PLUM CREEK TIMBER CO INC
S-3, 1999-08-04
REAL ESTATE INVESTMENT TRUSTS
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<PAGE>   1

     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1999

                                                  REGISTRATION NO 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                    FORM S-3
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------

                        PLUM CREEK TIMBER COMPANY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                   <C>                           <C>
              DELAWARE                            2411                           91-1912863
  (STATE OR OTHER JURISDICTION OF     (PRIMARY STANDARD INDUSTRIAL            (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)     CLASSIFICATION CODE NUMBER)          IDENTIFICATION NUMBER)

    999 THIRD AVENUE, SUITE 2300                                            PAUL A. SWEGLE, ESQ.
  SEATTLE, WASHINGTON, 98104-4096                                              DIRECTOR, LAW
           (206) 467-3600                                               999 THIRD AVENUE, SUITE 2300
 (ADDRESS, INCLUDING ZIP CODE, AND                                     SEATTLE, WASHINGTON 98104-4096
  TELEPHONE NUMBER, INCLUDING AREA                                             (206) 467-3600
  CODE, OF REGISTRANT'S PRINCIPAL                                   (NAME, ADDRESS, INCLUDING ZIP CODE,
         EXECUTIVE OFFICES)                                         AND TELEPHONE NUMBER INCLUDING AREA
                                                                        CODE, OF AGENT FOR SERVICE)
</TABLE>

                            ------------------------

<TABLE>
<S>                                   <C>                           <C>
                                               COPIES TO:
           GREGG A. NOEL                                                      PAUL C. PRINGLE
   SKADDEN, ARPS, SLATE, MEAGHER                                              BROWN & WOOD LLP
             & FLOM LLP                                                    555 CALIFORNIA STREET
 300 SOUTH GRAND AVENUE, SUITE 3400                                   SAN FRANCISCO, CALIFORNIA 94104
   LOS ANGELES, CALIFORNIA 90071                                               (415) 772-1200
           (213) 687-5000
</TABLE>

                            ------------------------

        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
 As soon as practicable after the effective date of the Registration Statement.

     If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
other than securities being offered only in connection with dividend or interest
reinvestment plans, please check the following box. [ ]

     If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

     If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

                        CALCULATION OF REGISTRATION FEE

<TABLE>
<S>                        <C>                     <C>                     <C>                     <C>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
      TITLE OF EACH                                   PROPOSED MAXIMUM        PROPOSED MAXIMUM
   CLASS OF SECURITIES          AMOUNT TO BE          AGGREGATE PRICE        AGGREGATE OFFERING          AMOUNT OF
    TO BE REGISTERED             REGISTERED             PER UNIT(1)               PRICE(1)            REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
  $.01 per share.........        7,000,000                 $29.75               $208,250,000              $57,894
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Pursuant to Rule 457(f) under the Securities Act of 1933, as amended, this
    amount represents the maximum aggregate offering price by using the average
    of the high and low prices for shares of the Registrant as reported by the
    New York Stock Exchange on August 2, 1999.

     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

Issued August 4, 1999

                                7,000,000 Shares

                        Plum Creek Timber Company, Inc.

                                  COMMON STOCK

                           -------------------------

   PLUM CREEK TIMBER COMPANY, INC. IS OFFERING 7,000,000 SHARES OF ITS COMMON
                                     STOCK.

                           -------------------------

   OUR COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE AND THE PACIFIC
 EXCHANGE UNDER THE SYMBOL "PCL". ON AUGUST   , 1999, THE CLOSING PRICE OF OUR
        COMMON STOCK ON THE NEW YORK STOCK EXCHANGE WAS $     PER SHARE.

                           -------------------------

                 INVESTING IN THE COMMON STOCK INVOLVES RISKS.
                    SEE "RISK FACTORS" BEGINNING ON PAGE 13.

                           -------------------------

                          PRICE $            PER SHARE

                           -------------------------

<TABLE>
<CAPTION>
                                                                 UNDERWRITING
                                                     PRICE TO    DISCOUNTS AND    PROCEEDS TO
                                                      PUBLIC      COMMISSIONS       COMPANY
                                                     --------    -------------    -----------
<S>                                                  <C>         <C>              <C>
Per Share..........................................  $            $                $
Total..............................................  $            $                $
</TABLE>

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

We have granted the underwriters the right to purchase up to an additional
shares to cover over-allotments. The underwriters expect to deliver the shares
to purchasers on                     , 1999.

                           -------------------------

                           Joint Bookrunning Managers

MORGAN STANLEY DEAN WITTER                                   MERRILL LYNCH & CO.

                    , 1999.
<PAGE>   3

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                       PAGE
                                       ----
<S>                                    <C>
Prospectus Summary...................    3
Risk Factors.........................   13
Forward-Looking Statements...........   18
Use of Proceeds......................   18
Price Range of Common Stock and
  Distribution Policy................   19
Capitalization.......................   20
Unaudited Pro Forma Condensed
  Consolidated Financial
  Statements.........................   21
Selected Historical Financial and
  Operating Data.....................   31
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations......................   33
</TABLE>

<TABLE>
<CAPTION>
                                       PAGE
                                       ----
<S>                                    <C>
The REIT Conversion..................   46
Business.............................   47
Federal and State Regulations........   60
Management...........................   64
Principal Stockholders...............   66
Material Federal Income Tax
  Consequences.......................   68
Description of Capital Stock.........   80
Underwriters.........................   85
Legal Matters........................   86
Experts..............................   86
Where You Can Find More
  Information........................   86
</TABLE>

                                        2
<PAGE>   4

                               PROSPECTUS SUMMARY

     You should read the following summary with the more detailed information
about us and our financial statements, including the notes to those financial
statements, included in this prospectus and in the documents incorporated by
reference in this prospectus. When we refer to "we," "us" or "our" in this
prospectus, we mean Plum Creek Timber Company, Inc. and, where appropriate, its
consolidated and unconsolidated subsidiaries and its predecessor, Plum Creek
Timber Company, L.P. When we refer to the "corporation" in this prospectus, we
mean Plum Creek Timber Company, Inc. and its consolidated subsidiaries. Our
manufacturing operations are conducted through unconsolidated subsidiaries.
Unless this prospectus states otherwise, all information assumes that the
underwriters do not exercise the over-allotment option.

                        PLUM CREEK TIMBER COMPANY, INC.

     We are the fifth largest owner of private timberlands in the United States
with a forest resource base of approximately 3.3 million acres. Our diverse
timber holdings are located in four distinct regions and are strategically
situated near end-markets for our products. As of December 31, 1998, we estimate
that our timber portfolio contained approximately 36.2 million cunits, as
summarized below. A cunit is a standard unit of measurement of volume equal to
one hundred cubic feet of timber.

<TABLE>
<CAPTION>
                                              ACRES         CUNITS
             REGION (STATES)                 (OWNED)     (IN MILLIONS)      PRIMARY SPECIES
             ---------------                ---------    -------------    --------------------
<S>                                         <C>          <C>              <C>
Cascade Region............................    307,000         5.0             Douglas-fir
  Washington                                                                    Hemlock
Rocky Mountain Region.....................  1,586,000        12.3             Douglas-fir
  Montana                                                                        Larch
  Idaho                                                                           Pine
Northeast Region..........................    905,000        13.8                Spruce
  Maine                                                                           Firs
                                                                                 Birch
                                                                                 Maple
Southern Region...........................    525,000         5.1         Southern Yellow Pine
  Louisiana
  Arkansas
</TABLE>

     Our disciplined growth strategy has allowed us to expand and diversify our
timber holdings, as well as increase our cash flow. Over the last decade, we
have increased our timber holdings from approximately 1.4 million acres to
approximately 3.3 million acres. For the same period, our inventory of standing
timber increased from approximately 19.4 million cunits to approximately 36.2
million cunits. In addition, our earnings before interest, taxes, depreciation,
depletion and amortization grew from $97 million in 1990 to $210 million in
1998. Earnings before interest, taxes, depreciation, depletion and amortization
does not take into account capital expenditures, does not represent cash
provided by operating activities in accordance with generally accepted
accounting principles and does not indicate the cash available to fund cash
needs, including distributions to stockholders.

                                  OUR INDUSTRY

     The timber industry provides raw material and conducts resource management
activities for the paper and forest products industry, including the planting,
fertilizing, thinning, and cutting of trees and the marketing of logs. Logs are
marketed and sold either as sawlogs to lumber and other wood products
                                        3
<PAGE>   5

manufacturers or as pulplogs to pulp and paper manufacturers. The timber
industry possesses several unique characteristics that distinguish it from the
broader paper and forest products industry which we believe make timber an
attractive asset class, including the following:

     - Renewable -- Timber is a growing and renewable resource that, if properly
       managed, increases in value as it grows and regenerates over time. Larger
       diameter trees are more valuable than smaller trees because they may be
       converted to higher value end-use products such as lumber and plywood.

     - Predictable and Improving Growth Rates -- Predictable biological growth
       is an attractive feature of timberland assets because it contributes to
       predictable, long-term harvest planning. The development and application
       of intensive forest management practices continue to improve biological
       growth rates.

     - Harvest Flexibility -- Timberland owners have flexibility to increase
       their harvests when prices are high and decrease their harvests when
       prices are low, allowing timberland owners to maximize the long-term
       value of their growing resource base.

     - Historical Real Price Appreciation -- Due to growing demand combined with
       limitations on supply caused by environmental restrictions, urban sprawl
       and overcutting, prices for Douglas-fir, Ponderosa Pine and Southern
       Yellow Pine timber have exceeded inflation by 2% to 4% per year, from
       1967 to 1997.

                              OUR GROWTH STRATEGY

     Our growth strategy is guided by specific operating objectives, including
maximizing the value of our current timberlands through intensive forest
management, expanding our resource base through acquisitions and maintaining our
leadership role in environmentally responsible resource management. To support
our growth strategy, we have made selective investments in manufacturing
facilities that help to create competitive local markets for our timber. These
facilities produce a variety of value-added lumber and panel products. To
further support our growth strategy, we recently converted from a master limited
partnership to a real estate investment trust or REIT. Our growth strategy
includes the following key elements:

     FOCUS ON MAXIMIZING THE VALUE OF OUR RESOURCE BASE THROUGH INTENSIVE
MANAGEMENT OF OUR TIMBERLANDS. We view our timber resource base as a renewable
asset with substantial inherent value. We seek to manage our timberlands in a
manner that optimizes the balance among current cash flows, the biological
growth of our timber, which averages between 2% and 12% annually, and prudent
environmental management. Our harvest management approach employs advanced
forest management practices, including the use of a computerized timber
inventory system, thinning and fertilization, and the development and use of
genetically improved seedlings.

     PURSUE ACQUISITIONS OF HIGH QUALITY TIMBER ASSETS. The United States timber
market is highly fragmented. We believe that, due to the desire among some
forest product companies to sell their timberland assets and the difficulties
faced by some small timberland owners in efficiently managing their timberlands,
there will continue to be numerous timberland acquisition opportunities. We
believe we are well positioned to compete for high quality timberland assets
because:

     - We are an attractive strategic partner for integrated forest product
       companies seeking to sell their timberlands because we do not compete
       with their pulp or paper manufacturing operations and we are willing to
       enter into long-term supply agreements;

     - We can structure acquisitions on a tax-efficient basis through the
       issuance of common stock, limited partnership interests in our operating
       partnership, or installment notes, giving sellers the ability to defer
       some or all of the taxes otherwise payable upon a sale;
                                        4
<PAGE>   6

     - The geographic reach of our operations enhances our awareness of new
       acquisition opportunities and our knowledge of environmental concerns,
       market dynamics, timber productivity and other factors important in
       valuing timberlands and operations in each region; and

     - Our reputation for environmental leadership makes us attractive to
       sellers concerned with continued responsible environmental resource
       management.

     Since the beginning of 1990, we have established a successful acquisition
record having acquired 867,000 acres in the Rocky Mountain Region, 905,000 acres
in the Northeast Region and 529,000 acres, plus approximately 9,000 leased
acres, in the Southern Region. Each of these acquisitions has been accretive to
our cash flow, and together they have enhanced our operating flexibility and
reduced our exposure to regional economic fluctuations.

     REALIZE THE VALUE OF SELECTED PROPERTIES THROUGH SALE OR EXCHANGE. In
addition to intensively managing our timberlands, we continually review our
timberland portfolio to identify properties that may have higher and better uses
than as commercial timberland. At this time, we have identified approximately
150,000 acres of properties located in recreational areas or near expanding
population centers that may be better suited for conservation, residential or
recreational purposes. We have transferred approximately 20,000 acres of what we
call "higher and better use properties" to an unconsolidated subsidiary. Our
unconsolidated subsidiary expects to sell or exchange these properties within
the next five years. Our strategy for the remaining 130,000 acres is to realize
the value of these properties, through sales or exchanges, over the next ten to
fifteen years. Our on-going review process evaluates properties based on a
number of factors such as proximity to population centers and major
transportation routes, and the presence of special ecological features. In
addition, we may occasionally exchange timberlands which have high environmental
or other public values for lands of equal value that are more suitable for
commercial timber management.

     MAINTAIN ENVIRONMENTAL LEADERSHIP. We believe that environmentally sound
management practices contribute to our growth and value by providing greater
predictability in the management of our assets. Our forestry and mill practices
follow a set of environmental principles aimed at the sound management of all
natural resources, including soils, air, watersheds, fisheries and wildlife
habitats. These principles are reflected in our habitat planning efforts. In
1996, we implemented a comprehensive habitat conservation plan covering
approximately 170,000 acres of our timberlands in the Cascade Region. We are
currently developing a habitat conservation plan for the bull trout and other
native fish species covering approximately 1.7 million acres in Montana, Idaho
and Washington, as well as a plan for the red-cockaded woodpecker covering
approximately 260,000 acres in Arkansas and Louisiana.

                              THE REIT CONVERSION

     On July 1, 1999, in order to better align our legal structure with our
long-term growth objectives, we converted from a master limited partnership to a
REIT. The ownership and management of our timberlands is now conducted through
an operating partnership, which is wholly owned by us. We believe that our new
structure has the following advantages:

     - We have a greater capacity to compete for acquisitions due to our ability
       to structure acquisitions on a tax efficient basis, including through the
       issuance of our common stock and limited partnership interests in our
       operating partnership;

     - We expect to have a lower cost of capital than we did as a master limited
       partnership;

     - We can attract a broader base of investors as a REIT than we could as a
       master limited partnership;

     - We maintain substantially all of the advantages of single-layer taxation
       enjoyed under our prior master limited partnership structure with respect
       to the treatment of taxable income; and
                                        5
<PAGE>   7

     - Unlike the treatment of distributions for most REITs, we anticipate that
       a significant portion of the distributions to our stockholders will
       continue to be taxable to the stockholders at long-term capital gains
       rates for Federal income tax purposes. The maximum Federal long-term
       capital gains rate for individuals is 20%.

     In order to comply with the asset and income requirements for qualification
as a REIT under the Internal Revenue Code, we have transferred our manufacturing
and marketing operations, including our sawmills, plywood mills and a medium
density fiberboard facility, to several unconsolidated subsidiaries. Two of our
unconsolidated subsidiaries purchase standing timber from our operating
partnership and its subsidiaries. Our unconsolidated subsidiaries sell some of
this purchased timber to mills owned by third-parties and convert the remaining
logs to lumber, plywood, and other wood products, including medium density
fiberboard. We believe the proximity of the manufacturing facilities to our
timberlands increases the value of our timberlands.

     Provisions of the Internal Revenue Code limit the voting stock that a REIT
may own in other corporations. As a result, members of our senior management
have purchased all of the voting stock of our unconsolidated subsidiaries. The
REIT is entitled to approximately 99% of the dividends from these corporations.
Our unconsolidated subsidiaries are not consolidated for accounting purposes and
are subject to income tax at the corporate level of approximately 40%. The
discussions in this prospectus related to our manufacturing and marketing
activities, as well as our efforts to sell or exchange "higher and better use
properties," refer to the operations of our unconsolidated subsidiaries.

     Had this structure been in place in fiscal 1998, the pro forma effect on
our operating results would have been a reduction in revenues of approximately
$466.5 million with an increase in net income of approximately $14.2 million.
The reduction in revenues is due to the transfer of our manufacturing operations
to unconsolidated subsidiaries. The increase in net income is primarily due to
the recording of a tax benefit related to the combined book loss of the
unconsolidated subsidiaries and the elimination of nonrecurring REIT conversion
costs. See "Unaudited Pro Forma Condensed Consolidated Financial Statements."
The chart below summarizes our current structure:
                             [ORGANIZATIONAL CHART]
                                        6
<PAGE>   8

                              RECENT DEVELOPMENTS

     On July 20, 1999, we reported second quarter earnings of $22.5 million, or
$0.30 per unit, compared to $16.1 million, or $0.17 per unit for the same period
in 1998. Earnings for the second quarter of 1998 included a charge of $8.8
million, or $0.19 per unit, related to our long-term incentive program. Revenues
for the second quarter of 1999 were $184.3 million compared to $171.8 million
for the second quarter of 1998. Earnings for the six-month period ending June
30, 1999 totaled $40.4 million, or $0.50 per unit on revenues of $362.6 million,
compared to earnings of $37.4 million, or $0.45 per unit, on revenues of $336.1
million for the same period in 1998. We also announced that our second quarter
distribution to stockholders will be $0.57 per share and will be paid on August
26, 1999 to stockholders of record as of August 13, 1999.

     Our second quarter 1999 Northwest lumber prices increased by 12% over
second quarter 1998 prices and our plywood prices during the second quarter
improved by 16% over second quarter 1998 prices. These price improvements are
primarily due to the healthy United States economy, which has resulted in strong
building and repair and remodeling activity. Second quarter 1999 prices for
domestic and export logs in our Cascade Region were higher than second quarter
1998 prices, primarily due to strong demand from lumber and plywood
manufacturers. Prices for sawlogs in our Southern Region during the second
quarter of 1999 were 21% below second quarter 1998 prices and prices for pulp
logs in our Southern Region during the second quarter were 9% lower than second
quarter 1998 prices. The sawlog and pulp log price declines were primarily due
to an abundant supply of logs throughout the Southern Region as a result of
favorable harvesting conditions. Second quarter 1999 prices for medium density
fiberboard, Southern lumber and Rocky Mountain Region logs were comparable to
second quarter 1998 prices.
                           -------------------------

     Our principal executive offices are located at 999 Third Avenue, Suite
2300, Seattle, Washington 98104-4096, and our telephone number is (206)
476-3600.
                                        7
<PAGE>   9

                                  THE OFFERING

     The following summarizes our offering of common stock. We are presenting
the information as if the underwriters do not exercise the over-allotment
option.

Common stock offered.............    7,000,000 shares

Common stock outstanding after
the offering.....................    70,456,575 shares

Use of proceeds..................    Repayment of a portion of outstanding debt.

New York Stock Exchange and
Pacific Exchange Symbol..........    "PCL"

Risk Factors.....................    For a discussion of risks that you should
                                     consider, see "Risk Factors" beginning on
                                     page 13. These risks include financial,
                                     operational, regulatory and other risks
                                     associated with our business.
                                        8
<PAGE>   10

                SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

     The following table sets forth, for the periods and at the dates indicated,
summary combined historical financial data for Plum Creek Timber Company, L.P.,
summary unaudited pro forma condensed consolidated financial data for Plum Creek
Timber Company, Inc. after giving effect to the conversion of the partnership to
a REIT, and summary unaudited pro forma condensed consolidated financial data
for the corporation as adjusted after giving effect to the conversion and to the
equity offering and the related use of proceeds for the repayment of debt. The
summary combined historical financial data for each of the three years in the
period ending December 31, 1998 are derived from, and should be read in
conjunction with, the audited financial statements included elsewhere in this
prospectus or incorporated herein by reference. The related combined historical
financial data for the three month periods ended March 31, 1998 and 1999 is
derived from the historical unaudited combined financial statements of the
partnership included elsewhere in this prospectus or incorporated herein by
reference which, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the unaudited interim periods. Interim results may not be
indicative of results that may be expected for any other interim period or for
the year as a whole. The summary unaudited pro forma condensed consolidated
financial information is derived from and should be read in conjunction with the
pro forma financial information contained elsewhere in this prospectus. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements." The pro forma
results of operations are not necessarily indicative of results of operations in
the future.

<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31,             THREE MONTHS ENDED MARCH 31,
                               -----------------------------------------    -----------------------------
                                                                  PRO                               PRO
                                                                 FORMA                             FORMA
                               1996(1)      1997     1998(2)    1998(2)       1998       1999      1999
                               --------   --------   --------   --------    --------   --------   -------
                                       (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AND SHARE AMOUNTS)
<S>                            <C>        <C>        <C>        <C>         <C>        <C>        <C>
INCOME STATEMENT DATA:
Revenues.....................  $633,741   $725,571   $699,370   $232,825(3) $164,325   $178,221   $49,067(3)
Costs of Goods Sold(4).......   429,897    503,259    505,366     73,904     118,644    129,111    14,212
Depreciation, Depletion, and
  Amortization...............    56,945     70,243     69,287     44,307      16,383     18,484    11,280
Operating Income.............   164,988    173,281    141,087    139,121      36,075     38,667    31,110
Interest Expense -- Net......    48,850     59,251     59,580     41,921      14,735     18,136    13,850
Income Before Income Taxes
  and Equity Earnings of
  Unconsolidated Subsidiaries
  and Preferred Stock
  Dividends..................   224,990    111,776     75,953     98,282      21,307     18,036    17,638
Provision for Income Taxes...     1,391         80        517                     27        174
Equity Earnings (Loss) of
  Unconsolidated Subsidiaries
  and Preferred Stock
  Dividends(5)...............                                     (8,692)                           2,101
General Partner Interest.....    27,777     31,918     33,713                  8,099      8,534
Net Income Allocable to
  Unitholders/Stockholders...   195,822     79,778     41,723     89,590      13,181      9,328    19,739
Net Income Per Unit/Per
  Share......................      4.71       1.72       0.90       1.41        0.28       0.20      0.31
Cash Distributions Declared
  per Unit...................      2.02       2.20       2.28                   0.57       0.57
Weighted Average Units/Shares
  Outstanding................    41,620     46,323     46,323     63,457      46,323     46,323    63,457
CASH FLOW DATA:
EBITDA(6)....................  $221,933   $243,524   $210,374   $209,509    $ 52,458   $ 57,151   $56,745
Capital Expenditures(7)......    19,280     28,348     64,340     64,340      12,098      7,438     7,438
</TABLE>

                                        9
<PAGE>   11

<TABLE>
<CAPTION>
                             AT YEAR END DECEMBER 31,                            AT MARCH 31,
                       ------------------------------------   --------------------------------------------------
                                                                                        PRO FORMA     PRO FORMA
                          1996         1997         1998         1998         1999         1999      AS ADJUSTED
                       ----------   ----------   ----------   ----------   ----------   ----------   -----------
                                                        (DOLLARS IN THOUSANDS)
<S>                    <C>          <C>          <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Working Capital......  $  152,988   $  158,262   $  129,587   $  151,416   $  124,550   $   78,941
Total Assets.........   1,336,434    1,300,897    1,438,243    1,290,004    1,423,490    1,228,572(9)
Total Debt...........     780,800      763,400      961,008      763,400      960,905      793,305(9)           (10)
Partners' Capital/
  Stockholders'
  Equity.............     491,648(8)    470,337     405,415      457,630      387,820      399,376             (10)
</TABLE>

<TABLE>
<CAPTION>
                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                                      PRO FORMA
                                                              1996    1997    1998      1998
                                                              ----    ----    ----    ---------
<S>                                                           <C>     <C>     <C>     <C>
OPERATING DATA:
Northwest Timberlands Fee Timber Harvested (MMBF)(11).......  577     512     495        495
Northeast Timberlands Fee Timber Harvested (M Tons).........                  131        131
Southern Timberlands Fee Timber Harvested (M Cunits)........  127     799     764        764
Lumber Production (MMBF)....................................  461     582     635        635
Plywood Production (MMSF) ( 3/8" basis)(12).................  297     312     323        323
MDF Production (MMSF) ( 3/4" basis).........................  113     127     132        132
</TABLE>

<TABLE>
<CAPTION>
                                                                                        THREE MONTHS
                                                        YEAR ENDED DECEMBER 31,        ENDED MARCH 31,
                                                     ------------------------------   -----------------
                                                     1996(1)      1997     1998(2)     1998      1999
                                                     --------   --------   --------   -------   -------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                  <C>        <C>        <C>        <C>       <C>
SEGMENT DATA:(13)
Northern Resources
  Revenues.........................................  $196,427   $158,535   $131,625   $28,534   $45,021
  EBITDA(6)........................................   151,784    128,996    103,431    26,432    36,404
  Operating Income.................................   119,767     98,792     73,715    19,479    27,644
Southern Resources
  Revenues.........................................     7,115     54,780     68,800    14,824    12,269
  EBITDA(6)........................................    11,046     72,047     69,098    15,668     9,098
  Operating Income.................................     8,149     54,313     53,568    12,133     6,074
Lumber
  Revenues.........................................   239,252    294,839    281,614    66,815    79,481
  EBITDA(6)........................................    30,172     46,181     15,704     6,269     7,705
  Operating Income.................................    18,596     34,667      2,599     3,178     3,555
Panel
  Revenues.........................................   138,947    149,618    154,640    39,625    40,286
  EBITDA(6)........................................    14,329     18,466     24,958     5,231     7,613
  Operating Income.................................     5,305      8,462     14,360     2,449     4,951
Land Sales
  Revenues.........................................    42,324     17,884     32,813     1,321     1,164
  EBITDA(6)........................................    35,434     13,963     26,598     1,155       731
  Operating Income.................................    35,434     13,963     26,598     1,155       731
Other
  Revenues.........................................     9,676     49,915     29,878    13,206
  EBITDA(6)........................................    (1,526)      (474)    (1,973)      428
  Operating Income.................................    (1,682)    (1,152)    (2,247)      406
</TABLE>

- -------------------------

 (1) Included in 1996 results of operations was a gain of $105,700 related to
     the sale of 107,000 acres of timberland in northeast Washington and
     northern Idaho and the impact of that sale from October 12, 1996. Results
     also include the impact of the acquisition from Riverwood International
                                       10
<PAGE>   12

     Corporation of 538,000 acres of timberland and related assets in Louisiana
     and Arkansas from October 19, 1996.

 (2) Results include the impact of the acquisition of 905,000 acres of
     timberlands in Maine from November 12, 1998.

 (3) Reflects the reduction of revenues related to the manufacturing operations,
     harvesting activities and some higher and better use lands that were
     transferred to the unconsolidated subsidiaries.

 (4) Amounts include depreciation, depletion and amortization.

 (5) On a combined basis the unaudited pro forma summaried financial information
     of the unconsolidated subsidiaries as of periods indicated are summarized
     as follows

<TABLE>
<CAPTION>
                                         YEAR ENDED        THREE MONTHS ENDED
                                      DECEMBER 31, 1998      MARCH 31, 1999
                                      -----------------    ------------------
<S>                                   <C>                  <C>
Revenues............................      $662,357              $175,577
Depreciation and Amortization.......        25,410                 7,312
Operating Income....................           671                 7,043
Interest Expense -- Net.............        18,913                 4,728
</TABLE>

     In accordance with APB No. 18, "The Equity Method of Accounting for
     Investments in Common Stock," our revenue related to the sale of timber to
     our unconsolidated subsidiaries will be deferred until the logs or finished
     goods are sold outside the group of unconsolidated subsidiaries. Therefore,
     all of our sales to the unconsolidated subsidiaries will also be included
     in the revenue of the unconsolidated subsidiaries in the period in which
     the timber, in the form of either whole logs, lumber, plywood or other wood
     products, is sold outside the group of unconsolidated subsidiaries. Revenue
     related to sales between the unconsolidated subsidiaries is eliminated in
     preparing the summarized combined financial information of the
     unconsolidated subsidiaries. Our reported revenues that were also included
     in the revenues of the unconsolidated subsidiaries amounted to $195,812 for
     the year ended December 31, 1998. Our reported revenues that were also
     included in the revenues of the unconsolidated subsidiaries amounted to
     $46,423 for the three month periods ended March 31, 1999.

 (6) EBITDA is defined as operating income before depreciation, depletion, and
     amortization. EBITDA is provided because management believes EBITDA
     provides useful information for evaluating our ability to make cash
     distributions. EBITDA should not be construed as an alternative to
     operating income (as an indicator of our operating performance) or as an
     alternative to cash flows from operating activities (as a measure of
     liquidity). Pro forma amounts include EBITDA from unconsolidated
     subsidiaries.

 (7) Does not include $181,148 related to the Maine timberland acquisition in
     1998 or $560,740 related to the Riverwood acquisition in 1996. Pro forma
     amounts include capital expenditures of $52,015 related to the
     unconsolidated subsidiaries for the year ended December 31, 1998. Pro forma
     amounts include capital expenditures of $5,560 related to the
     unconsolidated subsidiaries for the three months ended March 31, 1999.

 (8) The partnership issued 5.7 million units during 1996 for net proceeds of
     $144,297.

 (9) Reflects the transfer of certain assets and liabilities related to the
     manufacturing operations, harvesting activities and some higher and better
     use lands to the unconsolidated subsidiaries. Pro forma total assets and
     total debt including the unconsolidated subsidiaries as if consolidated
     with the corporation for financial reporting purposes would be $1,448,800
     and $963,305 at March 31, 1999.
                                       11
<PAGE>   13

(10) Amounts have been adjusted to reflect the proceeds of the equity offering
     used for the repayment of debt.

(11) The Northwest timberlands includes fee timber harvested from the Rocky
     Mountain and Cascade Regions.

(12) Does not include 111 MMSF, 200 MMSF and 37 MMSF for the years ended
     December 31, 1998, 1997 and 1996, respectively, related to the production
     at the Joyce, Louisiana, plywood facility which was closed in July 1998.

(13) We are organized into eight business units on the basis of both product
     line and geographic region. The eight business units have been aggregated
     into five reportable segments based on similar long-term economic
     characteristics. The five segments are: Northern Resources (which includes
     the Cascade, Rocky Mountain and Northeast Region timberland business
     units), Southern Resources (Southern timberland business unit), Land Sales
     (timberlands which may be sold for conservation, residential or
     recreational purposes), Lumber (which includes our Northwest and Southern
     lumber business units) and Panel (which includes our plywood and medium
     density fiberboard operations). Other includes data related to a plywood
     plant that was permanently closed in 1998 and a chip facility that was sold
     in 1998.
                                       12
<PAGE>   14

                                  RISK FACTORS

     You should carefully consider the following risks as well as the other
information contained or incorporated by reference in this prospectus before
purchasing the common stock.

THE CYCLICAL NATURE OF THE FOREST PRODUCTS INDUSTRY COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS

     Our results of operations are affected by the cyclical nature of the forest
products industry. Prices and demand for logs and manufactured wood products are
subject to cyclical fluctuations. The demand for logs and wood products is
primarily affected by the level of new residential construction activity and, to
a lesser extent, repair and remodeling activity and other industrial uses. These
activities are, in turn, subject to fluctuations due to, among other factors:

     - changes in domestic and international economic conditions;

     - interest rates;

     - population growth; and

     - weather conditions.

     Decreases in the level of residential construction activity generally
reduce demand for logs and wood products. This results in lower revenues,
profits and cash flows. In addition, our results of operations are subject to
global economic changes as global supplies of wood fiber shift in response to
changing economic conditions. For example, economic weakness throughout Asia
over the last two years has caused export quality North American logs normally
sold into the Japanese market to remain in, or be directed into, domestic
markets, causing oversupply in our domestic markets. Asian economic weakness has
caused European and Canadian producers to direct larger volumes of competing
wood products into United States markets, thereby lowering prices in our
markets. We believe that these conditions will continue to impact our business
for the near-term. We have also entered into several long-term supply agreements
with various forest product companies, which provide for market-based pricing
for our products. Price fluctuations for products subject to these agreements
may adversely affect our earnings. For example, we have entered into a long-term
supply agreement with Stone Container Corporation which provides for
market-based pricing for wood chips, subject to minimum and maximum prices until
December 31, 1999. If market prices for wood chips remain at current levels,
which are below the minimum level set by the supply agreement, our earnings
related to this agreement will be reduced starting in year 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Events and Trends Affecting Operating Results -- Stone Container
Corporation."

OUR CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE

     REITs are required to distribute 95% of their net taxable income. Unlike
ordinary income such as rent, the Internal Revenue Code does not require REITs
to distribute capital gain income. Accordingly, we do not believe that the
Internal Revenue Code will require us to distribute any material amounts of cash
since the majority of our income comes from stumpage sales, which is treated as
capital gain. The amount of our distributions to stockholders are determined
quarterly by our board of directors, in its sole discretion, based on our
results of operations, cash flow and capital requirements, economic conditions,
tax considerations and other factors, including future acquisitions, harvest
levels and changes in the price and demand for our products. Consequently, our
distribution levels may fluctuate.

OUR ABILITY TO HARVEST TIMBER MAY BE SUBJECT TO LIMITATIONS WHICH COULD
ADVERSELY AFFECT OUR OPERATIONS

     Weather conditions, timber growth cycles, access limitations and regulatory
requirements associated with the protection of wildlife and water resources may
restrict harvesting of our timberlands, as may other factors, including damage
by fire, insect infestation, disease, prolonged drought and natural

                                       13
<PAGE>   15

disasters. As is common in the forest products industry, we do not maintain
insurance coverage with respect to damage to our timberlands.

     Much of our Northwest timberlands are intermingled among sections of
Federal land managed by the United States Forest Service. In many cases, access
is only, or most economically, achieved through a road or roads built across
adjacent Federal land. In order to access these intermingled timberlands, we
have obtained from time to time either temporary or permanent access rights
across Federal lands. This process has often been, and will likely continue to
be, affected by, among other things, the requirements of the Endangered Species
Act, the National Environmental Policy Act and the Clean Water Act. We currently
lack legal access to approximately 10% of the merchantable timber, by volume, in
our Northwest timberlands. Access and regulatory restrictions may delay or
prevent us from harvesting some of our timberlands. See "Federal and State
Regulations."

     Our revenues, net income and cash flow from our operations are dependent to
a significant extent on the pricing for our products and our continued ability
to harvest timber at adequate levels. In addition, our ability to accelerate the
harvest of significant amounts of timber in order to fund distributions to
stockholders may be limited by the terms of our long-term debt agreements and
lines of credit.

HARVEST LEVELS IN SOME OF OUR REGIONS ARE EXPECTED TO DECLINE

     Harvest levels in our Rocky Mountain Region are expected to remain
relatively stable over the next two years. By the year 2000, we anticipate that
we will have nearly completed the conversion of slower growing forests to
younger, more productive stands in our Rocky Mountain Region, at which time we
anticipate a moderate reduction in the region's harvest levels. We expect
harvest levels in our Cascade Region to decline for the foreseeable future as
the conversion process approaches completion in that region. Harvest levels in
our Southern Region for the years 2000 to 2003 are expected to be moderately
lower compared to 1998 harvest levels as we complete the conversion of mature
second growth pine timberlands in this region into intensively managed pine
plantations. In light of the numerous factors that affect harvest levels, our
harvest levels in any given year may be lower than we expect.

OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL AND MAY ADVERSELY AFFECT OUR
ABILITY TO MANAGE OUR EXISTING BUSINESS

     We intend to continue to pursue a disciplined acquisition strategy as one
means of increasing the value of our assets. We cannot predict whether we will
be successful in consummating any additional acquisitions since general economic
or industry conditions may not be conducive to our acquisition strategy or we
may not be able to identify and acquire any further assets or businesses on
economically acceptable terms. Moreover, even if acquisitions are made, we
cannot predict what the consequences of these acquisitions would be on our
ability to manage our existing business.

     Our acquisition strategy involves numerous risks, including difficulties
inherent in the integration of new operations and systems, the diversion of
management's attention from other business concerns and the potential loss of
key employees of acquired businesses. Acquisitions also may involve the
expenditure of significant funds. Depending upon the nature, size and timing of
future acquisitions, we likely would be required to secure additional financing.
This additional financing may not be available on acceptable terms or at all.
Further, if we issue common stock, preferred stock or operating partnership
units to fund our acquisitions, the value of our outstanding common stock may be
diluted.

PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY PREVENT A
CHANGE IN CONTROL

     Some provisions of our certificate of incorporation may discourage a third
party from seeking to gain control of us. The ownership limitations described in
our certificate of incorporation could have the effect of delaying, deferring,
or limiting a change of control in which holders of common stock might receive a

                                       14
<PAGE>   16

premium for their shares over the then prevailing market price. The following is
a summary of provisions of our certificate of incorporation which may have this
effect:

The Ownership Limit

     In order for us to maintain our qualification as a REIT, not more than 50%
of the value of our outstanding shares of capital stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code). For the purpose of preserving our REIT qualification, our certificate of
incorporation prohibits ownership either directly or under the applicable
attribution rules of the Internal Revenue Code of more than 5% of the lesser of
the total number of shares of common stock outstanding or the value of the
outstanding shares of common stock by any stockholder other than by some
designated persons agreed to by us (the "Ownership Limit"). The Ownership Limit
may have the effect of discouraging an acquisition of control of us without the
approval of our board of directors.

     The Ownership Limit in our certificate of incorporation also restricts the
transfer of our common stock. For example, if any transfer of common stock would

     - result in any person owning, directly or indirectly, common stock in
       excess of the Ownership Limit,

     - result in our common stock being owned by fewer than 100 persons, or

     - result in our being "closely held" (as defined in the Internal Revenue
       Code), then

the common stock so transferred will be designated as "excess stock" and will be
transferred automatically to a trust effective on the day before the transfer of
this common stock. These transfer restrictions, however, allow specific persons
designated in our certificate of incorporation to beneficially own, in the
aggregate, up to 27% of our outstanding common stock. This exception will be
permanently reduced to the extent that these persons sell their shares of common
stock or special voting stock or to the extent that new issuances of common
stock reduce their percentage of beneficial ownership.

The Special Voting Stock

     We have issued shares of special voting stock which entitle holders to vote
as a separate class on many transactions, including amendments to our
certificate of incorporation, issuances of more than 20% of our outstanding
common stock for non-cash consideration, dissolution, mergers and the sale of
all or substantially all of our assets, as well as amendments to our bylaws
proposed by stockholders. In addition, holders of the special voting stock are
entitled to designate, for nomination purposes only, a number of nominees for
our board of directors, which taken together with any previously elected
designees, would constitute a majority of our board.

The Preferred Stock

     Our certificate of incorporation authorizes our board of directors to issue
up to 75 million shares of preferred stock. Upon issuance, our board of
directors will establish the preferences and rights for this preferred stock.
These preferences and rights may include the right to elect additional
directors. The issuance of preferred stock could have the effect of delaying or
preventing a change in control of us even if a change in control were in our
stockholders' best interests.

Section 203 of the Delaware General Corporation Law

     Section 203 of the Delaware General Corporation Law generally prohibits us
from engaging in business transactions with a person or entity that owns 15% or
more of our voting stock. A business transaction may include mergers, asset
sales and other transactions resulting in financial benefit to the person or
entity that owns 15% or more of our voting stock.

                                       15
<PAGE>   17

The Classified Board of Directors

     Our board of directors will be divided into three classes. The terms of the
first, second and third classes will expire in 2000, 2001 and 2002. Directors of
each class will be elected for a three-year term upon the expiration of the
initial term of each class. The staggered terms for directors may adversely
affect the stockholders' ability to effect a change in control, even if a change
in control were in their best interests.

IF WE FAIL TO QUALIFY AS A REIT, WE WOULD BE SUBJECT TO TAX AT CORPORATE RATES
AND WOULD NOT BE ABLE TO DEDUCT DISTRIBUTIONS TO STOCKHOLDERS WHEN COMPUTING OUR
TAXABLE INCOME

     If in any taxable year we fail to qualify as a REIT:

     - we would be subject to Federal and state income tax on our taxable income
       at regular corporate rates of approximately 40%;

     - we would not be allowed to deduct distributions to stockholders in
       computing taxable income; and

     - unless we were entitled to relief under the Internal Revenue Code, we
       would also be disqualified from treatment as a REIT for the four taxable
       years following the year during which we lost qualification.

     If we fail to qualify as a REIT, we might need to borrow funds or liquidate
some investments in order to pay the additional tax liability. Accordingly,
funds available for investment or distribution to our stockholders would be
reduced for each of the years involved.

     Qualification as a REIT involves the application of highly technical and
complex provisions of the Internal Revenue Code to our operations and the
determination of various factual matters and circumstances not entirely within
our control. There are only limited judicial or administrative interpretations
of these provisions. Although we operate in a manner consistent with the REIT
qualification rules, we cannot assure you that we are or will remain so
qualified.

OUR TIMBERLANDS ARE SUBJECT TO EXTENSIVE FEDERAL AND STATE ENVIRONMENTAL
REGULATIONS

     We are subject to regulation under, among other laws, the Clean Air Act,
the Clean Water Act, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
National Environmental Policy Act, and the Endangered Species Act, as well as
similar state laws and regulations. Violations of various statutory and
regulatory programs that apply to our operations could result in civil
penalties, remediation expenses, potential injunctions, cease and desist orders
and criminal penalties. We engage in the following activities which are subject
to regulation:

     - the generation of air emissions;

     - the discharge of industrial wastewater and storm water;

     - the generation and disposal of both hazardous and nonhazardous wastes;
       and

     - forest practices, including harvesting, planting and road building.

     Laws and regulations protecting the environment have generally become more
stringent in recent years and could become more stringent in the future. Some
environmental statutes impose strict liability, rendering a person liable for
environmental damage without regard to the person's negligence or fault. These
laws or future legislation or administrative or judicial action with respect to
protection of the environment may adversely affect our business.

     The Endangered Species Act and similar state laws protect species
threatened with possible extinction. A number of species on our timberlands have
been and in the future may be protected under

                                       16
<PAGE>   18

these laws, including the northern spotted owl, marbled murrelet, gray wolf,
grizzly bear, mountain caribou, bald eagle, red-cockaded woodpecker, bull trout,
and various salmon species. Our Northwest timberlands are often intermingled
with Federal land in or near areas that include the habitats of a number of
threatened or endangered species such as the northern spotted owl, bull trout
and grizzly bear. Protection of threatened and endangered species may include
restrictions on timber harvesting, road building and other forest practices on
private, Federal and state land containing the affected species. See "Federal
and State Regulations."

ADVERSE ECONOMIC FACTORS AFFECTING FOREIGN ECONOMIES COULD HAVE AN ADVERSE
AFFECT ON OUR LOG EXPORT BUSINESS

     Our export log business is substantially dependent on market and economic
conditions in the major Asian economies, particularly Japan. Accordingly, this
business may be affected by, among other things, fluctuations in exchange rates,
the availability of substitute products and changes in building practices. In
1998 and the first three months of 1999, all of our export log sales from the
Cascade Region were made to customers in Japan. Cascade Region export log
revenues accounted for approximately 3% of our total revenues for the first
three months of 1999, 3% in 1998, and 6% in 1997. Cascade Region export log
sales represented approximately 6% of our operating income for the first three
month of 1999, 6% in 1998, and 11% in 1997.

POSSIBLE DISRUPTION OF BUSINESS DUE TO THE YEAR 2000 PROBLEM

     The year 2000 problem results from an inability of some computer systems to
accurately recognize dates on and after the year 2000. As a result, beginning on
January 1, 2000, computer systems and software used by many companies and
organizations in a wide variety of industries will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly. Year 2000 compliance efforts may involve significant time and
expense, and uncorrected problems could materially adversely affect our
business.

     The year 2000 problem poses the following principal risks to our business:

     - disruptions due to our failure to achieve year 2000 readiness; and

     - disruptions due to the failure of third parties to achieve year 2000
       readiness.

     In 1997, we adopted a year 2000 plan to identify and address both internal
and external year 2000 issues. As part of the plan, we have identified all of
our major application and processing systems and have sought external and
internal resources to replace and test those systems. We are evaluating
customers and vendors that have significant relationships with us to determine
whether they are adequately preparing for the year 2000. In addition, we are
evaluating the need for contingency plans to reduce the impact of some potential
events that may occur. Any failure of these remediation efforts could result in
a disruption of our operations. Consequently, these failures could have a
material adverse effect on our business.

                                       17
<PAGE>   19

                           FORWARD-LOOKING STATEMENTS

     This prospectus and the information incorporated by reference includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Some of the
forward-looking statements can be identified by the use of forward-looking words
such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "estimates," or "anticipates," or the
negative of those words or other comparable terminology. Forward-looking
statements involve inherent risks and uncertainties. A number of important
factors could cause actual results to differ materially from those in the
forward looking statements, including those factors discussed in "Risk Factors."
Some factors include fluctuations in government regulations and economic
conditions and competition in our domestic and export markets. In addition,
factors that could cause our actual results to differ from those contemplated by
our projected, forecasted, estimated, or budgeted results as reflected in
forward-looking statements relating to our operations and business include the
following possibilities:

     - the failure to achieve the expected competitive advantages of operating
       as a REIT;

     - an unanticipated reduction in the demand for timber products; and

     - the failure to make strategic acquisitions.

     Accordingly, actual results may not conform to the forward-looking
statements contained in this prospectus.

                                USE OF PROCEEDS

     We estimate that we will receive net cash proceeds from this offering of
approximately $     million after deducting estimated underwriting discounts and
commissions and estimated offering expenses, assuming a public offering price of
$     , the closing price of our common stock on the New York Stock Exchange on
August   , 1999. If the underwriters exercise their over-allotment option in
full, we estimate that we will receive net cash proceeds from this offering of
approximately $     .

     We intend to contribute the net proceeds from this offering to our
wholly-owned operating partnership, through which we own substantially all of
our timberland assets. Our operating partnership will use the net proceeds of
this offering as follows:

     - approximately $218 million to repay outstanding debt under our line of
       credit, which matures on December 13, 2001 and bears a floating rate of
       interest; and

     - the remainder for general business purposes.

                                       18
<PAGE>   20

              PRICE RANGE OF COMMON STOCK AND DISTRIBUTION POLICY

     Our common stock trades on the New York Stock Exchange and the Pacific
Exchange under the symbol "PCL." The following table sets forth the quarterly
high and low sales prices for our predecessor's limited partnership units as
reported on the New York Stock Exchange Composite Tape for the years 1997 and
1998 and the first two quarters of 1999 through June 30, 1999, as well as
quarterly distributions declared for each quarter during the same period. The
table sets forth the quarterly high and low sales prices for our common stock as
reported on the New York Stock Exchange Composite Tape for the third quarter of
1999, through August   , 1999.

<TABLE>
<CAPTION>
                                                                               DISTRIBUTIONS
                                                                                 DECLARED
                                                             HIGH      LOW       PER UNIT
                                                             -----    -----    -------------
<S>                                                          <C>      <C>      <C>
1997
  First quarter............................................  $29 1/4  $25 7/8      $0.55
  Second quarter...........................................  $32 1/2  $26 3/4      $0.55
  Third quarter............................................  $36      $31 11/16     $0.55
  Fourth quarter...........................................  $34 3/8  $28          $0.55
1998
  First quarter............................................  $34 7/8  $30          $0.57
  Second quarter...........................................  $34 1/4  $28 3/16     $0.57
  Third quarter............................................  $31 1/8  $23 7/16     $0.57
  Fourth quarter...........................................  $29      $24 13/16     $0.57
1999
  First quarter............................................  $29 7/16 $25 1/2      $0.57
  Second Quarter...........................................  $32 1/8  $25 3/4      $0.57
  Third Quarter (through August   , 1999)..................  $        $               --
</TABLE>

     The closing price of our common stock on the New York Stock Exchange on
August   , 1999 appears on the cover page of this prospectus.

     Our distribution policy is determined by our board of directors. Our most
recent quarterly REIT distribution was $0.57 per share, equivalent to $2.28 on
an annualized basis. Future distributions will be determined by our board of
directors, in its sole discretion, based on our results of operations, cash flow
and capital requirements, economic conditions, tax considerations and other
factors, including harvest levels and future acquisitions.

                                       19
<PAGE>   21

                                 CAPITALIZATION

     The following table sets forth our pro forma short-term debt and total
capitalization on a consolidated basis at March 31, 1999, after giving effect to
the consummation of our conversion to a REIT. The "Pro Forma As Adjusted" column
sets forth our capitalization at March 31, 1999, after giving effect to the
issuance of 7,000,000 shares of common stock in this offering at $     per
share, the closing price of our common stock on the New York Stock Exchange on
August   , 1999.

<TABLE>
<CAPTION>
                                                                       MARCH 31, 1999
                                                           ---------------------------------------
                                                                                        PRO FORMA
                                                           HISTORICAL    PRO FORMA     AS ADJUSTED
                                                           -----------   ----------    -----------
                                                           (UNAUDITED IN THOUSANDS)
<S>                                                        <C>           <C>           <C>
Short-term debt:
  Current portion of long-term debt......................   $ 18,400      $  4,400      $  4,400
                                                            --------      --------      --------
     Total short-term debt...............................   $ 18,400      $  4,400      $  4,400
                                                            ========      ========      ========
Long-term debt:
  Senior Notes due 2007..................................   $113,700      $ 59,600      $ 59,600
  Senior Notes due 2009..................................    150,000       150,000       150,000
  Senior Notes due 2011..................................    176,905       176,905       176,905
  Senior Notes due 2016..................................    200,000       200,000       200,000
  First Mortgage Notes due 2007..........................    101,900            --            --
  Line of Credit.........................................    200,000       202,400            --
                                                            --------      --------      --------
     Total long-term debt................................   $942,505      $788,905      $586,505
                                                            --------      --------      --------
Total Stockholders' Equity(1)............................   $387,820      $399,376      $
                                                            ========      ========      ========
</TABLE>

- -------------------------
(1) We have 75 million shares of preferred stock authorized with none
    outstanding, 300 million shares of common stock authorized with 62,822,009
    shares outstanding and 634,566 shares of special voting stock authorized,
    all of which is outstanding. See "Description of Capital Stock."

                                       20
<PAGE>   22

              PLUM CREEK TIMBER COMPANY, INC. UNAUDITED PRO FORMA
                  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The following unaudited pro forma condensed consolidated financial
statements of Plum Creek Timber Company, Inc. reflect the conversion of Plum
Creek Timber Company, L.P., a publicly traded master limited partnership, to a
publicly traded real estate investment trust. In order to qualify as a REIT for
tax purposes, some of the partnership's assets and associated liabilities
related to the manufacturing operations, harvesting activities, and some higher
and better use lands were transferred to several unconsolidated subsidiaries in
exchange for preferred stock and nonvoting common stock. Therefore, following
the conversion, the manufacturing and harvesting operations and some higher and
better use land sales will no longer be accounted for on a combined/consolidated
basis with the activities of the corporation. Instead, the financial statements
of the corporation will reflect the net activities of the manufacturing and
harvesting operations along with some higher and better use land sales through
its preferred stock and nonvoting common stock ownership.

     The unaudited pro forma condensed consolidated balance sheet assumes the
conversion occurred on March 31, 1999. The unaudited pro forma condensed
consolidated statements of income for the three months ended March 31, 1999 and
the year ended December 31, 1998 assume the conversion occurred at January 1,
1998.

     The unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of the operating results or financial position that would
have been achieved had the conversion occurred on the indicated dates and should
not be construed as representative of future operating results or financial
position.

     The unaudited pro forma condensed consolidated financial statements and
accompanying notes should be read in conjunction with the historical financial
statements and related notes.

                                       21
<PAGE>   23

                        PLUM CREEK TIMBER COMPANY, INC.

            UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                              AS OF MARCH 31, 1999

<TABLE>
<CAPTION>
                                                             PRO FORMA ADJUSTMENTS
                                                             ----------------------
                                                              CORPORATE
                                              PARTNERSHIP    SUBSIDIARIES                PRO FORMA
                                             HISTORICAL(a)   FORMATION(b)    OTHER      CORPORATION
                                             -------------   ------------   -------     -----------
                                               (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S>                                          <C>             <C>            <C>         <C>
ASSETS
Current Assets:
  Cash and Cash Equivalents................   $  106,517      $             $(1,905)(c) $  104,612
  Inventories..............................       56,512        (56,512)                         0
  Other Current Assets.....................       43,732        (42,087)     11,773(d)      13,418
                                              ----------      ---------     -------     ----------
                                                 206,761        (98,599)      9,868        118,030
Timber and Timberlands -- Net..............    1,021,251         (5,400)                 1,015,851
Property, Plant and Equipment -- Net.......      183,536       (182,812)                       724
Investment in Equity Affiliates and
  Preferred Stock..........................            0         71,266       4,304(e)      86,708
                                                                              9,233(f)
                                                                              1,905(c)
Other Assets...............................       11,942         (4,683)                     7,259
                                              ----------      ---------     -------     ----------
     Total Assets..........................   $1,423,490      $(220,228)    $25,310     $1,228,572
                                              ==========      =========     =======     ==========
LIABILITIES
Current Liabilities........................   $   82,211      $ (54,895)    $11,773(d)  $   39,089
Long-Term Debt.............................      742,505       (156,000)                   586,505
Lines of Credit............................      200,000                      2,400(g)     202,400
Other Liabilities..........................       10,954         (9,333)       (419)(e)      1,202
                                              ----------      ---------     -------     ----------
     Total Liabilities.....................    1,035,670       (220,228)     13,754        829,196
                                              ----------      ---------     -------     ----------
Commitments and Contingencies
CAPITAL
Partners' Capital/Stockholders' Equity.....      387,820                      4,723(e)     399,376
                                                                              9,233(f)
                                                                             (2,400)(g)
                                              ----------      ---------     -------     ----------
     Total Liabilities and Partners'
       Capital/ Stockholders' Equity.......   $1,423,490      $(220,228)    $25,310     $1,228,572
                                              ==========      =========     =======     ==========
</TABLE>

 See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
                                   Statements

                                       22
<PAGE>   24

                        PLUM CREEK TIMBER COMPANY, INC.

                   UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                              STATEMENT OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                      PRO FORMA ADJUSTMENTS
                                                     ------------------------
                                                      CORPORATE
                                     PARTNERSHIP     SUBSIDIARIES                    PRO FORMA
                                    HISTORICAL(a)    FORMATION(h)     OTHER         CORPORATION
                                    -------------    ------------    --------       -----------
                                        (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S>                                 <C>              <C>             <C>            <C>
Revenues..........................   $   699,370      $(466,545)     $              $   232,825
                                     -----------      ---------      --------       -----------
Costs and Expenses:
  Cost of Goods Sold..............       505,366       (431,462)                         73,904
  Selling, General and
     Administrative...............        52,917        (33,641)          524(i)         19,800
                                     -----------      ---------      --------       -----------
     Total Costs and Expenses.....       558,283       (465,103)          524            93,704
Operating Income..................       141,087         (1,442)         (524)          139,121
Interest Expense..................       (60,622)        18,913          (212)(j)       (41,921)
Reorganization Costs..............        (4,763)                       4,763(k)              0
Other Expense -- Net..............           251            929           (98)(l)         1,082
                                     -----------      ---------      --------       -----------
Income before Income Taxes and
  Equity in Earnings (Loss) of
  Affiliates and Preferred Stock
  Dividends.......................        75,953         18,400         3,929            98,282
Provision for Income Taxes........           517           (517)                              0
                                     -----------      ---------      --------       -----------
Income (Loss) before Equity in
  Earnings (Loss) of Affiliates
  and Preferred Stock Dividends...        75,436         18,917         3,929            98,282
Equity in Earnings (Loss) of
  Affiliates and Preferred Stock
  Dividends.......................             0                       (8,692)(m)        (8,692)
                                     -----------      ---------      --------       -----------
Net Income........................   $    75,436      $  18,917      $ (4,763)      $    89,590
General Partner Interest..........        33,713                      (33,713)(n)             0
                                     -----------      ---------      --------       -----------
Net Income Allocable to
  Unitholders/ Stockholders.......   $    41,723      $  18,917      $ 28,950       $    89,590
                                     ===========      =========      ========       ===========
Net Income per Unit...............   $      0.90
                                     ===========
Net Income per Common Share --
  Basic and Diluted...............                                                  $      1.41
                                                                                    ===========
Weighted average number of Units
  outstanding -- Basic and
  Diluted.........................    46,323,300
Weighted average number of REIT
  Shares outstanding -- Basic and
  Diluted.........................                                                   63,456,575(n)
</TABLE>

 See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
                                   Statements

                                       23
<PAGE>   25

                        PLUM CREEK TIMBER COMPANY, INC.

                   UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                              STATEMENT OF INCOME
                FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999

<TABLE>
<CAPTION>
                                                       PRO FORMA ADJUSTMENTS
                                                      -----------------------
                                                       CORPORATE
                                      PARTNERSHIP     SUBSIDIARIES                   PRO FORMA
                                     HISTORICAL(A)    FORMATION(H)     OTHER        CORPORATION
                                     -------------    ------------    -------       -----------
                                         (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S>                                  <C>              <C>             <C>           <C>
Revenues...........................   $   178,221      $(129,154)     $             $    49,067
                                      -----------      ---------      -------       -----------
Costs and Expenses:
  Cost of Goods Sold...............       129,111       (114,899)                        14,212
  Selling, General and
     Administrative................        10,443         (6,940)         242(i)          3,745
                                      -----------      ---------      -------       -----------
     Total Costs and Expenses......       139,554       (121,839)         242            17,957
Operating Income...................        38,667         (7,315)        (242)           31,110
Interest Expense...................       (18,525)         4,728          (53)(j)       (13,850)
Reorganization Costs...............        (2,651)                      2,651(k)              0
Other Expense -- Net...............           545           (215)          59(l)            378
                                                                          (11)(o)
                                      -----------      ---------      -------       -----------
Income before Income Taxes and
  Equity in Earnings (Loss) of
  Affiliates and Preferred Stock
  Dividends........................        18,036         (2,802)       2,404            17,638
Provision for Income Taxes.........           174           (174)                             0
                                      -----------      ---------      -------       -----------
Income (Loss) before Equity in
  Earnings (Loss) of Affiliates and
  Preferred Stock Dividends........        17,862         (2,628)       2,404            17,638
Equity in Earnings (Loss) of
  Affiliates and Preferred Stock
  Dividends........................             0                       2,101(m)          2,101
                                      -----------      ---------      -------       -----------
Net Income.........................   $    17,862      $  (2,628)     $ 4,505       $    19,739
General Partner Interest...........         8,534                      (8,534)(n)             0
                                      -----------      ---------      -------       -----------
Net Income Allocable to
  Unitholders/ Stockholders........   $     9,328      $  (2,628)     $13,039       $    19,739
                                      ===========      =========      =======       ===========
Net Income per Unit................   $      0.20
                                      ===========
Net Income per Common Share --
  Basic and Diluted................                                                 $      0.31
                                                                                    ===========
Weighted average number of Units
  outstanding -- Basic and
  Diluted..........................    46,323,300
Weighted average number of REIT
  Shares outstanding -- Basic and
  Diluted..........................                                                  63,456,575(n)
</TABLE>

See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
                                       24
<PAGE>   26

                        PLUM CREEK TIMBER COMPANY, INC.

              NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)

NOTE 1. BASIS OF PRESENTATION

     On June 8, 1998 the partnership announced that the Board of Directors of
its general partner had authorized the partnership to seek approval from its
unitholders to convert its structure from a publicly traded master limited
partnership into a publicly traded REIT. On April 19, 1999, the partnership's
unitholders approved the conversion, which was completed on July 1, 1999.

     Prior to the conversion the partnership owned 98% of Plum Creek
Manufacturing, L.P. and 96% of Plum Creek Marketing, Inc. The general partner of
the partnership, Plum Creek Management Company, L.P., managed the businesses of
the partnership, Plum Creek Manufacturing and Plum Creek Marketing and owned the
remaining 2% general partner interest in Plum Creek Manufacturing partnership
and 4% of Plum Creek Marketing.

     In connection with the conversion, the partnership formed Plum Creek Timber
Company, Inc., a corporation that operates under the laws governing REITs, the
operating partnership and several taxable corporations.

     The conversion was accomplished through the simultaneous merger of the
partnership into the operating partnership and the merger of the general partner
into the corporation. In the first merger, which was conditioned upon the
simultaneous consummation of the second merger, the partnership was merged into
the operating partnership, a wholly-owned subsidiary of the corporation, and the
general partner interest in the partnership was cancelled. In addition, the
units of limited partnership held by the unitholders were converted into 73% of
the common stock of the corporation. In the second merger, the general partner
was merged into the corporation and the outstanding equity interests of the
general partner were converted into 26% of the common stock and 634,566 shares
of special voting stock.

     As a result of the conversion, the partnership's outstanding units were
converted on a one-for-one basis into 46,323,300 shares of common stock.
Additionally, the equity interests in the general partner were converted into
16,498,709 shares of common stock and 634,566 shares of special voting stock.
The special voting stock is convertible into common stock at the option of the
holder on a one-for-one basis and is entitled to receive the same dividends as
common stock. The special voting stock is included in the denominator in
computing basic and diluted earnings per share.

     Furthermore, in order to qualify as a REIT, some of the partnership's
assets and associated liabilities related to the manufacturing operations and
harvesting activities along with some higher and better use lands were
transferred to one of several corporations, collectively referred to as the
unconsolidated subsidiaries. Following the transfers, the corporation is
entitled to approximately 99% of the economics of the unconsolidated
subsidiaries through a combination of preferred stock and nonvoting common
stock. The remaining approximate 1% of the economics and 100% voting control of
the unconsolidated subsidiaries are owned by four individuals who are also
officers of the corporation.

     The accompanying unaudited pro forma condensed consolidated financial
statements have been prepared based upon the corporation consolidating with the
operating partnership and Plum Creek Manufacturing. The basis for the
consolidation is that the corporation, or a wholly-owned subsidiary thereof, is
the general partner of the operating partnership and Plum Creek Manufacturing
and will have control over the operating partnership and Plum Creek
Manufacturing. The unconsolidated subsidiaries are not consolidated with the
corporation because the corporation neither directly nor indirectly has any
voting rights with respect to the unconsolidated subsidiaries. The corporation's
nonvoting common stock

                                       25
<PAGE>   27
                        PLUM CREEK TIMBER COMPANY, INC.

              NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                        FINANCIAL STATEMENTS (CONTINUED)
             (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)

investment in the unconsolidated subsidiaries will be accounted for using the
equity method of accounting in accordance with APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock." The basis for using the equity
method is that the corporation receives substantially all of the economic
benefit from the unconsolidated subsidiaries. The corporation's preferred stock
investment in the unconsolidated subsidiaries will be accounted for using the
cost method of accounting. Additionally, the footnotes to the pro forma
financial statements include summarized financial information of the
unconsolidated subsidiaries on a combined basis.

     Conversion costs are estimated to be $9,800 of which $4,763 has been
recorded by the partnership for the year ended December 31, 1998 and $2,651 for
the quarter ended March 31, 1999. The conversion costs have been eliminated from
the unaudited pro forma condensed consolidated statements of income because they
represent nonrecurring expenditures.

     The conversion of units into common stock in connection with the merger of
the partnership into the operating partnership is being accounted for as a
reorganization with amounts being recorded at historical cost. The general
partner's sole activity was related to its management and investment in the
partnership and its subsidiaries. As a result, the general partnership's assets
were limited to, and comprised of, its investment in the partnership, Plum Creek
Manufacturing, and Plum Creek Marketing, along with related cash and certain
long-term incentive award plan assets (which are held in a grantor trust formed
by the general partner). The conversion of the general partnership interest in
the partnership for common stock and special voting stock in connection with the
second merger is being accounted for as a reorganization with amounts being
recorded at historical cost. The conversion of the general partner's interest in
Plum Creek Manufacturing and Plum Creek Marketing for common stock and special
voting stock in connection with the second merger is being accounted for as a
purchase of a minority interest in accordance with APB No. 16. "Business
Combinations" with amounts being recorded at fair value. As a result of the
combination of reorganization accounting and purchase accounting for the
minority interest, along with other related adjustments, pro forma Stockholder's
Equity as of March 31, 1999 is computed as follows:

<TABLE>
<CAPTION>
                                                              (DOLLARS IN THOUSANDS)
                                                              ----------------------
<S>                                                           <C>
Limited Partners' Capital (historical at March 31, 1999)....         $389,781
General Partner's Capital (historical at March 31, 1999)....           (1,961)
                                                                     --------
Partner's Capital (historical at March 31, 1999)............         $387,820
Purchase of minority interest (2% interest in Plum Creek
  Manufacturing and 4% interest in Plum Creek Marketing)....            4,723
Conversion costs incurred after March 31, 1999..............           (2,400)
Recording of deferred tax assets relating to a change in tax
  status....................................................            9,233
                                                                     --------
Pro Forma Stockholders' Equity..............................         $399,376
                                                                     ========
</TABLE>

     The accompanying unaudited pro forma condensed consolidated financial
statements and related notes have not been audited. In management's opinion, all
adjustments considered necessary for the fair presentation of the results of
operations and financial position for the unaudited pro forma condensed
consolidated financial statements have been reflected. Results for the periods
for which unaudited pro

                                       26
<PAGE>   28
                        PLUM CREEK TIMBER COMPANY, INC.

              NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                        FINANCIAL STATEMENTS (CONTINUED)
             (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)

forma condensed consolidated statements are provided are not necessarily
indicative of those to be expected in future periods. All significant affiliated
transactions have been eliminated.

NOTE 2. PRO FORMA ADJUSTMENTS

     (a) See Notes to Plum Creek Timber Company, L.P. Combined Financial
Statements for the basis of presentation of the corporation's Historical
Financial Statements.

     (b) Reflects the transfer of certain of the partnership's assets and
related liabilities of the manufacturing operations, harvesting activities, and
certain timberlands, to the unconsolidated subsidiaries. The net book value
associated with the transfer has been recorded under Investment in Equity
Affiliates and Preferred Stock.

     As of the balance sheet date the corporation has the following outstanding
debt obligations, which includes the current portion of $18,400:

<TABLE>
<CAPTION>
                                                              (DOLLARS IN THOUSANDS)
                                                              ----------------------
<S>                                                           <C>
Senior Notes due 2007.......................................         $122,000
First Mortgage Notes due 2007...............................          112,000
Senior Notes due 2009.......................................          150,000
Senior Notes due 2011.......................................          176,905
Senior Notes due 2016.......................................          200,000
Line of Credit..............................................          200,000
                                                                     --------
                                                                     $960,905
                                                                     ========
</TABLE>

     In connection with the formation of the unconsolidated subsidiaries, the
unconsolidated subsidiaries will assume $170,000 in total of the above
indebtedness of the corporation. The $170,000 indebtedness consists of the First
Mortgage Notes (which are collateralized by the manufacturing facilities), and
$58,000 face value of the Senior Notes due 2007.

     (c) Represents related party notes receivable issued to various members of
management as part of the conversion. The proceeds from the notes were used by
management to purchase their approximate 1% economic ownership interest in the
unconsolidated subsidiaries. Management's purchase of their ownership interest
in the unconsolidated subsidiaries will be accounted for as a capital
contribution on the books of the unconsolidated subsidiaries. Accordingly, the
related party notes receivable have been reclassified to Investment in Equity
Affiliates and Preferred Stock. The notes are due in 10 years, payable on
demand, and bear a fixed market rate of interest, which is payable annually.
Management does not anticipate repayment in the near term.

     (d) Reflects the recording of the assets and liabilities associated with
deferred compensation and long-term incentive compensation awards. These assets
(which are held in a grantor trust) and liabilities were assumed as a result of
the merger of the general partner into the corporation. Also included in a
grantor trust are 358,767 shares of common stock of the corporation related to
the funding of several unit award plans. The shares and the deferred
compensation are recorded at cost in Stockholders' Equity.

     (e) The exchange of the general partner's 2% general partner interest in
Plum Creek Manufacturing and 4% interest in Plum Creek Marketing for shares of
common stock is subject to purchase accounting in accordance with APB No. 16,
"Business Combinations." The basis step-up associated with

                                       27
<PAGE>   29
                        PLUM CREEK TIMBER COMPANY, INC.

              NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                        FINANCIAL STATEMENTS (CONTINUED)
             (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)

this purchase is computed based on the difference between the book value and
fair value of the general partner's minority interest in Plum Creek
Manufacturing and Plum Creek Marketing. As a result of these purchases, the
historical minority interest related to Plum Creek Manufacturing and Plum Creek
Marketing in the amount of $419 is eliminated.

     The basis step-up of approximately $4,304 will be allocated to Property,
Plant and Equipment of the unconsolidated subsidiaries, and as a result, has
been accordingly reflected in the corporation's Investment in Equity Affiliates
and Preferred Stock. The basis step-up will be depreciated over approximately
ten years. Current period depreciation expense of $426 has been reflected in
computing the combined pro forma equity earnings reported by the corporation
related to its investment in the unconsolidated subsidiaries for the year ended
December 31, 1998 and $107 for the quarter ended March 31, 1999.

     (f) Represents the recording of a deferred tax asset as a result of
transferring the manufacturing operations and the harvesting activities from a
nontaxable partnership to unconsolidated subsidiaries. The deferred tax asset of
$9,233 represents the tax effect of temporary differences (primarily self
insurance and employee benefit accruals) at the conversion date. In accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," a one-time adjustment is being recorded for the net temporary
differences as of the conversion date. This deferred tax benefit has not been
included in the pro forma statements of income due to its nonrecurring nature,
and as a result, has been credited directly to stockholders' equity. No
adjustment has been made for the corporation's temporary differences (including
its share of the operating partnership's differences) because, as a REIT, the
corporation anticipates that it will not have to pay any significant
corporate-level tax.

     Current period income tax (benefit) expense of ($10,809) has been reflected
in computing the combined pro forma equity earnings reported by the corporation
related to its investment in the unconsolidated subsidiaries for the year ended
December 31, 1998 and $176 for the quarter ended March 31, 1999. The income tax
provision was calculated using a combined federal and state statutory tax rate
of 40%.

     (g) Reflects approximately $2,400 of REIT conversion costs that were
neither paid nor accrued as of March 31, 1999. Total REIT conversion costs are
estimated to be approximately $9,800. Amounts of $4,763 have been recorded by
the partnership for the year ended December 31, 1998 and $2,651 for the quarter
ended March 31, 1999. Conversion costs include estimated allowances for legal,
investment advisory, fairness opinion, tax and financial advisory, solicitation,
printing, consent fees for lender waivers, and other costs. Conversion costs are
being expensed in the historical financial statements in the period incurred.

     (h) Reflects the reduction in revenues and expenses associated with the
manufacturing operations and costs of harvesting timber. Following the
conversion, these activities will be conducted by the unconsolidated
subsidiaries and will be reported by the corporation as Equity in Earnings
(Loss) of Affiliates and Preferred Stock Dividends.

     (i) Represents an expense of $864 for the year ended December 31, 1998 and
$405 for the quarter ended March 31, 1999, related to a management incentive
plan that was previously a cost incurred by the general partner. On a pro forma
basis, $524 of this expense for the year ended December 31, 1998 and $242 for
the quarter ended March 31, 1999, has been allocated to the corporation and the
remainder has been reflected in computing the combined pro forma equity earnings
reported by the corporation related

                                       28
<PAGE>   30
                        PLUM CREEK TIMBER COMPANY, INC.

              NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                        FINANCIAL STATEMENTS (CONTINUED)
             (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)

to its investment in the unconsolidated subsidiaries. The allocation was based
on an approximation of time anticipated to be devoted by management to the
various unconsolidated subsidiaries.

     (j) Reflects the increase in interest expense as a result of increased
borrowings under the corporation's line of credit for conversion costs not paid
as of December 31, 1998 or March 31, 1999. The assumed incremental interest rate
under the Line of Credit is 6%.

     (k) Reflects the elimination of REIT conversion costs that were expensed in
the partnership's historical financial statements. These costs are not reflected
in the pro forma income statements because they represent nonrecurring
expenditures.

     (l) To eliminate the minority interest associated with the general
partner's ownership interest in Plum Creek Manufacturing and Plum Creek
Marketing.

     (m) Represents the equity income (loss) and preferred stock dividends of
the unconsolidated subsidiaries. As a result of the conversion, the assets and
related liabilities of the manufacturing operations and harvesting activities
along with some higher and better use lands were transferred to the
unconsolidated subsidiaries. On a combined basis the unaudited pro forma
financial position of the unconsolidated subsidiaries as of March 31, 1999 is
summarized as follows:

<TABLE>
<CAPTION>
                                                              (DOLLARS IN THOUSANDS)
                                                              ----------------------
<S>                                                           <C>
Current Assets..............................................         $100,599
Noncurrent Assets...........................................          228,875
Current Liabilities.........................................           52,995
Noncurrent Liabilities......................................          169,233
</TABLE>

     The current and noncurrent liabilities include $170,000 of indebtedness.
The $170,000 of indebtedness consists of the First Mortgage Notes (which are
collateralized by the manufacturing facilities), and $58,000 face value of the
Senior Notes due 2007.

     On a combined basis the unaudited pro forma results of operations of the
unconsolidated subsidiaries as of periods indicated are summarized as follows:

<TABLE>
<CAPTION>
                                                                       THREE MONTHS
                                                   YEAR ENDED             ENDED
                                                DECEMBER 31, 1998     MARCH 31, 1999
                                                -----------------   ------------------
<S>                                             <C>                 <C>
Revenues......................................      $662,357             $175,577
Gross Profit..................................           671                7,043
Interest Expense..............................        18,913                4,728
Income Tax Expense (Benefit)..................       (10,809)                 176
  Net Income (Loss)...........................        (8,780)               2,122
</TABLE>

     Gross profit includes depreciation and amortization expense of $25,410 for
the year ended December 31, 1998 and $7,312 for the quarter ended March 31,
1999. The Income Tax Expense (Benefit) amount includes a tax benefit of $2,973
for the year ended December 31, 1998 and $743 for the quarter ended March 31,
1999, related to the transfer of certain timberlands to the unconsolidated
subsidiaries in exchange for an installment note receivable. The related
interest expense of $7,433 for the year ended December 31, 1998 and $1,858 for
the quarter ended March 31, 1999, associated with the installment note has been
eliminated.

                                       29
<PAGE>   31
                        PLUM CREEK TIMBER COMPANY, INC.

              NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                        FINANCIAL STATEMENTS (CONTINUED)
             (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)

     In accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," the revenue of the corporation related to the sale
of timber to the unconsolidated subsidiaries will be deferred until the logs or
finished goods are sold outside the group of unconsolidated subsidiaries.
Therefore, all sales by the corporation to the unconsolidated subsidiaries will
also be included in the revenue of the unconsolidated subsidiaries in the period
in which the timber (in the form of either whole logs, lumber, plywood or other
wood products) is sold outside the unconsolidated subsidiaries. Revenue related
to sales between the unconsolidated subsidiaries is eliminated in preparing the
summarized combined financial information of the unconsolidated subsidiaries.
Revenues reported by the corporation that were also included in the revenues of
the unconsolidated subsidiaries amounted to $195,812 for the year ended December
31, 1998 and $46,423 for the quarter ended March 31, 1999.

     (n) Reflects the elimination of the general partner's allocation as a
result of converting its general partner interest to a combination of common
stock and special voting stock. In exchange for its general partner interest the
general partner received 16,498,709 shares of common stock and 634,566 shares of
special voting stock which is convertible into common stock.

     (o) Reflects the decrease in interest income as a result of decreased cash
in the amount of $864 for payment related to a management incentive plan for the
year ended December 31, 1998. See note (i).

                                       30
<PAGE>   32

                SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                             ------------------------------------------------------------------------
                                                                                                            PRO FORMA
                                               1994       1995(1)     1996(2)        1997       1998(3)      1998(3)
                                             ---------   ---------   ----------   ----------   ----------   ---------
                                                        (DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S>                                          <C>         <C>         <C>          <C>          <C>          <C>
INCOME STATEMENT DATA
 Revenues..................................  $ 578,657   $ 585,074   $  633,741   $  725,571   $  699,370   $ 232,825(4)
 Operating Income..........................    164,134     158,976      164,988      173,281      141,087     139,121
 Interest Expense -- Net...................    (46,521)    (45,763)     (48,850)     (59,251)     (59,580)    (41,921)
 Other Income (Expense) -- Net.............     (4,477)     (1,910)     108,852       (2,254)      (5,554)      1,082
                                             ---------   ---------   ----------   ----------   ----------   ---------
 Income Before Income Taxes and Equity
   Earnings of Unconsolidated Subsidiaries
   and Preferred Stock Dividends...........    113,136     111,303      224,990      111,776       75,953      98,282
 Provision for Income Taxes................        924         572        1,391           80          517
                                             ---------   ---------   ----------   ----------   ----------   ---------
 Equity Earnings (Loss) of Unconsolidated
   Subsidiaries and Preferred Stock
   Dividends(5)............................                                                                    (8,692)
 Net Income................................    112,212     110,731      223,599      111,696       75,436      89,590
 General Partner Interest..................     16,325      22,487       27,777       31,918       33,713
                                             ---------   ---------   ----------   ----------   ----------   ---------
 Net Income Allocable to
   Unit/Shareholders.......................  $  95,887   $  88,244   $  195,822   $   79,778   $   41,723   $  89,590
                                             =========   =========   ==========   ==========   ==========   =========
 Net Income per Unit/Share.................  $    2.36   $    2.17   $     4.71   $     1.72   $     0.90   $    1.41
 Cash Distributions Declared per
   Unit/Share..............................       1.67        1.96         2.02         2.20         2.28
CASH FLOW AND OTHER DATA
 Net Cash Provided by Operating
   Activities..............................  $ 155,115   $ 165,214   $  171,948   $  189,976   $  164,004
 Net Cash Used in Investing Activities.....    (20,907)    (25,712)    (419,241)     (28,080)     (65,834)
 Net Cash Provided by (Used in) Financing
   Activities..............................   (107,291)   (112,840)     283,581     (150,407)    (119,758)
 EBITDA(6).................................    218,277     213,073      221,933      243,524      210,374   $ 209,509
 Depreciation, Depletion and
   Amortization............................     54,143      54,097       56,945       70,243       69,287      44,307
 Capital Expenditures(7)...................     25,837      30,683       19,280       28,348       64,340      64,340
BALANCE SHEET DATA
 Working Capital...........................  $  90,511   $ 111,541   $  152,988   $  158,262   $  129,587
 Total Assets..............................    826,220     826,086    1,336,434    1,300,897    1,438,243
 Total Debt................................    544,400     531,400      780,800      763,400      961,008
 Partners' Capital.........................    222,977     233,868      491,648(8)    470,337     405,415
OPERATING DATA
 Northwest Timberlands Fee Timber Harvested
   (MMBF)(10)..............................        559         562          557          512          495         495
 Northeastern Timberlands Fee Timber
   Harvested (M Tons)......................                                                           131         131
 Southern Timberlands Fee Timber Harvested
   (M Cunits)..............................                                 127          799          764         764
 Lumber Production (MMBF)..................        388         433          461          582          635         635
 Plywood Production (MMSF) (3/8"
   basis)(11)..............................        290         294          297          312          323         323
 MDF Production (MMSF) (3/4" basis)........        123         102          113          127          132         132
</TABLE>


<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED MARCH 31,
                                             ------------------------------------
                                                                       PRO FORMA
                                                1998         1999         1999
                                             ----------   ----------   ----------
                                                    (DOLLARS IN THOUSANDS,
                                                 EXCEPT PER UNIT/SHARE DATA)
<S>                                          <C>          <C>          <C>
INCOME STATEMENT DATA
 Revenues..................................  $  164,325   $  178,221   $   49,067(4)
 Operating Income..........................      36,075       38,667       31,110
 Interest Expense -- Net...................     (14,735)     (18,136)     (13,850)
 Other Income (Expense) -- Net.............         (33)      (2,495)         378
                                             ----------   ----------   ----------
 Income Before Income Taxes and Equity
   Earnings of Unconsolidated Subsidiaries
   and Preferred Stock Dividends...........      21,307       18,036       17,638
 Provision for Income Taxes................          27          174
                                             ----------   ----------   ----------
 Equity Earnings (Loss) of Unconsolidated
   Subsidiaries and Preferred Stock
   Dividends(5)............................                                 2,101
 Net Income................................      21,280       17,862       19,739
 General Partner Interest..................       8,099        8,534
                                             ----------   ----------   ----------
 Net Income Allocable to
   Unit/Shareholders.......................  $   13,181   $    9,328   $   19,739
                                             ==========   ==========   ==========
 Net Income per Unit/Share.................  $     0.28   $     0.20   $     0.31
 Cash Distributions Declared per
   Unit/Share..............................        0.57         0.57
CASH FLOW AND OTHER DATA
 Net Cash Provided by Operating
   Activities..............................  $   36,185   $   34,724
 Net Cash Used in Investing Activities.....     (12,044)      (6,542)
 Net Cash Provided by (Used in) Financing
   Activities..............................     (33,987)     (35,458)
 EBITDA(6).................................      52,458       57,151   $   56,745
 Depreciation, Depletion and
   Amortization............................      16,383       18,484       11,280
 Capital Expenditures(7)...................      12,098        7,438        7,438
BALANCE SHEET DATA
 Working Capital...........................  $  151,416   $  124,550   $   78,941
 Total Assets..............................   1,290,004    1,423,490    1,228,572(9)
 Total Debt................................     763,400      960,905      793,305(9)
 Partners' Capital.........................     457,630      387,820      399,376
OPERATING DATA
 Northwest Timberlands Fee Timber Harvested
   (MMBF)(10)..............................
 Northeastern Timberlands Fee Timber
   Harvested (M Tons)......................
 Southern Timberlands Fee Timber Harvested
   (M Cunits)..............................
 Lumber Production (MMBF)..................
 Plywood Production (MMSF) (3/8"
   basis)(11)..............................
 MDF Production (MMSF) (3/4" basis)........
</TABLE>

- -------------------------

 (1) Certain reclassifications have been made for comparability purposes and
     have no impact on net income.

 (2) Included in 1996 results of operations was a gain of $105,700 related to
     the sale of 107,000 acres of timberland in northeast Washington and
     northern Idaho and the impact of that sale from October 12, 1996. Results
     also include the impact of the acquisition from Riverwood International
     Corporation of 538,000 acres of timberland and related assets in Louisiana
     and Arkansas from October 19, 1996.

 (3) Results include the impact of the acquisition of 905,000 acres of
     timberlands in Maine from November 12, 1998.

 (4) Reflects the reduction of revenues related to the manufacturing operations,
     harvesting activities and some higher and better use lands that were
     transferred to the unconsolidated subsidiaries.

 (5) On a combined basis the unaudited pro forma summary financial information
     of the unconsolidated subsidiaries as of periods indicated are summarized
     as follows

                                       31
<PAGE>   33

<TABLE>
<CAPTION>
                                                                                     THREE MONTHS
                                                                 YEAR ENDED             ENDED
                                                              DECEMBER 31, 1998     MARCH 31, 1999
                                                              -----------------   ------------------
<S>                                                           <C>                 <C>
Revenues....................................................      $662,357             $175,577
Depreciation and Amortization...............................        25,410                7,312
Operating Income............................................           671                7,043
Interest Expense -- Net.....................................        18,913                4,728
</TABLE>

    In accordance with APB No. 18, "The Equity Method of Accounting for
    Investments in Common Stock," our revenue related to the sale of timber to
    our unconsolidated subsidiaries will be deferred until the logs or finished
    goods are sold outside the group of unconsolidated subsidiaries. Therefore,
    all of our sales to the unconsolidated subsidiaries will also be included in
    the revenue of the unconsolidated subsidiaries in the period in which the
    timber, in the form of either whole logs, lumber, plywood or other wood
    products, is sold outside the group of unconsolidated subsidiaries. Revenue
    related to sales among the unconsolidated subsidiaries is eliminated in
    preparing the summarized combined financial information of the
    unconsolidated subsidiaries. Our reported revenues that were also included
    in the revenues of the unconsolidated subsidiaries amounted to $195,812 for
    the year ended December 31, 1998. Our reported revenues that were also
    included in the revenues of the unconsolidated subsidiaries amounted to
    $46,423 for the three month periods ended March 31, 1999.

 (6) EBITDA is defined as operating income before depreciation, depletion, and
     amortization. EBITDA is provided because management believes EBITDA
     provides useful information for evaluating our ability to make cash
     distributions. EBITDA should not be construed as an alternative to
     operating income (as an indicator of our operating performance) or as an
     alternative to cash flows from operating activities (as a measure of
     liquidity). Pro forma amounts include EBITDA from unconsolidated
     subsidiaries.

 (7) Does not include $181,148 related to the Maine timberland acquisition in
     1998 or $560,740 related to the Riverwood acquisition in 1996. Pro forma
     amounts include capital expenditures of $52,015 related to the
     unconsolidated subsidiaries for the year ended December 31, 1998. Pro forma
     amounts include capital expenditures of $5,560 related to the
     unconsolidated subsidiaries for the three months ended March 31, 1999.

 (8) The partnership issued 5.7 million limited partnership units during 1996
     for net proceeds of $144,297.

 (9) Reflects the transfer of certain assets and liabilities related to the
     manufacturing operations, harvesting activities and some higher and better
     use lands to the unconsolidated subsidiaries. Pro forma total assets and
     total debt including the unconsolidated subsidiaries as if consolidated
     with the corporation for financial reporting purposes would be $1,448,800
     and $963,305 at March 31, 1999.

(10) The Northwest timberlands includes fee timber harvested from the Rocky
     Mountain and Cascade Regions.

(11) Does not include 111 MMSF, 200 MMSF and 37 MMSF for the years ended
     December 31, 1998, 1997 and 1996, respectively, related to production at
     the Joyce, Louisiana, plywood facility which was closed in July 1998.

                                       32
<PAGE>   34

                  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                         CONDITION AND RESULTS OF OPERATIONS

     You should read the following discussion and analysis of our financial
condition and the results of our operations together with our financial
statements and the notes to those financial statements included in this
prospectus. When we refer to the "corporation" we mean Plum Creek Timber
Company, Inc. and its consolidated subsidiaries.

OVERVIEW

     REIT CONVERSION. On June 8, 1998, Plum Creek Timber Company, L.P. announced
that the board of directors of its general partner had authorized the
partnership to seek approval from its unitholders to convert its structure from
a publicly traded master limited partnership to a REIT. On April 19, 1999, the
unitholders approved this conversion, and on July 1, 1999, the conversion was
completed. As a result of the conversion and in order to qualify for tax
purposes as a REIT, some of the partnership's assets and associated liabilities
related to manufacturing operations, harvesting activities and some higher and
better use lands were transferred to several unconsolidated corporate
subsidiaries. Each of our unconsolidated subsidiaries is a corporation subject
to federal and state income tax. The corporation is entitled to approximately
99% of the economics of these unconsolidated subsidiaries through a combination
of nonvoting common stock and preferred stock interests. In order to comply with
REIT qualification rules, the remaining approximate 1% of the economics and 100%
of the voting control of these unconsolidated subsidiaries are owned by four
members of our senior management.

     FINANCIAL REPORTING IMPACT. As a result of the above described structural
changes, the financial reporting under the REIT structure is different than the
historical financial reporting by the partnership. Summarized below are the
major items that are reported differently under the REIT structure:

     Revenues. The corporation owns and manages the timberlands and sells timber
pursuant to timber cutting contracts. In order to meet REIT income qualification
tests under the Internal Revenue Code, the corporation has entered into timber
cutting contracts with the unconsolidated subsidiaries, and, unlike the
partnership, the corporation does not recognize revenue from the harvesting and
delivery of logs. Therefore, the corporation's revenue consists primarily of
proceeds from timber cutting contracts, some qualified land sales and other
miscellaneous real estate related income. In addition, the consolidated
financial statements of the corporation do not include the revenues associated
with the manufacturing operations, primarily lumber, plywood and medium density
fiberboard sales, and some higher and better use land sales.

     Costs and Expenses. The corporation's cost of goods sold and selling,
general and administrative expenses do not include the expenses associated with
the manufacturing operations, harvesting activities and some higher and better
use land sales.

     Interest Expense. The corporation's interest expense does not include the
interest expense associated with approximately $170 million of debt that was
transferred to the unconsolidated subsidiaries.

     Equity in Earnings (Loss) of Affiliates and Preferred Stock
Dividends. Approximately 99% of the net earnings or loss from the manufacturing
operations, harvesting activities and some higher and better use land sale
activities are reflected in the corporation's net income through a single line
item titled "Equity in Earning, (Loss) of Affiliates and Preferred Stock
Dividends."

     Net Income. The corporation's net income is computed similarly to the
partnership's historical net income with one exception. The exception relates to
the ongoing income tax impact associated with the operations that were
transferred to unconsolidated subsidiaries. Since our manufacturing operations,
harvesting activities and some higher and better use land sales are now
conducted through unconsolidated subsidiaries, the corporation's share of the
unconsolidated subsidiaries' earnings are net of the

                                       33
<PAGE>   35

related income tax expense or benefit. For example, generally in a year in which
the unconsolidated subsidiaries report a consolidated loss, the corporation's
net income will be favorably impacted by its share of the unconsolidated
subsidiaries' income tax benefit. Similarly, in a year in which the
unconsolidated subsidiaries report consolidated income, the corporation's net
income will be reduced by its share of the unconsolidated subsidiaries' income
tax expense.

     Earnings Per Share. In general, the corporation computes its earnings per
share by dividing its net income by the weighted-average number of shares
outstanding, which include the 17,133,275 shares that were issued to the
partnership's general partner in the conversion. The partnership had
historically computed net income per unit by dividing the partnership's net
income available to unitholders by the weighted-average number of limited
partner units outstanding. Net income available to unitholders was equal to the
partnership's net income less the income allocated to the general partner, which
consisted of an incentive distribution allocation and 2% of earnings. For
example, in 1998 the general partner was allocated 45% of net income and
received 25.5% of distributions made by the partnership. Therefore, for any
given level of net income, earnings per share reported by the corporation may be
different than the per unit amounts historically reported by the partnership.

     Assets and Liabilities. The corporation's balance sheet does not separately
reflect the assets and liabilities associated with the manufacturing operations,
harvesting activities and some higher and better use lands. Instead, the book
value net of related liabilities for these assets and operations is reflected in
the corporation's nonvoting common stock and preferred stock investments in the
unconsolidated subsidiaries.

     Footnotes. The footnotes to the corporation's financial statements include
summarized financial information for the unconsolidated subsidiaries on a
combined basis, including revenues, gross profit, interest expense, income tax
expense (benefit) and net income (loss).

     MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS. The
corporation's period by period comparison of operating results are similar to
the analysis provided by the partnership. The analysis is by business segment
and incorporates the operations of both the corporation and the unconsolidated
subsidiaries. The corporation continues to have the same five reportable
segments as did the partnership.

     As used in this prospectus, "Northern Resources Segment" refers to our
combined timber operations in the Northwest and Northeastern United States.
"Southern Resources Segment" refers to our timber operations in the Southern
United States. "Lumber Segment" refers to our combined lumber facilities. "Panel
Segment" refers to our combined plywood and medium density fiberboard
facilities. "Land Sales Segment" refers to our higher and better use land sales.
"Other" refers to our southern plywood facility which was closed in 1998 and our
northwest chip facility which was sold in 1998.

EVENTS AND TRENDS AFFECTING OPERATING RESULTS

     MARKET FORCES. The demand for logs and manufactured wood products depends
upon international and domestic market conditions, the value of the United
States dollar in foreign exchange markets, competition, the availability of
substitute products and other factors. In particular, the demand for logs,
lumber, plywood and medium density fiberboard is affected by new residential and
industrial construction, and repair and remodel activity. These activities are
subject to fluctuations due to changes in economic conditions, tariffs, interest
rates, population growth and other economic, demographic and environmental
factors. Additionally, the demand for logs is impacted by the demand for wood
chips in the pulp and paper markets.

     CURRENT MARKET CONDITIONS. Throughout 1998 there was an excess supply of
logs and lumber in the United States market due to economic weakness in Asia.
The supply of logs in the Cascade Region increased significantly during 1998 due
to both the re-direction of export quality logs to the domestic market and an
inflow of logs from British Columbia. As a result, prices for our domestic logs
in the

                                       34
<PAGE>   36

Cascade Region decreased in 1998 by approximately 13% from 1997 levels. Prices
for domestic logs in the Cascade Region for the first six months of 1999
improved by approximately 13% over 1998 prices, primarily due to strong lumber
markets and weather-related harvesting curtailments. Prices for domestic logs in
the Rocky Mountain Region declined modestly in 1998 compared to 1997 prices,
primarily as a result of weak lumber markets and an excess supply of logs.
Despite improving lumber and plywood markets, prices for domestic logs in the
Rocky Mountain Region have remained flat during the first six months of 1999,
primarily due to a balance of supply of and demand for logs throughout the
region as a result of favorable harvesting conditions. Pulp log and chip prices
in the Northwest remained weak during 1998 due to a world-wide excess supply of
pulp and paper. Northwest pulp log and chip prices held steady during the first
six months of 1999, as did prices for sawlogs and pulp logs in the Northeast
Region.

     Sawlog prices in the Southern Region in 1998 were generally comparable to
1997. However, prices during the second half of 1998 were under downward
pressure due to weak lumber prices and an excess supply of logs. Prices weakened
further during the first six months of 1999 due to an excess supply of logs as a
result of unusually favorable harvesting conditions. Pulp log prices in the
Southern Region improved slightly in 1998 compared to 1997, primarily due to log
supply shortages in the first half of the year as a result of weather-related
harvesting curtailments. Prices for pulp logs in the Southern Region for the
first six months of 1999 declined slightly compared to 1998 prices due to an
abundant supply of logs as a result of favorable harvesting conditions.

     Export log prices for the Cascade Region decreased in 1998 by approximately
16% from 1997 levels, primarily due to continued economic weakness in Asia.
Demand for export logs during 1998 remained weak due to lower Japanese housing
starts, estimated to be 1.2 million in 1998 compared to 1.4 million in 1997,
high unemployment, weakness in the Japanese yen, and low Japanese consumer
confidence. Export log prices during the first six months of 1999 generally
remained weak.

     Industry composite indices for commodity lumber prices were 16% lower in
1998 than in 1997, primarily due to the worldwide excess supply of lumber.
Demand for lumber remained extremely strong during 1998 due to a robust United
States economy, low interest rates, healthy job growth and strong consumer
confidence. Both housing starts and new home sales in 1998 were approximately
10% above 1997 figures. However, due to weak Asian markets, the supply of lumber
in the United States increased. The increased supply was primarily due to the
re-direction of lumber previously sold in Japan and increased substitution of
engineered wood products. Furthermore, lumber prices in the Southern United
States have experienced greater downward pressure due to increased substitution
of Western species and engineered wood products. Industry composite indices for
commodity lumber prices for the first six months of 1999 improved by
approximately 15% over 1998 indices. This price improvement is primarily due to
the strong United States economy, which has resulted in a 7% increase in housing
starts during the first six months of 1999 compared to the same period in the
prior year, low field inventories and improving foreign markets. Lumber prices
in the Southern United States during the first six months of 1999 have only
increased slightly. Southern lumber price improvement has been limited because a
smaller percentage of Southern Yellow Pine as compared to Western species is
consumed in the housing sector and because of the continued substitution of
engineered wood products. Board prices in the repair and remodel markets
declined by over 10% in 1998 from 1997 levels. The price decline was primarily
due to increased imports from European producers, as well as increased domestic
production as a result of a shift in production from dimension lumber to boards.
Imports of European lumber increased by approximately 300% in 1998 over 1997
volumes, to approximately 20% of the United States board market. Board prices
during the first six months of 1999 improved by approximately 5% over 1998
prices, primarily due to strong repair and remodeling activity as a result of
the healthy United States economy. During 1999, European producers continued to
supply approximately 20% of the United States board market.

                                       35
<PAGE>   37

     Industry composite indices for commodity plywood prices in 1998 were
comparable to 1997 prices. Commodity plywood prices were generally under
downward pressure during the first half of 1998 due to continued oriented strand
board capacity expansion. Oriented strand board competes with plywood in some
applications and continues to capture a significant share of the North American
structural panel market, estimated at approximately 49% in 1998. However,
commodity plywood prices improved during the second half of 1998, primarily due
to strong building activity, rising oriented strand board prices and recent
plywood plant closures. Industry composite indices for commodity plywood prices
for the first six months of 1999 improved by approximately 11% over 1998
indices. The price improvement is primarily due to strong building activity, low
field inventories, rising oriented strand board prices and declining plywood
production. Industrial and specialty grade plywood prices remained strong during
1998 and strengthened further during the first six months of 1999, primarily due
to strong consumer spending and rising commodity plywood prices.

     Medium density fiberboard prices in 1998 were comparable to 1997 prices.
North American demand for medium density fiberboard continues to grow
approximately 10% per year, primarily due to increased acceptance and expanded
applications. The largest growth is occurring in applications that require
high-quality panels, such as kitchen cabinets and moldings. However, despite
improving demand, prices were generally under downward pressure during the
fourth quarter of 1998, due to increased supply resulting from three new mills
beginning operations in 1998, better operating performance by start-up mills and
the re-direction to North American markets of medium density fiberboard
previously sold in Asian markets. Medium density fiberboard prices generally
held steady during the first six months of 1999, as the continued increase in
demand was offset by higher production.

     COMPARABILITY OF FINANCIAL STATEMENT PERIODS. On November 12, 1998, we
acquired 905,000 acres in Maine. On October 18, 1996, we acquired 529,000 acres,
plus approximately 9,000 lease acres in Louisiana and Arkansas. We may also,
from time to time, sell timberlands and facilities if attractive opportunities
arise. For example, on October 11, 1996, we sold 107,000 acres in northeast
Washington and northern Idaho, along with a sawmill near Colville, Idaho, to
Stimson Lumber Company for approximately $141.9 million, plus $8.7 million for
working capital. In 1996, these assets generated $61.0 million of revenues and
$15.7 million of operating income. In 1995, these assets generated $67.8 million
in revenues and $14.6 million in operating income. Accordingly, the
comparability of periods covered by our financial statements is, and in the
future may be, affected by the impact of acquisitions and divestitures.

     HARVEST PLANS. We determine our harvest plans based on a number of factors,
including the economic maturity of each harvest area, timber growth rates,
market demands for various species or log sizes, and environmental
considerations.

     Harvest levels in the Rocky Mountain Region averaged approximately 365
million board feet in 1998 and 1997. We expect harvest levels in 1999 and 2000
to decline slightly compared to 1998. By the year 2000, we anticipate that we
will have nearly completed the conversion of slower growing forests to younger,
more productive stands in the Rocky Mountain Region, at which time we anticipate
a moderate reduction in the region's harvest levels. Harvest levels in the
Cascade Region averaged 150 million board feet during 1995 to 1997 before
declining approximately 10% in 1998. Beginning in 1999, we expect harvest levels
in the Cascade Region to decline for the foreseeable future as the conversion of
slower growing forests to younger, more productive stands is completed. We
anticipate the harvest level in the Northeast Region, including sawlogs and
pulpwood, to be approximately one million tons in 1999 and remain stable for the
foreseeable future.

     Harvest levels in the Southern Region, including sawlogs and pulpwood, were
approximately 800 thousand cunits during 1997 and declined to 760 thousand
cunits during 1998. We expect the 1999 harvest volume to approximate the 1998
volume. Harvest levels for the years 2000 to 2003 will be moderately lower
compared to 1998, as we complete both the conversion of mature second growth
pine

                                       36
<PAGE>   38

timberlands into intensively managed pine plantations and our accelerated
thinning operations, which are intended to improve growth rates. In subsequent
years, we expect harvest levels in the Southern Region to gradually increase as
we benefit from faster growing, intensively managed plantations.

     Harvest plans are influenced by projections of our timber inventory,
demand, timber supply from other sources, availability of legal access and other
factors that may be outside of our control. Accordingly, actual harvest levels
may vary materially. We believe that our harvest plans are sufficiently flexible
to permit modification in response to short-term fluctuations in the markets for
logs and lumber.

     STONE CONTAINER CORPORATION. A substantial portion of our wood chips
derived from manufacturing lumber and plywood in the Rocky Mountain Region are
sold to Stone Container Corporation under a long-term supply agreement. This
agreement generally provides for market-based pricing for wood chips subject to
minimum and maximum prices until December 31, 1999. If market prices for chips
remain at current levels, which are below the minimum level set by the supply
agreement, annual earnings before interest, taxes, depreciation, depletion and
amortization would be reduced by approximately $11 million starting in the year
2000. The actual impact of the phase-out of the minimum pricing provision,
however, cannot be accurately predicted, and will depend on future market
prices.

HISTORICAL RESULTS OF OPERATIONS

FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998

     The following table compares operating income by segment for the quarters
ended March 31:

                          OPERATING INCOME BY SEGMENT
                            (UNAUDITED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               1999       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Northern Resources..........................................  $27,644    $19,479
Southern Resources..........................................    6,074     12,133
Lumber......................................................    3,555      3,178
Panel.......................................................    4,951      2,449
Land Sales..................................................      731      1,155
Other.......................................................        -        406
                                                              -------    -------
Total Segment Operating Income..............................   42,955     38,800
Other Costs & Eliminations..................................   (4,288)    (2,725)
                                                              -------    -------
Total.......................................................  $38,667    $36,075
                                                              =======    =======
</TABLE>

     The accounting policies of the segments are substantially the same as those
described in Note 1 to Notes to Combined Financial Statements of Plum Creek
Timber Company, L.P. For segment purposes, however, inventories are stated at
the lower of average cost or market on the first-in, first-out ("FIFO") method.
Therefore, the difference in computing cost of goods sold under the last in,
first out ("LIFO") and FIFO methods is included in "Other Costs & Eliminations."

     NORTHERN RESOURCES SEGMENT. Revenues increased by $20.2 million, or 35%, to
$78.1 million in the first quarter 1999, compared to $57.9 million in the first
quarter 1998. This increase was primarily due to $14.0 million of additional
revenues as a result of the Maine timberland acquisition and increased Rocky
Mountain Region log sales volume. Rocky Mountain Region log sales volume
increased by approximately 17% compared to 1998, primarily as a result of
favorable harvesting conditions which allowed increased production in order to
build log inventories prior to weather-related seasonal downtime.

     Northern Resources Segment operating income was 35% as a percentage of its
revenues in the first quarter 1999 and 34% in the first quarter 1998. Northern
Resources Segment costs and expenses

                                       37
<PAGE>   39

increased by $12.1 million, or 32%, to $50.5 million in 1999, compared to $38.4
million in 1998. This increase was primarily due to $9.2 million of additional
costs as a result of the Maine timberland acquisition and increased Rocky
Mountain Region log sales volume.

     SOUTHERN RESOURCES SEGMENT. Revenues decreased by $6.4 million, or 24%, to
$20.4 million in the first quarter 1999, compared to $26.8 million in the first
quarter 1998. This decrease was primarily due to an 18% decline in sawlog prices
and a 16% decline in sawlog sales volume. The price decline was primarily
weather related. Weather during the first quarter 1999 was unseasonably dry,
compared to unseasonably wet weather during the first quarter 1998. As a result,
there was an abundant supply of logs during the first quarter 1999, compared to
a log shortage during the same period in the prior year period. The sales volume
variance was primarily due to a decline in the internal usage of logs and the
abundant supply of logs. The internal usage of logs declined compared to the
prior year first quarter due to the July 1998 closure of the Joyce, Louisiana
plywood facility and the three-month delayed start-up of the new Joyce,
Louisiana sawmill.

     Southern Resources Segment operating income was 30% as a percentage of its
revenues in the first quarter 1999 and 45% in the first quarter 1998. This
decline was primarily due to lower log prices. Southern Resources Segment costs
and expenses decreased by $0.4 million, or 3%, to $14.3 million in 1999,
compared to $14.7 million in 1998, primarily due to the decline in sawlog sales
volume.

     LUMBER SEGMENT. Revenues increased by $12.7 million, or 19%, to $79.5
million in the first quarter 1999, compared to $66.8 million in the first
quarter 1998. This increase was primarily due to revenues of $8.2 million from
the Meridian, Idaho remanufacturing facility, acquired in May 1998, and a 9%
increase in lumber sales volume, offset in part by an 11% decrease in Southern
lumber sales prices. Lumber sales volume increased primarily due to greater
operating efficiencies at most of our mills and the start-up of the new Joyce,
Louisiana sawmill. Southern lumber prices decreased primarily due to a lower
percentage of higher-value, wide-dimension lumber in our sales mix as a result
of fewer large diameter sawlogs from our timberlands.

     Lumber Segment operating income was approximately 5% as a percentage of its
revenues in the first quarters of both 1999 and 1998. Lumber Segment costs and
expenses increased by $12.3 million, or 19%, to $75.9 million in the first
quarter 1999, compared to $63.6 million in the first quarter 1998. This increase
was primarily due to $7.7 million of costs associated with the Meridian, Idaho
remanufacturing facility and increased lumber sales volume.

     PANEL SEGMENT. Revenues increased by $0.7 million to $40.3 million in the
first quarter 1999, compared to $39.6 million in the first quarter 1998. This
increase was primarily due to a 7% increase in plywood prices and a 4% increase
in medium density fiberboard prices, offset in part by a slight decline in
plywood sales volume. Plywood prices increased primarily due to unusually strong
building activity during the first quarter 1999, rising oriented strand board
prices, a decline in plywood production, and strong industrial markets. Prices
also increased due to a higher percentage of premium grade panel production.
Medium density fiberboard prices improved due to strong demand growth and our
consistent production of premium grade panels.

     Panel Segment operating income was 12% as a percentage of its revenues in
the first quarter 1999 and 6% in the first quarter 1998. The increase in
operating income was primarily due to higher plywood and medium density
fiberboard prices and lower medium density fiberboard raw material costs. Panel
Segment costs and expenses decreased by $1.8 million, or 5%, to $35.3 million in
the first quarter 1999, compared to $37.2 million in the first quarter 1998.
This decrease was primarily due to a decline in plywood sales volume and a 10%
decline in medium density fiberboard raw material costs.

     LAND SALES SEGMENT. Revenues decreased by $0.2 million, or 14%, to $1.2
million in 1999, compared to $1.4 million in 1998. Land Sales Segment operating
income was 63% as a percentage of its

                                       38
<PAGE>   40

revenues in the first quarter 1999 and 87% in the first quarter 1998. Land Sales
Segment costs and expenses increased by $0.2 million to $0.4 million in 1999,
compared to $0.2 million in 1998.

     Other Costs and Eliminations, which consists of corporate overhead,
intercompany log profit elimination and the change in the LIFO reserve,
decreased operating income by $4.3 million in the first quarter of 1999,
compared to $2.7 million in the first quarter of 1998. The change in Other Costs
and Eliminations of $1.6 million is primarily due to the intercompany log profit
elimination related to the build-up of log inventories in the Southern Resources
Segment in the fourth quarter of 1997 and the subsequent processing of these
logs in the first quarter of 1998. Similar log inventories were not built-up
during the fourth quarter of 1998. The profit on intercompany log sales is
deferred until the lumber and plywood manufacturing facilities convert existing
log inventories into finished products and sell them to third parties, at which
time intercompany profit is recognized.

     Interest expense increased by $3.5 million, or 24%, to $18.5 million, in
the first quarter 1999, compared to $15.0 million in the first quarter 1998.
This increase was primarily due to the issuance of $177 million of senior notes
in the fourth quarter 1998 related to the Maine timberland acquisition.

     Reorganization costs of $2.7 million were costs associated with our
conversion into a REIT. See Note 2 of Notes to Combined Financial Statements of
Plum Creek Timber Company, L.P. Reorganization costs consisted of fees for
legal, investment banking and tax consultants, as well as printing and other
related costs. Reorganization costs were being expensed as incurred.

     The income allocated to the former general partner of the partnership
increased by $0.4 million to $8.5 million in the first quarter 1999, compared to
$8.1 million in the first quarter 1998, primarily due to higher quarterly
distributions to unitholders. Net income was allocated to the former general
partner based on two percent of the partnership's net income, adjusted for the
former general partner's incentive distribution, plus the incentive
distribution. The former general partner's incentive distribution was based on
the number of outstanding units times a percentage of the per unit distribution
paid to limited partners, which totaled $0.57 per unit in the first quarter
1999, compared to $0.55 per unit in the first quarter 1998.

RESULTS OF FISCAL YEARS ENDED 1998, 1997, 1996

     The following table compares operating income by segment for the years
ended December 31:

                          OPERATING INCOME BY SEGMENT
                            (UNAUDITED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   1998        1997        1996
                                                 --------    --------    --------
<S>                                              <C>         <C>         <C>
Northern Resources.............................  $ 73,715    $ 98,792    $119,767
Southern Resources.............................    53,568      54,313       8,149
Lumber.........................................     2,599      34,667      18,596
Panel..........................................    14,360       8,462       5,305
Land Sales.....................................    26,598      13,963      35,434
Other..........................................    (2,247)     (1,152)     (1,682)
                                                 --------    --------    --------
          Total Segment Operating Income.......   168,593     209,045     185,569
Other Costs & Eliminations.....................   (27,506)    (35,764)    (20,581)
                                                 --------    --------    --------
          Total................................  $141,087    $173,281    $164,988
                                                 ========    ========    ========
</TABLE>

     The accounting policies of the segments are substantially the same as those
described in Note 1 to Notes to Combined Financial Statements of Plum Creek
Timber Company, L.P. For segment purposes, however, inventories are stated at
the lower of average cost or market on the FIFO method. Therefore,

                                       39
<PAGE>   41

the difference in computing cost of goods sold under the LIFO and FIFO methods
is included in "Other Costs & Eliminations."

FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

     NORTHERN RESOURCES SEGMENT. Revenues decreased by $23.6 million, or 9%, to
$250.3 million in 1998, compared to $273.9 million in 1997. This decrease was
primarily due to declining harvest levels in the Cascade Region, lower domestic
log prices in the Rocky Mountain and Cascade Regions, lower export log prices
and the re-direction of export quality logs to the domestic market, offset in
part by $5.8 million of additional revenues as a result of the Maine timberland
acquisition. An approximate 15% planned decline in the sawlog harvest level in
the Cascade Region decreased revenue by approximately $13 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Events and Trends Affecting Operating Results -- Harvest Plans."
Rocky Mountain Region domestic log prices decreased by 4% and Cascade Region
domestic log prices decreased by 13%, compared to 1997, primarily as a result of
weak lumber markets and an excess supply of logs. Export prices decreased by
16%, primarily due to a decline in Japanese demand for logs.

     Northern Resources Segment operating income was 29% as a percentage of its
revenues in 1998 and 36% in 1997. This decrease is primarily due to the decline
in domestic and export log prices and the re-direction of export quality logs to
the domestic market. Northern Resources Segment costs and expenses increased by
$1.5 million, or 1%, to $176.6 million in 1998, compared to $175.1 million in
1997. This increase was primarily due to $4.5 million of additional costs as a
result of the Maine timberland acquisition, offset in part by decreased
harvesting costs in the Cascade Region as a result of reduced harvest levels.

     SOUTHERN RESOURCES SEGMENT. Revenues decreased by $0.7 million to $118.4
million in 1998, compared to $119.1 million in 1997. This decrease is primarily
due to a 7% decline in Southern domestic log sales volume, offset in part by
slightly higher Southern pulp log prices and increased in-woods chipping
operations.

     Southern Resources Segment operating income was 45% as a percentage of its
revenues in 1998 and 46% in 1997. Southern Resources Segment costs and expenses
remained flat year to year, with $64.8 million of costs and expenses in each of
1998 and 1997.

     LUMBER SEGMENT. Revenues decreased by $13.2 million, or 4%, to $281.6
million in 1998, compared to $294.8 million in 1997. Excluding revenues
associated with the May 1998 Meridian acquisition, 1998 revenues decreased by
$29.4 million, or 10%, to $265.4 million, compared to $294.8 in 1997. This
decrease was primarily due to lower Northwest and Southern lumber prices, offset
in part by increased Southern lumber sales volume. Northwest lumber prices
decreased by 12% and Southern lumber prices decreased by 13%, compared to 1997,
primarily due to the worldwide overproduction of lumber resulting from weak
Asian demand. Southern lumber sales volume increased by 4% compared to 1997,
primarily due to the processing of additional logs following the July 1998
Southern plywood facility closure.

     Lumber Segment operating income was 1% as a percentage of its revenues in
1998 and 12% in 1997. This decrease is primarily due to the severe decline in
Northwest and Southern lumber prices. Lumber Segment costs and expenses
increased by $18.8 million, or 7%, to $279.0 million in 1998 compared to $260.2
million in 1997. This increase was primarily due to $15.7 million of additional
operating costs related to the Meridian remanufacturing plant acquisition and
increased Southern lumber sales volume.

     PANEL SEGMENT. Revenues increased by $5.0 million, or 3%, to $154.6 million
in 1998, compared to $149.6 million in 1997. This increase was primarily due to
increased medium density fiberboard and plywood sales volume and higher plywood
prices. Medium density fiberboard sales volume increased by 7% compared to 1997,
primarily due to increased production as a result of operational improvements.

                                       40
<PAGE>   42

Plywood sales volume increased by 2% compared to 1997, primarily due to
additional shifts and improved fiber recovery. Plywood prices increased by 2%
compared to 1997, primarily due to a higher value product mix.

     Panel Segment operating income was 9% as a percentage of its revenues in
1998 and 6% in 1997, primarily due to lower medium density fiberboard raw
material costs and higher plywood prices. Panel Segment costs and expenses
decreased by $0.9 million, or 1%, to $140.3 million in 1998, compared to $141.2
million in 1997. This decrease was primarily due to reduced medium density
fiberboard raw material costs, offset in part by increased medium density
fiberboard and plywood sales volume.

     LAND SALES SEGMENT. Revenues increased by $14.9 million, or 83%, to $32.8
million in 1998, compared to $17.9 million in 1997. This increase was primarily
due to two large land sales consummated in the fourth quarter of 1998 for total
proceeds of $17.7 million.

     Land Sales Segment operating income was 81% as a percentage of its revenues
in 1998 and 78% in 1997. Land Sales Segment costs and expenses increased by $2.3
million, or 59%, to $6.2 million in 1998, compared to $3.9 million in 1997,
primarily due to additional sales.

     Other Costs and Eliminations, which consists of corporate overhead,
intercompany log profit elimination and the change in the LIFO reserve,
decreased operating income by $27.5 million in 1998, compared to $35.8 million
in 1997. The change in Other Costs and Eliminations of $8.3 million is primarily
due to a decrease in the deferral of intercompany log profit elimination, offset
in part by increased corporate overhead. The profit on intercompany log sales is
deferred until the lumber and plywood manufacturing facilities convert existing
log inventories into finished products and sell them to third parties, at which
time intercompany profit is recognized. During 1998, intercompany log profit of
$6.2 million was released while $7.8 million was deferred during 1997. The
increase in operating income due to intercompany log profit is primarily due to
the build-up of log inventories in Southern Resources in the fourth quarter 1997
and the subsequent processing of these logs in the first quarter 1998 during
weather-related harvest restrictions. Similar log inventories were not built-up
during the fourth quarter 1998. The decrease in operating income due to
corporate overhead is primarily due to achieving a fifth and final target under
our 1994 Long-Term Incentive Plan and Key Employee Long-Term Incentive Plan in
April 1998. The expense related to these plans was approximately $13.3 million
in 1998, compared to $7.8 million in 1997. A portion of the increase was offset
by lower incentive compensation accruals due to lower earnings levels.

     Reorganization costs of $4.8 million were costs associated with our
conversion to a REIT. See Note 2 of Notes to Combined Financial Statements of
Plum Creek Timber Company, L.P. Reorganization costs consisted of fees for
legal, investment banking and tax consultants, as well as printing and other
related costs. Reorganization costs were expensed as incurred.

     The income allocated to the former general partner of the partnership
increased by $1.8 million to $33.7 million for 1998, compared to $31.9 million
for 1997, primarily due to higher quarterly distributions to unitholders. Net
income was allocated to the former general partner based on two percent of the
partnership's net income, adjusted for the former general partner's incentive
distribution, plus the incentive distribution. The former general partner's
incentive distribution was based on the number of outstanding units times a
percentage of the per unit distribution paid to limited partners, which totaled
$2.26 per unit in 1998, compared to $2.16 per unit in 1997.

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

     NORTHERN RESOURCES SEGMENT. Revenues decreased by $34.9 million, or 11%, to
$273.9 million in 1997, compared to $308.8 million in 1996. This decrease was
primarily due to a decline in Rocky Mountain Region log sales volume, lower
export sales volume, and a decrease in export log sales prices. Domestic log
sales volume in the Rocky Mountain Region decreased by 14% compared to 1996, as
a

                                       41
<PAGE>   43

result of the October 1996 sale of 107,000 acres of timberlands. Export sales
volumes decreased by 17% primarily as a result of the re-direction of export
quality logs to the domestic market due to weak export markets. Export prices
decreased by 7% compared to 1996, due to decreased demand as a result of the
weakness in Japan's domestic economy and an increase in the global supply of
logs targeted toward the Japanese market.

     Northern Resources Segment operating income was 36% as a percentage of its
revenues in 1997 and 39% in 1996. This decrease was primarily due to higher log
and haul costs in the Rocky Mountain Region and lower export log sales prices.
Northern Resources Segment costs and expenses decreased by $13.9 million, or 7%,
to $175.1 million in 1997, compared to $189.0 million in 1996. This decrease was
primarily due to the decline in Rocky Mountain Region log sales volume, offset
in part by increased log and haul costs in the Rocky Mountain Region. Rocky
Mountain Region log and haul costs increased by 8% as a result of more expensive
logging methods.

     SOUTHERN RESOURCES SEGMENT. Revenues increased by $100.8 million to $119.1
million in 1997, compared to $18.3 million in 1996. This increase was due to the
October 1996 Southern Region acquisition. Prior to October 1996, we had no
operations in the South.

     Southern Resources Segment operating income was 46% as a percentage of its
revenues in 1997 and 45% in 1996. Southern Resources Segment costs and expenses
increased by $54.7 million to $64.8 million in 1997, compared to $10.1 million
in 1996. This increase was due to the October 1996 Southern Region acquisition.

     LUMBER SEGMENT. Revenues increased by $55.5 million, or 23%, to $294.8
million in 1997, compared to $239.3 million in 1996. This increase was due to
additional revenues of $83.0 million from the Southern lumber facilities and
increased lumber sales prices, offset in part by lower lumber sales volumes and
decreased Northwest chip revenues. Lumber sales prices in the Northwest
increased by 3%, primarily due to strength in the United States housing market
and the reduction in supply of preferred western species. Northwest lumber sales
volume decreased by 15% compared to 1996, primarily due to the October 1996 sale
of the Arden sawmill in Colville, Washington. Wood chip sales volume decreased
compared to 1996 due to the sale of the Arden sawmill.

     Lumber Segment operating income was 12% as a percentage of its revenues in
1997 and 8% in 1996. This increase was primarily due to higher Northwest lumber
prices and the Southern Region acquisition. Lumber Segment costs and expenses
increased by $39.5 million, or 18%, to $260.2 million in 1997, compared to
$220.7 million in 1996. This increase was primarily due to $72.8 million of
additional costs related to the Southern lumber facilities, offset in part by
lower Northwest lumber sales volumes.

     PANEL SEGMENT. Revenues increased by $10.7 million, or 8%, to $149.6
million in 1997, compared to $138.9 million in 1996. This increase was primarily
due to higher plywood and medium density fiberboard sales volumes, offset in
part by lower medium density sales prices. Plywood sales volume in the Northwest
increased by 8% compared to 1996, primarily as a result of increased production
due to additional production shifts and capital improvements. Medium density
fiberboard sales volume increased by 13% primarily due to greater efficiencies
from high-energy refiners that were installed in the third quarter 1995. Medium
density fiberboard sales prices decreased by 6% primarily as a result of
industry capacity expansion and aggressive pricing by start-up mills.

     Panel Segment operating income was 6% as a percentage of its revenues in
1997 and 4% in 1996. Panel Segment costs and expenses increased by $7.6 million,
or 6%, to $141.2 million in 1997, compared to $133.6 million in 1996. This
increase was primarily due to higher plywood and medium density fiberboard sales
volumes, offset in part by lower medium density fiberboard raw materials and
production costs.

                                       42
<PAGE>   44

     LAND SALES SEGMENT. Revenues decreased by $24.4 million, or 58%, to $17.9
million in 1997, compared to $42.3 million in 1996. This decrease was the result
of 3,350 acres of "higher and better use" land being sold in 1997 compared to
sales of 21,600 acres in 1996.

     Land Sales Segment operating income was 78% as a percentage of its revenues
in 1997 and 84% in 1996. Land Sales Segment costs and expenses decreased by $3.0
million, or 43%, to $3.9 million in 1997, compared to $6.9 million in 1996.

     Other Costs and Eliminations, which consists of corporate overhead,
intercompany log profit elimination and the change in the LIFO reserve,
decreased operating income by $35.8 million in 1997, compared to $20.6 million
in 1996. The variance of $15.2 million was primarily due to an increase in both
corporate overhead and the deferral of intercompany profit. The increase in
corporate overhead is primarily due to expense resulting from the achievement of
a unit value target under our 1994 Long-Term Incentive Plan and Key Employee
Long-Term Incentive Plan during the third quarter 1997 and the addition of the
Southern Region. The increase in deferred intercompany log profit was a result
of increasing inventory levels in 1997. Mill log inventories levels in the
Southern Region increased as a result of anticipated weather-related harvesting
curtailments during the first quarter 1998 and, in the Northwest, due to
favorable harvesting conditions during the fourth quarter 1997. The profit on
intercompany log sales is deferred until the lumber and plywood manufacturing
facilities convert existing log inventories into finished products and sell them
to third parties, at which time intercompany profit is recognized. The
achievement of a unit value target under our Long-Term Incentive Plan and Key
Employee Long-Term Incentive Plan resulted in $7.8 million of expense in 1997,
the majority of which was included in selling, general and administrative
expenses, compared to an expense of $3.9 million in 1996.

     Interest expense increased by $10.3 million, or 21%, to $60.4 million in
1997, compared to $50.1 million in 1996, primarily due to the issuance of $200
million of senior notes in the fourth quarter 1996 related to the Southern
Region acquisition. Gain on disposition of assets in 1996 included $105.7
million related to the Newport asset sale.

     The income allocated to the former general partner of the partnership
increased by $4.1 million during 1997 compared to 1996 due to higher quarterly
distributions to unitholders and the issuance of 5.7 million additional limited
partner units in the fourth quarter of 1996, offset in part by lower net income.
Net income was allocated to the former general partner based on two percent of
the partnership's net income, adjusted for the former general partner's
incentive distribution paid, plus the incentive distribution. The incentive
distribution is based on a percentage of the quarterly distribution paid which
totaled $2.16 per unit in 1997, compared to $2.00 per unit in 1996.

     EXPORT SALES. Export log and finished product sales are denominated in
United States dollars and include markets in Pacific Rim countries, principally
Japan, and to Canada and Europe. Combined export revenues as a percentage of
total revenues were 5% in 1998, 9% in 1997 and 11% in 1996.

YEAR 2000 READINESS DISCLOSURE

     Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. Any programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in the computer shutting down or performing incorrect computations. As a result,
before December 31, 1999, computer systems and software used by many companies
may need to be upgraded to comply with "Year 2000" requirements.

                                       43
<PAGE>   45

     During the first quarter of 1997, we adopted a Year 2000 plan to identify
and address both internal and external Year 2000 issues. Our Year 2000 plan
addresses the following:

     - information technology systems;

     - process control systems and embedded chips used in our manufacturing
       operations; and

     - key business relationships.

Pursuant to our plan, we completed a company-wide assessment of our information
technology systems in 1997 to determine the impact of the Year 2000 issue. We
completed most of the necessary revisions to our systems and processes by
year-end 1998. Testing and verification of our systems and processes for Year
2000 compliance will be completed prior to January 1, 2000.

OUR STATE OF READINESS

     Over the last five years, we have replaced many of our business computer
systems in order to realize cost savings and process improvements. A majority of
these replacements, all of which are Year 2000 compliant, were completed prior
to the company-wide Year 2000 issue assessment. The related costs have been
capitalized. In 1999, we completed the replacement of our payroll and human
resources systems. To replace these systems, we spent approximately $300,000 in
1998 and approximately $110,000 in 1999. These costs have been capitalized.

     Our log accounting systems have required program modifications to achieve
Year 2000 readiness. The program modifications and testing was completed in June
1999 at an approximate cost of $28,000 for 1998 and an approximate cost of
$7,000 for 1999. Our information systems personnel performed all remediation
efforts, and the related costs were expensed as incurred.

     During 1998, we completed an inventory of the process control systems and
embedded chips used in our manufacturing operations and we identified the
systems that could be subject to Year 2000 problems. The systems used in the
lumber and plywood operations require minimal changes, while the medium density
fiberboard systems will require the replacement of some process control
software. The modifications and testing of the manufacturing control systems
will be completed in 1999, at an approximate cost of $33,000 for 1998 and an
approximate cost of $132,000 for 1999. These costs will be expensed as incurred.
Currently, the modifications and testing of the manufacturing process control
systems are 95% complete.

     As part of our Year 2000 plan, service providers, vendors, suppliers and
customers that are critical to our operations have been notified and steps are
being undertaken to determine their Year 2000 readiness through questionnaires,
interviews, and other available means. We will continue our efforts to determine
the readiness of our key business partners and the potential impacts on our
operations if key business partners are not Year 2000 compliant by year-end
1999.

RISKS ASSOCIATED WITH YEAR 2000 ISSUES

     We rely on our key business partners for materials and services. If our
business partners fail to achieve Year 2000 compliance, our ability to operate
could be adversely impacted. However, the impact would be limited to the extent
that sufficient alternate supplies of materials or services are available.

     We are also dependent upon our customers for sales and cash flow. Year 2000
interruptions in our customers' operations could result in reduced sales,
increased inventory or receivable levels, and cash flow reductions. While these
events are possible, our customer base is broad enough to minimize the effects
of individual occurrences.

                                       44
<PAGE>   46

CONTINGENCY PLANS

     We are evaluating the need for contingency plans to mitigate possible
business disruptions. Contingency plans may include increasing raw materials
inventories, securing alternate sources of supply, or modifying production
schedules. Additionally, if we determine that key business partners may fail to
achieve Year 2000 readiness, we will develop appropriate contingency plans.

SUMMARY CONCLUSION

     Based on our assessments, we do not expect Year 2000 issues relating to our
information technology systems, process control systems or embedded chips used
in our manufacturing operations to have a material impact on our financial
position, results of operations or liquidity. Furthermore, we will continue to
monitor the progress of our key business partners in achieving Year 2000
compliance, and, to the extent practicable, will develop contingency plans.
However, we can give no assurance that our key business partners will achieve
Year 2000 compliance on a timely basis, or the extent to which operations may be
impacted in the event that our key business partners fail to achieve Year 2000
compliance.

LIQUIDITY AND CAPITAL RESOURCES

     During the first quarter 1999, net cash provided by operating activities
totaled $34.7 million, compared to $36.2 million for the same period in 1998.
The decrease of $1.5 million was primarily due to lower net income, offset in
part by higher depreciation, depletion and amortization. On March 31, 1999, we
had $106.5 million of cash and cash equivalents.

     We have an unsecured line of credit with a group of banks. Subject to
customary covenants, the line of credit allows us to borrow from time to time up
to $225 million for general corporate purposes, including up to $20 million of
standby letters of credit issued on our behalf. The line of credit matures on
December 13, 2001 and bears a floating rate of interest. As of March 31, 1999,
we had $200 million outstanding under the line of credit with $25 million
remaining availability. As of April 1, 1999, $102 million of the borrowings on
the line of credit were repaid.

     Our borrowing agreements contain restrictive covenants, including
limitations on harvest levels, sales of assets, cash distributions and the
incurrence of indebtedness. In addition, the line of credit requires the
maintenance of an interest coverage ratio. We were in compliance with these debt
covenants as of March 31, 1999.

     We distributed $0.57 per unit for the first quarter 1999. The distribution
equaled $35.5 million, including $9.1 million to the former general partner of
our predecessor, and was paid on May 27, 1999 to unitholders of record on May
14, 1999.

     Cash required to meet our quarterly cash distributions, capital
expenditures and principal and interest payments will be significant. Management
believes, however, that expected borrowings under our line of credit, cash
otherwise on hand and cash flows from continuing operations will be sufficient
to fund planned capital expenditures, distributions, and interest and principal
payments for the next twelve months. Following this offering and the application
of the proceeds to reduce the amounts outstanding under our line of credit, we
will have $225 million available under our line of credit.

     CAPITAL EXPENDITURES. Capital expenditures in the first quarter 1999
totaled $7.4 million, compared to $12.1 million for the same period in 1998.
Total 1999 capital expenditures are expected to be approximately $26 million,
compared to $64.3 million expended in 1998. Planned capital expenditures include
approximately $5 million to complete the construction of the Joyce, Louisiana
sawmill, $6 million for maintenance and equipment upgrades in our manufacturing
facilities and $15 million for logging roads, reforestation and expenditures
related to our timberlands.

                                       45
<PAGE>   47

                              THE REIT CONVERSION

     On July 1, 1999, in order to better align our legal structure with our
long-term growth objectives, we converted from a master limited partnership to a
REIT. In connection with this conversion, we issued 73% of our equity to our
former limited partners in the form of common stock, and 27% of our equity to
our former general partner in the form of common stock and special voting stock,
which is convertible into common stock. See "Description of Capital Stock."

     We believe that this new structure has the following advantages:

     - We have a greater capacity to compete for acquisitions due to our ability
       to structure acquisitions on a tax efficient basis, including through the
       issuance of our common stock and limited partnership interests in our
       operating partnership;

     - We expect to have a lower cost of capital than we did as a master limited
       partnership;

     - We can attract a broader base of investors as a REIT than we could as a
       master limited partnership;

     - We maintain substantially all of the advantages of single-layer taxation
       enjoyed under our prior master limited partnership structure with respect
       to the treatment of taxable income; and

     - Unlike the treatment of distributions for most REITs, we anticipate that
       a significant portion of the distributions to our stockholders will
       continue to be taxable to the stockholders at long-term capital gains
       rates for Federal income tax purposes. The maximum Federal long-term
       capital gains rate for individuals is 20%.

     In order to comply with the asset and income requirements for qualification
as a REIT under the Internal Revenue Code, we have transferred our manufacturing
and marketing operations, including our sawmills, plywood mills and a medium
density fiberboard facility and our operations relating to the sale of higher
and better use properties, to several unconsolidated subsidiaries. Our
unconsolidated subsidiaries sell some of this purchased timber to mills owned by
third-parties, and convert the remaining logs to lumber, plywood, and other wood
products, including medium density fiberboard. All reference to these operations
contained in this prospectus refer to the operations of our unconsolidated
subsidiaries.

     Provisions of the Internal Revenue Code limit the voting stock that a REIT
may own in other corporations. As a result, members of our senior management
have purchased all of the voting stock of our unconsolidated subsidiaries. These
purchases were financed through full-recourse, secured loans from our operating
partnership. The following table indicates the members of senior management and
their percentage ownership of the voting stock of the unconsolidated
subsidiaries:

<TABLE>
<CAPTION>
                            NAME                              PERCENTAGE OWNERSHIP
                            ----                              --------------------
<S>                                                           <C>
Rick R. Holley..............................................           34%
William R. Brown............................................           22%
Michael J. Covey............................................           22%
Charles P. Grenier..........................................           22%
</TABLE>

     The corporation is entitled to approximately 99% of the dividends from the
unconsolidated subsidiaries. Our unconsolidated subsidiaries are not
consolidated for accounting purposes and are subject to income tax at the
corporate level of approximately 40%.

     Had this structure been in place in fiscal 1998, the pro forma effect on
our operating results would have been a reduction in revenues of approximately
$466.5 million with an increase in net income of approximately $14.2 million.
The reduction in revenues is due to the transfer of our manufacturing operations
to unconsolidated subsidiaries. The increase in net income is primarily due to
the recording of a tax benefit related to the combined book loss of the
unconsolidated subsidiaries and the elimination of nonrecurring REIT conversion
costs. See "Unaudited Pro Forma Condensed Consolidated Financial Statements."

                                       46
<PAGE>   48

                                    BUSINESS

OVERVIEW

     We are the fifth largest owner of private timberlands in the United States
with a forest resource base of approximately 3.3 million acres. Our diverse
timber holdings are located in four distinct regions and are strategically
situated near end-markets for our products. As of December 31, 1998, we estimate
that our timber portfolio contained approximately 36.2 million cunits, as
summarized below. A cunit is a standard unit of measurement of volume equal to
one hundred cubic feet of timber.

<TABLE>
<CAPTION>
                                              ACRES         CUNITS              PRIMARY
             REGION (STATES)                 (OWNED)     (IN MILLIONS)          SPECIES
             ---------------                ---------    -------------    --------------------
<S>                                         <C>          <C>              <C>
Cascade Region............................    307,000         5.0             Douglas-fir
  Washington                                                                    Hemlock
Rocky Mountain Region.....................  1,586,000        12.3             Douglas-fir
  Montana                                                                        Larch
  Idaho                                                                           Pine
Northeast Region..........................    905,000        13.8                Spruce
  Maine                                                                           Firs
                                                                                 Birch
                                                                                 Maple
Southern Region...........................    525,000         5.1         Southern Yellow Pine
  Louisiana
  Arkansas
</TABLE>

     Our disciplined growth strategy has allowed us to expand and diversify our
timber holdings, as well as increase our cash flow. Over the last decade, we
have increased our timber holdings from approximately 1.4 million acres to
approximately 3.3 million acres at the end of 1998. For the same period, our
inventory of standing timber increased from approximately 19.4 million cunits to
approximately 36.2 million cunits. In addition, our earnings before interest,
taxes, depreciation, depletion and amortization grew from $97 million in 1990 to
$210 million in 1998. Earnings before interest, taxes, depreciation, depletion
and amortization does not take into account capital expenditures, does not
represent cash provided by operating activities in accordance with generally
accepted accounting principles and does not indicate the cash available to fund
cash needs, including distributions to stockholders.

INDUSTRY OVERVIEW

UNIQUE ASSET CHARACTERISTICS

     The timber industry provides raw material and conducts resource management
activities for the paper and forest products industry, including the planting,
fertilizing, thinning, and cutting of trees and the marketing of logs. Logs are
marketed and sold either as sawlogs to lumber and other wood products
manufacturers or as pulplogs to pulp and paper manufacturers. The timber
industry possesses several unique characteristics that distinguish it from the
broader paper and forest products industry which we believe make timber an
attractive asset class, including the following:

     - Renewable -- Timber is a growing and renewable resource that, if properly
       managed, increases in value as it grows and regenerates over time. Larger
       diameter trees are more valuable than smaller trees because they may be
       converted to higher value end-use products such as lumber and plywood.

                                       47
<PAGE>   49

     - Predictable and Improving Growth Rates -- Predictable biological growth
       is an attractive feature of timberland assets because it contributes to
       predictable, long-term harvest planning. The development and application
       of intensive forest management practices continue to improve biological
       growth rates.

     - Harvest Flexibility -- Timberland owners have flexibility to increase
       their harvests when prices are high and decrease their harvests when
       prices are low, allowing timberland owners to maximize the long-term
       value of their growing resource base.

     - Historical Real Price Appreciation -- Due to growing demand combined with
       limitations on supply caused by environmental restrictions, urban sprawl
       and overcutting, prices for Douglas-fir, Ponderosa Pine and Southern
       Yellow Pine timber have exceeded inflation by 2% to 4% per year, from
       1967 to 1997.

SUPPLY AND DEMAND DYNAMICS

     There are five primary end-markets for most of the timber harvested in the
United States:

     - products used in new housing construction;

     - products used in the repair and remodeling of existing housing;

     - products for industrial uses;

     - raw material for the manufacture of pulp and paper; and

     - logs for export.

     Supply. The supply of timber is limited, to some extent, by the
availability of timberland. The availability of timberland, in turn, is limited
by several factors, including government restrictions, alternate uses such as
agriculture, and loss to urban or suburban real estate development. The large
amounts of capital and time required to create new timberlands also limits
timber supply.

     Tree growth rates vary from region to region because of differences in
weather, climate and soil conditions. Newly-planted seedlings take 15 to 30
years to reach harvest maturity in the Southern United States, 45 to 60 years in
the Northwestern United States and up to 80 years in the Northeast and Rocky
Mountains, depending on the desired product. Consequently, the development of
new timberlands in the United States is not commonplace. Instead, it is more
cost effective to convert existing natural growth stands to forestry plantations
by applying modern forestry techniques to efficiently increase tree growth and
harvest levels.

     The United States government is a significant timberland holder, and timber
harvested from government lands plays an important role in the supply-demand
balance. Heightened environmental awareness in recent years has resulted in the
enactment of governmental policies which have reduced the volume of timber under
contract to be sold from federal lands from over 10 billion board feet per year
in the 1980s to only 3.3 billion board feet in 1998. The resulting supply
decrease has contributed to increased prices for logs and lumber, benefitting
forest products companies with private timber holdings.

                                       48
<PAGE>   50

                                    [GRAPH]

Source: U.S. Department of Agriculture.

     Demand. The demand for timber is directly related to the underlying demand
for pulp, paper, lumber, panel and other forest products. The demand for pulp
and paper is largely driven by population growth and per-capita income levels.
The demand for lumber and manufactured wood products is primarily affected by
the level of new residential construction activity and repair and remodeling
activity, which, in turn, is impacted by changes in general economic and
demographic factors, including interest rates for home mortgages and
construction loans.

PRICING

     Timber is the only asset within the paper and forest products industry
whose price has risen in real terms over the last 30 years. United States Forest
Service data indicates that prices for Douglas-fir, Ponderosa Pine and Southern
Yellow Pine timber have exceeded inflation by 2% to 4% per year, from 1967 to
1997. Short-term timber prices have historically been cyclical as a result of
supply and demand imbalances. Supply and demand imbalances can be caused by
weather, capacity expansions and contractions, and sudden changes in government
policies affecting the timber industry. Timber price increases in the late 1980s
and early 1990s were significantly influenced by the reduction of supply from
federal lands due to environmental concerns. Reduced harvest levels led to
increased timber prices in the Western United States. Lumber and plywood prices
also rose, to a lesser extent, in response to this reduction in harvest levels.
As a result, wood products manufacturers' margins were reduced and a large
number of lumber and plywood mills in the Western United States closed. As
sawmills and plywood plants in the Southern United States increased their output
to fill the void created by the closure of western capacity, the demand for
southern timber increased, which gradually drove up timber prices in the
Southern United States.

     Log prices in the United States were also impacted in the mid 1990s by
exceptionally strong log export prices. The price of logs exported from the
United States to Asia, soared to large premiums over

                                       49
<PAGE>   51

domestic United States log prices due to strong demand from Japan, a decline in
supply from the United States, and a very strong yen. In 1997, however, Japanese
housing starts fell nearly 30%, and the yen decreased in value 20% versus the
United States dollar. These factors, as well as increased competition from
Russian logs and Scandinavian lumber led to a sharp drop in shipments of United
States export logs to Japan in 1997 and 1998.

OUTLOOK

     In the first half of 1999, there has been healthy log demand due to strong
new home construction and repair and remodeling markets in the United States, as
well as an increase in demand from Asia, which is showing signs of an economic
recovery. The macroeconomic factors that influence demand, such as mortgage
rates, unemployment, home construction and consumer confidence, remain strong.

OUR GROWTH STRATEGY

     Our growth strategy is guided by specific operating objectives, including
maximizing the value of our current timberlands through intensive forest
management, expanding our resource base through acquisitions and maintaining our
leadership role in environmentally responsible resource management. To support
our growth strategy, we have made selective investments in manufacturing
facilities which help to create competitive local markets for our timber. These
facilities produce a variety of value-added lumber and panel products. Our
growth strategy includes the following key elements:

     FOCUS ON MAXIMIZING THE VALUE OF OUR RESOURCE BASE THROUGH INTENSIVE
MANAGEMENT OF OUR TIMBERLANDS. We view our timber resource base as a renewable
asset with substantial inherent value. We seek to manage our timberlands in a
manner that optimizes the balance among current cash flows, the biological
growth of our timber, which averages between 2% and 12% annually, and prudent
environmental management. Our harvest management approach employs advanced
forest management practices, including the use of a computerized timber
inventory system, thinning and fertilization, and the development and use of
genetically improved seedlings.

     PURSUE ACQUISITIONS OF HIGH QUALITY TIMBER ASSETS. The United States timber
market is highly fragmented. We believe that, due to the desire among some
forest product companies to sell their timberland assets and the difficulties
faced by some small timberland owners in efficiently managing their timberlands,
there will continue to be numerous timberland acquisition opportunities. We
believe we are well positioned to compete for high quality timberland assets
because:

     - We are an attractive strategic partner for integrated forest product
       companies seeking to sell their timberlands because we do not compete
       with their pulp or paper manufacturing operations and we are willing to
       enter into long-term supply agreements;

     - We can structure acquisitions on a tax-efficient basis through the
       issuance of common stock, limited partnership interests in our operating
       partnership, or installment notes, giving sellers the ability to defer
       some or all of the taxes otherwise payable upon a sale;

     - The geographic reach of our operations enhances our awareness of new
       acquisition opportunities and our knowledge of environmental concerns,
       market dynamics, timber productivity and other factors important in
       valuing timberlands and operations in each region; and

     - Our reputation for environmental leadership makes us attractive to
       sellers concerned with continued responsible environmental resource
       management.

     Since the beginning of 1990, we have established a successful acquisition
record having acquired 867,000 acres in the Rocky Mountain Region, 905,000 acres
in the Northeast Region and 529,000 acres, plus approximately 9,000 leased
acres, in the Southern Region. Each of these acquisitions has been

                                       50
<PAGE>   52

accretive to our cash flow, and together they have enhanced our operating
flexibility and reduced our exposure to regional economic fluctuations.

     REALIZE THE VALUE OF SELECTED PROPERTIES THROUGH SALE OR EXCHANGE. In
addition to intensively managing our timberlands, we continually review our
timberland portfolio to identify properties that may have higher and better uses
than as commercial timberland. At this time, we have identified approximately
150,000 acres of properties located in recreational areas or near expanding
population centers that may be better suited for conservation, residential or
recreational purposes. We have transferred approximately 20,000 acres of what we
call "higher and better use properties" to an unconsolidated subsidiary. Our
unconsolidated subsidiary expects to sell or exchange these properties within
the next five years. Our strategy for the remaining 130,000 acres is to realize
the value of these properties, either through sales or exchanges, over the next
ten to fifteen years. Our on-going review process evaluates properties based on
a number of factors such as proximity to population centers and major
transportation routes, and the presence of special ecological features. In
addition, we may occasionally exchange timberlands which have high environmental
or other public values for lands of equal value that are more suitable for
commercial timber management.

     MAINTAIN ENVIRONMENTAL LEADERSHIP. We believe that environmentally sound
management practices contribute to our growth and value by providing greater
predictability in the management of our assets. Our forestry and mill practices
follow a set of environmental principles aimed at the sound management of all
natural resources, including soils, air, watersheds, fisheries and wildlife
habitats. These principles are reflected in our habitat planning efforts. In
1996 we implemented a comprehensive habitat conservation plan covering
approximately 170,000 acres of our timberlands in the Cascade Region. We are
currently developing a habitat conservation plan for the bull trout and other
native fish species covering approximately 1.7 million acres in Montana, Idaho
and Washington, as well as a plan for the red-cockaded woodpecker covering
approximately 260,000 acres in Arkansas and Louisiana.

OUR ACQUISITION STRATEGY

     We intend to pursue the acquisition of high quality timberlands that
present opportunities to derive more value than the seller is achieving. Our
REIT structure provides a competitive advantage by giving us the flexibility to
issue attractive acquisition currencies, in the form of common stock or
operating partnership units, that allow us to offer a seller liquidity and tax
efficiency. We believe that this flexibility will allow us to negotiate
acquisitions on more favorable terms than other potential buyers that do not
offer these tax efficiencies. In addition, we believe that these same advantages
will increase the likelihood of future acquisitions being completed in privately
negotiated transactions rather than in auction settings.

     We believe our geographic reach enables us to identify a broad range of
acquisition opportunities, and our evaluation criteria and experience provide us
with the discipline and insight necessary to successfully complete accretive
acquisitions.

     Although we will continue to consider attractive foreign timberland
acquisitions, our focus is primarily on softwood-growing timberlands in the
United States. We seek to improve returns through acquisitions by:

     - improving the merchandising of logs in order to sell them for the highest
       value possible;

     - reducing costs through operating synergies;

     - recognizing and capturing higher and better use values through sales or
       land exchanges;

     - reducing environmental and regulatory costs; and

     - using our modern inventory and mapping systems, together with our
       knowledge of intensive silviculture, to develop harvest plans that
       optimize economics and timber growth.

                                       51
<PAGE>   53

     We evaluate potential acquisitions based on the unique characteristics of
each property and specific acquisition criteria including:

     - national and regional supply and demand factors;

     - volumes, species and age characteristics of standing timber;

     - environmental constraints, such as the actual or potential presence of
       endangered species; and

     - our ability to increase the property's cash flow.

OUR TIMBERLANDS

     Our timberlands are well diversified, not only by species mix but also by
age distribution. Growth rates vary depending on species, location, age and
forestry practices. We manage our timberlands in two business segments, the
Northern Resources Segment, consisting of timberlands in western Washington,
western Montana, northern Idaho and central Maine, and the Southern Resources
Segment, consisting of timberlands in Louisiana and Arkansas.

THE NORTHERN RESOURCES SEGMENT

     Cascade Region. The Cascade Region's 307,000 acres of timberland in western
Washington contain an estimated 5.0 million cunits of standing timber. Logs
harvested in the Cascade Region are sold for export to Pacific Rim countries,
principally Japan, and to domestic mills owned by third parties. Logs sold for
export are generally of higher quality than logs sold into the domestic market.

     In the Cascade Region, approximately 59% of the logs sold in 1998 were sold
to unaffiliated domestic wood products manufacturers. We also sold 17% of the
logs from the Cascade Region to third parties as pulp logs. These logs generally
constitute smaller and lower quality logs not suitable for use by wood products
manufacturers. Competitors in the domestic log market include the United States
Forest Service, the state of Washington, and numerous private individuals and
industrial timber owners.

     Customers for the Cascade Region's export sawlogs consist primarily of
large Japanese trading companies. Competitors in the export market include
numerous private land or timber owners in the United States and Canada, as well
as companies and state-controlled enterprises in Chile, New Zealand, Russia and
Scandinavia, all of which have abundant timber resources. We compete primarily
based on our long-term relationships and our reputation as a reliable year-round
supplier of premium grade logs.

     In 1998, approximately 24% of the logs harvested in the Cascade Region were
sold to customers in Japan. Douglas-fir logs sold to Japan have historically
commanded a significant premium over Douglas-fir logs sold domestically.
However, export log prices declined significantly in 1998 and 1997, eliminating
a large portion of this premium. Cascade Region export log revenues accounted
for 3% of our combined revenues in 1998, 6% in 1997 and 8% in 1996. In addition,
Cascade Region export log sales accounted for 6% of operating income in 1998,
11% in 1997 and 18% in 1996. For a discussion of our financial reporting of
these operations following the REIT conversion see "Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- Overview -- Financial Reporting Impact."

                                       52
<PAGE>   54

     The following table sets forth the Cascade Region's timber inventory by
species as of December 31, 1998.

<TABLE>
<CAPTION>
                                                               VOLUME           PERCENTAGE
                       SPECIES                          (THOUSANDS OF CUNITS)   OF VOLUME
                       -------                          ---------------------   ----------
<S>                                                     <C>                     <C>
Douglas-fir...........................................          2,337               47
Hemlock...............................................            873               17
True Firs.............................................            955               19
Other Conifers........................................            560               12
Hardwoods.............................................            271                5
                                                                -----              ---
          Total.......................................          4,996              100
</TABLE>

     Rocky Mountain Region. The Rocky Mountain Region consists of 1,586,000
acres of timberland in western Montana and northern Idaho, containing an
estimated 12.3 million cunits of standing timber. The Rocky Mountain Region
primarily sells logs to our lumber and plywood facilities, with the remainder
sold to third-party domestic mills. In conjunction with an acquisition in 1993,
we entered into a log sourcing agreement with Stimson Lumber Company to supply
Stimson's Montana mills with logs, based upon prevailing market prices, over a
ten-year period ending in 2003.

     In the Rocky Mountain Region, we sell virtually all of our logs
domestically as saw timber. In 1998, approximately 68% of the logs sold in the
region were sold to our manufacturing facilities and the remainder were either
sold to unaffiliated domestic mills or traded to other timber companies for logs
better fitting our needs. In addition, a small percentage of lower quality logs
are sold to pulp and paper manufacturers.

     Competitors in the Rocky Mountain Region log market include the United
States Forest Service, the states of Montana and Idaho, the Bureau of Land
Management, the Bureau of Indian Affairs, as well as numerous private
individuals and industrial timber owners.

     The following table sets forth the Rocky Mountain Region's timber inventory
by species as of December 31, 1998.

<TABLE>
<CAPTION>
                                                             VOLUME            PERCENTAGE
                      SPECIES                         (THOUSANDS OF CUNITS)    OF VOLUME
                      -------                         ---------------------    ----------
<S>                                                   <C>                      <C>
Douglas-fir.........................................          4,992                40
Pine................................................          3,072                25
Larch...............................................          1,671                14
True Firs...........................................          1,175                10
Other Conifers......................................          1,436                11
                                                             ------               ---
          Total.....................................         12,346               100
</TABLE>

     Northeast Region. The Northeast Region consists of 905,000 acres of
timberland in central Maine, containing an estimated 13.8 million cunits of
standing timber. Logs sold in the Northeast Region are sold for export to Canada
and to domestic mills owned by third parties. In connection with our acquisition
of these 905,000 acres in 1998, we entered into a long-term agreement to supply
wood fiber to S.D. Warren Company's paper facility in Skowhegan, Maine at
prevailing market prices. The fiber supply agreement covers a 25-year period
ending in 2023 and may be extended for up to an additional 15 years at the
option of S.D. Warren Company.

     In the Northeast Region, approximately 19% of the logs sold in 1998 were
exported to lumber mills in Canada. Competitors in this market include numerous
wood brokers, private individual and industrial timber owners in Maine, and the
Canadian provinces of Quebec and New Brunswick.

                                       53
<PAGE>   55

     The following table sets forth the Northeast Region's timber inventory by
species as of December 31, 1998.

<TABLE>
<CAPTION>
                                                             VOLUME            PERCENTAGE
                      SPECIES                         (THOUSANDS OF CUNITS)    OF VOLUME
                      -------                         ---------------------    ----------
<S>                                                   <C>                      <C>
Spruce..............................................          3,005                22
True Firs...........................................          2,066                15
Other Conifers......................................          1,189                 9
Hardwoods...........................................          7,491                54
                                                             ------               ---
          Total.....................................         13,751               100
</TABLE>

THE SOUTHERN RESOURCES SEGMENT

     The Southern Region consists of 525,000 acres (plus 9,000 acres of leased
land) of timberland in Louisiana and Arkansas, containing an estimated 5.1
million cunits of standing timber. In 1998, 73% of logs from this region were
sold to our lumber facilities and 27% were sold to other purchasers. The
Southern Region timberlands are nearing the end of a process of conversion from
unmanaged forests into actively managed plantation forests. We expect this
process to be completed by the year 2000. In connection with our acquisition of
the Southern Region timberlands and manufacturing facilities in 1996, we entered
into a long-term agreement to supply pulp logs and mill residuals to Riverwood
International Corporation at prices that are based upon prevailing market
prices. The fiber supply agreement covers a 20-year period ending in 2016 and
can be extended for up to an additional 10 years.

     The fee harvest in the Southern Region during 1998 was approximately 58%
pulp logs and 42% sawlogs. We expect that our long-term supply agreement with
Riverwood International Corporation will provide us with a secure market for our
local mill residuals and a substantial portion of the pine and hardwood pulp
logs harvested from our Southern Region timberlands. Competitors in this market
include the United States Forest Service, the states of Arkansas and Louisiana,
as well as numerous private individuals and industrial timber owners in the
region.

     The following table sets forth the Southern Region's timber inventory by
species as of December 31, 1998.

<TABLE>
<CAPTION>
                                                             VOLUME            PERCENTAGE
                      SPECIES                         (THOUSANDS OF CUNITS)    OF VOLUME
                      -------                         ---------------------    ----------
<S>                                                   <C>                      <C>
Southern Yellow Pine................................          4,169                81
Hardwoods...........................................            960                19
                                                              -----               ---
          Total.....................................          5,129               100
</TABLE>

RESOURCE MANAGEMENT

     We view our timberlands as assets with substantial inherent value. We
strive to manage our timberlands in an economically prudent and environmentally
responsible manner in order to enhance their value. We seek to enhance value by
improving the productivity of our forests, controlling harvesting costs, and
sorting and merchandising logs to obtain their highest value.

     Value can be enhanced on younger timber stands through thinning operations.
Value increases as trees grow and add wood volume more rapidly. After thinning a
timber stand, we continue to grow the healthiest trees, that have the greatest
potential for future value. As trees grow larger, they can be used in higher
valued applications such as plywood.

     We consider the impact of forest management activities on properties with
higher and better uses other than long-term timber production, and modify
harvest plans accordingly.

                                       54
<PAGE>   56

     We use different management techniques in each of our regions, employing a
variety of the most beneficial, proven silvicultural methods available. We
expect the timber growth rates on our timberland to continue to improve over
time as a result of genetic advances in seedlings, intensive forest management
practices such as thinning and fertilization, and the increasing proportion of
our timberlands that are converted from natural forests to actively managed
plantations. Technology and forest management advances have increased forest
growth rates and shortened harvest cycles. We believe our focus on intensive
forest management practices will enhance forest productivity and increase the
value of our timberlands.

     It is our policy to ensure that every acre harvested is promptly
reforested. Based on the geographic and climatic conditions of the harvest site,
harvested areas may be regenerated naturally by leaving mature trees to reseed
the area. Natural regeneration methods are used on approximately 90% of the
timberlands in our Rocky Mountain and Northeast Regions. In both the Cascade and
Southern Regions, substantially all of the reforestation is done by planting.
During 1998, we planted 4.1 million seedlings on the timberlands located in our
Cascade, Rocky Mountain and Northeast Regions and 8.4 million seedlings on our
Southern Region timberlands.

     Forests are subject to a number of natural hazards, including damage by
fire, insects and disease. Severe weather conditions and other natural disasters
can also reduce the productivity of forest lands and can interfere with the
processing and delivery of forest products. However, damage from natural causes
is typically localized and would only affect a portion of the timberlands at any
given time. Nevertheless, these hazards are unpredictable and losses might not
be so limited. The size and diversity of our timberlands, together with our
intensive forest management, should help to minimize these risks. Consistent
with the practices of other large timber companies, we do not maintain insurance
against loss to standing timber on our timberlands, but we do maintain insurance
for loss of logs due to fire and other occurrences following harvesting.

HARVEST PLANS

     Annual harvest plans are based on our projected inventory, regional supply
and demand expectations and environmental constraints.

     We make inventory projections using computer software that can model both
forecasted harvests and forest growth over time, so that we can achieve optimum
economic returns while maintaining ecosystems and wildlife habitat. These
projections provide the foundation for the detailed annual operating plans used
by our foresters on our timberlands.

     Our harvest planning is facilitated by our geographic information system,
which is a computer software program that provides detailed field maps. Our
planning is also facilitated by our computerized timber inventory system, which
is constantly updated with recent harvest activities and new biological growth
information on our timberlands.

     Our inventory estimates are based upon timber data including the heights
and diameters of trees, along with other data such as a timber stand's
accessability and expected logging conditions and costs. Our inventory is
updated regularly, accounting for both the growth and harvest of timber stands,
and the incorporation of new data.

     Other information about our timberlands, such as roads, forest boundaries,
elevations and the location of endangered species, are recorded in our
computerized geographic information systems in each region. These systems are
important in the development of detailed annual harvest plans, contractor
administration, legal record keeping and the development of habitat conservation
plans.

                                       55
<PAGE>   57

ENVIRONMENTAL STEWARDSHIP

     We are a leader in environmentally responsible resource management. In
1998, we were one of the first timber companies to commit to third-party
verification under the American Forest & Paper Association's Sustainable
Forestry Initiative.(SM) The Sustainable Forestry Initiative(SM) sets forth a
comprehensive nationwide approach to responsible forest stewardship. Sustainable
Forestry Initiative(SM) principles are designed to ensure that forest management
is integrated with the conservation of soil, air and water resources, wildlife
and fish habitat, and aesthetics. Under the Sustainable Forestry Initiative,(SM)
we have instituted a third-party verification program, in which independent
teams will audit all of our operating regions to verify adherence to the
Sustainable Forestry Initiative's(SM) objectives and performance standards.

     Our protection of wildlife habitat is another example of our environmental
leadership. We currently manage more than a quarter-million acres under two
separate habitat conservation agreements. The habitats of hundreds of species
are protected by these agreements, including five species listed as threatened
under the Endangered Species Act.

     In 1996, the United States Fish and Wildlife Service and the National
Marine Fisheries Service approved our habitat conservation plan that provides
habitat protection for 285 wildlife species on approximately 170,000 acres in
our Cascade Region. Just three years into the 50 year plan, we have demonstrable
progress to report:

     - We have completed detailed scientific analyses in 13 of the 20 watersheds
       to be studied in the habitat conservation plan area;

     - Monitoring has confirmed a stable population of spotted owls on these
       lands over the last three years, including 85 juveniles;

     - We have closed or restricted access to 24 roads to address watershed
       concerns and habitat requirements for wolves, grizzly bears and other
       species; and

     - Our scientists discovered the presence of Larch Mountain salamanders, a
       species not previously known to exist in the western Cascades, but which
       is protected under the habitat conservation plan.

     As we realize the benefits of the Cascade Region's habitat conservation
plan, we are developing a similar long-term habitat conservation plan for the
bull trout and other native fish species, such as steelhead and salmon, covering
1.7 million acres in Montana, Idaho, and Washington, as well as a plan for the
red-cockaded woodpecker covering 260,000 acres in Arkansas and Louisiana. In
addition, we have an agreement in place to conserve grizzly bear habitat
covering 83,000 acres of our timberlands in the Swan Valley in western Montana.

HIGHER AND BETTER USE LANDS

     We have currently identified approximately 150,000 acres of our properties
located in recreational areas or near expanding population centers that may be
better suited for conservation, residential or recreational purposes, rather
than for long-term commercial timberland management. We have transferred
approximately 20,000 acres of these properties to an unconsolidated subsidiary.
Our unconsolidated subsidiary expects to sell or exchange these properties
within the next five years. Our strategy for the remaining 130,000 acres is to
realize the value of these properties, through sales or exchanges, over the next
ten to fifteen years. Our on-going review process evaluates properties based on
a number of factors such as proximity to population centers and major
transportation routes, and the presence of special ecological features. We sold
approximately 14,710 acres of higher and better use land in 1998, 3,350 acres in
1997 and 21,600 acres in 1996.

                                       56
<PAGE>   58

MANUFACTURING FACILITIES

     GENERAL. Our manufacturing operations are conducted through our
unconsolidated subsidiaries and include six lumber mills, two plywood plants,
one medium density fiberboard facility, and two lumber remanufacturing
facilities. These facilities, strategically located near our timberlands in
Montana, Idaho, Louisiana and Arkansas, convert logs to lumber, plywood and
other wood products, and convert sawdust and shavings to medium density
fiberboard. These facilities accounted for 62% of our revenues in 1998,
excluding revenues from facilities closed or sold in 1998. For a discussion of
our financial reporting of these operations following the REIT conversion see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview -- Financial Reporting Impact."

     We employ modern technology in our manufacturing facilities in order to
improve efficiency, maximize the utilization and value of our timber resources
and maintain the high quality standards that have been the basis of our
penetration of value-added markets. Since the beginning of 1993, we have
invested approximately $100 million in capital improvements to improve the
efficiency and expand the capacity of our conversion facilities. In 1998, we
completed the modernization of our Joyce, Louisiana sawmill. This high-volume,
multi-line sawmill is constructed on the site of a former plywood plant and
sawmill that we acquired with our Southern timberlands.

     LUMBER. We produce a diverse line of lumber products, including common and
select boards, dimension and stud lumber, industrial lumber, edge-glued boards
and finger-jointed studs. In 1998, we produced 635 million board feet of lumber,
compared to 582 million board feet in 1997, and 461 million board feet in 1996.
As a result of reconfigurations at the Joyce, Louisiana and Pablo, Montana
mills, and the May 1998 acquisition of an edge-glued board remanufacturing
facility in Meridian, Idaho, we expect our lumber capacity to be approximately
750 million board feet by the end of 1999. Lumber sales, including
remanufactured lumber, accounted for approximately 40% of our combined revenues
in 1998. For a discussion of our financial reporting of these operations
following the REIT conversion see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview -- Financial Reporting
Impact."

     Lumber products manufactured in the northwest United States are targeted to
domestic lumber retailers, such as retail home centers, for use in repair and
remodeling projects. Lumber products manufactured in the southern United States
are targeted to the home construction, industrial and export markets.
Value-added products and services such as consumer appearance boards,
pull-to-length boards, premium furring strips, premium studs and pattern boards
targeted to specialty markets have made us less dependent on the more volatile
home construction market. In 1998, 44% of our lumber products were sold into
retail markets, 26% to stocking distributors, 20% to industrial and
remanufactured product markets, 2% to export markets and 8% to other markets.

     Competition in our lumber markets is primarily based on price and quality
and, to a lesser extent, the ability to meet delivery requirements on a
consistent long-term basis and provide specialized customer service. We compete
in domestic lumber markets primarily with other United States, Canadian and
European companies. Canadian and European lumber producers have increased their
penetration into the United States market due to their lower wood fiber costs
and favorable exchange rates. The lumber market is also subject to competition
from substitute products, primarily in shelving, window and door markets.
Substitute products include radiata pine, medium density fiberboard, oriented
strand board, particle board, laminates, steel and plastic. Substitution has
significantly increased in the past several years due to increases in stud and
board prices in the early 1990s.

     PLYWOOD. We produce high-grade plywood which we sell primarily into
specialized industrial markets. In 1998, we produced 323 million square feet of
plywood, compared to 312 million square feet in 1997 and 297 million square feet
in 1996. Plywood sales represented 16% of our total combined revenues in 1998.
For a discussion of our financial reporting of these operations following the
REIT

                                       57
<PAGE>   59

conversion see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview -- Financial Reporting Impact."

     During 1998, 64% of our plywood products were sold in specialty industrial
markets, including recreational boat, recreational vehicle, and
fiberglass-reinforced panels. Our plywood products are generally of higher
quality than commodity construction grade products and command higher prices in
these specialty markets.

     Competition within the plywood market is based primarily on price and
quality and, to a lesser extent, the ability to offer a full line of products
and meet delivery requirements on a consistent, long-term basis. The domestic
plywood market is characterized by numerous large and small producers and is
also subject to competition from oriented strand board, a less expensive
substitute wood product. Due to oriented strand board's cost advantage, its
market share in the residential segment has been increasing, and we expect this
trend to continue. Oriented strand board's share of the North American
structural panel market was approximately 49% in 1998. The quality of oriented
strand board continues to improve and has become widely accepted in most
building applications. However, since oriented strand board does not have the
strength-to-weight ratio, moisture resistance and machinability of plywood, it
cannot be used in some specialty applications. Some commodity plywood
manufacturers, in order to avoid closing their facilities, have been refocusing
their products toward the specialty plywood market, resulting in increased
competition in markets we serve. We expect to remain competitive due to our
strong customer base, extensive experience in industrial markets, supply of
superior wood, and our reputation for high quality products, including various
trademarked products such as MarineTech(R), RV-X(R), DuraFloor(R), and
Ultra-Core(R).

     MEDIUM DENSITY FIBERBOARD. We supply high quality medium density fiberboard
to markets in North America and the Pacific Rim. Medium density fiberboard
products are primarily sold to distributors and door, molding, fixture and
furniture manufacturers. Medium density fiberboard sales accounted for
approximately 6% of our revenues in 1998. For a discussion of our financial
reporting of these operations following the REIT conversion see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview -- Financial Reporting Impact."

     We produce these products at our Montana facility using sawdust and wood
shavings from our lumber and plywood plants, and from third parties. During
1995, our medium density fiberboard process was redesigned to produce MDF(2)(R),
one of the highest quality medium density fiberboard products available.
MDF(2)(R) can be machined and finished more efficiently and has expanded our
markets to include higher value applications, such as moldings, doors, flooring
and kitchen cabinets.

     Medium density fiberboard producers compete on a global scale, primarily on
the basis of price, quality and service. Medium density fiberboard is also
subject to competition from solid wood products and hardboard and particle board
products. Competition in the industry has been increasing as a result of
significant capacity expansion both in the United States and Canada. MDF(2)(R)
commands a price premium over standard medium density fiberboard due to its
superior quality and its physical properties and densities. Moreover, because
our fiber supply consists of western softwoods, a slower growth species with a
low abrasive content, MDF(2)(R) has proven to have superior machining and
finishing qualities over competing products. In addition, because of the
elimination of wood chips from MDF(2)(R)'s manufacturing process, which
substantially reduces raw material costs, and our access to low-cost energy
sources, we believe we are one of the lowest cost medium density fiberboard
producers in the market.

     We source 55% of our sawdust and wood shavings for medium density
fiberboard production internally from our plywood and lumber operations in the
Rocky Mountain Region. The remaining 45% of the fiber is purchased from third
parties.

     RESIDUAL WOOD CHIPS. Our lumber and plywood mills produce residual wood
chips as a by-product of the conversion of raw logs into finished products.
These wood chips are sold to regional paper and pulp

                                       58
<PAGE>   60

mills. A substantial portion of our wood chips derived from manufacturing lumber
and plywood in the Rocky Mountain Region are sold to Stone Container Corporation
under a long term supply agreement. This agreement generally provides for
market-based pricing for the wood chips, subject to specific minimum and maximum
prices until December 31, 1999. If market sales prices for chips remain at
current levels, which are below the minimum level set by the supply agreement,
our annual earnings before interest, taxes, depreciation and amortization would
be reduced by approximately $11 million starting in the year 2000. The actual
impact of the phase-out of the minimum pricing provision, however, cannot be
accurately predicted, and will depend on future market prices.

                                       59
<PAGE>   61

                         FEDERAL AND STATE REGULATIONS

ENDANGERED SPECIES

     The Endangered Species Act protects species threatened with possible
extinction. A number of species indigenous to our timberlands have been listed
as threatened or endangered or have been proposed for this status under the
Endangered Species Act. As a result, our activities in or adjacent to the
habitat of these species may be subject to restrictions on the harvesting of
timber and the construction of roads.

     In June 1996, we received a permit under the Endangered Species Act from
the United States Fish and Wildlife Service and the National Marine Fisheries
Service that covers our forest management on 170,000 acres in the Cascade Region
(the "Planning Area"). As a part of the permit application, we prepared a
multi-species habitat conservation plan that will govern our management
activities in the Planning Area during the 50-year life of the permit. The
habitat conservation plan requires us to maintain set levels of wildlife habitat
and to take numerous other mitigation measures, including the protection of
riparian areas.

     In consideration for this mitigation, the permit authorizes forestry
practices that are consistent with the habitat conservation plan, even though
they may have an adverse impact on spotted owls, grizzly bears, bull trout, gray
wolves or marbled murrelets, the listed species currently covered by the habitat
conservation plan and permit. The habitat conservation plan provides that the
United States Fish and Wildlife Service and the National Marine Fisheries
Service will amend the permit to add subsequently listed species without
requiring us to provide additional mitigation absent extraordinary
circumstances. The bull trout was added to the permit pursuant to this provision
upon its listing in 1998. Extraordinary circumstances would include situations
where continued activity under the habitat conservation plan would have a
significant material adverse impact on the species and mitigation on Federal
land would not alleviate the concern. As an incentive to us to create additional
wildlife habitat in the Planning Area, the permit provides additional
authorization during a second 50-year period if the wildlife habitat within the
Planning Area exceeds levels set in the habitat conservation plan. Therefore,
the permit is expected to provide long-term certainty and predictability for our
harvest activities in the Planning Area.

     In October 1998, Congress passed legislation directing the United States
Forest Service to exchange specific Federal lands to us for some of our lands of
equal value located in the Planning Area (the "I-90 Land Exchange"). In
connection with this exchange, we are seeking an amendment to the habitat
conservation plan that would add the lands we receive within the Planning Area
as a result of the land exchange. There can be no assurance, however, that the
I-90 Land Exchange will be completed.

     In December 1995, we entered into an agreement to conserve grizzly bears
with the United States Fish and Wildlife Service, the United States Forest
Service, and the state of Montana covering 83,000 acres of our timberlands in
the Swan Valley in western Montana. Under the grizzly bear agreement, we have
agreed to protect habitat and to minimize the impact of our forestry activities
on the grizzly bear. In consideration for this mitigation, the United States
Fish and Wildlife Service authorized forestry practices in the Swan Valley that
are consistent with the agreement, but may have an effect on grizzly bears.

     Although the habitat conservation plan and grizzly bear agreement have both
been implemented and are functioning as expected, there can be no assurance that
the terms of these agreements will remain in force or be sufficient to protect
us against subsequent amendments of the Endangered Species Act or additional
listings thereunder, or against changes to other applicable laws and
regulations. Any of these changes could materially and adversely affect our
operations. In addition, legal challenges could disrupt the continued operation
of the habitat conservation plan or the grizzly bear agreement, and thereby
reduce the level of certainty we anticipate gaining from these plans.

                                       60
<PAGE>   62

     In 1998, the United States Fish and Wildlife Service listed some population
segments of the bull trout as threatened under the Endangered Species Act. Bull
trout are present in numerous streams and rivers which flow across our lands in
Montana, Idaho and Washington. In addition, the red-cockaded woodpecker, listed
as threatened, is found on our lands in Louisiana and Arkansas. We are currently
working with the United States Fish and Wildlife Service and the National Marine
Fisheries Service to develop a habitat conservation plan for bull trout and
other native fish species. We are also working with the United States Fish and
Wildlife Service to develop a habitat conservation plan for the red-cockaded
woodpecker. If these plans are approved, we will receive permits authorizing
forest practices consistent with those plans. Although discussions are underway,
we are unable to predict whether either of these plans will ultimately be
approved or what their terms would be. We are unable, at this time, to predict
the nature or scope of any land management restrictions that might be required
to protect native salmonids or red-cockaded woodpeckers.

     The Endangered Species Act also prohibits the Federal government from
jeopardizing species listed under the Endangered Species Act or from destroying
or adversely modifying their designated critical habitat. Private landowners are
potentially affected by these restrictions if a private activity requires
Federal action, such as the granting of access or Federal funding. Where there
is a Federal connection, the Federal agency involved must consult with the
United States Fish and Wildlife Service or, in the case of anadromous fish, the
National Marine Fisheries Service, to determine that the proposed activity would
not jeopardize the listed species or cause direct or indirect adverse
modification of its designated critical habitat. If the landowner's proposed
activity would have these effects, the United States Fish and Wildlife Service
or the National Marine Fisheries Service must propose, where possible,
alternatives or modifications to the proposed activity.

     Our land holdings in the Cascade and Rocky Mountain Regions are often
intermingled with Federal land and access across Federal lands may require
Federal approval. In the past, our access to these areas has been delayed by
administrative processes and legal challenges and restricted under the
Endangered Species Act. Although we believe that access to our lands in the
Planning Area and the Swan Valley should be facilitated by the Cascade Region's
habitat conservation plan and the grizzly bear agreement, and should be further
facilitated if the native fish habitat conservation plan is approved and the
I-90 Land Exchange consummated, there can be no assurance that access delays
will not continue to occur.

     At this time, we believe that Federal and state laws and regulations
related to the protection of endangered species will not have a material adverse
effect on our financial position, results of operations or liquidity. We
anticipate, however, that increasingly strict laws and regulations relating to
the environment, natural resources and forestry operations, as well as increased
social concern over environmental issues, may result in additional restrictions
on us leading to increased costs, additional capital expenditures and reduced
operating flexibility.

GENERAL ENVIRONMENTAL REGULATION

     Our operations are subject to Federal, state and local environmental laws
and regulations, including laws relating to water, air, solid waste and
hazardous substances. Although we believe that we are in material compliance
with these requirements, there can be no assurance that we will not incur
significant costs, civil and criminal penalties, and liabilities, including
those relating to claims for damages to property or natural resources, resulting
from our operations. We maintain environmental compliance programs and
periodically conduct regular internal and independent third-party regulatory
audits of our facilities and timberlands to monitor compliance with these laws
and regulations.

     Environmental laws and regulations have changed substantially and rapidly
over the last 20 years, and we anticipate there will be continuing changes. The
trend in environmental regulation is to place more restrictions and limitations
on activities that may affect the environment, such as emissions of pollutants
and the generation and disposal of wastes. Increasingly strict environmental
restrictions and

                                       61
<PAGE>   63

limitations have resulted in increased operating costs for us and it is possible
that the costs of compliance with environmental laws and regulations will
continue to increase.

     Although we do not consider current laws and regulations relating to the
environment to be materially burdensome, there can be no assurance that these
laws or future legislative, administrative or judicial actions, which are
becoming increasingly stringent, will not adversely affect us or our ability to
continue our activities and operations as currently conducted with respect to
our timberlands and facilities.

AIR QUALITY

     Our manufacturing facilities emit regulated substances that are subject to
the requirements of the federal Clean Air Act, as amended, and comparable state
statutes. Most of our manufacturing facilities are required to obtain federal
operating permits under Title V of the 1990 Clean Air Act Amendments. Title V of
the 1990 Clean Air Act Amendments requires that major industrial sources of air
pollution obtain federally enforceable permits, which contain all of the
applicable air quality restrictions for the facility. We do not believe that the
cost of renewing or obtaining the required Title V permits for our facilities
will be material.

WATER QUALITY AND WASTEWATER

     The federal Clean Water Act and comparable state statutes regulate
discharges of process wastewater, and require national pollutant discharge
elimination system permits for discharge of industrial wastewater and stormwater
into regulated public waters. We believe that these laws will not have a
material adverse effect on our financial position, results of operations or
liquidity. However, there can be no assurance in this regard.

HAZARDOUS MATERIALS

     Our manufacturing facilities use and generate both hazardous and
nonhazardous substances, including wood waste and boiler ash, the handling and
disposal of which are subject to Federal and state laws, including the Resources
Conservation and Recovery Act, the Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("CERCLA") and comparable state statutes.
CERCLA imposes liability, without regard to fault or the legality of the
original act, on potentially responsible parties that contribute to a release or
threatened release of a hazardous substance into the environment. Potentially
responsible parties include the owner or operator of a site at which a release
or threatened release occurs, as well as any person who disposed of, or arranged
for disposal of, hazardous substances at a site.

     In the ordinary course of operations, several of our manufacturing
facilities have in the past utilized, and are expected to continue to utilize,
on-site and off-site facilities for the disposal of hazardous and nonhazardous
wastes. In addition, some site activities, including those of former operators
of our properties, may have resulted in conditions that may require remediation
under environmental laws. We believe that we will not incur responsibility for
any cleanup costs under CERCLA with respect to past activities affecting our
facilities or our timberlands that would be likely to have a material adverse
effect on our financial position, results of operations or liquidity. However,
there can be no assurance in this regard.

TIMBERLANDS

     Our forest practices are and will in the future be subject to specialized
statutes and regulations in the states where we operate, which currently include
Montana, Washington, Idaho, Louisiana, Arkansas and Maine. Many of these states
have enacted laws which regulate forestry operations, such as growing,
harvesting and processing activities on forest lands. Among other requirements,
these laws impose some

                                       62
<PAGE>   64

reforestation obligations on the owners of forest lands. Several states require
prior notification before beginning harvesting activities. The states of
Washington and Maine require a regulatory review taking from 15 to 30 days or
more prior to harvesting, depending upon the environmental and other
sensitivities of the proposed activity.

     Other state laws and regulations control the following activities:

     - slash burning and harvesting during fire hazard periods;

     - activities that affect water courses or are in proximity to inland shore
       lines;

     - activities that affect water quality, and

     - some grading and road construction activities.

LOG EXPORTS

     Federal legislation currently prohibits the sale of unprocessed logs
harvested from Federal lands located in the western half of the United States,
if logs will be exported from the United States by the purchaser thereof, or if
logs will be used by the purchaser thereof as a substitute for timber from
private lands which is exported by a purchaser. In order to enforce this
substitution prohibition, the legislation requires persons who export private
logs and who wish to purchase Federal timber, to obtain an approved Federal
timber "sourcing area." In 1991, we applied for and obtained an approved
sourcing area for our Northwest manufacturing facilities. Under the legislation,
sourcing areas are subject to review and renewal at least every five years.
Revisions to the export law were enacted in November 1997, which we believe
ensure that our sourcing area will be renewed. However, there can be no
assurance in this regard.

     In addition, Federal legislation prohibits the export of unprocessed logs
harvested from Washington and Oregon. Proposals have also been made from time to
time, but to date have been unsuccessful, to either ban or tax the export of
unprocessed logs harvested from private lands.

SAFETY AND HEALTH

     The operations of our timberlands and our conversion facilities are subject
to the requirements of the Occupational Safety and Health Act and comparable
state statutes relating to the health and safety of employees. We believe that
we are in substantial compliance with the Occupational Safety and Health Act
regulations, including general industry standards, permissible exposure levels
for toxic chemicals (including wood dust and formaldehyde) and record-keeping
requirements. We conduct internal safety audits to identify potential violations
of law or unsafe conditions.

PRODUCT LIABILITY AND REGULATION

     All of the states in the United States and many foreign jurisdictions in
which we sell our products have, through some combination of legislation and
judicial decision, provided for the liability of the manufacturer and supplier
of defective materials for resulting personal injury and property damage. Our
operations entail exposure to product liability in connection with both the
export and domestic sales of our products. We have not been subject to any
material litigation relating to product liability.

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<PAGE>   65

                                   MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

     The following table presents pertinent information concerning our executive
officers and directors as of the date of this prospectus.

<TABLE>
<CAPTION>
           NAME              AGE                          POSITION
           ----              ---                          --------
<S>                          <C>    <C>
Rick R. Holley.............  47     President and Chief Executive Officer, Director
Charles P. Grenier.........  50     Executive Vice President, Director
William R. Brown...........  48     Executive Vice President and Chief Financial Officer
Michael J. Covey...........  41     Vice President, Resources
Barbara L. Crowe...........  48     Vice President, Human Resources
James A. Kraft.............  44     Vice President, General Counsel and Secretary
David L. Leland............  64     Director and Chairman of the Board
Ian B. Davidson............  67     Director
John G. McDonald...........  62     Director
Hamid R. Moghadam..........  43     Director
William E. Oberndorf.......  46     Director
William J. Patterson.......  37     Director
John H. Scully.............  55     Director
</TABLE>

     Rick R. Holley. Mr. Holley served as the President and Chief Executive
Officer of Plum Creek Management Company, L.P., our predecessor's general
partner (the "General Partner") from January 1994 through our conversion to a
REIT, and continues in the same position with the corporation. Mr. Holley served
as a Director of PC Advisory Corp I, our predecessor's ultimate general partner
("Corp I") from January 1994 through our conversion to a REIT, and was elected a
Director of the corporation on July 1, 1999.

     Charles P. Grenier. Mr. Grenier served as the Executive Vice President of
the General Partner from January 1994 through our conversion to a REIT, and
continues in the same position with the corporation. Mr. Grenier served as a
Director of Corp I from April 1995 through our conversion to a REIT, and was
elected a Director of the corporation on July 1, 1999. Mr. Grenier also serves
as a Director of Winter Sports, Inc.

     William R. Brown. Mr. Brown served as the Executive Vice President and
Chief Financial Officer of the General Partner from May 12, 1999 through our
conversion to a REIT and continues in the same position with the corporation.
Mr. Brown served as the Vice President of Strategic Business Development for the
General Partner from January 1998 to May 1999, Vice President, Resource
Management from February 1995 to January 1998 and Director, Planning from
December 1992 to February 1995.

     Michael J. Covey. Mr. Covey served as the Vice President, Resources of the
General Partner from January 1998 through our conversion to a REIT, and
continues in the same position with the corporation. Mr. Covey was the General
Manager, Rocky Mountain Timberlands for the General Partner from August 1996 to
January 1998, was Director of Operations, Rocky Mountain Region from June 1995
to August 1996, and was Plant Manager, Ksanka Sawmill from December 1992 to June
1995.

     Barbara L. Crowe. Ms. Crowe served as the Vice President, Human Resources
of the General Partner from April 1997 through our conversion to a REIT, and
continues in the same position with the corporation. From October 1995 through
March 1997, Ms. Crowe was Vice President, Human Resources for Weight Watchers
Gourmet Food Co., a subsidiary of the H.J. Heinz Company. From November 1991
through September 1995, Ms. Crowe worked in Human Resources at Ore-Ida Foods,
Inc., a subsidiary of the H.J. Heinz Company, first as Manager, then as General
Manager.

                                       64
<PAGE>   66

     James A. Kraft. Mr. Kraft served as the Vice President, General Counsel and
Secretary of the General Partner from April 1996 through our conversion to a
REIT, and continues in the same position with the corporation. Mr. Kraft was
Vice President, Law of the General Partner from January 1994 to April 1996.

     Ian B. Davidson. Mr. Davidson served as a Director of Corp I from December
1992 through our conversion to a REIT, and was elected a Director of the
corporation on July 1, 1999. Since 1970, Mr. Davidson has been Chairman and
Chief Executive Officer of D.A. Davidson & Co. and DADCO, a regional brokerage
firm. Mr. Davidson also serves as a Director of Energy West and the DADCO
Companies.

     David D. Leland. Mr. Leland served as a Director and Chairman of the Board
of Corp I from December 1992 through our conversion to a REIT, and was elected a
Director and the Chairman of the Board of the corporation on July 1, 1999. Mr.
Leland served as the President and Chief Executive Officer of the General
Partner from December 1992 to December 1993.

     John G. McDonald. Mr. McDonald was elected a Director of the corporation on
July 1, 1999. Mr. McDonald is the IBJ Professor of Finance in the Graduate
School of Business at Stanford University, where he has been a faculty member
since 1968. He serves as a director of Varian Associates, Inc.; Scholastic
Corp.; TriNet Corp. Realty Trust, Inc.; Garden State Vintners, Inc.; and eight
funds managed by Capital Research and Management Company and affiliates.

     Hamid R. Moghadam. Mr. Moghadam was elected a Director of the corporation
on July 1, 1999. He is the President and Chief Executive Officer of AMB Property
Corporation, one of the largest public REITs in the country focusing on
industrial properties and community shopping centers. Mr. Moghadam is a director
and one of the founders of AMB.

     William E. Oberndorf. Mr. Oberndorf served as a Director of Corp I from
November 1992 through our conversion to a REIT, and was elected a Director of
the corporation on July 1, 1999. Since 1991, Mr. Oberndorf's principal
occupation has been as a Managing Director of SPO Partners & Co., a private
investment firm that is an affiliate of our predecessor. Mr. Oberndorf serves as
a Director for Bell & Howell Company, Inc.

     William J. Patterson. Mr. Patterson served as a Director of Corp I from
November 1992 through our conversion to a REIT, and was elected a Director of
the corporation on July 1, 1999. Since 1991, Mr. Patterson's principal
occupation has been as a Managing Director of SPO Partners & Co., a private
investment firm that is an affiliate of our predecessor.

     John H. Scully. Mr. Scully served as a Director of Corp I from November
1992 through our conversion to a REIT, and was elected a Director of the
corporation on July 1, 1999. Since 1991, Mr. Scully's principal occupation has
been as a Managing Director of SPO Partners & Co., a private investment firm
that is an affiliate of our predecessor. Mr. Scully serves as a Director for
Bell & Howell Company, Inc.

                                       65
<PAGE>   67

                             PRINCIPAL STOCKHOLDERS

BENEFICIAL OWNERSHIP

     The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of August   , 1999 by each person
who is known to be the beneficial owner of more than 5% of the outstanding
shares of our common stock, our directors and our most highly compensated
executive officers, and all of our directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                                   PERCENTAGE OF
                                                         AMOUNT AND NATURE OF       OUTSTANDING
                                                        BENEFICIAL OWNERSHIP OF       COMMON
       NAME OF INDIVIDUAL OR IDENTITY OF GROUP               COMMON STOCK              STOCK
       ---------------------------------------          -----------------------    -------------
<S>                                                     <C>                        <C>
Beneficial Owners of More than 5%
  PC Advisory Partners I, L.P.........................        17,133,275(a)            27.00%
  PC Intermediate Holdings, L.P.......................        17,133,275(a)            27.00%
Directors
  Ian B. Davidson.....................................            25,784(b)              .04%
  Charles P. Grenier..................................           206,870(c)              .33%
  Rick R. Holley......................................           652,162(d)(e)          1.03%
  David D. Leland.....................................           102,625(f)              .16%
  John G. McDonald....................................             2,000                  --
  Hamid R. Moghadam...................................                --                  --
  William E. Oberndorf................................        17,136,103(g)            27.00%
  William J. Patterson................................        17,135,948(g)            27.00%
  John H. Scully......................................        17,140,760(g)(h)         27.00%
Executive Officers
  William R. Brown....................................            43,608(i)              .07%
  James A. Kraft......................................           118,853(j)              .19%
  Michael J. Covey....................................            14,820(k)              .02%
  Barbara L. Crowe....................................             9,660(l)              .02%
13 Executive Officers & Directors as a Group..........        18,322,641               28.86%
</TABLE>

- -------------------------
(a) PC Advisory Partners I, L.P. and PC Intermediate Holdings, L.P. are deemed
    to be under common control. Each is deemed, therefore, to beneficially own
    shares of common stock held by the other. PC Advisory Partners I, L.P.
    directly owns 164,987 shares of common stock and 6,346 shares of our special
    voting stock, which is convertible into common stock. PC Intermediate
    Holdings, L.P. directly owns 16,333,722 shares of common stock, and 628,220
    shares our special voting stock.

(b) Includes 300 shares of common stock owned by Mr. Davidson's wife.

(c) Includes 56,124 shares of common stock receipt of which has been deferred
    pursuant to an election under an employee benefits plan. Also includes 5,750
    shares of common stock owned by Mr. Grenier's children.

(d) Includes 96,598 shares of common stock receipt of which has been deferred
    pursuant to an election under an employee benefits plan. Also includes 6,800
    shares of common stock owned by Mr. Holley's children.

(e) Includes 358,767 shares of common stock owned by an employee benefits trust
    as to which Mr. Holley, as President and Chief Executive Officer, has voting
    and dispositive power. Mr. Holley disclaims beneficial ownership of the
    shares of common stock held by the trust.

(f)  Includes 32,000 share of common stock held by Mr. Leland's wife.

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<PAGE>   68

(g)  Includes 164,987 shares of common stock and 6,346 shares of special voting
     stock held by PC Advisory Partners I, L.P. Also includes 16,333,722 shares
     of common stock, and 628,220 shares of special voting stock held by PC
     Intermediate Holdings, L.P. Messrs. Oberndorf, Patterson and Scully have
     shared control of, and have an indirect pecuniary interest in, PC Advisory
     Partners I, L.P. and PC Intermediate Holdings, L.P.

(h) Includes 5,000 shares of common stock held in a trust over which Mr. Scully
    has voting and dispositive power.

(i)  Includes 14,242 shares of common stock receipt of which has been deferred
     pursuant to an election under an employee benefits plan.

(j)  Includes 41,399 shares of common stock receipt of which has been deferred
     pursuant to an election under an employee benefits plan. Also includes
     3,220 shares of common stock held by Mr. Kraft's children.

(k) Includes 4,818 shares of common stock receipt of which has been deferred
    pursuant to an election under an employee benefits plan.

(l)  Includes 3,324 shares of common stock receipt of which has been deferred
     pursuant to an election under an employee benefits plan.

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<PAGE>   69

                    MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     The following summary discusses the Federal income tax considerations
anticipated to be material to our prospective stockholders. The discussion does
not address the tax consequences that may be relevant to individual stockholders
in light of their particular circumstances or any special treatment to which
they may be subject under certain Federal income tax laws, such as dealers in
securities, traders in securities that elect to mark to market, banks, insurance
companies, tax-exempt organizations (except to the extent discussed under the
heading "-- Taxation of Tax-Exempt Stockholders") or non-United States persons
(except to the extent discussed under the heading "-- Taxation of Non-United
States Stockholders"). This discussion does not address any consequences arising
under the laws of any state, local or foreign jurisdiction.

     The information in this discussion is based on current provisions of the
Internal Revenue Code, existing, temporary and currently proposed Treasury
Regulations thereunder, the legislative history of the Internal Revenue Code,
existing administrative interpretations and practices of the Internal Revenue
Service, and judicial decisions, all of which are subject to change either
prospectively or retroactively. No assurance can be given that future
legislation, Treasury Regulations, administrative interpretations or judicial
decisions will not significantly change the current law or adversely affect
existing interpretations of current law. Skadden, Arps, Slate, Meagher & Flom
LLP, our special counsel, has delivered an opinion with respect to certain tax
matters (the "Tax Opinion"), which is attached as Exhibit 8.1 to the
Registration Statement of which this prospectus forms a part, which contains an
opinion substantially to the effect that, subject to the foregoing
qualifications, the discussion set forth in this prospectus constitutes, in all
material respects, a fair and accurate summary of the United States federal
income tax consequences of the purchase, ownership, and disposition of common
stock.

     We have received a substantially unqualified opinion from Skadden, Arps,
Slate, Meagher & Flom LLP to the effect that we have been organized in
conformity with the requirements for qualification as a REIT and that our
planned method of operation as represented by us in certificates delivered to
Skadden, Arps, Slate, Meagher & Flom LLP will enable us to meet the requirements
for qualification and taxation as a REIT for the taxable year ending on December
31, 1999 and thereafter. Receipt of the opinion of Skadden, Arps, Slate, Meagher
& Flom LLP is not equivalent to the receipt of a ruling from the Internal
Revenue Service to the effect that we have been organized in conformity with the
requirements for qualification as a REIT. Absent receipt from the Internal
Revenue Service of a favorable private letter ruling, there can be no assurance
that the Service will not challenge our status as a REIT. We have, however, as
described more fully under "Income Tests" below, received a private letter
ruling from the Internal Revenue Service substantially to the effect that our
timberlands, including those timberlands that are subject to timber cutting
contracts, will be considered qualifying real estate assets or interests in real
property for purposes of the REIT asset tests discussed below, and that the
gains derived by us from timber cutting contracts will be from the sale of real
property for purposes of the REIT gross income tests. See "Risk Factors -- If we
fail to qualify as a REIT, we would be subject to tax at corporate rates and
would not be able to deduct distributions to stockholders when computing our
taxable income."

     You are advised to consult with your tax advisor regarding the specific tax
consequences of the ownership and disposition of shares of our common stock in
light of your specific tax and investment situation and the specific Federal,
state, local and foreign laws that may be applicable to our common stock.

TAXATION OF PLUM CREEK AS A REIT

General.

     Under Federal income tax law, if certain detailed conditions imposed by the
Internal Revenue Code and the related Treasury Regulations are satisfied, an
entity that invests principally in real estate and that would otherwise be
subject to tax as a corporation may elect to be treated as a REIT for United
States

                                       68
<PAGE>   70

federal income tax purposes. These conditions relate, in part, to the nature of
the entity's assets and income. If we qualify for taxation as a REIT, we will
generally not be subject to Federal corporate income tax on our taxable income
that we distribute currently to our stockholders. This treatment substantially
eliminates "double taxation." Double taxation means taxation once at the
corporate level when income is earned and once again at the stockholder level
when such income is distributed.

     We intend to elect to be treated for tax purposes as, and to operate so as
to qualify as, a REIT under sections 856 through 860 of the Internal Revenue
Code, commencing with our taxable year ending on December 31, 1999. No assurance
can be given, however, that we will operate in a manner so as to qualify, or
remain qualified, as a REIT. Skadden, Arps, Slate, Meagher & Flom LLP, acting as
our special counsel, has delivered an opinion substantially to the effect that
commencing with our tax year ending on December 31, 1999, we will be organized
in conformity with the requirements for qualification as a REIT, and our
proposed method of operation will enable us to meet the requirements for
qualification and taxation as a REIT provided that (i) the elections and other
procedural steps described in this discussion of "Material Federal Income Tax
Consequences" are completed in a timely fashion and (ii) we (including our
subsidiaries) operate in accordance with various assumptions and factual
representations that we have made concerning our organization, business,
properties and operations. In providing its opinion, Skadden, Arps, Slate,
Meagher & Flom LLP has relied upon certain representations received from us and
the operating partnership. The opinion is based upon facts, representations and
assumptions as of its date, and Skadden, Arps, Slate, Meagher & Flom LLP will
have no obligation to advise us or holders of common stock of any subsequent
change in the matters stated, represented or assumed or any subsequent change in
applicable law. Qualification and taxation as a REIT will depend upon our
ability to meet on an ongoing basis (through actual annual operating results,
our asset base, distribution levels and diversity of share ownership) the
various qualification tests imposed under the Internal Revenue Code discussed
below, the results of which will not be reviewed by Skadden, Arps, Slate,
Meagher & Flom LLP on a continuing basis. No assurance can be given that the
actual results of our operations for any particular taxable year will satisfy
such requirements, and an opinion of counsel is not binding upon the Internal
Revenue Service. Further, the anticipated income tax treatment described in this
prospectus may be changed, perhaps retroactively, by legislative, administrative
or judicial action at any time. See "-- Failure to Qualify as a REIT."

     The sections of the Internal Revenue Code and the corresponding Treasury
Regulations relating to the taxation of REITs and their stockholders are highly
technical and complex. The following discussion sets forth the material aspects
of the rules that govern the Federal income tax treatment of a REIT and its
stockholders. This summary is based on current United States law, including the
applicable Internal Revenue Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change, which changes may apply retroactively.

     If we qualify for taxation as a REIT, we will generally not be subject to
Federal corporate income taxes on that portion of our ordinary income or capital
gain that we currently distribute to stockholders. The REIT provisions of the
Internal Revenue Code generally allow a REIT to deduct dividends paid to our
stockholders. This deduction for dividends substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. We will, however, be subject to Federal
income tax under certain circumstances, among which are the following:

     - We will be subject to tax at regular corporate rates on any undistributed
       REIT taxable income, including undistributed net capital gains. See,
       however, "Annual Distribution Requirements" with respect to our ability
       to elect to treat as having been distributed to our stockholders certain
       of our capital gains upon which we have paid taxes, in which event so
       much of the taxes as we have paid with respect to such income would also
       be treated as having been distributed to stockholders.

     - We may be subject to the "alternative minimum tax" on certain of our
       items of tax preference.

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<PAGE>   71

     - If we have (i) net income from the sale or other disposition of
       "foreclosure property" which is held primarily for sale to customers in
       the ordinary course of business or (ii) other nonqualifying income from
       foreclosure property, we will be subject to tax at the highest corporate
       rate on such income. In general, foreclosure property is property
       acquired through foreclosure after a default on a loan secured by the
       property or on a lease of the property.

     - We will be required to pay a 100% tax on any net income from prohibited
       transactions. In general, prohibited transactions are sales or other
       taxable dispositions of property, other than foreclosure property, held
       for sale to customers in the ordinary course of business.

     - If we fail to satisfy the 75% gross income test or the 95% gross income
       test (as discussed below), but we have maintained our qualification as a
       REIT because certain other requirements have been met, we will be subject
       to a 100% tax on an amount equal to (i) the gross income attributable to
       the greater of the amount by which we fail the 75% or 95% gross income
       test multiplied by (ii) a fraction intended to reflect our profitability.

     - We will be required to pay a 4% excise tax on the amount by which our
       annual distributions to our stockholders are less than the sum of (i) 85%
       of our ordinary income for the year, (ii) 95% of our REIT capital gain
       net income for the year (other than capital gain income we elect to
       retain and pay tax on) and (iii) any undistributed taxable income from
       prior periods (other than capital gains from such years which we elected
       to retain and pay tax on).

     - If we acquire an asset from a corporation which is not a REIT in a
       transaction in which the basis of the asset in our hands is determined by
       reference to the basis of the asset in the hands of the transferor
       corporation, and we subsequently sell the asset within ten years, then
       under Treasury regulations not yet issued, we would be required to pay
       tax at the highest regular corporate tax rate on this gain to the extent
       (a) the fair market value of the asset exceeds (b) our adjusted tax basis
       in the asset, in each case, determined as of the date on which we
       acquired the asset. The results described in this paragraph assume that
       we will elect this treatment in lieu of an immediate tax when the asset
       is acquired.

Requirements for Qualification.

     To qualify as a REIT, we must elect to be so treated and we must meet the
requirements discussed below relating to our organization, sources of income,
nature of assets and distributions of income.

Organizational Requirements.

     Our stock must be held by at least 100 persons and no more than 50% of the
value of our capital stock may be owned, directly or indirectly, by five or
fewer individuals (as specially defined for these purposes) at all times during
the last half of the taxable year. For these purposes, certain entities such as
private foundations are treated as an individual. We must satisfy these stock
ownership requirements in our second taxable year and in each subsequent taxable
year. Our certificate of incorporation provides for certain restrictions
regarding the transfer of our capital stock in order to aid in meeting the stock
ownership requirements, but these restrictions cannot insure that we will in all
cases comply with these ownership requirements.

     To monitor our compliance with the stock ownership requirements, we are
required to maintain records regarding the actual ownership of our stock. To do
so, we must demand written statements each year from the record holders of
certain percentages of our stock in which the record holders are to disclose the
actual owners of the stock (i.e., the persons required to include in gross
income the REIT dividends). A list of those persons failing or refusing to
comply with this demand must be maintained as part of our records. A stockholder
who fails or refuses to comply with the demand must submit a

                                       70
<PAGE>   72

statement with its Federal income tax return disclosing the actual ownership of
the stock and certain other information.

Income Tests.

     In order to maintain qualification as a REIT, we must annually satisfy two
gross income requirements. First, for each taxable year we must derive, directly
or indirectly, at least 75% of our gross income (excluding gross income from
"prohibited transactions") from investments relating to real property or
mortgages on real property (including "rents from real property" and "gain from
the sale or other disposition of real property") other than property held
primarily for sale to customers in the ordinary cause of business or from
certain types of temporary investments. Second, for each taxable year we must
derive, directly or indirectly, at least 95% of our gross income (excluding
gross income from "prohibited transactions") from such real property
investments, dividends, interest and gain from the sale or disposition of stock
or securities (or from any combination of the foregoing).

     In addition, if we should realize any net income from the sale or other
disposition of property held primarily for sale to customers in the ordinary
course of business (including our share of any such gain realized by any
partnership in which we are a partner) then such income would be treated as
income from a "prohibited transaction" and would not count towards satisfying
the 95% and 75% gross income tests. Such income would also be subject to a 100%
penalty tax. Under existing law, whether property is held primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction.

     Rents that we receive will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. It is anticipated that the only rental income we
will receive will be from certain farmlands and grazing lands and from certain
hunting leases. It is anticipated that any income we receive from such hunting
leases and properties will constitute "rents from real property" under the
applicable rules. While it is not expected that we will receive a substantial
amount of rental income, we will take steps to ensure that any such rental
income will qualify as "rents from real property" for purposes of the 75% and
95% gross income tests.

     We have received a private letter ruling from the Internal Revenue Service
substantially to the effect that our timberlands, including those timberlands
that are subject to timber cutting contracts, will be considered qualifying real
estate assets or interests in real property for purposes of the REIT asset
tests, and that the gains derived by us from timber cutting contracts will be
from the sale of real property for purposes of the REIT gross income tests. In
reaching these conclusions, the Internal Revenue Service expressly relied upon a
representation from us that our disposals of timber pursuant to these timber
cutting contracts will qualify as disposals of timber under section 631(b) of
the Internal Revenue Code. In connection with this representation, we have
received an opinion of Skadden, Arps, Slate, Meagher & Flom, LLP, substantially
to the effect that our disposal of timber pursuant to these timber cutting
contracts will qualify for treatment under section 631(b) of the Internal
Revenue Code.

     If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for such year if we are
entitled to relief under certain provisions of the Code. These relief provisions
will generally be available if our failure to meet such tests was due to
reasonable cause and not due to willful neglect, we attach a schedule of the
sources of our income to our Federal income tax return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances we would be
entitled to the benefit of these relief provisions. As discussed above in
"-- General," even if these relief provisions apply, a tax would be imposed with
respect to the excess gross income.

     The Treasury Regulations provide that if we are a partner in a partnership,
we will be deemed to own our proportionate share of the assets of the
partnership, and we will be deemed to be entitled to our

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<PAGE>   73

proportionate share of the gross income of the partnership. In addition, the
character of the assets and gross income of the partnership generally retains
the same character in our hands for purposes of satisfying the gross income
tests and the asset tests.

Asset Tests.

     At the close of each quarter of its taxable year, we must satisfy three
tests relating to the nature of our assets. First, at least 75% of the value of
our total assets must be represented by real estate assets including (i) our
allocable share of real estate assets held by partnerships in which we own an
interest and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering, cash, cash items and government securities. Second, not
more than 25% of our total assets may be represented by securities other than
those in the 75% asset class. Third, of the investments included in the 25%
asset class, the value of any one issuer's securities owned by us may not exceed
5% of the value of our total assets, and we may not own more than 10% of any one
issuer's outstanding voting securities.

     As of the date of this prospectus, substantially more than 75% of the fair
market value of the assets indirectly owned by us through the operating
partnership consist of timberlands owned in fee, and we expect that, at all
times, substantially more than 75% of the assets indirectly owned by us through
the operating partnership will consist of fee ownership of timberland.
Accordingly, we believe that we will be able to meet the 75% test described
above on a going forward basis.

     The operating partnership owns all of the nonvoting stock (representing 99%
of the outstanding equity) and none of the voting stock (representing 1% of the
outstanding equity) of five unconsolidated subsidiaries which are engaged in the
business of harvesting timber and manufacturing timber products. These
unconsolidated subsidiaries were formed, as part of the conversion, to own and
operate businesses that we, as a REIT, would not be permitted to own and operate
directly. Through our ownership interest in the operating partnership we are
considered to own our pro rata share of the stock of such unconsolidated
subsidiaries held by the operating partnership. Neither we nor the operating
partnership will own any outstanding voting securities of the unconsolidated
subsidiaries.

     The 5% test described above must generally be met for any quarter in which
we acquire securities of the issuer. Thus, this requirement must be satisfied
not only on the date we acquire securities of each of the unconsolidated
subsidiaries but also each time we increase our ownership of securities of any
unconsolidated subsidiaries, including as a result of our interest in the
operating partnership, the exercise by the partners of any exchange rights or
otherwise. Although we will take steps to ensure that we satisfy the 5% value
test for any quarter with respect to which testing will occur, there can be no
assurance that such steps will always be successful or will not require us to
reduce our overall interest in one or more of the unconsolidated subsidiaries.
The opinion of Skadden, Arps, Slate, Meagher & Flom LLP is based on the
assumption of continued compliance with these tests.

     If we fail to satisfy the asset tests at the end of a calendar quarter,
such a failure would not cause us to lose our REIT status if (i) we satisfied
all of the asset tests at the close of the preceding calendar quarter and (ii)
the discrepancy between the value of our assets and the asset requirements
either did not exist immediately after the acquisition of any particular asset
or was not wholly or partly caused by such an acquisition (i.e., the discrepancy
arose from changes in the market values of our assets). If the condition
described in clause (ii) of the preceding sentence were not satisfied, we could
still avoid disqualification by eliminating any discrepancy within 30 days after
the close of the quarter in which it arose.

Annual Distribution Requirements.

     In order to qualify as a REIT, we will be required to make distributions
(other than capital gain dividends) to our stockholders in an amount at least
equal to (i) the sum of (a) 95% of our "REIT
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<PAGE>   74

taxable income" (computed without regard to the dividends paid deduction and our
net capital gain) and (b) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before we timely file our tax return for
such year and if paid on or before the first regular dividend payment date after
such declaration. To the extent that we do not distribute (or we are not treated
as having distributed) all of our capital gain or we distribute (or we are
treated as having distributed) at least 95%, but less than 100%, of our "REIT
taxable income," as adjusted, we will be subject to tax on the undistributed
income at regular ordinary and capital gain corporate tax rates. If we should
fail to distribute during each calendar year at least the sum of (i) 85% of our
REIT ordinary income for such year, (ii) 95% of our REIT capital gain income for
such year (other than capital gain income which we elect to retain and pay tax
on as provided for below) and (iii) any undistributed taxable income from prior
periods (other than capital gains from such years which we elected to retain and
pay tax on), we would be subject to a 4% excise tax on the excess of the
required distribution over the amounts actually distributed.

     Pursuant to recently enacted legislation, we may elect to retain rather
than distribute our net long-term capital gains. The effect of this election is
that (i) we would be required to pay the tax on such gains at regular corporate
tax rates, (ii) our stockholders, while required to include their proportionate
share of the undistributed long-term capital gain in income, would receive a
credit or refund for their share of the tax paid by us; and (iii) the basis of a
stockholder's stock would be increased by the amount of the undistributed
long-term capital gains (minus the amount of capital gains tax paid by us and
deemed paid by the stockholder).

     It is possible that we, from time to time, may not have sufficient cash or
other liquid assets to meet the annual distribution requirements described above
due to timing or other differences between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at our taxable income. If we encounter
this situation, we may elect to pay the tax and retain the capital gain.
Nevertheless, in order to pay such tax or otherwise meet the distribution
requirements, we may find it necessary to arrange for short or possibly
long-term borrowings, issue equity or sell assets.

     Under certain circumstances, we may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to our
stockholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.

Failure to Qualify as a REIT.

     If we fail to qualify for taxation as a REIT in any taxable year and if the
relief provisions do not apply, we will be subject to tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Distributions to our stockholders in any year in which we fail to qualify
as a REIT will not be deductible by us nor will they be required to be made. As
a result, our cash available for distribution to our stockholders would be
significantly reduced. In addition, if we fail to qualify as a REIT, all
distributions to our stockholders will be subject to tax as ordinary income, to
the extent of our current and accumulated earnings and profits, and, subject to
certain limitations of the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, we will also be disqualified from being eligible
to be subject to tax as a REIT for the four taxable years following the year
during which such qualification was lost. It is not possible to state whether in
all circumstances we would be entitled to such statutory relief.

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<PAGE>   75

TAXATION OF TAXABLE U.S. HOLDERS

     As used herein, the term "U.S. Holder" means a holder of our common stock
who (for United States federal income tax purposes) is (i) an individual who is
a citizen or resident of the United States; (ii) an entity which is a
corporation or partnership for United States federal income tax purposes and
which is created or organized in the United States or under the laws of the
United States or any political subdivision thereof (although certain
partnerships so created or organized may be treated, under regulations not yet
published, as not a United States person); (iii) any estate whose income is
includable in gross income for United States federal income tax purposes
regardless of its source; or (iv) a "Domestic Trust." A Domestic Trust is
generally any trust with respect to which a court within the United States is
able to exercise primary supervision over the administration of such trust, and
as to which one or more United States fiduciaries have the authority to control
all substantial decisions of such trust.

Distributions to U.S. Holders.

     Distributions made to U.S. Holders, other than tax-exempt entities, that
are not designated as capital gain dividends, will generally be subject to tax
as ordinary income to the extent of our current and accumulated earnings and
profits as determined for Federal income tax purposes. If the amounts
distributed exceed a stockholder's allocable share of our earnings and profits,
the excess will be treated as a return of capital to the extent of the
stockholder's adjusted basis in the common stock, which will not be subject to
tax, and thereafter as a gain from the sale or exchange of a capital asset. At
the present time, we anticipate that a portion of the distributions made by us
will constitute a return of capital to the holder and the remainder will
generally constitute capital gain dividends.

     Distributions made by us to U.S. Holders that we properly designate as
capital gain dividends will be subject to tax as capital gains (to the extent
that they do not exceed our actual net capital gain for the taxable year)
without regard to the period for which a U.S. Holder has held his common stock.
The maximum capital gains rate for individuals with respect to capital gains
dividends is 20%. If we elect to retain capital gains rather than distribute
them, a U.S. Holder will be deemed to receive a capital gain dividend equal to
its share of such retained capital gains. In such a case, a stockholder will
receive a tax credit or refund for its share of the tax paid by us on such
undistributed capital gains and the basis of the stockholders' common stock
would be increased by the amount of the undistributed capital gains (minus the
amount of capital gains tax paid by us deemed distributed to such stockholders).

     Dividends declared by us in October, November, or December of any year and
payable to a stockholder of record on a specified date in any such month shall
be treated as both paid by us and received by the stockholder on December 31 of
such year, provided that we actually pay the dividend on or before January 31 of
the following calendar year. Stockholders may not include in their income tax
returns any of our net operating losses or capital losses. We will notify each
stockholder after the close of our taxable year as to the portions of the
distributions attributable to that year which constitute ordinary income,
capital gain or a return of capital.

     We will be treated as having sufficient earnings and profits to treat as a
dividend any distribution that we make up to the amount required to be
distributed in order to avoid imposition of the 4% excise tax discussed under
"-- Taxation of Plum Creek as a REIT -- General" and "-- Taxation of Plum Creek
as a REIT -- Annual Distribution Requirements." As a result, stockholders may be
required to treat as taxable dividends certain distributions that would
otherwise result in tax free returns of capital. In addition, any "deficiency
dividend" will be treated as a "dividend" (an ordinary dividend or a capital
gain dividend, as the case may be), regardless of our earnings and profits.

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Passive Activity Losses and the Investment Interest Limitation.

     Distributions made by us and gain arising from the sale or exchange by a
U.S. Holder of common stock will not be treated as passive activity income, and,
as a result, U.S. Holders will generally not be able to apply any "passive
losses" against such income or gain. Dividends from us (to the extent they do
not constitute a capital gain dividend or a return of capital) will generally be
treated as investment income for purposes of the investment interest limitation.
Net capital gain from the sale or other disposition of shares of common stock
and capital gain dividends will generally not be considered investment income
for purposes of the investment interest limitation.

Sale of Common Stock.

     Upon any sale or other disposition of common stock, a U.S. Holder will
generally recognize gain or loss for Federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market value
of any property received on such sale or other disposition and (ii) the holder's
adjusted basis in such common stock for tax purposes. Such gain or loss will be
capital gain or loss if the common stock has been held by the U.S. Holder as a
capital asset and will be eligible for preferential capital gains rates if such
common stock has been held for more than one year, as discussed above under
"Distributions to U.S. Holders." In general, any loss recognized by a U.S.
Holder upon the sale or other disposition of our common stock that has been held
for six months or less (after applying certain holding period rules) will be
treated as a long-term capital loss to the extent of distributions received by
such U.S. Holder from us which were treated as long-term capital gains.

TAXATION OF TAX-EXEMPT STOCKHOLDERS

     Based upon a published ruling by the Internal Revenue Service,
distributions that we make to a stockholder that is a tax-exempt entity will not
constitute "unrelated business taxable income" ("UBTI"), provided that the
tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Internal Revenue Code and
the shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity.

     Notwithstanding the preceding paragraph, however, a portion of the
dividends we distribute may be treated as UBTI to certain U.S. private pension
trusts if we were treated as a "pension-held REIT." We are not currently nor do
we anticipate that we will be a "pension-held REIT." If we were to become a
pension-held REIT, these rules would generally only apply to certain U.S.
pension trusts that hold more than 10% of our stock.

TAXATION OF NON-UNITED STATES STOCKHOLDERS

     The rules governing United States federal income taxation of the ownership
and disposition of common stock by persons that are, for purposes of such
taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S. Holders") are
complex, and no attempt is made herein to provide more than a brief summary of
such rules. Accordingly, the discussion does not address all aspects of United
States federal income tax and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Holder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that we qualify for taxation as a REIT.
Prospective Non-U.S. Holders should consult their tax advisors to determine the
impact of Federal, state, local and foreign tax laws with regard to an
investment in common stock (including reporting requirements) in light of their
individual investment circumstances. As discussed below, because of the nature
of our income, investment in our stock by Non-U.S. Holders may be less favorable
than investments in REITs whose principal activity is not timber-related.

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Distributions to Non-U.S. Holders.

     Under the Foreign Investors In Real Property Tax Act ("FIRPTA"),
distributions to a Non-U.S. Holder that are attributable to gain from sales or
exchanges by us of United States real property interests will cause the Non-U.S.
Holder to be treated as recognizing such gain as income effectively connected
with a United States trade or business. Non-U.S. Holders would thus generally be
subject to tax at the same rates applicable to domestic stockholders (subject to
a special alternative minimum tax in the case of nonresident alien individuals).
Such gain may also be subject to a 30% branch profits tax in the hands of a
Non-U.S. Holder that is a corporation. We are generally required to withhold 35%
of any such distribution. That amount is creditable against the Non-U.S.
Holder's United States federal income tax liability. It should be noted that the
35% withholding tax rate on capital gain dividends is higher than the maximum
rate on long-term capital gains of U.S. Holders that are individuals. It should
also be emphasized that the income we will receive under our timber cutting
contracts will be characterized for Federal income tax purposes as gain from the
sale or other disposition of real property. Accordingly, the portion of any
distribution that we make that is not a return of capital will be subject to
such treatment. Although we currently expect that a substantial portion of each
distribution will be a return of capital that would not be subject to such
treatment, no assurances can be given that the relative amounts of capital gain
and return of capital would not change over time and, because at the time of a
distribution we will generally not know whether such distribution is in excess
of earnings and profits, we intend to withhold at a rate of 35% on the entire
amount of any distribution.

     The portion of dividends received by Non-U.S. Holders payable out of our
earnings and profits which are not attributable to capital gains, if any, and
which are not effectively connected with a U.S. trade or business of the
Non-U.S. Holder will be subject to U.S. withholding tax at the rate of 30%
(unless reduced by treaty). In general, Non-U.S. Holders will not be considered
engaged in a U.S. trade or business solely as a result of their ownership of
common stock. In cases where the dividend income from a Non-U.S. Holder's
investment in common stock is (or is treated as) effectively connected with the
Non-U.S. Holder's conduct of a U.S. trade or business, the Non-U.S. Holder will
generally be subject to U.S. tax at graduated rates, in the same manner as U.S.
stockholders are subject to tax with respect to such dividends (and may also be
subject to the 30% branch profits tax in the case of a Non-U.S. Holder that is a
foreign corporation).

     In general, for purposes of determining whether tax is to be withheld at a
30% rate or at a reduced rate as specified in an applicable tax treaty, we will
presume that dividends paid on or before December 31, 1999 to a holder with an
address in a foreign country will be paid to a resident of such foreign country
absent knowledge that such treatment is not warranted. Under recently finalized
United States Treasury Regulations applicable to dividends paid after December
31, 2000 (the "Final Regulations"), to obtain a reduced rate of withholding
under a treaty, a Non-U.S. Holder will be required to either (i) provide an
Internal Revenue Service Form W-8BEN certifying such Non-U.S. Holder's
entitlement to benefits under a treaty together with, in certain circumstances,
additional information, or (ii) satisfy certain other applicable treaty
certification requirements. The Final Regulations also provide special rules to
determine whether, for purposes of determining the applicability of a tax treaty
and for purposes of the 30% withholding tax described above, dividends paid to a
Non-U.S. Holder that is an entity should be treated as paid to the entity or to
those persons or entities holding an interest in such entity. Non-U.S. Holders
who hold common stock through U.S. pass-through entities should consult their
tax advisors.

     Distributions in excess of our current and accumulated earnings and profits
to Non-U.S. Holders will not be subject to tax to the extent that they do not
exceed the adjusted basis of the stockholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Holder's common stock,
they will give rise to gain from the sale or exchange of its common stock, the
tax treatment of which is described below. Because at

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<PAGE>   78

the time of a distribution we will generally not know whether such distribution
is in excess of earnings and profits, we intend to withhold at rate of 35% on
the entire amount of any distribution. Nevertheless, a Non-U.S. Holder may seek
a refund of such amounts from the Internal Revenue Service if it subsequently
determines that such distribution was, in fact, in excess of our current or
accumulated earnings and profits and the amount withheld exceeded the Non-U.S.
Holder's United States tax liability, if any.

Sale of Common Stock.

     Gain recognized by a Non-U.S. Holder upon the sale or exchange of common
stock will generally not be subject to United States taxation unless such shares
constitute a "United States real property interest" within the meaning of
FIRPTA. The common stock will not constitute a "United States real property
interest" so long as we are a "domestically controlled REIT." A "domestically
controlled REIT" is a REIT in which, at all times during a specified testing
period, less than 50% in value of its stock is held directly or indirectly by
Non-U.S. Holders. We believe that we are currently a "domestically controlled
REIT," because the common stock is publicly traded; however, no assurance can be
given that we will continue to be a "domestically controlled REIT." If we cease
to be a "domestically-controlled REIT," gain arising from the disposition of our
shares will not be subject to tax, provided that our shares are publicly traded
on an established securities market (as determined under applicable Treasury
Regulations) and the stockholder holds 5% or less of our outstanding stock
during the five-year period ending on the date of disposition.

     Notwithstanding the foregoing, a Non-U.S. Holder will be subject to tax on
gain from the sale or exchange of common stock not otherwise subject to FIRPTA
if the Non-U.S. Holder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States. In such case, the nonresident alien individual will be
subject to a 30% United States withholding tax on the amount of such
individual's gain.

Backup Withholding Tax and Information Reporting.

     We must report annually to the Internal Revenue Service and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, such stockholder, regardless of whether any tax was actually
withheld. That information may also be made available to the tax authorities of
the country in which a Non-U.S. Holder resides.

     Backup withholding tax (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish certain information under the
United States information reporting requirements) will generally not apply to
dividends (including any capital gain dividends) that we pay on common stock to
a Non-U.S. Holder at an address outside the United States.

     The payment of the proceeds from the disposition of common stock to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of common stock to
or though a non-U.S. office of a non-U.S. broker will generally not be subject
to backup withholding and information reporting.

     The backup withholding tax is not an additional tax and may be credited
against a Non-U.S. Holder's United States federal income tax liability or
refunded to the extent excess amounts are withheld, provided that the required
information is supplied to the Service.

     The Service has issued final Treasury Regulations regarding the backup
withholding rules as applied to Non-U.S. Holders. Those final Treasury
Regulations alter the current system of backup withholding compliance and will
be effective for payments made after December 31, 2000. You should consult your

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tax advisors regarding the application of the final Treasury Regulations and
their potential effect on the ownership of common stock.

TAX ASPECTS OF OUR OWNERSHIP OF INTERESTS IN THE OPERATING PARTNERSHIP

     Substantially all of our investments are held indirectly through the
operating partnership. In general, partnerships are "pass-through" entities that
are not subject to Federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. Skadden, Arps,
Slate, Meagher & Flom LLP, our special counsel, has delivered an opinion,
substantially to the effect that the operating partnership will not be
classified as an association subject to tax as a corporation, but will instead
be classified as either (A) a disregarded entity if we own 100% of its
membership interests directly or indirectly through one or more of our wholly-
owned subsidiaries, or (B) a partnership if, in addition to us at least one
other person that is unrelated to us or that is not, directly or indirectly, a
100% owned disregarded entity, owns an interest in the operating partnership.
Accordingly, we will include in our income our proportionate share of the
foregoing items of the operating partnership for purposes of the various REIT
income tests and in the computation of our REIT taxable income. Moreover, for
purposes of the REIT asset tests, we will include our proportionate share of
assets held through the operating partnership.

OTHER TAXES

     We, the operating partnership, any of our subsidiaries, or our stockholders
may be subject to foreign, state and local tax in various countries, states and
localities, including those countries, states and localities in which we or they
transact business, own property, or reside. The state, local or foreign tax
treatment of us and the stockholders in those jurisdictions may differ from the
Federal income tax treatment described above. Consequently, you should consult
your tax advisor regarding the effect of foreign, state and local tax laws upon
an investment in the common stock in light of your individual investment
circumstances.

PROPOSED CHANGES TO REIT QUALIFICATION REQUIREMENTS

     The House of Representatives recently approved legislation that would, if
enacted into law, significantly modify certain aspects of the REIT gross income
and asset tests. A bill has been introduced in the Senate which contains
provisions which are similar to those in the House bill. The Clinton
Administration's Year 2000 budget proposal also contains similar provisions.
Included in the recently approved legislation are the following modifications:

     - Under current law a REIT is prohibited from owning more than 10% of the
       voting securities of any corporation. The legislation would modify the
       current ownership limitations to prohibit a REIT from owning more than
       10% of the voting securities or 10% of the value of any corporation,
       unless the corporation elected to be treated as a "taxable REIT
       subsidiary." A REIT would be permitted to own up to 100% of the voting
       securities and 100% of the value of the other interests in a taxable REIT
       subsidiary. In addition, the 5% REIT asset test would not apply to
       taxable REIT subsidiaries, but taxable REIT subsidiaries would be subject
       to the 25% asset test (see "Taxation of Plum Creek as a REIT -- Asset
       Tests" above).

     - The legislation would also apply certain limitations to the deductibility
       of interest paid by a taxable REIT subsidiary to a related REIT.

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<PAGE>   80

     If the House bill is enacted in its current form, it would not apply to our
unconsolidated subsidiaries unless they were to acquire a substantial new line
of business or substantial assets. If we were required to convert our
unconsolidated subsidiaries into taxable REIT subsidiaries, we would be
permitted to own up to 100% of the voting stock and 100% of the value of such
subsidiaries. In such a case, it is possible that the limitations on interest
deductions would apply to interest payments made by the subsidiaries to us, in
which case, the subsidiaries would be subject to increased taxation thereby
diminishing our after-tax cash-flow from such subsidiaries. It is presently
uncertain whether the approved legislation will be enacted into law, or, if
enacted, what the terms, including the effective dates, of the modifications
would be. Further, if the House bill is enacted in its current form, it would
eliminate the need for our senior management to own any equity in the
unconsolidated subsidiaries, and would allow us to report the financial
operations of these subsidiaries on a consolidated basis.

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                          DESCRIPTION OF CAPITAL STOCK

     The following summary description of our capital stock does not purport to
be complete and is qualified in its entirety by reference to our certificate of
incorporation, our bylaws and the Delaware General Corporation Law ("DGCL"). We
have filed copies of our certificate of incorporation and bylaws with the
Securities and Exchange Commission. These documents are incorporated by
reference into the registration statement of which this prospectus is a part.

GENERAL

     We have authorized 525,634,567 shares of capital stock, consisting of:

     - 300 million shares of common stock, par value $.01 per share;

     - 634,566 shares of special voting stock, par value $.01 per share;

     - 150,000,001 shares of excess stock, par value $.01 per share; and

     - 75 million shares of preferred stock, par value $.01 per share.

     Upon the completion of the this offering, 70,456,575 shares of common stock
will be issued and outstanding, 634,566 shares of special voting stock will be
issued and outstanding and no shares of preferred stock will be issued and
outstanding. We issued our special voting stock to the partners of our former
general partner in connection with our conversion to a REIT.

COMMON STOCK AND SPECIAL VOTING STOCK

     Each holder of shares of our common stock and special voting stock is
entitled to one vote for each share held on all matters to be voted upon by our
stockholders. In addition, if individuals affiliated with our former general
partner and designated in our certificate of incorporation retain beneficial
ownership of at least five million shares of common stock and/or special voting
stock, in the aggregate, subject to customary adjustment to avoid dilution:

     - those individuals will have the right to designate, for nomination
       purposes only, a sufficient number of our nominees for our board of
       directors that, taken together with any previously elected designees,
       could constitute a majority of our board of directors; and

     - holders of special voting stock will have the right to vote their special
       voting stock, in a separate class vote, on some matters required to be
       submitted for stockholder approval, including:

      - amendments to our certificate of incorporation;

      - issuances of more than 20% of our outstanding common stock for non-cash
        consideration;

      - dissolution;

      - mergers;

      - the sale of all or substantially all of our assets; and

      - amendments to our bylaws as proposed by our stockholders.

     Generally, matters submitted to our stockholders require the affirmative
vote of stockholders holding a majority of the number of votes cast either
present in person or by proxy at a duly convened meeting of stockholders, except
that the removal of directors, some mergers and the amendment of specific
sections of our certificate of incorporation requires the affirmative vote of
stockholders holding 66 2/3% of the number of votes entitled to be cast on such
proposals. Our board of directors is divided into three classes, with the
directors in each class serving for three years and until their successors are
duly qualified.

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<PAGE>   82

Therefore, in general, the replacement of a majority of our board of directors
will take two years or the vote of 66 2/3% of the shares of common stock
outstanding.

     Subject to the rights of the holders of preferred stock, and subject to any
other provisions of our certificate of incorporation, holders of common stock
are entitled to receive REIT distributions out of assets legally available
therefor as our board of directors may determine. Holders of special voting
stock are entitled to receive the same REIT distributions as holders of common
stock, except that REIT distributions paid in common stock will be paid in
special voting stock to these holders.

     Our shares of special voting stock are convertible, at the holder's option,
into an equal number of shares of common stock. If the beneficial ownership of
the persons designated in our certificate of incorporation drops below five
million shares of common stock and/or special voting stock, in the aggregate,
subject to customary adjustment to avoid dilution, all of our outstanding shares
of special voting stock will automatically convert into common stock. Finally,
if shares of our special voting stock are transferred to persons unaffiliated
with the individuals designated in our certificate of incorporation, these
shares will automatically convert into an equal number of shares of common
stock.

     Upon any liquidation or dissolution, the holders of our common stock and
special voting stock would be entitled to share ratably in our assets that are
legally available for distribution to stockholders after payment of liabilities.
If we have any preferred stock outstanding, holders of the preferred stock may
be entitled to distribution and/or liquidation preferences. In either case, we
must pay the applicable distribution to the holders of our preferred stock
before we may pay distributions to the holders of our common stock or special
voting stock. Except as discussed below, holders of our common stock and special
voting stock have no conversion, sinking fund, redemption, preemptive or
subscription rights. In addition, holders of our common stock and special voting
stock do not have cumulative voting rights. Holders of our special voting stock
have the right to convert shares of special voting stock into our shares of
common stock.

TRANSFER AGENT AND REGISTRAR

     BankBoston, N.A. acts as transfer agent and registrar for our common stock.

PREFERRED STOCK

     Our board of directors has the authority to determine and alter the rights,
preferences, privileges and restrictions granted to or imposed on any unissued
series of our preferred stock and to fix the number of shares, distribution
rights, conversion or exchange rights, voting rights, redemption rights,
liquidation preferences, and sinking funds of any series of our preferred stock.
The authorized shares of our preferred stock will be available for issuance
without further action by our stockholders, unless stockholder action is
required by applicable law or by the rules of a stock exchange on which any
series of our stock may be listed. As of the date of this prospectus, no shares
of preferred stock are outstanding and we have no current plans to issue any
preferred stock.

RESTRICTIONS ON OWNERSHIP AND TRANSFER OF SHARES

     In order for us to qualify as a REIT under the Internal Revenue Code, among
other things, not more than 50% in value of our outstanding capital stock may be
owned, directly or indirectly, by five or fewer individuals, as defined by the
Internal Revenue Code. Also, shares of our capital stock must be beneficially
owned by 100 or more persons during the last 335 days of a taxable year of 12
months, other than the first year or during a proportionate part of a shorter
year taxable year.

     To protect us from losing our status as a REIT, our certificate of
incorporation, subject to some exceptions, provides that no person, other than
the individuals designated in our certificate of incorporation and their
affiliates, may beneficially own more than the Ownership Limit of our shares of
capital

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stock. "Ownership Limit" means the provisions in our certificate of
incorporation which prohibit ownership either directly or under the applicable
attribution rules of the Internal Revenue Code of more than 5% of the lesser of
the total number of shares of common stock outstanding or the value of the
outstanding shares of common stock by any stockholder other than by some
designated persons agreed to by us. These ownership restrictions, however, allow
the individuals designated in our certificate of incorporation and some of their
affiliates to beneficially own up to 27% of our capital stock, which exception
will be permanently reduced in accordance with any reduction in their
proportional beneficial ownership from sales of shares of our capital stock by
these individuals and their affiliates or new issuances of capital stock by us,
and which exception will be increased to adjust for repurchases of capital stock
by us.

     Any transfer of shares of our capital stock is null and void, and the
intended transferee will acquire no rights to the shares of capital stock, if
the transfer would do any of the following:

     - cause any person to beneficially own shares of our capital stock in
       excess of the Ownership Limit not otherwise permitted as provided above;

     - result in the shares of our capital stock being owned by fewer than 100
       persons within the meaning of 856(a)(5) of the Internal Revenue Code;

     - result in us being "closely held" within the meaning of section 856(h) of
       the Internal Revenue Code;

     - result in us failing to qualify as a "domestically controlled REIT"
       within the meaning of section 897(h)(4)(B) of the Internal Revenue Code;
       or

     - otherwise cause us to fail to qualify as a REIT.

     The restriction on transferability and ownership described above which
prohibits any person from beneficially owning shares of our capital stock in
excess of the Ownership Limit will not apply if our board of directors, upon
receipt of a ruling from the Internal Revenue Service or an opinion of counsel
or other evidence or undertakings acceptable to it, waives the application of
the Ownership Limit to a person subject to the limit, provided that:

     - our board of directors obtains representations and undertakings as are
       reasonably necessary to ascertain that the acquiror's beneficial
       ownership or constructive ownership of shares of capital stock will not
       at that time or in the future result in any of the other situations
       described above; and

     - the acquiror agrees in writing that any violation or attempted violation
       of any other limitations, restrictions and conditions that our board of
       directors may impose at the time of waiver with respect to the acquiror
       will result in the conversion of these shares in excess of the original
       limit applicable to the acquiror into shares of excess stock.

     If any purported transfer of our capital stock or other event resulting in
an increase in any holder's percentage interest in our common stock would cause
a purported transferee or holder to be in violation of the Ownership Limit or
would cause us to be disqualified as a REIT, then the purported transferee or
holder will not acquire or will cease to own, as the case may be, the number of
shares in excess of the Ownership Limit or in excess of the highest number of
shares which would allow us to remain qualified as a REIT. The excess stock will
be converted automatically into an equal number of shares of stock and
transferred automatically, by operation of law, to a trust, the beneficiary of
which will be a qualified charitable organization selected by us. Automatic
transfer shall be deemed to be effective as of the close of business on the
trading day prior to the date of the violative transfer or event. Upon the
occurrence of a conversion of shares of capital stock into an equal number of
shares of excess stock, these shares of capital stock shall be automatically
retired and canceled, without any action required by our board of directors, and
shall thereupon be restored to the status of authorized but unissued shares of
the particular

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class or series of capital stock from which this excess stock was converted and
may be reissued by us as that particular class or series of capital stock.

     As soon as practical after the transfer of shares of excess stock to the
trust, the trustee of the trust, who shall be designated by us, will be required
to designate one or more persons who could own excess shares without violating
the Ownership Limit or causing us to be disqualified as a REIT and to sell
excess shares to these permitted transferees. Upon the trustee's designation and
sale of the excess stock to the permitted transferee, shares of excess stock
will automatically convert into an equal number of shares of capital stock of
the same class and series from which the excess stock was converted. Upon the
occurrence of a conversion of shares of excess stock into an equal number of
shares of capital stock, shares of excess stock shall be automatically retired
and canceled, without any action by our board of directors, and shall be
restored to the status of authorized but unissued shares of excess stock and may
be reissued by us as excess stock. However, if the transfer of excess stock to a
purported permitted transferee would or does violate any of the transfer
restrictions set forth above, this transfer shall be void as to that number of
shares of excess stock that cause the violation of this restriction when shares
are converted into shares of capital stock and the purported permitted
transferee shall be deemed to be a prohibited owner and shall acquire no rights
in these shares of excess stock or our capital stock. Shares of our capital
stock shall be automatically converted into excess stock and transferred to the
trust from which they were originally transferred.

     Any prohibited owner shall be entitled, following acquisition of the shares
of excess stock and the subsequent designation and sale of excess stock to a
permitted transferee, to receive from the trustee sales proceeds received by the
trust for the excess shares. The proceeds of a sale are calculated according to
a formula in our certificate of incorporation.

     In addition, excess shares held in the trust shall be deemed to have been
offered for sale to us, or our designee, at a price per share equal to the
lesser of the price per share in the transaction that created the excess stock
or market value. We shall have the right to accept this offer for a period of 90
days.

     All certificates representing shares of common stock bear a legend
referring to the restrictions described above.

     We are required to keep records which disclose the actual ownership of our
outstanding shares of capital stock. Accordingly, in order to comply with these
record keeping requirements, any person who beneficially owns more than 3% of
the our outstanding shares of any class or series of our capital stock, or the
lower percentages as are then required pursuant to regulations under the
Internal Revenue Code, is required to provide to us, by January 31st of each
year, a written statement or affidavit stating the name and address of the
beneficial owner, the number of shares beneficially owned by the beneficial
owner and a description of how the shares are held. In addition, each record and
beneficial owner of our capital stock shall, upon demand, be required to
disclose to us in writing the information we may request in order to determine
our status as a REIT and to ensure compliance with the Ownership Limit. In
addition, the individuals designated in our certificate of incorporation and
their affiliates shall promptly notify us upon any transfer of our capital
stock.

     The ownership limitations described above could have the effect of
delaying, deferring or preventing a change of control in which holders of common
stock might receive a premium for their shares over the then prevailing market
price. See also "Risk Factors -- Provisions in our certificate of incorporation
and Delaware law may prevent a change in control."

SECTION 203 OF DELAWARE GENERAL CORPORATION LAW

     We are subject to the "business combination" statute of the Delaware
General Corporation Law. In general, the statute prohibits us from engaging in
various "business combination" transactions with any

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<PAGE>   85

"interested stockholder" for a period of three years after the date of the
transaction in which the person became an "interested stockholder" unless:

     - the transaction is approved by our board of directors prior to the date
       the "interested stockholder" obtains "interested stockholder" status;

     - upon consummation of the transaction, the "interested stockholder"
       beneficially owns at least 85% of our outstanding voting stock at the
       time the transaction commenced, excluding shares owned by:

      - our officers who are also directors;

      - our employee stock plans, if any, in which our employee participants do
        not have the right to determine confidentially whether the shares held
        subject to the plan will be tendered in a tender or exchange offer; or

      - the transaction is approved by our board of directors and authorized at
        an annual or special meeting of our stockholders holding an affirmative
        vote of at least 66 2/3% of our outstanding voting stock, which is not
        owned by the "interested stockholder."

     Under this statute, a "business combination" includes the following:

     - mergers;

     - asset sales; and

     - other transactions resulting in financial benefit to the "interested
       stockholder."

     An "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years, did own 15% or more of our voting
stock.

     This statute could prohibit or delay a merger or other takeover or change
of control. Accordingly, this statute may discourage any attempts to acquire us.

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                                  UNDERWRITERS

     Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives, have severally agreed to purchase,
and we have agreed to sell to them severally the number of shares indicated
below:

<TABLE>
<CAPTION>
                                                              NUMBER OF
                            NAME                               SHARES
                            ----                              ---------
<S>                                                           <C>
Morgan Stanley & Co. Incorporated...........................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
                                                              --------
          Total.............................................
                                                              ========
</TABLE>

     The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered hereby are subject to
the approval of specific legal matters by their counsel and to specific other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus if any of the shares are taken.
However, the underwriters are not required to take or pay for the shares covered
by the underwriters' over-allotment option described below.

     The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to specific dealers at a price that represents
a concession not in excess of $          a share under the public offer price.
Any underwriter may allow, and specific dealers may reallow, a concession not in
excess of $          a share to other underwriters or to other dealers. After
the initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.

     We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of $     additional
shares of common stock at the public offering price listed on the cover page of
this prospectus, less underwriting discounts and commissions. The underwriters
may exercise this option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of common stock offered
by this prospectus. To the extent the option is exercised, each underwriter will
become obligated, subject to some conditions, to purchase about the same
percentage of the additional shares of common stock as the number listed next to
the underwriter's name in the preceding table bears to the total number of
shares of common stock listed next to the names of all underwriters in the
preceding table. If the underwriters' option is exercised in full, the total
price to the public would be $          , the total underwriters' discounts and
commission would be $          and our total proceeds would be $          .

     We and our directors, executive officers and some of our stockholders have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of
the underwriters, they will not, during the period ending 90 days after the date
of this prospectus:

     - offer, pledge, sell, contract to sell, sell any option or contract to
       purchase, purchase any option or contract to sell, grant any option,
       right or warrant to purchase, lend or otherwise transfer or dispose of,
       directly or indirectly, any shares of common stock or any securities
       convertible into or exercisable or exchangeable for common stock; or

     - enter into any swap or other arrangement that transfers to another, in
       whole or in part, any of the economic consequences of ownership of the
       common stock,

                                       85
<PAGE>   87

whether any transaction described above is to be settled by delivery of common
stock or other securities, in cash or otherwise. The restrictions described in
this paragraph do not apply to:

     - the sale of shares to the underwriters;

     - our issuance of shares of common stock upon the exercise of an option or
       a warrant or the conversion of a security outstanding on the date of this
       prospectus of which the underwriters have been advised in writing; or

     - transactions by any person other than us relating to shares of common
       stock or other securities acquired in open market transactions after the
       completion of the offering of the shares.

     In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.

     The underwriters have agreed to reimburse us for a portion of our expenses
incurred in connection with this offering.

     We and the underwriters have agreed to indemnify each other against
specific liabilities, including liabilities under the Securities Act.

                                 LEGAL MATTERS

     Specific legal matters, including the validity of the issuance of the
common stock being offered by this prospectus and the United States federal
income tax consequences in connection with this offering, will be passed upon
for Plum Creek Timber Company, Inc. by Skadden, Arps, Slate, Meagher & Flom LLP,
Los Angeles, California. Brown & Wood LLP, San Francisco, California will act as
counsel for the underwriters.

                                    EXPERTS

     The combined balance sheet as of December 31, 1998 and 1997, and the
combined statements of income and cash flows for each of the three years in the
period ended December 31, 1998 of Plum Creek Timber Company, L.P. have been
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

     We file reports, proxy statements, and other information with the SEC. You
can read and copy these reports, proxy statements and other information
concerning us at the SEC's Public Reference Room at 450 Fifth Street, N.W.
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The SEC maintains an internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers that file electronically, including
ourselves. Our common stock is quoted on the New York Stock Exchange and

                                       86
<PAGE>   88

the Pacific Exchange. These reports, proxy statements and other information are
also available for inspection at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005, or the offices of the Pacific Exchange,
301 Pine Street, San Francisco, California, 94104.

     This prospectus is part of a registration statement that we filed with the
SEC. You can obtain the full registration statement from the SEC as indicated
above.

     The SEC allows us to "incorporate by reference" the information we file
with the SEC. This permits us to disclose important information to you by
referring to these filed documents. Any information referred to in this way is
considered part of this prospectus, and any information that we file with the
SEC after the date of this prospectus will automatically be deemed to update and
supersede this information. We incorporate by reference the following documents
that have been filed with the SEC:

     - Annual Report on Form 10-K for the fiscal year ended December 31, 1998
       (filed March 18, 1999) and Amendment 1 to the Annual Report on Form
       10-K/A dated March 29, 1999 (filed March 31, 1999);

     - Quarterly Reports on Form 10-Q for the quarterly period ended March 31,
       1999 (filed May 14, 1999);

     - Current Reports on Form 8-K dated February 8, 1999 (filed February 10,
       1999), March 12, 1999 (filed March 12, 1999), March 18, 1999 (filed March
       22, 1999), March 22, 1999 (filed March 23, 1999), March 24, 1999 (filed
       March 25, 1999), March 26, 1999 (filed March 30, 1999), March 29, 1999
       (filed March 31, 1999), April 9, 1999 (filed April 12, 1999), April 19,
       1999 (filed April 20, 1999), June 21, 1999 (filed June 22, 1999), July 1,
       1999 (filed July 1, 1999), and July 1, 1999 (filed July 14, 1999); and

     - Registration Statement on Form 8-A dated July 1, 1999 (filed July 1,
       1999).

     We also incorporate by reference any future filings made with the SEC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act.

     We will provide without charge upon written or oral request, a copy of any
or all of the documents that are incorporated by reference into this prospectus.
Requests should be directed to Director, Investor Relations, Plum Creek Timber
Company, Inc., 999 Third Avenue Suite 2300, Seattle, Washington 98104 (telephone
number 206-467-3600).

                                       87
<PAGE>   89

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

     The following expenses (other than the SEC registration fee and NASD filing
fee) are estimated.

<TABLE>
<S>                                                           <C>
SEC registration fee........................................  $
NASD filing fee.............................................
Printing and engraving expenses.............................
Accountants' fees and expenses..............................
Attorneys' fees and expenses................................
Miscellaneous...............................................
                                                              --------
          Total.............................................
                                                              ========
</TABLE>

ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

     Our certificate of incorporation limits the liability of our directors to
us and our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to us or our stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the Delaware General Corporate Law ("DGCL"), or (iv) for
any transaction from which the director derived an improper impersonal benefit.
If the DGCL is amended to further eliminate or limit the liability of directors,
then the liability of a director, in addition to the aforementioned limitations
on personal liability, will be limited to the fullest extent permitted by the
amended DGCL.

     Our bylaws require us to indemnify our directors, officers and certain
other parties in (i) suits or proceedings other than those by or in the right of
us if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of us, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe such
person's conduct was illegal and (ii) suits or proceedings by or in the right of
us if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of us except that with
respect to this clause (ii), no such indemnification will be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to us, unless the Court of Chancery or the court in which such action
or suit was brought determines such person is fairly and reasonably entitled to
indemnity.

     Our bylaws permit us to purchase and maintain insurance on behalf of
directors, officers and certain other parties against any liability asserted
against such person and incurred by such person in such capacity, whether or not
we would have the power or the obligation to indemnify such person.

     It is the position of the Securities and Exchange Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act of 1933 is against public policy and is unenforceable pursuant to
Section 14 of the Securities Act of 1933.

                                      II-1
<PAGE>   90

ITEM 16. EXHIBITS.

     The following is a list of all exhibits filed as part of this registration
statement on Form S-3, including those incorporated by reference.

<TABLE>
<C>      <S>
 1.1*    Underwriting Agreement, dated as of July   , 1999, by and
         among Plum Creek Timber Company, Inc., Morgan Stanley & Co.
         Incorporated and Merrill Lynch, Pierce, Fenner & Smith
         Incorporated.
 2.1     Amended and Restated Agreement and Plan of Conversion, dated
         as of July 17, 1998, by and among Plum Creek Timber Company,
         Inc., Plum Creek Timber Company, L.P. and Plum Creek
         Management Company, L.P. (Registration Statement on Form
         S-4, filed on January 28, 1999).
 2.2     Agreement and Plan of Merger, dated as of July 17, 1998, by
         and among Plum Creek Timber Company, L.P., Plum Creek
         Acquisition Partners, L.P. and Plum Creek Timber Company,
         Inc. (Registration Statement on Form S-4, filed on January
         28, 1999).
 2.3     Agreement and Plan of Merger, dated as of July l7, 1998, by
         and between Plum Creek Timber Company, Inc. and Plum Creek
         Management Company, L.P. (Registration Statement on Form
         S-4, filed on January 28, 1999).
 4.1     Senior Note Agreement, dated May 31, 1989, 11 1/8% Senior
         Notes due June 8, 2007, Plum Creek Timber Company, L.P.
         (Form 10-Q, No. 1-10239, for the quarter ended June 30,
         1989). Amendment No. l, consent and waiver dated January l,
         1991 to Senior Note Agreement, dated May 31, 1989, 11 1/8%
         Senior Notes due June 8, 2007, Plum Creek Timber Company,
         L.P. (Form 8 Amendment No. 1, for the year ended December
         31, 1990). Amendment No. 2, consent and waiver dated
         September l, 1993 to the Senior Note Agreement (Form l0-K/A,
         Amendment No. l, for the year ended December 31, 1993).
         Amendment No. 3, Senior Note Agreement Amendment dated May
         20, 1994 (Form 10-K/A, Amendment No. l, for the year ended
         December 31, 1994). Senior Note Agreement dated May 31, 1996
         (Form 10-Q, No. 1-10239, for the quarter ended June 30,
         1996). Senior Note Agreement Amendment dated April 15, 1997
         (Form 10-Q, No. 1-10239, for the quarter ended September 30,
         1997).
 4.2     Mortgage Note Agreement, dated May 31, 1989, 11 1/8% First
         Mortgage Notes due June 8, 2007, Plum Creek Manufacturing,
         Inc. (Form 10-Q, No. 1-10239, for the quarter ended June 30,
         1989). Amendment No. l, consent and waiver dated January 1,
         1991 to Mortgage Note Agreement, dated May 31, 1989, 11 1/8%
         First Mortgage Notes due June 8, 2007, Plum Creek
         manufacturing, Inc., now Plum Creek Manufacturing, L.P.
         (Form 8 Amendment No. 1, for the year ended December 31,
         1990). Amendment No. 2, consent and waiver dated September
         1, 1993 to the Mortgage Note Agreement (Form 10-K/A,
         Amendment No. 1, for the year ended December 31, 1993).
         Amendment No. 3, Mortgage Note Agreement Amendment dated May
         20, 1994 (Form 10-K/A, Amendment No. l, for the year ended
         December 31, 1994). Amendment to Mortgage Note Agreement
         dated June 15, 1995 (Form l0-Q, No. 1-10239, for the quarter
         ended September 30, 1995). Mortgage Note Agreement dated May
         31, 1996 (Form 10-Q, No. 1-10239, for the quarter ended June
         30, 1996). Mortgage Note Agreement Amendment dated April 15,
         1997 (Form 10-Q, No. 1-10239, for the quarter ended
         September 30, 1997).
 4.3     Senior Note Agreement, dated August 1, 1994, 8.73% Senior
         Notes due August 1, 2009, Plum Creek Timber Company, L.P.
         (Form 10-K/A, Amendment No. l, for the year ended December
         31, 1994). Senior Note Agreement Amendment dated as of
         October 15, 1995 (Form 10-K, No. 1-10239, for the year ended
         December 31, 1995). Senior Note Agreement Amendment dated
         May 31, 1996 (Form 10-Q, No. 1-10239, for the quarter ended
         June 30, 1996). Senior Note Agreement Amendment dated April
         15, 1997 (Form 10-Q, No. 1-10239, for the quarter ended
         September 30, 1997).
</TABLE>

                                      II-2
<PAGE>   91

<TABLE>
<C>        <S>
     4.4   Senior Note Agreement dated as of November 13, 1996, $75 million Series A due November 13, 2006, $25
           million Series B due November 13, 2008, $75 million Series C due November 13, 2011, $25 million Series
           D due November 13, 2016 (Form 10-K, No. 1-10239, for the year ended December 31, 1996).
     4.5   Senior Note Agreement dated as of November 12, 1998, Series E due February 12, 2007, Series F due
           February 12, 2009, Series G due February 12, 2011 (Form 8-K and Form 8-K/A, No. 1-10239, dated November
           12, 1998).
     4.6   Form of Common Stock Certificate (Registration Statement on Form S-4, filed on January 28, 1999).
     5.l*  Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain matters regarding the shares of
           Common Stock offered hereby.
     8.1*  Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain tax matters.
    23.1   Consent of PricewaterhouseCoopers LLP.
    23.2*  Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in their opinions filed as Exhibits 5.1
           and 8.1).
    24.1   Power of Attorney (included on the signature page hereto).
</TABLE>

- -------------------------
* To be filed by amendment.

ITEM 17. UNDERTAKINGS.

     (a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

     (b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

     (c) The undersigned registrant hereby undertakes that:

          (1) For purposes of determining any liability under the Securities Act
     of 1933, the information omitted from the form of prospectus filed as part
     of this registration statement in reliance upon Rule 430A and contained in
     a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     registration statement as of the time it was declared effective.

          (2) For the purpose of determining any liability under the Securities
     Act of 1933, each post-effective amendment that contains a form of
     prospectus shall be deemed to be a new registration statement relating to
     the securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.

                                      II-3
<PAGE>   92

                                   SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on this Form S-3, and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on this 2nd day of
August, 1999.

                                          PLUM CREEK TIMBER COMPANY, INC.

                                          By:      /s/ RICK R. HOLLEY

                                            ------------------------------------
                                                      Rick R. Holley,
                                               President and Chief Executive
                                                           Officer

                               POWER OF ATTORNEY

     Each person whose signature appears below constitutes and appoints Rick R.
Holley, William R. Brown and James A. Kraft, and each of them, his or her true
and lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement (and to any registration statement
filed pursuant to Rule 462 under the Securities Act of 1933), and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
                         SIGNATURE                                 TITLE                   DATE
                         ---------                                 -----                   ----
    <C>                                                  <C>                          <S>

                    /s/ RICK R. HOLLEY                         President and          August 2, 1999
    ---------------------------------------------------   Chief Executive Officer
                      Rick R. Holley                           and Director

                    /s/ DAVID D. LELAND                    Chairman of the Board      August 2, 1999
    ---------------------------------------------------        and Director
                      David D. Leland

                  /s/ CHARLES P. GRENIER                 Executive Vice President     August 2, 1999
    ---------------------------------------------------        and Director
                    Charles P. Grenier

                   /s/ WILLIAM R. BROWN                  Executive Vice President     August 2, 1999
    ---------------------------------------------------     and Chief Financial
                     William R. Brown                       Officer (Principal
                                                         Accounting and Financial
                                                                 Officer)

                    /s/ IAN B. DAVIDSON                          Director             August 2, 1999
    ---------------------------------------------------
                      Ian B. Davidson
</TABLE>

                                      II-4
<PAGE>   93

<TABLE>
<CAPTION>
                         SIGNATURE                                 TITLE                   DATE
                         ---------                                 -----                   ----
    <C>                                                  <C>                          <S>
                                                                 Director             August   , 1999
    ---------------------------------------------------
                     John G. McDonald

                   /s/ HAMID R. MOGHADAM                         Director             August 2, 1999
    ---------------------------------------------------
                     Hamid R. Moghadam

                 /s/ WILLIAM E. OBERNDORF                        Director             August 2, 1999
    ---------------------------------------------------
                   William E. Oberndorf

                 /s/ WILLIAM J. PATTERSON                        Director             August 2, 1999
    ---------------------------------------------------
                   William J. Patterson

                    /s/ JOHN H. SCULLY                           Director             August 1, 1999
    ---------------------------------------------------
                      John H. Scully
</TABLE>

                                      II-5

<PAGE>   1

                         [PRICEWATERHOUSECOOPERS LOGO]

                                                                    EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report dated January 26, 1999 relating to the
financial statements, which appears in the Plum Creek Timber Company, L.P.'s
Annual Report on Form 10-K for the year ended December 31, 1998. We also
consent to the reference to us under the headings "Experts" in such
Registration Statement.

PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

Seattle, Washington
July 30, 1999




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