Edgar Filing: GEORGIA PACIFIC CORP

Form 10-K For Period Ended December 28th, 2002

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the Fiscal Year Ended December 28, 2002

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

For the transition period from __________ to __________

Commission File Number 1-3506

GEORGIA-PACIFIC CORPORATION

(Exact name of registrant as specified in its charter)

Georgia		93-0432081
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

133 Peachtree Street, N.E.,

Atlanta, Georgia 30303

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (404) 652-4000

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

Title of Each Class		Name of Each Exchange on which Registered
Georgia-Pacific Corporation—Georgia-Pacific Group Common Stock ($.80 par value)		New York Stock Exchange
Georgia-Pacific Group Rights to Purchase Series B Junior Preferred Stock (no par value)		New York Stock Exchange

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

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

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

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

As of the close of business on March 12, 2003, the registrant had 250,319,958 shares of Georgia-Pacific Common Stock outstanding.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 28, 2002 (assuming, for the sole purpose of this calculation that all executive officers and directors of the registrant are “affiliates”) was $5,586,427,267 for Georgia-Pacific Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Georgia-Pacific Corporation’s definitive Proxy Statement for use in connection with its Annual Meeting of Shareholders scheduled to be held on May 6, 2003 are incorporated by reference in answer to Part III of this Form 10-K.

GEORGIA-PACIFIC CORPORATION

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 28, 2002

TABLE OF CONTENTS

PART I

		Page
Item 1.	Business	1
Item 2.	Properties	8
Item 3.	Legal Proceedings	8
Item 4.	Submission of Matters to a Vote of Security Holders	9

	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	9
Item 6.	Selected Financial Data	9
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 8.	Financial Statements and Supplementary Data	40
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	120

	PART III
Item 10.	Directors and Executive Officers of the Registrant	120
Item 11.	Executive Compensation	122
Item 12.	Security Ownership of Certain Beneficial Owners and Management	122
Item 13.	Certain Relationships and Related Transactions	122
Item 14.	Controls and Procedures	122

	PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	123

PART I

ITEM 1. BUSINESS

Georgia-Pacific Corporation (the “Corporation” or “Georgia-Pacific”) was organized in 1927 under the laws of the State of Georgia.

The Corporation is engaged in four principal business operations: the manufacture of tissue products (including bath tissue, paper towels, and napkins) and disposable tabletop products (including disposable cups, plates and cutlery); the manufacture of containerboard and packaging (including linerboard, medium and corrugated packaging); the manufacture of bleached pulp and paper (including paper, market and fluff pulp, kraft and bleached board) and the manufacture and distribution of building products (including plywood, oriented strand board, various industrial wood products, and softwood and hardwood lumber as well as certain non-wood products including gypsum board, chemicals and other products).

Prior to October 6, 2001, the Corporation also engaged in the growing of timber on approximately 4.7 million acres of timberlands that the Corporation owned or leased. In 2001, these timberlands supplied approximately 10% of the overall timber requirements of the Corporation’s manufacturing facilities. On October 6, 2001, the Corporation completed the spin off of The Timber Company and its merger with and into Plum Creek Timber Company, Inc. (“Plum Creek”).

Among North American producers, Georgia-Pacific ranks first in the production of tissue paper products, disposable tableware, structural wood panels and industrial wood panels; second in wood bonding and industrial thermosetting resins; third in gypsum wallboard; fourth in lumber products, containerboard, corrugated packaging and market pulp; and fifth in paper (uncoated free-sheet). The Corporation’s building products distribution business is the leading supplier of wholesale building products in the United States. Georgia-Pacific’s chemical business also supplies paper chemicals and tall oil based chemicals.

Most of Georgia-Pacific’s products are made of solid wood, virgin and recycled wood fiber, or wood by-products. Georgia-Pacific purchases the majority of these readily available raw materials from timber owners, independent log merchants and brokers, and recycled fiber brokers.

Georgia-Pacific’s strategy is to improve its portfolio of businesses by divesting or exiting non-strategic businesses, and by acquiring and investing in businesses that are high value-added and that position Georgia-Pacific closer to consumers. A key component of that strategy is improving the Corporation’s bath tissue, paper towel and napkin business, which is commonly referred to as the tissue business. The Corporation believes that its acquisition of Fort James Corporation in 2000 directly facilitated that strategy. In 2001, in connection with the Corporation’s redirection of its focus away from commodity-based businesses, the Corporation sold a portion of its pulp and paper assets to Domtar Inc. and divested its timber businesses by redeeming all of the outstanding shares of stock of The Timber Company and merging its timber businesses with Plum Creek.

In May 2002, the Corporation’s board of directors approved separating Georgia-Pacific’s consumer products, packaging and bleached pulp and paper businesses (along with its remaining interest in the Unisource paper distribution business) from the Corporation’s building products manufacturing and distribution business. After this separation, the Corporation would have consisted of only the building products manufacturing and distribution business. In September 2002 this separation was indefinitely suspended in light of conditions in the financial and capital markets, operating results in Georgia-Pacific’s two principal businesses, and the market’s perception of its asbestos liabilities.

Georgia-Pacific’s four principal businesses are broken down into six operating segments: North America consumer products, international consumer products, packaging, bleached pulp and paper, building products manufacturing and building products distribution.

Consumer Products

Georgia-Pacific is the largest North American producer of tissue products; a leading manufacturer of tissue products in Europe; and through its Dixie business, the largest producer of disposable tableware in North America. The consumer products include a wide array of branded and private label consumer and commercial tissue products. These include bath tissue, paper towels and napkins, which are made from virgin and recycled fibers, as well as disposable plates, cups and cutlery. Primary production of these products takes place in 26 tissue mills throughout Europe and the United States and 12 disposable tableware plants in North America. Worldwide tissue capacity is approximately 3.9 million tons, making this business the world’s largest producer of tissue products. Markets for tissue products are generally influenced by population growth, changes in per capita consumption, and levels of economic activity in a geographic market.

The consumer products business operates as two segments: North America consumer products and international consumer products.

North America Consumer Products Segment

With a 37% volume market share, Georgia-Pacific is the largest producer of tissue products in North America. The business produces bath tissue, paper towels and napkins made from virgin and recycled fibers, in both branded and private label tissue products, for the retail and commercial markets. According to industry statistics, Georgia-Pacific’s North American retail and commercial manufacturing cash cost position is the lowest among its leading industry competitors. Fourteen production and converting facilities located throughout the United States and two converting facilities in Mexico produce finished goods to serve the North American market. In 2002, North American sales accounted for approximately $5,455 million, or 77% of the Corporation’s worldwide consumer products sales.

Retail Tissue. In the retail (or “at-home”) channel, which accounted for approximately 68% of domestic tissue sales in 2002, Georgia-Pacific produces both branded and private label products. The rankings of the Corporation’s principal retail brands based on unit share include Quilted Northern and Angel Soft bath tissue (the number two and three bathroom tissue brands, respectively), Sparkle and Brawny paper towels (the number three and four paper towel brands, respectively), and five of the seven leading napkin brands including Mardi Gras napkins (the leading paper napkin brand) and Vanity Fair premium dinner napkins (the number one premium napkin brand). Other retail brands include Sparkle and Brawny paper napkins, and Soft’N Gentle bathroom and facial tissue, MD bath tissue, Mardi Gras towels, Zee napkins (number one on the West Coast), and Green Forest towels and napkins.

Georgia-Pacific also supplies private label or customer brand products to some of the largest retailers in the United States. The Corporation believes that it is the leading supplier to the United States private label towel and tissue market, with a market share of 42%.

Georgia-Pacific believes it is the leading supplier of tissue, towel and napkin products to the warehouse club, the fastest growing channel in the consumer products industry. Additionally, the Corporation has well-established relationships with the leaders in the rapidly expanding mass merchandise channel, as well as long-term relationships with major retailers in the grocery channel. Georgia-Pacific’s position in expanding retail channels provides superior growth prospects compared to the overall market.

Commercial Tissue. In 2002, the remaining 32% of domestic tissue sales came from commercial and industrial (or “away-from-home”) markets. These sales were made through independent paper distributors, food

service and janitorial distributors, and directly to national fast food accounts for use in restaurants, offices, factories, hospitals, schools and hotels and through the Corporation’s office product distribution business (Unisource), wholly-owned until November, 2002, when a controlling interest was sold. The Corporation’s principal away-from-home brands include proprietary dispensing systems for the Cormatic, Ultimatic and Guardian brands; and Envision, the leading brand of environmentally positioned 100% recycled tissue, towel and napkin products.

According to the American Forest & Paper Association, in 2001, Georgia-Pacific sold more tissue products in the commercial channel than any other company in North America and based on volume has a 40% share. With a 44% share in the food service industry and a 45% share in the health care industry, the Corporation believes it has the largest market share in the fastest growing end-use markets for commercial tissue products.

Georgia-Pacific is the market leader in proprietary dispensers and also has leading market positions in the paper distribution, janitorial supply and manufacturing end-use markets. The commercial tissue market benefits from attractive long-term fundamentals, including unit volume growth due to increased dining and entertaining outside of the home.

Dixie. The Dixie business, with one of the best-known names in disposable plates, cups and cutlery, has the number one market share in the $12 billion North American disposable tableware market. The Corporation’s principal retail tabletop brand, Dixie, is virtually synonymous with the paper cup it created over 80 years ago. Through a twelve-plant network of focused production facilities in North America, Dixie manufactures a full range of products for both retail and foodservice markets.

Georgia-Pacific believes that it is the leading supplier of tabletop products to the warehouse club channel. The Corporation believes that it is one of the largest producers of disposable cups, plates and related products for the foodservice industry. Foodservice customers include distributors, restaurants, hotels, office buildings and institutions, many of the same customers to which G-P sells its North American tissue. Approximately 57% of sales are into retail distribution channels and the remaining 43% are into foodservice distribution channels. In 2002, Dixie’s net sales were approximately $907 million.

International Consumer Products Segment

The international consumer products segment is a leading supplier of paper-based consumer products in many European countries. Product lines in both the retail and away-from-home markets include bathroom and facial tissue, paper towels and napkins. Retail sales include both branded and private label products. The Corporation also markets feminine hygiene products and pharmacy supplies in select countries. These products are manufactured across Europe in 11 mills with an annual capacity of over 906,000 tons, or are purchased from others. Eleven stand-alone converting plants strategically located throughout Europe and China supplement converting operations located at the primary production mills. The combined network provides cost-effective market reach given the high European distribution costs and the resulting decrease in the maximum practical distribution radius from any one-mill site. In 2002, net sales for the International business accounted for approximately $1,663 million, or 23% of the Corporation’s worldwide consumer products sales.

During 2002, tissue-based products accounted for approximately 87% of the Corporation’s annual International Consumer Products sales with the balance comprised of feminine hygiene products, ancillary products such as health care and pharmacy items, and unconverted tissue parent rolls. Georgia-Pacific sells its tissue, towel and napkin products through both retail and away-from-home distribution channels in Europe. Approximately 75% of the Corporation’s European towel and tissue sales were into retail distribution channels and 25% were into away-from-home and other channels. Sales into retail channels are supported by both branded and private label product offerings.

The Corporation’s principal European brands include Lotus bathroom tissue and handkerchiefs (both hold the number one position in France), Moltonel bathroom tissue (the number two tissue in France), Lotus kitchen

towels (the number one kitchen towel in the Netherlands), O’Kay kitchen towels (the number one kitchen towel in France), Colhogar kitchen towels and bathroom tissue (both hold number one positions in Spain), KittenSoft towels and bathroom tissue (both hold number one positions in Ireland), EMBO bathroom tissue (the number one tissue in Finland), Tenderly bathroom tissue (the number three tissue in Italy), Delica kitchen towels, napkins and bathroom tissue (the number one towel and napkins and number two bath tissue in Greece), Vania feminine hygiene products (one of the leaders in France), Selpak premium tissue products (the leader in Turkey) and Demak’Up cotton facial pads (the leader in Europe).

Georgia-Pacific’s largest European operations are in France and the United Kingdom, which combined account for approximately 65% of its European tissue sales. Aggregating at-home branded, private label and away-from-home production, the Corporation believes it is the largest producer of tissue products in France, Finland, Ireland, and Turkey and the second largest producer in the United Kingdom and Greece.

Packaging

The packaging segment focuses on providing packaging solutions for a wide variety of industrial customers. Its primary products include corrugated containers and containerboard. The Corporation’s four containerboard mills rank fourth in North American containerboard production with a capacity of 3.8 million tons, approximately 10% of North American capacity. The containerboard mills produce unbleached linerboard and medium, in roll form, that is shipped to converting facilities. One of the largest domestic producers of containerboard, the packaging segment is the third largest supplier of containerboard to independent converters in the United States.

Georgia-Pacific has three principal types of converting facilities: corrugated box plants, which fabricate corrugated sheets from containerboard and print, cut, fold and join them to create finished boxes; sheet feeders, which also fabricate corrugated sheets and then deliver them to other converters who complete the finished box; and graphic packaging facilities, which fabricate corrugated sheets and utilize graphic capabilities and design techniques to meet specialized customer requirements. The segment’s 53 converting plants consume approximately 70% of the segment’s containerboard production; the remainder is sold to independent box converters in the United States, Latin America and Asia. Georgia-Pacific is the fourth largest supplier of corrugated containers in the United States.

In addition to standard corrugated containers, the segment’s packaging plants supply many specialty-packaging products. These include display-ready corrugated packaging that works interchangeably with the Corporation’s line of reusable plastic containers, double and triple-wall boxes, bulk bins, water-resistant packaging, and high-finish and preprinted packaging for point-of-sale displays. The Corporation’s Color-Box subsidiary produces high quality litho-laminated packaging at nine specialty printing, coating and converting facilities. It is the largest litho-laminate corrugated manufacturer in North America.

Markets for containerboard and packaging products are affected primarily by changes in industry capacity, the level of industrial activity in the United States, and export markets. Containerboard exports totaled 248,000 tons during 2002 compared to 2001’s level of 266,000 tons. In 2002, exports for the packaging segment were $112 million, approximately 4% of segment net sales.

Bleached Pulp and Paper

The bleached pulp and paper segment produces market pulp, paper and other products at nine facilities in North America. Combined production capacity for pulp and paper is 3.7 million tons. The bleached pulp and paper segment’s mills are among the industry’s lowest cost producers. Exports from this business segment consist chiefly of market pulp bound for Asia, Europe, and Latin America. In 2002, exports for the bleached pulp and paper segment were $432 million, approximately 17% of segment sales. Markets for pulp and paper products

are affected primarily by changes in industry capacity, the level of economic growth in the United States and export markets, and fluctuations in currency exchange rates.

Paper. Georgia-Pacific is the fifth largest North American producer of uncoated free-sheet paper. Uncoated free-sheet paper is used in office copy machines and printers, commercial printing, business forms, stationery, tablets, books, envelopes, labels and checks. The bleached pulp and paper segment’s four uncoated free-sheet paper mills have a combined annual capacity of 1.2 million tons, approximately 7% of North American capacity. These products are sold through paper distributors, office product distributors, printing equipment manufacturers, retailers and converters. Products are sold under a variety of brand names including: Spectrum, Eureka and GeoCycle.

Market Pulp. Georgia-Pacific ranks eighth in the production of market pulp worldwide. The bleached pulp and paper segment includes three pulp mills with a combined annual capacity of nearly 1.6 million tons, approximately 19% of United States capacity. These mills produce primarily Southern softwood and Northern hardwood pulps sold to industrial users for the manufacture of many paper grades.

Georgia-Pacific’s Brunswick facility is the largest fluff pulp production facility in the world. It contributes approximately 826,000 tons annually to make the Corporation the second largest producer of fluff pulp in the world. Fluff pulp is used primarily in the manufacture of disposable diapers and other sanitary items.

Bleached Board. The bleached pulp and paper segment manufactures approximately 500,000 tons of bleached paper board annually for use in frozen food containers, food service items and other products. The combined bleached board capacities at Naheola, Alabama and Crossett, Arkansas make Georgia-Pacific Corporation the fourth largest bleached board producer in North America.

Paper Distribution

In November 2002, Georgia-Pacific completed the sale of a 60% controlling interest in Unisource, the Corporation’s paper distribution business, to an affiliate of Bain Capital, LLC. Unisource has been treated as a separate reportable segment in the accompanying financial statements. Beginning in November 2002, the profits from the remaining 40% equity investment in Unisource were included in the bleached pulp and paper segment.

Building Products Manufacturing

Building Products Manufacturing is one of the leading manufacturers of building products in the United States. The segment manufactures wood panels (including plywood, oriented strand board (“OSB”) and industrial panels), lumber, gypsum products, chemicals and other products. These products are manufactured at 131 facilities in the United States, 7 plants in Canada, 2 plants in South America, and a joint venture in South Africa. These products are sold directly to industrial customers, independent dealers and wholesalers, and large building product retailers or through our building products distribution business.

The building products business is affected by the level of housing starts; the level of home repairs, remodeling and additions; commercial building activity; the availability and cost of financing; and changes in industry capacity. The demand for building products tends to be stronger during the second and third quarters when weather conditions favor construction. Exports for the building products manufacturing segment in 2002 were $113 million (approximately 2% of segment sales), primarily to the Caribbean and Europe.

Building products manufacturing is organized into five divisions:

Structural Panels. Based on panel production capacity of 8.7 billion square feet, Georgia-Pacific is the largest producer of structural wood panels in North America. Georgia-Pacific accounts for about 19% of North American panel capacity. The division’s 20 softwood plywood plants produce approximately 32% of North American capacity and, its six OSB plants can produce 2.2 billion square feet or 9% of annual North American capacity. With most of these plants located in the Southeast, the business benefits from an ample supply of timber, favorable weather conditions, regional population growth, national economic growth and other factors.

Two facilities manufacture engineered lumber products. Demand for the building products segment’s engineered lumber products has increased in recent years as wood I-joists (made from veneer, OSB and sawn lumber) have increasingly become the product of choice for floor joist applications. Laminated veneer lumber (“LVL”) and wood I-joists are designed to meet the precise structural performance requirements of roofing and flooring systems. The segment produces both LVL and I-joists.

Industrial Wood Products. The building products manufacturing segment is the largest producer of industrial wood panels and the fourth largest producer of hardwood plywood in North America. The division’s particleboard plants produce more than 1.4 billion square feet of panels annually, which is approximately 17% of U.S. and Canadian capacity. Georgia-Pacific believes it is the largest producer of particleboard flooring and currently supplies more than 35% of the flooring substrate for the manufactured housing market. Seventeen mills manufacture composite panels of particleboard, MDF, hardboard and softboard, as well as hardwood plywood, interior decorative panels and thermally fused melamine panels. Applications include furniture, cabinets, housing, retail fixtures, and other industrial products.

Lumber. The fourth largest lumber producer in North America, Georgia-Pacific has the capacity to manufacture about 2.5 billion board feet annually or approximately 4% of North American lumber production. Most of the Corporation’s 33 lumber mills are located in the Southern United States. Lumber products are manufactured from Southern pine, a variety of Appalachian and Southern hardwoods, cedar, spruce, hemlock and Douglas fir. During fourth quarter of 2002, the Corporation closed its western softwood mill in Ft. Bragg, California. This mill was responsible for one-third of Georgia-Pacific’s western softwood production capacity.

Georgia-Pacific’s building products business ranks as one of the top producers of pressure-treated lumber in the nation. Approximately 36% of its southern pine lumber production is pressure-treated to protect it for use in outdoor applications such as decks, fences, bridges and playground equipment. Georgia-Pacific owns six pressure-treated lumber plants, two of which are idle. Southeast Wood Treating, Inc. operates the other four Georgia-Pacific treating facilities as well as seven additional plants it owns. With production from 11 facilities, the business can sell more than one billion board feet of lumber annually.

Gypsum Products. Georgia-Pacific operates 18 gypsum board plants throughout the United States and Canada and with an annual capacity of 6.5 billion square feet has the third largest gypsum wallboard capacity in North America. Gypsum products include wallboard, DensGuard specialty panels, fire-door cores, industrial plaster and joint compound. The business is substantially vertically integrated in paper and gypsum rock, operating three recycled gypsum paperboard mills and ten gypsum quarries/mines. Gypsum reserves are approximately 301 million recoverable tons, an estimated 64-year supply at current production rates.

Georgia-Pacific is the only producer of fiberglass-faced and backed gypsum sheathing and decking products in the United States. Additionally, it is one of only two mineral fire door core producers in the U.S. as well as a major producer of mineral fire stop door components. It produces almost 50% of the value-added industrial plaster in the United States.

In March 2002, the Delair, New Jersey gypsum paperboard plant with an annual capacity of 60 thousand tons was sold. Delair represented 19% of Georgia-Pacific’s gypsum paper capacity. In June 2002, the 65 thousand ton Sigurd, Utah plaster plant was closed.

Chemicals. The Corporation’s chemical business is a leading supplier of wood bonding resins, industrial thermosetting resins, formaldehyde, paper chemicals, and tall oil based chemicals. These chemicals and resins are used in a variety of specialty applications, including production of wood panels, papermaking, roofing, thermal insulation, metalworking, coatings, fertilizers, and transportation. The business ships more than four billion pounds of bonding and thermosetting resins, formaldehyde, pine chemicals, and paper chemicals annually from 17 United States and 2 South American plants. The business also operates through a joint venture in South Africa with Chemical Services, Ltd. During 2002, the Corporation closed its Houston, Texas and Rock Hill,

South Carolina plants. These two plants had a capacity of 214 million pounds, 8% of Georgia-Pacific’s annual formaldehyde production.

Building Products Distribution

Building Products Distribution. The building products distribution business is the leading domestic wholesaler of building products. It sells building products to independent dealers, industrial customers and large home improvement centers from two sales centers in North America and distributes product from 63 warehouse locations throughout the United States and one in Canada. The building products distribution business provides a nationwide outlet for a significant portion of Georgia-Pacific’s lumber and structural panel products. Approximately 71% of the business’ sales are building products purchased from third parties. The Corporation’s building products distribution business believes that its geographic coverage and product breadth are unmatched in North America.

Additional Information

Additional information pertaining to the Corporation’s businesses, including operating segments, is set forth under the captions “Georgia-Pacific Corporation and Subsidiaries—Management’s Discussion and Analysis” and “Georgia-Pacific Corporation and Subsidiaries—Sales and Operating Profits by Operating Segment” presented in Notes 1 and 2 of the Corporation’s Notes to Consolidated Financial Statements, under Item 8 of this Form 10-K.

The Corporation’s Internet website is http://www.gp.com and includes, free of charge, through the Investor Relations portion of the website, the Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Corporation electronically files such material with, or furnishes it to, the Securities and Exchange Commission.

Timber Resources

The principal raw material used by the Corporation is timber and wood fiber. During 2002 Plum Creek supplied 10% of the overall timber requirements of Georgia-Pacific Group’s facilities. The Corporation purchases its remaining timber requirements from third-party landowners in the open market. No single supplier, other than Plum Creek, supplied more than 10% of the Corporation’s timber requirements.

Effective on the merger date of October 6, 2001, Georgia-Pacific and Plum Creek entered into a timber supply agreement that is effective for 10 years and subject to an automatic ten-year renewal period, unless either party delivers a timely termination notice. This agreement covers four key southern timber basins: Southeast Arkansas, Mississippi, Florida and Southeast Georgia. Under the agreement, Plum Creek must offer to Georgia-Pacific specified percentages of its annual harvest, subject to absolute minimum and maximum limitations in each basin. Georgia-Pacific can elect between 36%-51% of such annual harvest each year in Mississippi, Florida and Southeast Georgia, and between 52%-65% in Southeast Arkansas. The total annual softwood volume will range from a minimum of 2.7 million tons to a maximum of 4.2 million tons. The prices for such timber will be negotiated at arms length between Plum Creek and Georgia-Pacific every six months.

Mineral Resources

Information pertaining to the Corporation’s gypsum resources is set forth under the captions “Georgia-Pacific Group—Building Products—Gypsum Products” in this item.

Environment

Information pertaining to environmental issues and the Corporation’s expenditures for pollution control facilities and equipment is set forth under the captions “Georgia-Pacific Corporation and Subsidiaries—

Management’s Discussion and Analysis—Liquidity and Capital Resources—Investing Activities” and Note 15 of the Notes to Consolidated Financial Statements, and is presented under Items 7 and 8 of this Form 10-K.

Employees

Information pertaining to persons employed by the Corporation is set forth under the captions “Georgia-Pacific Corporation and Subsidiaries—Management’s Discussion and Analysis—Liquidity and Capital Resources—Other”, presented under Item 7 of this Form 10-K.

Patents, Copyrights, Licenses, Trade Secrets and Trademarks

The Corporation is the owner of numerous patents, copyrights, trademarks, licenses and trade secrets, as well as substantial know-how and technology (herein collectively referred to as “technology”) relating to its products and the processes for their production, the packages used for its products, the design and operation of various processes and equipment used in its business and certain quality assurance and financial software. The manufacturing and processing of many of the Corporation’s products are among the important trade secrets of the Corporation.

The Corporation also owns numerous trademarks, which are very important to its business, especially its consumer products business. Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. The Corporation has registered and licenses the right to use its trademarks in conjunction with certain merchandise other than products it manufactures. In part, the Corporation’s success can be attributed to the existence of its trademarks.

ITEM 2. PROPERTIES

The geographic location and capacity of the manufacturing facilities by segment is set forth on Exhibit 99.1 hereto which is hereby incorporated herein by this reference.

The Corporation’s manufacturing and support facilities are designed according to the requirements of the products to be manufactured. Therefore, the type of construction varies from facility to facility. Management believes that its manufacturing facilities, taken as a whole, are well-maintained and generally adequate for current operations.

Utilization of a particular facility varies based upon demand for the product. While it is not possible to measure with any degree of certainty the productive capacity of a facility, we have estimated capacity in Exhibit 99.1, which is incorporated herein by reference thereto.

The Corporation generally owns its manufacturing and other facilities, although warehouse and office facilities are often leased. The Corporation examines alternatives for its higher cost facilities, including modernizing, replacing or closing such facilities. The Corporation continually reviews many business opportunities and alternatives, including possible acquisitions or sales of properties.

Information concerning the Corporation’s timber and mineral resources is presented under Item 1 of this Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

Information pertaining to the Corporation’s Legal Proceedings is set forth in Note 15 of the Corporation’s Consolidated Financial Statements which are presented under Item 8 of this Form 10-K and are incorporated herein by reference thereto.

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

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Georgia-Pacific common stock is listed on the New York Stock Exchange and trades under the symbol GP. As of the close of business on March 12, 2003, the closing stock price of one share of Georgia-Pacific common stock was $13.07 and there were approximately 38,234 record holders of such stock.

Information with respect to the Market for the Corporation’s Common Equity and Related Stockholder Matters is set forth in a table under the captions “Selected Financial Data—Financial Position, End of Year” in Note 16 of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K, which is incorporated herein by reference thereto.

The Corporation expects to continue to pay quarterly dividends in the amounts set forth in Note 16 of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K, which dividend information is incorporated herein by reference thereto.

ITEM 6. SELECTED FINANCIAL DATA

Information with respect to Selected Financial Data for the Corporation is set forth under the captions “Selected Financial Data—Operations—Georgia-Pacific Corporation and Subsidiaries” and “Selected Financial Data—Financial Position, End of Year,” which are presented under Item 8 of this Form 10-K, and are incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion summarizes the significant factors affecting the results of operations and financial condition of the Corporation during the three fiscal years ended December 28, 2002. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Supplemental Information set forth in Item 8 of this report.

Georgia-Pacific Corporation is engaged in four principal business operations: the manufacture of tissue products (including bath tissue, paper towels, and napkins) and disposable tabletop products (including disposable cups, plates and cutlery); the manufacture of containerboard and packaging (including linerboard, medium, kraft and corrugated packaging); the manufacture of bleached pulp and paper (including paper, market and fluff pulp, and bleached board) and the manufacture and distribution of building products (including plywood, oriented strand board, various industrial wood products, and softwood and hardwood lumber as well as certain non-wood products including gypsum board, chemicals and other products).

2002 Compared with 2001

The Corporation reported consolidated net sales of $23.3 billion and a net loss of $735 million for 2002, compared with net sales of $25.0 billion and a net loss of $407 million in 2001.

Interest expense was $841 million in 2002, compared with $1,080 million in 2001. The decrease is the result of lower debt levels and slightly lower interest rates.

The Corporation reported a loss from continuing operations before income taxes of $508 million and an income tax benefit of $318 million for the year ended December 28, 2002, compared with a loss from continuing

operations before income taxes of $295 million and an income tax provision of $181 million for the year ended December 29, 2001. The effective rate in 2002 was different from the statutory rate primarily because of the write-off of nondeductible goodwill (see Note 6 of the Notes to Consolidated Financial Statements) and because of tax benefits from the sale of a controlling 60 percent interest in the Unisource paper distribution business (see Note 3 of the Notes to Consolidated Financial Statements). The effective tax rate in 2001 was different from the statutory rate primarily because of nondeductible goodwill amortization expense associated with business acquisitions and because of nondeductible goodwill applicable to assets sold (see Note 3 of the Notes to Consolidated Financial Statements).

During 2002 and 2001, the corporation recorded a pretax charge to earnings of $315 million ($198 million after tax) and $350 million ($221 million after tax), respectively, to cover projected asbestos liabilities and defense costs through 2012 and 2011, respectively, net of insurance recoveries. (see Note 15 of the Notes to Consolidated Financial Statements). The Corporation intends to annually update its estimate of asbestos liabilities, defense costs and insurance recoveries and make adjustments to such reserves as necessary.

In November 2002, the Corporation completed the sale of a controlling 60 percent interest in its Unisource paper distribution business and recorded a pre-tax loss of $298 million ($30 million after tax). Unisource is reported as the paper distribution segment for the first ten months of 2002 and for all of 2001 and 2000. The results from the 40 percent interest the Corporation retains in Unisource are reflected in the bleached pulp and paper segment.

Effective December 30, 2001, the Corporation adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 142 requires that entities discontinue amortization of all purchased goodwill, including amortization of goodwill recorded in past business combinations. Accordingly, the Corporation no longer amortized goodwill beginning in 2002. During 2001, goodwill amortization expense aggregated $235 million, which included $156 million in the North America consumer products segment, $13 million in the international consumer products segment, $21 million in the packaging segment, $23 million in the bleached pulp and paper segment, $19 million in the paper distribution segment, and $3 million in the building products manufacturing segment.

The adoption of SFAS No. 142 required the Corporation to perform an initial impairment assessment on all goodwill as of the beginning of 2002 for each of the Corporation’s reporting units. In this assessment, the Corporation compared the fair value of the reporting unit to its carrying value. The fair values of the reporting units were calculated based on the present value of future cash flows. The assumptions used in these discounted cash flow analyses were consistent with the reporting unit’s internal planning. The cumulative effect of the adoption of this accounting principle was an after-tax charge to earnings of $545 million effective at the beginning of 2002 (see Note 6 of the Notes to Consolidated Financial Statements) related to the impairment of goodwill in the paper distribution segment.

Beginning in the third quarter of 2001, the Corporation began reporting The Timber Company as a discontinued operation. October 6, 2001, the Corporation completed the spin off of The Timber Company and its merger with and into Plum Creek (see Note 3 of the Notes to Consolidated Financial Statements).

In the first quarter of 2001, the Corporation refinanced debt in the amount of $300 million, and accordingly, recorded an extraordinary loss, net of taxes, on the early extinguishment of debt in the amount of $12 million.

In the first quarter of 2001, the Corporation adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” and, accordingly, recorded an after-tax cumulative effect of accounting change credit of $11 million.

The remaining discussion refers to the “Selected Operating Segment Data” table below which should be read in conjunction with the more detailed segment information set forth in Note 2 of the Notes to Consolidated Financial Statements and Sales and Operating Profits by Operating Segment.

SELECTED OPERATING SEGMENT DATA

Georgia-Pacific Corporation and Subsidiaries

	Fiscal Year Ended
	2002			2001			2000
In millions
Net sales:
North America consumer products	$	5,455		$	5,441		$	1,970
International consumer products		1,663			1,590			119
Packaging		2,726			2,610			2,735
Bleached pulp and paper		2,562			3,239			3,271
Paper distribution		4,755			6,213			6,872
Building products manufacturing		5,117			5,256			5,801
Building products distribution		3,785			3,822			4,320
Other*		(2,792	)		(3,155	)		(3,038	)

Total net sales	$	23,271		$	25,016		$	22,050

Operating profits (losses):
North America consumer products	$	851		$	663		$	(9	)
International consumer products		141			126			(9	)
Packaging		316			384			512
Bleached pulp and paper		65			28			357
Paper distribution		(516	)		48			158
Building products manufacturing		129			83			354
Building products distribution		50			65			23
Other		(703	)		(612	)		(238	)

Operating profits		333			785			1,148
Interest expense		841			1,080			595

(Loss) income from continuing operations before income taxes		(508	)		(295	)		553
(Benefit) provision for income taxes		(318	)		181			210

(Loss) income from continuing operations		(190	)		(476	)		343
Income from discontinued operations, net of taxes		–			70			162

(Loss) income before extraordinary item and accounting change		(190	)		(406	)		505
Extraordinary item, net of taxes		–			(12	)		–
Cumulative effect of accounting change, net of taxes		(545	)		11			–

Net (loss) income	$	(735	)	$	(407	)	$	505

Includes the elimination of intersegment sales.

North America Consumer Products

The Corporation’s North America consumer products segment reported net sales of $5.5 billion and operating profits of $851 million for the year ended December 28, 2002, compared with net sales of $5.4 billion and operating profits of $663 million for the year ended December 29, 2001. Included in the 2002 operating results are charges of $18 million primarily related to severance and facility closure costs. The 2001 operating results included a charge of $83 million for the closure of the Bellingham, Washington pulp mill and goodwill amortization of $156 million. Excluding these severance and facility closure charges and goodwill amortization, return on net sales decreased slightly to 16% compared with 17% in 2001. The decrease in 2002 operating results was due principally to a 2% decline in retail tissue prices. Commercial tissue pricing was down 5% year over year due to competitive market conditions, which began late in 2001. Pricing improved slightly in the second half

of 2002. Costs for wastepaper, a key raw material in the tissue business, followed an increasing trend during 2002 and were 13% higher on average for the year than in 2001. In the fourth quarter of 2002, wastepaper costs were 43% higher that the comparable period in 2001. During 2003, retail markets are expected to remain competitive as the businesses enter the year with lower selling price levels in retail tissue and higher waste paper costs. The Corporation also expects modest growth in sales volumes in all North America consumer products businesses in 2003.

On March 30, 2001, the Corporation announced that it would permanently close its pulp mill and associated chemical plant at Bellingham, Washington. This decision was based on the age of the facility and the extraordinarily high energy costs on the West Coast in late 2000. These operations had been temporarily closed since December 2000. The Bellingham pulp mill produced approximately 220,000 tons of pulp, including 135,000 tons of sulfite market pulp, and 260,000 tons of lignin annually. In connection with this closure the Corporation recorded a pretax charge to earnings in the north America consumer products segment of approximately $57 million for the write-off of assets, approximately $14 million for the termination of approximately 420 hourly and salaried employees and approximately $12 million for facility closing costs. Of the $83 million total pretax charge to earnings, $79 million was charged to cost of sales, $3 million was charged to selling and distribution expense and $1 million was charged to general and administrative expenses.

International Consumer Products

The Corporation’s international consumer products segment consists of the European businesses and certain small tissue joint ventures located in Europe and elsewhere, all acquired in the Fort James acquisition in November 2000. The international consumer products segment reported net sales of $1.7 billion and operating profits of $141 million for the fiscal year ended December 28, 2002, compared with net sales and operating profits of $1.6 billion and $126 million, respectively, during 2001. During 2002, the U.S. dollar weakened against the functional currencies of the businesses in the international consumer products segment. The impact of the change in foreign currency exchange rates was to increase net sales and operating profits in 2002 by $81 million and $9 million, respectively. Excluding goodwill amortization of $13 million in 2001 and the effect of the change in currency exchange rates, return on net sales remained flat at 9% in 2002 and 2001. The operating environment in Europe is expected to remain competitive in 2003, particularly in the United Kingdom. This segment is forecasting modestly higher profit in 2003 driven by modest sales growth and product mix improvements.

Packaging

The Corporation’s packaging segment reported net sales of $2.7 billion and operating profits of $316 million for the year ended December 28, 2002, compared with net sales of $2.6 billion and operating profits of $384 million in 2001. Excluding goodwill amortization of $21 million, operating profits were $405 million in 2001. Return on net sales decreased to 12% from 16% in 2001. Average selling prices decreased in 2002 for all packaging products. Average selling prices for linerboard and medium decreased 7% and 11%, respectively, and average selling prices for packaging boxes decreased 5%. These decreases were offset by a 5% increase in sales volume for both linerboard and packaging boxes. In 2003, the Corporation expects continued competitive price pressures for its packaging products, particularly in the first half of the year.

During 2002 and 2001, the Corporation took market-related paper machine downtime at its containerboard mills to avoid excess inventories, resulting in a reduction in containerboard production of approximately 97,000 tons and 274,000 tons, respectively.

Bleached Pulp and Paper

The Corporation’s bleached pulp and paper segment reported net sales of $2.6 billion and operating profits of $65 million for the year ended December 28, 2002. In 2001, the segment reported net sales of $3.2 billion and

operating profits of $28 million. In August 2001, the bleached pulp and paper segment sold four paper and pulp facilities and recorded a pre-tax loss of $63 million. During 2001 these facilities reported net sales and an operating loss of $770 million and $64 million, respectively. Excluding goodwill amortization of $23 million in 2001 and the results of operations sold in 2001, return on net sales decreased to 3% compared with 5% for the same period a year ago. The decrease in net sales and operating profits was due primarily to a decrease in average prices for all of the Corporation’s bleached pulp and paper products, offset somewhat by lower production costs. Average selling prices for market pulp and fluff pulp decreased 5% and 10%, respectively, while paper prices decreased 8% compared with 2001 prices.

During 2002, the Corporation incurred market-related downtime at its bleached pulp and paper mills, resulting in a reduction in pulp production of 97,000 tons. In 2001, the Corporation incurred market-related downtime at its pulp and paper mills resulting in a reduction in pulp and paper production of 104,000 tons and 21,000 tons, respectively.

Average selling prices for the Corporation’s pulp and paper products decreased during 2002 but ended the year at levels higher than 2001. The Corporation expects continued weak markets in 2003, although profits should improve somewhat due to higher year-over-year average prices in pulp and paper.

Paper Distribution

The Corporation’s paper distribution segment, which represents the operating results of Unisource for the first ten months of 2002 and all of 2001, reported net sales of $4.8 billion and an operating loss of $516 million in 2002, compared to net sales and operating profits of $6.2 billion and $48 million, respectively, in 2001. In November 2002, the Corporation sold a 60 percent controlling interest in the Unisource paper distribution business and recorded a pre-tax loss on the sale of $298 million. Also included in the 2002 results are goodwill and other long-lived assets impairment charges of $208 million. Included in the segment’s 2001 operating results is goodwill amortization of $19 million. Excluding these unusual charges in 2002 and goodwill amortization expense in 2001, operating results decreased to a loss of $10 million in 2002 compared to an operating profit of $67 million in 2001. The decline in sales and operating profits for the paper distribution segment is a direct result of declining prices and volumes in the printing business. Beginning in November 2002, the Corporation began reporting in the bleached pulp and paper segment its share of Unisource’s operating results as equity in earnings of an unconsolidated subsidiary.

Building Products Manufacturing

The Corporation’s building products manufacturing segment reported net sales of $5.1 billion and operating profits of $129 million for the year ended December 28, 2002, compared with net sales of $5.3 billion and operating profits of $83 million in 2001. As a result of weak market conditions in this segment, the Corporation announced the closure of certain structural panels mills, lumber mills, industrial wood products mills, and gypsum plants and recorded charges of $93 million in 2001 related to these plant closures and asset impairments, net of gains on asset sales. Excluding these net facility closure and asset impairment charges and goodwill amortization of $3 million in 2001, return on net sales was flat at 3% in 2002 and 2001. During 2002, average selling prices for plywood, treated lumber, softwood lumber, particleboard and oriented strand board decreased 5%, 9%, 4%, 8% and 2%, respectively, while sales volumes for gypsum declined 11% compared to the prior year. A 12% increase in gypsum selling prices and a 4% increase in sales volume for both plywood and oriented strand board somewhat offset these declines. Overall building product market conditions are expected to improve in 2003. Housing starts are expected to remain strong and a recovery in the industrial sector is anticipated.

In connection with overall weak market conditions in the wallboard market due to excess capacity in the industry, the Corporation announced in June 2001 that it would close gypsum wallboard plants at Savannah, Georgia; Long Beach, California; and Winnipeg, Manitoba, Canada. The Corporation also announced that it would indefinitely idle wallboard production lines at Acme, Texas; Sigurd, Utah; and Blue Rapids, Kansas; and

reduce operations at its remaining gypsum wallboard production facilities. The plant closures and production curtailments affected approximately 45% of the Corporation’s gypsum wallboard production capacity. In connection with this announcement, the Corporation recorded a pretax charge to earnings in the building products manufacturing segment of approximately $57 million for the write-off and impairment of assets, approximately $5 million for the termination of approximately 350 hourly and salaried employees, and approximately $5 million for facility closing costs, most of which was charged to cost of sales.

During 2001, the Corporation announced the closure of certain structural panels mills, lumber mills, industrial wood products mills and chemical plants. The closures were based on the fact that the facilities utilized outdated technology compared to the Corporation’s other plants, which placed them at an operating disadvantage to the Corporation’s other facilities. In connection with these announcements, the segment recorded a pretax charge to earnings of approximately $14 million for the write-off and impairment of assets, approximately $12 million for the termination of employees, and approximately $5 million for facility closing costs, most of which was charged to cost of sales.

Building Products Distribution

The Corporation’s building products distribution segment reported net sales and operating profits of $3.8 billion and $50 million, respectively for the year ended December 28, 2002, compared with net sales of $3.8 billion and operating profits of $65 million in 2001. The decline in segment operating profits is primarily due to a decline in gross margins in 2002. Overall building product market conditions are expected to improve in 2003. Housing starts are projected to remain strong and a recovery in the industrial sector is anticipated. In addition, the Corporation’s strong position with big box retailers continues to support future growth opportunities.

Other

The operating loss for the “Other” nonreportable segment, which includes some miscellaneous businesses, unallocated corporate operating expenses and the elimination of profit on intersegment sales, increased by $91 million to a loss of $703 million in 2002 from a loss of $612 million in 2001. Included in the 2002 loss are $378 million of pre-tax charges primarily for asbestos and business separation costs. The 2001 segment loss included pre-tax charges of $341 for asbestos, net of other one-time gains. Excluding these charges, the net change in the other segment was primarily driven by higher pension costs and foreign currency transaction losses.

During 2002, the Corporation recorded pension expense of approximately $176 million and made pension contributions of $56 million. Because of lower than expected returns on pension plan assets and a lower discount rate used to value the pension liabilities, the Corporation estimates its pension expense and pension contributions will increase to approximately $260 million and $120 million, respectively, in 2003.

Liquidity and Capital Resources

During 2002, the Corporation reduced debt by $698 million primarily from proceeds from the sale of a 60% controlling interest in Unisource (see Note 3 of the Notes to Consolidated Financial Statements) and operating cash flows. In 2003, the Corporation expects its cash flow from operations and financing activities (including $1.5 billion of proceeds from the January 2003 senior notes offering – see Note 7 to Consolidated Financial Statements) to be sufficient to fund planned capital investments, pay dividends and make scheduled debt repayments. If the Corporation does not substantially achieve its expected 2003 cash flows, the Corporation could be required to draw down funds from available credit facilities and renegotiate certain restrictive debt covenants. The following discussion provides further details of the Corporation’s liquidity and capital resources.

Operating Activities

The Corporation generated cash from operations of $1,010 million during 2002 and $1,482 million in 2001. The decrease in cash provided by operations in 2002 was primarily a result of the net lower operating results in all of the Corporation’s reportable operating segments and an increase in overall working capital requirements, principally related to the increase in the tax refund receivable from the Unisource transaction.

Investing Activities

During 2002, capital expenditures for property, plant and equipment were $693 million compared with $739 million in 2001. Expenditures in 2002 included $363 million in the North America consumer products segment, $62 million in the international consumer products segment, $70 million in the packaging segment, $75 million in the bleached pulp and paper segment, $7 million in the paper distribution segment, $61 million in the building products manufacturing segment, $4 million in the building products distribution segment and $51 million of other and general corporate. In 2003, the Corporation expects to make capital expenditures for property, plant and equipment of approximately $750 million.

During 2002, the Corporation invested $37 million for pollution control and abatement. The Corporation’s 2003 capital expenditure budget currently includes approximately $23 million for environment-related projects. Certain other capital projects being undertaken primarily for improving financial returns or safety will also include expenditures for pollution control.

On April 15, 1998, the United States Environmental Protection Agency promulgated a set of regulations known as the “Cluster Rule” that established new requirements for air emissions and wastewater discharges from pulp and paper mills. The Cluster Rule requires pulp and paper mills to become elemental chlorine free in the pulp bleaching process. Air regulations under the Cluster Rule are called “MACT” or Maximum Achievable Control Technology regulations, with MACT I regulations representing rules regarding pulping and bleaching and MACT II regulations representing rules regarding combustion sources. The Corporation estimated that it would make capital expenditures of up to approximately $504 million through April 2006 in order to comply with the Cluster Rule’s requirements. Of that total, approximately $380 million was spent through 2002 and an additional $25 million is expected to be spent in 2003. The work performed in 2002 was primarily for MACT II requirements and early planning and engineering for the second part of MACT I of the Cluster Rule. Remaining expenditures are for air emissions controls under MACT II regulations (to be completed by January 2004) and the second part MACT I regulations (to be completed by April 2006).

Investments to purchase timberlands (including purchases of timberlands by The Timber Company prior to its spin off and merger with Plum Creek) totaled $31 million in 2001.

Effective November 2, 2002, the Corporation sold a 60% controlling interest in its Unisource paper distribution business to an affiliate of Bain Capital Partners, LLC, and retained the remaining 40% equity interest in Unisource. In connection with this disposal, the Corporation recorded a pretax loss of $298 million ($30 million after taxes) in the fourth quarter of 2002 in the paper distribution segment. This loss is included in “Other losses, net” on the accompanying Consolidated Statements of Operations. In addition, the Corporation entered into a financing lease arrangement with a third party regarding certain warehouse facilities used by Unisource. As part of these transactions, the Corporation:

•

received $471 million in cash during fiscal 2002 in connection with the disposition and repaid debt;

•

received $169 million in cash as a result of the financing lease arrangement accounted for as a capital lease by the Corporation;

•

received two payment-in-kind notes from Unisource for $70 million and $100 million, which accrue interest at an annual interest rate of 7% and 8%, respectively, and mature in November 2012;

•

entered into a sublease with Unisource for certain warehouses retained by the Corporation;

•

expects to receive in the first half of fiscal 2003 a cash refund from the related tax benefit on the Unisource sale of approximately $193 million and expects to repay debt with these funds; and

•

expects to pay approximately $23 million in taxes in fiscal 2003 in connection with the financing lease arrangement.

As part of the Unisource transaction, the Corporation has entered into a loan agreement with Unisource pursuant to which the Corporation has agreed to provide, subject to certain conditions, a $100 million subordinated secured loan to Unisource. This subordinated loan, if drawn, will mature in May 2008 and bears interest at a fluctuating rate. In addition, the Corporation has also agreed to provide certain employee benefits and other administrative services to Unisource pursuant to an agreement with a two-year term. The Corporation also agreed to provide certain insurance coverage (including related letters of credit) to Unisource, generally for a period of five years, including workers’ compensation, general liability, automobile liability and property insurance.

During 2002, the Corporation disposed of and sold various assets including a gypsum facility for a total of $28 million in cash and recognized a pretax loss of $26 million which was reflected in “Other losses, net” in the accompanying Consolidated Statements of Operations. During 2001, the Corporation sold various assets including two lumber mills, industrial wood products property, certain paper distribution assets, timber assets and corporate aircraft for a total of $202 million in cash and recognized a pretax gain of $70 million. Of the total gain recognized, $44 million related to the sale of certain timber assets associated with The Timber Company and was included in “Income from discontinued operations, net of taxes” in the accompanying Consolidated Statements of Operations with the remainder reflected in “Other losses, net.”

At the end of November 2000, the Corporation completed a tender offer pursuant to which it purchased each outstanding share of common stock of Fort James Corporation for $29.60 per share in cash and 0.2644 shares of Georgia-Pacific common stock. The Corporation is paying cash and issuing Georgia-Pacific shares as the untendered Fort James shares are delivered to the Corporation’s exchange agent for cancellation. Through December 29, 2001, the Corporation had paid approximately $6,186 million in cash ($46 million of which was paid during 2001) and issued approximately 53.9 million shares of Georgia-Pacific common stock (0.2 million shares of which were issued during 2001) valued at $1,485 million for such shares. The fair value of the Georgia-Pacific common shares was determined based on the average trading prices of Georgia-Pacific common stock for the two trading days before and after July 16, 2000 (the date of the announcement of the Fort James acquisition). In addition, the Corporation assumed $3.3 billion of Fort James debt in the acquisition.

During 2001, the Corporation acquired the remaining 46% interest it did not previously own in Color-Box, LLC, a joint venture with Chesapeake Corporation for approximately $59 million. The results of operations of this joint venture were consolidated with those of the Corporation beginning in July 2001. The Corporation has accounted for this acquisition using the purchase method to record a new cost basis for the additional share of assets acquired and liabilities assumed.

During the first quarter of 2001, the Corporation acquired the remaining ownership of two chemical joint ventures for approximately $26 million. The results of operations of these chemical businesses were consolidated with those of the Corporation beginning in February 2001. The Corporation has accounted for these acquisitions using the purchase method to record a new cost basis for assets acquired and liabilities assumed.

On August 7, 2001, the Corporation completed the sale of a portion of its paper and pulp assets to Domtar Inc. for $1.65 billion in cash. The assets involved in this transaction were the Corporation’s stand-alone uncoated free sheet paper mills at Ashdown, Arkansas; Nekoosa and Port Edwards, Wisconsin; and Woodland, Maine, as well as associated pulp facilities. The Corporation used the net proceeds of approximately $1.53 billion ($1.14 billion after taxes) to repay debt. In connection with this sale, the Corporation recorded a pretax loss of $63 million during 2001 in the bleached pulp and paper segment. This loss was reflected in Other losses, net on the accompanying Consolidated Statements of Operations. In addition, the Corporation recorded a provision for

income taxes of $197 million, principally applicable to $630 million of non-deductible goodwill related to the assets sold.

Pursuant to a consent decree executed with the United States Department of Justice in connection with the Fort James acquisition, the Corporation sold a portion of its away-from-home tissue manufacturing assets (formerly Georgia-Pacific Tissue) to SCA for approximately $850 million. The sale was completed on March 2, 2001, with net proceeds of approximately $581 million ($660 million after tax benefit) used to repay debt. In the fourth quarter of 2000, the Corporation recorded a pretax loss of $204 million in the consumer products segment for the write-down of these assets to their net realizable value; accordingly, no significant gain or loss was recognized upon completion of the sale in 2001.

On October 6, 2001, the Corporation completed the spin off of The Timber Company and its merger with and into Plum Creek. In accordance with the merger agreement, shareholders of The Timber Company received 1.37 shares of Plum Creek stock for each share of The Timber Company stock. This transaction, which included the assumption by Plum Creek of $646 million of the Corporation’s debt, was valued at approximately $3.4 billion. Plum Creek assumed a 10-year timber supply agreement between the Corporation and The Timber Company.

The transaction was originally conditioned on the receipt of a private letter ruling from the Internal Revenue Service (the “Service”) that the transaction would be tax-free to the Corporation and to the shareholders of The Timber Company. In June 2001, the Corporation and Plum Creek amended the original merger agreement and determined to effect the merger upon receipt of opinions from tax counsel that the spin off of The Timber Company from the Corporation and the subsequent merger with Plum Creek would be tax-free to the Corporation and to the shareholders of The Timber Company. The Service notified the companies on June 12, 2001, that it had decided not to issue the private letter ruling based on its belief that the companies had failed to carry the high burden of proof of business purpose necessary for the transaction to receive such an advance ruling. On September 13, 2002, the Corporation entered into a closing agreement with the Service completing a Pre-Filing Agreement review of the Corporation’s Federal income tax reporting of the transaction. Under the terms of the closing agreement, the Service agreed that no gain or loss was recognized by the Corporation or its shareholders as a result of the spin-off of the Timber Company from the Corporation. The Corporation believes that the closing agreement is substantially conclusive with respect to the tax consequences associated with the spin-off.

Financing Activities

The Corporation’s senior management has established the parameters of the Corporation’s financial policies, which have been approved by the Board of Directors. These include balancing the Corporation’s debt and equity to keep its weighted average cost of capital low while retaining the flexibility needed to ensure that the Corporation can meet its financial obligations when or before they come due and to finance attractive business opportunities. Historically, the Corporation has set debt targets based on the cash generating capability of the Corporation under various business scenarios. The Corporation experiences variances in its cash flow from period to period and various statistical methods are utilized to reasonably estimate possible deviations in estimated future cash flows.

The Corporation maintains a high portion of its debt as long-term at fixed interest rates. The Corporation intends to manage the maturities of its long-term debt (excluding bank debt) so that no more than $500 million matures in any one year and if it does then the sum of the maturities of any two consecutive years does not exceed $1 billion. Generally, the Corporation seeks to have 75% of its aggregate debt at fixed rates so as to minimize exposure to fluctuating interest rates. Short-term debt is used in modest proportions and generally for seasonal working capital variations and/or financing some of its accounts receivable. The Corporation utilizes bank credits for temporary short- and/or intermediate-term financing usually bridging known or expected events. Additionally, the Corporation maintains committed, available borrowing capacity to allow for seasonal, timing, or unexpected needs. At December 28, 2002, unused capacity was $784 million. For further discussion of the unused capacity, see the tables that follow.

The Corporation continuously reviews its financing objectives to determine the appropriate level of debt it should employ in its capital structure to provide the necessary flexibility to finance future growth and investment opportunities.

The Corporation’s total debt, excluding senior deferrable notes, decreased by $698 million to $11.5 billion at December 28, 2002 from $12.2 billion at December 29, 2001. The decrease was primarily due to cash generated from the sale of a 60% controlling interest in Unisource (see Note 3 of the Notes to Consolidated Financial Statements) and from operating cash flows. At December 28, 2002, the weighted average interest rate on the Corporation’s total debt, excluding senior deferrable notes and including outstanding interest rate exchange agreements, was 6.11%.

The Corporation has decreased its accounts receivable secured borrowing program to $700 million and renewed the program through December 2003. During the first quarter of 2003, the Corporation expects to increase its accounts receivable secured borrowing program by $200 million and use the funds to repay higher cost debt. G-P Receivables, Inc. (“G-P Receivables”) is a wholly owned subsidiary of the Corporation and is the special purpose entity into which the receivables of the Corporation and participating domestic subsidiaries are transferred. G-P Receivables, in turn, sells the receivables to the various banks and entities that purchase the receivables. The receivables outstanding under these programs and the corresponding debt are included as both “Receivables” and “Commercial paper and other short-term notes,” respectively, on the accompanying balance sheets. This program is accounted for as a secured borrowing. As collections reduce previously pledged interests, new receivables may be pledged. G-P Receivables is a separate corporate entity from the Corporation and its assets will be available first and foremost to satisfy the claims of its creditors. The maximum amount of the creditors’ investment under the program is subject to change based on the level of eligible receivables and restrictions on concentrations of receivables. The accounts receivable secured borrowing programs contain the same restrictive covenants as the unsecured financing facilities.

In connection with the sale of a 60% controlling interest in Unisource, the Corporation terminated its United States and Canadian accounts receivable secured borrowing programs for Unisource. Termination of these programs required the repayment of the domestic accounts receivable program in the amount of $400 million and the repayment of the Canadian accounts receivable program in the amount of US $60 million.

In connection with the sale of a 60% controlling interest in Unisource, the Corporation entered into a $175 million sale-leaseback transaction that was accounted for as a capital lease obligation. The Corporation paid approximately $6 million in fees associated with the transaction, which matures in 2018. The fees are being amortized over the term of the sale-leaseback transaction. The Corporation also paid $9 million to terminate an existing capital lease obligation held by Unisource.

On December 23, 2002, $18 million of the Corporation’s 7.93% notes matured. An additional $10 million and $20.5 million of the Corporation’s 7.86% and 7.87% notes matured on December 17, 2002 and December 2, 2002, respectively.

On October 8, 2002, the Corporation redeemed $2 million of variable rate industrial revenue bonds. On February 27, 2002, the Corporation also issued $73 million of its variable rate industrial revenue bonds, due February 1, 2022 to replace the maturity of $73 million of its variable rate industrial revenue bonds.

On June 15, 2002, $300 million of the Corporation’s 9.95% debentures matured. An additional $100 million of the Corporation’s 6.50% debentures matured on September 15, 2002.

The Corporation issued 17,250,000 of 7.5% PEPS Units for $862.5 million in July 1999. Each PEPS Unit consisted of a purchase contract that obligated the holder to purchase shares of Georgia-Pacific common stock for $50 per share on or prior to August 16, 2002 and a senior deferrable note of the Corporation due August 16, 2004. The terms of the PEPS Unit offering included a remarketing of the notes on August 16, 2002. On August 7, 2002, due to market conditions and other factors, the Corporation announced that the senior deferrable notes

would not be remarketed. On August 16, 2002, the Corporation redeemed 17,248,268 PEPS Units and issued 18,205,543 shares of Georgia-Pacific common stock for $47.375 per share, valued at $862.5 million. The remaining 1,732 PEPS Units were settled with the holders receiving $86,600 of Global Senior Deferrable Notes. Prior to the redemption of the PEPS Units, the liability related to the PEPS Units was classified as “Senior deferrable notes” on the accompanying consolidated balance sheets.

On August 7, 2002, the Corporation obtained a $650 million Senior Capital Markets Bridge Facility from Bank of America, N.A. and Goldman Sachs Credit Partners, L.P. This bridge loan was scheduled to mature on August 16, 2003 and was used along with the available cash and borrowings from existing bank credit facilities to repay $850 million in bridge financing on August 16, 2002. On December 31, 2002, the Corporation used cash generated from the sale of Unisource (see Note 3 of the Notes to Consolidated Financial Statements) to pay $150 million of the Senior Capital Markets Bridge Facility.

On January 30, 2003, the Corporation completed a $1.5 billion senior notes offering, consisting of $800 million of 9.375% notes due in 2013 and $700 million of 8.875% notes due in 2010, all of which were guaranteed by Fort James Corporation. In the second quarter of 2003, the Corporation intends to cause Fort James Operating Company, a subsidiary of Fort James Corporation, to guarantee these notes as well. The 9.375% notes due in 2013 are callable at the Corporation’s option beginning in 2008. Proceeds from the offering were used to completely repay the Senior Capital Markets Bridge Facility, and approximately $1 billion of bank debt outstanding under the revolving credit facility. Following this offering, the Corporation had approximately $1.6 billion outstanding under its Multi-Year Revolving Credit Facility and approximately $1.3 billion of available liquidity under this facility.

On March 15, 2001, the Corporation redeemed $300 million of its 6.234% Senior Notes Due March 15, 2011 and recorded an extraordinary loss of approximately $12 million (net of taxes of $7 million).

At December 28, 2002, the Corporation’s Multi-Year Revolving Credit Facility totaled $3,750 million with a maturity date of November 28, 2005. The amount available under the Multi-Year Revolving Credit Facility was reduced to $3,500 million on December 31, 2002. Pursuant to an amendment to the Multi-Year Revolving Credit Facility, dated as of November 19, 2002, amounts available under the Multi-Year Revolving Credit Facility would be further reduced to $3,250 million and to $3,000 million on December 31, 2003 and 2004, respectively. The amendment to the Multi-Year Revolving Credit Facility (the “Seventh Credit Facility Amendment”), effective as of March 28, 2003 (the “Amendment Effective Date”), amends this provision such that amounts available thereunder will be reduced (a) to $3,250 million on the Amendment Effective Date (i) $2,750 million of which will be revolving loans and (ii) $500 million of which will be converted to term loans on April 1, 2003 and due November 2005, and (b) to $3,000 million on December 31, 2004 with a $2,500 million revolver and the $500 million term loan. Borrowings under this agreement bear interest at market rates. These interest rates may be adjusted according to a rate grid based on the Corporation’s long-term debt ratings. Fees associated with these revolving credit facilities include a facility fee of 0.4% per annum on the aggregate commitments of the lenders as well as up-front fees. The fees are being amortized over the term of the agreements. Fees and margins may also be adjusted according to a pricing grid based on the Corporation’s long-term debt ratings. At December 28, 2002, $2,447 million was borrowed under the Multi-Year Revolving Credit Facility, at a weighted-average interest rate of 3.3%. Amounts outstanding under the revolving credit facilities are included in “Commercial paper and other short-term notes” and “Long-term debt, excluding current portion” on the accompanying consolidated balance sheets.

The Corporation’s amounts outstanding under the credit agreements include the following:

	December 28, 2002
In millions
Commitments:
Multi-Year Revolving Credit Facility	$	3,750
Senior Capital Markets Bridge Facility**		650

Credit facilities available		4,400

Amounts Outstanding:
Letter of Credit Agreements*		(514	)
Multi-Year Revolving Credit Facility due November 2005, average rate of 3.3%		(2,447	)
Senior Capital Markets Bridge Facility		(650	)

Total credit balance		(3,611	)

Total credit available	$	789

The Letter of Credit Agreements include only Standby Letters of Credit from Bank of America.

The Senior Capital Markets Bridge Facility was repaid on January 30, 2003 and the facility was terminated.

Assuming the senior notes offering, the use of proceeds, net of fees, and the $500 million conversion to term loans in the amount available under the Multi-Year Revolving Credit Facility, as amended, had occurred on December 28, 2002, the Corporation’s amounts outstanding under the credit agreements would have been as follows:

	December 28, 2002
In millions
Commitments:
Multi-Year Revolving Credit Facility	$	2,750
Term loan portion of Multi-Year Revolving Credit Facility		500
Senior Capital Markets Bridge Facility		–

Credit facilities available		3,250

Amounts Outstanding:
Letter of Credit Agreements*		(514	)
Multi-Year Revolving Credit Facility due November 2005, average rate of 3.3%		(1,142	)
Term loan portion of Multi-Year Revolving Credit Facility		(500	)
Senior Capital Markets Bridge Facility		–

Total credit balance		(2,156	)

Total credit available**	$	1,094

The Letter of Credit Agreements include only Standby Letters of Credit from Bank of America.

The Corporation would have been limited to $1,078 million of available credit pursuant to certain debt covenants and its outstanding debt balance at December 28, 2002. This limitation on available credit will be reduced as the Corporation repays debt.

The Corporation’s borrowing arrangements contain a number of financial and non-financial covenants, which restrict the activities of the Corporation. The more significant financial covenants are discussed below. In addition, certain agreements contain cross-default provisions. At December 28, 2002, the Corporation was in compliance with the covenants of these agreements.

The unsecured financing facilities require a maximum leverage ratio (funded indebtedness to net worth plus funded indebtedness), as amended by the Seventh Credit Facility Amendment, of 70.00% on December 28, 2002

and March 29, 2003; 67.50% on June 28, 2003, September 27, 2003 and January 3, 2004; 65.00% on April 3, 2004 and and thereafter. The restrictive covenants also require a minimum interest coverage ratio (as defined in the financing facilities agreements), as amended by the Seventh Credit Facility Amendment, of 2.50 to 1.00 on December 28, 2002; 2.25 to 1.00 on March 29, 2003, June 28, 2003, September 27, 2003 and January 3, 2004; 2.50 to 1.00 on April 3, 2004; 2.75 to 1.00 on July 3, 2004; and 3.00 to 1.00 on October 2, 2004 and thereafter. In addition, the restrictive covenants require a minimum net worth that changes quarterly and a maximum debt level of $12,594 million for so long as the leverage ratio of the Corporation exceeds 65.00%. The Corporation was in compliance with these debt covenants as of December 28, 2002 with a leverage ratio of 66.54%, an interest coverage ratio of 2.65 to 1.00, a debt balance of $11,516 million, and an adjusted net worth calculated as follows:

	December 28, 2002
In millions
Adjusted Net Worth:
Net Worth	$	4,560
Goodwill write-offs as described in Note 6 of the Notes to Consolidated Financial Statements		651
Minimum Pension Liability Adjustment as described in Note 12 of the Notes to Consolidated Financial Statements		580

Adjusted Net Worth		5,791

Required Net Worth:
80% of Net worth as of the Credit Agreement closing date		4,650
50% of Net Income from fourth quarter 2000 through 2002*		66
Proceeds of capital stock or equity interest from fourth quarter 2000 through 2002		1,077
The Timber Company Net Worth		(329	)

Required Net Worth		5,464

Adjusted Net Worth surplus/(deficit)	$	327

Does not include quarters with net losses.

On November 19, 2002, the Corporation amended its minimum net worth covenant in its Multi-Year Revolving Credit Facility and a similar covenant in other borrowing agreements to include in the adjusted net worth calculation the $580 million (net of taxes) minimum pension liability adjustment described in Note 12 of the Notes to Consolidated Financial Statements.

Continued compliance with these restrictive covenants is dependent on the Corporation substantially achieving its 2003 forecast, which is dependent on a number of factors, many of which are outside of the Corporation’s control. Management believes its forecast is reasonable and that the Corporation will remain in compliance with such covenants. Should events occur that result in noncompliance, management believes that remedies acceptable to its lenders are available.

The following table presents principal (or notional) amounts and related weighted average interest rates by year of expected maturity for the Corporation’s debt obligations and interest rate exchange agreements as of December 28, 2002. For obligations with variable interest rates, the tables set forth payout amounts based on current rates and do not attempt to project future interest rates.

As of December 28, 2002

	2003			2004			2005			2006			2007			Thereafter			Total			Fair Value December 28, 2002
(In millions, except percentages)
Secured borrowings and short-term notes	$	710			–			–			–			–			–		$	710		$	710
Average interest rates		2.2	%		–			–			–			–			–			2.2	%		2.2	%
Credit facilities		–			–		$	2,447			–			–		$	650		$	3,097		$	3,097
Average interest rates		–			–			3.3	%		–			–			4.4	%		3.6	%		3.6	%
Notes and debentures	$	580		$	336			–		$	600		$	300		$	4,400		$	6,216		$	5,612
Average interest rates		4.0	%		6.7	%		–			7.5	%		6.9	%		8.5	%		7.8	%		8.4	%
Euro-denominated bonds		–		$	313			–			–			–			–		$	313		$	314
Average interest rates		–			4.8	%		–			–			–			–			4.8	%		4.7	%
Revenue bonds	$	3		$	31		$	21			–		$	28		$	782		$	865		$	781
Average interest rates		5.2	%		2.0	%		5.6	%		–			6.4	%		5.2	%		5.2	%		7.1	%
Capital leases	$	10		$	12		$	13		$	14		$	17		$	221		$	287		$	315
Average interest rates		8.7	%		8.4	%		8.6	%		8.6	%		9.4	%		8.1	%		8.3	%		9.2	%
European debt	$	16		$	18		$	12		$	9		$	6		$	27		$	88		$	88
Average interest rates		8.1	%		6.5	%		6.0	%		5.9	%		6.1	%		4.9	%		6.2	%		6.1	%
Other loans	$	12			–			–			–			–			–		$	12		$	11
Average interest rates		3.2	%		–			–			–			–			–			3.2	%		3.6	%
Total debt maturity	$	1,331		$	710		$	2,493		$	623		$	351		$	6,080
Notional amount of interest rate exchange agreements (variable to fixed)	$	300			–			–			–			–			–		$	300		$	(9	)
Average interest rate paid (fixed)		5.9	%		–			–			–			–			–			5.9	%		5.9	%
Average interest rate received (variable)		1.8	%		–			–			–			–			–			1.8	%		2.1	%
Notional amount of interest rate exchange Agreements (rate collar)		–			–		$	47			–			–			–		$	47		$	4
Average interest rate cap		–			–			7.5	%		–			–			–			7.5	%		7.5	%
Average interest rate floor		–			–			5.5	%		–			–			–			5.5	%		5.5	%

Approximately $149 million of the Corporation’s revenue bonds are supported by letters of credit that expire within one year. The Corporation has the intent to renew the letters of credit supporting these revenue bonds. Therefore, maturities of these obligations are reflected in accordance with their stated terms.

The Corporation’s debt portfolio is sensitive to changes in interest rates. Interest rate changes would result in gains or losses in the market value of the Corporation’s debt portfolio due to differences in market interest rates and the rates at inception of the debt agreements. Based on the Corporation’s indebtedness at December 28, 2002, a 100 basis point interest rate change is estimated to impact the fair value of the debt portfolio by $499 million and interest expense by $41 million. The Corporation also has international subsidiaries whose functional currencies are other than the U.S. dollar reporting currency. Changes in foreign currency exchange rates will result in cumulative currency translation adjustments in other comprehensive income. Based on the Corporation’s investment in operations located in Europe at December 28, 2003, a 1 percent change in foreign currency exchange rates for the related currencies is estimated to impact other comprehensive income by approximately $14 million.

The following table presents commitment amounts by year of expected expiration for the Corporation’s standby letters of credit agreements, operating leases and noncancelable contracts.

As of December 28, 2002

	2003		2004		2005		2006		2007		Thereafter		Total
(In millions)
Standby letters of credit*	$	–	$	–	$	–	$	–	$	–	$	52	$	52
Operating leases	$	122	$	113	$	102	$	89	$	74	$	66	$	566
Other noncancelable contracts	$	165	$	130	$	107	$	86	$	76	$	138	$	702

Standby letters of credit for Bank of America are included above under the credit facilities.

The Corporation has the intent to renew the Standby Letters of Credit where appropriate as they mature, therefore, the obligations do not have a definite maturity date.

On January 21, 2003, Moody’s Investors Service announced that it had downgraded the Corporation’s senior implied and issuer debt ratings from Ba1 to Ba2 and the Corporation’s senior unsecured notes from Ba1 to Ba3. On January 29, 2003, Fitch Ratings announced that it had lowered the Corporation’s senior unsecured long-term debt ratings from BB+ to BB and withdrawn the Corporation’s commercial paper rating.

At December 28, 2002, the Corporation had interest rate exchange agreements that effectively converted $300 million of floating rate obligations with a weighted average interest rate of 1.8% to fixed rate obligations with an average effective interest rate of approximately 5.9%. Interest rate exchange agreements with a notional amount of $1.7 billion matured during 2002. During 2002 and 2001, interest rate exchange agreements increased interest expense by $41 million and $29 million, respectively. The agreements had a weighted-average maturity of approximately eight months at December 28, 2002.

At December 28, 2002, the Corporation also had interest rate exchange agreements (a collar) that effectively capped $47 million of floating rate obligations to a maximum interest rate of 7.5% and established a minimum interest rate on such obligations of 5.5%. The Corporation’s interest expense is unaffected by this agreement when the market interest rate falls within this range. During 2002 and 2001, these agreements decreased interest expense by $2 million and $1 million, respectively. The agreements had a weighted-average maturity of approximately three years at December 28, 2002.

The Corporation’s international operations create exposure to foreign currency exchange rate risks. At December 28, 2002 and December 29, 2001, the Corporation had outstanding approximately $294 million (net of discount) and $238 million (net of discount), respectively, of Euro-denominated bonds, which were designated as a hedge against its net investment in Europe. The use of this financial instrument allows the Corporation to reduce its overall exposure to exchange rate movements, since the gains and losses on this instrument substantially offsets losses and gains on the assets, liabilities and transactions being hedged.

Since 1991, the Argentine peso has been pegged to the US dollar at a rate of one Argentine peso to one US dollar. In January 2002, the Argentine government announced its intent to create a dual currency system with an “official” fixed exchange rate of 1.4 pesos to 1 US dollar for import and export transactions, and a “free” floating exchange rate for other transactions. The Corporation has a small investment in Argentina, for which the effect of this devaluation of the Argentine peso was insignificant.

The Corporation does not utilize derivatives for speculative purposes. Derivatives are transaction specific so that a specific debt instrument, contract or invoice determines the amount, maturity and other specifics of the hedge. Counterparty risk is limited to institutions with long-term debt ratings of A or better.

The Corporation’s senior management establishes the parameters of the Corporation’s financial risk, which have been approved by the Corporation’s Board of Directors. Hedging interest rate exposure through the use of swaps and options and hedging foreign exchange exposure through the use of forward contracts are specifically contemplated to manage risk in keeping with management’s policy. Derivative instruments, such as swaps, forwards, options or futures, which are based directly or indirectly upon interest rates, currencies, equities and commodities, may be used by the Corporation to manage and reduce the risk inherent in price, currency and interest rate fluctuations.

Prior to 1996, the Corporation sold certain assets for $354 million and agreed to lease the assets back from the purchaser over a period of 30 years. Under the agreement with the purchaser, the Corporation agreed to maintain a deposit (initially in the amount of $322 million) that, together with interest earned thereon, was expected to be sufficient to fund the Corporation’s lease obligation, including the repurchase of assets at the end of the term. This transaction was accounted for as a financing arrangement. At the inception of the agreement, the Corporation recorded on its balance sheet an asset for the deposit from the sale of $305 million and a liability for the lease obligation of $346 million. The sale of these assets to Domtar in 2001 (see Note 3 of the Notes to Consolidated Financial Statements) required the Corporation to repurchase these assets from the lessor. Accordingly, the lessor and the Corporation agreed to a deferred payment arrangement essentially under the same terms as the original lease obligation. The Corporation agreed to maintain the original deposit under its existing terms and create a second deposit. The sum of these deposits (approximately $400 million at December 29, 2001) approximates the deferred payment amount. A legal right of set off exists between the deferred payment amount owed and the deposits and, accordingly, the Corporation has recorded these transactions net in the accompanying consolidated balance sheets as “Other long-term liabilities”.

In 1999, the Corporation entered into a financing arrangement (“NZ financing arrangement”) to enhance the return of the deposit made in connection with the sale-leaseback transaction discussed above by issuing NZ$724 million of 5.74% Debentures Due April 5, 2005 that were legally defeased with deposits of an equal amount. Because they were legally defeased, generally accepted accounting principles do not require the debentures and related deposits to be reflected on the Corporation’s consolidated balance sheets. Accordingly, the Corporation has not reflected the debentures or the related deposits on the accompanying consolidated balance sheets. The Corporation’s proposed separation of its consumer products and packaging business and its building products business necessitated a termination of the NZ financing arrangement. Because the termination process had commenced before the proposed separation was indefinitely suspended, the entire NZ financing arrangement terminated in December 2002.

In conjunction with the pre-2000 sales of timberlands formerly located in California and Maine, the Corporation received notes from the purchasers totaling $718 million. The notes received from the California sales were monetized through the issuance of notes payable and commercial paper secured by the notes, and the notes received from the Maine sale (the “Maine Notes”) were monetized through the issuance of notes payable in a private placement with the proceeds from such monetizations being used to repay debt. Proceeds from the notes received from the purchasers are being used to fund payments required for the notes payable. The notes receivable are classified as “Other assets” and the notes payable are classified as “Other long-term liabilities” on the accompanying consolidated balance sheets. The Maine Notes were issued by G-P Maine, Inc., an indirect, wholly owned subsidiary of the Corporation. It is a separate corporate entity from the Corporation, and its assets will be available first and foremost to satisfy the claims of its creditors.

As of December 28, 2002, the Corporation had $1.5 billion of debt and equity securities available for issuance under a shelf registration statement filed with the Securities and Exchange Commission in 2000.

At the end of November 2000, the Corporation acquired Fort James (as described above and in Note 3 of the Notes to Consolidated Financial Statements) and issued 21.5 million shares of Georgia-Pacific treasury stock and 32.2 million newly issued shares of Georgia-Pacific stock as part of that transaction. During 2001, the Corporation issued an additional 190,000 shares of Georgia-Pacific Stock as part of this transaction.

During 2002, the Corporation received proceeds from option plan exercises and the 2001 employee stock purchase plan of $4 million and $37 million, respectively. During 2001, the Corporation received proceeds from option plan exercises and the 2000 employee stock purchase plan of $129 million and $36 million, respectively.

During 2002 and 2001, the Corporation paid dividends totaling $118 million and $175 million, respectively.

Georgia-Pacific’s strategy is to improve its portfolio of businesses by divesting or exiting non-strategic businesses, and by acquiring and investing in businesses that are high value-added and that position Georgia-Pacific closer to consumers. A key component of that strategy is improving the Corporation’s bath tissue, paper towel and napkin business, which is commonly referred to as the tissue business. The Corporation believes that its acquisition of Fort James Corporation in 2000 directly facilitated that strategy. In 2001, in connection with the Corporation’s redirection of its focus away from commodity-based businesses, the Corporation sold a portion of its pulp and paper assets to Domtar Inc. and completed the spin-off of The Timber Company and its merger with and into Plum Creek.

Other

The Corporation employs approximately 61,000 people, approximately 26,000 of whom are members of unions. The Corporation considers its relationship with its employees to be good. Forty union contracts are subject to negotiation and renewal in 2003, including ten at large facilities.

The Corporation is a party to various legal proceedings incidental to its business and is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. As is the case with other companies in similar industries, the Corporation faces exposure from actual or potential claims and legal proceedings involving environmental matters. Liability insurance in effect during the last several years provides only very limited coverage for environmental matters.

The Corporation is involved in environmental remediation activities at approximately 172 sites, both owned by the Corporation and owned by others, where it has been notified that it is or may be a potentially responsible party (“PRP”) under the United States Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or similar state “superfund” laws. Of the known sites in which it is involved, the Corporation estimates that approximately 36% are being investigated, approximately 20% are being remediated and approximately 44% are being monitored (an activity that occurs after either site investigation or remediation has been completed). The ultimate costs to the Corporation for the investigation, remediation and monitoring of many of these sites cannot be predicted with certainty, due to the often unknown nature and magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups, the evolving nature of cleanup technologies and governmental regulations, and the inability to determine the Corporation’s share of multiparty cleanups or the extent to which contribution will be available from other parties, all of which factors are taken into account to the extent possible in estimating the Corporation’s liabilities. The Corporation has established reserves for environmental remediation costs for these sites that it believes are probable and reasonably able to be estimated. To the extent that the Corporation is aware of unasserted claims, considers them probable, and can estimate their potential costs, the Corporation includes appropriate amounts in the reserves.

Based on analyses of currently available information and previous experience with respect to the cleanup of hazardous substances, the Corporation believes it is reasonably possible that costs associated with these sites may exceed current reserves by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $127 million. This estimate of the range of reasonably possible additional costs is less certain than the estimates upon which reserves are based, and in order to establish the upper limit of such range, assumptions least favorable to the Corporation among the range of reasonably possible outcomes were used. In estimating both its current reserve for environmental remediation and the possible range of additional costs, the Corporation has not assumed it will bear the entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based generally on their financial condition and probable contribution on a per-site basis.

Presented below is the activity in the Corporation’s environmental liability account for the last three years.

	2002			2001			2000
in millions
Beginning balance	$	318		$	121		$	57
Expense charged to earnings:
Related to previously existing matters		14			2			29
Related to new matters		–			15			2
Amounts related to acquisitions/(divestitures):
Amounts assumed by others in divestitures		–			–			–
Original purchase price allocations		–			–			49
Changes in purchase price allocations		–			207			–
Payments		(26	)		(27	)		(16	)

Ending balance	$	306		$	318		$	121

Expense charged to earnings in the above table includes amounts accrued for new matters and changes in existing estimates. Payments represent amounts paid in full or partial settlement or for environmental studies and similar costs.

Kalamazoo River Superfund Site

The Corporation is implementing an Administrative Order by Consent (“AOC”) entered into with the Michigan Department of Natural Resources and the United States Environmental Protection Agency (“United States EPA”) regarding an investigation of the Kalamazoo River Superfund Site. The Kalamazoo River Superfund Site is comprised of 35 miles of the Kalamazoo River, three miles of Portage Creek and a number of operable units in the form of landfills, waste disposal areas and impoundments. The Corporation became a PRP for the site in December 1990 by signing the AOC. There are two other named PRPs at this time. The contaminant of concern is polychlorinated biphenyls (“PCBs”) in the river sediments and residuals in the landfills and waste disposal areas.

A draft Remedial Investigation/Feasibility Study (“RI/FS”) for the Kalamazoo River was submitted to the State of Michigan on October 30, 2000 by the Corporation and other PRPs. The draft RI/FS evaluated five remedial options ranging from no action to total dredging of the river and off-site disposal of the dredged materials. In February 2001, the PRPs, at the request of the State of Michigan, also evaluated 9 additional potential remedies. The cost for these remedial options ranges from $0 to $2.5 billion. The draft RI/FS recommends a remedy involving stabilization of over twenty miles of riverbank and long-term monitoring of the riverbed. The total cost for this remedy is approximately $73 million. It is unknown over what time frame these costs will be paid out. The United States EPA has recently taken over management of the RI/FS and is evaluating the proposed remedy. The Corporation cannot predict what impact or change will result from the United States EPA’s assuming management of the site.

The Corporation is paying 50% of the costs for the river portion of the RI/FS investigation based on an interim allocation. This 50% interim allocation includes the share assumed by Fort James prior to its acquisition by the Corporation. Several other companies have been identified by government agencies as PRPs, and all but one is believed to be financially viable. The Corporation is currently engaged in cost recovery litigation against two other parties, and has identified several more parties that it believes have some share of liability for the river.

The Corporation, as part of implementing the AOC, has investigated the closure of two disposal areas which are contaminated with PCBs. The cost to remediate one of the disposal areas, the King Highway Landfill, was approximately $9 million. The remediation of that area is essentially complete and the Corporation is waiting for final approval of the closure from the State of Michigan. A 30-year post-closure care period will begin upon receipt of closure approval. Expenditures accrued for post-closure care will be made over the following 30 years. The Corporation is solely responsible for closure and post closure care of the King Highway Landfill.

It is anticipated that the cost for closure of the second disposal area, the Willow Boulevard/A Site landfill, will be approximately $8 million. The Corporation is still negotiating the final closure agreement with the State of Michigan. It is anticipated these costs will be paid out over the next five years, and for post-closure care for 30 years following certification of the closure. The Corporation is solely responsible for closure and post-closure care of the Willow Boulevard portion of the landfill, and is sharing investigation costs for the A Site portion of the landfill with Millennium Holdings on an equal basis. A final determination as to how closure and post-closure costs for the A Site will be allocated between the Corporation and Millennium Holdings has not been made, however, the Corporation’s share should not exceed 50%.

The Corporation has spent approximately $30.9 million on the Kalamazoo River Superfund Site through December 28, 2002 broken down as follows:

Site	(in millions)
River	$	17.2
King Highway		9.0
A Site		1.7
Willow Blvd		3.0

	$	30.9

All such amounts were charged to earnings.

The reserve for the Kalamazoo River Superfund Site is based on the assumption that the bank stabilization remedy will be selected as the final remedy by the United States EPA and the State of Michigan, and that the costs of the remedy will be shared by several other PRPs. Based on analyses of currently available information and previous experience with respect to the cleanup of hazardous substances, the Corporation believes that the reserves are adequate; however, it is reasonably possible that costs associated with the Kalamazoo River Superfund Site may exceed current reserves by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $70 million.

Fox River Site

The Fox River site in Wisconsin is comprised of 39 miles of the Fox River and Green Bay. The site was nominated by the United States EPA (but never finally designated) as a Superfund Site due to contamination of the river by PCBs through wastewater discharged from the recycling of carbonless copy paper from 1953-1971. The Corporation became a PRP through its acquisition of Fort James.

In October 2001, the Wisconsin Department of Natural Resources (“WDNR”) and the United States EPA released for public comment a draft RI/FS and proposed remedial action plan (“PRAP”) for the Fox River and

Green Bay. The draft sets forth a proposed remedy with an estimated total cost of $308 million. The Corporation provided comments on this plan to the relevant agencies in January 2002. Those comments questioned the WDNR’s assumed costs for dredging, as information from other remediation dredging projects indicated costs per cubic yard of material dredged were significantly higher than those used by WDNR. The Corporation and other PRPs also questioned the need to dredge the amount of sediment called for by the proposed remedy. The Corporation believes that other alternatives involving substantially less dredging would meet the risk reduction goals of WDNR. The final cleanup alternative to be selected and implemented, the costs of the alternative, and the Corporation’s share of such costs, are unknown at this time.

Six other companies have been identified by the governments as PRPs, most of which are believed to be financially viable. Under an interim allocation, the Corporation is paying 30 percent of costs incurred by the PRPs in analyzing and responding to the various agency reports, including the RI/FS and PRAP. The Corporation believes its ultimate liability will be less than 30 percent. It is unknown over what time frame these costs will be paid out.

The Corporation’s reserves for the Fox River site are based on the assumptions that the volume of sediment to be dredged will be less than the amount discussed in the PRAP, that the cost per cubic yard of sediment removed will be several times higher, as well as the Corporation’s estimate of its ultimate share of such liability. Given currently available information and its previous experience with respect to the clean up of hazardous substances, the Corporation believes its current reserves for this site are adequate. The WDNR is expected to issue a Record of Decision (ROD) in 2003 for the portion of the Fox River Site into which the Fort James mill discharged wastewater. Depending on the conclusions of this ROD about the volume of sediment to be dredged and the permitted use of other remedies at this portion of the river, it is reasonably possible that the Corporation’s share of the remediation costs associated with this site may not require utilization of all such reserves, or may exceed such reserves by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $20 million.

The Corporation has spent approximately $35.6 million from 1995 to December 28, 2002 on the Fox River site, some of which was spent by Fort James prior to its acquisition by the Corporation.

In October 2000, the United States Fish and Wildlife Service (“FWS”) released for public comment its Restoration and Compensation Determination Plan for natural resource damages to the Lower Fox River and Green Bay. The Corporation has entered into an agreement with the WDNR and the FWS that would settle claims for natural resource damages under CERCLA, the Federal Water Pollution Control Act, and state law for approximately $12.5 million, and to date has paid approximately $8.7 million of this amount. The agreement will be effective when entered by a Federal District Court in Wisconsin. The $12.5 million to be paid under this agreement is separate and apart from any costs related to remediation of the Fox River site.

In 1999 the Corporation and Chesapeake Corporation formed a joint venture to which a Chesapeake subsidiary, Wisconsin Tissue Mills, Inc., contributed tissue mills and other assets located along the Fox River. Wisconsin Tissue is one of the PRPs for the Fox River site. Chesapeake and Wisconsin Tissue specifically retained all liabilities arising from Wisconsin Tissue’s status as a PRP, and indemnified the Corporation and the joint venture against these liabilities. In 2001, the Corporation (having acquired all of Chesapeake’s interest) sold this joint venture to Svenska Cellulosa Aktiebolaget (publ) (“SCA”) and indemnified SCA and the joint venture against all environmental liabilities (including all liabilities arising from the Fox River site for which Wisconsin Tissue is ultimately responsible) arising prior to the closing of the SCA sale. As part of the agreement pursuant to which the Corporation acquired Chesapeake’s interest in the joint venture, Chesapeake specifically agreed that the Corporation would retain Chesapeake’s prior indemnification for such liabilities.

Whatcom Waterway Superfund Site

The Whatcom Waterway is a Federal channel located adjacent to the Corporation’s pulp and paper mill in Bellingham, Washington. The State declared the Whatcom Waterway a Superfund site due to historical

contamination of sediments with woody debris, phenolics and mercury. On March 6, 1995, the Washington Department of Ecology named the Corporation as a Potentially Liable Party (“PLP”) in the case. The State is presently preparing to name other PLPs in the case.

An RI/FS completed by the Corporation identified a preferred remedial alternative comprised of a combination of dredging, capping and habitat restoration with a total estimated cost of $23 million. It is anticipated these costs will be paid out over the next 5 to 10 years. The Corporation has completed interim remedial action and habitat restoration of a portion of the site. Environmental monitoring of this portion of the site is ongoing. The reserve for the Whatcom Waterway site is based on the assumptions that the $23 million proposed remedy involving limited dredging and capping will be selected by the State of Washington as the final remedy and that the cost of the remedy will be shared among a small group of PLPs.

The Corporation has spent approximately $3.3 million through December 28, 2002 on the Whatcom Waterway site, all of which was charged to earnings.

Other

The Corporation is in discussion with the State of Mississippi (Department of Environmental Quality) concerning alleged Prevention of Significant Deterioration (PSD) violations under the Clean Air Act. The Corporation believes it has strong arguments that it did not violate PSD but a penalty may be assessed in excess of $100,000. We are unable at this time to be more specific in the amount of the penalty but the final amount will not result in a material impact on the Corporation.

Asbestos Matters

The Corporation and many other companies are defendants in suits brought in various courts around the nation by plaintiffs who allege that they have suffered personal injury as a result of exposure to asbestos-containing products. The Corporation’s asbestos liabilities relate primarily to joint systems products manufactured by Bestwall Gypsum Company and the Corporation’s gypsum business that contained small amounts of asbestos fiber. The Corporation acquired Bestwall in 1965, and discontinued using asbestos in the manufacture of these products in 1977.

These suits allege a variety of lung and other diseases based on alleged exposure to the Corporation’s products. In many cases, the plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that any injuries they have incurred did in fact result from exposure to the Corporation’s products. Virtually all asbestos suits involve multiple defendants and seek money damages. The Corporation is unable to provide any meaningful disclosure about the total amount of such damages, for the following reasons: First, the Corporation does not track this data in any form since it does not consider the amount of damages, if any, alleged in the initial complaint relevant in assessing its exposure to asbestos liabilities. Second, the Corporation estimates that less than 15% of the approximately 68,800 claims currently pending against it contain any specific demand for damages, as opposed to a general demand for such damages as the plaintiff may prove at trial, or a demand which is stated as being in excess of the minimum jurisdictional limit of a particular court. Third, even those complaints which do contain a specific damage demand nearly always involve multiple defendants (anywhere from 30 to over 100), most of which never manufactured joint systems products. The Corporation is not aware of any complaint which states a specific demand for money damages solely from the Corporation. Finally, even for claims which allege specific damages, plaintiffs’ lawyers often allege the same amount of damages regardless of the specific disease a plaintiff may have. In addition, in many such cases no specific disease is alleged, and thus the damages alleged are meaningless because the ultimate settlement value of any claim is significantly influenced by the actual disease the plaintiff is able to prove.

The following table presents information about the approximate number of the Corporation’s asbestos claims during the past three fiscal years:

	Fiscal Year Ended
	2002	2001	2000
Claims Filed¹	41,700	39,700	55,600
Claims Resolved²	35,100	30,900	46,000
Claims Unresolved at End of Period	68,800	62,200	53,400

Claims Filed includes all asbestos claims for which service has been received and/or a file has been opened by the Corporation and each such claim represents a plaintiff who is pursuing an asbestos claim against the Corporation.

Claims Resolved includes asbestos claims which have been settled or dismissed or which are in the process of being settled or dismissed based upon agreements or understandings in place with counsel for the claimants.

In addition, Fort James Corporation, a wholly owned subsidiary of the Corporation, currently is defending approximately 600 asbestos premises liability claims.

From the commencement of this litigation through December 28, 2002, the Corporation either had settled, had dismissed or was in the process of settling a total of approximately 269,700 asbestos claims. For this same period the Corporation’s asbestos payments, for liability, defense and administration, before insurance recoveries and tax benefits, totaled approximately $440 million. The Corporation generally settles asbestos claims for amounts it considers reasonable given the facts and circumstances of each claim.

In the Fall of 2001, the Corporation retained National Economic Research Associates (NERA) and Peterson Consulting, nationally recognized consultants in asbestos liability and insurance, to work with it to project the amount, net of insurance, that it would pay for its asbestos-related liabilities and defense costs through 2011. Based on the analysis of NERA and Peterson Consulting, at the end of 2001 the Corporation established reserves for the probable and reasonably estimable asbestos liabilities and defense costs it believed it would pay through 2011, and established receivables for insurance recoveries that were deemed probable. In the fourth quarter of 2001, the Corporation recorded a pre-tax charge to earnings of $350 million to cover the projected asbestos liabilities and defense costs, net of expected insurance recoveries, it expected to pay through 2011.

NERA’s estimate was based on historical data supplied by the Corporation and publicly available studies. NERA concluded that, based on the latency periods of asbestos-related diseases (both cancers and non-cancers), the peak incidence of such diseases occurred prior to 2002. It expected, based on the last dates of manufacture of asbestos-containing products in the United States, that the number of new diagnoses of asbestosis and other non-cancerous diseases would drop beginning in 2001. It also cited annual surveys of the National Cancer Institutes that show the annual incidence of mesothelioma began to decline in the mid-1990s. NERA expected these factors, as well as the advancing age of the allegedly exposed population, its movement away from work centers as its members retire, and NERA’s view that many asbestos claims filed in the 1990s were based in part on mass screenings of possibly-exposed individuals, would result in the number of claims filed against the Corporation for asbestos-related injuries beginning to decline in 2002. While the number of new claims filed against the Corporation in 2002 was slightly higher than in 2001, the Corporation is of the view that the number of new claims filed against it is consistent with NERA’s estimate.

However, during 2002 the Corporation paid, pre-tax and before insurance, approximately $181 million for its asbestos liabilities and defense costs, which was $75 million more than the Corporation expected to pay based on NERA’s estimate. These higher payments were caused by a $10 million judgment which the Corporation paid in one case decided on appeal by the Maryland Supreme Court in 2002, and higher than expected settlements paid in less than 1% of the total cases it resolved in 2002, all of which involved mesothelioma claims. During 2001, the Corporation paid, pre-tax and before insurance, about $84 million for its asbestos liabilities and defense costs. Because of 2002’s higher asbestos liabilities and defense costs, the Corporation asked NERA to review its original estimate and adjust it as needed. NERA’s revised estimate shows that the Corporation’s total, undiscounted asbestos liabilities, including defense costs, over the ten-year period from 2002 through 2012 will

be slightly less than $1.2 billion, before any insurance recoveries and ignoring any possible tax benefits. The principal factor contributing to the increase in NERA’s total estimate is the projected effect of the higher indemnity and defense costs the Corporation experienced in 2002 on its costs in future years. In addition, NERA extended its original estimate through 2012, which accounted for approximately $60 million of the total accrual, before insurance. The Corporation believes that NERA’s projection represents its best estimate of the reasonably estimable asbestos costs it will incur based upon currently available information.

As they did at the end of 2001, Peterson Consulting and the Corporation reviewed the Corporation’s existing insurance policies and agreements, engaged in discussions with counsel to the Corporation, analyzed publicly available information bearing on the creditworthiness of the Corporation’s various insurers, and employed insurance allocation methodologies which the Corporation and Peterson Consulting believed appropriate to ascertain the amount of probable insurance recoveries from the Corporation’s insurers for the accrued asbestos liabilities. The analysis took into account self-insurance reserves, policy exclusions, liability caps and gaps in the Corporation’s coverage, as well as insolvencies among certain of the Corporation’s insurance carriers. Although the Corporation and Peterson Consulting believe these assumptions are appropriate, there are other assumptions that could have been employed that would have resulted in materially lower insurance recovery estimates. Based on this analysis, the Corporation’s total expected insurance recoveries for its projected asbestos liabilities and costs over the period through 2012 will be about $670 million. As a result, in the fourth quarter of 2002 the Corporation recorded an additional pre-tax charge to earnings of $315 million which, when added to amounts remaining from charges recorded in 2001, it believes are sufficient to cover its projected asbestos liabilities and defense costs, net of expected insurance recoveries. The Corporation has recorded the reserves for its asbestos liabilities as “Other current liabilities” and “Other long-term liabilities,” and the related insurance recoveries as “Other current assets” and “Other assets,” in the accompanying consolidated balance sheets.

The following table summarizes accruals to, and payments from, the Corporation’s reserve for its total asbestos personal injury liabilities, and receipts from its insurance carriers, and additions to its expected insurance receivables, for the last three fiscal years (dollars in thousands):

	Fiscal Year Ended
	2002			2001			2000
Asbestos Liabilities
Beginning Balance	$	836,615		$	136,553		$	88,022
Accruals¹		507,000			783,682		$	106,162
Payments		(181,176	)		(83,620	)		(57,631	)

Ending Balance	$	1,162,439		$	836,615		$	136,553


Insurance Receivable
Beginning Balance	$	527,228		$	171,943		$	105,608
Receipts		(49,528	)		(65,668	)		(36,280	)
Accruals		192,000			420,953			102,615

Ending Balance	$	669,700		$	527,228		$	171,943

The accrual for 2002 included approximately $60 million as a result of NERA extending its original projection to include 2012.

The charge to earnings taken in the fourth quarter of 2002 is due to the increase in the Corporation’s projected asbestos liabilities contained in NERA’s revised estimate, insolvencies of certain insurance companies which wrote a part of the Corporation’s excess layers of product liability insurance, as well as assumptions by the Corporation and Peterson Consulting about the outcome of likely allocation and coverage issues involving such insurance. The insurance receivable recorded by the Corporation does not assume any recovery from insolvent carriers, and assumes that those carriers which are currently solvent will continue to be solvent throughout the period of NERA’s estimate. However, there can be no assurances that these assumptions will be correct. Substantially all of the insurance recoveries deemed probable are from insurance companies rated A- (excellent)

or better by A.M. Best Company. No more than 25% of such insurance recoveries are from any one company, though several of the insurers are under common control. The Corporation has limited amounts of product liability insurance remaining beyond the amounts recorded for the period through 2012.

The analyses of NERA and Peterson Consulting in both 2001 and 2002 are based on their professional judgment. The more important assumptions in NERA’s projection of the number of claims that will be filed against the Corporation include the population exposed to asbestos-containing products manufactured by the Corporation, the expected occurrence of various diseases in these exposed populations, the rate at which these exposed populations actually file claims, and activities of the asbestos plaintiffs’ bar designed to maximize its profits from such claims. The cost of settling claims is driven by these same assumptions, as well as by prevailing judicial and social environments in the jurisdictions in which claims are filed, the rulings by judges and the attitudes of juries in those jurisdictions, the demands of the asbestos plaintiffs’ bar with respect to the value of each such claim, the insolvencies of other defendants to a particular claim, and the impact of verdicts against other defendants on settlement demands against the Corporation.

Generally, NERA’s projections assume:

•

That the number of new claims to be filed against the Corporation each year through 2012 will decline at a fairly constant rate each year beginning in 2003;

•

That the percentage of claims settled by the Corporation will be about three-quarters of the total number of claims resolved (whether by settlement or dismissal) each year through 2012;

•

That the average estimated per case settlement costs, as adjusted to reflect the higher indemnity costs experienced in 2002, are anticipated to decrease slightly over the period through 2012; and

•

That the total amounts paid by the Corporation in settlements, and in defense and administrative costs, will decline at varying rates over the period through 2012.

Among the more important assumptions made by Peterson in projecting the Corporation’s future insurance recoveries are the resolution of allocation issues among various layers of insurers, the application of particular theories of recovery based on decided cases, and the continuing solvency of various insurance companies.

Given these assumptions, and the uncertainties involved in each of them, the Corporation’s actual asbestos liabilities, defense costs and insurance recoveries could be higher or lower than those currently projected and/or recorded. However, these assumptions are only some of those contained in the NERA and Peterson projections, and all of such assumptions are only one aspect of the overall projections made by those firms. Changes in the foregoing assumptions, or others, whether from time to time or over the period covered by such projections, may or may not affect the validity of the overall projections. The Corporation intends to monitor its accrued asbestos liabilities, defense costs and insurance recoveries against these overall projections, and will make adjustments to such accruals as required by generally accepted accounting principles.

For all of these reasons, there can be no assurance that the Corporation’s currently accrued asbestos liabilities will be accurate, that its accrued insurance recoveries will be realized, or that the Corporation will not be required in the future to incur additional charges relating thereto. Given these uncertainties, the Corporation believes that it is reasonably possible that it will incur asbestos liabilities for the period through 2012 and beyond in amounts in excess of the NERA estimate, but cannot estimate such excess amount at this time. The Corporation believes that it is reasonably possible that such excess liabilities could be material to its operating results in any given quarter or year but, based on the information available to it at present, does not believe that it is reasonably possible that such excess liabilities would have a material adverse effect on its long-term results of operations, liquidity or consolidated financial position.

Critical Accounting Policies

A summary of the Corporation’s significant accounting policies is included in Note 1 to Notes to Consolidated Financial Statements. Management believes that the consistent application of these policies enables

the Corporation to provide readers of the financial statements with useful and reliable information about the Corporation’s operating results and financial condition. The following are accounting policies that management believes are most important to the portrayal of the Corporation’s financial condition and results and require management’s most difficult, subjective, or complex judgments.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Judgments and assessments of uncertainties are required in applying the Corporation’s accounting policies in many areas. For example, key assumptions are particularly important when determining amounts allocated to identifiable intangible assets in a business combination and in developing the Corporation’s projected liabilities for pension and other postretirement benefits. Other areas in which significant uncertainties exist include, but are not limited to, projected costs to be incurred in connection with environmental and legal matters, including its asbestos liabilities. The Corporation recognizes a liability for environmental remediation and legal indemnification and defense costs when it believes it is probable a liability has been incurred and the amount can be reasonably estimated. The liabilities are developed based on currently available information and reflect the participation of other potentially responsible parties, depending on the parties’ financial condition and probable contribution. The accruals are recorded at undiscounted amounts and are reflected as liabilities on the accompanying consolidated balance sheets. The Corporation also has insurance that covers losses on certain environmental claims and records receivables to the extent that the realization of the insurance is deemed probable. This receivable is recorded at an undiscounted amount and is reflected as an asset in the accompanying consolidated balance sheets.

In addition, management uses judgment in assessing goodwill, and other long-lived assets for impairment. In accordance with the transition provisions of SFAS No. 142, the Corporation has assessed the recoverability of its goodwill. After the transition, the Corporation will review the recorded value of its goodwill annually, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. Recoverability is determined by comparing the fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of the reporting unit exceeds its fair value, the implied fair value of the reporting unit goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Goodwill totaled $7.7 billion at December 28, 2002 and represented 31% of total assets. The Corporation assesses its long-lived assets other than goodwill for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. To analyze recoverability, the Corporation projects undiscounted net future cash flows over the remaining life of such assets. If these projected cash flows are less than the carrying amount, an impairment would be recognized, resulting in a write-down of assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amount and the fair value of the assets.

Accounting Changes

In the first quarter of 2002, the Corporation changed its method of computing LIFO inventory increments from year-to-date average cost to latest acquisition cost. The Corporation believes that the latest acquisition cost more closely aligns the value of increases in inventory with physical quantities giving rise to the increases and that this method more appropriately reflects the underlying substance of changes in inventory. In addition, the Corporation changed its method of pooling LIFO inventories from a statutory legal entity approach to an approach that allows the alignment by business segment. The Corporation believes that this approach results in better matching of costs to revenues in a manner that is more consistent with the way the businesses are managed. The cumulative effect of these changes on prior years was not determinable. These changes did not have a material effect on 2002 results of operations or financial position.

Effective December 30, 2001, the Corporation adopted SFAS No. 141, Business Combinations (“SFAS No. 141”), and SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that entities assess the fair value of the net assets underlying all acquisition-related goodwill on a reporting unit basis (see Note 6 of the Notes to Consolidated Financial Statements).

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”). SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for the amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Corporation will adopt the new rules on asset retirement obligations effective December 29, 2002. Management is continuing to evaluate the impact that the adoption of SFAS No. 143 will have on the Corporation’s financial position and result of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). SFAS No. 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt (An Amendment of APB Opinion No. 30), which required all gains and losses from extinguishment of debt to be classified as extraordinary items. As a result, the criteria in Opinion 30 will be used to classify those gains and losses. SFAS No. 145 also amends Statement No. 13, Accounting for Leases, to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002 and early application is encouraged. Any gains or losses previously classified as extraordinary items in prior periods presented that do not meet the criteria in Opinion 30 for classification as an extraordinary item must be reclassified. Management has determined that previously reported extraordinary losses do not meet the criteria in Opinion 30 for classification as an extraordinary item and will need to be reclassified in the Consolidated Statement of Operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”) which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (“EITF 94-3”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes fair value as the objective for initial measurement of the liability. This statement is effective for exit or disposal activities that are initiated after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS No. 148”). SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. SFAS No. 148’s amendment of the transition and annual disclosure requirements of SFAS No. 123 are effective for fiscal years ending after December 15, 2002. The additional disclosures required under SFAS No. 148 have been included in Note 1 of the Notes to Consolidated Financial Statements under the caption ‘income per share’.

In November 2002, the FASB issued FASB Interpretation Number 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN45”). FIN45 requires an entity to disclose in its interim and annual financial statements information with respect to its obligations under certain guarantees that it has issued. It also requires an entity to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN45 are effective for interim and annual periods after December 15, 2002. These disclosures are presented in Note 15 of the Notes to Consolidated Financial Statements. The initial recognition and initial measurement requirements of FIN45 are effective prospectively for guarantees issued or modified after December 31, 2002. The Corporation is currently assessing the initial measurement requirements of FIN45. However, management does not believe that the recognition requirements will have a material impact on the Corporation’s financial position, cash flows or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (“ FIN46”), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN46 must be applied for the first interim or annual period beginning after June 15, 2003. The Corporation is currently evaluating the effect that the adoption of FIN46 will have on its results of operations and financial condition.

For a discussion of commitments and contingencies, see Note 15 of the Notes to Consolidated Financial Statements.

2001 Compared with 2000

The Corporation reported consolidated net sales of $25.0 billion and a net loss of $407 million for 2001, compared with net sales of $22.1 billion and net income of $505 million in 2000. Included in 2001 results are a full year of net sales and operating profits from the Fort James operations that were consolidated with the Corporation beginning in December 2000.

Interest expense was $1,080 million in 2001, compared with $595 million in 2000. The increase is the result of higher debt levels primarily related to the acquisition of Fort James, offset slightly by lower interest rates.

The Corporation reported a loss from continuing operations before income taxes of $295 million and an income tax provision of $181 million for fiscal year 2001, compared with income from continuing operations before income taxes of $553 million and an income tax provision of $210 million for 2000. The effective tax rate in 2001 was different from the statutory rate primarily because of nondeductible goodwill amortization expense associated with business acquisitions and because of nondeductible goodwill applicable to assets sold (see Note 3 of the Notes to Consolidated Financial Statements). The effective tax rate in 2000 was different from the statutory rate due to the utilization of state tax credits and foreign sales corporation tax benefits that more than offset nondeductible goodwill amortization expense associated with business combinations.

During 2001, the Corporation recorded a pretax charge to earnings of $350 million to cover its projected asbestos liabilities and defense costs, net of insurance recoveries, through 2011.

Beginning in the third quarter of 2001, the Corporation began reporting The Timber Company as a discontinued operation. Income from discontinued operations decreased to $70 million in 2001, compared with $162 million in 2000. This decrease was primarily a result of a decline in both sales prices and sales volume. Included in 2001 results was interest expense of $31 million, a $44 million pretax gain related to the sale of certain timber assets, and a $24 million pretax charge for an insurance premium associated with the merger of the Corporation’s timber and timberlands business with Plum Creek (see Note 3 of the Notes to Consolidated Financial Statements).

North America Consumer Products

The Corporation’s North America consumer products segment reported net sales of $5.4 billion and operating income of $663 million for 2001, which included net sales and operating profits from the operations of Fort James that were acquired at the end of November 2000. Fort James’ results of operations were consolidated with those of the Corporation beginning in the fiscal month of December 2000. During 2000, the segment reported net sales of $2.0 billion and an operating loss of $9 million. Included in 2001 results was a charge of $83 million for the closure of the Bellingham, Washington pulp mill. Included in 2000 results was a charge of $204 million for the write-down of the Corporation’s away from home tissue business that was sold during the first quarter of 2001. Excluding these charges, return on sales increased to 14% compared with 10% in 2000. The increase in 2001 net sales and operating profits was due principally to the inclusion of a full year of operating results of the Fort James businesses and significant savings from lower distribution and manufacturing costs and other synergies resulting from merging the Corporation’s retail tissue business with the Fort James operations.

International Consumer Products

The Corporation’s international consumer products segment consists of the European businesses and certain small tissue joint ventures located outside of Europe, all acquired in the Fort James acquisition in November 2000. Net sales and operating profits (losses) for this segment were $1.6 billion and $126 million, respectively, for 2001 and $119 million and $(9) million, respectively, for 2000. The increase in 2001 net sales and operating profits was due principally to the inclusion of a full year of operating results of the Fort James businesses.

Packaging

The Corporation’s packaging segment reported net sales of $2.6 billion and operating profits of $384 million for the year ended December 29, 2001, compared with net sales of $2.7 billion and operating profits of $512 million in 2000. During 2000, the Corporation sold certain packaging assets resulting in a pre-tax gain of $25 million. Excluding this gain on asset sales, return on sales decreased to 15% from 18% in 2000. Average selling prices decreased in 2001 for all packaging products. Average selling prices for linerboard and medium decreased 5% and 9%, respectively, and average selling prices for packaging decreased slightly. Sales volume decreased for packaging by 4% when compared with the prior year. These decreases were offset by a slight increase in sales volume for linerboard and a $36 million cost savings year over year.

During 2001 and 2000, the Corporation took market-related paper machine slowback or downtime at its containerboard mills to avoid excess inventories, resulting in a reduction in containerboard production of approximately 274,000 and 271,000 tons, respectively.

Bleached Pulp and Paper

The Corporation’s bleached pulp and paper segment reported net sales of $3.2 billion and operating profits of $28 million for the year ended December 29, 2001, compared with net sales of $3.3 billion and operating profits of $357 million in 2000. In August 2001, the bleached pulp and paper segment sold four paper and pulp facilities and recorded a pre-tax loss of $63 million. In December 2000, the Corporation announced the permanent closure of its Kalamazoo, Michigan, paper mill and a permanent closure of a paper machine at its Nekoosa, Wisconsin, operations. In connection with the Kalamazoo paper mill closure, the Corporation recorded a fourth quarter 2000 charge of $57 million for employee termination, asset write-down, mill closure and other costs. Excluding these losses, return on net sales decreased to 3% compared with 13% for 2000. The decrease in net sales and operating profits was due primarily to a decrease in average prices for all of the Corporation’s bleached pulp and paper products, offset somewhat by lower wood fiber and production costs. Average selling prices for market pulp decreased 27% and 13%, respectively, while paper prices decreased 5% compared with 2000 prices.

During 2001, the Corporation incurred market-related downtime at its bleached pulp and paper mills, resulting in a reduction in pulp production of 104,000 tons and in paper production of 21,000 tons. In 2000, the Corporation incurred market-related downtime at its pulp and paper mills resulting in a reduction in pulp and paper production of 17,000 tons and 60,000 tons, respectively. Divested operations contributed operating losses of $64 million and operating profits of $59 million to the segment’s 2001 and 2000 results, respectively.

Paper Distribution

The Corporation’s paper distribution segment, which represented the operating results of Unisource, reported net sales of $6.2 billion and operating profits of $48 million in 2001, compared to net sales and operating profits of $6.9 billion and $158 million, respectively, in 2000. The decline in sales an operating profits for the paper distribution business is a direct result of declining prices and volumes in the printing business.

Building Products Manufacturing

The Corporation’s building products manufacturing segment reported net sales of $5.3 billion and operating profits of $83 million for the year ended December 29, 2001, compared with net sales of $5.8 billion and operating profits of $354 million in 2000. As a result of weak market conditions in this segment, the Corporation announced the closure of certain structural panels mills, lumber mills, industrial wood products mills and gypsum plants and recorded charges of $93 million in 2001 related to these plant closures and asset impairments, net of gains on asset sales. In 2000, the segment recorded a restructuring charge of approximately $8 million for asset write-offs, employee termination and facility closing costs of a gypsum facility. Excluding these net facility closure and asset impairment charges, return on net sales was 3% in 2001 and 6% in 2000. The primary components of the decrease in 2001 net sales and operating profits were 10% lower average particleboard selling prices, 20% lower average oriented strand board selling prices and a 24% decrease in average gypsum wallboard selling prices coupled with a 10% decrease in plywood sales volume, and 18% decrease in softwood lumber sales volume, a 15% decrease in particleboard sales volume and a 19% decrease in gypsum wallboard sales volume. These declines were slightly offset by a 15% increase in oriented strand board sales volume and a decline in wood costs.

Building Products Distribution

The Corporation’s building products distribution segment reported net sales and operating profits of $3.8 billion and $65 million in 2001, respectively, compared with net sales of $4.3 billion and operating profits of $23 million in 2000. The increase in 2001 operating profit was primarily a result of 2% higher gross margins and lower operating expenses, despite the decline in building products markets.

Other

million to a loss of $612 million in 2001 from a loss of $238 million in 2000. This increase was primarily the result of the $350 million charge recorded in the fourth quarter of 2001 for projected asbestos liabilities through the 2011, net of anticipated insurance recoveries.

Factors That May Affect Future Results

Some of the matters discussed in this Form 10-K and the accompanying Annual Review concerning, among other things, the business outlook, anticipated financial and operating results, strategies, contingencies and contemplated transactions of the Corporation, constitute forward-looking statements and are based upon management’s expectations and beliefs concerning future events. There can be no assurance that these events will occur or that the Corporation’s results will be as estimated. In some cases, the forward-looking statements contained in this Form 10-K and the accompanying Annual Review can be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” or “estimates,” or the negative of these terms or other comparable terminology.

Forward-looking statements are only predictions. Therefore, readers are cautioned not to place undue reliance on these forward-looking statements, which are based on information known today and speak only as of the date of the filing of this Form 10-K. Moreover, in the future, the Corporation, through its senior management team, may make additional or different forward-looking statements about the matters described in this document. The Corporation undertakes no obligation to publicly revise any of these forward-looking statements to reflect changes in the facts or information on which they are based or any events or circumstances occurring after the date hereof. Actual events or future results may differ materially as a result of the following factors, as well as other factors described elsewhere in this Form 10-K, or in the Corporation’s other SEC filings, including the Corporation’s Form 8-K, dated October 17, 1996, and Form 8-K, dated January 21, 2003, which are incorporated herein by this reference.

The following factors, which the Corporation cautions are not exclusive, are described in accordance with the provisions of the Private Securities Litigation Reform Act of 1995, which encourages companies to disclose these factors.

1. The Corporation has substantial indebtedness.

As described in this Form 10-K and the accompanying Annual Review, the Corporation has substantial indebtedness. The Corporation’s ability to meet its debt service obligations and to repay its outstanding indebtedness will depend in part on cash from operations and in part on cash produced by divestitures of some of the Corporation’s businesses. There can be no assurance that such divestitures will be consummated, or, if consummated, that the price and terms of such divestitures will be advantageous to the Corporation. Further, there can be no assurance that the Corporation’s businesses will be able to generate sufficient cash flows from operations, as they are subject to general economic, business, financial, competitive, legislative, regulatory and other factors beyond the Corporation’s control.

The Corporation’s level of indebtedness has important consequences, including limiting the Corporation’s ability to invest operating cash flow to expand its business, to capitalize on business opportunities and to react to competitive pressures or adverse changes in governmental regulation, because it must dedicate a substantial portion of these cash flows to service its debt. In addition, the Corporation could, under certain circumstances that management believes are unlikely to occur, be unable to refinance or obtain additional financing because of market conditions, its high levels of debt and the debt restrictions under its current debt agreements.

On January 21, 2003, Moody’s Investors Service announced that it had downgraded the Corporation’s senior implied and issuer debt ratings from Ba1 to Ba2 and the Corporation’s senior unsecured notes from Ba1 to Ba3. Moody’s rating actions affected approximately $9 billion of debt securities. On January 29, 2003, Fitch Ratings announced that it had lowered the Corporation’s senior unsecured long-term debt ratings from BB+ to BB and withdrawn the Corporation’s commercial paper rating. Fitch’s rating action with respect to the BB rating

affected $1.5 billion of debt securities. There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any future reductions in the Corporation’s debt ratings could increase the costs of the Corporation’s future short-term financings.

2. Execution of Transformation Strategy.

The Corporation’s long-term strategy is to improve its portfolio of businesses by divesting or exiting non-strategic businesses, and by acquiring and expanding businesses which are high value-added and that position Georgia-Pacific closer to its customers. A key to this transformation will be the Corporation’s tissue business, which was expanded significantly with the acquisition of Fort James Corporation in late 2000. Although the Corporation believes that it has a strong cost position, superior manufacturing expertise and excellent brands, this business faces competition from established companies that may have more experience or expertise in marketing, advertising and brand management than the Corporation currently has. To succeed, the Corporation must continue to develop brand recognition and loyalty, product quality and performance, price, marketing and distribution capabilities. Aggressive reaction by competitors may lead to increased advertising and promotional spending by the Corporation in order to maintain market share in this segment as well as others. In addition, to successfully achieve its strategy the Corporation will need to rely heavily on the development and introduction of new products and product line extensions as a means of achieving and/or maintaining leadership in various product categories.

3. Competition and Volatility of Commodity Businesses.

The Corporation faces intense competition from both large international and small domestic producers in most of its businesses. However, operating results are particularly volatile for the Corporation’s building products and pulp and paper businesses because most of these products are commodities, for which price is the principal competitive factor. The Corporation cannot control such factors as decreasing demand from customers or increasing supply from competitors, both of which cause price decreases for such products which adversely affects the Corporation’s net sales, operating income and cash flows.

4. Costs Associated with Environmental Compliance and Remediation and Litigation.

As more fully discussed under Note 15 of the Notes to Consolidated Financial Statements which are presented under Item 8 of this Form 10-K, the Corporation’s operations are subject to significant regulation by federal, state and local environmental and safety authorities. The costs of compliance with existing and new regulatory schemes could require significant capital expenditures that would decrease the amount of funds available for investment in other areas of the Corporation’s operations. For example, the United States Environmental Protection Agency has recently issued new air emission regulations, known as “MACT” or Maximum Achievable Control Technology regulations. The costs of compliance with these regulations and additional or supplementary regulations cannot be definitively quantified and there can be no assurance that the costs of such compliance will not be material to the Corporation’s results of operations in certain reporting periods. In addition, the costs of remediating known environmental sites, as described in Note 15 of the Notes to Consolidated Financial Statements, in some instances has been significant and remediation of future sites could also be significant. There can be no assurance that the final remediation costs will equal currently estimated costs or that additional sites will not require significant remediation expenses.

The Corporation is subject to litigation risks that are similar to other Corporations of its size and complexity in an increasingly litigious environment. While the Corporation does not believe that any of these matters will be material to its long term financial status, as disclosed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other” and Note 15 of the Notes to Consolidated Financial Statements, certain litigation related matters may be material to the Corporation’s results of operations in certain reporting periods.

5. Costs Associated with Asbestos Liabilities and Litigation.

In fiscal 2001 and 2002, working with National Economic Research Associates (NERA) and Peterson Consulting, its external consultants, Georgia-Pacific recorded pre-tax charges totaling $665 million for asbestos liabilities and defense costs, net of anticipated insurance recoveries that it expects to pay through 2012.

Projecting liabilities for asbestos litigation is subject to a number of important risks and uncertainties, including the possibility that the number of asbestos claims filed against the Corporation in the future will be greater than projected; the risk that the cost of defending and settling current and future asbestos claims will be higher than projected, resulting in more rapid depletion of available insurance coverage and higher out-of-pocket costs; the possibility of additional insolvencies among insurance carriers; the risk that final resolution of allocation, coverage or other issues affecting available insurance coverage will result in lower insurance recoveries than forecast; the possibility that adverse jury verdicts could require us to pay damages in amounts greater than the amounts for which Georgia-Pacific now settles cases; and the risk that bankruptcies of other asbestos defendants may increase costs in the future.

These or other factors could cause the Corporation’s actual liabilities to be materially higher, and its insurance recoveries to be materially lower, than those projected and recorded to date. If these or other factors cause Georgia-Pacific to determine that the assumptions used by NERA or Peterson Consulting in their latest projections are no longer reasonable, or if it determines that its asbestos exposure net of insurance recoveries for years after 2012 is material, the Corporation may have to establish additional reserves relating to asbestos beyond the charges already taken, and the amount of these reserves may be material, but the Corporation cannot estimate the amount of any such additional reserves at this time.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Quantitative and Qualitative Disclosures about Market Risk information for the Corporation required by this Item are set forth on page 22 under the caption “Georgia-Pacific Corporation and Subsidiaries—Management’s Discussion and Analysis—Liquidity and Capital Resources—Financing Activities” under Item 7 of this Form 10-K is incorporated herein by reference thereto.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

		Page
Financial Statements
Report on Management’s Responsibilities		41
Report of Independent Auditors		42
Consolidated Statements of Operations		43
Consolidated Statements of Cash Flows		44
Consolidated Balance Sheets		45
Consolidated Statements of Shareholders’ Equity		46
Consolidated Statements of Comprehensive (Loss) Income		47
Notes to Consolidated Financial Statements		48
Supplemental Information:
Selected Financial Data—Operations		114
Selected Financial Data—Financial Position, End of Year		116
Sales and Operating Profits by Operating Segment		118
Schedule II—Valuation and Qualifying Accounts		119

REPORT ON MANAGEMENT’S RESPONSIBILITIES

Georgia-Pacific Corporation and Subsidiaries

Management of Georgia-Pacific Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements and the estimates and judgments upon which certain amounts in the financial statements are based. Management is also responsible for preparing the other financial information included in the annual report on Form 10-K. In our opinion, the accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, and the other financial information in the annual report on Form 10-K is consistent with the financial statements.

Management is also responsible for establishing and maintaining a system of internal control over financial reporting, which encompasses policies, procedures, and controls directly related to, and designed to provide reasonable assurance as to, the reliability of the published financial statements. An independent assessment of the system is performed by the Corporation’s internal audit staff in order to confirm that the system is adequate and operating effectively. The Corporation’s independent auditors also consider certain elements of the internal control system in order to determine their auditing procedures for the purpose of expressing an opinion on the financial statements. Management has considered any significant recommendations regarding the internal control system that have been brought to its attention by the internal audit staff or independent auditors and has taken steps it deems appropriate to maintain a cost-effective internal control system. The Audit Committee of the Board of Directors, consisting of independent directors, provides oversight to the financial reporting process. The Corporation’s internal auditors and independent auditors meet regularly with the Audit Committee to discuss financial reporting and internal control issues and have full and free access to the Audit Committee.

There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Furthermore, the effectiveness of an internal control system can vary over time due to changes in conditions.

Management believes that as of December 28, 2002, the internal control system over financial reporting is adequate and effective in all material respects.

LOGO

JAMES E. TERRELL

Vice President and Controller

LOGO

DANNY W. HUFF

Executive Vice President—Finance and Chief Financial Officer

LOGO

A.D. CORRELL

Chairman and Chief Executive Officer

January 31, 2003

REPORT OF INDEPENDENT AUDITORS

Board of Directors, Georgia-Pacific Corporation:

We have audited the accompanying consolidated balance sheets of Georgia-Pacific Corporation (a Georgia corporation) and subsidiaries as of December 28, 2002 and December 29, 2001 and the related consolidated statements of operations, shareholders’ equity, comprehensive (loss) income, and cash flows for each of the three years in the period ended December 28, 2002. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Georgia-Pacific Corporation and subsidiaries at December 28, 2002 and December 29, 2001 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 28, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 6 to the consolidated financial statements, in 2002 the Corporation ceased amortization of goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets and as discussed in Note 10 to the consolidated financial statements, in 2001, the Corporation adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.

LOGO

Atlanta, Georgia

January 31, 2003,

except for Note 7, as to which the date is

March 28, 2003

GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Fiscal Year Ended
	2002			2001			2000
In millions, except per share amounts
Net sales	$	23,271		$	25,016		$	22,050

Costs and expenses:
Cost of sales		18,115			19,276			17,334
Selling and distribution		1,869			2,025			1,600
Depreciation and amortization		1,030			1,343			910
General and administrative		1,054			1,072			856
Interest, net		841			1,080			595
Other losses, net		870			515			202

Total costs and expenses		23,779			25,311			21,497

(Loss) income from continuing operations before income taxes		(508	)		(295	)		553
(Benefit) provision for income taxes		(318	)		181			210

(Loss) income from continuing operations		(190	)		(476	)		343
Income from discontinued operations, net of taxes		–			70			162

(Loss) income before extraordinary loss and accounting change		(190	)		(406	)		505
Extraordinary loss from early retirement of debt, net of taxes		–			(12	)		–
Cumulative effect of accounting changes, net of taxes		(545	)		11			–

Net (loss) income	$	(735	)	$	(407	)	$	505

Georgia-Pacific Group
(Loss) income from continuing operations	$	(190	)	$	(476	)	$	343
Extraordinary loss, net of taxes		–			(12	)		–
Cumulative effect of accounting change, net of taxes		(545	)		11			–

Net (loss) income	$	(735	)	$	(477	)	$	343

Basic per share:
(Loss) income from continuing operations	$	(0.80	)	$	(2.09	)	$	1.95
Extraordinary loss, net of taxes		–			(0.05	)		–
Cumulative effect of accounting change, net of taxes		(2.29	)		0.04			–

Net (loss) income	$	(3.09	)	$	(2.10	)	$	1.95

Diluted per share:
(Loss) income from continuing operations	$	(0.80	)	$	(2.09	)	$	1.94
Extraordinary loss, net of taxes		–			(0.05	)		–
Cumulative effect of accounting change, net of taxes		(2.29	)		0.04			–

Net (loss) income	$	(3.09	)	$	(2.10	)	$	1.94

Average number of shares outstanding:
Basic		237.6			227.6			175.8
Diluted		237.6			227.6			176.9

The Timber Company
Income from discontinued operations, net of taxes				$	70		$	162

Basic per common share				$	0.86		$	2.01

Diluted per common share				$	0.86		$	2.00

Average number of shares outstanding:
Basic					81.0			80.7
Diluted					81.7			81.1

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

GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Fiscal Year Ended
	2002			2001			2000
In millions
Cash flows from operating activities:
Net (loss) income	$	(735	)	$	(407	)	$	505
Adjustments to reconcile net (loss) income to cash provided by operations, excluding the effects of acquisitions and divestitures:
Cumulative effect of accounting change, net of taxes		545			(11	)		–
Depreciation		1,000			1,079			819
Amortization of intangibles and goodwill		30			267			96
Deferred income taxes		(24	)		(109	)		82
Other losses, net		870			514			141
(Increase) decrease in receivables		(94	)		265			183
(Increase) decrease in inventories		(2	)		203			(20	)
Increase in accounts payable		49			23			17
Change in other working capital		(159	)		(240	)		8
Change in taxes receivable/payable		(288	)		(26	)		(178	)
Change in other assets and other long-term liabilities		(155	)		(43	)		(27	)
Tax benefit on stock benefit plans		–			23			4
Other, net		(27	)		(56	)		(74	)

Cash provided by operations		1,010			1,482			1,556

Cash flows from investing activities:
Property, plant and equipment investments		(693	)		(739	)		(909	)
Timber and timberland purchases		–			(31	)		(59	)
Acquisitions		(6	)		(133	)		(6,142	)
Proceeds from sales of assets		668			2,311			422
Other		(31	)		(66	)		(63	)

Cash (used for) provided by investing activities		(62	)		1,342			(6,751	)

Cash flows from financing activities:
Repayments of long-term debt		(5,081	)		(2,631	)		(123	)
Additions to long-term debt		5,731			631			5,937
Fees paid to issue debt		(14	)		(39	)		(38	)
Increase (decrease) in bank overdrafts		71			(94	)		14
Decrease in accounts receivable secured borrowings and short-term notes		(1,574	)		(690	)		(300	)
Common stock repurchased		–			–			(140	)
Proceeds from option plan exercises		4			129			26
Employee stock purchase plan		37			36			–
Cash dividends paid		(118	)		(175	)		(166	)

Cash (used for) provided by financing activities		(944	)		(2,833	)		5,210

Increase (decrease) in cash		4			(9	)		15
Balance at beginning of year		31			40			25

Balance at end of year	$	35		$	31		$	40

Supplemental disclosures of cash flow information:
Noncash investing and financing activity:
Redemption of senior deferrable notes and issuance of common stock (see Note 8)	$	863		$	–		$	–

Unisource sale/leaseback transaction (see Note 3)	$	169		$	–		$	–

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

GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 28, 2002			December 29, 2001
In millions, except shares and per share amounts
ASSETS
Current assets:
Cash and equivalents	$	35		$	31

Receivables, less allowances of $39 at both December 28, 2002 and December 29, 2001		1,777			2,352

Inventories
Raw materials		590			628
Finished goods		1,116			1,476
Supplies		507			504
LIFO reserve		(77	)		(96	)

Total inventories		2,136			2,512

Deferred income tax assets		35			101
Taxes receivable		334			–
Other current assets		389			464

Total current assets		4,706			5,460

Property, plant and equipment
Land and improvements		566			612
Buildings		2,128			2,197
Machinery and equipment		15,905			15,502
Construction in progress		258			532

Property, plant and equipment, at cost		18,857			18,843
Accumulated depreciation		(9,535	)		(9,051	)

Property, plant and equipment, net		9,322			9,792

Goodwill, net		7,663			8,265

Intangible assets, net		676			713

Other assets		2,262			2,134

Total assets	$	24,629		$	26,364

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Secured borrowings and short-term notes	$	710		$	2,284
Current portion of long-term debt		621			572
Accounts payable		1,532			1,630
Accrued compensation		291			300
Other current liabilities		891			1,024

Total current liabilities		4,045			5,810

Long-term debt, excluding current portion		10,185			9,358

Senior deferrable notes		–			863

Other long-term liabilities		4,397			3,582

Deferred income tax liabilities		1,442			1,846

Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued or outstanding		–			–
Junior preferred stock, no par value; 25,000,000 shares authorized; no shares issued or outstanding		–			–
Common stock, par value $0.80; 400,000,000 shares authorized; 250,238,000 shares and 230,095,000 shares issued and outstanding at December 28, 2002 and December 29, 2001, respectively		200			184
Additional paid-in capital		3,413			2,521
Retained earnings		1,468			2,321
Long-term incentive plan deferred compensation		(2	)		(3	)
Accumulated other comprehensive loss		(519	)		(118	)

Total shareholders’ equity		4,560			4,905

Total liabilities and shareholders’ equity	$	24,629		$	26,364

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

GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Fiscal Year Ended
	2002			2001			2000
In millions, except shares in thousands and per share amounts
Common stock:
Beginning balance	$	184		$	182		$	155
Common stock issued:
Stock option plans and directors plan		–			4			1
Employee stock purchase plans		1			1			–
Common stock issued for PEPS conversion		15			–			–
Common stock issued for acquisitions		–			–			26
Spin-off of The Timber Company		–			(3	)		–

Ending balance		200			184			182

Treasury stock:
Beginning balance		–			(330	)		(880	)
Common stock repurchased		–			–			(140	)
Treasury stock issued for acquisition		–			–			690
Spin-off of The Timber Company		–			330			–

Ending balance		–			–			(330	)

Additional paid-in capital:
Beginning balance		2,521			2,427			1,510
Common stock issued:
Stock option plans and directors plan		8			149			153
Employee stock purchase plans		36			35			–
Common stock issued for PEPS conversion		848			–			–
Common stock issued for acquisitions		–			5			764
Spin-off of The Timber Company		–			(95	)		–

Ending balance		3,413			2,521			2,427

Retained earnings:
Beginning balance		2,321			3,463			3,124
Net (loss) income		(735	)		(407	)		505
Spin-off of The Timber Company		–			(560	)		–
Cash dividends declared (Georgia-Pacific Group, $0.50, per common share for each of the three years presented; The Timber Company, $0.75 per common share for 2001 and $1.00 per share for 2000 )		(118	)		(175	)		(166	)

Ending balance		1,468			2,321			3,463

Long-term incentive plan deferred compensation:
Beginning balance		(3	)		(4	)		(2	)
Common stock issued under long-term incentive plan, net		1			1			(2	)

Ending balance		(2	)		(3	)		(4	)

Accumulated other comprehensive loss:
Beginning balance		(118	)		(16	)		(32	)
Activity, net of taxes		(401	)		(102	)		16

Ending balance		(519	)		(118	)		(16	)

Total shareholders’ equity	$	4,560		$	4,905		$	5,722

Georgia-Pacific Group common stock shares issued and outstanding:
Beginning balance, common stock issued		230,095			224,844			191,983
Common stock issued:
Stock option plans and directors plan		230			3,550			570
Employee stock purchase plans		1,696			1,511			–
Long-term incentive plan		–			–			92
Conversion of PEPS units		18,206			–			–
Common stock issued for acquisitions		11			190			32,199

Balance, common stock issued		250,238			230,095			224,844
Common stock repurchased and held in treasury		–			–			(21,501	)
Treasury stock issued for acquisition		–			–			21,501

Balance, common stock outstanding		250,238			230,095			224,844

The Timber Company common stock shares issued and outstanding:
Beginning balance, common stock issued					94,571			93,904
Common stock issued:
Stock option plans and directors plan					2,081			667
Employee stock purchase plans					17			–
Spin-off of The Timber Company					(96,669	)		–

Balance, common stock issued					–			94,571
Common stock repurchased and held in treasury					–			(14,387	)

Balance, common stock outstanding					–			80,184

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

GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

	Fiscal Year Ended
	2002			2001			2000
In millions
Net (loss) income	$	(735	)	$	(407	)	$	505
Other comprehensive (loss) income before taxes:
Foreign currency translation adjustments		154			(29	)		24
Derivative instruments:
Fair market value adjustments on derivatives		6			(50	)		–
Reclassification adjustments for losses included in net income		35			–			–
Unrealized loss on securities:
Unrealized losses arising during the period		(4	)		–			–
Reclassification adjustment for impairment included in net income		4			–			–
Minimum pension liability adjustment		(941	)		(75	)		2
Income tax benefit (expense) related to items of other comprehensive income		345			52			(10	)

Comprehensive (loss) income	$	(1,136	)	$	(509	)	$	521

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

GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Corporation, a Georgia corporation, is broadly engaged in four business operations: the manufacture of tissue products (including bath tissue, paper towels, and napkins) and disposable tabletop products (including disposable cups, plates and cutlery); the manufacture of containerboard and packaging (including linerboard, medium, kraft and corrugated packaging); the manufacture of bleached pulp and paper (including paper, market and fluff pulp, and bleached board) and the manufacture and distribution of building products (including plywood, oriented strand board, various industrial wood products, and softwood and hardwood lumber as well as certain non-wood products including gypsum board, chemicals and other products).

Prior to November 2, 2002, the Corporation was engaged in the distribution of paper products, packaging and facility supplies through its paper products distribution business, Unisource Worldwide, Inc. (“Unisource”). Effective November 2, 2002, the Corporation sold a 60 percent controlling interest in Unisource to an affiliate of Bain Capital, LLC (see Note 3). Prior to October 6, 2001, the Corporation also engaged in the growing of timber on approximately 4.7 million acres of timberlands that the Corporation owned or leased. These timberlands supply approximately 10% of the overall timber requirements of the Corporation’s manufacturing facilities. On October 6, 2001, the Corporation completed the spin off of The Timber Company and its merger with and into Plum Creek Timber Company, Inc. (“Plum Creek”) (see Note 3).

Basis of Presentation

On December 16, 1997, shareholders of the Corporation approved the creation of two classes of common stock intended to reflect separately the performance of the Corporation’s manufacturing and former timber businesses (the “Letter Stock Recapitalization”). The Corporation’s Articles of Incorporation were amended and restated to (i) create a new class of stock designated as Georgia-Pacific Corporation—Timber Group common stock, $0.80 par value per share (“The Timber Company stock”), consisting of 250 million authorized shares; (ii) redesignate each authorized share of the Corporation’s common stock, $0.80 par value per share (the Existing Common Stock) as, and convert each share into, one share of Georgia-Pacific Corporation—Georgia-Pacific Group common stock (now two shares of Georgia-Pacific Group common stock after giving effect to the May 14, 1999 two-for-one stock split), $0.80 par value per share (“Georgia-Pacific Group stock”); (iii) increase the number of shares of Georgia-Pacific Group stock authorized for issuance from 150 million shares to 400 million shares; and (iv) authorize the distribution of one share of The Timber Company stock for each outstanding share of Georgia-Pacific Group stock.

The Corporation’s manufacturing and former timber businesses are referred to herein as the “Georgia-Pacific Group” and “The Timber Company,” respectively, or collectively as the “groups.”

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation and its wholly owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. The equity method of accounting is used for investments in companies where the Corporation has a 20% to 50% ownership interest. These investments are accounted for under the equity method of accounting because the Corporation does not exercise control over the companies, nor does the Corporation have substantive participating rights. The equity method of accounting is also used in instances where the Corporation may have an ownership interest greater than 50% and the investing partner has substantive participating rights. Certain of the Corporation’s equity investments are reported on a lag of one to three months to allow adequate time to compile their results.

GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Effective November 2, 2002, the Corporation completed the sale of a controlling 60 percent interest in its Unisource paper distribution business (see Note 3). The results of Unisource are reported in the paper distribution segment prior to the sale. The Corporation’s 40 percent interest in Unisource subsequent to the sale is accounted for under the equity method and is included in the bleached pulp and paper segment.

Revenue Recognition

The Corporation recognizes revenue when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the Corporation’s price to the buyer is fixed and determinable, and collectibility is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership. The timing of revenue recognition is largely dependent on shipping terms. Revenue is recorded at the time of shipment for terms designated at f.o.b. (free on board) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer’s delivery site. The Corporation does not recognize revenue from bill and hold transactions until the product is delivered to the customer’s delivery site (for sales with terms of f.o.b. destination) or until the product is shipped to the customer (for sales with terms of f.o.b. shipping point). Discounts and allowances are comprised of trade allowances, cash discounts and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience.

Foreign Currency Translation

The functional currency for most international subsidiaries is the local currency for the country in which the subsidiaries own their primary assets. The translation of the applicable currencies into United States dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Any related translation adjustments are recorded directly in other comprehensive income. Foreign currency transaction gains (losses) are reflected in the Consolidated Statements of Operations and were $9.6 million, nil and $(4.5) million in 2002, 2001, and 2000, respectively.

Other losses, net

The following amounts are included in Other losses, net:

	2002		2001			2000
In millions
Asset impairments:
Unisource (see Note 4)	$	208	$	–		$	–
Sale of Georgia-Pacific Tissue to SCA (see Note 3)		–		–			204
Gypsum (see Note 4)		–		57			6
Bellingham (see Note 4)		–		57			–
Kalamazoo		–		–			19
Other		22		14			–
Charge for asbestos liabilities, net of insurance recovery		315		350			–
Loss (gain) on asset sales:
Sale of 60% interest in Unisource (see Note 3)		298		–			–
Sale of paper and pulp assets to Domtar Inc. (see Note 3)		–		63			–
Other		27		(26	)		(27	)

Other losses, net	$	870	$	515		$	202

GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Loss) Income Per Share

Basic (loss) income per share are computed based on net income and the weighted average number of common shares outstanding. Diluted earnings per share reflect the assumed issuance of common shares under long-term incentive, stock option and stock purchase plans, and pursuant to the terms of the Premium Equity Participating Security Units (“PEPS Units”) (see Note 7). The computation of diluted earnings per share does not assume conversion or exercise of securities that would have an antidilutive effect on earnings per share. Amounts are computed for each class of common stock based on the separate earnings attributed to each of the respective businesses.

(Loss) Income Per Share

	Georgia-Pacific Group Fiscal Year Ended
	2002			2001			2000
In millions, except shares and per share amounts
Basic and diluted income available to Shareholders (numerator):
(Loss) income from continuing operations	$	(190	)	$	(476	)	$	343
Extraordinary loss from early retirement of debt, net of taxes		–			(12	)		–
Cumulative effect of accounting changes, net of taxes		(545	)		11			–

Net (loss) income	$	(735	)	$	(477	)	$	343

Shares (denominator):
Weighted average shares outstanding		237,639,025			227,590,185			175,835,279
Dilutive securities:
Options		–	*		–	**		872,380	***
Employee stock purchase plans		–			–			191,945

Total assuming conversion		237,639,025			227,590,185			176,899,604


				The Timber Company Fiscal Year Ended
				2001			2000
In millions, except shares and per share amounts
Basic and diluted income available to Shareholders (numerator):
Income from discontinued operations, net of taxes				$	70		$	162

Shares (denominator):
Weighted average shares outstanding					80,960,667			80,705,171
Dilutive securities:
Options					785,449			408,905
Employee stock purchase plans					–			1,936

Total assuming conversion					81,746,116			81,116,012

Options to purchase 22,205,895 shares of Georgia-Pacific Group stock at prices ranging from $9.59 to $91.58 per share were outstanding during 2002. However, these were not included in the computation of diluted earnings per share because the Corporation reported a loss for the year and inclusion of such shares would have had an antidilutive effect.

Options to purchase 20,151,717 shares of Georgia-Pacific Group stock at prices ranging from $9.59 to $91.58 per share were outstanding during 2001, as were PEPS Units to purchase Georgia-Pacific Group stock. However, these were not included in the computation of diluted earnings per share because the Corporation reported a loss for the year and inclusion of such shares would have had an antidilutive effect.

***

Options to purchase 5,474,098 shares of Georgia-Pacific Group stock at prices ranging from $31.57 to $91.58 per share were outstanding during 2000, as were PEPS Units to purchase Georgia-Pacific Group stock. However, these were not included in the computation of diluted earnings per share because the options’ exercise price and the PEPS Unit purchase contract price were greater than the average market price of the common shares.

GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation

The Corporation has elected to continue to account for its stock-based compensation plans under APB Opinion No. 25 and disclose pro forma effects of the plans on net income and earnings per share as provided by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). Accordingly, because the fair market value on the date of grant was equal to the exercise price, no compensation cost has been recognized. Had compensation cost for these plans been determined based on the fair value at the grant dates in 2002, 2001 or 2000 under the plan consistent with the method of SFAS No. 123, the pro forma net income and earnings per share would have been as follows:

	Fiscal Year Ended
	2002			2001			2000
In millions, except per share amounts
Georgia-Pacific Corporation
Net (loss) income as reported	$	(735	)	$	(407	)	$	505
Less total stock-based employee compensation expense determined under the fair value based method, net of taxes		(25	)		(32	)		(38	)

Pro forma net income		(760	)		(439	)		467

Stock-based employee compensation cost, net of taxes, included in the determination of net income as reported		1			1			1

Georgia-Pacific Group
Net (loss) income as reported		(735	)		(477	)		343
Less total stock-based employee compensation expense determined under the fair value based method, net of taxes		(25	)		(30	)		(35	)

Pro forma net income		(760	)		(507	)		308

Net (loss) income per share*
As reported		(3.09	)		(2.10	)