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Entering 2005, additional favorable price effects are expected to continue. Synergies associated with the Box USA acquisition will benefit 2005 through both volume improvements and cost reductions. The implementation of a new operating model at our mills, representing the first phase of our supply chain project, will result in some efficiency improvements and cost savings in 2005. The European operating results are expected to improve as a result of targeted market growth and cost reduction initiatives. 

Consumer Packaging 2004 net sales of $2.6 billion were up compared to the 2003 and 2002 sales of $2.5 billion each. Our average prices in 2004 increased about 1% for bleached board over 2003, and were up about 4% for the beverage and foodservice converting businesses. The higher prices reflect the pass-through of higher raw material costs, although this continues to be tempered by competitive pressures. Our bleached board mills operated with no market-related downtime in 2004, with shipments up 10% over the prior year. Operating profits in 2004 declined 12% from 2003 and 34% from 2002 as improved pricing and favorable operations in the mills did not overcome the impact of cost increases in raw materials, especially wood, energy and resin. During 2004, manufacturing improvement, rationalization and organizational restructuring plans were implemented throughout this business to reduce costs and improve market alignment. 

Improved price realizations are expected to continue into 2005 as the market remains strong; however, raw material costs for wood and resin are expected to be negative factors. Capital improvements and cost reduction efforts made in 2004 will benefit operating results in 2005. 

## Distribution 

Our Distribution business, including xpedx , markets a diverse array of products and services to customers in many business segments, including commercial printing, manufacturing and building services. Distribution’s customer demand is sensitive to changes in general economic conditions. Sales to commercial printers are heavily dependent on the levels of corporate advertising and promotional spending. In addition, efficient customer service, cost-effective logistics, and controlled working capital management are key factors in this segment’s profitability. 

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Distribution’s 2004 net sales increased 3% from 2003 and 1% from 2002. Operating profits in 2004 were 9% higher than 2003, but were 4% lower than 2002. Sales revenue increases 

and cost containment initiatives drove the 2004 earnings improvement. The sales growth reflects rising prices for paper and tissue products and for packaging products. Also contributing to the sales growth were the addition of new national retail accounts to Distribution’s customer portfolio and brisk demand from commercial printers. Reduction in operating costs continued in 2004 as the business consolidated facilities and rationalized its information systems. Since 2002, Distribution has reduced its work force 38% through actions related to consolidations and system efficiencies. 

The outlook for 2005 is favorable. Our average prices are expected to remain at or above 2004 levels, and additional market penetration is planned through new initiatives in the printing and manufacturing segments. Additional improvement is expected from programs to further reduce operating costs. 

## Forest Products 

Forest Products manages approximately 6.8 million acres of forestlands in the United States, and operates wood products plants in the United States that produce lumber, plywood, engineered wood products and utility poles. Forest Resources’ operating results are largely driven by demand and pricing for softwood sawtimber, and to a lesser extent for softwood pulpwood, by the volume of merchantable timber on Company forestlands, and by demand and pricing for specific forestland tracts offered for sale. Wood Products operating results are driven by new housing starts and repair and remodeling activity. Fiber costs are a major factor in Wood Products’ profitability. 

Forest Products net sales for 2004 were about even with 2003, but were 5% lower than in 2002. Operating profits in 2004 were 10% and 24% higher than in 2003 and 2002, respectively. Earnings in 2004 reflected continued strong contributions from the U.S. Wood Products business, primarily as a result of higher average plywood and lumber prices ($180 million) and improved mix of products sold ($20 million). Lower earnings from forestland and real estate sales ($95 million) and from reduced Forest Resources’ harvest volumes ($15 million), combined with higher raw material costs ($15 million) to partially offset the impact of these higher prices. 

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Forest Resources sales in 2004 were $900 million compared with $1.1 billion in 2003 and $1.2 billion in 2002. Operating profits in 2004 were 16% lower than in 2003 and 

