | )    |  |   | (114  | )
|                         |  |                         |       |   |      |   |       |      |  |   |       |  
|Total                    |  |                        | 1,552 |   |      |  | 1,489 |      |  |  | 1,463 |  
|                         |  |                         |       |   |      |   |       |      |  |   |       |  



Plywood.    The plywood unit, which is responsible for the Wood Products Divisions plywood operations in Finland, France, Estonia and Russia, was Western Europes largest plywood manufacturer as of
December 31, 2003. Our plywood production comprises 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.



18



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##### Table of Contents

The plywood operations principal markets are the European Union countries, which account for
approximately 80% of annual turnover. Germany, France and the Benelux countries are the most important markets outside of Finland. We sell our plywood almost exclusively based on firm orders received. In this way, we are not required to maintain
large inventories. In early 2003, we completed construction of a new facility to produce thin veneers alongside our Chudovo plywood mill in Russia. The new facility has the capacity to produce over ten million square meters of birch plywood
annually. In addition, in 2003 we acquired the Otepää birch plywood mill in Estonia, which produces 20,000 m3of high-quality plywood annually for the building, furniture and transport vehicle industries. Most of the production of this mill has been exported, mainly to central European markets.



Our principal competitors in plywood include Finnforest Corporation
(Finnforest) 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, 2003, we were Western Europes third biggest producer of sawn timber. The unit operates eight sawmills in Finland with a production capacity of approximately 2.1 million cubic meters per
year and one mill in Austria with a production capacity of approximately 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. Beginning in 2001, we began specializing most of our sawmills in a single species of timber to raise production efficiency and improve quality. We have also made an investment to internationalize our sawmilling business and support our wood
procurement through the construction of a new sawmill at Pestovo in Russia. The Pestovo mill, which started operations in the spring of 2004, has an initial production capacity of approximately 300,000 cubic meters per year.



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 Eastern European producers.



Building Supplies Trade.    The
building supplies unit operates retail chains of mainly wood based building material merchants in Finland, the United Kingdom, Ireland and Denmark. In April 2004, we sold our Danish retail chain operations of Anco Trae. The sold business had a
turnover of approximately 70 million in 2003 and it employed approximately 190 people. Our main competitors in the building supplies trade are suppliers based in Finland and Sweden, include 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 2003, 89% of the Wood Products Divisions production was sold in the European Union countries, with sales in Finland representing approximately
31% of the business areas total turnover. The other main markets were in the United Kingdom, Germany and France.



The following table sets forth the Wood Products Divisions 2003 turnover by geographic market:



|                               |  |               |       |                                   |     |  
|------------------------------ |  | ------------- | ----- | --------------------------------- | --- | -
|                               |  |  in millions |       | Percent of business area turnover |    
|Finland                        |  |              | 478   |                                   | 31  | %
|Other European Union countries |  |               | 901   |                                   | 58  |  
|Other European countries       |  |               | 64    |                                   | 4   |  
|U.S. and Canada                |  |               | 11    |                                   | 1   |  
|Rest of the world              |  |               | 98    |                                   | 6   |  
|                               |  |               |       |                                   |     |  
|Total                          |  |              | 1,552 |                                   | 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 70% of the sales of these operations are to other units within the Group.



19



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##### Table of Contents

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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | the new ventures business unit, which develops new products and services in support of our future business operations, with the Rafsec smart labels being the most notable products
currently being developed; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Other operations is also responsible for staff functions and shareholdings. Currently, our most significant shareholding is
19.9 million shares (14.6% of shares outstanding) of Metso Corporation, a global engineering company.



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



|                                         |  |                                           |  |       |  |      
|---------------------------------------- |  | ----------------------------------------- |  | ----- |  | -----
|                                         |  | Year ended December 31,                  
|                                         |  | 2003                                      |  | 2002  |  | 2001 
|                                         |  | ( in millions, except forpersonnel data)
|Turnover(1)                              |  | 672                                       |  | 583   |  | 489  
|Operating profit                         |  | 264                                       |  | 209   |  | 396  
|                                         |  |                                           |  |       |  |      
|Forestry department (Finland)            |  | 41                                        |  | 37    |  | 45   
|Energy department (Finland)              |  | 78                                        |  | 51    |  | 99   
|Share of results of associated companies |  | 22                                        |  | 60    |  | 82   
|Other(2)                                 |  | 123                                       |  | 61    |  | 170  
|Personnel at December 31                 |  | 2,887                                     |  | 3,546 |  | 3,767

---

|(1) |  | Turnover includes sales outside the Group only.
|--- |  | -----------------------------------------------

|(2) |  | Includes capital gains of 167 million, 81 million and, 265 million on sales of listed shares in 2003, 2002 and 2001, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------



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



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 (47%) and Metsäliitto Cooperative (six percent). Metsä-Botnia produces softwood and birch pulps at five mills in Finland
and its turnover in 2003 was 1,006 million. Metsä-Botnia had approximately 1,900 employees as of December 31, 2003. Most of the pulp produced by Metsä-Botnia is supplied to the companys shareholders. Metsä-Botnia can
provide approximately 30% of our annual chemical pulp requirement. In 2003, we bought 605,000 tons of pulp from Metsä-Botnia.



Pohjolan Voima



We have a 42.0% 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 56.8% owned by Pohjolan Voima.
In 2003, Pohjolan Voima had a turnover of 660 million and a workforce of approximately 850.



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 investment we intend to secure competitively priced electricity for our mills in Finland and central Europe 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.



20



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##### Table of Contents

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, 2003, the Kaukas mill had an annual capacity of
0.72 million tons, the Wisaforest mill had an annual capacity of 0.63 million tons, the Kymi mill had an annual capacity of 0.53 million tons, the Tervasaari mill had an annual capacity of 0.24 million tons and the Miramichi mill had an annual
capacity of 0.22 million tons. Our current chemical pulp entitlement from our 47% interest in Metsä-Botnia totals 1.1 million tons per year. In early 2004, we increased the capacity of the Wisaforest pulp mill to 0.80 million tons.



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 1.9 million tons in 2003, making us the biggest user of recycled fiber for publication paper manufacturing in Europe. Total consumption of recovered paper was 2.3 million tons in 2003.



The following table sets forth our annual pulp production
volumes:



|                          |  |                         |  |       |  |      
|------------------------- |  | ----------------------- |  | ----- |  | -----
|                          |  | Year ended December 31,
|                          |  | 2003                    |  | 2002  |  | 2001 
|                          |  | (1,000 tons)           
|Production(1)             |  |                         |  |       |  |      
|Chemical pulp             |  |                         |  |       |  |      
|Own production            |  | 2,027                   |  | 2,102 |  | 2,038
|From associated companies |  | 605                     |  | 594   |  | 550  
|Mechanical pulp           |  | 2,952                   |  | 2,951 |  | 2,673
|Recycled fiber pulp       |  | 1,875                   |  | 1,735 |  | 810  
|                          |  |                         |  |       |  |      
|Total                     |  | 7,459                   |  | 7,382 |  | 6,071
|                          |  |                         |  |       |  |      

---

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



The following table sets forth our annual pulp consumption volumes:



|                    |  |                         |  |       |  |      
|------------------- |  | ----------------------- |  | ----- |  | -----
|                    |  | Year ended December 31,
|                    |  | 2003                    |  | 2002  |  | 2001 
|                    |  | (1,000 tons)           
|Consumption         |  |                         |  |       |  |      
|Chemical pulp       |  | 3,139                   |  | 3,161 |  | 2,970
|Mechanical pulp     |  | 3,002                   |  | 2,988 |  | 2,683
|Recycled fiber pulp |  | 1,877                   |  | 1,737 |  | 811  
|                    |  |                         |  |       |  |      
|Total               |  | 8,018                   |  | 7,886 |  | 6,464
|                    |  |                         |  |       |  |      



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.



21



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##### Table of Contents

Our electricity procurement in 2003 amounted to 19.9 TWh, of which 18.1 TWh was used internally and 1.8
TWh was sold. Total electricity consumption by our mills outside of Finland was 6.8 TWh.



The generating capacity available to us in Finland through in-house and leased capacity and through associated companies totaled approximately 2,150 MW as at December 31, 2003. Our most important associated companies
in terms of energy are Pohjolan Voima, in which we have a 42.0% 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. Because it is no longer possible to significantly increase our use of hydropower in Finland, we are promoting the use of biomass fuels for our energy supply. In 2003, our procurement of thermal energy totaled 36.6 TWh. The share of biomass
fuels of the total fuels supply was approximately 56%. We were also involved in building new biofuel power plant at Savonlinna which was completed in 2003. In addition, we have expanded our use of biomass fuels to include the byproducts of logging.
In 2003, we procured logging residues that generated energy exceeding 1.0 TWh for the first time. The energy was generated at our own power plants, as well as at our associated companies power plants. We also expect to participate in certain
emissions trading programs, as such programs are developed, particularly in Europe.



Wood Procurement



We own 930,000 hectares of
forest land 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. In 2003, we felled 1.6 million cubic meters of wood on our own land in Finland, less than the volume that can be felled sustainably. In addition, we manage approximately 200,000 hectares of forest land for private forest owners in
Finland. We also own approximately 2,000 hectares and manage (through our Tilhill Forestry subsidiary) 167,000 hectares of forest land in the United Kingdom and own 79,000 hectares of forest land in the United States. In Canada, we have 17,000
hectares of forest land and also administer 938,000 hectares of Province-owned forest land under long-term licenses. We also have a 38.4% ownership interest in Forestal Oriental, a forest management company in Uruguay with 57,000 hectares of land,
of which 32,000 hectares are planted with eucalyptus. In addition, we have entered into a letter of intent to establish a joint venture in Zhanjiang, China to focus initially on forestation projects.



The following table sets forth our wood consumption by country:



|               |  |            |  |        |  |       
|-------------- |  | ---------- |  | ------ |  | ------
|               |  | 2003       |  | 2002   |  | 2001  
|               |  | (1,000 m3)
|Finland        |  | 20,910     |  | 20,960 |  | 20,800
|United Kingdom |  | 690        |  | 760    |  | 800   
|Austria        |  | 980        |  | 800    |  | 40    
|Canada         |  | 2,080      |  | 2,140  |  | 1,800 
|France         |  | 460        |  | 420    |  | 410   
|Germany        |  | 520        |  | 500    |  | 30    
|Russia         |  | 200        |  | 200    |  |      
|Estonia        |  | 60         |  |       |  |      
|United States  |  | 410        |  | 560    |  | 515   
|               |  |            |  |        |  |       
|Total          |  | 26,310     |  | 26,340 |  | 24,395
|               |  |            |  |        |  |       



The Groups total
wood consumption was 26.3 million cubic meters in 2003. Wood consumption by our production plants in Finland totaled 20.9 million cubic meters. Of this amount, approximately 74% was obtained from private forests, approximately two percent came from
forests owned by the Finnish State and approximately six percent from our own forests. The remaining 18% was imported, primarily from Russia. The forestry department in Finland supplied 4.6 million cubic meters of wood to associated companies and
other mills outside of our Group.



Wood consumption by our
mills outside Finland totaled 5.4 million cubic meters in 2003. Wood required by our subsidiaries outside Finland is purchased primarily from local suppliers.



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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 forest lands. 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 forest lands through 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 an extensive network of paper agents and representatives in other
countries. We sell paper products mainly to Western European customers and have a customer base in Europe, 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 16 countries as well as agents covering
our most important markets around the world.



The following
table sets forth our turnover by market area:



|                               |  |                         |       |      |   |        |  |   |      
|------------------------------ |  | ----------------------- | ----- | ---- | - | ------ |  | - | -----
|                               |  | Year ended December 31,
|                               |  | 2003                    |       | 2002 |   | 2001  
|                               |  | ( in millions)        
|Germany                        |  |                        | 1,550 |      |  | 1,803  |  |  | 1,561
|United Kingdom                 |  |                         | 1,242 |      |   | 1,368  |  |   | 1,433
|Finland                        |  |                         | 1,135 |      |   | 988    |  |   | 974  
|France                         |  |                         | 725   |      |   | 850    |  |   | 876  
|Other European Union countries |  |                         | 2,040 |      |   | 2,150  |  |   | 1,995
|Other European countries       |  |                         | 778   |      |   | 796    |  |   | 668  
|U.S. and Canada                |  |                         | 1,406 |      |   | 1,495  |  |   | 1,453
|Rest of the world              |  |                         | 1,072 |      |   | 1,025  |  |   | 958  
|                               |  |                         |       |      |   |        |  |   |      
|Total                          |  |                        | 9,948 |      |  | 10,475 |  |  | 9,918
|                               |  |                         |       |      |   |        |  |   |      



Seasonality of UPM-Kymmenes
Business



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.



23



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In 2003, we filed 76 patent applications in Finland and 16 Patent Cooperation Treaty applications. As at
December 31, 2003, our intellectual property rights were protected by approximately 601 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 109 million and our capital expenditures on environmental protection amounted to 37 million in 2003, as compared to
operating expenses (including depreciation) attributable to environmental protection of 113 million and 89 million in 2002 and 2001, respectively, and capital expenditures on environmental protection of 21 million and 40
million in 2002 and 2001, respectively.



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, except for Miramichi, have ISO 14001 certified environmental management systems in place. In addition, Raflatacs Scarborough converting materials plant, Schauman Woods Finnish plywood mills,
United Sawmills sawmills, our Finnish hydroelectric power plants and the forestry department each have been granted an ISO 14001 certification. In all, approximately 95% of our total paper output was produced in mills using certified
environmental management systems. We continued the work to gain certification for the chain of custody for our wood raw material. In 2003, 67% of the wood we used came from certified forests.



In 2001, the specific average waste water amount of paper production rose by
approximately five percent and the respective oxygen demand (Chemical Oxygen Demand) of discharges by some 11%. The total fossil carbon dioxide emissions of our mill power plants were up some 30%, but total solid waste amount to landfills decreased
by approximately two percent. Our paper production remained about the same, although two new mills acquired in 2000 have been included in the production. The acquired mills relied partly on the use of heavy fuel oil and coal. In 2002, the specific
average waste water amount of paper production decreased by approximately 19% 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 four percent and the respective oxygen demand of discharges by approximately eleven percent. The total fossil carbon dioxide emissions of mill power plants remained about the same, while the total solid
waste amount to landfills remained unchanged. Paper production increased about two percent.



The most important project in 2003 in terms of its environmental impact was modernization work at Pietarsaari pulp mill which was completed in May 2004. Following completion, we expect that the mills specific
emissions will fall considerably, while the dust content of the flue gases will fall by approximately 70%, and the specific oxygen demand of the effluent will be cut by 50%. A third deinking line for recovered paper went into production at our
Shotton mill in November 2003, allowing us to discontinue the mills mechanical pulp production.



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



24



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##### Table of Contents

countries in which we have production facilities, our management is 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, management does 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 50% 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. Due to the acquisition of Haindl, we are now the largest user of recovered paper for printing papers in the world.



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, which was renewed in 1997, is to preserve natural biodiversity. The legislation changed our forestry practice and, as a result, we
now provide extensive environmental training to our forestry departments entire field personnel.



As an indication of our commitment to environmental protection, our annual general meeting of shareholders on March 19, 2002 approved our Board of
Directors proposal to donate approximately 560 hectares of forestry land in Repovesi in southeastern Finland for the establishment of a new Finnish national park. The Finnish Parliament has established Repovesi as a national park effective
January 1, 2003.



We have adopted a policy of not purchasing
wood from protected forest lands 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.



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.



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 |  | PercentageVoting Power
|UPM-Kymmene Beteiligungs GmbH           |  | Germany                 |  | 100             |  | 100                   
|UPM-Kymmene Vervaltung GmbH             |  | Germany                 |  | 100             |  | 100                   
|UPM-Kymmene Deutschland GmbH & Co. KgaA |  | Germany                 |  | 100             |  | 100                   
|UPM-Kymmene Papier GmbH & Co. KG        |  | Germany                 |  | 100             |  | 100                   
|UPM-Kymmene Groupe S.A.                 |  | France                  |  | 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.



25



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##### Table of Contents

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              |  | 450,000220,000183,000       |     |  | LWC magazine paper chemical pulp timber, m3                 
|                     |  |                        | 
|China                |  |                        |  |                             |     |  |                                                             
|Changshu             |  | Changshu               |  | 320,00050,000               |     |  | uncoated fine paper coated fine
paper                       
|                     |  |                        | 
|Finland              |  |                        |  |                             |     |  |                                                             
|Jämsänkoski          |  | Jämsänkoski            |  | 120,000590,000140,000       |     |  | LWC magazine paper SC magazine paper label papers           
|                     |  |                        | 
|Kaipola              |  | Kaipola                |  | 300,000410,000              |     |  | LWC magazine paper newsprint                                
|                     |  |                        | 
|Kajaani              |  | Kajaani                |  | 160,000445,000              |     |  | SC magazine paper newsprint                                 
|                     |  |                        | 
|Kuusankoski          |  | Kymi                   |  | 550,000370,00020,000525,000 |     |  | coated fine paper uncoated fine paper MG paper chemical pulp
|                     |  |                        | 
|Lappeenranta         |  | Kaukas                 |  | 580,000720,000              |     |  | LWC magazine paper chemical pulp                            
|                     |  |                        | 
|Pietarsaari          |  | Wisapaper Wisapulp     |  | 180,000800,000              | (1) |  | kraft paper chemical pulp                                   
|                     |  |                        | 
|Rauma                |  | Rauma                  |  | 700,000530,000              |     |  | LWC magazine paper SC magazine
paper                        
|                     |  |                        | 
|Valkeakoski          |  | Tervasaari             |  | 410,000235,000              |     |  | kraft, envelope, release and base label papers chemical pulp
|                     |  |                        | 
|Voikkaa              |  | Voikkaa                |  | 400,000                     |     |  | LWC magazine paper                                          
|                     |  |                        | 
|France               |  |                        |  |                             |     |  |                                                             
|Docelles             |  | Papeteries de Docelles |  | 125,000                     |     |  | envelope paper                                              
|                     |  |                        | 
|Grand-Couronne       |  | Chapelle Darblay       |  | 340,000                     |     |  | newsprint                                                   
|                     |  |                        | 
|Strasbourg           |  | Stracel                |  | 250,000                     |     |  | 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               |  | 210,000480,000              |     |  | SC magazine paper newsprint                                 
|Schwedt              |  | Schwedt                |  | 300,000                     |     |  | newsprint                                                   

---

|(1) |  | Including new capacity of 180,000 tons after completion of the rebuild in spring 2004.
|--- |  | --------------------------------------------------------------------------------------



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|                     |  |                          |  |          |  |                                                  
|-------------------- |  | ------------------------ |  | -------- |  | -------------------------------------------------
|Location of Facility |  | Unit                     |  | Capacity |  | Principal Activity                               
|                     |  |                          |  | (tons)   |  |                                                  
|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)          |  | Raflatac Walki Wisa      |  | n/an/a   |  | self-adhesive label materials packaging materials
|                     |  |                          | 
|Finland              |  |                          |  |          |  |                                                  
|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 Walki Wisa |  | n/an/a   |  | release paper packaging materials                
|                     |  |                          | 
|Iowa City, IA        |  | Loparex Group            |  | n/a      |  | release paper                                    
|                     |  |                          | 
|Fletcher, NC         |  | Raflatac                 |  | n/a      |  | label materials                                  

---

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



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##### Table of Contents

|                       |  |                 |  |                 |   |  |                              
|---------------------- |  | --------------- |  | --------------- | - |  | -----------------------------
|Location of Facility   |  | Unit            |  | Capacity        |   |  | Principal Activity           
|                       |  |                 |  | (m3)            |   |  |                              
|Wood Products Division |  |                 |  |                 |   |  |                              
|                       |  |                 | 
|Plywood                |  |                 |  |                 |   |  |                              
|                       |  |                 | 
|Estonia                |  |                 |  |                 |   |  |                              
|Otepää                 |  | Schauman Wood   |  | 25,000          |   |  | plywood                      
|                       |  |                 | 
|Finland                |  | Schauman Wood   |  |                 |   |  |                              
|Heinola                |  |                 |  | 50,000          |   |  | plywood                      
|                       |  |                 | 
|Joensuu                |  |                 |  | 50,000          |   |  | plywood                      
|                       |  |                 | 
|Kuopio                 |  |                 |  | 40,000          |   |  | plywood                      
|                       |  |                 | 
|Lahti                  |  |                 |  | n/a             |   |  | plywood                      
|                       |  |                 | 
|Lappeenranta           |  |                 |  | 70,000          |   |  | plywood                      
|                       |  |                 | 
|Pellos                 |  |                 |  | 480,000         |   |  | plywood                      
|                       |  |                 | 
|Savonlinna             |  |                 |  | 75,000          |   |  | plywood                      
|                       |  |                 | 
|Jyväskylä              |  |                 |  | 100,000         |   |  | plywood                      
|                       |  |                 | 
|Viiala                 |  |                 |  | 35,000          |   |  | plywood                      
|                       |  |                 | 
|Vuohijärvi             |  |                 |  | 70,000          |   |  | veneer                       
|                       |  |                 | 
|Keuruu and Lohja       |  |                 |  | 18,000(combined | ) |  | special plywood and veneer   
|                       |  |                 | 
|France                 |  |                 |  |                 |   |  |                              
|Loulay                 |  | Schauman Wood   |  | 50,000          |   |  | plywood                      
|                       |  |                 | 
|Russia                 |  |                 |  |                 |   |  |                              
|Chudovo                |  | Schauman Wood   |  | 75,0007,500     |   |  | plywood veneer               
|                       |  |                 | 
|Sawmilling             |  |                 |  |                 |   |  |                              
|                       |  |                 | 
|Austria                |  |                 |  |                 |   |  |                              
|Steyrermühl            |  | Steyrermühl     |  | 300,000         |   |  | timber                       
|                       |  |                 | 
|Finland                |  | United Sawmills |  |                 |   |  |                              
|Heinola                |  |                 |  | 120,000         |   |  | timber & components          
|                       |  |                 | 
|Kajaani                |  |                 |  | 220,000         |   |  | timber & components          
|                       |  |                 | 
|Korkeakoski            |  |                 |  | 250,000         |   |  | timber                       
|                       |  |                 | 
|Lappeenranta           |  |                 |  | 500,000         |   |  | timber & components          
|                       |  |                 | 
|Leivonmäki             |  |                 |  | 70,000          |   |  | timber                       
|                       |  |                 | 
|Luumäki(2)             |  |                 |  | n/a             |   |  | components                   
|                       |  |                 | 
|Parkano                |  |                 |  | 200,000         |   |  | timber & components          
|                       |  |                 | 
|Pietarsaari            |  |                 |  | 310,000         |   |  | timber                       
|                       |  |                 | 
|Pori                   |  |                 |  | 350,000         |   |  | timber                       
|                       |  |                 | 
|Russia                 |  |                 |  |                 |   |  |                              
|Pestovo                |  | Pestovo         |  | 300,000         |   |  | timber                       
|                       |  |                 | 
|Other                  |  |                 |  |                 |   |  |                              
|                       |  |                 | 
|Finland                |  |                 |  |                 |   |  |                              
|Jyväskylä              |  | Rafsec          |  | n/a             |   |  | self-adhesive label materials

---

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



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In addition to the manufacturing facilities listed above, we own four and lease five hydro power plants
with an aggregate capacity of 72 megawatts and 124 megawatts, respectively.



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 Finnish GAAP. Finnish GAAP differs
in certain significant respects from U.S. GAAP. A reconciliation of the amounts of net profit and shareholders equity reported under Finnish GAAP to the amounts determined under U.S. GAAP and a discussion of the principal differences are set
out in Note 23 of the notes to the consolidated financial statements included elsewhere in this annual report.



Overview



UPM derives
its revenue primarily from the sale of magazine papers, newsprint and fine and speciality papers. These three divisions represented 66% of our turnover in 2003. We derive additional revenue from the sale of converted products and wood products,
which together represented 28% of our turnover in 2003. We are well-integrated, with a high degree of self-sufficiency in pulp and energy. Europe represents 75% of our turnover, the United States represents 13% and Asia represents six percent. (See
Item 4.Market Area)



The main driving forces
in the paper and forest products industry are general economic growth, capacity build-up, commodity pricing, delivery volumes, capacity utilization and cost competitiveness. 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. We have been among the most
profitable large companies in the paper and forest products industry.



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 of 200 million by the beginning of 2005, with more than two thirds of the target being achieved by the end of
2003. Furthermore, the synergy benefits from the Haindl acquisition positively affect our financial results.



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 for the industry also in most recent years, although excessive investments have
been made in some paper grades. Since 2001, demand for most paper products has also been very weak, with declines in demand in certain paper grades which has resulted in continued oversupply and low prices.



Although consumption by end-users of most paper grades has in general
increased relatively steadily by an average of approximately three percent 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.



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Lower levels of profitability, increased economic uncertainty as well as adverse price developments in
recent years have kept industry participants more cautious about making significant investments in capital equipment. European and North American paper producers have continued to increase capacity through rebuilding, acquisitions and restructuring,
rather than through investments in new capacity, although new capacity has been introduced in Europe mainly in the area of newsprint and coated magazine and fine paper.



For certain fine paper grades, European industry participants also face a potential threat from producers in Asia and South
America. 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 following tables set forth global demand for printing papers in
2003(1):



|                  |  |                                 |  |           |  |            
|----------------- |  | ------------------------------- |  | --------- |  | -----------
|                  |  | MagazinePapers                  |  | Newsprint |  | Fine Papers
|                  |  | (million tons per year)        
|Western Europe    |  | 9.6                             |  | 9.5       |  | 13.7       
|U.S. and Canada   |  | 8.1                             |  | 11.2      |  | 17.8       
|Rest of the world |  | 4.4                             |  | 15.8      |  | 34.2       
|                  |  |                                 |  |           |  |            
|Total             |  | 22.1                            |  | 36.5      |  | 65.7       
|                  |  |                                 |  |           |  |            
|                  |  |                                 | 
|                  |  | MagazinePapers                  |  | Newsprint |  | Fine Papers
|                  |  | (kilograms per capita per year)
|Western Europe    |  | 24.5                            |  | 24.3      |  | 35.0       
|U.S. and Canada   |  | 25.9                            |  | 36.0      |  | 57.0       
|Rest of the world |  | 0.8                             |  | 2.9       |  | 6.2        
|Global            |  | 3.6                             |  | 5.9       |  | 10.6       

---

|(1) |  | 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, Western Europe and the United
States and Canada in the last five years:



Changes in Demand for Printing
Papers(1)



|                    |  |                                     |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------- |  | ----------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|Paper Grade         |  | 2003                                |   |  | 2002 |   |  | 2001 |   |  | 2000 |   |  | 1999 |  
|                    |  | (Percentage change from prior year) |  
|Western Europe      |  |                                     |   |  |      |   |  |      |   |  |      |   |  |      |  
|                    |  |                                     |   |  |     
|Newsprint           |  | 1                                   |   |  | (5   | ) |  | (3   | ) |  | 4    |   |  | 5    |  
|SC magazine         |  | 2                                   |   |  | (1   | ) |  | 0    |   |  | 9    |   |  | 6    |  
|Coated magazine     |  | 3                                   |   |  | 1    |   |  | (6   | ) |  | 13   |   |  | 4    |  
|Coated fine paper   |  | 2                                   |   |  | 0    |   |  | (7   | ) |  | 3    |   |  | 10   |  
|Uncoated fine paper |  | (2                                  | ) |  | (1   | ) |  | (2   | ) |  | 2    |   |  | 5    |  
|                    |  |                                     |   |  |     
|U.S. and Canada     |  |                                     |   |  |      |   |  |      |   |  |      |   |  |      |  
|                    |  |                                     |   |  |     
|Newsprint           |  | (1                                  | ) |  | (2   | ) |  | (11  | ) |  | 0    |   |  | 2    |  
|SC magazine         |  | 6                                   |   |  | 5    |   |  | (2   | ) |  | 14   |   |  | 7    |  
|Coated magazine     |  | 5                                   |   |  | 5    |   |  | (8   | ) |  | 5    |   |  | (1   | )
|Coated fine paper   |  | (5                                  | ) |  | 4    |   |  | (9   | ) |  | 1    |   |  | 6    |  
|Uncoated fine paper |  | (1                                  | ) |  | (2   | ) |  | (7   | ) |  | (1   | ) |  | 4    |  

---

|(1) |  | Sources: CEPIPRINT, CEPIFINE and PPPC.
|--- |  | --------------------------------------



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Paper demand fluctuations have been rather significant in recent years. Demand growth in 1999 through
2000 was above average, and especially in 2000 magazine paper demand was vigorous on both continents. Weakened economic growth and the subdued advertising market resulted in a decreased demand for paper especially in USA and Canada, but also Western
Europe. In 2002, the market for printing papers remained weak in Western Europe while some improvements were seen in the North American market. The year 2003 brought some more positive growth for magazine papers, but the demand of newsprint and fine
paper was weak on both continents. Speciality paper demand was largely unchanged in 2001 and 2002. In 2003, the label paper demand continued good, but envelope paper demand weakened. The packaging paper market strengthened towards the end of the
year. Demand for converting industrys products weakened in North America and Asia in 2001. The market remained challenging throughout 2002 and 2003, also in Western Europe. Siliconised paper markets were especially lackluster. 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 Western Europe. As a result of weak paper demand, the market for pulp during 2001 and 2002 was depressed, but it improved
somewhat in 2003.



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



Changes in Prices for Printing Papers(1)



|                    |  |                                     |   |  |      |   |  |      |   |  |      |  |      |  
|------------------- |  | ----------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- |  | ---- | -
|Paper Grade         |  | 2003                                |   |  | 2002 |   |  | 2001 |   |  | 2000 |  | 1999 |  
|                    |  | (Percentage change from prior year) |  
|Western Europe      |  |                                     |   |  |      |   |  |      |   |  |      |  |      |  
|                    |  |                                     |   |  |     
|Newsprint           |  | (13                                 | ) |  | (13  | ) |  | 16   |   |  | 2    |  | (2   | )
|SC magazine         |  | (7                                  | ) |  | (5   | ) |  | 3    |   |  | 3    |  | 2    |  
|Coated magazine     |  | (10                                 | ) |  | (10  | ) |  | 4    |   |  | 4    |  | (1   | )
|Coated fine paper   |  | (11                                 | ) |  | (7   | ) |  | (2   | ) |  | 20   |  | (4   | )
|Uncoated fine paper |  | (10                                 | ) |  | (5   | ) |  | (3   | ) |  | 21   |  | (1   | )
|                    |  |                                     |   |  |     
|USA & Canada        |  |                                     |   |  |      |   |  |      |   |  |      |  |      |  
|                    |  |                                     |   |  |     
|Newsprint           |  | 10                                  |   |  | (21  | ) |  | 3    |   |  | 9    |  | (12  | )
|SC magazine         |  | 3                                   |   |  | (14  | ) |  | (2   | ) |  | 2    |  | (4   | )
|Coated magazine     |  | 1                                   |   |  | (15  | ) |  | (7   | ) |  | 10   |  | (11  | )
|Coated fine paper   |  | 3                                   |   |  | (12  | ) |  | (11  | ) |  | 8    |  | (6   | )
|Uncoated fine paper |  | (5                                  | ) |  | (5   | ) |  | (5   | ) |  | 13   |  | (3   | )

---

|(1) |  | Sources: Resource Information Systems, Inc. and Pulp and Paper International. Price changes in Western Europe are based on prices in euros and price changes in North America are
based on prices in U.S. dollars.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Paper prices
generally fluctuate even more than demand. In early 1999 paper prices decreased somewhat. The market for printing papers strengthened considerably in the summer of 1999 and as a result, prices for printing papers stabilized and price increases were
introduced in the fall of 1999. Similarly, prices for our converting products enjoyed positive development particularly in the second half of 1999 as a result of strengthening demand in Western Europe and the United States and the recovery of the
Asian market. 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 Western Europe. Fine
and speciality paper prices, along with pulp prices, were under pressure during the year in both Western 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 step-by-step resulting in higher average prices relative to 2002, with the exception of uncoated fine paper. In Western Europe, average prices of newsprint
declined by 13%, magazine papers by nine percent and fine papers by ten to eleven percent in 2003.



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.



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Market Pulp (NBSKP) Prices, USD/ton



|     |  |         |  |      |  |    
|---- |  | ------- |  | ---- |  | ---
|Year |  | Average |  | High |  | Low
|1999 |  | 523     |  | 610  |  | 460
|     |  |         | 
|2000 |  | 683     |  | 710  |  | 630
|     |  |         | 
|2001 |  | 535     |  | 705  |  | 450
|     |  |         | 
|2002 |  | 463     |  | 490  |  | 435
|     |  |         | 
|2003 |  | 526     |  | 560  |  | 440

---

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 a large proportion of our pulp production internally as raw material for our paper production. The Group is approximately 90% self-sufficient in pulp.



Market Conditions for Converted Products



At the beginning of 1999, demand for almost all UPMs converted
products was moderate but the markets strengthened considerably towards the year-end. Self-adhesive label markets grew especially in the Far East and industrial wrapping operations enjoyed good growth in our non-European markets. During 2000, the
markets for converted products were extremely good 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 siliconised papers
and industrial wrappings. Also the demand growth rate of self-adhesive 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 self-adhesive labelstock. During 2003, the North American market for self-adhesive labelstock improved, but the European demand was weak. Also the Asian market developed positively. Meanwhile, the demand for
siliconised 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.



Market Conditions for Wood Products



In 1999, prices for spruce plywood rose, while prices for birch plywood decreased. 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. Tough market conditions continued in 2003 as U.S. dollar based exporters became more active in the Western European
market. Prices declined noticeably. The consumption of sawn timber and building products remained high for all of 1999. Despite good demand, the decreasing price trend continued in 1999 as a result of increased price competition caused by higher
supply. The trend in cost increases in the forest industry was restrained. 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.



Current value of assets



Our assets are, in most cases, valued at cost less depreciation according to plan. The current values of certain assets are, however, considerably higher
than their book values.



As at December 31, 2003, listed shares
held by UPM had a book value totaling 176 million and a current value of 196 million.



UPMs 930,000 hectares of forest holdings in Finland had a book value of 1,141 per hectare and a total book value of 1,061 million
(including revaluations of 548 million) as at December 31, 2003.



We estimate that the average current value of our forest holdings was 1,371 per hectare for a total current value of 1,275 million in Finland in 2003.



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##### Table of Contents

Application of Critical Accounting Policies



The following discussion is based upon our consolidated financial statements, which have been prepared in accordance with
Finnish GAAP, 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
23 to the financial statements) and Finnish GAAP 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



33



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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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | 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
23.I.(g) of the notes to the consolidated financial statements included elsewhere in this annual report.



| | · |  | 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. We follow very specific and detailed guidelines regarding the recoverability of any tax assets recorded on the balance sheet. 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 ten
percent 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 paper division, newsprint division and fine paper business, respectively, for
the year ended December 31, 2003. A similar ten percent 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.



Long-term changes in exchange rates also have a marked impact on our
financial results. We estimate that a hypothetical ten percent 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, 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 2003, costs and expenses totaled 8.5 billion.



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



|                      |  |                               |  
|--------------------- |  | ----------------------------- | -
|                      |  | As a percentageof total costs |  
|Personnel expenses    |  | 20                            |  
|Logs and pulpwood     |  | 13                            |  
|Delivery              |  | 12                            |  
|Chemicals and fillers |  | 12                            |  
|Recycled paper        |  | 3                             |  
|Other raw materials   |  | 10                            |  
|Energy                |  | 8                             |  
|Other                 |  | 22                            |  
|                      |  |                               |  
|Total                 |  | 100                           | %
|                      |  |                               |  



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Recent Developments



Reporting Under International Financial Reporting Standards (IFRS)



We publicly report under the International Financial Reporting Standards, or IFRS, for our financial reporting beginning on January 1, 2004. Previously, we had used Finnish Accounting Standards, or FAS, for our
financial reporting. This change in accounting standards will affect, among other things, the following aspects of our financial statements:



| | · |  | Business combinations.    The mergers that took place in the late 1980s and the 1990s in connection with the restructuring of the Finnish forest
industry are treated under IFRS as acquisitions and not as pooling of interests. The new treatment of these and other acquisitions has an impact on acquisition costs and their allocation, and depreciation and amortization.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Asset revaluations.    The revaluations made primarily to forest holdings in Finland are reversed. However, biological assets are valued under IFRS
at their fair value.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Sale and lease-back arrangements.    The company has sold and then leased back certain power plants under long-term agreements and uses the
electrical power generated by these plants in its own production. Under IFRS these divested assets must be reinstated on the balance sheet.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Interest paid during construction.    Most interest payments made while construction is in progress are recognized under FAS as expenses. Under
IFRS, the company will recognize interest paid during construction partly as an acquisition cost when it relates to fixed assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Shareholdings in listed companies.    Under IFRS, these holdings are measured on the balance sheet at their final quoted prices on the balance
sheet date without any profit/loss effect, whereas under FAS they are valued at no more than their acquisition cost.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Financial instruments.    Under IFRS, financial instruments are stated on the balance sheet at their fair values. Gains or losses on hedging
instruments relating to future cash flows are booked under IFRS according to the principles of hedge accounting.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Value of forest holdings.    Under FAS, forest holdings are valued at acquisition cost plus revaluations made. Under IFRS, biological assets are
valued at their fair value and any change in value is booked to the income statement. The determination of the fair value is based on the present value of future cash flows.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Finnish pension scheme (TEL).    Under FAS, pension expenses are recorded in accordance with local accounting practices. Under FAS, TEL was
regarded as a defined contribution plan. Under IFRS, the disability element of TEL is calculated as a defined benefit plan.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Segment accounting and reporting.    The reporting segments will not change under IFRS. They are based on the Groups organization and
internal reporting.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Other differences.    The other differences concern mainly the treatment and reporting of provisions, taxes and associated companies. Under IFRS,
the share of the result of associated companies before taxes is reported after operating profit, whereas under FAS they are reported in operating profit.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations for the Three Months Ended March 31, 2004



On April 27, 2004, we announced our results for the three months ended March
31, 2004. Sales for the three months ended March 31, 2004 were 2,451 million, which represented a slight increase over sales of 2,423 million for the same period in 2003. Operating profit for the three months ended March 31, 2004 was
101 million, compared to 100 million for the same period in 2003.



Antitrust Investigation



UPM has directed the Companys 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 has also decided to approach competition law authorities to disclose any conduct that has not comported with applicable competition laws. UPM has also strengthened its competition law compliance programs. It has created a European
Union Competition Law Compliance Manual and has begun a comprehensive competition law training program for all its employees. Seven hundred of the most senior Company employees have been trained to date and have individually confirmed their
compliance with the



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##### Table of Contents

competition laws. Internal audits have been expanded to include competition law issues and a variety of other internal controls have been implemented.
Pursuant to the continuing investigation, the Company has also made organizational and personnel changes. As the investigation continues, additional such changes may be made.



During 2004, UPM and its subsidiaries have been cooperating 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 is cooperating fully with the authorities and their ongoing investigations, and may yet be subject to additional
investigations in other parts of the world. Further details regarding these investigations and related legal proceedings are included in Item 3. Key InformationRisk Factors and Item 8. Financial InformationOther
Financial InformationLegal Proceedings.



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 currently not possible for UPM to estimate any potential liability. UPM will continue to
consider the need to establish loss provisions in light of future developments.



Recent Acquisitions and Divestitures



In
November 2001, we purchased all of the outstanding shares of Haindl for an aggregate acquisition cost of 3,652 million. At the same time, we entered into an agreement to sell two of Haindls paper mills to the Norwegian paper producer,
Norske Skog, for 1,027 million. The enterprise value of the acquisition of the four mills was 2,690 million. The combined production capacity of the mills hosting a total of eight modern paper machines is 1.9 million tons per year of
magazine papers and newsprint. In 2001, the mills had a turnover of 1,189 million and employed 2,443 people at year-end. The acquisition strengthened our position as the worlds largest magazine paper producer and as one of the leading
newsprint producers in Europe. It also enhanced our position as a local producer in the middle of Europes most important markets. The products of the acquired mills complemented our own product range and improved our ability to serve customers
locally. The transaction resulted in a more balanced fiber raw material base for our operations and more than doubled our consumption of recovered paper, currently being approximately 2.3 million tons per year. As a result of the acquisition, we
benefit from synergies in production, marketing, logistics and purchasing. By the end of 2003, we had achieved nearly all of the initial savings target of 70 million to be reached by the end of 2004. The acquisition was financed through a
2.5 billion bank loan. In addition, we offered 12.3 million shares for subscription by a group of Haindl shareholders. The shares were purchased by members of the Holzhey and Bischoff families at a price of 34.071 per share, which was
the weighted average quotation price for our shares on the Helsinki Exchange between March 30 and May 16, 2001, and represented a total value of 419 million.



In July 2002, we sold 22.8% of the shipping company Transfennica Oy Ab to 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 a turnover 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 an annual turnover 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.



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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 163 million on the sale. As a result of the sale, we no longer own any shares in Nokia.



Restructuring Activities



In September 2003, we decided to close 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. The closure took place on May 1, 2004. As a result, we booked a non-recurring 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 pre-tax charge of 128 million in 2002 as a result of the closures and reassessments of useful lives of fixed assets. This
charge includes impairment of assets of 79 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 pre-tax 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 and Introduction of the Euro



Historically, most of our revenues, debts and receivables, and a significant portion of our expenditures, were denominated in currencies other than our prior accounting currency, the Finnish markka. Fluctuations in
exchange rates therefore had a significant impact on our financial results and competitiveness. The biggest single risk was that relating to fluctuations in the exchange rate of the Finnish markka. Total foreign exchange losses resulting from
currency fluctuations and included in the profit and loss account net of the results of our hedging activities were 27 million in 1999.



On January 1, 1999, member states of the European Union participating in Stage Three of the EMU, including Finland, adopted a single currency, the euro.
The euro was introduced as our accounting currency on that date. For Finnish markka, the conversion rate was FIM 5.94573 to one euro. 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 2003, total foreign exchange gains resulting from currency fluctuations and included in the profit and loss account net of our hedging activities were 57 million, compared to
losses of 24 million in 2002 and a net gain of 7 million in 2001. See Item 11. Quantitative and Qualitative Disclosures about Market Risks.



We have not experienced, and management does not expect, any material adverse impact on our competitive position resulting
from the introduction of the euro. The introduction of the euro, and the consequent elimination of the currency exchange rate risk between the national currencies of the participating member states and the former Finnish markka, has eliminated the
need for currency exchange transactions and hedging transactions with respect to these currencies, resulting in transaction cost savings to the Group. 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 2002, the U.S. dollar decreased in value against the euro by approximately 16% compared to the
exchange rate on January 2, 2002. The value of the British



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pound sterling decreased by approximately four percent from 0.6262 on January 2, 2002 to 0.6505 on December 31, 2002. During 2003, the U.S. dollar decreased
in value against the euro by approximately 21% compared to the exchange rate on January 2, 2003. The value of the British pound sterling decreased by approximately eight percent from 0.6520 on January 2, 2003 to 0.7048 on December 31, 2003.



Results of Operations



The
following table sets forth the turnover and operating profit of our various business areas and divisions in accordance with Finnish GAAP and the production and delivery volumes of our divisions for the three most recent years:



|                                |  |                         |   |  |        |   |  |       |  
|------------------------------- |  | ----------------------- | - |  | ------ | - |  | ----- | -
|                                |  | Year ended December 31, |  
|                                |  | 2003                    |   |  | 2002   |   |  | 2001  |  
|                                |  | ( in millions)         |  
|Turnover by Division            |  |                         |   |  |        |   |  |       |  
|Paper Divisions                 |  |                         |   |  |        |   |  |       |  
|Magazine papers                 |  | 3,320                   |   |  | 3,577  |   |  | 3,548 |  
|Newsprint                       |  | 1,295                   |   |  | 1,381  |   |  | 1,058 |  
|Fine and speciality papers      |  | 2,278                   |   |  | 2,449  |   |  | 2,362 |  
|Converting division             |  | 1,374                   |   |  | 1,541  |   |  | 1,480 |  
|Wood products division          |  | 1,552                   |   |  | 1,489  |   |  | 1,463 |  
|Other operations                |  | 672                     |   |  | 583    |   |  | 489   |  
|Interdivisional sales           |  | (543                    | ) |  | (545   | ) |  | (482  | )
|                                |  |                         |   |  |        |   |  |       |  
|Total                           |  | 9,948                   |   |  | 10,475 |   |  | 9,918 |  
|                                |  |                         |   |  |        |   |  |       |  
|Operating Profit by Division(1) |  |                         |   |  |        |   |  |       |  
|Paper Divisions                 |  |                         |   |  |        |   |  |       |  
|Magazine papers                 |  | 153                     |   |  | 225    |   |  | 598   |  
|Newsprint                       |  | 54                      |   |  | 162    |   |  | 211   |  
|Fine and speciality papers      |  | 241                     |   |  | 359    |   |  | 336   |  
|Converting division             |  | 43                      |   |  | 70     |   |  | 46    |  
|Wood products division          |  | 29                      |   |  | 37     |   |  | 27    |  
|Other operations                |  | 264                     |   |  | 209    |   |  | 396   |  
|                                |  |                         |   |  |        |   |  |       |  
|Total                           |  | 784                     |   |  | 1,062  |   |  | 1,614 |  
|                                |  |                         |   |  |        |   |  |       |  

---

|(1) |  | The 2003 figures included non-recurring charges of 9 million for the Newsprint Division and 4 million for the Converting Division. The 2002 figures included
non-recurring charges of 128 million for the Magazine Papers Division related to the Blandin restructuring and 8 million for the Newsprint Division related to writedown of assets. The 2001 figures included non-recurring charges of
20 million for the Magazine Papers Division mainly related to writedown of assets in idled and rebuilt facilities and one-time employee termination benefits and 11 million for the Converting Division related to restructuring activities.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                           |  |                                                |  |        |  |      
|-------------------------- |  | ---------------------------------------------- |  | ------ |  | -----
|                           |  | Years ended December 31,                      
|                           |  | 2003                                           |  | 2002   |  | 2001 
|                           |  | (In 1,000 tons, except sawntimber and plywood)
|Production                 |  |                                                |  |        |  |      
|Papers total               |  | 10,232                                         |  | 10,046 |  | 8,298
|Chemical pulp              |  | 2,027                                          |  | 2,102  |  | 2,038
|Plywood, 1000 m3           |  | 936                                            |  | 905    |  | 786  
|Sawn timber, 1000 m3       |  | 2,408                                          |  | 2,201  |  | 2,035
|Deliveries                 |  |                                                |  |        |  |      
|Magazine papers            |  | 4,822                                          |  | 4,618  |  | 3,964
|Newsprint                  |  | 2,587                                          |  | 2,467  |  | 1,667
|Fine and speciality papers |  | 2,879                                          |  | 2,774  |  | 2,546



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



Turnover



General.    Our turnover was 9,948 million
for the year ended December 31, 2003, down by five percent from turnover of 10,475 million for the year ended December 31, 2002. Our total paper production in 2003 amounted to 10,232,000 tons, compared with 10,046,000 tons for the year ended
December 31, 2002. Turnover declined mainly due to lower prices.



Magazine papers.    Turnover in the magazine papers division was 3,320 million for the year ended December 31, 2003, a decline of seven percent from 3,577 million for the year ended December 31, 2002.
Although deliveries increased by four percent from 4,618,000 tons to 4,822,000 tons, lower prices and the weaker U.S. dollar offset the positive impact of higher volumes. In 2003, our capacity utilization rate was 87%, as compared to 85% in the
previous year.



In 2003, overall demand for coated magazine
paper increased by three percent in Western Europe and by five percent in the United States in comparison to the year ended December 31, 2002. Demand for uncoated magazine paper increased by two percent in Western Europe but increased by six percent
in the United States during the year ended December 31, 2003. European magazine paper prices were approximately nine percent lower 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 two percent from record-low levels.



Newsprint.    Turnover in the newsprint division was 1,295 million for the year ended December 31, 2003, a decrease of six percent from turnover of 1,381 million for the year
ended December 31, 2002. This decrease was primarily due to lower prices. Our newsprint deliveries were 2,587,000 tons during the year ended December 31, 2003, an increase of five percent from 2,467,000 tons in the year ended December 31, 2002. In
2003, the capacity utilization rate was 90%, as compared to 88% in the previous year.



In 2003, demand for newsprint grew by only one percent in Western Europe and declined by the same amount, one percent, in the United States. Newsprint demand in the United States has declined for three consecutive
years, in 2001, 2002 and 2003. Newsprint prices in Europe fell on average by 13% for the year ended December 31, 2003 as compared to the year ended December 31, 2002.



Fine and speciality papers.    Turnover in the Fine and Speciality Papers Division was
2,278 million for the year ended December 31, 2003, a decrease of seven percent from turnover of 2,449 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 four percent from 2,774,000 tons during the year ended December 31, 2002. In 2003, capacity utilization was 88%, compared with 89% for the year 2002. Speciality paper operating rates were above 90%, but coated fine
paper operating rates continued at a low level. The Chinese mill at Changshu operated at practically maximum capacity.



Demand for fine paper was far from robust throughout 2003. In Western Europe, demand for uncoated fine paper declined by two percent and increased by only
two percent for coated fine paper compared to the preceding year. In China, the vigorous demand growth 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. Average prices of uncoated fine papers in Western Europe were ten percent lower in 2003 as compared to average prices in 2002, while coated paper prices
declined by eleven percent. In China, prices on average remained similar to the year 2002. Speciality paper prices declined somewhat in 2003 as compared to 2002.



Converting.    Turnover in the Converting Division was 1,374 million for the year ended
December 31, 2003, a decrease of eleven percent from turnover of 1,541 million for the year ended December 31, 2002. The decrease in turnover was primarily due to the sale of Walki Films in October 2002, as well as weak demand and lower
prices. Raflatacs turnover was 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 turnover of Loparex decreased by 14% and total turnover amounted to 334 million. Demand was lackluster in all the main markets, and fierce competition resulted in lower prices. Walki Wisas turnover was down slightly at
305 million in 2003, compared with 318 million in 2002. Market conditions for industrial wrappings were challenging in Europe.



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Wood Products.    Turnover in the Wood Products Division was 1,552
million for the year ended December 31, 2003, an increase of four percent from turnover of 1,489 million for the year ended December 31, 2002. This increase was primarily due to higher deliveries. Plywood operations resulted in a turnover of
529 million, a decrease of two percent from the turnover of 538 million for the year ended December 31, 2002. The sawmilling operations generated a turnover of 499 million in 2003, an increase of nine percent compared with the
turnover of 459 million for the year ended December 31, 2002. The building supplies trade had a turnover of 650 million, an increase of six percent from the year 2002.



The divisions plywood production amounted to 936,000 cubic meters during the year ended December 31, 2003, an increase
of three percent compared to plywood production of 905,000 cubic meters during the year ended December 31, 2002. The divisions output of sawn timber during the year ended December 31, 2003 amounted to 2,274,000 cubic meters, an increase of
eleven percent from the sawn timber output of 2,051,000 cubic meters during the year ended December 31, 2002.



Other operations.    Turnover from other operations amounted to 672 million for the year ended December 31, 2003, an
increase of 15% from turnover of 583 million for the year ended December 31, 2002.



Operating profit (loss)



General.    Our operating profit amounted to 784 million for the year ended December 31, 2003, a decrease of 26% from operating profit of 1,062 million for the year ended December 31, 2002. Lower paper
prices and the stronger euro were the main reasons for the lower operating profit. Operating profit fell in all operative divisions, but increased in Other Operations. Cost savings carried out during the year and synergy benefits from the Haindl
acquisition had a positive impact on operating profit. Operating profit for 2003 included net non-recurring income of 129 million. Gains from the sale of listed shares were 167 million and other capital gains amounted to 23
million. Non-recurring restructuring costs, write-downs and other provisions were 42 million, while the costs related to the unrealized MACtac acquisition were 19 million. Operating profit for 2002 included net non-recurring charges of
46 million.



Magazine
papers.    Operating profit of the Magazine Papers Division amounted to 153 million for the year ended December 31, 2003, a decrease of 32% from operating profit of 225 million for the year ended December 31,
2002. This decrease was mainly due to lower prices and the weaker U.S. dollar. Improved cost-effectiveness and synergy benefits, on the other hand, positively contributed to profits.



Newsprint.    Operating profit of the Newsprint Division amounted to 54 million for the
year ended December 31, 2003, a decrease of 67% from operating profit of 162 million for the year ended December 31, 2002. The decrease was attributable mainly to lower prices, while synergies from the acquisition of Haindls newsprint
capacity had a positive impact on profitability.



Fine and
speciality papers.    Operating profit of the fine and speciality papers division amounted to 241 million for the year ended December 31, 2003, a decrease of 33% from operating profit of 359 million for the year
ended December 31, 2002. Lower prices were the main reason for the decrease in profitability.



Converting.    Operating profit of the Converting Division amounted to 43 million for the year ended December 31, 2003, a decrease of 39% from operating profit of 70 million for
the year ended December 31, 2002. Weak demand and lower prices were characteristics leading to lower profit in 2003 versus 2002.



Wood products.    The Wood Products Division had an operating profit of 29 million for the year ended December 31, 2003,
a decrease of 22% from operating profit of 37 million for the year ended December 31, 2002. Lower plywood prices were the main reasons for weakened operating profit.



Other operations. Operating profit from other operations amounted to 264 million for the year ended December
31, 2003, as compared to operating profit of 209 million for the year ended December 31, 2002. Forestry operations in Finland contributed 41 million in 2003, as compared to 37 million in 2002, whereas energy operations resulted in
an operating profit of 78 million in 2003, as compared to 51 million in 2002. Our share of the results of associated companies, mainly Metsä-Botnia, contributed 22 million to operating profit in 2003, compared with 60
million in 2002, the decrease being a result of the stronger euro and higher costs.



For the year ended December 31, 2003, net non-recurring income was 129 million. Net gains from the sale of listed shares were 167 million, 163 million of which resulted from the sale of 11.3 million
Nokia shares.



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Other capital gains were 23 million. Non-recurring restructuring costs, write-downs and other provisions were 42 million, while the operating
loss related to the unrealized MACtac acquisition was 19 million. Operating profit for 2002 included net non-recurring charges of 46 million. For the year ended December 31, 2002, net non-recurring items from the sale of shares and fixed
assets and write-downs showed a loss of 46 million, after giving effect to gains of 77 million on the sales of shares in Nokia during the year. Other items included in net capital gains, writedowns and restructurings resulted in a loss
of 123 million in 2002.



Financial Items



Net financial expenses amounted to 225 million for
the year ended December 31, 2003, a decrease of 18% compared to net financial expenses of 273 million during the year ended December 31, 2002. The decrease was due to lower average interest rates and lower net interest-bearing liabilities.



Extraordinary Items



There were no extraordinary items for the years ended December 31, 2003 or
2002.



Profit (loss)



We had a profit before extraordinary items, taxes and minority interests of
559 million for the year ended December 31, 2003, a decrease of 29% from profit of 789 million during the year ended December 31, 2002. Income taxes related to ordinary activities for the year ended December 31, 2003 amounted to
193 million, a decrease of 20% compared to income taxes related to ordinary activities of 241 million during the year ended December 31, 2002. As the net income was lower, the effective portion of non-deductible amortization of goodwill
increased in 2003. This increase, together with lower net income in 2003, was the primary reason our effective tax rate for the year ended December 31, 2003 increased to 34.5%, compared with 30.5% for the year ended December 31, 2002. The prevailing
corporate tax rate in Finland during 2003 and 2002 was 29.0%. Net profit amounted to 368 million for the year ended December 31, 2003, compared to 550 million for the year ended December 31, 2002. The decrease was primarily due to lower
prices and the weaker U.S. dollar.



The Year ended December 31, 2002
Compared to the Year ended December 31, 2001



Turnover



General.    Our turnover was 10,475 million for the year ended December 31, 2002, an increase of six percent from turnover of 9,918 million for the year ended December 31, 2001. Our total paper
production in 2002 amounted to 10,046,000 tons, compared with 8,298,000 tons for the year ended December 31, 2001. Excluding the impact of the Haindl acquisition, our turnover would have been lower in 2002 compared to 2001 due to lower prices.



Magazine papers.    Turnover in the
Magazine Papers Division was 3,577 million for the year ended December 31, 2002, which was slightly higher than turnover of 3,548 million for the year ended December 31, 2001. Although deliveries increased by 16% from 3,964,000 tons to
4,618,000 tons due to the mills acquired from Haindl, lower prices offset the positive impact of this increase to turnover. In 2002, our capacity utilization rate continued to be low at 86%, as compared to 85% in the previous year.



In 2002, overall demand for coated magazine paper increased by only one
percent in Western Europe and by four percent in the United States in comparison to the year ended December 31, 2001, when demand declined markedly. Demand for uncoated magazine paper declined by one percent in Western Europe but increased by five
percent in the United States during the year ended December 31, 2002. European magazine paper prices were approximately nine percent lower in the year ended December 31, 2002 than they were in the year ended December 31, 2001. In the United States,
average magazine paper prices decreased even more, by approximately 15%.



Newsprint.    Turnover in the Newsprint Division was 1,381 million for the year ended December 31, 2002, an increase of 31% from turnover of 1,058 million for the year ended
December 31, 2001. This increase was primarily due to the addition of Haindls newsprint production into the division from December 2001. Our newsprint deliveries were 2,467,000 tons during the year ended December 31, 2002, an increase of 48%
from 1,667,000 tons in the year ended December 31, 2001. The decline in prices in Western Europe partially offset the positive development of turnover. In 2002, the capacity utilization rate was 89%, as compared to 91% in the previous year.



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In 2002, demand for newsprint declined by five percent in Western Europe and two percent in the United
States, following declines of three percent and eleven percent, respectively, in 2001. Special newsprint for use in newspaper supplements, books and directories experienced slightly better demand throughout the year 2002 as compared to the year
2001. Newsprint prices in Europe fell on average by 13% for the year ended December 31, 2002 as compared to the year ended December 31, 2001.



Fine and speciality papers.    Turnover in the Fine and Speciality Papers Division was 2,449 million for the year ended
December 31, 2002, an increase of four percent from turnover of 2,362 million for the year ended December 31, 2001. Our fine and speciality paper deliveries during the year ended December 31, 2002 were 2,774,000 tons, an increase of nine
percent from 2,546,000 tons during the year ended December 31, 2001. In 2002, capacity utilization was 90%, approximately the same as the 89% for the year 2001. Speciality paper operating rates were close to maximum, but specially coated fine paper
operating rates were at a low level.



Demand for fine paper
continued to be weak throughout 2002. In Western Europe, demand for both uncoated and coated fine paper stayed at the level of the preceding year. In China, demand growth was good and the Changshu mill operated at full capacity. The demand for
packaging and label papers improved in 2002, but the demand for envelope papers was weaker for the year 2002 as compared to the year 2001. Average prices of uncoated fine papers in Western Europe were five percent lower in 2002 as compared to
average prices in 2001, while coated paper prices declined by seven percent. In China, prices increased. Speciality paper prices were rather stable in 2002 as compared to 2001.



Converting.    Turnover in the Converting Division was 1,541 million for the year ended
December 31, 2002, an increase of four percent from turnover of 1,480 million for the year ended December 31, 2001. The increase in turnover was primarily due to organic growth at Raflatac. Raflatacs turnover increased by ten percent to
736 million as a result of sales from the new factory in North Carolina. Improved sales elsewhere also contributed to the increased turnover. Overall, the self-adhesive labelstock market experienced weak demand conditions. In 2002, the
turnover growth of Loparex slowed down to only four percent and total turnover amounted to 389 million. Market conditions, especially in North America, were challenging. Walki Wisas turnover decreased by 5 million to 318
million in 2002. Moderate demand growth for industrial wrappings was offset by lower average prices.



Wood products.    Turnover in the Wood Products Division was 1,489 million for the year ended December 31, 2002, an
increase of two percent from turnover of 1,463 million for the year ended December 31, 2001. This increase was primarily due to higher deliveries of plywood and sawn timber. The sawmilling operations generated turnover of 432 million in
2002, an increase of four percent compared with the turnover of 417 million for the year ended December 31, 2001. Plywood operations resulted in a turnover of 525 million, an increase of four percent from the turnover of 504
million for the year ended December 31, 2001. The building supplies trade had a turnover of 615 million, which was largely unchanged from the year 2001.



The divisions output of sawn timber during the year ended December 31, 2002 amounted to 2,051,000 cubic meters, an increase of eleven percent
from the sawn timber output of 1,856,000 cubic meters during the year ended December 31, 2001. The increase was due to the addition of Steyrermühls sawmilling capacity, which was acquired in connection with the Haindl acquisition. The
divisions plywood production amounted to 905,000 cubic meters during the year ended December 31, 2002, an increase of 15% compared to plywood production of 786,000 cubic meters during the year ended December 31, 2001. A large share of the
increase was due to the production of the new Pellos softwood plywood mill.



Other operations.    Turnover from Other Operations amounted to 583 million for the year ended December 31, 2002, an increase of 19% from turnover of 489 million for the year
ended December 31, 2001. This increase was largely caused by the inclusion in other operations of the logistics companies acquired in connection with the Haindl acquisition.



Operating profit (loss)



General.    Our operating profit amounted to 1,062 million for the year ended December 31, 2002, a decrease of 34% from
operating profit of 1,614 million for the year ended December 31, 2001. Lower paper prices were the main cause of the lower operating profit. Operating profit of the Magazine Papers Division, the Newsprint Division and the Other Operations
fell, whereas the operating profit of the Fine and Speciality Papers Division, the Converting and the Wood Products Division increased. The Haindl acquisition had a positive



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impact on our operating profit. See Item 5. Recent DevelopmentsRecent Acquisitions and Divestitures. Operating profit for 2002 included net
non-recurring charges of 46 million from the disposition of stock exchange listed shares and fixed assets and non-recurring write-downs and other closing-related costs in connection with the shutdown of two paper machines at the Blandin mill
in Minnesota, United States, compared to net non-recurring gains of 220 million during the year ended December 31, 2001, resulting from the total gains on the sales of listed shares of 265 million, and partially offset by a deficit of
45 million as a result of other net capital gains, writedowns and restructurings.



Magazine papers.    Operating profit of the Magazine Papers Division amounted to 225 million for the year ended December 31, 2002, a decrease of 62% from operating profit of 598
million for the year ended December 31, 2001. This decrease was mainly due to lower prices and non-recurring charges of 128 million relating to the closure of the two smallest paper machines at the Blandin paper mill in the United States.



Newsprint.    Operating profit of
the Newsprint Division amounted to 162 million for the year ended December 31, 2002, a decrease of 23% from operating profit of 211 million for the year ended December 31, 2001. The decrease was attributable to lower prices and
non-recurring charges of 8 million.



Fine and
speciality papers.    Operating profit of the Fine and Speciality Papers Division amounted to 359 million for the year ended December 31, 2002, an increase of seven percent from operating profit of 336 million for
the year ended December 31, 2001. The increase in profitability was due to higher turnover and improved efficiency of production.



Converting.    Operating profit of the Converting Division amounted to 70 million for the year ended December 31, 2002,
an increase of 52% from operating profit of 46 million for the year ended December 31, 2001. This increase was due to higher turnover and improved efficiency of production. The 2001 operating profit included non-recurring charges of 11
million.



Wood products.    The Wood
Products Division had an operating profit of 37 million for the year ended December 31, 2002, an increase of 37% from operating profit of 27 million for the year ended December 31, 2001. Higher turnover was the main cause for the
increase.



Other
operations.    Operating profit from other operations amounted to 209 million for the year ended December 31, 2002, as compared to operating profit of 396 million for the year ended December 31, 2001. Forestry
operations in Finland contributed 37 million in 2002, a decrease of 18% from 45 million in 2001, whereas energy operations resulted in an operating profit of 51 million in 2002, as compared to 99 million in 2001. Our share of
the results of associated companies, mainly Metsä-Botnia, contributed 60 million to operating profit in 2002, compared with 82 million in 2001, which decrease was due to lower average chemical pulp prices.



For the year ended December 31, 2002, net non-recurring items from the sale
of shares and fixed assets and write-downs showed a loss of 46 million, after giving effect to gains of 77 million on the sales of shares in Nokia during the year. Other items included in net capital gains, writedowns and restructurings
resulted in a loss of 123 million in 2002. In 2001, net non-recurring items resulted in a gain of 220 million, including 265 million in gains on the sale of listed shares (after giving effect to gains of 267 million on the
sales of Nokia shares) and a loss of 45 million from other items included in net capital gains, writedowns and restructurings.



Financial Items



Net financial expenses amounted to 273 million for the year ended December 31, 2002, a decrease of three percent compared to net financial expenses
of 281 million during the year ended December 31, 2001. The decrease was due to lower interest rates.



Extraordinary Items



There were no extraordinary items for the years ended December 31, 2002 or 2001.



Profit (loss)



We had a profit before extraordinary items, taxes and minority interests of 789 million for the year ended December 31, 2002, a decrease of 41% from
profit of 1,333 million during the year ended December 31, 2001.



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Income taxes related to ordinary activities for the year ended December 31, 2002 amounted to 241 million, a decrease of 36% compared to income taxes
related to ordinary activities of 378 million during the year ended December 31, 2001. Our effective tax rate for the year ended December 31, 2002 was 30.5%, compared with 28.4% for the year ended December 31, 2001. The prevailing corporate
tax rate in Finland during 2002 and 2001 was 29.0%. Net profit amounted to 550 million for the year ended December 31, 2002, compared to 955 million for the year ended December 31, 2001. The decrease was primarily due to lower price
levels and lower capital gains.



Liquidity and Capital Resources



Overview



Our primary source of liquidity comes from our generation of operating cash
flow. At December 31, 2003, we had 388 million in cash and cash equivalents. At December 31, 2003, we also had two unused credit facilities of which 2,000 million expires in 2006 and 1,200 million expires in 2008. 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.



Our liquidity resources are subject to change as market and general economic conditions evolve. Increase in liquidity could
result from an increase in cash flow from operations or, for example, a divestment of non-core assets. Decrease of 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.



The following table sets out a summary of our main cash flows in 2001-2003:



|                                                   |  |                         |   |  |       |   |  |        |  
|-------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ------ | -
|                                                   |  | Year Ended December 31, |  
|                                                   |  | 2003                    |   |  | 2002  |   |  | 2001   |  
|                                                   |  | ( in millions)         |  
|Net cash flow from operating activities            |  | 1,264                   |   |  | 1,429 |   |  | 1,645  |  
|Net cash flow used in investing activities         |  | (352                    | ) |  | (441  | ) |  | (2,854 | )
|Net cash flow (used in) /from financing activities |  | (918                    | ) |  | (997  | ) |  | 1,399  |  



Cash from Operating Activities



Our net cash flow from operating activities was
1,264 million for the year ended December 31, 2003 as compared to 1,429 million for the year ended December 31, 2002 and 1,645 million for the year ended December 31, 2001. 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 due to reduction in working capital. Our operating profit for the year 2003 included capital gains on disposal of
fixed assets of 200 million and our operating profit for the years 2002 and 2001 included capital gains of 132 million and 299 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 580 million, 612
million and 3,216 million for the years ended December 31, 2003, 2002 and 2001 respectively. After sales of shares and other assets, and change of other long-term investments amounting to 228 million, 171 million and 362
million, our net cash flows in investing activities were 352 million, 441 million and 2,854 million for the years 2003, 2002 and 2001 respectively. 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 to start up 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. In 2001, the most significant investment item was the acquisition of Haindl.



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Cash used in Financing Activities



Net cash used in financing activities was 918 million for the year ended December 31, 2003 as compared to 997
million for the year ended December 31, 2002. For the year ended December 31, 2001, new loans were raised to finance the Haindl acquisition, and net cash provided by financing activities was 1,399 million. Dividend payments of 390
million, 388 million and 371 million, for the financial years of 2002, 2001 and 2000, are included in cash flow used in financing operations for the years ended December 31, 2003, 2002 and 2001 respectively.



At December 31, 2003, with 4,241 million long-term, mainly consisting
of bond loans, loans from financial institutions and pension loans, and 852 million short-term interest-bearing debts totaling to 5,093 million and offset by 494 million interest-bearing receivables, primarily including cash and
cash equivalents, we had a total of 4,599 million net interest-bearing liabilities. For the second sequential year, our net interest-bearing liabilities decreased to 4,599 million at December 31, 2003 from 5,285 million at December
31, 2002 largely as the result of careful management of capital. As of December 31, 2001, our net interest-bearing liabilities were 6,041 million. The gearing ratio, i.e. net interest-bearing liabilities divided by shareholders equity,
was 67%, 76% and 89% at December 31, 2003, 2002 and 2001 respectively. The average rate of interest on our loans was 3.5% per annum during the year ended December 31, 2003, down 0.3 percentage points from 3.8% in 2002. The average rate of interest
on our loans was 4.9% per annum during the year ended December 31, 2001.



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, 2003
was 8.1 years.



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.



In October 1999, we launched a 250 million bond issue with a maturity of ten years.



In August 1999, we established a global medium-term note program allowing us to issue bonds in different currencies up to a maximum of 1 billion. In
2003, the amount of the program was increased to 4 billion. By March 31, 2004, a total of 2,301 million had been issued under the program.



In March 1998, we provided a U.S.$121 million loan to Asia Pacific Forest Products (Suzhou) Pte (AP Suzhou), the Singaporean holding company
responsible for Asia Pacific International Holdings Ltd.s (APRIL) fine paper mill in China. The loan was made in connection with our equity investment in AP Suzhou. In August 2000, we acquired all of APRILs holdings in AP
Suzhou and the loan was transferred from AP Suzhou to APRIL. In April 2002, the loan was renegotiated. The loan is now secured by APRILs shareholding of approximately 12% in the pulp producer P.T. Riau Andalan Pulp & Paper. The loan is
scheduled to be repaid through regular installments, the first of which were paid in April 2002. The final maturity of the loan will be on December 31, 2006. As of December 31, 2003, the amount of the loan outstanding was U.S.$71 million. We have
also entered into an agreement with P.T. Riau Andalan Pulp & Paper to purchase 0.2 million tons of pulp per year to the Changshu mill.



In November 1997, we launched a U.S.$600 million bond issue to institutional investors in the United States. U.S.$225 million of the bonds is repayable in
ten years from the date of issue and U.S.$375 million in 30 years. We have also launched a U.S.$155 million privately placed bond issue, which is repayable in 2005, to institutional investors in the United States in 1995.



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We have two major committed revolving credit facilities which are part of our liquidity resources. One is
for 2.0 billion which matures in 2006. The other is for 1.2 billion and matures in 2008. No drawings were outstanding under our committed credit facilities at December 31, 2003.



Since 1998, we have repurchased an aggregate of, after adjusted by the 2003
bonus issue, 70.1 million of our own shares. Such an amount of shares would equal approximately 13.4% of our present share capital. Of the total number of shares repurchased, 68.6 million have been cancelled and 1.5 million shares have been used to
finance acquisitions. At the annual general meeting of shareholders on March 24, 2004, the shareholders authorized for a period of one year from the annual general meeting of shareholders the repurchase of up to 26,178,900 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stable). 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.



Off-Balance Sheet Arrangements



We have agreed to sell the ownership right to specified trade receivables on a continuous and irrevocable basis. As at December 31, 2003, the value of the
receivables sold was 179 million. See Note 15 to our consolidated financial statements attached hereto.



We have leased certain power plants under long-term agreements to use the electrical power in our production. Leasing commitments are 19 million in
2004 and subsequently 93 million up to 2012. See Note 21 to our consolidated financial statements attached hereto.



We purchase some of our electricity from Pohjolan Voima Oy, in which we have a 41.97% stake. Pursuant to the PVO and TVO shareholders agreements,
the Group bears partial responsibility proportionate to its output share for the costs of management, costs determined by the Articles of Association of PVO and costs for the disposal of nuclear waste produced by the Olkiluoto nuclear power plant.
Even though contributions to such funds are sufficient to cover estimated future costs, the possibility exists that actual costs could exceed fund provisions and, if this were to occur, the Group would be partially responsible for any such excess
costs, proportionate to its output share. See Note 21 and Note 23.II(g) to our consolidated financial statements attached hereto.



There are no other 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 tables set forth our
obligations and commitments to make future payments under contracts and contingent commitments at December 31, 2003:



|                                             |  |                                |  |                 |  |           |  |           |  |                 
|-------------------------------------------- |  | ------------------------------ |  | --------------- |  | --------- |  | --------- |  | ----------------
|                                             |  | Anticipated Payments by Period
|                                             |  | Total                          |  | Less than1 year |  | 1-3 years |  | 3-5 years |  | More than5 years
|                                             |  | ( in millions)               
|Contractual Obligations                      |  |                                |  |                 |  |           |  |           |  |                 
|Long-term debt                               |  | 4,522                          |  | 248             |  | 813       |  | 983       |  | 2,478           
|Operating lease commitments                  |  | 206                            |  | 44              |  | 74        |  | 49        |  | 39              
|Capital lease obligations including interest |  | 93                             |  | 41              |  | 25        |  | 6         |  | 21              
|Purchase commitments                         |  | 1,403                          |  | 746             |  | 405       |  | 140       |  | 112             
|                                             |  |                                |  |                 |  |           |  |           |  |                 
|Total                                        |  | 6,224                          |  | 1,079           |  | 1,317     |  | 1,178     |  | 2,650           
|                                             |  |                                |  |                 |  |           |  |           |  |                 



The figures included
in Purchase Obligations 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



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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 Information on the CompanyOther OperationsPohjolan Voima and Directors, Senior Management and EmployeesRelated Party TransactionsEnergy.



We have pension arrangements made to comply with local
conditions and practices of each country concerned. For purposes of Finnish GAAP, our pension expenses are based on pension liability calculations and are included in the profit and loss account. We have not recognized the liability for the Finnish
defined benefit pension liability of TEL-system. Under U.S. GAAP, pension expense is recorded on a full accrual basis for qualifying defined benefit plans and reflected in the income statement over the working lives of the employees provided with
such benefits. We do not expect to have material funding requirements for our domestic pension plans, and we do not anticipate any future payments related to our unfunded foreign defined benefit plans to be material. Therefore, payments related to
our employee benefit plans are not included in the table above.



Research
and Development



General



Group-level research and development concentrates on strategic raw materials
and environmental impact studies as well as preliminary research into topics such as new product sectors. Specific research and development expenditures amounted to 48 million in 2003, 46 million in 2002 and 45 million in 2001.
These figures do not include all development work connected with investment projects, or the routine product and production development that forms part of normal business operations at our mills. In addition to our own research and development work,
approximately ten to 15% of our research and development activities are conducted by Oy Keskuslaboratorio-Centrallaboratorium Ab (the Finnish Pulp and Paper Research Institute or FPPRI), which is owned by us together with three
other Finnish paper and forest products companiesStora Enso, Metsäliitto Group and Myllykoski. We have also been involved in many national pulp and paper technology programs initiated by the National Technology Agency of Finland (TEKES).
In addition, we obtain research services on a contractual basis from other research institutes and universities in other countries, either as work commissioned by us or as participation in joint technology projects approved by the Board of Directors
of the FPPRI.



Product and process development



Our own research projects are directed at developing our products and
manufacturing processes.



Development work conducted by our
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 is a constant challenge for our mills, as it means reducing the costs of fiber and
other materials as well as energy costs. We constantly work to expand the range and improve the balance of fiber raw materials and strive to manage the use of energy more efficiently.



In our newsprint and magazine paper manufacturing, we improved our cost-effectiveness by increasing the use of recycled
fiber and of minerals costing less than wood fiber, and by cutting down on the use of the more expensive chemical pulp. In fine paper manufacture, the proportions of short-fiber birch pulp and minerals were increased. The already wide range of
printing papers was further expanded by the addition of Finesse products and grades intended for digital printing. Production of high-brightness magazine papers was stepped up on several of our paper machines.



Process research by our 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. The results were improved product quality and more efficient production.



We made the following rebuilds and modernizations in 2003:



| | · |  | Rauma PM 1: rebuild of the press section and coater and changeover to the neutral process for magazine paper manufacture
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| | · |  | Kaipola PM 6: rebuild of forming section
| | - |  | ----------------------------------------



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| | · |  | Voikkaa PM 18: modifications to allow production of brighter magazine papers
| | - |  | ----------------------------------------------------------------------------



| | · |  | Schongau PM 9: press section rebuild to improve the print-ability of RCF-containing papers
| | - |  | ------------------------------------------------------------------------------------------



| | · |  | Jämsänkoski PM 3: modernization for production of new label papers.
| | - |  | -------------------------------------------------------------------



Our long-term collaboration with suppliers of machinery, equipment and raw materials is aimed at developing new generations of high-quality coated and
uncoated printing papers. Work continued with numerous printing press manufacturers and printing houses to improve printing process efficiency and print quality.



Our paper divisions have four research centers in Finland and two more abroad employing a total of over 200 people. In
Finland, all research work will be handled by the Lappeenranta research centre from mid-2005 onwards. A total of around 200 people are engaged in technical development work at the mills. Collaboration with suppliers of machinery, equipment and raw
materials takes the form of individual projects.



Our chemical
pulp research focused on raising efficiency levels at the mills. Efforts to reduce specific consumptions of wood and bleaching chemicals and volumes of solid waste from the pulp mills were successful.



In order to support growth, particularly in the fine papers business, the
range of fiber raw materials was extended and work was 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 obtained from forest thinning were used to develop a new type of pulp that is particularly suitable for speciality paper production.



The most important development projects conducted by our Converting Division concerned Raflatacs double-sided Duoface
labelstock and thin glassine backing paper, Loparexs PE-coated Layflat release liner for graphic applications, CopperGarda special product for printed circuit boards, a glassine liner for high-speed self-adhesive label applications, and
Walki Wisas high-strength envelope laminates.



Research
conducted by our Wood Products Division in 2003 focused on improving the surface treatment of cladding boards and panels, further developing gluing techniques for wood products, and replacing the materials traditionally used to improve the
biological resistance of wood products by more environmentally friendly methods.



New Ventures



Our New Ventures unit
conducts development projects arising from research work carried out by the company or its partners and aimed at finding new ways to improve existing products and processes and at developing completely new products. The projects in progress relate
to coating, biochemistry and waste handling. Promising innovations that are not directly linked to present business operations are developed into commercial products through the New Ventures unit.



The most notable New Ventures project currently concerns UPM Rafsec, which is
developing radio-frequency identification (RFID) labels and cards. These are used for product labelling by both wholesalers and retailers. The principal users have already agreed on global standards, and the first commercial applications are
expected to be introduced on a wider scale during 2004. Another important use for RFID products is in public transport, for which we are developing new, competitive non-contact tickets. The use of systems using such tickets is expected to increase
in the next few years. UPM Rafsec currently employs 60 people.



Capital Expenditures



We expect
our capital expenditure, excluding acquisitions in 2004, to be below the level of our depreciation. We have five main projects under construction during 2004, including the construction of the new Changshu paper machine, a rebuild of the Pietarsaari
pulp mill and recovery plant, completed in spring 2004, a system project for managing supply chain, modernization of Rauma paper machine number two and modernization of Jämsänkoski paper machine six. The new Changshu paper machine to be
completed in 2005 will substantially increase the mills production capacity for fine paper, bringing the mills total production capacity 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 450 million.



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During the year ended December 31, 2003, our gross capital expenditure amounted to 584 million, an
increase of 23 million from our capital expenditure of 561 million during the year ended December 31, 2002. During the year ended December 31, 2001, our gross capital expenditure amounted to 827 million. Capital expenditures
comprised primarily investments in plants and machinery. Acquisitions and purchases of shares accounted for 36 million in 2003, as compared to 52 million in 2002 and 3,023 million in 2001. Maintenance and replacement investments in
existing production machinery totaled 312 million in 2003 as compared to 363 million in 2002 and 353 million in 2001. In addition to this, 272 million was spent in 2003 on changes in production and on new production units and
production lines, as compared to 198 million in 2002 and 474 million in 2001.



The most significant project during 2003 was the expansion of the deinking plant at Shotton. The total cost of the project, so far, has been 100 million, excluding grant aid of 9 million awarded by the
British government. The new capacity came on stream in November 2003.



Sales of fixed assets, including shares in listed companies, totaled 255 million in 2003. In 2002, the proceeds realized from the sale of shares and fixed assets were 212 million. In 2001, the proceeds realized from the sale of
shares and fixed assets were 350 million. The proceeds from asset sales in each of these years related principally to the disposition of shares in Nokia.



Holdings in Stock Exchange Listed Securities



As of December 31, 2003, we owned a 14.6% (19.9 million shares) interest in Metso, the parent company of a Finnish multinational engineering group resulting from the merger of Rauma and Valmet Corporation, one of the
worlds leading suppliers of equipment and machinery for the pulp and paper industries as well as one of the worlds leading suppliers of rock and mineral processing equipment. We held a majority interest in Rauma until 1997 and conducted
engineering activities through it. From May 27, 1997 until June 30, 1999, we accounted for Rauma as an associated company by using the equity method of accounting.



Inflation



Inflation in Finland
as measured by the consumer price index was 0.9% for the year 2003, 1.6 for the year 2002 and 2.6% for the year 2001. 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
which 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.



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 nine 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.



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##### Table of Contents

Following the annual general meeting of our shareholders held on March 24, 2004, 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.                                                                                                                                                                                                                                                                                                                  
|                               | 
|                               |  | LLM.                                                                                                                                                                                                                                                                                                                                                                                  
|                               | 
|                               |  | Member of the Board of Nokia Corporation, and Chairman of the Board of the Finnish Central Chamber of Commerce to 31.12. 2003.                                                                                                                                                                                                                                                        
|                               | 
|                               |  | Owns 6,040 of our shares.                                                                                                                                                                                                                                                                                                                                                             
|                               | 
|Gustaf Serlachius, b. 1935     |  | Board member since 1996, Vice Chairman since 2000.                                                                                                                                                                                                                                                                                                                                    
|                               | 
|                               |  | 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 1,769,949 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 28,671 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 3,523 of our shares.                                                                                                                                                                                                                                                                                                                                                             
|                               | 
|Michael C. Bottenheim, b. 1947 |  | Board member since 2001.                                                                                                                                                                                                                                                                                                                                                              
|                               | 
|                               |  | Doctoral degree in Law, MBA.                                                                                                                                                                                                                                                                                                                                                          
|                               | 
|                               |  | In 1972 he joined Pierson, Heldring & Pierson, a private Dutch Bank as a corporate financier, which he left in 1976 to join Citicorps European Investment Bank in London. From 1985
until 2000 he 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 3,523 of our shares.                                                                                                                                                                                                                                                                                                                                                             



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|                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Berndt Brunow, b. 1950        |  | Board member since 2002.                                                                                                                                                                                                                                                                                                                                                                                                                
|                              | 
|                              |  | B.Sc. (Econ.).                                                                                                                                                                                                                                                                                                                                                                                                                          
|                              | 
|                              |  | President & CEO of Oy Karl Fazer Ab. 2002-                                                                                                                                                                                                                                                                                                                                                                                              
|                              |  | President & CEO of Sanitec Corp. 19922002                                                                                                                                                                                                                                                                                                                                                                                              
|                              |  | 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 and Oy Nautor Ab.                                                                                                                                                                                                                                                                                                                                                                              
|                              | 
|                              |  | Owns 259,735 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                             
|                              | 
|Karl Grotenfelt, b. 1944      |  | Board member since March 2004.                                                                                                                                                                                                                                                                                                                                                                                                          
|                              | 
|                              |  | LLM.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                              | 
|                              |  | Chairman of the Board of Directors of Maximedia Oy 19752001.                                                                                                                                                                                                                                                                                                                                                                           
|                              |  | Chairman of the Board of Directors of Famigro Oy since 2003.                                                                                                                                                                                                                                                                                                                                                                            
|                              |  | President of the European Landowners Organization (ELO) since 2001. 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.                                                                                                                                                                                  
|                              | 
|                              |  | Owns 6,500 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                               
|                              | 
|Georg Holzhey, b. 1939        |  | Board member since 2003.                                                                                                                                                                                                                                                                                                                                                                                                                
|                              | 
|                              |  | Dr. oec.-publ.                                                                                                                                                                                                                                                                                                                                                                                                                          
|                              | 
|                              |  | Executive Vice President and co-owner of G. Haindlsche Papier-fabriken KgaA 19702001. Executive Vice President of UPM-Kymmene Corporation in 2002. Chairman of the Board of
Augsburger Localbahn GmbH, member of the boards of BDI, Bundesverband der Deutschen Industrie, the Confederation of European Paper Industries (CEPI), VBP Verband Bayerischer Papierfabriken, VIK Verband der Indust-riellen Energie- und
Kraftwirtschaft.
|                              | 
|                              |  | Owns 644,279 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                             
|                              | 
|Françoise Sampermans, b. 1947 |  | Board member since March 2004.                                                                                                                                                                                                                                                                                                                                                                                                          
|                              | 
|                              |  | B. Arts & Psych.                                                                                                                                                                                                                                                                                                                                                                                                                        
|                              | 
|                              |  | Vice President of NMPP, a French distribution chain formed by the Hachette Group and five media cooperatives. Vice President of business unit Magazine and Multimedia Distribution in France at
NMPP 20002003. Executive positions at publishers (Marianne, Le Nouvel Economiste), the printer Quebecor Europe and Alcatel-Alstom Group during 19842000.                                                                              
|                              | 
|                              |  | Owns 500 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                                 



The number of shares
held by the members of our Board of Directors as stated above are as of May 31, 2004. 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.



52



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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. As a newly appointed deputy to the President and CEO, Mr. Pesonen became President and CEO on January 29, 2004, following the resignation of 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 14 of our shares and holds 10,000 Class A stock options, 17,500 Class B stock options, 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.                                                                                                                                                                                                                                                                                                                                                                           
|                        | 
|                        |  | 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 4,700 Class B stock options, 33,000 Class D stock options and 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.                                                                                                                                                                                                                                       
|                        | 
|                        |  | Holds 10,000 Class A stock options, 10,000 Class B stock options, 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 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 14,500 Class B stock options, 22,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                      



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|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|-------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Matti Lievonen, b. 1958    |  | President, Fine and Speciality Papers Division, since January 2004.                                                                                                                                                                                                                                                                                                                                      
|                           | 
|                           |  | B.Sc. (Eng.), MBA.                                                                                                                                                                                                                                                                                                                                                                                       
|                           | 
|                           |  | 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 10,000 Class B stock options, 33,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                                                       
|                           | 
|Matti J. Lindahl, b. 1946  |  | President, Converting Division, since October 2002.                                                                                                                                                                                                                                                                                                                                                      
|                           | 
|                           |  | B.Sc. (Econ.).                                                                                                                                                                                                                                                                                                                                                                                           
|                           | 
|                           |  | 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.                                                            
|                           | 
|                           |  | Holds 35,000 Class B stock options, 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 17,500 Class B stock options, 33,000 Class D stock options and 37,000 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 35,000 Class B stock options, 33,000 Class D stock options and 37,000 Class E stock options.                                                                                                                                                                                                                                                                         
|                           | 
|Riitta Savonlahti, b. 1964 |  | Executive Vice President, Human Resources since June 2004.                                                                                                                                                                                                                                                                                                                                               
|                           | 
|                           |  | M. Sc. (Econ.)                                                                                                                                                                                                                                                                                                                                                                                           
|                           | 
|                           |  | Personnel Administrator with ABB Strömberg Power Oy 1993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.                                                                                                                                                                                                                                                                                                                                                                      



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|                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 17,500 Class A stock options, 17,500 Class B stock options, 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 3,956 of our shares and holds 35,100 Class A stock options, 35,000 Class B stock options, 33,000 Class D stock options and 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 Ltd 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1994. 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 17,500 Class A stock options, 17,500 Class B stock options, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                          | 
|                          |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



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The number of shares and stock options held by the members of our Executive Team as stated above are as
of May 31, 2004. 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 stock option is exercisable for two of our shares.



Compensation of Directors and Officers



For the year ended December 31, 2003, the aggregate remuneration, including benefits in kind, paid to the members of our Board of Directors and our Executive Team, as a group (23 persons), was approximately 6.5 million, 15% 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 six months salary may be paid to the Executive Team members as profit-sharing based on their overall performance. Juha Niemelä, our former President and Chief Executive Officer, and Martin
Granholm, our Executive Vice President, were paid 1,089,000 and 484,000 in salary, benefits in kind and fees, respectively, in the year 2003.



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. Jussi Pesonen receives a monthly salary of 45,000, in addition to which he receives benefits in kind
in the form of a car and telephone.



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.



Members of our Executive Team are covered by an early retirement plan, which provides for a possibility of retiring prior to the current statutory
retirement age of 65. Pursuant to such plans, the retirement age varies from 60 to 63. The costs of such early retirement plan are generally covered by voluntary pension insurance. In all other respects, retirement plans for our executives are
structured pursuant to applicable local statutory pension benefit laws and regulations.



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 Chief Executive Officer, 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.



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 employment. 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.



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Our Board of Directors has elected, from among its independent members, an Audit Committee comprising
Michael C. Bottenheim as Chairman and Martti Ahtisaari and Françoise Sampermans 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 Vesa Vainio as Chairman and Berndt Brunow 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 Gustaf Serlachius as Chairman and Karl Grotenfeld and Jorma Ollila 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.



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, 2003, we employed 34,482 individuals of whom 19,401, 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 2003 totaled 6 million. 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.



A large number of our employees belong to trade unions. In Finland, approximately 90% of our employees belong to labor unions, while in the other
countries, where we have principal production plants, the proportion of unionized workers typically varies between ten percent 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 existing nation-wide collective agreements covering our blue-collar workers in the forest industry were made for a two-year period ending on February 15, 2005. The collective agreements covering our Finnish salaried
white-collar employees will be effective until February 28, 2005. In accordance with the agreements, a nation-wide wage increase was implemented in Finland in March 2004.



57



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



|                         |  |              |  |        |  |       
|------------------------ |  | ------------ |  | ------ |  | ------
|                         |  | December 31,
|                         |  | 2003         |  | 2002   |  | 2001  
|Finland                  |  | 19,401       |  | 19,873 |  | 20,642
|Germany                  |  | 4,333        |  | 4,385  |  | 4,411 
|Great Britain            |  | 1,960        |  | 2,001  |  | 2,030 
|France                   |  | 1,771        |  | 2,032  |  | 2,170 
|Austria                  |  | 712          |  | 737    |  | 721   
|Russia                   |  | 660          |  | 571    |  | 514   
|Ireland                  |  | 345          |  | 315    |  | 283   
|Spain                    |  | 272          |  | 255    |  | 193   
|Denmark                  |  | 234          |  | 233    |  | 241   
|Estonia                  |  | 173          |  | 22     |  | 21    
|The Netherlands          |  | 169          |  | 185    |  | 196   
|Italy                    |  | 81           |  | 65     |  | 61    
|Belgium                  |  | 66           |  | 128    |  | 139   
|Sweden                   |  | 62           |  | 69     |  | 77    
|Poland                   |  | 50           |  | 53     |  | 51    
|Portugal                 |  | 7            |  | 88     |  | 73    
|Other European countries |  | 73           |  | 71     |  | 82    
|United States            |  | 1,526        |  | 1,968  |  | 1,915 
|Canada                   |  | 1,414        |  | 1,449  |  | 1,473 
|China                    |  | 834          |  | 772    |  | 726   
|Malaysia                 |  | 126          |  | 103    |  | 89    
|Australia                |  | 96           |  | 90     |  | 80    
|South Africa             |  | 78           |  | 73     |  | 74    
|Rest of the world        |  | 39           |  | 41     |  | 36    
|                         |  |              |  |        |  |       
|Total                    |  | 34,482       |  | 35,579 |  | 36,298
|                         |  |              |  |        |  |       



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



|                           |  |              |  |        |  |       
|-------------------------- |  | ------------ |  | ------ |  | ------
|                           |  | December 31,
|                           |  | 2003         |  | 2002   |  | 2001  
|Magazine papers            |  | 8,887        |  | 9,325  |  | 9,317 
|Newsprint                  |  | 3,785        |  | 3,826  |  | 3,842 
|Fine and speciality papers |  | 6,654        |  | 6,611  |  | 6,635 
|Converting                 |  | 4,558        |  | 4,694  |  | 4,872 
|Wood products              |  | 7,711        |  | 7,577  |  | 7,865 
|Other operations           |  | 2,887        |  | 3,546  |  | 3,767 
|                           |  |              |  |        |  |       
|Total                      |  | 34,482       |  | 35,579 |  | 36,298
|                           |  |              |  |        |  |       



Share Ownership



As of May 31,
2004, members of our Board of Directors and our Executive Team, as a group, held 2,746,418 ordinary shares, representing 0.525% of the issued and outstanding share capital and 0.525% of the voting rights of UPM-Kymmene Corporation. Members of our
Executive Team, in the aggregate, also hold stock options that, if converted, could raise our share capital by 4,059,260.00 (2,387,800 ordinary shares), representing, as of May 31, 2004, 0.437% 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 May 31, 2004.



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 will be exercisable through April 30,
2005 at an exercise price of



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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 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 stock 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 stock options, our share
capital may be 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-Kymmene 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.



The maximum
number of new shares that may be issued through the exercise of the stock options represents approximately 4.4% of our total share capital.



59



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##### Table of Contents

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 May 31, 2004 based on registered share ownership as reflected in our share register (except for the Holzhey/Bischoff group, which includes ten prior Haindl shareholders):



|                                                                 |  |                    |  |                   |  |                 
|---------------------------------------------------------------- |  | ------------------ |  | ----------------- |  | ----------------
|                                                                 |  | As of May 31, 2004
|                                                                 |  | Number of shares   |  | Percent of shares |  | Percent of votes
|Holzhey/Bischoff group (including ten prior Haindl shareholders) |  | 18,723,353         |  | 3.58              |  | 3.58            
|                                                                 |  |                    | 
|Ilmarinen Mutual Pension Insurance Company                       |  | 10,549,468         |  | 2.01              |  | 2.01            
|                                                                 |  |                    | 
|Gustaf Serlachius (representing five shareholders)               |  | 6,401,404          |  | 1.22              |  | 1.22            
|                                                                 |  |                    | 
|Oy Premier Holding Ab                                            |  | 2,200,000          |  | 0.42              |  | 0.42            
|Palkkiyhtymä Oy                                                  |  | 1,800,000          |  | 0.34              |  | 0.34            
|Palcmills Oy                                                     |  | 800,000            |  | 0.15              |  | 0.15            
|Palkki Group                                                     |  | 4,800,000          |  | 0.91              |  | 0.91            
|                                                                 |  |                    | 
|The State Pension Fund                                           |  | 4,650,000          |  | 0.88              |  | 0.88            
|                                                                 |  |                    | 
|Varma-Sampo Mutual Pension Insurance Company                     |  | 4,632,740          |  | 0.88              |  | 0.88            
|                                                                 |  |                    | 
|Merita plc Pension Fund                                          |  | 2,073,170          |  | 0.40              |  | 0.40            
|Merita plc Pension Foundation                                    |  | 905,270            |  | 0.17              |  | 0.17            
|Nordea Securities plc                                            |  | 120,875            |  | 0.02              |  | 0.02            
|Nordea Life Assurance Finland Ltd                                |  | 933,320            |  | 0.18              |  | 0.18            
|Nordea Group                                                     |  | 4,032,635          |  | 0.77              |  | 0.77            
|                                                                 |  |                    | 
|Svenska litteratursällskapet i Finland                           |  | 3,482,070          |  | 0.67              |  | 0.67            
|                                                                 |  |                    | 
|Eläke-Fennia Mutual Pension Fund                                 |  | 2,254,612          |  | 0.43              |  | 0.43            
|                                                                 |  |                    | 
|The Finnish Cultural Foundation                                  |  | 2,176,448          |  | 0.42              |  | 0.42            
|                                                                 |  |                    | 
|Suomi Mutual Life Assurance Company                              |  | 2,175,000          |  | 0.42              |  | 0.42            
|                                                                 |  |                    | 
|Nominees & registered foreign owners                             |  | 304,372,456        |  | 58.13             |  | 58.13           
|(including Holzhey/Bischoff group)                               |  | 323,095,809        |  | 61.71             |  | 61.71           
|                                                                 |  |                    | 
|Others                                                           |  | 155,328,744        |  | 29.68             |  | 29.68           
|Total                                                            |  | 523,578,930        |  | 100.00            |  | 100.00          



To the knowledge of
our management, there was one holder of five percent or more of our shares as of May 31, 2004:



|                           |  |                    |  |                   |  |                
|-------------------------- |  | ------------------ |  | ----------------- |  | ---------------
|                           |  | As of May 31, 2004
|                           |  | Number of shares   |  | Percent of shares |  | Percentof votes
|Capital Group Companies(1) |  | 26,228,616         |  | 5.02              |  | 5.02           

---

|(1) |  | Funds managed by the Capital Group Companies, Inc. hold their shares through custodial accounts. Therefore, management is unable to determine the exact holdings of these funds 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 I989, as amended, or the dates of the annual or extraordinary general meetings of shareholders of
UPM-Kymrnene 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 June 14, 2004, 14,424,455 shares in the form of ADSs, representing
2.75% of our issued and outstanding shares, were held in the United States by 16 record holders. In addition, as of June 1, 2004, 1,669,995 shares, representing 0.32% of our issued and outstanding shares, were held in the United States by 201 record
holders.



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##### Table of Contents

Related Party Transactions



As
described in Item 5. Operating and Financial Review and ProspectsRecent DevelopmentsHaindl Acquisition, 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
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 significant outstanding indebtedness to UPM-Kymmene Corporation by any director or executive officer or ten
percent shareholder of the Company. See also Note 23.II(l) 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 pulp. Furthermore, we hold a 47% interest in an associated company, Metsä-Botnia, which entitles us to receive chemical pulp. Metsä-Botnia is a joint
venture corporation with M-real, a Finnish paper producer, which owns a 47% interest in Metsä-Botnia, and Metsäliitto Group, a cooperative organization of Finnish forest owners and the controlling shareholder of M-real, which owns a six
percent interest in Metsä-Botnia. Chemical pulp produced by Metsä-Botnia is sold to us and to M-real at the market price less certain transportation and other costs. In 2003, our chemical pulp entitlement with respect to the production of
Metsä-Botnia was approximately 1.1 million tons.



Energy.    We obtain the energy for our production units in Finland through our own and leased power plants and through ownership in power companies which entitle us to receive electricity and heat from those
companies. Of our total electric power requirement globally during 2003, approximately 70% was obtained internally or through ownership in power companies. Our electricity procurement from ownership in power companies was 19.9 TWh in 2003, of which
18.1 TWh was consumed by our own mills and 1.8 TWh was sold. Our electricity procurement is derived, among others, from our 42.0% interest in Pohjolan Voima, a power producer and a 56.8% shareholder in Teollisuuden Voima Oy, one of Finlands
two nuclear power companies; and a 19.0% interest in the hydropower shares of, and a 4.1% interest of the total share capital of, Kemijoki Oy, a Finnish hydro-electric power company. In accordance with the power companies respective articles
of association and related shareholder agreements, the prices we pay to the associated companies are based on production costs, which are generally lower than market prices. Internal sales are priced at the prevailing market price. See Item 4.
Information on the CompanyEnergy.



Research and
Development.    Approximately ten to 15% of our research and development activities are conducted by the FPPRI, in which we are one of four corporate owners with a 39.0% interest. Our share of FPPRI provides us with
fundamental research information regarding our main raw materials, major manufacturing processes and key product attributes. In addition to joint research, we also use the institute for contract research in connection with product and process
development. FPPRI provides such contract research services to us at cost. Discoveries made in the process of its research activities are the property of the institute, which makes a decision whether or not to apply for a patent for each discovery
on a case-by-case basis. If a patent is granted, all corporate owners have a right to use this patent. If, however, FPPRI decides not to apply for a patent, the discovery is auctioned to corporate owners or, if they are not interested, to unrelated
third parties. See Item 5. Operating and Financial Review and ProspectsResearch and Development.



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##### Table of Contents

Recovered Paper.    We own 23.0% of Paperinkeräys Oy
(Paperinkeräys), a Finnish company engaged in the procurement, processing and transport of recovered paper. The other shareholders of Paperinkeräys consist of Finnish forest industry companies. We purchase approximately 55% of
all household recovered paper collected in Finland by Paperinkeräys. Such paper is used at our Kaipola mill in Finland, where it is processed into recycled fiber pulp for newsprint production. Recycled fiber pulp processed from the paper bought
from Paperinkeräys accounts for approximately 40% of all fiber raw material used at the Kaipola mill. Recovered paper is sold to the Company and to other shareholders of Paperinkeräys 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. We own 33.3% of Austria Papier Recycling G.m.b.H. (APR), an Austrian
company engaged in the procurement of recovered paper from household collections in Austria. The other shareholders of APR consist of other forest industry companies.



Shipping.    We own 27.1% of the shares of Transfennica, a Finnish shipping company engaged in
the transport of cargo, primarily paper and other forest products, between Finland and the main European trading ports. The other shareholders of Transfennica consist of certain other Finnish paper and forest industry companies, including M-real,
Myllykoski and Metsä-Botnia, and the Dutch transport company Spliethoff. Shipping services provided by Transfennica to UPM-Kymmene Corporation and the other shareholders are priced at the prevailing market price.



We intend to continue to engage in transactions on a similar basis with such
related companies. For additional discussion, see Note 23 of the notes to the consolidated financial statements included elsewhere in this annual report.



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
eleven percent of our global turnover in 2003. Sales to our most important markets, the European Union and North America, contributed over 80% of our total turnover. Our export sales from Finland, our main base of operations, were equal to
4,597 million in 2003.



The following table sets forth
the percentages of our turnover in 2003 by market area:



|                               |  |                                 
|------------------------------ |  | --------------------------------
|                               |  | Percentage of 2003Group Turnover
|Market Area                    |  |                                 
|Germany                        |  | 16                              
|United Kingdom                 |  | 12                              
|Finland                        |  | 11                              
|France                         |  | 7                               
|Other European Union countries |  | 21                              
|Rest of Europe                 |  | 8                               
|USA and Canada                 |  | 14                              
|Asia                           |  | 6                               
|Other countries(1)             |  | 5                               
|                               |  |                                 
|Total                          |  | 100                             
|                               |  |                                 

---

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



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##### Table of Contents

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.



UPM has directed the Companys 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 has also decided to approach competition law authorities to disclose any conduct that has not comported with applicable competition laws. UPM has also strengthened its competition law compliance programs. It has created a European
Union Competition Law Compliance Manual and has begun a comprehensive competition law training program for all its employees. Seven hundred of the most senior Company employees have been trained to date and have individually confirmed their
compliance with the competition laws. Internal audits have been expanded to include competition law issues and a variety of other internal controls have been implemented. Pursuant to the continuing investigation, the Company has also made
organizational and personnel changes. As the investigation continues, additional such changes may be made.



During 2004, UPM and its subsidiaries have been cooperating 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 is cooperating fully with the 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 federal 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 has
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 will respond to the Statement of Objection as the Commission has requested.



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 currently 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



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##### Table of Contents

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.



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 Exchanges 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 Exchanges, as reported in euros by
the Helsinki Exchanges, retroactively taking into account the bonus issue in March 2003:



|                                |  |                            |  |      
|------------------------------- |  | -------------------------- |  | -----
|                                |  | Price per UPM-KymmeneShare
|                                |  | High                       |  | Low  
|                                |  | ()                       
|1999                            |  | 21.25                      |  | 11.00
|2000                            |  | 22.45                      |  | 12.46
|2001                            |  | 19.93                      |  | 14.00
|2002                            |  | 22.25                      |  | 12.61
|2003                            |  | 17.10                      |  | 11.05
|2004 (through May 31)           |  | 16.60                      |  | 14.44
|                                |  |                           
|                                |  | High                       |  | Low  
|                                |  | ()                       
|2002                            |  |                            |  |      
|First Quarter                   |  | 22.25                      |  | 18.00
|Second Quarter                  |  | 21.56                      |  | 18.22
|Third Quarter                   |  | 20.24                      |  | 13.58
|Fourth Quarter                  |  | 18.88                      |  | 12.61
|                                |  |                           
|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 (through May 31) |  | 16.40                      |  | 14.51



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##### Table of Contents

|                          |  |                            |  |      
|------------------------- |  | -------------------------- |  | -----
|                          |  | Price per UPM-KymmeneShare
|                          |  | High                       |  | Low  
|                          |  | ()                       
|November 2003             |  | 16.65                      |  | 15.40
|December 2003             |  | 16.56                      |  | 14.50
|January 2004              |  | 15.92                      |  | 14.44
|February 2004             |  | 16.18                      |  | 14.45
|March 2004                |  | 16.60                      |  | 14.72
|April 2004                |  | 16.40                      |  | 14.90
|May 2004 (through May 31) |  | 15.77                      |  | 14.51



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 May 31, 2004, there were 14,283,430
ADSs outstanding. The outstanding ADSs were held of record by 16 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 16
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 per UPMKymmene ADS
|                                |  | High                     |  | Low   
|                                |  | (U.S.$)                 
|1999 (commencing June 29)       |  | 21.38                    |  | 12.63 
|2000                            |  | 22.25                    |  | 11.75 
|2001                            |  | 17.65                    |  | 12.83 
|2002                            |  | 20.52                    |  | 12.85 
|2003                            |  | 20.00                    |  | 12.70 
|2004 (through May 31)           |  | 20.21                    |  | 17.71 
|                                |  |                         
|                                |  | High                     |  | Low   
|                                |  | (U.S.$)                 
|2002                            |  |                          |  |       
|First Quarter                   |  | 18.52                    |  | 16.13 
|Second Quarter                  |  | 20.52                    |  | 17.03 
|Third Quarter                   |  | 19.78                    |  | 13.58 
|Fourth Quarter                  |  | 18.25                    |  | 12.85 
|                                |  |                         
|2003                            |  |                          |  |       
|First Quarter                   |  | 17.40                    |  | 13.25 
|Second Quarter                  |  | 14.425                   |  | 12.70 
|Third Quarter                   |  | 18.55                    |  | 14.54 
|Fourth Quarter                  |  | 20.00                    |  | 17.01 
|                                |  |                         
|2004                            |  |                          |  |       
|First Quarter                   |  | 20.21                    |  | 18.08 
|Second Quarter (through May 31) |  | 19.16                    |  | .17.71
|                                |  |                         
|                                |  | High                     |  | Low   
|                                |  | (U.S.$)                 
|November 2003                   |  | 19.45                    |  | 18.51 
|December 2003                   |  | 20.00                    |  | 18.17 
|January 2004                    |  | 20.19                    |  | 18.50 
|February 2004                   |  | 20.21                    |  | 18.53 
|March 2004                      |  | 20.01                    |  | 18.08 
|April 2004                      |  | 19.16                    |  | 18.26 
|May 2004 (through May 31)       |  | 18.72                    |  | 1.7.71



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##### Table of Contents

Trading and Settlement on the Helsinki Exchanges



Trading in, and clearing of, securities on the Helsinki Exchanges 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 Exchanges, the
Helsinki Exchanges Automated Trading and Information 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.



Official share trading takes place from 10:00 a.m. to 6:00 p.m. and evening
trading, from 6:03 p.m. to 7:30 p.m. Helsinki time on each trading day. The official closing prices are confirmed at the end of the official share trading at 6:00 p.m. Offers may be placed in the system beginning at 9:00 a.m. during a pretrading
period. Offers are matched from 9:40 a.m. to 10:00 a.m. to determine the opening quotations of the day. Contract transactions may continue to be registered during aftermarket trading from 6:03 to 6:30 p.m. and from 8:30 to 9:00 a.m. the following
morning within the price limits arrived at during the official share trading and the evening trading.



Trades are normally cleared in the Finnish Central Securities Depositorys (the 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 Exchanges 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 five percent,
ten percent, 15%, 20%, 25%, 331/3%, 50% or 662/3%, 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 Exchanges.



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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##### Table of Contents

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
Exchanges. 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 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



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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 both Clearstream Banking S.A.,
Luxembourg 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, 2003, our issued share capital was 890,084,181.00 consisting of 523,578,930 fully-paid
shares (the minimum and maximum share capital were amended by a resolution made at the annual general meeting on March 19, 2003). Each of our shares entitles its holder to one vote. The shares are in book-entry format.



On March 19, 2003, the annual general meeting of shareholders resolved to
increase our 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.



Also, the annual general meeting of shareholders on March 24,
2004 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 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 26,178,900 and they will be
purchased through public trading on the Helsinki Exchanges. 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 Exchanges 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 five percent of the total number of our
shares and less than five percent 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 24, 2004, 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.



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As of December 31, 2003, none of our shares were held as treasury shares. In December 2002, we announced
that we would redeem all 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 our 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 were redeemed.



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 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 areas of
business. 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



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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 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 331/3% 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 Exchanges 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.



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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 assets 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 must 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. There is currently 208 million on deposit in the Second Escrow Account. On November 30, 2006, the Sellers may replace the Second Escrow Account and interest thereon
with a bank guaranty. The maximum amount of claims that may be today brought for matters relevant to the Second Escrow Account is 208 million.



The Sellers are jointly and severally liable for any claims brought by us up to the respective maximum amounts applicable to the escrow accounts. In no
event are the Sellers liable for claims above the maximum amounts for the escrow accounts.



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.



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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.



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 Exchanges 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. With effect from January 1, 1996, the rate of such tax was 28%.
The corporate income tax rate was raised to 29%, with effect as from January 1, 2000.



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Finland applies an imputation or avoir fiscalsystem for profits distributed as dividends in order
to eliminate double taxation of companies and their shareholders. Under the avoir fiscalsystem, there is 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 exceeds or is less than the corporate tax charge payable to the Finnish taxation authorities calculated on taxable income, a tax surplus will be established or a supplementary tax liability will be 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.



In respect of the possible future abolishment of the avoir fiscalsystem in Finland, see discussion below under
Shareholders and Holders of ADSsTax Credit on Dividends.



Shareholders and Holders of ADSs



Tax Credit on Dividends



The Finnish avoir
fiscalsystem is applied in its entirety only to shareholders who are residents of Finland. Under the avoir fiscalsystem, 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 are currently of the same size, no taxes are 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.



In June 2001, the Finnish Ministry of
Finance appointed a committee to evaluate, among other things, the acceptability of the avoir fiscalsystem in light of Finnish and EU legislation. The committee presented its report in November 2002. The committee was of the opinion that
Finland should abolish the avoir fiscalsystem and as a result dividends would be taxable. In addition, the Finnish Supreme Administrative Court has requested a preliminary ruling from the European Court of Justice in relation to the Finnish
imputation system on September 10, 2002. As a result of the ruling, Finland may be forced to amend or even abolish the current avoir fiscalsystem.



In March 2003, the Republic of Finland held Parliamentary elections that resulted in the formation of a new government. This new Finnish government, which
assumed office in April 2003, has publicly announced its intention to abolish the avoir fiscalsystem. However, under the publicly announced program of the new government, certain minor shareholders would continue to have some relief in
respect of taxation of dividends. No further details in respect of any future changes in the Finnish taxation of dividends are available as of the date of this annual report.



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 29% as from January 1, 2000. The rate of withholding tax in 1999 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 payor prior to the payment of dividends. If such a Source Tax Card or such 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



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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 (except the new countries joined EU on May 1, 2004 during a certain transition period) 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 fiscalsystem and are subject to a general corporate income tax in their respective countries of residency, as specified in
Directive 90/435/EEC.



Finnish Transfer Tax



There is no transfer tax payable in Finland on share transfers made on
the Helsinki Exchanges. If the transfer is not made on the Helsinki Exchanges, 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 our hold 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 expatriots or holders that own (or are deemed to own) ten percent 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.



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.



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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 ratato 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.



Under recently enacted tax legislation, eligible 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 will 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. 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)
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.



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



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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 noncorporate 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 noncorporate 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 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



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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, 2003 and 2002,
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.



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 2003 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.



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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 ten percent 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, 2003 and 2002 was estimated to be 125 million and 95 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, 2003 and 2002, there was an estimated hypothetical
negative effect of 58 million and 56 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 one percent 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 Exchanges). These securities have exposure to price risk. The fair market value of the equity investments held by us as of December 31, 2003 and 2002 was 196
million and 388 million, respectively. The estimated potential loss in fair market value resulting from a hypothetical ten percent adverse movement in equity prices quoted by stock exchanges was 20 million as of December 31, 2003 as
compared to 39 million as of December 31, 2002. Currently, there are no outstanding derivative financial instruments designated as hedges of these investments in publicly traded companies.



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 President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, after evaluating 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, 2003, 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.



There were no significant changes in the Groups internal controls over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Groups internal control over financial reporting subsequent to the date our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer completed their evaluation, nor were there
any significant deficiencies or material weaknesses in the Groups internal controls requiring corrective actions.



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
SEC 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 Commisson requirement does not affect the duties, obligations or liability of any other member of
the Audit Committee or Board of Directors.



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 Oy, for the audit of the annual
consolidated financial for the years ended December 31, 2003 and December 31, 2002 were 2,901,000 and 3,276,000, 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 Oy were 421,000 and 272,000, respectively, for the years ended 2003 and 2002.



Tax Fees.    Fees paid to PricewaterhouseCoopers Oy, associated with tax compliance and tax consultation were
1,278,000 and 1,098,000 respectively, for the years ended 2003 and 2002.



All Other Fees.    All other fees paid to PricewaterhouseCoopers Oy related to other services were 194,000 and 886,000 respectively, for the years ended 2003 and 2002.



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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.



100% 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-65 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 4 billion Global Medium Term Note Programme of UPM-Kymmene Corporation and UPM-Kymmene Finance B.V. guaranteed by UPM-Kymmene Corporation dated April 29, 2003.



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.



4.4 Contract of Employment for Martin Granholm, Executive Vice President of UPM-Kymmene, dated January 31, 2002 (incorporated herein by
reference to Exhibit 4.4 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 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).



4.6 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).



4.7 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).



4.8
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).



4.9 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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4.10 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).



4.11 Agreement between UPM-Kymmene
Corporation and Juha Niemelä dated January 29, 2004.



6.1 Under Finnish GAAP, basic earnings per share is calculated by taking profit or loss before extraordinary items, adjusted for income taxes and minority interests, 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 23 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.



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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:  June 21, 2004



UPM-KYMMENE CORPORATIONBy:

/S/    JOUKO
TAIPALEName:  Jouko TaipaleTitle:    Senior Vice President, Financial ControlBy:

/S/    REKO
AALTO-SETÄLÄName:  Reko Aalto-SetäläTitle:    General Counsel




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



UPM-Kymmene Corporation



Consolidated
Financial Statements



|                                                                                                  |  |     
|------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                  |  | Page
|Report of Independent Auditors                                                                    |  | F-2 
|Consolidated Profit and Loss Account for each of the years ended December 31, 2002, 2001 and 2000 |  | F-3 
|Consolidated Balance Sheet as of December 31, 2002 and 2001                                       |  | F-4 
|Consolidated Cash Flow Statement for each of the years ended December 31, 2002, 2001 and 2000     |  | F-5 
|Notes to the Consolidated Financial Statements                                                    |  | F-7 



F-1



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##### Table of Contents

Report of Independent Auditors



To the Board of Directors and Shareholders

of UPM-Kymmene Corporation



In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of profit and loss and cash flows present fairly, in all material respects, the financial position of UPM-Kymmene Corporation and its subsidiaries as of December 31, 2003 and 2002, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in Finland. 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 statements in accordance with generally accepted auditing standards in Finland and the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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.



Accounting principles generally accepted in Finland 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 23 to the consolidated financial statements.



PricewaterhouseCoopers Oy

Authorized Public Accountants

Helsinki, Finland

February 11, 2004



F-2



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##### Table of Contents

UPM-KYMMENE CORPORATION



CONSOLIDATED PROFIT AND LOSS ACCOUNTS



|                                                  |  |      |   |  |                         |   |  |               |   |  |        |   |  |        |  
|------------------------------------------------- |  | ---- | - |  | ----------------------- | - |  | ------------- | - |  | ------ | - |  | ------ | -
|                                                  |  |      |   |  | Year ended December 31, |  
|                                                  |  | Note |   |  | 2003                    |   |  | 2003          |   |  | 2002   |   |  | 2001   |  
|                                                  |  |      |   |  | (U.S.$)                 |   |  | ()           |   |  | ()    |   |  | ()    |  
|                                                  |  |      |   |  |                         |   |  | (in millions) |   |  |        |  
|Turnover                                          |  | (1   | ) |  | 12,531                  |   |  | 9,948         |   |  | 10,475 |   |  | 9,918  |  
|Other operating income                            |  | (2   | ) |  | 277                     |   |  | 220           |   |  | 155    |   |  | 315    |  
|Costs and expenses                                |  | (3   | ) |  | (10,682                 | ) |  | (8,480        | ) |  | (8,610 | ) |  | (7,958 | )
|Share of results of associated companies          |  | (4   | ) |  | 28                      |   |  | 22            |   |  | 60     |   |  | 83     |  
|Depreciation and value adjustments                |  | (5   | ) |  | (1,166                  | ) |  | (926          | ) |  | (1,018 | ) |  | (744   | )
|                                                  |  |      |   |  |                         |   |  |               |   |  |        |   |  |        |  
|Operating profit                                  |  | (6   | ) |  | 988                     |   |  | 784           |   |  | 1,062  |   |  | 1,614  |  
|Financial income and expenses                     |  | (7   | ) |  | (288                    | ) |  | (228          | ) |  | (273   | ) |  | (279   | )
|Share of results of associated companies          |  | (7   | ) |  | 4                       |   |  | 3             |   |  |       |   |  | (2     | )
|                                                  |  |      |   |  |                         |   |  |               |   |  |        |   |  |        |  
|Profit before extraordinary items                 |  |      |   |  | 704                     |   |  | 559           |   |  | 789    |   |  | 1,333  |  
|Extraordinary income                              |  |      |   |  |                        |   |  |              |   |  |       |   |  |       |  
|Extraordinary expenses                            |  |      |   |  |                        |   |  |              |   |  |       |   |  |       |  
|                                                  |  |      |   |  |                         |   |  |               |   |  |        |   |  |        |  
|Profit before income taxes and minority interests |  |      |   |  | 704                     |   |  | 559           |   |  | 789    |   |  | 1,333  |  
|Income taxes                                      |  | (8   | ) |  | (243                    | ) |  | (193          | ) |  | (241   | ) |  | (378   | )
|Minority interest                                 |  |      |   |  | 3                       |   |  | 2             |   |  | 2      |   |  |       |  
|                                                  |  |      |   |  |                         |   |  |               |   |  |        |   |  |        |  
|Profit for the financial period                   |  |      |   |  | 464                     |   |  | 368           |   |  | 550    |   |  | 955    |  
|                                                  |  |      |   |  |                         |   |  |               |   |  |        |   |  |        |  
|Undiluted earnings per share,                    |  | (9   | ) |  | 0.88                    |   |  | 0.70          |   |  | 1.06   |   |  | 1.93   |  
|                                                  |  |      |   |  |                         |   |  |               |   |  |        |   |  |        |  
|Diluted earnings per share,                      |  | (9   | ) |  | 0.88                    |   |  | 0.70          |   |  | 1.05   |   |  | 1.90   |  
|                                                  |  |      |   |  |                         |   |  |               |   |  |        |   |  |        |  



The accompanying
notes constitute an integral part of these consolidated financial statements.



F-3



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##### Table of Contents

UPM-KYMMENE CORPORATION



CONSOLIDATED BALANCE SHEETS



|                                       |  |      |   |  |                         |  |        |  |       
|-------------------------------------- |  | ---- | - |  | ----------------------- |  | ------ |  | ------
|                                       |  |      |   |  | Year ended December 31,
|                                       |  | Note |   |  | 2003                    |  | 2003   |  | 2002  
|                                       |  |      |   |  | (U.S.$)                 |  | ()    |  | ()   
|                                       |  |      |   |  | (in millions)          
|ASSETS                                 |  |      |   |  |                         |  |        |  |       
|Non-current assets                     |  |      |   |  |                         |  |        |  |       
|Intangible assets                      |  | (10  | ) |  | 438                     |  | 348    |  | 364   
|Goodwill on consolidation              |  | (11  | ) |  | 2,386                   |  | 1,894  |  | 1,987 
|Tangible assets                        |  | (12  | ) |  | 9,884                   |  | 7,846  |  | 8,253 
|Investments held as non-current assets |  | (13  | ) |  | 1,761                   |  | 1,398  |  | 1,507 
|                                       |  |      |   |  |                         |  |        |  |       
|                                       |  |      |   |  | 14,469                  |  | 11,486 |  | 12,111
|                                       |  |      |   |  |                         |  |        |  |       
|Current assets                         |  |      |   |  |                         |  |        |  |       
|Stocks                                 |  | (14  | ) |  | 1,533                   |  | 1,217  |  | 1,288 
|Receivables                            |  | (15  | ) |  | 1,796                   |  | 1,426  |  | 1,550 
|Cash in hand and at bank               |  |      |   |  | 489                     |  | 388    |  | 425   
|                                       |  |      |   |  |                         |  |        |  |       
|                                       |  |      |   |  | 3,818                   |  | 3,031  |  | 3,263 
|                                       |  |      |   |  |                         |  |        |  |       
|Total                                  |  |      |   |  | 18,287                  |  | 14,517 |  | 15,374
|                                       |  |      |   |  |                         |  |        |  |       
|EQUITY AND LIABILITIES                 |  |      |   |  |                         |  |        |  |       
|Shareholders equity                   |  | (16  | ) |  |                         |  |        |  |       
|Share capital                          |  |      |   |  | 1,121                   |  | 890    |  | 442   
|Share premium reserve                  |  |      |   |  | 865                     |  | 687    |  | 654   
|Revaluation reserve                    |  |      |   |  | 460                     |  | 365    |  | 365   
|Legal reserve                          |  |      |   |  | 285                     |  | 226    |  | 671   
|Retained earnings                      |  |      |   |  | 5,458                   |  | 4,333  |  | 4,238 
|Profit for the financial period        |  |      |   |  | 464                     |  | 368    |  | 550   
|                                       |  |      |   |  |                         |  |        |  |       
|                                       |  |      |   |  | 8,653                   |  | 6,869  |  | 6,920 
|                                       |  |      |   |  |                         |  |        |  |       
|Minority interests                     |  |      |   |  | 40                      |  | 32     |  | 33    
|                                       |  |      |   | 
|Provisions                             |  | (17  | ) |  | 517                     |  | 410    |  | 450   
|                                       |  |      |   | 
|Liabilities                            |  |      |   |  |                         |  |        |  |       
|Deferred tax liability                 |  | (18  | ) |  | 811                     |  | 644    |  | 645   
|Non-current liabilities                |  | (19  | ) |  | 5,384                   |  | 4,274  |  | 5,139 
|Current liabilities                    |  | (20  | ) |  | 2,882                   |  | 2,288  |  | 2,187 
|                                       |  |      |   |  |                         |  |        |  |       
|                                       |  |      |   |  | 9,077                   |  | 7,206  |  | 7,971 
|                                       |  |      |   |  |                         |  |        |  |       
|Total                                  |  |      |   |  | 18,287                  |  | 14,517 |  | 15,374
|                                       |  |      |   |  |                         |  |        |  |       



The accompanying
notes constitute an integral part of these consolidated financial statements.



F-4



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##### Table of Contents

UPM-KYMMENE CORPORATION



CONSOLIDATED CASH FLOW STATEMENTS



|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|-------------------------------------------------------------------- |  | -- | - |  | ----------------------- | - |  | ------ | - |  | ----- | - |  | ------ | -
|                                                                     |  |    |   |  | Year ended December 31, |  
|                                                                     |  |    |   |  | 2003                    |   |  | 2003   |   |  | 2002  |   |  | 2001   |  
|                                                                     |  |    |   |  | (U.S.$)                 |   |  | ()    |   |  | ()   |   |  | ()    |  
|                                                                     |  |    |   |  | (in millions)           |  
|Cash flow from operating activities                                  |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|Operating profit                                                     |  |    |   |  | 988                     |   |  | 784    |   |  | 1,062 |   |  | 1,614  |  
|Adjustments to operating profit                                      |  | (a | ) |  | 911                     |   |  | 723    |   |  | 862   |   |  | 397    |  
|Change in net working capital                                        |  | (b | ) |  | 154                     |   |  | 122    |   |  | (144  | ) |  | 96     |  
|Interest received                                                    |  |    |   |  | 20                      |   |  | 16     |   |  | 30    |   |  | 40     |  
|Interest paid                                                        |  |    |   |  | (285                    | ) |  | (226   | ) |  | (301  | ) |  | (337   | )
|Dividends received                                                   |  |    |   |  | 88                      |   |  | 70     |   |  | 67    |   |  | 118    |  
|Other financial income and expenses                                  |  |    |   |  | (81                     | ) |  | (64    | ) |  | 46    |   |  | 32     |  
|Direct taxes paid                                                    |  | (c | ) |  | (203                    | ) |  | (161   | ) |  | (193  | ) |  | (315   | )
|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|Net cash from operating activities                                   |  |    |   |  | 1,592                   |   |  | 1,264  |   |  | 1,429 |   |  | 1,645  |  
|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|                                                                     |  |    |   |  |                        
|Cash flow from investing activities                                  |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|Acquisition of Group companies net of cash acquired                  |  | (d | ) |  | (18                     | ) |  | (14    | ) |  | (10   | ) |  | (2,330 | )
|Investments in associated company shares                             |  |    |   |  | (3                      | ) |  | (2     | ) |  | (26   | ) |  | (29    | )
|Investments in other shares                                          |  |    |   |  |                        |   |  |       |   |  | (5    | ) |  | (8     | )
|Purchase of tangible and intangible assets                           |  |    |   |  | (710                    | ) |  | (564   | ) |  | (571  | ) |  | (849   | )
|Proceeds from sale of Group companies net of cash disposed           |  |    |   |  | (6                      | ) |  | (5     | ) |  | 12    |   |  | 1      |  
|Proceeds from sale of associated companies                           |  |    |   |  | 18                      |   |  | 14     |   |  | 7     |   |  | (2     | )
|Proceeds from sale of other shares                                   |  |    |   |  | 219                     |   |  | 174    |   |  | (1    | ) |  | 253    |  
|Proceeds from sale of tangible and intangible assets                 |  |    |   |  | 23                      |   |  | 18     |   |  | 84    |   |  | 50     |  
|Increase in other long-term investments                              |  |    |   |  | (3                      | ) |  | (2     | ) |  | (2    | ) |  | (4     | )
|Decrease in other long-term investments                              |  |    |   |  | 68                      |   |  | 54     |   |  | 71    |   |  | 64     |  
|Other items                                                          |  |    |   |  | (31                     | ) |  | (25    | ) |  |      |   |  |       |  
|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|Net cash used in investing activities                                |  |    |   |  | (443                    | ) |  | (352   | ) |  | (441  | ) |  | (2,854 | )
|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|Cash flow before financing activities                                |  |    |   |  | 1,149                   |   |  | 912    |   |  | 988   |   |  | (1,209 | )
|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|                                                                     |  |    |   |  |                        
|Cash flow from financing activities                                  |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|Increase in long-term liabilities                                    |  |    |   |  | 729                     |   |  | 579    |   |  | 1,050 |   |  | 3,551  |  
|Decrease in long-term liabilities                                    |  |    |   |  | (1,265                  | ) |  | (1,004 | ) |  | (978  | ) |  | (1,993 | )
|Increase (+) or decrease (-) in current interest-bearing liabilities |  |    |   |  | (108                    | ) |  | (86    | ) |  | (605  | ) |  | (50    | )
|Increase (-) or decrease (+) in interest-bearing receivables         |  |    |   |  | 14                      |   |  | 11     |   |  | (19   | ) |  | 19     |  
|Dividends paid                                                       |  |    |   |  | (491                    | ) |  | (390   | ) |  | (388  | ) |  | (371   | )
|Share issue                                                          |  |    |   |  |                        |   |  |       |   |  |      |   |  | 419    |  
|Purchase of own shares                                               |  |    |   |  |                        |   |  |       |   |  |      |   |  | (152   | )
|Other items                                                          |  |    |   |  | (35                     | ) |  | (28    | ) |  | (57   | ) |  | (24    | )
|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|Net cash used in financing activities                                |  |    |   |  | (1,156                  | ) |  | (918   | ) |  | (997  | ) |  | 1,399  |  
|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|Net increase (+) or decrease (-) in cash and cash equivalents        |  | (e | ) |  | (46                     | ) |  | (37    | ) |  | 2     |   |  | 195    |  
|Cash and cash equivalents at January 1                               |  |    |   |  | 535                     |   |  | 425    |   |  | 423   |   |  | 228    |  
|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  
|Cash and cash equivalents at December 31                             |  |    |   |  | 489                     |   |  | 388    |   |  | 425   |   |  | 423    |  
|                                                                     |  |    |   |  |                         |   |  |        |   |  |       |   |  |        |  



The accompanying
notes constitute an integral part of these consolidated financial statements.



F-5



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##### Table of Contents

UPM-KYMMENE CORPORATION



CONSOLIDATED CASH FLOW STATEMENTS (continued)



|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|------------------------------------------------------------------------ |  | ----------------------- | - |  | ---- | - |  | ----- | - |  | ------ | -
|                                                                         |  | Year ended December 31, |  
|                                                                         |  | 2003                    |   |  | 2003 |   |  | 2002  |   |  | 2001   |  
|                                                                         |  | (U.S.$)                 |   |  | ()  |   |  | ()   |   |  | ()    |  
|                                                                         |  | (in millions)           |  
|(a) Adjustments to operating profit                                      |  |                         |   |  |      |   |  |       |   |  |        |  
|Depreciation and value adjustments                                       |  | 1,166                   |   |  | 926  |   |  | 1,018 |   |  | 744    |  
|Gains (-) or losses (+) on sale of fixed assets                          |  | (249                    | ) |  | (198 | ) |  | (123  | ) |  | (294   | )
|Share of results (+/-) of associated companies                           |  | (27                     | ) |  | (22  | ) |  | (60   | ) |  | (83    | )
|Other                                                                    |  | 21                      |   |  | 17   |   |  | 27    |   |  | 30     |  
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|Total                                                                    |  | 911                     |   |  | 723  |   |  | 862   |   |  | 397    |  
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|                                                                         |  |                         |   | 
|(b) Change in net working capital                                        |  |                         |   |  |      |   |  |       |   |  |        |  
|Increase (-) or decrease (+) in stocks                                   |  | 33                      |   |  | 26   |   |  | (23   | ) |  | 26     |  
|Increase (-) or decrease (+) in non-interest-bearing receivables         |  | 69                      |   |  | 55   |   |  | 78    |   |  | 85     |  
|Increase (+) or decrease (-) in current non-interest-bearing liabilities |  | 52                      |   |  | 41   |   |  | (199  | ) |  | (15    | )
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|Total                                                                    |  | 154                     |   |  | 122  |   |  | (144  | ) |  | 96     |  
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|                                                                         |  |                         |   | 
|(c) Taxes paid                                                           |  |                         |   |  |      |   |  |       |   |  |        |  
|Taxes paid, total                                                        |  | (229                    | ) |  | (181 | ) |  | (284  | ) |  | (358   | )
|Allocated to sales of shares                                             |  | 33                      |   |  | 26   |   |  | 82    |   |  | 44     |  
|Allocated to sale of other fixed assets                                  |  | 9                       |   |  | 7    |   |  | 9     |   |  | (1     | )
|Allocated to other items                                                 |  | (16                     | ) |  | (13  | ) |  |      |   |  |       |  
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|Total                                                                    |  | (203                    | ) |  | (161 | ) |  | (193  | ) |  | (315   | )
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|                                                                         |  |                         |   | 
|(d) Additional information on acquisition of Group companies             |  |                         |   |  |      |   |  |       |   |  |        |  
|Effect of acquired companies on consolidated assets and liabilities      |  |                         |   |  |      |   |  |       |   |  |        |  
|Non-current assets                                                       |  | (20                     | ) |  | (15  | ) |  | (3    | ) |  | (2,962 | )
|Current assets                                                           |  | (3                      | ) |  | (2   | ) |  | (21   | ) |  | (819   | )
|Non-current liabilities                                                  |  | 3                       |   |  | 2    |   |  | 9     |   |  | 332    |  
|Current liabilities                                                      |  | 3                       |   |  | 2    |   |  |      |   |  | 668    |  
|Other items                                                              |  | (1                      | ) |  | (1   | ) |  | 3     |   |  | 28     |  
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|Cash flow                                                                |  | (18                     | ) |  | (14  | ) |  | (12   | ) |  | (2,753 | )
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|Less cash and cash equivalents of acquired companies                     |  |                        |   |  |     |   |  | 2     |   |  | 423    |  
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|Cash flow on acquisition net of cash acquired                            |  | (18                     | ) |  | (14  | ) |  | (10   | ) |  | (2,330 | )
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|                                                                         |  |                         |   | 
|(e) Effect of exchange rate differences on cash and cash equivalents     |  |                         |   |  |      |   |  |       |   |  |        |  
|Cash and cash equivalents at January 1                                   |  | 535                     |   |  | 425  |   |  | 423   |   |  | 228    |  
|Effect of exchange rate changes                                          |  | (39                     | ) |  | (31  | ) |  | 11    |   |  | 5      |  
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|                                                                         |  | 496                     |   |  | 394  |   |  | 434   |   |  | 233    |  
|Increase (+) or decrease (-) in cash and cash equivalents                |  | (7                      | ) |  | (6   | ) |  | (9    | ) |  | 190    |  
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  
|Cash and cash equivalents at December 31                                 |  | 489                     |   |  | 388  |   |  | 425   |   |  | 423    |  
|                                                                         |  |                         |   |  |      |   |  |       |   |  |        |  



The accompanying
notes constitute an integral part of these consolidated financial statements.



F-6



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS



Accounting policies



Basis of presentation



The consolidated financial statements of UPM-Kymmene Corporation (the
Company and together with its consolidated subsidiaries, the Group), a Finnish public limited company domiciled in Helsinki, are prepared in accordance with Finnish accounting practice. The figures are stated in euros under
the historical cost convention, except for certain balance sheet items that have been revalued.



Use of the euro and the United States dollar in the accounts



The accounts have been prepared in euros (). Solely for convenience of the reader, the amounts pertaining to the most recent financial period are
translated from the euro to the United States dollar (U.S.$), at the rate on December 31, 2003 of 1 euro = U.S.$1.2597.



Principles of consolidation



The consolidated financial statements include all Group companies and associated companies. Subsidiaries acquired during the year are included in the
consolidated profit and loss account from the date of their acquisition and subsidiaries sold are included up to their date of sale.



The consolidated financial statements are drawn up using the purchase method and include all companies in which the Company has a controlling interest as
stated in the Accounting Act. The difference between the acquisition cost and the subsidiarys equity at the time of acquisition has been allocated, where applicable, to the underlying assets and depreciated accordingly. The remainder of the
difference is shown as goodwill on consolidation and amortized according to plan.



All inter-company transactions, receivables, liabilities and unrealized profits, as well as distribution of profits within the Group, are eliminated in the consolidated financial statements.



Minority interests are presented separately in determining the Groups
profit for the financial period. They are also shown separately from shareholders equity and liabilities in the consolidated balance sheet.



Investments held as non-current assets



Associated companies are accounted for using the equity method. Accordingly, the Groups share of profits and losses of associated companies less
amortization of the acquisition cost difference is included in the consolidated profit and loss account. The Groups share of post-acquisition undistributed profits and losses of associated companies and the unamortized portion of the
acquisition cost difference is included in the investments in associated companies in the consolidated balance sheet. The acquisition cost difference in respect of power companies is allocated to non-wasting tangible assets.



The shares of results of associated companies connected with the Groups
core business operations are included in operating profit and those of other associated companies in financial items.



Foreign currencies



Receivables and liabilities in foreign currencies are converted into euro at the middle rates of exchange quoted on the balance sheet date. Exchange
differences arising on translation of trade receivables are entered under turnover, and exchange differences on trade payables under costs and expenses. Exchange rate differences on translation of other receivables and liabilities are entered under
financial income and expenses.



The profit and loss accounts of
subsidiaries outside the euro-zone are converted into euro using quarterly average rates of exchange, and the balance sheets using the exchange rates quoted by the European Central Bank on the balance sheet date. The difference is entered in the
Groups shareholders equity.



F-7



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Exchange differences on derivative contracts relating to the Groups net
cash flow are entered under turnover. Other exchange differences arising from hedging instruments are entered under financial income and expenses. Open derivative contracts are valued at the middle rate of exchange prevailing at the balance sheet
date and are entered in the profit and loss account. The exception is derivative contracts relating to the Groups net cash flow, which are entered in the profit and loss account as the cash flow is credited or debited.



Tangible and intangible assets



Tangible and intangible assets are stated at historical cost less planned
depreciation and value adjustments. In addition, the balance sheet value includes revaluations for land and investments in shares. Planned depreciation is calculated on a straight-line basis so as to write off the cost of the assets over their
expected useful lives:



|                                                      |  |            
|----------------------------------------------------- |  | -----------
|Goodwill on consolidation and other intangible assets |  | 5-20 years 
|Buildings and structures                              |  | 25-40 years
|Heavy machinery                                       |  | 15-20 years
|Light machinery and equipment                         |  | 5-15 years 
|Other tangible assets                                 |  | 5-12 years 



Goodwill on
consolidation of large companies acquired is amortized over 20 years, which corresponds to the estimated time of influence of the acquisitions.



Depreciation is not made in respect of land and water areas.



Own shares



The Companys own shares are entered at cost under non-current assets. For calculation of key indices, own shares are eliminated from
shareholders equity and number of shares.



Stocks



Stocks are valued at cost, which is calculated to include the variable costs
of manufacture and an appropriate proportion of the fixed costs of their acquisition and manufacture, however not exceeding the probable net realizable value or replacement value.



Deferred taxes



Deferred tax liabilities and assets are recorded on the consolidated balance sheet and are calculated from timing differences, including revaluations.



Accumulated depreciation difference and untaxed reserves
(appropriations) are divided into shareholders equity and deferred tax liability in the consolidated balance sheet. Under Finlands Companies Act, those portions of untaxed reserves and accumulated depreciation difference included in
shareholders equity are excluded from distributable funds.



Provisions



Provisions on the balance sheet comprise those expenses
to which a commitment has been made but which have not yet been realized. These may include pension liabilities and the costs of business closure and restructuring.



Changes in provisions are shown in the profit and loss account under the appropriate expense item.



F-8



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Turnover



Turnover is calculated after deduction of sales discounts and indirect sales taxes. Turnover also includes exchange
differences arising on translation of trade receivables and derivative contracts relating to protection of the Groups sales.



Research and development



Research and development costs are expensed as incurred.



Pension arrangements



The pension arrangements made in the Group comply with local conditions and practices of each country concerned. Pension expenses are based on pension
liability calculations and are included in the profit and loss account.



The pension cover of employees of the parent company and of other Finnish Group companies is arranged through Finnish pension insurance companies, through the companys own pension funds and directly by the company. The liabilities of
the companys own pension funds are covered in full.



Extraordinary
income and expenses



Income and expenses from
non-recurring but significant transactions arising other than in the course of the companys ordinary activities are recorded as extraordinary income and expenses and are stated in the consolidated accounts after deduction of tax.



Income taxes



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



F-9



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                            |  |                         |   |  |        |   |  |       |  
|--------------------------------------------------------------------------- |  | ----------------------- | - |  | ------ | - |  | ----- | -
|                                                                            |  | Year ended December 31, |  
|                                                                            |  | 2003                    |   |  | 2002   |   |  | 2001  |  
|                                                                            |  | ( in millions)         |  
|1.    Turnover by division                                                  |  |                         |   |  |        |   |  |       |  
|Magazine Papers                                                             |  | 3,320                   |   |  | 3,577  |   |  | 3,548 |  
|Newsprint                                                                   |  | 1,295                   |   |  | 1,381  |   |  | 1,058 |  
|Fine and Speciality Papers                                                  |  | 2,278                   |   |  | 2,449  |   |  | 2,362 |  
|Converting                                                                  |  | 1,374                   |   |  | 1,541  |   |  | 1,480 |  
|Wood Products                                                               |  | 1,552                   |   |  | 1,489  |   |  | 1,463 |  
|Other operations                                                            |  | 672                     |   |  | 583    |   |  | 489   |  
|Intra-Group sales                                                           |  | (543                    | ) |  | (545   | ) |  | (482  | )
|                                                                            |  |                         |   |  |        |   |  |       |  
|Total                                                                       |  | 9,948                   |   |  | 10,475 |   |  | 9,918 |  
|                                                                            |  |                         |   |  |        |   |  |       |  
|Internal turnover by division                                               |  |                         |   |  |        |   |  |       |  
|Magazine Papers                                                             |  | 110                     |   |  | 105    |   |  | 136   |  
|Newsprint                                                                   |  | 24                      |   |  | 4      |   |  | 3     |  
|Fine and Speciality Papers                                                  |  | 278                     |   |  | 311    |   |  | 225   |  
|Converting                                                                  |  | 43                      |   |  | 44     |   |  | 40    |  
|Wood Products                                                               |  | 88                      |   |  | 81     |   |  | 78    |  
|Other Operations(1)                                                         |  |                        |   |  |       |   |  |      |  
|                                                                            |  |                         |   |  |        |   |  |       |  
|Total                                                                       |  | 543                     |   |  | 545    |   |  | 482   |  
|                                                                            |  |                         |   |  |        |   |  |       |  
|(1)    Turnoverfrom Other Operations includes only sales outside the Group. | 
|                                                                            |  |                         |  
|Turnover by market                                                          |  |                         |   |  |        |   |  |       |  
|Germany                                                                     |  | 1,550                   |   |  | 1,803  |   |  | 1,561 |  
|United Kingdom                                                              |  | 1,242                   |   |  | 1,368  |   |  | 1,433 |  
|Finland                                                                     |  | 1,135                   |   |  | 988    |   |  | 974   |  
|France                                                                      |  | 725                     |   |  | 850    |   |  | 876   |  
|Other EU countries                                                          |  | 2,040                   |   |  | 2,150  |   |  | 1,995 |  
|Other European countries                                                    |  | 778                     |   |  | 796    |   |  | 668   |  
|USA and Canada                                                              |  | 1,406                   |   |  | 1,495  |   |  | 1,453 |  
|Rest of world                                                               |  | 1,072                   |   |  | 1,025  |   |  | 958   |  
|                                                                            |  |                         |   |  |        |   |  |       |  
|Total                                                                       |  | 9,948                   |   |  | 10,475 |   |  | 9,918 |  
|                                                                            |  |                         |   |  |        |   |  |       |  
|                                                                            |  |                         |  
|                                                                            |  | 2003                    |   |  | 2002   |   |  | 2001  |  
|2.    Other operating income                                                |  |                         |   |  |        |   |  |       |  
|Capital gains on disposal of fixed assets                                   |  | 200                     |   |  | 132    |   |  | 299   |  
|Income from rents                                                           |  | 11                      |   |  | 12     |   |  | 11    |  
|Other                                                                       |  | 9                       |   |  | 11     |   |  | 5     |  
|                                                                            |  |                         |   |  |        |   |  |       |  
|Total                                                                       |  | 220                     |   |  | 155    |   |  | 315   |  
|                                                                            |  |                         |   |  |        |   |  |       |  



F-10



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                        |  |                                       |   |  |       |   |  |       |  
|------------------------------------------------------- |  | ------------------------------------- | - |  | ----- | - |  | ----- | -
|                                                        |  | Year ended December 31,               |  
|                                                        |  | 2003                                  |   |  | 2002  |   |  | 2001  |  
|                                                        |  | ( in millions except personnel data) |  
|3.    Costs and expenses                                |  |                                       |   |  |       |   |  |       |  
|Change in stocks of finished goods and work in progress |  | 34                                    |   |  | (43   | ) |  | 49    |  
|Production for own use                                  |  | (47                                   | ) |  | (51   | ) |  | (46   | )
|Materials and services                                  |  |                                       |   |  |       |   |  |       |  
|Raw materials, consumables and goods                    |  |                                       |   |  |       |   |  |       |  
|Purchased during the period                             |  | 4,474                                 |   |  | 4,540 |   |  | 4,311 |  
|Change in stocks                                        |  | (3                                    | ) |  | (20   | ) |  | (69   | )
|External services                                       |  | 959                                   |   |  | 863   |   |  | 772   |  
|                                                        |  |                                       |   |  |       |   |  |       |  
|                                                        |  | 5,417                                 |   |  | 5,289 |   |  | 5,017 |  
|Personnel expenses                                      |  |                                       |   |  |       |   |  |       |  
|Salaries and fees                                       |  |                                       |   |  |       |   |  |       |  
|Salaries of Boards of Directors and Managing Directors  |  | 11                                    |   |  | 20    |   |  | 22    |  
|Other salaries                                          |  | 1,293                                 |   |  | 1,344 |   |  | 1,235 |  
|                                                        |  |                                       |   |  |       |   |  |       |  
|                                                        |  | 1,304                                 |   |  | 1,364 |   |  | 1,257 |  
|Indirect employee costs                                 |  |                                       |   |  |       |   |  |       |  
|Pension expenses                                        |  | 188                                   |   |  | 199   |   |  | 151   |  
|Other indirect employee costs                           |  | 191                                   |   |  | 206   |   |  | 204   |  
|                                                        |  |                                       |   |  |       |   |  |       |  
|                                                        |  | 379                                   |   |  | 405   |   |  | 355   |  
|Other operating costs and expenses                      |  | 1,380                                 |   |  | 1,552 |   |  | 1,329 |  
|                                                        |  |                                       |   |  |       |   |  |       |  
|Total                                                   |  | 8,480                                 |   |  | 8,610 |   |  | 7,958 |  
|                                                        |  |                                       |   |  |       |   |  |       |  



The annual salaries,
emoluments in kind and fees paid to the Parent Companys Managing Director and Deputy Managing Director in 2003 were 1.089 million (1.184 million) and 0.484 million (0.487 million), respectively.



At December 31, 2003, none of the Groups managing directors, deputy
managing directors or members of the boards of directors had any loans outstanding from the company or its subsidiaries.



The Managing Directors agreed retirement age is 60 years. In the event of the Managing Directors dismissal and a change of control of the
company, he shall be entitled to compensation corresponding to 24 months salary.



|                           |  |                         |  |        |  |       
|-------------------------- |  | ----------------------- |  | ------ |  | ------
|                           |  | Year ended December 31,
|                           |  | 2003                    |  | 2002   |  | 2001  
|Personnel (average)        |  |                         |  |        |  |       
|Magazine Papers            |  | 9,180                   |  | 9,635  |  | 8,491 
|Newsprint                  |  | 3,843                   |  | 3,914  |  | 2,972 
|Fine and Speciality Papers |  | 6,827                   |  | 6,816  |  | 6,797 
|Converting                 |  | 4,755                   |  | 4,979  |  | 4,903 
|Wood Products              |  | 7,803                   |  | 7,862  |  | 7,580 
|Other Operations           |  | 3,343                   |  | 3,660  |  | 3,720 
|                           |  |                         |  |        |  |       
|Total                      |  | 35,751                  |  | 36,866 |  | 34,463
|                           |  |                         | 
|Personnel at year end      |  | 34,482                  |  | 35,579 |  | 36,298



F-11



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                                                                        |  |                         |   |  |       |   |  |      
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | -----
|                                                                                                                                        |  | Year ended December 31,
|                                                                                                                                        |  | 2003                    |   |  | 2002  |   |  | 2001 
|                                                                                                                                        |  | ( in millions)        
|4.    Shares of results of associated companies                                                                                         |  |                         |   |  |       |   |  |      
|Oy Metsä-Botnia Ab                                                                                                                      |  | 26                      |   |  | 50    |   |  | 80   
|Pohjolan Voima Oy                                                                                                                       |  | (9                      | ) |  | (3    | ) |  |     
|Others                                                                                                                                  |  | 5                       |   |  | 13    |   |  | 3    
|                                                                                                                                        |  |                         |   |  |       |   |  |      
|Total included in operating profit                                                                                                      |  | 22                      |   |  | 60    |   |  | 83   
|                                                                                                                                        |  |                         |   |  |       |   |  |      
|                                                                                                                                        | 
|                                                                                                                                        |  | Year ended December 31,
|                                                                                                                                        |  | 2003                    |   |  | 2002  |   |  | 2001 
|                                                                                                                                        |  | ( in millions)        
|5.    Depreciation according to plan and value adjustments                                                                              |  |                         |   |  |       |   |  |      
|Depreciation according to plan                                                                                                          |  |                         |   |  |       |   |  |      
|Intangible rights                                                                                                                       |  | 8                       |   |  | 8     |   |  | 4    
|Goodwill                                                                                                                                |  | 10                      |   |  | 11    |   |  | 4    
|Goodwill on consolidation                                                                                                               |  | 113                     |   |  | 112   |   |  | 41   
|Other capitalized expenditure                                                                                                           |  | 26                      |   |  | 22    |   |  | 20   
|Buildings                                                                                                                               |  | 95                      |   |  | 98    |   |  | 76   
|Machinery and equipment                                                                                                                 |  | 642                     |   |  | 652   |   |  | 562  
|Other tangible assets                                                                                                                   |  | 24                      |   |  | 24    |   |  | 21   
|                                                                                                                                        |  |                         |   |  |       |   |  |      
|Total                                                                                                                                   |  | 918                     |   |  | 927   |   |  | 728  
|                                                                                                                                        |  |                         |   |  |       |   |  |      
|Value adjustments on non-current assets                                                                                                 |  | 8                       |   |  | 91    |   |  | 16   
|                                                                                                                                        |  |                         |   |  |       |   |  |      
|Total                                                                                                                                   |  | 926                     |   |  | 1,018 |   |  | 744  
|                                                                                                                                        |  |                         |   |  |       |   |  |      
|                                                                                                                                        | 
|                                                                                                                                        |  | Year ended December 31,
|                                                                                                                                        |  | 2003                    |   |  | 2002  |   |  | 2001 
|                                                                                                                                        |  | ( in millions)        
|Planned depreciation and value adjustments by division                                                                                  |  |                         |   |  |       |   |  |      
|Magazine Papers(1)                                                                                                                      |  | 415                     |   |  | 492   |   |  | 343  
|Newsprint                                                                                                                               |  | 184                     |   |  | 196   |   |  | 93   
|Fine and Speciality Papers                                                                                                              |  | 196                     |   |  | 190   |   |  | 171  
|Converting                                                                                                                              |  | 57                      |   |  | 59    |   |  | 56   
|Wood Products                                                                                                                           |  | 50                      |   |  | 49    |   |  | 43   
|Other Operations                                                                                                                        |  | 24                      |   |  | 32    |   |  | 38   
|                                                                                                                                        |  |                         |   |  |       |   |  |      
|                                                                                                                                        |  | 926                     |   |  | 1,018 |   |  | 744  
|                                                                                                                                        |  |                         |   |  |       |   |  |      
|(1)    Includes in 2002 a non-recurring expence of 85 million charged in connection with the shutdown of Blandins two paper machines.
|                                                                                                                                        |  | Year ended December 31,
|                                                                                                                                        |  | 2003                    |   |  | 2002  |   |  | 2001 
|                                                                                                                                        |  | ( in millions)        
|6.    Operating profit by division                                                                                                      |  |                         |   |  |       |   |  |      
|Magazine Papers                                                                                                                         |  | 153                     |   |  | 225   |   |  | 598  
|Newsprint                                                                                                                               |  | 54                      |   |  | 162   |   |  | 211  
|Fine and Speciality Papers                                                                                                              |  | 241                     |   |  | 359   |   |  | 336  
|Converting                                                                                                                              |  | 43                      |   |  | 70    |   |  | 46   
|Wood Products                                                                                                                           |  | 29                      |   |  | 37    |   |  | 27   
|Other operations                                                                                                                        |  | 264                     |   |  | 209   |   |  | 396  
|                                                                                                                                        |  |                         |   |  |       |   |  |      
|                                                                                                                                        |  | 784                     |   |  | 1,062 |   |  | 1,614
|                                                                                                                                        |  |                         |   |  |       |   |  |      



F-12



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The 2003 figures include non-recurring charges of 9 million for
Newsprint and 4 million for Converting. The corresponding figures in 2002 and, in parenthesis, for 2001 were Magazine Papers 128 million (20 million), Newsprint 8 million (0 million), and Converting 0 million
(11 million).



|                                         |  |                         |  |      |  |     
|---------------------------------------- |  | ----------------------- |  | ---- |  | ----
|                                         |  | Year ended December 31,
|                                         |  | 2003                    |  | 2002 |  | 2001
|                                         |  | ( in millions)        
|Other Operations                         |  |                         |  |      |  |     
|Forest Department in Finland             |  | 41                      |  | 37   |  | 45  
|Energy Department in Finland             |  | 78                      |  | 51   |  | 99  
|Share of results of associated companies |  | 22                      |  | 60   |  | 82  
|Others and eliminations                  |  | 123                     |  | 61   |  | 170 
|                                         |  |                         |  |      |  |     
|                                         |  | 264                     |  | 209  |  | 396 
|                                         |  |                         |  |      |  |     



The most significant
non-recurring items for Other Operations are gains on the sale of listed shares: 2003, 167 million; 2002, 81 million; and 2001 265 million.



|                                              |  |                         |  |        |  |       
|--------------------------------------------- |  | ----------------------- |  | ------ |  | ------
|                                              |  | Year ended December 31,
|                                              |  | 2003                    |  | 2002   |  | 2001  
|                                              |  | ( in millions)        
|Capital employed (average) by division        |  |                         |  |        |  |       
|Magazine Papers                               |  | 4,923                   |  | 5,253  |  | 4,380 
|Newsprint                                     |  | 2,124                   |  | 2,368  |  | 984   
|Fine and Speciality Papers                    |  | 2,471                   |  | 2,628  |  | 2,602 
|Converting                                    |  | 688                     |  | 786    |  | 801   
|Wood Products                                 |  | 777                     |  | 742    |  | 664   
|Other Operations and Group items              |  | 1,435                   |  | 1,404  |  | 1,376 
|                                              |  |                         |  |        |  |       
|                                              |  | 12,418                  |  | 13,181 |  | 10,807
|                                              |  |                         |  |        |  |       
|                                              | 
|                                              |  | Year ended December 31,
|                                              |  | 2003                    |  | 2002   |  | 2001  
|                                              |  | ( in millions)        
|Return on capital employed (Roce) by division |  |                         |  |        |  |       
|Magazine Papers                               |  | 3.1                     |  | 4.3    |  | 13.7  
|Newsprint                                     |  | 2.5                     |  | 6.8    |  | 21.4  
|Fine and Speciality Papers                    |  | 9.8                     |  | 13.7   |  | 12.9  
|Converting                                    |  | 6.3                     |  | 8.9    |  | 5.8   
|Wood Products                                 |  | 3.7                     |  | 5.0    |  | 4.1   
|                                              |  |                         |  |        |  |       
|Group total                                   |  | 6.4                     |  | 8.4    |  | 15.6  
|                                              |  |                         |  |        |  |       
|Excluding non-recurring items                 |  | 5.6                     |  | 8.8    |  | 13.5  
|                                              |  |                         |  |        |  |       



The formulae used to
calculate the return on capital employed for the divisions and the Group are presented on page iii.



F-13



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                         |  |                         |   |  |         |   |  |         |  
|-------------------------------------------------------- |  | ----------------------- | - |  | ------- | - |  | ------- | -
|                                                         |  | Year ended December 31, |  
|                                                         |  | 2003                    |   |  | 2002    |   |  | 2001    |  
|                                                         |  | ( in millions)         |  
|7.    Financial income and expenses                      |  |                         |   |  |         |   |  |         |  
|Income from other investments held as non-current assets |  |                         |   |  |         |   |  |         |  
|Dividend income                                          |  | 18                      |   |  | 21      |   |  | 33      |  
|Interest income                                          |  | 5                       |   |  | 10      |   |  | 15      |  
|Other interest and financial income                      |  |                         |   |  |         |   |  |         |  
|Other interest income                                    |  | 11                      |   |  | 15      |   |  | 25      |  
|Other financial income                                   |  | 6                       |   |  | 2       |   |  | 1       |  
|Exchange differences                                     |  | (28                     | ) |  | 2       |   |  | (5      | )
|Interest expenses and other financial expenses           |  |                         |   |  |         |   |  |         |  
|Interest expenses                                        |  | (219                    | ) |  | (286    | ) |  | (317    | )
|Other financial expenses                                 |  | (21                     | ) |  | (37     | ) |  | (31     | )
|Shares of results of associated companies                |  | 3                       |   |  |        |   |  | (2      | )
|                                                         |  |                         |   |  |         |   |  |         |  
|                                                         |  | (225                    | ) |  | (273    | ) |  | (281    | )
|                                                         |  |                         |   |  |         |   |  |         |  
|                                                         | 
|                                                         |  | Year ended December 31, |  
|                                                         |  | 2003                    |   |  | 2002    |   |  | 2001    |  
|                                                         |  | ( in millions)         |  
|8.    Income taxes                                       |  |                         |   |  |         |   |  |         |  
|Taxes for the financial period                           |  | 182                     |   |  | 273     |   |  | 394     |  
|Taxes from previous periods                              |  | 4                       |   |  | (2      | ) |  | 1       |  
|Change in deferred tax                                   |  | 7                       |   |  | (30     | ) |  | (17     | )
|                                                         |  |                         |   |  |         |   |  |         |  
|Total                                                    |  | 193                     |   |  | 241     |   |  | 378     |  
|                                                         |  |                         |   |  |         |   |  |         |  
|Effective tax rate, %                                    |  | 34.5                    |   |  | 30.5    |   |  | 28.4    |  
|Change in deferred taxes                                 |  |                         |   |  |         |   |  |         |  
|From timing differences                                  |  | 10                      |   |  | (23     | ) |  | (6      | )
|From consolidation eliminations                          |  | 10                      |   |  | 8       |   |  | (2      | )
|From appropriations                                      |  | (13                     | ) |  | (15     | ) |  | (9      | )
|                                                         |  |                         |   |  |         |   |  |         |  
|                                                         |  | 7                       |   |  | (30     | ) |  | (17     | )
|                                                         |  |                         |   |  |         |   |  |         |  
|                                                         | 
|                                                         |  | Year ended December 31, |  
|                                                         |  | 2003                    |   |  | 2002    |   |  | 2001    |  
|                                                         |  | ( in millions)         |  
|9.   Earnings per share                                  |  |                         |   |  |         |   |  |         |  
|Profit before extraordinary items                        |  | 559                     |   |  | 789     |   |  | 1,333   |  
|Minority interest                                        |  | 2                       |   |  | 2       |   |  |        |  
|Income taxes                                             |  | (193                    | ) |  | (241    | ) |  | (378    | )
|                                                         |  |                         |   |  |         |   |  |         |  
|Earnings                                                 |  | 368                     |   |  | 550     |   |  | 955     |  
|                                                         |  |                         |   |  |         |   |  |         |  
|Average number of shares                                 |  |                         |   |  |         |   |  |         |  
|Undiluted (1,000)                                        |  | 523,130                 |   |  | 518,935 |   |  | 495,784 |  
|Earnings per share,                                     |  | 0.70                    |   |  | 1.06    |   |  | 1.93    |  
|                                                         |  |                         |  
|Average number of shares                                 |  |                         |   |  |         |   |  |         |  
|Diluted (1,000)                                          |  | 524,254                 |   |  | 525,782 |   |  | 503,984 |  
|Diluted earnings per share,                             |  | 0.70                    |   |  | 1.05    |   |  | 1.90    |  



F-14



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                    |  |                         |   |  |      |  
|--------------------------------------------------- |  | ----------------------- | - |  | ---- | -
|                                                    |  | Year ended December 31, |  
|                                                    |  | 2003                    |   |  | 2002 |  
|                                                    |  | ( in millions)         |  
|10.   Intangible assets                             |  |                         |   |  |      |  
|Intangible rights                                   |  |                         |   |  |      |  
|Acquisition cost at January 1                       |  | 156                     |   |  | 162  |  
|Difference on translation                           |  | (4                      | ) |  | (5   | )
|Increases                                           |  | 8                       |   |  | 6    |  
|Decreases                                           |  | (1                      | ) |  | (3   | )
|Transfers between balance sheet items               |  | (13                     | ) |  | (4   | )
|                                                    |  |                         |   |  |      |  
|Acquisition cost at December 31                     |  | 146                     |   |  | 156  |  
|                                                    |  |                         |   |  |      |  
|Accumulated depreciation at January 1               |  | (86                     | ) |  | (80  | )
|Accumulated depreciation on decreases and transfers |  | 2                       |   |  | 2    |  
|Depreciation for the period                         |  | (8                      | ) |  | (8   | )
|Transfers between balance sheet items               |  | 9                       |   |  |     |  
|                                                    |  |                         |   |  |      |  
|Accumulated depreciation at December 31             |  | (83                     | ) |  | (86  | )
|                                                    |  |                         |   |  |      |  
|Book value at December 31                           |  | 63                      |   |  | 70   |  
|                                                    |  |                         |   |  |      |  
|                                                    | 
|                                                    |  | Year ended December 31, |  
|                                                    |  | 2003                    |   |  | 2002 |  
|                                                    |  | ( in millions)         |  
|Goodwill                                            |  |                         |   |  |      |  
|Acquisition cost at January 1                       |  | 131                     |   |  | 167  |  
|Difference on translation                           |  | (1                      | ) |  | (2   | )
|Increases                                           |  | 5                       |   |  | 4    |  
|Decreases                                           |  | (1                      | ) |  | (1   | )
|Transfers between balance sheet items               |  |                        |   |  | (37  | )
|                                                    |  |                         |   |  |      |  
|Acquisition cost at December 31                     |  | 134                     |   |  | 131  |  
|                                                    |  |                         |   |  |      |  
|Accumulated depreciation at January 1               |  | (21                     | ) |  | (47  | )
|Accumulated depreciation on decreases and transfers |  |                        |   |  | 37   |  
|Depreciation for the period                         |  | (10                     | ) |  | (11  | )
|                                                    |  |                         |   |  |      |  
|Accumulated depreciation at December 31             |  | (31                     | ) |  | (21  | )
|                                                    |  |                         |   |  |      |  
|Book value at December 31                           |  | 103                     |   |  | 110  |  
|                                                    |  |                         |   |  |      |  
|                                                    | 
|                                                    |  | Year ended December 31, |  
|                                                    |  | 2003                    |   |  | 2002 |  
|                                                    |  | ( in millions)         |  
|Other capitalized expenditures                      |  |                         |   |  |      |  
|Acquisition cost at January 1                       |  | 207                     |   |  | 179  |  
|Difference on translation                           |  | (4                      | ) |  | (5   | )
|Increases                                           |  | 29                      |   |  | 12   |  
|Decreases                                           |  | (18                     | ) |  | (6   | )
|Transfers between balance sheet items               |  | 26                      |   |  | 27   |  
|                                                    |  |                         |   |  |      |  
|Acquisition cost at December 31                     |  | 240                     |   |  | 207  |  
|                                                    |  |                         |   |  |      |  
|Accumulated depreciation at January 1               |  | (129                    | ) |  | (102 | )
|Difference on translation                           |  | 2                       |   |  | 2    |  
|Accumulated depreciation on decreases and transfers |  | 16                      |   |  | 5    |  
|Transfers between balance sheet items               |  | (9                      | ) |  | (13  | )
|Depreciation for the period                         |  | (26                     | ) |  | (21  | )
|Value adjustments and their cancellations           |  | (4                      | ) |  |     |  
|                                                    |  |                         |   |  |      |  
|Accumulated depreciation at December 31             |  | (150                    | ) |  | (129 | )
|                                                    |  |                         |   |  |      |  
|Book value at December 31                           |  | 90                      |   |  | 78   |  
|                                                    |  |                         |   |  |      |  



F-15



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                        |  |                         |   |  |       |  
|--------------------------------------- |  | ----------------------- | - |  | ----- | -
|                                        |  | Year ended December 31, |  
|                                        |  | 2003                    |   |  | 2002  |  
|                                        |  | ( in millions)         |  
|Other capitalized expenditures          |  |                         |   |  |       |  
|Acquisition cost at January 1           |  | 106                     |   |  | 60    |  
|Increases                               |  | 5                       |   |  | 60    |  
|Decreases                               |  | (12                     | ) |  | (1    | )
|Transfers between balance sheet items   |  | (7                      | ) |  | (13   | )
|                                        |  |                         |   |  |       |  
|Book value at December 31               |  | 92                      |   |  | 106   |  
|                                        |  |                         |   |  |       |  
|                                        | 
|                                        |  | Year ended December 31, |  
|                                        |  | 2003                    |   |  | 2002  |  
|                                        |  | ( in millions)         |  
|11.   Goodwill on consolidation         |  |                         |   |  |       |  
|Acquisition cost at January 1           |  | 2,205                   |   |  | 2,192 |  
|Increases                               |  | 20                      |   |  | 13    |  
|Decreases                               |  |                        |   |  |      |  
|                                        |  |                         |   |  |       |  
|Acquisition cost at December 31         |  | 2,225                   |   |  | 2,205 |  
|                                        |  |                         |   |  |       |  
|Accumulated depreciation at January 1   |  | (218                    | ) |  | (106  | )
|Depreciation for the period             |  | (113                    | ) |  | (112  | )
|                                        |  |                         |   |  |       |  
|Accumulated depreciation at December 31 |  | (331                    | ) |  | (218  | )
|                                        |  |                         |   |  |       |  
|Book value at December 31               |  | 1,864                   |   |  | 1,987 |  
|                                        |  |                         |   |  |       |  



92 million in
goodwill arising on consolidation has been allocated to machinery and equipment (109 million), 75 million to land (75 million), 30 million to buildings (32 million) and 9 million to intangible rights (10
million).



|                                          |  |                 |   |  |       |  
|----------------------------------------- |  | --------------- | - |  | ----- | -
|                                          |  | 2003            |   |  | 2002  |  
|                                          |  | ( in millions) |  
|12.   Tangible assets                     |  |                 |   |  |       |  
|Land and water areas                      |  |                 |   |  |       |  
|Acquisition cost at January 1             |  | 664             |   |  | 671   |  
|Difference on translation                 |  | (5              | ) |  | (5    | )
|Increases                                 |  | 4               |   |  | 8     |  
|Decreases                                 |  | (10             | ) |  | (12   | )
|Transfers between balance sheet items     |  |                |   |  | 2     |  
|                                          |  |                 |   |  |       |  
|Acquisition cost at December 31           |  | 653             |   |  | 664   |  
|Accumulated depreciation at January 1     |  | (7              | ) |  | (8    | )
|Difference on translation                 |  |                |   |  | 1     |  
|Value adjustments and their cancellations |  | 3               |   |  |      |  
|Accumulated depreciation at December 31   |  | (4              | ) |  | (7    | )
|                                          |  |                 |   |  |       |  
|Revaluations                              |  | 567             |   |  | 567   |  
|                                          |  |                 |   |  |       |  
|Book value at December 31                 |  | 1,216           |   |  | 1,224 |  
|                                          |  |                 |   |  |       |  
|Revaluations                              |  |                 |   |  |       |  
|Value at January 1                        |  | 567             |   |  | 567   |  
|                                          |  |                 |   |  |       |  
|Value at December 31                      |  | 567             |   |  | 567   |  
|                                          |  |                 |   |  |       |  



F-16



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                    |  |                 |   |  |        |  
|--------------------------------------------------- |  | --------------- | - |  | ------ | -
|                                                    |  | 2003            |   |  | 2002   |  
|                                                    |  | ( in millions) |  
|Buildings                                           |  |                 |   |  |        |  
|Acquisition cost at January 1                       |  | 2,875           |   |  | 2,914  |  
|Difference on translation                           |  | (42             | ) |  | (72    | )
|Increases                                           |  | 52              |   |  | 40     |  
|Decreases                                           |  | (37             | ) |  | (52    | )
|Transfers between balance sheet items               |  | 19              |   |  | 45     |  
|                                                    |  |                 |   |  |        |  
|Acquisition cost at December 31                     |  | 2,867           |   |  | 2,875  |  
|                                                    |  |                 |   |  |        |  
|Accumulated depreciation at January 1               |  | (1,182          | ) |  | (1,116 | )
|Difference on translation                           |  | 14              |   |  | 22     |  
|Transfers between balance sheet items               |  | 2               |   |  | (2     | )
|Accumulated depreciation on decreases and transfers |  | 32              |   |  | 23     |  
|Depreciation for the period                         |  | (94             | ) |  | (97    | )
|Value adjustments and their cancellations           |  | (1              | ) |  | (12    | )
|                                                    |  |                 |   |  |        |  
|Accumulated depreciation at December 31             |  | (1,229          | ) |  | (1,182 | )
|                                                    |  |                 |   |  |        |  
|Book value at December 31                           |  | 1,638           |   |  | 1,693  |  
|                                                    |  |                 |   |  |        |  
|                                                    |  |                
|                                                    |  | 2003            |   |  | 2002   |  
|                                                    |  | ( in millions) |  
|Machinery and equipment                             |  |                 |   |  |        |  
|Acquisition cost at January 1                       |  | 11,840          |   |  | 12,088 |  
|Difference on translation                           |  | (239            | ) |  | (370   | )
|Increases                                           |  | 307             |   |  | 265    |  
|Decreases                                           |  | (241            | ) |  | (163   | )
|Transfers between balance sheet items               |  | 157             |   |  | 20     |  
|                                                    |  |                 |   |  |        |  
|Acquisition cost at December 31                     |  | 11,824          |   |  | 11,840 |  
|                                                    |  |                 |   |  |        |  
|Accumulated depreciation at January 1               |  | (6,878          | ) |  | (6,557 | )
|Difference on translation                           |  | 120             |   |  | 168    |  
|Transfers between balance sheet items               |  |                |   |  | 108    |  
|Accumulated depreciation on decreases and transfers |  | 236             |   |  | 118    |  
|Depreciation for the period                         |  | (634            | ) |  | (640   | )
|Value adjustments and their cancellations           |  | (3              | ) |  | (75    | )
|                                                    |  |                 |   |  |        |  
|Accumulated depreciation at December 31             |  | (7,159          | ) |  | (6,878 | )
|                                                    |  |                 |   |  |        |  
|Book value at December 31                           |  | 4,665           |   |  | 4,962  |  
|                                                    |  |                 |   |  |        |  



F-17



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                    |  |                 |   |  |      |  
|--------------------------------------------------- |  | --------------- | - |  | ---- | -
|                                                    |  | 2003            |   |  | 2002 |  
|                                                    |  | ( in millions) |  
|Other tangible assets                               |  |                 |   |  |      |  
|Acquisition cost at January 1                       |  | 470             |   |  | 470  |  
|Difference on translation                           |  | (5              | ) |  | (11  | )
|Increases                                           |  | 17              |   |  | 21   |  
|Decreases                                           |  | (20             | ) |  | (9   | )
|Transfers between balance sheet items               |  | (3              | ) |  | (1   | )
|                                                    |  |                 |   |  |      |  
|Acquisition cost at December 31                     |  | 459             |   |  | 470  |  
|                                                    |  |                 |   |  |      |  
|Accumulated depreciation at January 1               |  | (332            | ) |  | (318 | )
|Difference on translation                           |  | 3               |   |  | 6    |  
|Transfers between balance sheet items               |  | 3               |   |  | (5   | )
|Accumulated depreciation on decreases and transfers |  | 14              |   |  | 12   |  
|Depreciation for the period                         |  | (23             | ) |  | (27  | )
|                                                    |  |                 |   |  |      |  
|Accumulated depreciation at December 31             |  | (335            | ) |  | (332 | )
|                                                    |  |                 |   |  |      |  
|Book value at December 31                           |  | 124             |   |  | 138  |  
|                                                    |  |                 |   |  |      |  
|                                                    |  |                
|                                                    |  | 2003            |   |  | 2002 |  
|                                                    |  | ( in millions) |  
|Advance payments and construction in progress       |  |                 |   |  |      |  
|Acquisition cost at January 1                       |  | 236             |   |  | 223  |  
|Difference on translation                           |  | (5              | ) |  | (5   | )
|Increases                                           |  | 215             |   |  | 205  |  
|Decreases                                           |  | (49             | ) |  | (20  | )
|Transfers between balance sheet items               |  | (194            | ) |  | (167 | )
|                                                    |  |                 |   |  |      |  
|Book value at December 31                           |  | 203             |   |  | 236  |  
|                                                    |  |                 |   |  |      |  
|                                                    |  |                
|                                                    |  | 2003            |   |  | 2002 |  
|                                                    |  | ( in millions) |  
|13.   Investments held as non-current assets        |  |                 |   |  |      |  
|Holding in associated companies                     |  |                 |   |  |      |  
|Acquisition cost at January 1                       |  | 862             |   |  | 848  |  
|Increases                                           |  | 6               |   |  | 34   |  
|Decreases                                           |  | (42             | ) |  | (4   | )
|Transfers between balance sheet items               |  |                |   |  | (16  | )
|                                                    |  |                 |   |  |      |  
|Acquisition cost at December 31                     |  | 826             |   |  | 862  |  
|                                                    |  |                 |   |  |      |  
|Accumulated depreciation at January 1               |  |                |   |  | (16  | )
|Value adjustments and their cancellations           |  |                |   |  | 16   |  
|Accumulated depreciation at December 31             |  |                |   |  |     |  
|Revaluations                                        |  | 103             |   |  | 103  |  
|                                                    |  |                 |   |  |      |  
|Book value at December 31                           |  | 929             |   |  | 965  |  
|                                                    |  |                 |   |  |      |  
|Revaluations                                        |  |                 |   |  |      |  
|Value at January 1                                  |  | 103             |   |  | 103  |  
|                                                    |  |                 |   |  |      |  
|Value at December 31                                |  | 103             |   |  | 103  |  
|                                                    |  |                 |   |  |      |  



Holdings in associated
companies include net unamortized goodwill of 60 million (52 million). Of this amount, 58 million (49 million) relates to Pohjolan Voima Oys shares.



F-18



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                    |  |                 |   |  |      |  
|--------------------------------------------------- |  | --------------- | - |  | ---- | -
|                                                    |  | 2003            |   |  | 2002 |  
|                                                    |  | ( in millions) |  
|Receivables from associated companies               |  |                 |   |  |      |  
|Acquisition cost at January 1                       |  | 18              |   |  | 77   |  
|Increases                                           |  |                |   |  | 3    |  
|Decreases                                           |  | (9              | ) |  | (6   | )
|Transfers between balance sheet items               |  | 3               |   |  | (56  | )
|                                                    |  |                 |   |  |      |  
|Acquisition cost at December 31                     |  | 12              |   |  | 18   |  
|                                                    |  |                 |   |  |      |  
|Accumulated depreciation at January 1               |  | (5              | ) |  | (44  | )
|Value adjustments and their cancellations           |  | 3               |   |  | 39   |  
|                                                    |  |                 |   |  |      |  
|Accumulated depreciation at December 31             |  | (2              | ) |  | (5   | )
|                                                    |  |                 |   |  |      |  
|Book value at December 31                           |  | 10              |   |  | 13   |  
|                                                    |  |                 |   |  |      |  
|                                                    |  |                
|                                                    |  | 2003            |   |  | 2002 |  
|                                                    |  | ( in millions) |  
|Other shares and holdings                           |  |                 |   |  |      |  
|Acquisition cost at January 1                       |  | 356             |   |  | 391  |  
|Difference on translation                           |  |                |   |  | (1   | )
|Increases                                           |  | 3               |   |  | 7    |  
|Decreases                                           |  | (16             | ) |  | (20  | )
|Transfers between balance sheet items               |  | (12             | ) |  | (21  | )
|                                                    |  |                 |   |  |      |  
|Acquisition cost at December 31                     |  | 331             |   |  | 356  |  
|                                                    |  |                 |   |  |      |  
|Accumulated depreciation at January 1               |  | (12             | ) |  | (27  | )
|Accumulated depreciation on decreases and transfers |  | 12              |   |  | 12   |  
|Value adjustments and their cancellations           |  |                |   |  | 3    |  
|                                                    |  |                 |   |  |      |  
|Accumulated depreciation at December 31             |  |                |   |  | (12  | )
|                                                    |  |                 |   |  |      |  
|Revaluation                                         |  | 61              |   |  | 61   |  
|                                                    |  |                 |   |  |      |  
|Book value at December 31                           |  | 392             |   |  | 405  |  
|                                                    |  |                 |   |  |      |  
|Revaluations                                        |  |                 |   |  |      |  
|Value at January 1                                  |  | 61              |   |  | 61   |  
|                                                    |  |                 |   |  |      |  
|Value at December 31                                |  | 61              |   |  | 61   |  
|                                                    |  |                 |   |  |      |  



Market values and
basis for valuations



The book value of shares in listed
companies is 176 million. The market value at December 31, 2003 was 196 million.



|                                      |  |                 |   |  |      |  
|------------------------------------- |  | --------------- | - |  | ---- | -
|                                      |  | 2003            |   |  | 2002 |  
|                                      |  | ( in millions) |  
|Other receivables                     |  |                 |   |  |      |  
|Acquisition cost at January 1         |  | 125             |   |  | 84   |  
|Increases                             |  | 2               |   |  | 48   |  
|Decreases                             |  | (48             | ) |  | (72  | )
|Transfers between balance sheet items |  | (12             | ) |  | 65   |  
|                                      |  |                 |   |  |      |  
|Acquisition cost at December 31       |  | 67              |   |  | 125  |  
|                                      |  |                 |   |  |      |  
|Book value at December 31             |  | 67              |   |  | 125  |  
|                                      |  |                 |   |  |      |  



F-19



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                              |  |                     |  |                 |  |                     |   |  |                 |  
|----------------------------- |  | ------------------- |  | --------------- |  | ------------------- | - |  | --------------- | -
|                              |  | 2003                |  | 2002            | 
|                              |  | Shares in thousands |  | ( in millions) |  | Shares in thousands |   |  | ( in millions) |  
|Own shares                    |  |                     |  |                 |  |                     |   |  |                 |  
|Acquisition cost at January 1 |  |                    |  |                |  | 1,175               |   |  | 38              |  
|Increases                     |  |                    |  |                |  |                    |   |  |                |  
|Own shares declared void      |  |                    |  |                |  | (1,175              | ) |  | (38             | )
|                              |  |                     |  |                 |  |                     |   |  |                 |  
|Book value at December 31     |  |                    |  |                |  |                    |   |  |                |  
|                              |  |                     |  |                 |  |                     |   |  |                 |  



|                                    |  |                         |  |      
|----------------------------------- |  | ----------------------- |  | -----
|                                    |  | Year ended December 31,
|                                    |  | 2003                    |  | 2002 
|                                    |  | ( in millions)        
|14.   Stocks                        |  |                         |  |      
|Raw materials and consumables       |  | 494                     |  | 502  
|Work in progress                    |  | 39                      |  | 70   
|Finished products and goods         |  | 579                     |  | 612  
|Other stocks                        |  | 73                      |  | 65   
|Advance payments                    |  | 32                      |  | 39   
|                                    |  |                         |  |      
|Total                               |  | 1,217                   |  | 1,288
|                                    |  |                         |  |      
|                                    | 
|                                    |  | Year ended December 31,
|                                    |  | 2003                    |  | 2002 
|                                    |  | ( in millions)        
|15.   Receivables                   |  |                         |  |      
|Non-current receivables             |  |                         |  |      
|Trade receivables                   |  | 1                       |  | 2    
|Loan receivables                    |  | 2                       |  | 1    
|Other receivables                   |  | 6                       |  | 9    
|Prepayments and accrued income      |  | 7                       |  | 6    
|                                    |  |                         |  |      
|Total                               |  | 16                      |  | 18   
|                                    |  |                         |  |      
|                                    | 
|                                    |  | Year ended December 31,
|                                    |  | 2003                    |  | 2002 
|                                    |  | ( in millions)        
|Current receivables                 |  |                         |  |      
|Trade receivables                   |  | 1,065                   |  | 1,224
|Loan receivables                    |  | 4                       |  | 4    
|Other receivables                   |  | 182                     |  | 151  
|Prepaid expenses and accrued income |  | 159                     |  | 153  
|                                    |  |                         |  |      
|                                    |  | 1,410                   |  | 1,532
|                                    |  |                         |  |      



F-20



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                 |  |                         |  |      
|---------------------------------------------------------------- |  | ----------------------- |  | -----
|                                                                 |  | Year ended December 31,
|                                                                 |  | 2003                    |  | 2002 
|                                                                 |  | ( in millions)        
|Receivables total                                                |  |                         |  |      
|Trade receivables                                                |  | 1,066                   |  | 1,226
|Loan receivables                                                 |  | 6                       |  | 5    
|Other receivables                                                |  | 188                     |  | 160  
|Prepaid expenses and accrued income                              |  | 166                     |  | 159  
|                                                                 |  |                         |  |      
|                                                                 |  | 1,426                   |  | 1,550
|                                                                 |  |                         |  |      
|Main items included in current prepayments and accrued income    |  |                         |  |      
|Personnel expenses                                               |  | 7                       |  | 7    
|Interest income                                                  |  | 13                      |  | 12   
|Interest expenses                                                |  | 8                       |  | 21   
|Income taxes                                                     |  | 62                      |  | 51   
|Indirect taxes                                                   |  | 23                      |  | 26   
|Others                                                           |  | 46                      |  | 36   
|                                                                 |  |                         |  |      
|                                                                 |  | 159                     |  | 153  
|                                                                 |  |                         |  |      
|Receivables from associated and participating interest companies |  |                         |  |      
|Trade receivables                                                |  | 19                      |  | 20   
|Loan receivables                                                 |  | 4                       |  |     
|                                                                 |  |                         |  |      
|                                                                 |  | 23                      |  | 20   
|                                                                 |  |                         |  |      



Some Group companies
in Great Britain, France, Italy and Germany have made agreements with third parties concerning their receivables (asset securitization). The Group companies in question have 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 (108 million), and it is presented on the consolidated balance sheet as a
decrease in trade receivables. The security associated with the asset securitization programme is reported on the consolidated balance sheet under other receivables. The expenses incurred in the sales of these receivables are included in financial
expenses on the consolidated profit and loss account. Increases and decreases in trade receivables are reported on the consolidated cash flow statement as cash generated from operations.



F-21



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                         |  |                         |   |  |                     |   |  |                    |   |  |                  |   |  |              |   |  |                  |   |  |                      |   |  |       |   |  |       |  
|---------------------------------------- |  | ----------------------- | - |  | ------------------- | - |  | ------------------ | - |  | ---------------- | - |  | ------------ | - |  | ---------------- | - |  | -------------------- | - |  | ----- | - |  | ----- | -
|                                         |  | Year ended December 31, |  
|                                         |  | Share Capital           |   |  | SharePremiumReserve |   |  | Revaluationreserve |   |  | Reserveownshares |   |  | Legalreserve |   |  | Retainedearnings |   |  | Cumul.Transl.Adjust. |   |  | Total |  
|                                         |  | Shares(1)               |   |  | Amount              |   |  |                    |   |  |                  |   | 
|                                         |  | ( in millions)         |  
|16.   Shareholders equity               |  |                         |   |  |                     |   |  |                    |   |  |                  |   |  |              |   |  |                  |   |  |                      |   |  |       |   |  |       |  
|BalanceDecember 31, 2000                |  | 259,973                 |   |  | 437                 |   |  | 199                |   |  | 366              |   |  | 279          |   |  | 672              |   |  | 4,161                |   |  | 42    |   |  | 6,156 |  
|Conversion of1994 Convertible bond loan |  | 520                     |   |  | 1                   |   |  | 10                 |   |  |                 |   |  |             |   |  |                 |   |  |                     |   |  |      |   |  | 11    |  
|Directed share issue                     |  | 12,300                  |   |  | 21                  |   |  | 398                |   |  |                 |   |  |             |   |  |                 |   |  |                     |   |  |      |   |  | 419   |  
|Bonus issue                              |  |                        |   |  | 5                   |   |  | (5                 | ) |  |                 |   |  |             |   |  |                 |   |  |                     |   |  |      |   |  |      |  
|Own shares declared void                 |  | (12,900                 | ) |  | (22                 | ) |  | 22                 |   |  |                 |   |  | (393         | ) |  |                 |   |  |                     |   |  |      |   |  | (393  | )
|Dividends paid                           |  |                        |   |  |                    |   |  |                   |   |  |                 |   |  |             |   |  |                 |   |  | (371                 | ) |  |      |   |  | (371  | )
|Transferred to reserve for own shares    |  |                        |   |  |                     |   |  |                   |   |  |                 |   |  | 152          |   |  |                 |   |  | (152                 | ) |  |      |   |  |      |  
|Profit for the period                    |  |                        |   |  |                    |   |  |                   |   |  |                 |   |  |             |   |  |                 |   |  | 955                  |   |  |      |   |  | 955   |  
|Translation differences and other        |  |                        |   |  |                    |   |  |                   |   |  |                 |   |  |             |   |  |                 |   |  | 11                   |   |  | 22    |   |  | 33    |  
|                                         |  |                         |   |  |                     |   |  |                    |   |  |                  |   |  |              |   |  |                  |   |  |                      |   |  |       |   |  |       |  
|BalanceDecember 31, 2001                |  | 259,893                 |   |  | 442                 |   |  | 624                |   |  | 366              |   |  | 38           |   |  | 672              |   |  | 4,604                |   |  | 64    |   |  | 6,810 |  
|                                         |  |                         |   |  |                     |   |  |                    |   |  |                  |   |  |              |   |  |                  |   |  |                      |   |  |       |   |  |       |  
|Conversion of1994 Convertible bond loan |  | 1,398                   |   |  | 2                   |   |  | 28                 |   |  |                 |   |  |             |   |  |                 |   |  |                     |   |  |      |   |  | 30    |  
|Own shares declared void                 |  | (1,175                  | ) |  | (2                  | ) |  | 2                  |   |  |                 |   |  | (38          | ) |  |                 |   |  |                     |   |  |      |   |  | (38   | )
|Cancellation of revaluations             |  |                        |   |  |                    |   |  |                   |   |  | (1               | ) |  |             |   |  |                 |   |  |                     |   |  |      |   |  | (1    | )
|Dividends paid                           |  |                        |   |  |                    |   |  |                   |   |  |                 |   |  |             |   |  |                 |   |  | (388                 | ) |  |      |   |  | (388  | )
|Profit for the period                    |  |                        |   |  |                    |   |  |                   |   |  |                 |   |  |             |   |  |                 |   |  | 550                  |   |  |      |   |  | 550   |  
|Translation differences and other        |  |                        |   |  |                    |   |  |                   |   |  |                 |   |  |             |   |  | (1               | ) |  | (5                   | ) |  | (37   | ) |  | (43   | )
|                                         |  |                         |   |  |                     |   |  |                    |   |  |                  |   |  |              |   |  |                  |   |  |                      |   |  |       |   |  |       |  
|BalanceDecember 31, 2002                |  | 260,116                 |   |  | 442                 |   |  | 654                |   |  | 365              |   |  |             |   |  | 671              |   |  | 4,761                |   |  | 27    |   |  | 6,920 |  
|                                         |  |                         |   |  |                     |   |  |                    |   |  |                  |   |  |              |   |  |                  |   |  |                      |   |  |       |   |  |       |  
|Conversion of1994 Convertible bond loan |  | 1,673                   |   |  | 3                   |   |  | 33                 |   |  |                 |   |  |             |   |  |                 |   |  |                     |   |  |      |   |  | 36    |  
|Bonus share issue                        |  | 261,790                 |   |  | 445                 |   |  |                   |   |  |                 |   |  |             |   |  | (445             | ) |  |                     |   |  |      |   |  |      |  
|Dividends paid                           |  |                        |   |  |                    |   |  |                   |   |  |                 |   |  |             |   |  |                 |   |  | (390                 | ) |  |      |   |  | (390  | )
|Profit for the period                    |  |                        |   |  |                    |   |  |                   |   |  |                 |   |  |             |   |  |                 |   |  | 368                  |   |  |      |   |  | 368   |  
|Translation differences and other        |  |                        |   |  |                    |   |  |                   |   |  |                 |   |  |             |   |  |                 |   |  |                     |   |  | (65   | ) |  | (65   | )
|                                         |  |                         |   |  |                     |   |  |                    |   |  |                  |   |  |              |   |  |                  |   |  |                      |   |  |       |   |  |       |  
|BalanceDecember 31, 2003                |  | 523,579                 |   |  | 890                 |   |  | 687                |   |  | 365              |   |  |             |   |  | 226              |   |  | 4,739                |   |  | (38   | ) |  | 6,869 |  
|                                         |  |                         |   |  |                     |   |  |                    |   |  |                  |   |  |              |   |  |                  |   |  |                      |   |  |       |   |  |       |  

---

|(1) |  | The number of shares is presented in thousands.
|--- |  | -----------------------------------------------



|                                                                                                        |  |                         |  |       |  |        |   |  |        |  
|------------------------------------------------------------------------------------------------------- |  | ----------------------- |  | ----- |  | ------ | - |  | ------ | -
|                                                                                                        |  | Year ended December 31, | 
|                                                                                                        |  | 2003                    |  | 2002  |  | 2003   |   |  | 2002   |  
|                                                                                                        |  | Company                 |  | Group | 
|                                                                                                        |  | ( in millions)         | 
|Distributable funds at December 31                                                                      |  |                         |  |       |  |        |   |  |        |  
|Retained earnings                                                                                       |  | 2,786                   |  | 2,542 |  | 4,371  |   |  | 4,211  |  
|Cumulative translation adjustment                                                                       |  |                        |  |      |  | (38    | ) |  | 27     |  
|Profit for the period                                                                                   |  | 276                     |  | 634   |  | 368    |   |  | 550    |  
|Portion of accumulated depreciation difference and untaxed reserves transferred to shareholders equity |  |                        |  |      |  | (1,436 | ) |  | (1,476 | )
|                                                                                                        |  |                         |  |       |  |        |   |  |        |  
|Distributable funds at December 31                                                                      |  | 3,062                   |  | 3,176 |  | 3,265  |   |  | 3,312  |  
|                                                                                                        |  |                         |  |       |  |        |   |  |        |  



|                                   |  |                         |  |     
|---------------------------------- |  | ----------------------- |  | ----
|                                   |  | Year ended December 31,
|                                   |  | 2003                    |  | 2002
|                                   |  | ( in millions)        
|17.   Provisions                   |  |                         |  |     
|Pensions                           |  | 342                     |  | 339 
|Closure and restructuring expenses |  | 21                      |  | 32  
|Environmental expenses             |  | 9                       |  | 7   
|Other                              |  | 38                      |  | 72  
|                                   |  |                         |  |     
|                                   |  | 410                     |  | 450 
|                                   |  |                         |  |     



F-22



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                |  |                        |  |     
|------------------------------- |  | ---------------------- |  | ----
|                                |  | Year endedDecember 31,
|                                |  | 2003                   |  | 2002
|                                |  | ( in millions)       
|18.   Deferred tax liability    |  |                        |  |     
|Deferred tax liability          |  |                        |  |     
|From timing differences         |  | 111                    |  | 112 
|From consolidation eliminations |  | 5                      |  | 6   
|From appropriations             |  | 620                    |  | 633 
|From revaluations               |  | 214                    |  | 214 
|                                |  |                        |  |     
|                                |  | 950                    |  | 965 
|                                |  |                        |  |     
|Deferred tax assets             |  |                        |  |     
|From timing differences         |  | 286                    |  | 289 
|From consolidation eliminations |  | 20                     |  | 31  
|                                |  |                        |  |     
|                                |  | 306                    |  | 320 
|                                |  |                        |  |     
|Deferred tax liability net      |  | 644                    |  | 645 
|                                |  |                        |  |     



The deferred tax
liability from revaluations has been deducted from the revaluations reserve in shareholders equity.



|                                       |  |                         |  |      
|-------------------------------------- |  | ----------------------- |  | -----
|                                       |  | Year ended December 31,
|                                       |  | 2003                    |  | 2002 
|                                       |  | ( in millions)        
|19.   Non-current liabilities          |  |                         |  |      
|Bond loans                             |  | 2,816                   |  | 2,860
|Loans from financial institutions      |  | 593                     |  | 1,291
|Pension loans                          |  | 571                     |  | 647  
|Trade payables                         |  | 13                      |  | 17   
|Other liabilities                      |  | 281                     |  | 324  
|                                       |  |                         |  |      
|                                       |  | 4,274                   |  | 5,139
|                                       |  |                         |  |      
|Repayment schedule for long-term loans |  |                         |  |      
|In 2005-2008 / 2004-2007               |  |                         |  |      
|Bond loans                             |  | 552                     |  | 527  
|Loans from financial institutions      |  | 457                     |  | 1,065
|Pension loans                          |  | 567                     |  | 331  
|Trade payables                         |  | 4                       |  | 5    
|Other liabilities                      |  | 250                     |  | 131  
|                                       |  |                         |  |      
|                                       |  | 1,830                   |  | 2059 
|                                       |  |                         |  |      
|In 2009- / 2008-                       |  |                         |  |      
|Bond loans                             |  | 2,264                   |  | 2,333
|Loans from financial institutions      |  | 136                     |  | 226  
|Pension loans                          |  | 4                       |  | 316  
|Trade payables                         |  | 10                      |  | 12   
|Other liabilities                      |  | 30                      |  | 193  
|                                       |  |                         |  |      
|                                       |  | 2,444                   |  | 3,080
|                                       |  |                         |  |      
|Total at December 31                   |  | 4,274                   |  | 5,139
|                                       |  |                         |  |      



F-23



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Bond loans



|                              |  |                    |  |               |  |                        |  |       |  |      
|----------------------------- |  | ------------------ |  | ------------- |  | ---------------------- |  | ----- |  | -----
|                              |  | Interestpercentage |  | Initial loan  |  | Year endedDecember 31,
|                              |  |                    |  | 2003          |  | 2002                  
|                              |  |                    |  |               |  |                        |  | ()   |  | ()  
|                              |  |                    |  | (in millions)
|Fixed interest                |  |                    |  |               |  |                        |  |       |  |      
|1995-2005                     |  | 7.72               |  | USD           |  | 155                    |  | 123   |  | 148  
|1997-2007                     |  | 6.875              |  | USD           |  | 215                    |  | 170   |  | 205  
|1997-2007                     |  | 6.88               |  | EUR           |  | 102                    |  | 102   |  | 102  
|1997-2027                     |  | 7.45               |  | USD           |  | 375                    |  | 297   |  | 358  
|1999-2009                     |  | 6.35               |  | EUR           |  | 250                    |  | 250   |  | 250  
|2000-2030                     |  | 3.55               |  | JPY           |  | 10,000                 |  | 74    |  | 80   
|2001-2006                     |  | 0.962              |  | JPY           |  | 2,000                  |  | 15    |  | 16   
|2001-2007                     |  | 6.875              |  | USD           |  | 10                     |  | 8     |  | 10   
|2002-2005                     |  | 0.10               |  | EUR           |  | 30                     |  | 30    |  | 30   
|2002-2007                     |  | 0.869              |  | JPY           |  | 2,000                  |  | 15    |  | 16   
|2002-2012                     |  | 6.125              |  | EUR           |  | 600                    |  | 600   |  | 600  
|2002-2014                     |  | 5.625              |  | USD           |  | 500                    |  | 369   |  | 477  
|2002-2017                     |  | 6.625              |  | GBP           |  | 250                    |  | 354   |  | 384  
|2003-2018                     |  | 5.50               |  | USD           |  | 250                    |  | 198   |  |      
|                              |  |                    |  |               |  |                        |  |       |  |      
|Bond loans, total             |  |                    |  |               |  |                        |  | 2,632 |  | 2,676
|                              |  |                    |  |               |  |                        |  |       |  |      
|Floating rate                 |  |                    |  |               |  |                        |  |       |  |      
|2002-2008                     |  | 2.955              |  | 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             |  |                    |  |               |  |                        |  | 2,816 |  | 2,860
|                              |  |                    |  |               |  |                        |  |       |  |      
|current portion              |  |                    |  |               |  |                        |  |      |  |     
|                              |  |                    |  |               |  |                        |  |       |  |      
|Bond loans, long-term portion |  |                    |  |               |  |                        |  | 2,816 |  | 2,860
|                              |  |                    |  |               |  |                        |  |       |  |      



F-24



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                            |  |                        |  |      
|----------------------------------------------------------- |  | ---------------------- |  | -----
|                                                            |  | Year endedDecember 31,
|                                                            |  | 2003                   |  | 2002 
|                                                            |  | ( in millions)       
|20.   Current liabilities                                   |  |                        |  |      
|Loans from financial institutions                           |  | 398                    |  | 231  
|Pension loans                                               |  | 83                     |  | 83   
|Advances received                                           |  | 38                     |  | 16   
|Trade payables                                              |  | 729                    |  | 722  
|Bills of exchange payable                                   |  | 9                      |  | 44   
|Other liabilities                                           |  | 391                    |  | 593  
|Accruals and deferred income                                |  | 640                    |  | 498  
|                                                            |  |                        |  |      
|                                                            |  | 2,288                  |  | 2,187
|                                                            |  |                        |  |      
|Payables to associated and participating interest companies |  |                        |  |      
|Trade payables                                              |  | 30                     |  | 34   
|Other liabilities                                           |  | 7                      |  | 62   
|                                                            |  |                        |  |      
|                                                            |  | 37                     |  | 96   
|                                                            |  |                        |  |      
|Main items included in current accruals and deferred income |  |                        |  |      
|Personnel expenses                                          |  | 214                    |  | 205  
|Interest expenses                                           |  | 16                     |  | 36   
|Income tax                                                  |  | 101                    |  | 75   
|Indirect taxes                                              |  | 9                      |  | 12   
|Currency derivatives                                        |  | 136                    |  | 15   
|Others                                                      |  | 164                    |  | 155  
|                                                            |  |                        |  |      
|                                                            |  | 640                    |  | 498  
|                                                            |  |                        |  |      
|                                                            | 
|                                                            |  | Year endedDecember 31,
|                                                            |  | 2003                   |  | 2002 
|                                                            |  | ( in millions)       
|Net interest-bearing liabilities                            |  |                        |  |      
|Interest-bearing liabilities                                |  |                        |  |      
|Non-current liabilities                                     |  |                        |  |      
|Bond loans                                                  |  | 2,816                  |  | 2,860
|Loans from financial institutions                           |  | 593                    |  | 1,291
|Pension loans                                               |  | 571                    |  | 647  
|Other liabilities                                           |  | 261                    |  | 307  
|                                                            |  |                        |  |      
|                                                            |  | 4,241                  |  | 5,105
|                                                            |  |                        |  |      
|Current liabilities                                         |  |                        |  |      
|Current portion of long-term loans                          |  | 248                    |  | 258  
|Bills of exchange payable                                   |  | 9                      |  | 44   
|Accruals and deferred income                                |  | 136                    |  |     
|Other current liabilities                                   |  | 459                    |  | 482  
|                                                            |  |                        |  |      
|                                                            |  | 852                    |  | 784  
|                                                            |  |                        |  |      
|Interest-bearing liabilities, total                         |  | 5,093                  |  | 5,889
|                                                            |  |                        |  |      



F-25



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                             |  |                        |  |      
|------------------------------------------------------------ |  | ---------------------- |  | -----
|                                                             |  | Year endedDecember 31,
|                                                             |  | 2003                   |  | 2002 
|                                                             |  | ( in millions)       
|Interest-bearing receivables                                 |  |                        |  |      
|Non-current assets                                           |  |                        |  |      
|Loan receivables                                             |  | 68                     |  | 125  
|Current assets                                               |  |                        |  |      
|Loan receivables                                             |  | 4                      |  | 4    
|Trade receivables                                            |  |                       |  | 5    
|Other receivables                                            |  | 34                     |  | 45   
|Cash in hand and at bank                                     |  | 388                    |  | 425  
|                                                             |  |                        |  |      
|Interest-bearing receivables, total                          |  | 494                    |  | 604  
|                                                             |  |                        |  |      
|Net interest-bearing liabilities                             |  | 4,599                  |  | 5,285
|                                                             |  |                        |  |      
|                                                             | 
|                                                             |  | Year endedDecember 31,
|                                                             |  | 2003                   |  | 2002 
|                                                             |  | ( in millions)       
|21.   Contingent liabilities                                 |  |                        |  |      
|Mortgages                                                    |  |                        |  |      
|As security against own debts                                |  | 178                    |  | 175  
|Guarantees                                                   |  |                        |  |      
|Guarantees for loans                                         |  |                        |  |      
|On behalf of associated and participating interest companies |  | 41                     |  | 41   
|On behalf of others                                          |  | 4                      |  | 6    
|Other guarantees                                             |  |                        |  |      
|On own commitments                                           |  | 20                     |  | 70   
|On behalf of others                                          |  | 3                      |  | 3    
|Pension liabilities                                          |  |                        |  |      
|Direct liabilities                                           |  | 9                      |  | 3    
|Leasing commitments(1)                                       |  |                        |  |      
|Commitments for 2004/2003                                    |  | 25                     |  | 26   
|Commitments for subsequent years                             |  | 68                     |  | 107  
|Other commitments                                            |  | 23                     |  | 31   

---

|(1) |  | The Group has also leased certain power plants under long-term agreements and uses the electrical power generated by these plants in its production. The Group has the right, but not
the obligation, to purchase these power plants or shares therein. Leasing commitments are 19 million in 2004 and subsequently 93 million up to 2012. The Group estimates that the market value of these agreements exceeds the above
commitment.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other agreements



Directors pension commitments



The retirement age for the managing directors and certain other directors of
Group companies has been fixed at 60-65 years.



Other
commitments



The Group purchases some of its electricity
from Pohjolan Voima Oy, in which it has a 41.97 percent stake. Pohjolan Voima Oy has a 56.8 percent stake in Teollisuuden Voima Oy, which owns one of the nuclear power plants operating in Finland. According to company documents of Pohjolan Voima Oy,
shareholders purchase electricity produced by the company at a price that covers its production costs. This price has generally been below the average market price.



F-26



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Nominal and market values of the Groups derivative agreements open at December 31



|                          |  |                 |   |  |               |   |  |       |  |      
|------------------------- |  | --------------- | - |  | ------------- | - |  | ----- |  | -----
|                          |  | Market value    |   |  | Nominal value
|                          |  | 2003            |   |  | 2002          |   |  | 2003  |  | 2002 
|                          |  | ( in millions)
|Currency derivatives      |  |                 |   |  |               |   |  |       |  |      
|Forward contracts         |  | 40              |   |  | 66            |   |  | 2,836 |  | 3,562
|Options                   |  |                 |   |  |               |   |  |       |  |      
|Bought                    |  |                |   |  |              |   |  |      |  |     
|Written                   |  |                |   |  |              |   |  |      |  |     
|Swap contracts            |  | (77             | ) |  | 6             |   |  | 584   |  | 249  
|                          |  |                
|                          |  | Market value    |   |  | Nominal value
|                          |  | 2003            |   |  | 2002          |   |  | 2003  |  | 2002 
|                          |  | ( in millions)
|Interest rate derivatives |  |                 |   |  |               |   |  |       |  |      
|Forward contracts         |  | (3              | ) |  | (9            | ) |  | 6,468 |  | 6,553
|Options                   |  |                 |   |  |               |   |  |       |  |      
|Bought                    |  |                |   |  |              |   |  |      |  |     
|Written                   |  | (3              | ) |  |              |   |  | 71    |  |     
|Swap contracts            |  | 214             |   |  | 275           |   |  | 3,281 |  | 4,042
|                          |  |                 |  
|                          |  | Market value    |   |  |               |   | 
|                          |  | 2003            |   |  | 2002          |   |  | 2003  |  | 2002 
|Other derivatives(1)      |  |                 |   |  |               |   |  |       |  |      
|Forward contracts         |  | 1               |   |  | (7            | ) |  | 13    |  | 33   
|Swap contracts            |  |                |   |  |              |   |  | 13    |  |     

---

|(1) |  | Other derivatives include pulp, paper and electricity derivatives.
|--- |  | ------------------------------------------------------------------



Interest rate derivatives are included under interest expenses during the period of validity of the contracts. Currency derivatives are included in the
financial result at market value except for those relating to net currency flows, which are entered in the profit and loss account as the cash flow is credited or debited. The outcomes of other derivatives are entered in the profit and loss account
as the cash flow is credited or debited.



Methods used to
determine the current market values of derivative instruments



Derivative instruments are valued at the present value of the cash flows arising from them.



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 principles for financing activities are defined in the
Groups Financial Policy approved by the Companys Board of Directors.



In its financial risk management, various financial instruments are used within the limits specified in the Groups Financial Policy. Only those instruments whose market value and risk profile can be continuously
and reliably monitored are used for this purpose.



Funding and
management of the financial risks are the responsibility of the Group Treasury department. Besides effective risk management, the department seeks to save costs and optimize the Groups cash flows.



Foreign currency risk



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.



F-27



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The first concerns the 12-month forecasted commercial foreign currency flows
and related hedging. Hedging 50 percent of the net foreign currency flow for the 12 months ahead is considered neutral. The overall hedging rate may vary between 25 and 100 percent, and the hedging rates for individual currencies between 0 and 100
percent.



The table below shows the nominal and market values
of the hedging instruments as well as the middle rates at December 31, 2003:



|         |  |                                      |   |  |                                     |  
|-------- |  | ------------------------------------ | - |  | ----------------------------------- | -
|Currency |  | Nominal value of hedging instruments |   |  | Market value of hedging instruments |  
|         |  | ( in millions)                      |   |  | ( in millions)                     |  
|USD(1)   |  | 295                                  |   |  | 76                                  |  
|GBP      |  | 296                                  |   |  | 5                                   |  
|CAD      |  | (106                                 | ) |  | 9                                   |  
|SEK      |  | 59                                   |   |  | (1                                  | )
|DKK      |  | 42                                   |   |  |                                    |  
|JPY      |  | 47                                   |   |  | 2                                   |  
|NOK      |  | 36                                   |   |  | 1                                   |  
|CHF      |  | 23                                   |   |  | 1                                   |  
|Others   |  | 35                                   |   |  | (2                                  | )
|         |  |                                      |   |  |                                     |  
|Total    |  | 727                                  |   |  | 91                                  |  
|         |  |                                      |   |  |                                     |  

---

|(1) |  | Includes hedging of capital expenditure worth (175) million.
|--- |  | -------------------------------------------------------------



The Groups profit centers and subsidiaries use their own discretion in hedging their net foreign currency exposures, which they do through the Group
Treasury department.



The Groups financial results and
competitiveness are also affected indirectly by the domestic currencies of its main competitors, principally the U.S. 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 reduce this risk.



The balance sheet position comprises foreign currency denominated debts and receivables. According to Groups Financial Policy, the aim is a fully hedged position. At December 31, 2003 the balance sheet position was 5 million. It
mainly comprises financial operations concerning China. Foreign currency risks associated with the shareholders equity of foreign subsidiaries are not hedged.



Interest rate risk



The Groups net debt per currency corresponds to the parent companys and subsidiaries loan portfolios in their domestic currencies. As a
consequence of this policy, the Groups most important loan currencies are euro, U.S. dollar, British pound sterling and Canadian dollar. China is the only exception to this domestic currency rule.



The Groups interest-bearing net debt (including derivatives) at
December 31, 2003 was broken down by currency as follows:



|         |  |                 |  |                            
|-------- |  | --------------- |  | ---------------------------
|Currency |  | Amount          |  | Interest ratesensitivity(1)
|         |  | ( in millions) |  | ( in millions)            
|EUR      |  | 3.2             |  | 13                         
|USD      |  | 0.5             |  | 2                          
|GBP      |  | 0.1             |  | 1                          
|CAD      |  | 0.5             |  | 1                          
|CNY      |  | 0.2             |  | 1                          
|Others   |  | 0.1             |  |                           
|         |  |                 |  |                            
|Total    |  | 4.6             |  | 19                         
|         |  |                 |  |                            

---

|(1) |  | Effect of a one percentage point rise in market rates of interest on the Groups net interest expenses over the following 12 months.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------



F-28



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Groups Financial Policy with respect to the management of interest
rate risk is to maintain an average interest fixing period of 12 months (+/  6 months) on its net debt portfolio. On the assumption that yield curves will be positive, this approach reduces interest costs in the long term. For this purpose,
the Group enters into various derivative financial instruments, including forward contracts, options and swaps. As of December 31, 2003, the average interest fixing period on the Groups net debt portfolio was 12 months.



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 realized quickly. In addition to cash funds of 388 million, at December 31, 2003 the Group had unused committed credit facilities amounting to 3.4
billion.



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, 2003 was 8.1 years (8.5 years at December 31, 2002).



Loan maturity schedule and credit facilities at December 31, 2003



|              |  |      
|------------- |  | -----
|Year          |  | Total
|2004          |  | 852  
|Short-term(1) |  | 604  
|Long-term     |  | 248  
|2005          |  | 397  
|2006          |  | 208  
|2007          |  | 446  
|2008          |  | 330  
|2009          |  | 323  
|2010          |  | 168  
|2011          |  | 155  
|2012-         |  | 2,214
|              |  |      
|Total         |  | 5,093
|              |  |      

---

|(1) |  | No committed credit facilities were in use at December 31, 2003.
|--- |  | ----------------------------------------------------------------



At December 31, 2003, the most important financial programs currently in use are:



| | · |  | Domestic commercial paper program, 1.0 billion
| | - |  | -----------------------------------------------



| | · |  | Euro commercial paper program, USD 500 million
| | - |  | ----------------------------------------------



| | · |  | Belgian commercial paper program, 400 million
| | - |  | ----------------------------------------------



| | · |  | Medium term note program, 4.0 billion
| | - |  | --------------------------------------



| | · |  | Revolving credit facility, 2.0 billion (matures 2006)
| | - |  | ------------------------------------------------------



| | · |  | Revolving credit facility, 1.2 billion (matures 2008)
| | - |  | ------------------------------------------------------



Counterparty risks



Counterparty risk is defined as the risk that a counterparty will be unable to fulfill his contractual obligations. According to the Groups
Financial Policy, derivative instruments and investments of cash funds may be made only with a counterparty who meets a certain standard of creditworthiness. The creditworthiness of counterparties is monitored by the Group Treasury department.



F-29



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



22.    Investments in shares



|                                                          |  |                        |  |              
|--------------------------------------------------------- |  | ---------------------- |  | -------------
|                                                          |  | Groupholdingpercentage |  | CarryingValue
|                                                          |  | ( in millions)       
|Shares in associated and participating interest companies |  |                        |  |              
|Austria Papier Recycling Ges.m.b.H., Austria              |  | 33.32                  |  | 0.1          
|Cervuctum Oy                                              |  | 37.50                  |  | 3.4          
|Circel Grundstücks-und Vermögensverwaltung AG, Germany    |  | 32.52                  |  | 1.9          
|Compania Forestal Oriental SA, Uruguay                    |  | 38.38                  |  | 21.3         
|Corenso United Oy Ltd                                     |  | 29.00                  |  | 15.4         
|Oy Finnish Peroxides Ab                                   |  | 25.00                  |  | 6.4          
|Kainuun Voima Oy                                          |  | 50.00                  |  | 5.2          
|Kaygee Papers Private Limited, India                      |  | 50.00                  |  | 0.4          
|Kemiart Liners Oy                                         |  | 47.00                  |  | 21.4         
|Oy KeskuslaboratorioCentrallaboratorium Ab               |  | 38.65                  |  | 0.7          
|Oy Metsä-Botnia Ab                                        |  | 47.00                  |  | 480.4        
|Paperinkeräys Oy                                          |  | 22.98                  |  | 3.0          
|Pohjolan Voima Oy                                         |  | 41.97                  |  | 347.5        
|Powest Oy                                                 |  | 43.41                  |  | 2.5          
|RETS Timber Oy Ltd                                        |  | 50.00                  |  | 0.8          
|Steveco Oy                                                |  | 34.32                  |  | 12.5         
|Oy Transfennica Ab                                        |  | 27.14                  |  | 0.1          
|Other                                                     |  |                        |  | 6.0          
|                                                          |  |                        |  |              
|Total                                                     |  |                        |  | 929          
|                                                          |  |                        |  |              



|                              |  |                  |  |                        |  |              
|----------------------------- |  | ---------------- |  | ---------------------- |  | -------------
|                              |  | Number of Shares |  | Groupholdingpercentage |  | CarryingValue
|Other shares and holdings     |  |                  |  |                        |  |              
|Gasum Oy                      |  | 1,060,000        |  | 2.00                   |  | 11.8         
|Kemijoki Oy                   |  | 100,797          |  | 4.13                   |  | 167.0        
|Metso Corporation             |  | 19.922,115       |  | 14.62                  |  | 173.5        
|Sea Containers Ltd, A, U.S.A. |  | 149,037          |  | 0.65                   |  | 2.4          
|Other                         |  |                  |  |                        |  | 37.3         
|                              |  |                  |  |                        |  |              
|Total                         |  |                  |  |                        |  | 392          
|                              |  |                  |  |                        |  |              



All companies are
domiciled in Finland unless otherwise noted.



23.    Summary of differences between Finnish accounting practice and generally accepted accounting principles in the United States



The Groups consolidated financial statements are prepared in accordance with Finnish accounting practice
(Finnish GAAP), which differs in certain material 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.



F-30



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 Finnish GAAP to the corresponding amounts in accordance with U.S. GAAP. The weighted average number
of shares for 2002 and 2001 has been restated to reflect the bonus issue as if it had occurred as of the beginning of each period presented (see note 23.II.a.)



Reconciliation of profit



|                                                                      |  |        |     |  |                                                  |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------- |  | ------ | --- |  | ------------------------------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                      |  |        |     |  | Year ended December 31,                          |        
|                                                                      |  |        |     |  | 2003                                             |         |   | 2002 |   |         | 2001 | 
|                                                                      |  |        |     |  | ( in millions, except share and per share data) |        
|Profit in accordance with Finnish GAAP                                |  |        |     |  |                                                  | 368     |   |      |   | 550     |      |  |   | 955     |  
|U.S. GAAP adjustments:                                                |  |        |     |  |                                                  |         |   |      |   |         |      |  |   |         |  
|Business combinations                                                 |  | (a     | )   |  |                                                  | (84     | ) |      |   | (75     | )    |  |   | (60     | )
|Reversal of goodwill amortization                                     |  | (b     | )   |  |                                                  | 125     |   |      |   | 124     |      |  |   |        |  
|Sale-leaseback transactions                                           |  | (d     | )   |  |                                                  | 4       |   |      |   | (2      | )    |  |   | (2      | )
|Capitalization of interest                                            |  | (e     | )   |  |                                                  | (18     | ) |      |   | (15     | )    |  |   | (6      | )
|Write-down of shares and holdings                                     |  | (f     | )   |  |                                                  | (26     | ) |      |   |        |      |  |   |        |  
|Employee benefits                                                     |  | (g     | )   |  |                                                  | (33     | ) |      |   | (4      | )    |  |   | 1       |  
|Derivative financial instruments                                      |  | (h     | )   |  |                                                  | 41      |   |      |   | 37      |      |  |   | (15     | )
|Share stock options                                                   |  | (i     | )   |  |                                                  | (3      | ) |      |   | 8       |      |  |   | (5      | )
|Restructuring costs                                                   |  | (j     | )   |  |                                                  | (10     | ) |      |   | 6       |      |  |   | 10      |  
|Other                                                                 |  | (k     | )   |  |                                                  | (15     | ) |      |   | 6       |      |  |   | 14      |  
|Deferred taxes                                                        |  | (l     | )   |  |                                                  | 24      |   |      |   | 7       |      |  |   | 6       |  
|Deferred tax effect of U.S. GAAP adjustments                          |  |        |     |  |                                                  | 25      |   |      |   | (14     | )    |  |   | 1       |  
|Net income before cumulative effect of change in accounting principle |  |        |     |  |                                                  | 398     |   |      |   | 628     |      |  |   | 899     |  
|Cumulative effect of change in accounting principle, net of taxes     |  | (h     | )   |  |                                                  |        |   |      |   |        |      |  |   | (19     | )
|                                                                      |  |        |     |  |                                                  |         |   |      |   |         |      |  |   |         |  
|Net income in accordance with U.S. GAAP                               |  |        |     |  |                                                  | 398     |   |      |   | 628     |      |  |   | 880     |  
|                                                                      |  |        |     |  |                                                  |         |   |      |   |         |      |  |   |         |  
|Out of which:                                                         |  |        |     |  |                                                  |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations                                     |  |        |     |  |                                                  | 397     |   |      |   | 625     |      |  |   | 902     |  
|Income (loss) from discontinued operations                            |  | 23.II. | (e) |  |                                                  | 1       |   |      |   | 3       |      |  |   | (3      | )
|Cumulative effect of change in accounting principles                  |  |        |     |  |                                                  |        |   |      |   |        |      |  |   | (19     | )
|Earnings per share in accordance with U.S. GAAP:                      |  | (m     | )   |  |                                                  |         |   |      |   |         |      |  |   |         |  
|Basic earnings per share                                              |  |        |     |  |                                                 | 0.76    |   |      |  | 1.21    |      |  |  | 1.77    |  
|Income from continuing operations                                     |  |        |     |  |                                                 | 0.76    |   |      |  | 1.20    |      |  |  | 1.82    |  
|Income from discontinued operations                                   |  |        |     |  |                                                  |        |   |      |  | 0.01    |      |  |  | (0.01   | )
|Cumulative effect of change in accounting principles                  |  |        |     |  |                                                  |        |   |      |   |        |      |  |  | (0.04   | )
|Diluted earnings per share                                            |  |        |     |  |                                                 | 0.76    |   |      |  | 1.20    |      |  |  | 1.75    |  
|Income from continuing operations                                     |  |        |     |  |                                                 | 0.76    |   |      |  | 1.19    |      |  |  | 1.79    |  
|Income from discontinued operations                                   |  |        |     |  |                                                  |        |   |      |  | 0.01    |      |  |  | (0.01   | )
|Cumulative effect of change in accounting principles                  |  |        |     |  |                                                  |        |   |      |   |        |      |  |  | (0.04   | )
|Basic weighted average number of shares (thousands)                   |  |        |     |  |                                                  | 523,130 |   |      |   | 518,935 |      |  |   | 495,784 |  
|Diluted weighted average number of shares (thousands)                 |  |        |     |  |                                                  | 524,254 |   |      |   | 525,782 |      |  |   | 503,984 |  



F-31



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Reconciliation of shareholders equity



|                                                     |  |    |   |  |                    |   |  |       |  
|---------------------------------------------------- |  | -- | - |  | ------------------ | - |  | ----- | -
|                                                     |  |    |   |  | As of December 31, |  
|                                                     |  |    |   |  | 2003               |   |  | 2002  |  
|                                                     |  |    |   |  | ( in millions)    |  
|Shareholders equity in accordance with Finnish GAAP |  |    |   |  | 6,869              |   |  | 6,920 |  
|U.S. GAAP adjustments:                               |  |    |   |  |                    |   |  |       |  
|Business combinations                                |  | (a | ) |  | 951                |   |  | 1,096 |  
|Reversal of goodwill amortization                    |  | (b | ) |  | 249                |   |  | 124   |  
|Revaluations                                         |  | (c | ) |  | (742               | ) |  | (745  | )
|Sale-leaseback transactions                          |  | (d | ) |  | (215               | ) |  | (219  | )
|Capitalization of interest                           |  | (e | ) |  | 81                 |   |  | 99    |  
|Other shares and holdings                            |  | (f | ) |  | 20                 |   |  | 181   |  
|Employee benefits                                    |  | (g | ) |  | (311               | ) |  | (257  | )
|Derivative financial instruments                     |  | (h | ) |  | 91                 |   |  | 14    |  
|Restructuring costs                                  |  | (j | ) |  | 6                  |   |  | 16    |  
|Other                                                |  | (k | ) |  | 3                  |   |  | 18    |  
|Deferred taxes                                       |  | (l | ) |  | (163               | ) |  | (187  | )
|Deferred tax effect of U.S. GAAP adjustments         |  |    |   |  | 324                |   |  | 268   |  
|                                                     |  |    |   |  |                    |   |  |       |  
|Shareholders equity in accordance with U.S. GAAP    |  |    |   |  | 7,163              |   |  | 7,328 |  
|                                                     |  |    |   |  |                    |   |  |       |  



Roll-forward
analysis of shareholders equity under U.S. GAAP



|                                                                                                                                 |  |                         |   |  |       |   |  |       |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                                                                                                                 |  | Year ended December 31, |  
|                                                                                                                                 |  | 2003                    |   |  | 2002  |   |  | 2001  |  
|                                                                                                                                 |  | ( in millions)         |  
|Balance in accordance with U.S. GAAP, beginning of year                                                                          |  | 7,328                   |   |  | 7,493 |   |  | 7,157 |  
|Dividends approved and paid                                                                                                      |  | (390                    | ) |  | (388  | ) |  | (371  | )
|Purchase of treasury shares                                                                                                      |  |                        |   |  |      |   |  | (152  | )
|Issue of shares                                                                                                                  |  |                        |   |  |      |   |  | 461   |  
|Conversion of convertible bond loans to shares                                                                                   |  | 36                      |   |  | 30    |   |  | 11    |  
|Change in cumulative currency translation adjustment                                                                             |  | (124                    | ) |  | (181  | ) |  | 46    |  
|Changes in net unrealized holding gain on available-for-sale securities, net of tax of 38 in 2003, 86 in 2002 and 218 in
2001 |  | (97                     | ) |  | (211  | ) |  | (532  | )
|Changes in net unrealized cash-flow hedges, net of tax of 10 in 2003                                                            |  | 26                      |   |  |      |   |  |      |  
|Additional minimum pension liability, net of tax of 4 in 2003, 24 in 2002 and 7 in 2001                                       |  | (17                     | ) |  | (35   | ) |  | (12   | )
|Deferred compensation                                                                                                            |  | (3                      | ) |  |      |   |  |      |  
|Additional paid in capital (stock-based compensation)                                                                            |  | 6                       |   |  | (8    | ) |  | 5     |  
|Net income for the year in accordance with U.S. GAAP                                                                             |  | 398                     |   |  | 628   |   |  | 880   |  
|                                                                                                                                 |  |                         |   |  |       |   |  |       |  
|Balance in accordance with U.S. GAAP, end of year                                                                                |  | 7,163                   |   |  | 7,328 |   |  | 7,493 |  
|                                                                                                                                 |  |                         |   |  |       |   |  |       |  



(a)    Business
combinations



Acquisition of Haindlsche
Papierfabriken KgaA in November 2001



On November 30,
2001, UPM-Kymmene purchased 100 percent of Haindlsche Papierfabriken KgaA (Haindl), a German producer of publication papers and low-cost newsprint and an industry leader in the use of recycled fiber. The aggregate purchase price
was 3,652 million, including 3,233 million of cash and common stock valued at 419 million under Finnish GAAP. At the same time, UPM-Kymmene entered into a separate and definitive back-to-back agreement to sell two of Haindls
paper mills to the Norwegian paper producer Norske Skogindustrier ASA (Norske) for 1,027 million. Both transactions took place simultaneously and therefore the net consideration paid by UPM-Kymmene for Haindl was 2,625
million. As a result of these transactions,



F-32



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



UPM-Kymmene owns four mills located in Augsburg, Schongau and Schwedt an der Oder, Germany,
and Steyrermühl, Austria. Management believes that the purchase of these four mills greatly strengthens UPM-Kymmenes position as a local player in Europes most important markets. Management believes that the products of these mills
complement UPM-Kymmenes own product range and improve the companys ability to serve its customers.



The acquisition was recorded using the purchase method of accounting under both Finnish GAAP and U.S. GAAP. Thus, from December 1, 2001, 100 percent of
Haindls net assets and results of operations has been recorded in UPM-Kymmenes consolidated financial statements.



Under Finnish GAAP, goodwill has been determined as the difference between the purchase price and the book value of the net assets acquired. Such goodwill
is being amortized over 20 years on a straight-line basis. Under U.S. GAAP, goodwill has been determined as the difference between the purchase price and the fair value of the net assets acquired. This goodwill is not being amortized but is subject
to regular impairment tests.



Equity shares issued by
UPM-Kymmene as purchase consideration have been valued under Finnish GAAP based on average share prices between March 30, 2001 and May 16, 2001. Under U.S. GAAP, such shares are valued based on average share prices shortly before and after the
acquisition was publicly announced. This has resulted in a 42 million increase in paid in capital and a net consideration of 2,667 for U.S. GAAP purposes.



Other acquisitions



Certain significant business combinations occurring between 1989 and 1996 have been accounted for using the pooling of interests method under Finnish
GAAP. Under U.S. GAAP, these transactions are required to be accounted for using the purchase method. The more restrictive conditions for pooling of interests accounting under U.S. GAAP which impacted the accounting treatment for such business
combinations included post-combination asset disposal, the independence of the combining companies and pre-combinations changes in equity interests. The adjustments from Finnish GAAP to U.S. GAAP for these business combinations affect a number of
financial statements line items as of their respective acquisition dates, but are disclosed in total within the Business Combinations adjustment. Any pre- and post-combination differences arising from these entities are reflected in
reconciling adjustments other than Business Combinations as appropriate.



Translation of goodwill



Under Finnish GAAP, 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.



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.



F-33



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, |  
|                                         |  | 2003                    |   |  | 2002  |   |  | 2001  |  
|                                         |  | ( in millions)         |  
|Net income                               |  |                         |   |  |       |   |  |       |  
|Cost of goods sold                       |  |                        |   |  |      |   |  | (14   | )
|Amortization of goodwill                 |  |                        |   |  |      |   |  | (28   | )
|Depletion of forest assets               |  | (9                      | ) |  | (11   | ) |  | (18   | )
|Amortization of intangible assets        |  | (34                     | ) |  | (34   | ) |  | (9    | )
|Depreciation of tangible assets          |  | (76                     | ) |  | (79   | ) |  | (9    | )
|Other operating income                   |  | (16                     | ) |  | (5    | ) |  | (19   | )
|Share of results of associated companies |  | (6                      | ) |  | (6    | ) |  | (7    | )
|Costs and expenses                       |  | 9                       |   |  | 15    |   |  | 19    |  
|Deferred taxes                           |  | 48                      |   |  | 45    |   |  | 25    |  
|                                         |  |                         |   |  |       |   |  |       |  
|Total                                    |  | (84                     | ) |  | (75   | ) |  | (60   | )
|                                         |  |                         |   |  |       |   |  |       |  
|Shareholders equity                     |  |                         |   |  |       |   |  |       |  
|Goodwill                                 |  | (345                    | ) |  | (288  | ) |  | (174  | )
|Other intangible assets                  |  | 97                      |   |  | 131   |   |  | 148   |  
|Land and water                           |  | 964                     |   |  | 980   |   |  | 998   |  
|Buildings                                |  | 159                     |   |  | 172   |   |  | 184   |  
|Machinery and equipment                  |  | 587                     |   |  | 654   |   |  | 744   |  
|Other shares and holdings                |  |                        |   |  | 16    |   |  | 21    |  
|Shares in associated companies           |  | 213                     |   |  | 219   |   |  | 225   |  
|Long-term debt                           |  | (8                      | ) |  | (11   | ) |  | (14   | )
|Deferred tax liabilities                 |  | (716                    | ) |  | (771  | ) |  | (813  | )
|Other liabilities                        |  |                        |   |  | (6    | ) |  | (18   | )
|                                         |  |                         |   |  |       |   |  |       |  
|Total                                    |  | 951                     |   |  | 1,096 |   |  | 1,301 |  
|                                         |  |                         |   |  |       |   |  |       |  



(b)
    Reversal of goodwill amortization



Under Finnish GAAP, 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 all other goodwill. This results in a reversal of goodwill amortization charges under Finnish GAAP.



The following table shows net income under U.S. GAAP for the year ended December 31, 2003, and pro forma net income for the years ended December 31, 2003,
2002 and 2001, exclusive of goodwill amortization:



|                                       |  |                         |  |      |  |     
|-------------------------------------- |  | ----------------------- |  | ---- |  | ----
|                                       |  | Year ended December 31,
|                                       |  | 2003                    |  | 2002 |  | 2001
|                                       |  | ( in millions)        
|Net income as reported under U.S. GAAP |  | 398                     |  | 628  |  | 880 
|Add back: Goodwill amortization        |  |                        |  |     |  | 73  
|Adjusted net income                    |  | 398                     |  | 628  |  | 953 
|                                       |  |                         | 
|Basic earnings per share:              |  |                         |  |      |  |     
|Net income as reported under U.S. GAAP |  | 0.76                    |  | 1.21 |  | 1.77
|Goodwill amortization                  |  |                        |  |     |  | 0.15
|Adjusted net income                    |  | 0.76                    |  | 1.21 |  | 1.92
|                                       |  |                         | 
|Diluted earnings per share:            |  |                         |  |      |  |     
|Net income as reported under U.S. GAAP |  | 0.76                    |  | 1.20 |  | 1.75
|Goodwill amortization                  |  |                        |  |     |  | 0.14
|Adjusted net income                    |  | 0.76                    |  | 1.20 |  | 1.90



F-34



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(c)    Revaluations



As permitted under Finnish GAAP, certain assets have been revalued in prior
years. 158 million of these revaluation reserves were previously transferred to share capital as allowable under the Finnish Companies Act in limited circumstances. In addition, the Group records its share of revaluations reserves in equity
investees through retained earnings. U.S. GAAP generally does not allow such revaluations except in certain respects involving business combinations.



(d)    Sale-leaseback transactions



The Group and its acquirees have entered into several transactions for the sale and leaseback of certain non-current assets. Payments are generally made
over 15 to 25 years and, as of December 31, 2003, are due through 2012.



Under Finnish GAAP, these transactions have been accounted for under the sale-leaseback method, whereby a sale is recorded, the asset is removed from the balance sheet, the gain or loss is recognized in the profit and loss account and the
leaseback is accounted for as an operating lease.



Due to the
Groups continuing involvement with the assets, the sale-leaseback transactions are classified as financing arrangements under U.S. GAAP. The assets continue to be accounted for in accordance with the Groups normal accounting policies.
Rental payments are applied to the principal of the related liability as well as to interest expense.



For U.S. GAAP purposes, the liability for such financings as of December 31, 2003 and 2002 would increase long-term debt by 286 million and
293 million, respectively, and the current portion of long-term debt by 2 million and 3 million, respectively. As of December 31, 2003 and 2002, excluding the impact of purchase accounting fair value adjustments as discussed under
paragraph (a) above of this section, non-current assets would increase by 73 million and 77 million, respectively.



(e)    Capitalization of interest



U.S. GAAP requires the interest costs incurred during the construction of qualifying assets to be capitalized and amortized over the life of the assets.
Under Finnish GAAP, the Group generally expenses such interest costs; however, interest costs have been capitalized on certain large construction projects.



For purposes of U.S. GAAP, additional amounts of interest expense amounting to 5 million, 7 million and 13 million have been capitalized
during the years ended December 31, 2003, 2002 and 2001, respectively. Amortization of capitalized interest was 18 million, 19 million and 19 million for each of the years ended December 31 2003, 2002 and 2001, respectively. The
net capitalized interest cost charged to the income statement in connection with assets sold was 5 million, 3 million and nil for the years ended December 31, 2003, 2002 and 2001.



(f)    Other shares and holdings



Under Finnish GAAP, the Groups marketable investments are recorded at
cost and classified in investments held as non-current assets. Changes in market value are generally not recognized until realized.



Under U.S. GAAP, the Groups investments in equity securities with readily determinable market values are classified as available-for-sale
securities, recorded as a separate balance sheet line item within non-current assets and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of applicable taxes, as a separate component of
shareholders equity.



If the decline in fair value is
considered other than temporary, an impairment is reported in the profit and loss statement, which reduces the book value of the investment. In 2003, an impairment loss of 26 million was recognized on certain listed securities.



F-35



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Available-for-sale securities in accordance with U.S. GAAP are summarized as
follows:



|                  |  |                  |  |                              |  |                               |  |            
|----------------- |  | ---------------- |  | ---------------------------- |  | ----------------------------- |  | -----------
|                  |  | U.S. GAAPcost(1) |  | Grossunrealizedholding gains |  | Grossunrealizedholding losses |  | MarketValue
|                  |  | ( in millions) 
|December 31, 2003 |  | 196              |  |                             |  |                              |  | 196        
|December 31, 2002 |  | 252              |  | 137                          |  | 2                             |  | 387        

---

|(1) |  | U.S. GAAP cost is comprised of the acquisition price plus the step-up in fair value of other shares and holdings as a result of the business combinations discussed in paragraph (a).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Proceeds from sales of available-for-sale
securities were 181 million, 83 million and 288 million during the years ended December 31, 2003, 2002 and 2001, respectively. Gross gains of 150 million, 73 million and 255 million and gross losses of 1
million, nil, and 5 million were realized on those sales during the years ended December 31, 2003, 2002 and 2001 respectively. Realized gains and losses on sales of investments are determined on an average cost basis.



(g)    Employee benefits



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, 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 the Group. In addition, there exists multi-employer pension
arrangements and defined contribution pension arrangements.



Under Finnish GAAP, pension expense is generally recorded in accordance with local accounting practices in the countries in which employees are provided with such benefits.



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 Pensionsas 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.



Net periodic benefit cost in accordance with U.S. GAAP for the years ended December 31, 2003, 2002 and 2001 is comprised of the following:



|                               |  |                              |   |  |                              |   |  |                              |   |  |         |   |  |          |   |  |         |  
|------------------------------ |  | ---------------------------- | - |  | ---------------------------- | - |  | ---------------------------- | - |  | ------- | - |  | -------- | - |  | ------- | -
|                               |  | Year ended December 31, 2003 |   |  | Year ended December 31, 2002 |   |  | Year ended December 31, 2001 |  
|                               |  | Domestic                     |   |  | Foreign                      |   |  | Domestic                     |   |  | Foreign |   |  | Domestic |   |  | Foreign |  
|                               |  | ( in millions)              |  
|Service cost                   |  | 16                           |   |  | 19                           |   |  | 32                           |   |  | 21      |   |  | 30       |   |  | 16      |  
|Interest cost                  |  | 20                           |   |  | 41                           |   |  | 22                           |   |  | 42      |   |  | 23       |   |  | 31      |  
|Expected return on plan assets |  | (10                          | ) |  | (23                          | ) |  | (9                           | ) |  | (33     | ) |  | (9       | ) |  | (34     | )
|Amortization                   |  | 5                            |   |  | 2                            |   |  | 7                            |   |  | 2       |   |  | 9        |   |  | 1       |  
|FAS 88 events                  |  |                             |   |  | 16                           |   |  |                             |   |  | 1       |   |  |         |   |  |        |  
|                               |  |                              |   |  |                              |   |  |                              |   |  |         |   |  |          |   |  |         |  
|Net periodic benefit cost      |  | 31                           |   |  | 55                           |   |  | 52                           |   |  | 33      |   |  | 53       |   |  | 14      |  
|                               |  |                              |   |  |                              |   |  |                              |   |  |         |   |  |          |   |  |         |  



F-36



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                                                                                                                              |  |                         |   |  |                         |   |  |          |   |  |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ----------------------- | - |  | -------- | - |  | ------- | -
|                                                                                                                                                                                              |  | As of December 31, 2003 |   |  | As of December 31, 2002 |  
|                                                                                                                                                                                              |  | Domestic                |   |  | Foreign                 |   |  | Domestic |   |  | Foreign |  
|                                                                                                                                                                                              |  | ( in millions)         |  
|Change in benefit obligation                                                                                                                                                                  |  |                         |   |  |                         |   |  |          |   |  |         |  
|Benefit obligation as of beginning of year                                                                                                                                                    |  | 367                     |   |  | 761                     |   |  | 416      |   |  | 712     |  
|Service cost                                                                                                                                                                                  |  | 16                      |   |  | 19                      |   |  | 32       |   |  | 21      |  
|Interest cost                                                                                                                                                                                 |  | 20                      |   |  | 41                      |   |  | 22       |   |  | 42      |  
|Employee contributions                                                                                                                                                                        |  |                        |   |  | 4                       |   |  |         |   |  | 3       |  
|FAS 88 events                                                                                                                                                                                 |  |                        |   |  | (64                     | ) |  |         |   |  | 1       |  
|Plan amendments                                                                                                                                                                               |  |                        |   |  | (9                      | ) |  |         |   |  | 1       |  
|Other adjustments                                                                                                                                                                             |  | 3                       |   |  | 39                      |   |  |         |   |  |        |  
|Actuarial loss (gain)                                                                                                                                                                         |  | (7                      | ) |  | 52                      |   |  | (62      | ) |  | 68      |  
|Benefit paid                                                                                                                                                                                  |  | (19                     | ) |  | (30                     | ) |  | (41      | ) |  | (35     | )
|Foreign currency effect                                                                                                                                                                       |  |                        |   |  | (30                     | ) |  |         |   |  | (52     | )
|                                                                                                                                                                                              |  |                         |   |  |                         |   |  |          |   |  |         |  
|Benefit obligation as of end of year                                                                                                                                                          |  | 380                     |   |  | 783                     |   |  | 367      |   |  | 761     |  
|                                                                                                                                                                                              |  |                         |   |  |                         |   |  |          |   |  |         |  
|Change in fair value of plan assets                                                                                                                                                           |  |                         |   |  |                         |   |  |          |   |  |         |  
|Fair value of plan assets as of beginning of year                                                                                                                                             |  | 174                     |   |  | 316                     |   |  | 160      |   |  | 396     |  
|Actual return on plan assets                                                                                                                                                                  |  | 5                       |   |  | 37                      |   |  | 15       |   |  | (32     | )
|Employer contribution                                                                                                                                                                         |  | 18                      |   |  | 50                      |   |  | 40       |   |  | 26      |  
|Employee contributions                                                                                                                                                                        |  |                        |   |  | 4                       |   |  |         |   |  | 3       |  
|FAS 88 events                                                                                                                                                                                 |  |                        |   |  | (64                     | ) |  |         |   |  |        |  
|Other adjustments                                                                                                                                                                             |  | 4                       |   |  | 35                      |   |  |         |   |  |        |  
|Benefits paid                                                                                                                                                                                 |  | (19                     | ) |  | (30                     | ) |  | (41      | ) |  | (35     | )
|Foreign currency effect                                                                                                                                                                       |  |                        |   |  | (20                     | ) |  |         |   |  | (42     | )
|                                                                                                                                                                                              |  |                         |   |  |                         |   |  |          |   |  |         |  
|Fair value of plan assets as of end of the year                                                                                                                                               |  | 182                     |   |  | 328                     |   |  | 174      |   |  | 316     |  
|                                                                                                                                                                                              |  |                         |   |  |                         |   |  |          |   |  |         |  
|Funded status                                                                                                                                                                                 |  |                         |   |  |                         |   |  |          |   |  |         |  
|Funded status as of end of year                                                                                                                                                               |  | (198                    | ) |  | (455                    | ) |  | (192     | ) |  | (445    | )
|Unrecognized transition obligation                                                                                                                                                            |  |                        |   |  | 2                       |   |  | 10       |   |  | 2       |  
|Unrecognized prior service cost                                                                                                                                                               |  | (62                     | ) |  | (2                      | ) |  | (69      | ) |  | 1       |  
|Unrecognized actuarial loss (gain)                                                                                                                                                            |  | 37                      |   |  | 166                     |   |  | 41       |   |  | 161     |  
|                                                                                                                                                                                              |  |                         |   |  |                         |   |  |          |   |  |         |  
|Accrued benefit cost                                                                                                                                                                          |  | (223                    | ) |  | (289                    | ) |  | (210     | ) |  | (281    | )
|                                                                                                                                                                                              |  |                         |   |  |                         |   |  |          |   |  |         |  
|Amounts recognized in the consolidated balance sheet                                                                                                                                          |  |                         |   |  |                         |   |  |          |   |  |         |  
|Accrued benefit liability                                                                                                                                                                     |  | (298                    | ) |  | (387                    | ) |  | (283     | ) |  | (392    | )
|Prepaid benefit cost                                                                                                                                                                          |  | 75                      |   |  |                        |   |  | 73       |   |  | 27      |  
|Intangible assets                                                                                                                                                                             |  |                        |   |  | 1                       |   |  |         |   |  | 1       |  
|Accumulated other comprehensive income                                                                                                                                                        |  |                        |   |  | 97                      |   |  |         |   |  | 83      |  
|                                                                                                                                                                                              |  |                         |   |  |                         |   |  |          |   |  |         |  
|Net amount recognized                                                                                                                                                                         |  | (223                    | ) |  | (289                    | ) |  | (210     | ) |  | (281    | )
|                                                                                                                                                                                              |  |                         |   |  |                         |   |  |          |   |  |         |  
|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                                                                                                                                                                |  | 125                     |   |  | 630                     |   |  | 129      |   |  | 545     |  
|Projected benefit obligation                                                                                                                                                                  |  | 188                     |   |  | 721                     |   |  | 192      |   |  | 585     |  
|Fair value of plan asset                                                                                                                                                                      |  |                        |   |  | 295                     |   |  |         |   |  | 210     |  
|Weighted average rate assumptions used in determining pension costs and the projected benefit obligation.                                                                                     |  |                         |   |  |                         |   |  |          |   |  |         |  
|Discount rate                                                                                                                                                                                 |  | 5.25                    | % |  | 5.51                    | % |  | 5.50     | % |  | 5.81    | %
|Expected rate of compensation increase                                                                                                                                                        |  | 3.75                    | % |  | 3.16                    | % |  | 3.75     | % |  | 3.78    | %
|Expected return on plans assets                                                                                                                                                               |  | 5.25                    | % |  | 6.99                    | % |  | 5.50     | % |  | 8.63    | %



F-37



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Plan assets are held in separately administered trusts. The assets of the
domestic pension plans consist principally of loans to the Group (see paragraphs (II)(i) and (II)(l)) and real estate, and the assets of the foreign pension plans consist principally of publicly traded debt and equity securities and mutual funds.



The above amounts for foreign pension plans include certain
other post-retirement benefits which are not significant to the Group.



The Group uses a December 31 measurement date for its pension and other post-retirement benefit plans.



The following additional information as required in accordance with SFAS 132R, Employers Disclosure about Pensions and Other Postretirement Benefits
Revised, which was issued in December 2003, relates to the Groups domestic plans only. The additional information disclosed regarding the assets, obligations, cash flows and net periodic benefit costs of the Groups domestic pension plans
will be disclosed for the Groups foreign plans in 2004 in accordance with the provisions of SFAS 132R.



The accumulated benefit obligation for the domestic plans was EUR 299 million and EUR 296 million as of December 31, 2003 and 2002, respectively.



The Group expects to make contributions of EUR 18 million to
its domestic pension plans in 2004.



Domestic Plan Assets



The Groups pension plan weighted average asset allocation at December
31, 2003, and 2002, by asset category are as follows:



|                  |  |                                          |   |  |      |  
|----------------- |  | ---------------------------------------- | - |  | ---- | -
|                  |  | Percentage ofPlan Assets at December 31, |  
|                  |  | 2003                                     |   |  | 2002 |  
|Assets Category:  |  |                                          |   |  |      |  
|Debt securities   |  | 89                                       | % |  | 88   | %
|Bonds             |  | 4                                        | % |  | 5    | %
|Real estate       |  | 6                                        | % |  | 6    | %
|Equity securities |  | 1                                        | % |  | 1    | %
|Total             |  | 100                                      | % |  | 100  | %



The objective of the
investment activities is an appropriate investment return within an accepted risk level taking into consideration a sufficient diversification of investments. The long-term investment return of all assets is taken into account when assessing
investment profitability. The long run target is to keep asset allocation at the current level in each asset category.



The assumption for weighted average expected return on plan assets is based on the target asset allocation at the beginning of the year. Almost 90% of
assets are re-borrowed by the Group. The borrowing rate is fixed to the Finnish statutory employment pension scheme (TEL) interest rate, which was 4% in 2003. This rate fluctuates during year, but in the long run the expected return on plan assets
is considered to be at least 5.25%, which is the discount rate.



F-38



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 significantly all of the assets in that plan were distributed in late 2003. On
this basis settlement accounting was applied for the Blandin Hourly Plan and consequently the acceleration of the 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 termination process for the Blandin Salaried Plan is expected to be completed in 2004. The Blandin Hourly and Salaried Plans include the following elements:



|                                                     |  |                         |   |  |      |  
|---------------------------------------------------- |  | ----------------------- | - |  | ---- | -
|                                                     |  | Year ended December 31, |  
|                                                     |  | 2003                    |   |  | 2002 |  
|                                                     |  | ( in millions)         |  
|Funded Status at end of year                         |  |                         |   |  |      |  
|Projected benefit obligation                         |  | (38                     | ) |  | (111 | )
|Accumulated benefit obligation                       |  | (38                     | ) |  | (111 | )
|Fair Value of plan assets                            |  | 36                      |   |  | 93   |  
|                                                     |  |                         |   |  |      |  
|(Unfunded) Funded Status                             |  | (2                      | ) |  | (18  | )
|                                                     |  |                         |   |  |      |  
|Amounts recognized in the consolidated balance sheet |  |                         |   |  |      |  
|(Unfunded) Funded Status                             |  | (2                      | ) |  | (18  | )
|Unrecognized net loss                                |  | 23                      |   |  | 48   |  
|Pre-paid benefit cost                                |  | 21                      |   |  | 30   |  
|Additional minimum liability                         |  | (23                     | ) |  | (48  | )
|                                                     |  |                         |   |  |      |  
|Net amount recognized                                |  | (2                      | ) |  | (18  | )
|                                                     |  |                         |   |  |      |  



Under U.S. GAAP, at
the date of the settlement, the pension benefit obligation must be remeasured 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.



(h)    Derivative financial instruments



Under Finnish GAAP, the Group records currency and
commodity derivatives relating to net cash flows in the profit and loss account as such cash flows are received or paid; any unrealized gains and losses are deferred at reporting period end. Currency derivatives related to balance sheet items are
marked to market. Interest rate derivatives relating to interest payments on the Groups net debt are recorded in the profit and loss account along with the interest payments on the net debt according to the accrual method.



On January 1, 2001, the Group adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) as amended by SFAS 137, SFAS 138 and the Derivatives Implementation Group (DIG). On this date, the Group recorded a net cumulative-effect-type transition adjustment of 19 million to
bring its accounting for derivative financial instruments into compliance with SFAS 133.



Accordingly, all derivatives have been recorded at fair value in the Groups balance sheet based on market valuations as of January 1, 2001. The difference between the previous carrying amount of certain
qualifying fair-value hedge derivatives and their fair values has been reported as a transition adjustment. The Group has also recognized offsetting gains and losses on hedged liabilities by adjusting their carrying amounts at that date. Certain
deferred amounts on derivative instruments that were previously reported independently as assets in the Groups balance sheet at the date of initial application have been derecognized and reported as part of the transition adjustment in the
profit and loss account.



F-39



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Under U.S. GAAP, at the inception of the transaction, the Group documents the
relationship between each hedging instrument and each hedged item, 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.



Under U.S. GAAP, the Group has designated certain of its interest rate swaps as qualifying fair-value hedge instruments, and accordingly has recorded changes in the fair value of these swaps and the related items
being hedged from the attributable interest rate risk in the profit and loss account. Hedge effectiveness for these interest rate swaps has been assessed on a regular basis, with any ineffective portions of these hedges being recognized in earnings.



Beginning from February 2003, under U.S. GAAP, the Group has
also designated certain of its forward foreign exchange contracts as qualifying cash-flow hedging instruments and accordingly recorded changes in the fair value of those qualifying derivatives that are highly effective both prospectively and
retrospectively in equity (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).



All other derivative financial instruments held by the Group are not designated as qualifying hedge instruments and, accordingly, changes in their fair
values have been recorded in the profit and loss account.



The
Group has also reviewed its contractual arrangements for the existence of embedded derivatives that should be separately accounted for under SFAS 133. Embedded derivatives identified as a result of this review have been recorded separately from
their host contracts at fair value, with changes in fair value recognized currently in their profit and loss account.



(i)    Share-based compensation



On March 25, 1998, the shareholders approved the issuance of 6,000,000 stock options conferring a right to subscribe an aggregate of 6,000,000 shares of
the Company to key personnel worldwide as part of the employee incentive program. The stock options comprised three classes with 2,000,000 in each class. Class A stock options are exercisable during the period commencing April 1, 2001 through April
30, 2005 based on an initial exercise price of 15.47 per share, class B stock options during the period commencing April 1, 2003 through April 30, 2005 based on an initial exercise price of 18.00 per share. The exercise price for all
stock options is being reduced by the amount of dividends distributed after May 1, 1998 and before the date of the share subscription. Starting in April 2001 and April 2003, respectively, Class A and B stock options have been quoted and traded on
the Helsinki Exchanges.



On March 19, 2002, the shareholders
approved an additional issuance of 7,600,000 stock options conferring a right to subscribe an aggregate of 7,600,000 shares of the Company for the key personnel. The new stock options comprise two classes with 3,800,000 in each class. Class D stock
options are exercisable during the period commencing April 1, 2004 through April 30, 2007 based on an initial exercise price of 21.95 per share. Class E stock options are exercisable during the period commencing April 1, 2005 through April 30,
2008 based on an initial exercise price of 14.27 and was based on the trade-weighted average price of UPM-Kymmene Corporations share quoted on the Helsinki Exchanges during the period from April 15, 2003 through May 15, 2003 plus an
increment of 10 percent. The exercise price for these stock options is being reduced by the amount of confirmed dividend on the record date of dividend distribution and before the date of the share subscription.



F-40



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Following the 2003 bonus share issue, each option entitles its holder to
subscribe two UPM-Kymmene Corporations shares instead of one. In addition, the initial exercise prices have been adjusted to reflect the effect of the bonus issue.



Stock option activity is as follows:



|                                |  |              |   |  |                               |  |                                          
|------------------------------- |  | ------------ | - |  | ----------------------------- |  | -----------------------------------------
|                                |  | Stockoptions |   |  | WeightedaverageExercise Price |  | Weighted AverageRemainingContractual Life
|                                |  | (number)     |   |  | ()                           |  | (months)                                 
|Balance on January 1, 2000      |  | 3,855,000    |   |  | 16.73                         |  | 64                                       
|                                |  |              |   |  |                               |  |                                          
|Cancelled                       |  | (130,000     | ) |  | 15.79                         |  |                                          
|                                |  |              |   |  |                               |  |                                          
|Balance on December 31, 2000    |  | 3,725,000    |   |  | 15.09                         |  | 52                                       
|                                |  |              |   |  |                               |  |                                          
|Granted                         |  | 155,000      |   |  | 15.14                         |  |                                          
|Cancelled                       |  | (10,000      | ) |  | 15.22                         |  |                                          
|                                |  |              |   |  |                               |  |                                          
|Balance on December 31, 2001(1) |  | 3,870,000    |   |  | 14.38                         |  | 40                                       
|                                |  |              |   |  |                               |  |                                          
|Granted                         |  | 3,738,500    |   |  | 21.95                         |  |                                          
|Cancelled                       |  | (26,500      | ) |  | 14.87                         |  |                                          
|                                |  |              |   |  |                               |  |                                          
|Balance on December 31, 2002(1) |  | 7,582,000    |   |  | 18.46                         |  | 40                                       
|                                |  |              |   |  |                               |  |                                          
|Granted                         |  | 3,591,000    |   |  | 14.40                         |  |                                          
|Cancelled                       |  | (101,300     | ) |  | 21.20                         |  |                                          
|                                |  |              |   |  |                               |  |                                          
|Balance on December 31, 2003    |  | 11,071,700   |   |  | 16.55                         |  | 36                                       
|                                |  |              |   |  |                               |  |                                          

---

|(1) |  | As of December 31, 2003, 1,036,000 stock options with a weighted average exercise price of 12.74 had been traded on the Helsinki Exchanges (2002: 907,400, weighted average
exercise price of 12.74) and remained unexercised.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under Finnish GAAP, the Group does not recognize compensation expense for the stock options granted. Under U.S. GAAP, compensation expense associated with the 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 Exchanges 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 3 million and 5 million for the years ended December 31, 2003 and
2001, respectively, and compensation income 8 million for 2002.



During 2003, 2002 and 2001, if the Group had determined compensation expense based on the fair value at the grant date for its share 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):



|                   |  |                                        |  |      |  |     
|------------------ |  | -------------------------------------- |  | ---- |  | ----
|                   |  | 2003                                   |  | 2002 |  | 2001
|                   |  | ( in millions, except per-share data)
|Net income         |  |                                        |  |      |  |     
|As reported        |  | 398                                    |  | 628  |  | 880 
|Pro forma          |  | 367                                    |  | 593  |  | 882 
|Earnings per share |  |                                        |  |      |  |     
|As reported:       |  |                                        |  |      |  |     
|Basic              |  | 0.76                                   |  | 1.21 |  | 1.77
|Diluted            |  | 0.76                                   |  | 1.20 |  | 1.75
|Pro forma:         |  |                                        |  |      |  |     
|Basic              |  | 0.82                                   |  | 1.24 |  | 1.78
|Diluted            |  | 0.82                                   |  | 1.23 |  | 1.76



F-41



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 using the minimum value method with the following weighted-average assumptions:



|                                                               |  |       |  |      
|-------------------------------------------------------------- |  | ----- |  | -----
|                                                               |  | 2003  |  | 2002 
|Risk Free interest rate                                        |  | 2.31% |  | 4.59%
|Expected dividend yield                                        |  | 4%    |  | 4%   
|Expected volatility                                            |  | 33%   |  | 37%  
|Assumed forfeiture                                             |  | None  |  | None 
|Expected life (years)                                          |  | 3     |  | 4    
|Weighted average fair value of stock options granted, each () |  | 2.48  |  | 6.98 



(j)    Restructuring cost



Under Finnish GAAP, the estimated costs of employee termination and other restructuring costs to existing activities are accrued based on managements estimates at year end. Under U.S. GAAP, these costs are recorded in the period the
benefits are communicated to the employees and if prior to the date of the financial statements management having the appropriate level of authority approves and commits the Group to the plan among other conditions. If the costs do not meet these
criteria, the accruals under Finnish GAAP are reversed for U.S. GAAP purposes and expensed as incurred. Starting in 2003, under U.S. GAAP, liabilities for costs associated with exit or disposal activities are recognized when incurred and reasonably
estimable.



(k)    Other



Other adjustments required when considering the significant differences
between Finnish GAAP and U.S. GAAP include:



Tangible assets



In connection with the closure of two paper machines in
the Blandin paper mill in the United States in 2002 (see note 23.II.d), under Finnish GAAP the Group recorded an impairment charge of 79 million, which included 8 million for a pulping-related asset. Under U.S. GAAP, SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), requires a two-step impairment test be performed for a group of assets that have the lowest identifiable set of cash flows. No impairment charge has resulted from the
application of the FAS 144 recoverability tests to the pulping-related asset, and, therefore, no impairment should be recognized for U.S. GAAP purposes.



Forest assets



Under Finnish GAAP, forest assets are stated at historical acquisition cost plus allowable revaluations. As of December 31, 2003 and 2002, the cost of
forest assets included 547 million and 548 million, respectively, of revaluations made in previous years. Reforestation and other costs necessary to sustain, develop and grow the forests are expensed as incurred.



For purposes of U.S. GAAP, forest assets are stated at the lower of cost or
estimated market value. Cost includes all expenditures incurred on acquisition of the forests (excluding land costs) plus reforestation and forestry development costs less depletions. Revaluations are not allowed under U.S. 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 15 million, 15 million and 13 million and depletion of forest assets was 9
million, 9 million and 10 million during the years ended December 31, 2003, 2002 and 2001, respectively.



Associated companies



In accordance with the equity method of accounting under Finnish GAAP and U.S. GAAP, the Group records its relative share of profits and losses reported
by the associated companies. Accordingly, this adjustment includes the Groups proportionate share of Finnish GAAP to U.S. GAAP adjustments to the net income of associated companies.



F-42



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(l)    Deferred taxes



Under Finnish GAAP, the Group records deferred taxes on a full liability
basis. Deferred taxes have not been provided on unremitted earnings of associated companies and certain purchase accounting differences.



Under U.S. GAAP, deferred tax assets and liabilities are recognized for all differences between the accounting and tax basis of assets and liabilities
except for unremitted earnings of subsidiaries (see note 23.II.n).



The net deferred tax liability under U.S. GAAP is reconciled as follows:



|                                                                                                     |  |                    |   |  |       |  
|---------------------------------------------------------------------------------------------------- |  | ------------------ | - |  | ----- | -
|                                                                                                     |  | As of December 31, |  
|                                                                                                     |  | 2003               |   |  | 2002  |  
|                                                                                                     |  | ( in millions)    |  
|Net deferred tax liability under Finnish GAAP                                                        |  | 644                |   |  | 645   |  
|Deferred taxes on unremitted earnings and certain purchase accounting differences                    |  | 163                |   |  | 187   |  
|Deferred tax liabilities arising from historical business combinations(refer to paragraph (a) above) |  | 716                |   |  | 771   |  
|Deferred tax effect of other U.S. GAAP adjustments                                                   |  | (324               | ) |  | (268  | )
|                                                                                                     |  |                    |   |  |       |  
|Net deferred tax liability provided in accordance with U.S. GAAP                                     |  | 1,199              |   |  | 1,335 |  
|                                                                                                     |  |                    |   |  |       |  



(m)    Earnings
per share



In accordance with 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 and 2001 have been restated to reflect the bonus issue as if it had occurred as of the beginning of each period presented
(see note 23.II.a). EPS has been calculated on a U.S. GAAP basis for the years ended December 31, 2003, 2002 and 2001 as follows:



|                                                                                                 |  |                                        |  |         |  |        
|------------------------------------------------------------------------------------------------ |  | -------------------------------------- |  | ------- |  | -------
|                                                                                                 |  | Year ended December 31,               
|                                                                                                 |  | 2003                                   |  | 2002    |  | 2001   
|                                                                                                 |  | ( in millions, except per share data)
|Numerator for basic EPSincome available to common shareholders                                  |  | 398                                    |  | 628     |  | 880    
|Effect of dilutive securities:                                                                   |  |                                        |  |         |  |        
|Convertible bond loan                                                                            |  |                                       |  | 2       |  | 3      
|Numerator for diluted EPSincome available to common shareholders after assumed conversions      |  | 398                                    |  | 630     |  | 883    
|Denominator for basic EPSweighted average shares (thousands)                                    |  | 523,130                                |  | 518,935 |  | 495,784
|Effect of dilutive securities (thousands):                                                       |  |                                        |  |         |  |        
|Convertible bond loan                                                                            |  | 449                                    |  | 4,980   |  | 6,916  
|Share stock options                                                                              |  | 675                                    |  | 1,867   |  | 1,284  
|Denominator for diluted EPSadjusted weighted average shares and assumed conversions (thousands) |  | 524,254                                |  | 525,782 |  | 503,984
|EPS:                                                                                             |  |                                        |  |         |  |        
|Basic                                                                                            |  | 0.76                                   |  | 1.21    |  | 1.77   
|Diluted                                                                                          |  | 0.76                                   |  | 1.20    |  | 1.75   



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(n)    Consolidated statement of comprehensive income



Comprehensive income measured in accordance with U.S. GAAP for the years
ended December 31, 2003, 2002 and 2001 is as follows:



|                                                                                                                            |  |                         |   |  |      |   |  |      |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                                                                                            |  | Year ended December 31, |  
|                                                                                                                            |  | 2003                    |   |  | 2002 |   |  | 2001 |  
|                                                                                                                            |  | ( in millions)         |  
|Net income in accordance with U.S. GAAP                                                                                     |  | 398                     |   |  | 628  |   |  | 880  |  
|Other comprehensive income                                                                                                  |  |                         |   |  |      |   |  |      |  
|Unrealized holding gains (net of income taxes of 38 million in 2003, 86 million in 2002, 218 million in
2001)           |  | (97                     | ) |  | (211 | ) |  | (532 | )
|Unrealized cash flow hedges (net of income taxes of (10) million in 2003, 0 million in 2002, 0 million in
2001)         |  | 26                      |   |  |     |   |  |     |  
|Foreign currency translation adjustments                                                                                   |  | (124                    | ) |  | (181 | ) |  | 46   |  
|Additional minimum pension liability (net of income taxes of 4 million in 2003, 24 million in 2002, 7 million in
2001)  |  | (17                     | ) |  | (35  | ) |  | (12  | )
|                                                                                                                            |  |                         |   |  |      |   |  |      |  
|Comprehensive income in accordance with U.S. GAAP                                                                           |  | 186                     |   |  | 201  |   |  | 382  |  
|                                                                                                                            |  |                         |   |  |      |   |  |      |  
|Accumulated other comprehensive income                                                                                      |  |                         |   |  |      |   |  |      |  
|Unrealized holding gains (net of income taxes of 0 million in 2003, (38) in 2002, (124) in 2001)                        |  |                        |   |  | 97   |   |  | 308  |  
|Unrealized cash flow hedges (net of income taxes of (10) million in 2003, 0 million in 2002, 0 million in
2001)         |  | 26                      |   |  |     |   |  |     |  
|Foreign currency translation adjustments                                                                                   |  | (202                    | ) |  | (78  | ) |  | 103  |  
|Additional minimum pension liability (net of income taxes of 37 million in 2003, 33 million in 2002, 9 million in
2001) |  | (67                     | ) |  | (50  | ) |  | (15  | )
|                                                                                                                            |  |                         |   |  |      |   |  |      |  
|                                                                                                                            |  | (243                    | ) |  | (31  | ) |  | 396  |  
|                                                                                                                            |  |                         |   |  |      |   |  |      |  



(o)    Classification differences



Consolidated profit and loss account



In
accordance with Finnish GAAP, the Group classifies the share of results in associated companies connected with the Groups core business operations and capital gains on disposal of non-current assets as a component of operating profit. Under
U.S. GAAP, these items would be classified as a component of other income (expense).



Under Finnish GAAP, the Group has classified certain income and expense as extraordinary items. Under U.S. GAAP these items would be classified as a component of other income (expense).



Under Finnish GAAP, the Group classifies realized and unrealized gains and
losses on foreign currency denominated transactions (including derivative financial instruments) in turnover, 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 (including derivative financial instruments) would be classified as component of other income (expense), net.



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The aggregate foreign exchange gains (losses) included in the profit and loss
account are as follows for the years ended December 31, 2003, 2002 and 2001:



|                                                                                                          |  |                         |   |  |      |   |  |      |  
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                                                                          |  | Year ended December 31, |  
|                                                                                                          |  | 2003                    |   |  | 2002 |   |  | 2001 |  
|                                                                                                          |  | ( in millions)         |  
|Classification under Finnish GAAP:                                                                        |  |                         |   |  |      |   |  |      |  
|Turnover                                                                                                  |  | 86                      |   |  | (27  | ) |  | 13   |  
|Costs and expenses                                                                                        |  | (1                      | ) |  | 1    |   |  | (1   | )
|Financial income and expenses                                                                             |  | (28                     | ) |  | 2    |   |  | (5   | )
|                                                                                                          |  |                         |   |  |      |   |  |      |  
|                                                                                                          |  | 57                      |   |  | (24  | ) |  | 7    |  
|U.S. GAAP adjustment for foreign currency derivative financial instruments (refer to paragraph (h) above) |  | 41                      |   |  | 37   |   |  | (42  | )
|                                                                                                          |  |                         |   |  |      |   |  |      |  
|Classification under U.S. GAAP:                                                                           |  |                         |   |  |      |   |  |      |  
|Other income (expense), net                                                                               |  | 98                      |   |  | 13   |   |  | (35  | )
|                                                                                                          |  |                         |   |  |      |   |  |      |  



Consolidated
balance sheet



In addition to the classification
differences previously discussed in this section, other differences exist in the balance sheet classification between Finnish GAAP and U.S. GAAP.



Under Finnish GAAP, the Group classifies certain cash overdrafts without a right of offset as a component of cash. In accordance with U.S. GAAP, cash
overdrafts without a right of offset are classified as current liabilities.



Under Finnish GAAP, the Group classifies certain non-current receivables as current assets. The non-current receivables would be classified as non-current assets in accordance with U.S. GAAP.



Under Finnish GAAP, 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.



Under Finnish GAAP, the Group classifies prepayments and accrued income as a component of both current and non-current receivables. In accordance with
U.S. GAAP, prepayments and accrued income would be classified as a component of other current assets and other non-current assets, respectively.



Under Finnish GAAP, the Group classifies the cost of certain items, including goodwill, software (and advance payments on software) and significant asset
renewals and betterments as intangible assets. Goodwill and software costs would be classified as other non-current assets and significant asset renewals and betterments would be classified as property, plant and equipment in accordance with U.S.
GAAP.



Under Finnish GAAP, the Group classifies other
receivables within investments held as non-current assets. Such receivables would generally be classified as other non-current assets in accordance with U.S. GAAP.



Under Finnish GAAP, deferred tax liabilities are not classified as either current or non-current. In accordance with U.S.
GAAP, deferred tax liabilities are classified as either current or non-current depending on the nature of the underlying temporary differences.



Consolidated cash flow statement



The Group reconciles operating profit to net cash from operating activities in the consolidated cash flow statement, providing for (i) the effects of all
deferrals of past operating cash receipts and cash payments; (ii) the effects of all accruals of expected future operating cash receipts and cash payments; and (iii) the effects of all items in operating profit classified as investing or financing
cash flows, such as gains or losses on sales on fixed assets. In accordance with U.S. GAAP, either the direct method or indirect method can be used to reconcile net income to net cash from operating activities.



F-45



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following provides the reconciliation of net cash provided from operating
activities under the indirect method:



|                                                                                           |  |                         |   |  |       |   |  |       |  
|------------------------------------------------------------------------------------------ |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                                                                           |  | Year ended December 31, |  
|                                                                                           |  | 2003                    |   |  | 2002  |   |  | 2001  |  
|                                                                                           |  | ( in millions)         |  
|Profit for the financial period                                                            |  | 368                     |   |  | 550   |   |  | 955   |  
|Adjustments to reconcile net income to net cash provided by operating activities:          |  |                         |   |  |       |   |  |       |  
|Share of results of associated companies                                                   |  | (25                     | ) |  | (60   | ) |  | (82   | )
|Depreciation                                                                               |  | 926                     |   |  | 1,018 |   |  | 744   |  
|Foreign exchange loss                                                                      |  | (108                    | ) |  | 53    |   |  | 46    |  
|Net profit on sale of non-current assets, net of direct taxes paid                         |  | (165                    | ) |  | (32   | ) |  | (251  | )
|Provisions                                                                                 |  | (14                     | ) |  | 31    |   |  | 26    |  
|Deferred income taxes                                                                      |  | 8                       |   |  | (30   | ) |  | (17   | )
|Other                                                                                      |  | 152                     |   |  | 43    |   |  | 128   |  
|Changes in operating assets and liabilities, net of effects of businesses acquired or sold |  |                         |   |  |       |   |  |       |  
|Stocks                                                                                     |  | 26                      |   |  | (23   | ) |  | 26    |  
|Short-term receivables                                                                     |  | 55                      |   |  | 78    |   |  | 85    |  
|Short-term liabilities                                                                     |  | 41                      |   |  | (199  | ) |  | (15   | )
|                                                                                           |  |                         |   |  |       |   |  |       |  
|Net cash provided by operating activities                                                  |  | 1,264                   |   |  | 1,429 |   |  | 1,645 |  
|                                                                                           |  |                         |   |  |       |   |  |       |  



As specified in note
(c) to the consolidated cash flow statement, the Group allocates income taxes paid to significant investing and financing activities, namely the sale of non-current assets. Such allocation is not permitted under U.S. GAAP.



Under Finnish GAAP, the amount paid net of direct taxes related to the
termination of the MACtac agreement is classified as investing activities. In accordance with U.S. GAAP, such amount would be classified as operating activities.



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 Finnish GAAP measurement basis.



(a)    Consolidated statement of changes in shareholders equity



The number of the Companys shares in issue rose in January-February 2003 by 1,673,490 to 261,789,465 and the share
capital by 2,844,933.00 to 445,042,090.50 as a result of the conversion of the subordinated convertible bond loan.



The Companys Annual General Meeting held on March 19, 2003 decided to increase the companys share capital to 890,084,181.00 through a
445,042,090.50 bonus issue. One new share was issued for each existing share held at March 24, 2003, the record date.



As of December 31, 2003 and 2002, the number of shares issued was 523,578,930 and 520,231,950 (both of which none were held in treasury), respectively. As
of December 31, 2003, if all 23,200,000 shares attached to the share options distributed to the Groups key personnel are also subscribed, the number of shares will rise to 546,778,930.



The articles of association were amended in connection with the bonus issue.
Under the articles of association, the Companys issued share capital may not be less than 750 million and not more than 3,000 million. The issued share capital may be increased or reduced between these limits without amendment to
the articles of association.



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Finnish law prohibits the Company from distributing the portion of retained
earnings represented by untaxed reserves and differences in accumulated depreciation between the Companys financial statements and tax books. This amount is disclosed in note 17.



(b)    Acquisitions



Haindl acquisition in November, 2001



For U.S. GAAP purposes, UPM-Kymmene has determined the fair values of the assets acquired and liabilities assumed from Haindl as of the acquisition date
based on information currently available and on current assumptions as to future operations. UPM-Kymmene has obtained independent appraisals of the fair values of the acquired property, plant and equipment, and identified intangible assets, and
their remaining useful lives. The Company has completed the review and determination of the fair values of the other assets acquired and liabilities assumed. The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition:



|                               |  |                 |  
|------------------------------ |  | --------------- | -
|                               |  | At November 30  |  
|                               |  | ( in millions) |  
|Current assets                 |  | 790             |  
|Property, plant, and equipment |  | 2,103           |  
|Intangible assets              |  | 300             |  
|Goodwill                       |  | 940             |  
|Other non current assets       |  | 2               |  
|                               |  |                 |  
|Total assets acquired          |  | 4,135           |  
|Current liabilities            |  | (642            | )
|Long-term debt                 |  | (400            | )
|Other non current liabilities  |  | (426            | )
|                               |  |                 |  
|Total liabilities assumed      |  | (1,468          | )
|                               |  |                 |  
|Net assets acquired            |  | 2,667           |  
|                               |  |                 |  



Of the 300
million of acquired intangible assets, 118 million was assigned to customer relationships, 112 million to technology, 35 million to registered patents, 25 to rights to use water, 6 to order backlog and 4 to
software. The rights to use water are considered to be indefinite-lived intangible assets and are therefore not subject to amortization. The remaining acquired intangible assets have a weighted-average useful life of approximately 8 years. The
weighted-average useful lives per major class of these acquired intangibles are as follows:



|                       |  |                             
|---------------------- |  | ----------------------------
|                       |  | Weighted-average useful life
|Customer relationships |  | 12 years                    
|Technology             |  | 6 years                     
|Patents                |  | 16 years                    
|Order Backlog          |  | 1 month                     
|Software               |  | 5 years                     



The 940 million
of goodwill was assigned to the magazines and newsprint segments in the amounts of 410 and 530, respectively. In connection with the acquisition, new tax basis was determined for acquired net assets located in Germany. As a result, a
portion of the total goodwill may be deductible for tax purposes. However, given the uncertainty of the outcome, a valuation allowance of 377 million was recorded in the purchase accounting. The Group will make any necessary adjustments when
the uncertainty is resolved.



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Rexam acquisition in February, 2001



On February 28, 2001 the Group completed the acquisition of 100 percent of
the shares of Rexam Release B.V. and Rexam Release Inc. (collectively Rexam) for a purchase price of U.S.$123 million. Rexam is involved in the manufacture of siliconized release materials for hygiene, labelling and technical
applications. Rexam has three production plants located in the Netherlands and United States.



The Rexam acquisition has been accounted for as a purchase under both Finnish GAAP and U.S. GAAP and accordingly, the results of its operations from March 1, 2001 are included in the Groups consolidated
financial statements.



Pro forma financial data



The following unaudited pro forma financial data for 2001
presents certain profit and loss amounts for the Group as if the acquisitions of Haindl and Rexam had occurred at the beginning of each financial period. The unaudited pro forma financial data has been prepared in accordance with Finnish GAAP, and
includes certain adjustments to reflect the assumed change in acquisition dates. The unaudited pro forma financial data does not include any adjustments for synergies resulting from these acquisitions, and does not purport to be indicative of the
results of operations which would have occurred had the acquisitions actually occurred on the dates indicated, or which may result in future periods.



|                           |  |                         |  |             |  |        
|-------------------------- |  | ----------------------- |  | ----------- |  | -------
|                           |  | Year ended December 31,
|                           |  | 2003                    |  | 2002        |  | 2001(1)
|                           |  |                         |  | (unaudited)
|                           |  | ( in millions)        
|Turnover                   |  | 9,948                   |  | 10,475      |  | 11,052 
|Net profit                 |  | 368                     |  | 550         |  | 1,005  
|Basic earning per share    |  | 0.70                    |  | 1.06        |  | 1.94   
|Diluted earnings per share |  | 0.70                    |  | 1.05        |  | 1.91   

---

|(1) |  | The data in this column has been calculated as if the acquisitions of Haindl and Rexam had occurred on January 1, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------



(c)    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, 2003 and 2002, which also resulted in no impairment charges.



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The changes in the carrying amount of goodwill for the year ended December
31, 2003 and 2002 measured on a U.S. GAAP basis and allocated by reportable segment, are as follows:



|                                |  |                 |   |  |           |  |                         |   |  |                      |   |  |               |   |  |                  |   |  |       |  
|------------------------------- |  | --------------- | - |  | --------- |  | ----------------------- | - |  | -------------------- | - |  | ------------- | - |  | ---------------- | - |  | ----- | -
|                                |  | Magazine Paper  |   |  | Newsprint |  | Fine & Speciality paper |   |  | Converting materials |   |  | Wood Products |   |  | Other Operations |   |  | Total |  
|                                |  | ( in millions) |  
|Balance as of January 1, 2002   |  | 1,118           |   |  | 522       |  | 164                     |   |  | 86                   |   |  | 27            |   |  | 7                |   |  | 1,924 |  
|Acquisitions                    |  | 6               |   |  | 7         |  |                        |   |  |                     |   |  | 4             |   |  |                 |   |  | 17    |  
|Translation adjustments         |  | (90             | ) |  |          |  | (18                     | ) |  | (9                   | ) |  |              |   |  |                 |   |  | (117  | )
|Disposals                       |  |                |   |  |          |  |                        |   |  |                     |   |  |              |   |  | (1               | ) |  | (1    | )
|Balance as of December 31, 2002 |  | 1,034           |   |  | 529       |  | 146                     |   |  | 77                   |   |  | 31            |   |  | 6                |   |  | 1,823 |  
|Balance as of January 1, 2003   |  | 1,034           |   |  | 529       |  | 146                     |   |  | 77                   |   |  | 31            |   |  | 6                |   |  | 1,823 |  
|Acquisition                     |  | 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 |  



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, 2003 |  | As of December 31, 2002 
|                                 |  | Gross Carrying Amount   |  | Accumulated Amortization |  | Gross Carrying Amount |  | Accumulated Amortization
|                                 |  | ( in millions)        
|Subject to amortization:         |  |                         |  |                          |  |                       |  |                         
|Customer relationships           |  | 118                     |  | 22                       |  | 118                   |  | 11                      
|Technology                       |  | 112                     |  | 42                       |  | 112                   |  | 22                      
|Patents                          |  | 47                      |  | 9                        |  | 40                    |  | 7                       
|Software                         |  | 182                     |  | 112                      |  | 159                   |  | 99                      
|Intangible rights                |  | 207                     |  | 121                      |  | 203                   |  | 113                     
|                                 |  |                         |  |                          |  |                       |  |                         
|Total                            |  | 666                     |  | 306                      |  | 632                   |  | 252                     
|                                 |  |                         |  |                          |  |                       |  |                         
|Not subject to amortization:     |  |                         |  |                          |  |                       |  |                         
|Rights to use water              |  | 168                     |  |                          |  | 168                   |  |                         
|                                 |  |                         |  |                          |  |                       |  |                         
|Total                            |  | 834                     |  |                          |  | 800                   |  |                         
|                                 |  |                         |  |                          |  |                       |  |                         
|Amortization Expense:            |  |                         |  |                          |  |                       |  |                         
|For year ended December 31, 2003 |  | 68                      |  |                          |  |                       |  |                         
|                                 |  |                         |  |                         
|Estimated Amortization Expense:  |  |                         |  |                          |  |                       |  |                         
|For year ended December 31, 2004 |  | 68                      |  |                          |  |                       |  |                         
|For year ended December 31, 2005 |  | 63                      |  |                          |  |                       |  |                         
|For year ended December 31, 2006 |  | 58                      |  |                          |  |                       |  |                         
|For year ended December 31, 2007 |  | 44                      |  |                          |  |                       |  |                         
|For year ended December 31, 2008 |  | 24                      |  |                          |  |                       |  |                         



(d)    Blandin
restructuring activities and impairment of long-lived assets



In 2002, the Board of Directors authorized the shutdown of its two oldest paper machines at the Blandin mill in Minnesota, United States. The paper machines were originally built in 1931 and 1963. Based on the machines age and
production capacity, the Group 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.



Under Finnish GAAP, the Group recorded a pre-tax charge of 128 million as a result of the closures and reassessments of useful lives. This charge includes impairment of assets of 79 million. In addition,
the Group



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



recorded an accrual of 20 million for involuntary termination of approximately 300
employees and other closing-related costs, as well as 20 million related to the settlement of Blandins pension and post-retirement healthcare plans. The remaining balance relates to effect of the change in the useful lives of the paper
machines, which was recorded under Finnish GAAP as an adjustment.



Under U.S. GAAP, the Group recorded a pre-tax charge of 76 million as a result of the restructuring initiatives. This charge includes impairment of assets of 71 million, as well as a pension-related expense of 5 million.
The difference between U.S. and Finnish GAAP relate to different criteria for recognition of employee termination benefits and other costs to exit activities (see note 23.I.k), defined benefit pension accounting for plan settlement (see note
23.I.g), long-lived asset impairment methodology and accounting for change in useful life estimates (see note 23.I.l).



(e)    Discontinued operations



Effective January 1, 2002, the Group adopted SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144). This
statement addresses 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 subsidiary, or an asset group.





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 Finnish GAAP, 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 restated 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 tax associated with the discontinued operations was 4 million for the year ended December 31, 2003.



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 Finnish GAAP, 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 restated
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 gain on disposal, net of tax associated with the discontinued operations, was 9 million for the year
ended December 31, 2002.



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The assets and liabilities associated with the discontinued operations
included on the consolidated balance sheets at December 31, 2002 are as follows:



|                          |  |                 
|------------------------- |  | ----------------
|                          |  | December 31,2002
|                          |  | ( in millions) 
|ASSETS                    |  |                 
|Cash and bank             |  | 2               
|Accounts receivable       |  | 8               
|Loan receivables          |  | 1               
|Other receivables         |  | 4               
|Inventory                 |  | 4               
|Tangible assets           |  | 3               
|                          |  |                 
|Total assets              |  | 22              
|                          |  |                 
|LIABILITIES               |  |                 
|Accounts payable          |  | 5               
|Accruals and debt         |  | 2               
|Other current liabilities |  | 3               
|                          |  |                 
|Total liabilities         |  | 10              
|                          |  |                 



(f)    Income
taxes



The Groups profit before income taxes and
minority interest under Finnish GAAP for the years ended December 31, 2003, 2002 and 2001 consists of the following:



|                                                        |  |                        |   |  |      |   |  |      
|------------------------------------------------------- |  | ---------------------- | - |  | ---- | - |  | -----
|                                                        |  | Year endedDecember 31,
|                                                        |  | 2003                   |   |  | 2002 |   |  | 2001 
|                                                        |  | ( in millions)       
|Profit (loss) before income taxes and minority interest |  |                        |   |  |      |   |  |      
|Domestic                                                |  | 578                    |   |  | 811  |   |  | 1,207
|Foreign                                                 |  | (19                    | ) |  | (22  | ) |  | 126  
|                                                        |  |                        |   |  |      |   |  |      
|                                                        |  | 559                    |   |  | 789  |   |  | 1,333
|                                                        |  |                        |   |  |      |   |  |      



The Groups
income tax expense under Finnish GAAP for the years ended December 31, 2003, 2002 and 2001 consists of the following:



|                                 |  |                         |   |  |      |   |  |      |  
|-------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                 |  | Year ended December 31, |  
|                                 |  | 2003                    |   |  | 2002 |   |  | 2001 |  
|                                 |  | ( in millions)         |  
|Current:                         |  |                         |   |  |      |   |  |      |  
|Domestic                         |  | 166                     |   |  | 206  |   |  | 337  |  
|Foreign                          |  | 20                      |   |  | 65   |   |  | 58   |  
|                                 |  | 186                     |   |  | 271  |   |  | 395  |  
|Deferred:                        |  |                         |   |  |      |   |  |      |  
|Domestic                         |  | (13                     | ) |  | 5    |   |  | 3    |  
|Foreign                          |  | 20                      |   |  | (35  | ) |  | (20  | )
|                                 |  |                         |   |  |      |   |  |      |  
|                                 |  | 7                       |   |  | (30  | ) |  | (17  | )
|                                 |  |                         |   |  |      |   |  |      |  
|Total provision for income taxes |  | 193                     |   |  | 241  |   |  | 378  |  
|                                 |  |                         |   |  |      |   |  |      |  



Current income tax
expense is stated after the benefit arising from the utilization of loss carry-forwards amounting to 21 million, 29 million and 40 million in 2003, 2002 and 2001, respectively.



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Estimated net operating loss carry-forwards amounted to 635 million (of
which 193 million were attributable to the French subsidiaries) as of December 31, 2003 and 400 million (of which 237 million were attributable to the French subsidiaries) as of December 31, 2002, respectively. The net operating
loss carry-forwards in France do not expire. The remaining net operating loss carry-forwards expire at various dates and in varying amounts.



A reconciliation of the computed tax at the Finnish statutory tax rate and the income tax expense recognized in accordance with Finnish GAAP for the years
ended December 31, 2003, 2002 and 2001 is as follows:



|                                              |  |                        |   |  |      |   |  |      |  
|--------------------------------------------- |  | ---------------------- | - |  | ---- | - |  | ---- | -
|                                              |  | Year endedDecember 31, |  
|                                              |  | 2003                   |   |  | 2002 |   |  | 2001 |  
|                                              |  | ( in millions)        |  
|Computed tax at Finnish statutory rate of 29% |  | 162                    |   |  | 229  |   |  | 387  |  
|Difference between Finnish and foreign rates  |  | (11                    | ) |  | (8   | ) |  |     |  
|Non-deductible purchase price difference      |  | 50                     |   |  | 54   |   |  | 24   |  
|Change in tax rates                           |  | 7                      |   |  | (2   | ) |  | (5   | )
|Adjustment to valuation allowance             |  |                       |   |  | (17  | ) |  | (23  | )
|Tax losses with no tax benefit                |  | 14                     |   |  | 7    |   |  | 27   |  
|Results of associated companies               |  | (7                     | ) |  | (18  | ) |  | (23  | )
|Other                                         |  | (22                    | ) |  | (4   | ) |  | (9   | )
|                                              |  |                        |   |  |      |   |  |      |  
|Income tax expense                            |  | 193                    |   |  | 241  |   |  | 378  |  
|                                              |  |                        |   |  |      |   |  |      |  



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 Finnish GAAP as of December 31, 2003 and 2002 are as follows:



|                                           |  |                        |   |  |        |  
|------------------------------------------ |  | ---------------------- | - |  | ------ | -
|                                           |  | Year endedDecember 31, |  
|                                           |  | 2003                   |   |  | 2002   |  
|                                           |  | ( in millions)        |  
|Deferred tax liabilitiesnon-current:      |  |                        |   |  |        |  
|Tax over book depreciation                 |  | (909                   | ) |  | (868   | )
|Revaluation of assets                      |  | (214                   | ) |  | (214   | )
|Other temporary differences                |  | (5                     | ) |  | (6     | )
|                                           |  |                        |   |  |        |  
|Total deferred tax liabilitiesnon-current |  | (1,128                 | ) |  | (1,088 | )
|                                           |  |                        |   |  |        |  
|Deferred tax assetscurrent                |  | 143                    |   |  | 144    |  
|Deferred tax assetsnon-current:           |  |                        |   |  |        |  
|Net operating loss carry-forwards          |  | 203                    |   |  | 100    |  
|New tax basis of acquired assets           |  | 498                    |   |  | 553    |  
|Other temporary differences                |  | 70                     |   |  | 76     |  
|                                           |  |                        |   |  |        |  
|Total deferred tax assetsnon-current      |  | 771                    |   |  | 729    |  
|                                           |  |                        |   |  |        |  
|Valuation allowance                        |  | (430                   | ) |  | (430   | )
|                                           |  |                        |   |  |        |  
|Net deferred income tax liability          |  | 644                    |   |  | (645   | )
|                                           |  |                        |   |  |        |  



The Group has recorded
a valuation allowance to reflect the estimated amount of deferred tax assets, principally due to the uncertainty associated with the tax authorities acceptance of the tax basis in Germany.



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(g)    Associated companies



The following table sets forth summarized unaudited financial information of
Oy Metsä-Botnia Ab and Pohjolan Voima Oy on an aggregate basis:



|                                                                |  |                 |  |      
|--------------------------------------------------------------- |  | --------------- |  | -----
|                                                                |  | 2003            |  | 2002 
|                                                                |  | ( in millions)
|Balance sheet data (as of December 31)                          |  |                 |  |      
|Current assets                                                  |  | 805             |  | 788  
|Non-current assets                                              |  | 3,071           |  | 3,117
|Current liabilities                                             |  | 416             |  | 375  
|Non-current liabilities                                         |  | 1,428           |  | 1,486
|Minority interests                                              |  | 207             |  | 179  
|Profit and loss statement data (for the year ended December 31) |  |                 |  |      
|Net sales                                                       |  | 1,667           |  | 1,704
|Operating income                                                |  | 64              |  | 188  
|Net income                                                      |  | 30              |  | 106  



Dividends received
from associated companies were 52 million, 46 million and 85 million for the years ended December 31, 2003, 2002 and 2001, respectively.



Pohjolan Voima Oy



The Groups associated company Pohjolan Voima Oy (PVO) holds a 56.8 percent shareholding in Teollisuuden Voima Oy (TVO),
which owns and operates a nuclear power plant in Olkiluoto, Finland. The operation of a nuclear power plant involves substantial potential costs and liabilities, and is governed by strict 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 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 partial responsibility
proportionate to its output share for the costs of management, cost determined by the Articles of Association of PVO and costs of disposal of nuclear waste produced by the Olkiluoto nuclear power plant. Even though contributions to such funds are
sufficient to cover estimated future costs, the possibility exists that actual costs could exceed fund provisions and, if this were to occur, the Group would be partially responsible for any such excess costs, proportionate to its output share.



In December 2003, the Group announced it would reserve
approximately 29 percent of the capacity of the new nuclear plant being built by PVO.



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(h)    Leases



The Group leases certain tangible assets, including buildings, machinery and
equipment, under long-term arrangements. As of December 31, 2003, the approximate future minimum lease payments under noncancelable leases that have initial or remaining noncancelable lease terms in excess of one year are as follows under Finnish
GAAP:



|                                            |  |                 |  |         |  
|------------------------------------------- |  | --------------- |  | ------- | -
|                                            |  | Operating(1)    |  | Capital |  
|                                            |  | ( in millions) | 
|Year ending December 31:                    |  |                 |  |         |  
|2004                                        |  | 44              |  | 41      |  
|2005                                        |  | 39              |  | 22      |  
|2006                                        |  | 35              |  | 3       |  
|2007                                        |  | 26              |  | 3       |  
|2008                                        |  | 23              |  | 3       |  
|Thereafter                                  |  | 39              |  | 21      |  
|                                            |  |                 |  |         |  
|Total minimum lease payments                |  | 206             |  | 93      |  
|                                            |  |                 |  |         |  
|Less amount representing interest           |  |                 |  | (10     | )
|                                            |  |                 |  |         |  
|Present value of net minimum lease payments |  |                 |  | 83      |  
|Less current maturities                     |  |                 |  | (37     | )
|                                            |  |                 |  |         |  
|Long-term obligation                        |  |                 |  | 46      |  
|                                            |  |                 |  |         |  

---

|(1) |  | Operating leases include the sale and leaseback of certain non-current assets which are accounted for as financing arrangements under U.S. GAAP as discussed in paragraph (I)(d).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain leases contain escalation clauses,
renewal options, and/or purchase options. Rental expense under operating leases in accordance with Finnish GAAP amounted to 108 million, 103 million and 88 million during the years ended December 31, 2003, 2002 and 2001,
respectively.



Under Finnish GAAP, amounts related to the
capital lease of machinery and equipment included in tangible assets were 264 million and 283 million as of December 31, 2003 and 2002, respectively. Accumulated amortization with respect to these leased assets was 183 million and
182 million as of December 31, 2003 and 2002, respectively. Depreciation is calculated on a straight-line basis so as to write off the cost of the capitalized leased asset in accordance with the Groups normal depreciation policy for
tangible assets.



(i)    Loans



Under Finnish GAAP, interest-bearing liabilities are recognized at their
nominal amount and the transaction costs are expensed to income statement as incurred or deferred to the balance sheet and amortized on a straight line basis to the income statement over the maturity of the liability.



Under U.S. GAAP, interest-bearing liabilities 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 on the income statement over the period of the interest-bearing liabilities.



In addition, under U.S. GAAP, 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 on the income statement.



The Group has issued the majority of its fixed rate bond loans under the Medium term note programme of 4.0 billion. The maturities, currencies and
interest rates are disclosed in the note 19 to the financial statements under the Bonds caption.



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 percent. 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, February 28, 2003 the
total number 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.



Loans from financial institutions consist of international bank borrowings
with varying maturities and either fixed or floating interest rates. The loans from financial institutions are primarily arranged by the Groups central treasury function with commercial banks and are denominated in various currencies,
including euro and U.S. dollars. As of December 31, 2003, the interest rates of the long-term loans range from 2.1 to 5.7 percent and the loans mature at various dates and in various amounts through 2013.



Pension loans, as permitted in Finland, consist mainly of borrowings from
pension insurance companies of a portion of amounts contributed for pensions during the year at specified interest rates. Principal payments on such loans are payable over 10 years. The Group may elect to borrow up to 40 percent of the total pension
premiums for the year. As of December 31, 2003, the interest rates on such pension loans are regulated by the Finnish government and range from 3.25 to 5.5 percent with a weighted average of 4.2 percent.



The Groups committed credit facilities (both used and unused),
amounting to 3.6 billion, are intended for working capital requirements and general corporate purposes as well as for a back-up of the commercial paper programs. Commitment fees of the committed facilities vary from 0.17 to 0.3 percent per
annum.



The Groups loans were collateralized by mortgages
totaling 178 million.



The following presents the
carrying amounts and estimated fair values under Finnish GAAP of the Groups long-term loans (including the current portion) as of December 31, 2003 and 2002:



|                                  |  |                  |  |                  |  |           |  |          
|--------------------------------- |  | ---------------- |  | ---------------- |  | --------- |  | ---------
|                                  |  | December 31,2003 |  | December 31,2002
|                                  |  | BookValue        |  | FairValue        |  | BookValue |  | FairValue
|                                  |  | ( in millions) 
|Bond loans                        |  | 2,816            |  | 2,950            |  | 2,860     |  | 3,099    
|Convertible bond loans            |  |                 |  |                 |  | 40        |  | 40       
|Loans from financial institutions |  | 720              |  | 687              |  | 1,388     |  | 1,313    
|Pension loans                     |  | 654              |  | 671              |  | 730       |  | 716      



(j)    Fair
value of financial instruments



Fair value of a financial
instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation or sale.



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UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The carrying amounts of cash in hand and at bank, current receivables and
current liabilities approximates fair value because of the short maturity of these instruments. Estimates of fair value for other of the Groups financial instruments have been made using the following methods and assumptions:



Other shares and holdings



The book value and fair value of other shares and holdings with a readily
determinable market value are disclosed in paragraph (I)(f). The fair values were determined based on quoted market prices. For other shares and holdings for which there is not a readily determinable market value, the book value and estimated fair
value is 167 million and 264 million, respectively, as of both December 31, 2003 and 2002.



Long-term loans



Fair value disclosures of the Groups long-term loans as of December 31, 2003 and 2002 are disclosed in paragraph (II)(i). Fair values of long-term
loans 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| | · |  | The fair value of fixed rate and market-based floating rate long-term loans is estimated using the expected future payments discounted at market interest rates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



Derivative financial instruments



Fair value disclosures for the Groups derivative
financial instruments as of December 31, 2003 and 2002 are presented in Note 21 to the consolidated financial statements. 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 of December 31.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| | · |  | Forward foreign exchange contracts are fair valued based on the quoted market rates as of December 31.
| | - |  | ------------------------------------------------------------------------------------------------------



| | · |  | Foreign currency options are fair valued based on quoted market rates as of December 31.
| | - |  | ----------------------------------------------------------------------------------------



| | · |  | 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 of December 31.
| | - |  | -------------------------------------------------------------------------------------



(k)    Segment information



In 2001, the Group reorganized its operating segments. Accordingly, the segment information for prior years has been
restated to conform to the current operating structure. As a result, the Groups operations are currently conducted in the following segments:



| | · |  | Paper Divisions:
| | - |  | ----------------



| | · |  | Magazine Papers
| | - |  | ---------------



| | · |  | Newsprint
| | - |  | ---------



| | · |  | Fine and Speciality Papers
| | - |  | --------------------------



| | · |  | Converting Division
| | - |  | -------------------



| | · |  | Wood Products Division
| | - |  | ----------------------



| | · |  | Other Operations
| | - |  | ----------------



The divisions integrated chemical pulp production into their financial reporting.



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Magazine Papers.    The magazine paper division
has been created from the former publication papers division. 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.    The newsprint division has also been created from the former publication papers division. The 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.    The division produces a complete range of coated and uncoated wood-free 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, siliconised release
materials and industrial wrappings.



Wood Products
Division.    This division includes sawmilling, plywood manufacturing, joinery 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 turnover of Other Operations
comprises only sales outside the Group.



The accounting
policies of the segments are these same as those for the Group as described in Accounting policies. All inter-segment sales prices are market-based, and all inter-segment sales are eliminated in consolidation.



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The tables below present information on segment results and capital
expenditures for the years ended December 31, 2003, 2002 and 2001. Total assets are not reported by segment as the Group does not produce such information internally.



|                           |  |                                                  |  |                                          |  |                         |  |      |  |      |  |      |  |      |  |       |  |      
|-------------------------- |  | ------------------------------------------------ |  | ---------------------------------------- |  | ----------------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ----- |  | -----
|                           |  | Turnover from externalcustomers                  |  | Turnover from other operating segments   |  | Operating profit       
|                           |  | Year ended December 31,                          |  | Year ended December 31,                  |  | Year ended December 31,
|                           |  | 2003                                             |  | 2002                                     |  | 2001                    |  | 2003 |  | 2002 |  | 2001 |  | 2003 |  | 2002  |  | 2001 
|                           |  | ( in millions)                                 
|Magazine papers            |  | 3,210                                            |  | 3,472                                    |  | 3,413                   |  | 110  |  | 105  |  | 136  |  | 153  |  | 225   |  | 598  
|Newsprint                  |  | 1,271                                            |  | 1,377                                    |  | 1,054                   |  | 24   |  | 4    |  | 3    |  | 54   |  | 162   |  | 211  
|Fine and speciality papers |  | 2,000                                            |  | 2,138                                    |  | 2,137                   |  | 278  |  | 311  |  | 225  |  | 241  |  | 359   |  | 336  
|Converting materials       |  | 1,331                                            |  | 1,497                                    |  | 1,440                   |  | 43   |  | 44   |  | 40   |  | 43   |  | 70    |  | 46   
|Wood Products              |  | 1,464                                            |  | 1,408                                    |  | 1,385                   |  | 88   |  | 81   |  | 78   |  | 29   |  | 37    |  | 27   
|Other Operations           |  | 672                                              |  | 583                                      |  | 489                     |  |     |  |     |  |     |  | 264  |  | 209   |  | 396  
|                           |  |                                                  |  |                                          |  |                         |  |      |  |      |  |      |  |      |  |       |  |      
|Total, Group               |  | 9,948                                            |  | 10,475                                   |  | 9,918                   |  | 543  |  | 545  |  | 482  |  | 784  |  | 1,062 |  | 1,614
|                           |  |                                                  |  |                                          |  |                         |  |      |  |      |  |      |  |      |  |       |  |      
|                           |  |                                                  | 
|                           |  | Depreciation, amortization and value adjustments |  | Share of results of associated companies |  | Capital expenditures(1)
|                           |  | Year ended December 31,                          |  | Year ended December 31,                  |  | Year endedDecember 31, 
|                           |  | 2003                                             |  | 2002                                     |  | 2001                    |  | 2003 |  | 2002 |  | 2001 |  | 2003 |  | 2002  |  | 2001 
|                           |  | ( in millions)                                 
|Magazine Papers            |  | 415                                              |  | 492                                      |  | 343                     |  |     |  |     |  |     |  | 162  |  | 188   |  | 1,556
|Newsprint                  |  | 184                                              |  | 196                                      |  | 93                      |  |     |  |     |  |     |  | 109  |  | 84    |  | 1,503
|Fine and speciality papers |  | 196                                              |  | 190                                      |  | 171                     |  |     |  |     |  |     |  | 206  |  | 153   |  | 391  
|Converting materials       |  | 57                                               |  | 59                                       |  | 56                      |  |     |  |     |  |     |  | 31   |  | 68    |  | 215  
|Wood Products              |  | 50                                               |  | 49                                       |  | 43                      |  |     |  |     |  | 1    |  | 91   |  | 69    |  | 137  
|Other Operations           |  | 24                                               |  | 32                                       |  | 38                      |  | 22   |  | 60   |  | 82   |  | 21   |  | 51    |  | 48   
|                           |  |                                                  |  |                                          |  |                         |  |      |  |      |  |      |  |      |  |       |  |      
|Total, Group               |  | 926                                              |  | 1,018                                    |  | 744                     |  | 22   |  | 60   |  | 83   |  | 620  |  | 613   |  | 3,850
|                           |  |                                                  |  |                                          |  |                         |  |      |  |      |  |      |  |      |  |       |  |      

---

|(1) |  | Amounts disclosed for capital expenditures include purchased businesses.
|--- |  | ------------------------------------------------------------------------



Turnover by geographic area for the years ended December 31, 2003, 2002 and 2001 is disclosed in Note 1 to the consolidated financial statements. Turnover
is attributed to each country based on the destination of the sale.



Tangible asset information by geographic area as of December 31, 2003 and 2002 is as follows:



|                         |  |                    |  |      
|------------------------ |  | ------------------ |  | -----
|                         |  | As of December 31,
|                         |  | 2003               |  | 2002 
|                         |  | ( in millions)   
|Finland                  |  | 4,567              |  | 4,731
|Germany                  |  | 1,153              |  | 1,230
|United Kingdom           |  | 412                |  | 407  
|France                   |  | 310                |  | 346  
|Austria                  |  | 250                |  | 273  
|Other European Union     |  | 69                 |  | 71   
|Other European countries |  | 77                 |  | 38   
|U.S. and Canada          |  | 618                |  | 723  
|Rest of world            |  | 390                |  | 434  
|                         |  |                    |  |      
|Total                    |  | 7,846              |  | 8,253
|                         |  |                    |  |      



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(l)    Related party transactions



The Group holds shares in an associated company which entitles it to receive
chemical pulp from this company. The Group holds a 47 percent interest in Oy Metsä-Botnia Ab (Metsä-Botnia), a joint venture between M-real Oyj (M-real) (formerly Metsä-Serla Oyj), 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 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 226 million, 265 million and 281 million in 2003, 2002 and 2001, respectively.



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 (i) Pohjolan Voima Oy, a Finnish power producer in which the Group holds
a 41.97 per cent equity interest and (ii) Kemijoki Oy, a Finnish hydropower producer in which the Group holds a 4.13 per cent 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 174 million, 140 million and 132 million in 2003, 2002 and 2001, respectively. 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 are priced at the prevailing market price.



Approximately 10 to 15 percent of the Groups research and development
activities is conducted by Oy KeskuslaboratorioCentralaboratorium Ab (the Finnish Pulp and Paper Research Institute or FPPRI), in which the Group is one of four corporate owners with a 38.65 percent 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. In addition, FPPRI provides the Group contract research services at cost.



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 percent 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
19 million, 18 million and 18 million in 2003, 2002 and 2001, respectively. 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 23 percent interest engaged in the procurement, processing and transport
of recovered paper. Aggregate raw material purchases from associated companies amounted to 14 million, 14 million and 13 million in 2003, 2002 and 2001, respectively. 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. Haindl has
a similar arrangement concerning recovered paper which is purchased from Austria Paper Recycling G.m.b.H., a company in Austria in which the Group owns a 33 percent equity interest. The aggregate recovered paper purchases in Austria amounted to
11 million in 2003.



The Group is entitled to borrow
amounts from its pension funds. As of December 31, 2003 and 2002, the Groups long-term borrowings from its pension funds were 167 and 159, respectively. Interest expense associated with such borrowings amounted to 5 million
in 2003, 6 million in 2002 and 8 million in 2001.



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(m)    Commitments and contingencies



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. As a result of the investigation, several class action suits have been brought against UPM-Kymmene Corporation, Raflatac Inc. and other labelstock producers in the
United States.



Except for the proceedings described above and
as disclosed in note 24, 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.



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 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 amounts of future payments by UPM-Kymmene Corporation on behalf of its subsidiaries under these guarantees are disclosed in note 21 to the financial
statements under the Other guarantees on own commitments 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
the Group on behalf of these parties under these guarantees are disclosed in note 21 to the financial statements under the Guarantees 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 8 million and 31 million as at 31 December 2003 and 2002, respectively, and they are included in the amounts disclosed in note 21 to the financial statements under
the Other Commitments caption.



(n)    Other
accounting policies and disclosures



Principal
activities



UPM-Kymmene is a global forest industry group
engaged in the production of paper, with an emphasis on the manufacture and sale of printing and writing papers. The Group is significantly vertically integrated with operations that are organized through five divisions: Magazine Papers Division,
Newsprint Division, Fine and Speciality Papers Division, Converting Division and Wood Products Division. The Groups other operations include real estate, logistics, forest and energy.



The Groups activities are centered on the European Union countries and
North America, with production facilities in 16 countries.



Use of estimates



The preparation of financial
statements under both Finnish GAAP and U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses in the
reporting periods. Accounting estimates have been employed in these financial statements to determine reported amounts, including realizability of certain assets,



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



useful lives of tangible and intangible assets, income taxes and others. Actual results may
differ from the estimates used in the financial statements.



Turnover (revenue) recognition



Turnover is
recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price to the customer is fixed and determinable and collectibility is reasonably assured. Distribution costs are classified
as costs and expenses in the consolidated profit and loss account.



Research and development



Total costs for
research and development were 48 million, 46 million and 45 million in 2003, 2002 and 2001, respectively.



Tangible assets



Ordinary repairs and maintenance are generally charged to expense during the financial period in which they are incurred. However, significant renewals
and betterments are capitalized as other capitalized expenditures and depreciated over their expected useful lives. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation and, as appropriate, any
related revaluation from the accounting records with any resulting gain or loss reflected in the profit and loss statement.



Impairment of long-lived assets, investments and goodwill



The Group reviews all long-lived assets and investments for potential impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the fair value of the asset; fair value is principally determined with reference to future net
cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized as a value adjustment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the
assets.



The Group continually evaluates the carrying value of
goodwill. An impairment is recognized as a value adjustment when the expected future operating cash flows derived from the underlying businesses are less than the carrying value of the goodwill.



Assets to be disposed of



Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. As appropriate, fair value estimates incorporate adjusted depreciable lives of assets to be disposed of to the extent that depreciation and other operating costs will be recovered from remaining operating cash flows.



Stocks



The Group uses the first-in, first-out method of determining cost for
substantially all stocks. To minimize the risk of excess or obsolete stock, the Group monitors stock levels and expected usage on a periodic basis and records write-downs as required.



Receivables



Trade receivables are recorded net of the following allowances for doubtful accounts:



|                  |  |                              |  |           |  |            |  |                       
|----------------- |  | ---------------------------- |  | --------- |  | ---------- |  | ----------------------
|                  |  | Balance at Beginning of Year |  | Additions |  | Deductions |  | Balance at End of Year
|                  |  | ( in millions)             
|December 31, 2003 |  | 10                           |  | 7         |  | 13         |  | 4                     
|December 31, 2002 |  | 7                            |  | 13        |  | 10         |  | 10                    
|December 31, 2001 |  | 5                            |  | 7         |  | 5          |  | 7                     



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Receivables from associated companies are recorded net of the following value
adjustments:



|                  |  |                              |  |           |  |            |  |                       
|----------------- |  | ---------------------------- |  | --------- |  | ---------- |  | ----------------------
|                  |  | Balance at Beginning of Year |  | Additions |  | Deductions |  | Balance at End of Year
|                  |  | ( in millions)             
|December 31, 2003 |  | 5                            |  |          |  | 3          |  | 2                     
|December 31, 2002 |  | 44                           |  |          |  | 39         |  | 5                     
|December 31, 2001 |  | 51                           |  |          |  | 7          |  | 44                    



Deferred taxes



A valuation allowance is established as a reduction of
any deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized.



The Group has not recognized deferred tax liabilities in respect of undistributed earnings of subsidiaries located in Finland and in the other European
Union countries since, in most cases, such earnings can be transferred to the parent company without tax consequences. In addition, the Group does not provide deferred income taxes on undistributed earnings of other foreign subsidiaries because such
earnings are intended to be permanently reinvested in those operations, except in specific situations where the Group has elected to distribute earnings of these other foreign subsidiaries.



Cash equivalents



For purposes of reporting cash flows, the Group considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2003 and 2002, time deposits, including certificates of deposit, included in cash in hand and at bank were 268 million and 280
million, respectively.



Dividends



Under the Finnish Companies Act, dividends are limited to the lesser of the
Companys and the Groups distributable funds available at the end of the preceding financial year and are further subject to additional limitations.



Dividends per share approved by the shareholders and paid during 2003, 2002 and 2001 (in respect of the 2002, 2001 and 2000 financial years,
respectively) amounted to 0.75, 0.75 and 0.75, respectively.



Other current liabilities



As of December 31, 2003 and 2002, 153 million and 257 million of commercial paper was included in other current liabilities, respectively.



Derivative financial instruments



As explained further in Note 21 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 contain varying degrees of off-balance sheet risk whereby changes in market value may be in excess of the amounts recognized in the consolidated balance sheets. Additionally, these 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.



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Guarantees



Guarantees, as disclosed in Note 21 to the consolidated financial
statements, are made in the ordinary course of business on behalf of affiliated companies and others in certain limited circumstances. These guarantees are entered into with financial institutions and other credit grantors and generally obligate the
Group to make payment in the event of a default by the borrower. The guarantees have off-balance sheet credit risk which represents the accounting loss that would be recognized at the reporting date if the guaranteed parties failed to perform
completely as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that no amounts could be recovered from other parties.



Environmental costs



Environmental expenditures that pertain to current operations or relate to
future revenues are expensed or capitalized in accordance with the Groups accounting policies. Expenditures that result from remediation of an existing condition caused by past operations, and do not contribute to current or future revenues,
are expensed. Environmental accruals are recorded based on current interpretations of environmental laws and regulations when it is probable that the liability has been incurred and the amount of such liability can be reasonably estimated. Amounts
accrued are not discounted and do not include third-party recoveries.



Concentrations of 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, but generally no collateral is required. In some circumstances, the Group has obtained credit insurance for certain qualified customers.



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 confirm with the current year presentation.



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(o)    New accounting standards



In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (FAS 149). FAS 149 generally improves financial reporting for derivative instruments by requiring that contracts with comparable characteristics be accounted for similarly and by clarifying when a
derivative contains a financing component that warrants special reporting in the statement of cash flows. The guidance in SFAS 149 was effective prospectively for contracts entered into or modified and for hedging relationships designated after June
30, 2003. The Group has evaluated the impact of this statement and does not expect it to have a material impact on the financial statements.



In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (FAS 150). The
statement establishes standards on how to classify and measure certain financial instruments with characteristics of both liabilities and equity and requires additional disclosures regarding alternative ways of settling instruments and the capital
structure of entitiesall of whose shares are mandatory redeemable. The provisions of FAS 150 were effective for all financial instruments entered into or modified after May 31, 2003, and otherwise was effective the first interim period
beginning after June 15, 2003. However, the guidance applying to mandatory redeemable noncontrolling interests has been deferred. The Group does not expect this statement to have a material impact on the financial statements.



In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities Revised. FIN 46R modifies the scope exceptions provided in FASB Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN 46). Entities would be required to replace
FIN 46 provisions with FIN 46R provisions for all newly created post-January 31, 2003 entities as of the end of the first interim or annual reporting period ending after March 15, 2004. The provisions of FIN 46, or the early adoption of the
provisions of FIN 46R, are effective at the end of the first interim or annual reporting period ending after December 15, 2003 for Special Purpose Entities (SPEs) created prior to February 1, 2003. For all non-SPEs created prior to
February 1, 2003, entities will be required to adopt FIN 46R at the end of the first interim or annual reporting period ending after March 15, 2004. The Group is currently assessing the impact of FIN 46 on its financial position and results of
operations.



In December 2003, the Staff of the Securities and
Exchange Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition, which supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104s primary purpose
is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. Additionally,
SAB 104 rescinds the SECs Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. EITF 00-21 was effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The Group has evaluated the impact of this statement and does not expect it to have a material impact on the financial statements.



(p)    Subsequent events



During the first quarter in 2004, the Company terminated its agreements
concerning the sale of trade receivables to third parties (asset securitization), which increased the Companys debt by 179 million.



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##### Table of Contents

UPM-KYMMENE CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



24.    Events (Unaudited) subsequent to the date of the Independent
Auditors Report



On March 24, 2004, the General
Meeting of shareholders resolved to authorize the Board of Directors to increase the 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 an aggregate maximum of 104,715,000 shares and to maximum aggregate increase of the share capital of 178,015,500. In addition, the shareholders authorized purchases of the
Companys own shares in 2004 by a minimum of 100 and a maximum 26,178,900 shares.



On March 24, 2004, the shareholders approved the Board of Directors proposal for a dividend of 0.75 per share. The dividend, totaling 393 million, was paid on April 5, 2004.



In May 2004, the Company received an EU Commission Statement of Objection
concerning alleged antitrust activities in the market for plastic industrial sacks. UPM manufactured plastic industrial sacks until December 2000 when UPM sold the PE films and sacks business of UPMs Converting Materials Division to the German
company, Rheinische Kunststoffwerke GmbH. According to the Statement of Objection, the manufacturers of plastic industrial sacks have been involved in allocating markets and fixing prices. UPM will respond to the Statement of Objection as requested
by the Commission.



UPM has directed the Companys 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 has not comported with applicable competition laws. During 2004, UPM and its subsidiaries have been cooperating with competition law authorities in the European Union, Canada, and the United States. UPM has
received conditional immunity from competition authorities in the European Commission, several European Union member states, and Canada with respect to certain conduct UPM disclosed to them. In the United States, the Antitrust Division of the U.S.
Department of Justice is conducting criminal investigations into alleged anticompetitive conduct in the labelstock and magazine paper industries. UPM is cooperating full with the authorities and their ongoing investigations, and may yet be subject
to additional investigations in other parts of the world.



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 flows. At
this time, however, and in light of UPMs cooperation with authorities, and due to the considerable uncertainties associated with these matters, it is currently not possible for UPM to estimate any potential liability. UPM will continue to
consider the need to establish loss provisions in light of further developments.



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