UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2003

OR

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

Commission file number 1-10239

PLUM CREEK TIMBER COMPANY, INC.
(Exact name of registrant as specified in its charter)

999 Third Avenue, Seattle, Washington 98104-4096 Telephone: (206) 467-3600

Organized in the State of Delaware         I.R.S. Employer Identification No. 91-1912863

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 Exchange Act).
Yes [ X ] No [  ]

The number of outstanding shares of the registrant’s common stock as of October 24, 2003 was 182,994,952.

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1. Basis of Presentation

When we refer to “Plum Creek”, “the company”, “we”, “us” or “our” we mean Plum Creek Timber Company, Inc., a Delaware corporation and a real estate investment trust, or REIT, and all of its wholly owned consolidated subsidiaries.

The consolidated financial statements include all of the accounts of Plum Creek.  At September 30, 2003, the company owned and managed approximately 8 million acres of timberlands in the Northwest, Southern and Northeast United States, and owned and operated ten wood product conversion facilities in the Northwest United States. The company estimates that approximately 400,000 acres of its 8 million acres of timberlands are located in recreational areas or near expanding population centers and may be better suited for conservation, residential or recreational purposes, rather than for long-term commercial timber management. Furthermore, the company estimates that an additional 900,000 acres may also be suited for conservation, residential or recreational development.

Plum Creek has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code, and as such, is generally not subject to corporate-level income tax. However, the company conducts certain non-REIT activities through various taxable REIT subsidiaries, which are subject to corporate-level income tax. These activities include our manufacturing operations, the harvesting and selling of logs, and sales of some of our higher and better use lands. As a result, the effective tax rate is lower than the federal statutory rate due to the exclusion of the REIT income.

All significant intercompany transactions have been eliminated in consolidation of the financial statements. All transactions are denominated in United States dollars.

The financial statements included in this Form 10-Q are unaudited and do not contain all of the information required by accounting principles generally accepted in the United States of America to be included in a full set of financial statements. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The audited financial statements in the company’s 2002 annual report on Form 10-K include a summary of significant accounting policies of the company and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included. All such adjustments are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. Statement 149 amends Statement 133 as a result of decisions previously made as part of the Derivatives Implementation Group process, changes made in connection with other FASB projects dealing with financial instruments, and deliberations in connection with issues raised in relation to the application of the definition of a derivative. Except for certain provisions that merely represent the codification of previous Derivatives Implementation Group decisions, which were effective immediately, the Statement is effective for contracts entered into or modified after September 30, 2003, and hedging relationships designated after September 30, 2003. Management does not expect that adoption of this standard will have a material impact on the company’s financial condition, results of operations or cash flows.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Statement 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. Management does not expect that adoption of this standard will have a material impact on the company’s financial condition, results of operations or cash flows.

During each of the first three quarters of 2003, dividends of $0.35 per share were declared and paid, compared to dividends of $0.57 per share during the second and third quarter of 2002. No dividend was declared during the first quarter of 2002. Instead, the dividend that would have been declared in January 2002 was accelerated to December 2001 due to certain REIT requirements in connection with our October 6, 2001 merger with The Timber Company.

Note 2. Timber and Timberlands, Property, Plant and Equipment, and Inventory

Timber and timberlands consisted of the following (in millions):

During the first quarter of 2003, the company agreed to sell approximately 29,000 acres of non-strategic timberlands for $13 million. This transaction closed in the second quarter of 2003. The timberlands had a book basis of $22 million, and the company recorded an impairment of $9 million in the first quarter of 2003. The timberlands possessed a timber age profile younger than the average for the company’s Rockies Region, had limited real estate potential, and were the furthest west from the company’s manufacturing facilities.

During the third quarter of 2003, Plum Creek acquired 38,000 acres of forestlands in Arkansas and 33,000 acres in New Hampshire for approximately $58 million. The timberlands contain both softwood and mixed hardwood stands. The purchases were financed primarily using borrowings under existing lines of credit and $24 million of funds from tax-deferred exchange transactions.

During the third quarter of 2003, a loss of $4 million was recorded in the Northern Resources Segment as a result of forest fires on approximately 45,000 acres in Montana. The $4 million loss represents the book basis of the timber volume destroyed by fire.

Property, plant and equipment consisted of the following (in millions):

Inventories, accounted for using the lower of average cost or market, consisted of the following (in millions):

Note 3. Borrowings

Our lines of credit consist of a $600 million revolving line of credit maturing September 30, 2005, and a $150 million 364-day revolving line of credit maturing on November 25, 2003. Subject to customary covenants, the line of credit maturing in 2005 allows for borrowings from time to time up to $600 million, including up to $50 million of standby letters of credit. Borrowings on the lines of credit fluctuate daily based on cash needs. At September 30, 2003, we had $491 million of borrowings and $5 million of standby letters of credit outstanding under our line of credit maturing in 2005; there were no borrowings under the 364-day revolving line of credit. The company has elected not to renew the $150 million line of credit. As of September 30, 2003, $104 million remained available for borrowing under our $600 million line of credit. On October 1, 2003, $258 million of the borrowings under our lines of credit was repaid.

On January 22, 2003, the company issued $300 million of senior notes maturing serially in 2008 to 2013 consisting of the following (in millions):

The proceeds from the issuance of these notes were used to repay a portion of the outstanding borrowings under the lines of credit and for general business funding purposes.

Note 4. Earnings Per Share

The following table sets forth the reconciliation of basic and diluted earnings per share for the quarters ended September 30 (in millions, except per share amounts):

183

.7

185

The following table sets forth the reconciliation of basic and diluted earnings per share for the nine months ended September 30 (in millions, except per share amounts):

184

.0

185

Options to purchase 0.5 million shares of common stock at exercise prices of $29.70 to $30.70 per share were outstanding during the third quarter of 2003 and the third quarter and nine months ended September 30, 2002, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.  For the nine months ended September 30, 2003, antidilutive options for 1.1 million shares with exercise prices of $24.95 to $30.70 were excluded for certain quarters from the computation of diluted earnings per share. The antidilutive options expire on or before January 2, 2013.

Note 5. Capital

The changes in the company’s capital accounts for the quarter andnine months ended September 30, 2003 are as follows (in millions):

Note 6. Segment Information

The table below presents information about reported segments for the quarters ended September 30 (in millions):

The table below presents information about reported segments for the nine months ended September 30 (in millions):

A reconciliation of total operating income to income before income taxes for the quarters ended September 30 is presented below (in millions):

A reconciliation of total operating income to income before income taxes for the nine months ended September 30 is presented below (in millions):

Note 7. Stock-Based Compensation

During 2002, the company adopted the fair value recognition provisions of FASB Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, for stock-based employee compensation, effective as of January 1, 2002. Under the prospective method of adoption selected by the company, stock-based employee compensation cost was recognized in accordance with the fair value recognition provisions of Statement 123 for all employee awards granted, modified, or settled on or after January 1, 2002.

The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding unvested awards in the quarters and nine-month periods ended September 30 (in millions, except per share amounts):

In 2003, the company granted stock options for 474,250 shares. Option recipients have the right to purchase the company’s common stock at the fair market value of the company’s stock as of the date of the grant. The options have an average exercise price of $21.95 per share and a ten-year term. Options vest over a four-year period at a rate of 25% per year. The fair value of the 2003 grants was calculated using the Black-Scholes option valuation model. The grant date fair value of the 2003 grants is $3.27 per option. The expected life of the options is 7 years. Other assumptions used to calculate the fair value include a risk-free interest rate of 3.6%, expected volatility of 29% and a dividend yield of 6.4%.

Note 8. Subsequent Events

On October 28, 2003, the board of directors authorized the company to make a dividend payment of $0.35 per share, or approximately $64 million, which will be paid on November 26, 2003 to stockholders of record on November 13, 2003.

In October 2003, Plum Creek acquired 68,000 acres of timberlands located in South Carolina for approximately $104 million, which was financed primarily using borrowings under existing lines of credit. The timberlands are dominated by merchantable loblolly pine plantations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

References to “Plum Creek”, “the company”, “we”, “us” or “our” are references to Plum Creek Timber Company, Inc., a Delaware corporation and a real estate investment trust, or REIT, for federal income tax purposes, and all of its wholly owned subsidiaries.

This Report contains forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as “believes”, “expects”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, “projects”, “strategy” or “anticipates” or the negative of those words or other comparable terminology. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those described in the forward-looking statements. Some factors include changes in governmental, legislative and environmental restrictions, catastrophic losses from fires, floods, windstorms, earthquakes, volcanic eruptions, insect infestations or diseases, as well as changes in economic conditions and competition in our domestic and export markets and other factors described from time to time in our filings with the Securities and Exchange Commission. In addition, factors that could cause our actual results to differ from those contemplated by our projected, forecasted, estimated or budgeted results as reflected in forward-looking statements relating to our operations and business include, but are not limited to:

It is likely that if one or more of the risks materialize, or if one or more assumptions prove to be incorrect, the current expectations of Plum Creek and its management will not be realized. Forward-looking statements speak only as of the date made, and neither Plum Creek nor its management undertakes any obligation to update or revise any forward-looking statement.

The following discussion and analysis should be read in conjunction with the financial information and analysis included in our 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2003.

Critical Accounting Policies

Impairment of Long-Lived Assets

General.     The company evaluates its ability to recover its net investment in long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 requires recognition of an impairment loss in connection with long-lived assets used in a business when the carrying value (net book value) of such assets exceeds the estimated future undiscounted cash flows attributable to such assets over their expected useful life. Impairment losses are measured by the extent to which the carrying value of a group of assets exceeds the fair value of such assets at a given point in time. When the fair values of the assets are not available, the company estimates the fair values by using the discounted expected future cash flows attributable to the assets. The cash flows are discounted at a rate commensurate with the risks associated with the recovery of the assets’ carrying value. Furthermore, SFAS 144 requires recognition of an impairment loss in connection with long-lived assets held for sale when the carrying value of such assets exceeds an amount equal to their fair value less selling costs.

The company has grown substantially through acquisitions in recent years. A large portion of the carrying value of the company’s Timber and Timberlands, and Property, Plant and Equipment represents amounts of the purchase price of recent acquisitions allocated to those assets. The allocation of the purchase price in a business combination is highly subjective. Management is required to estimate the fair values of acquired assets and liabilities as of the acquisition date. Subsequent to the original allocation, these assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable through future operations. SFAS 144 requires that long-lived assets be grouped and evaluated for impairment at the lowest level for which there are independent cash flows. The company tracks cash flows for its eight million acres of timberlands by grouping them into 10 geographic areas in the Northern Resources Segment and 13 geographic areas in the Southern Resources Segment. Additionally, the company tracks cash flows for each of its 10 manufacturing facilities.

Timber and Timberlands Used in Our Business. SFAS 144 provides that for assets used in a business, an impairment loss is recorded only when the carrying value of such assets is not recoverable through future operations. The recoverability test is based on undiscounted future cash flows over the expected life of the assets. The company uses one harvest cycle (which ranges between 20 and 90 years) for evaluating the recoverability of its timber and timberlands. As a result of the inherently long life of timber and timberlands, management does not expect to incur an impairment loss in the future for the timber and timberlands used in its business.

Timber and Timberlands Held for Sale. SFAS 144 provides that an impairment loss is recognized for long-lived assets held for sale when the carrying value of such asset exceeds an amount equal to its fair value less selling costs. An asset is generally considered to be held for sale when management has committed to a plan to sell the asset, the asset is available for immediate sale in its present condition, management has initiated an active program to locate a buyer, and the sale is expected to close within one year. Each of the foregoing occurred during the first quarter of 2003 in connection with approximately 29,000 acres of non-strategic timberlands that were sold during the second quarter of 2003. As a result, we recorded an impairment loss of $9 million during the first quarter of 2003. We expect to continue to sell or exchange non-strategic timberlands to other forest products companies or non-industrial investors, and it is possible that we will recognize, in accordance with SFAS 144, additional impairment losses in the future in connection with sales of non-strategic timberlands.

Property, Plant and Equipment. The carrying value of Property, Plant and Equipment represents primarily the net book value of our ten manufacturing facilities. Each manufacturing facility is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable through future operations. The estimated future cash flows over the remaining useful live of a manufacturing facility is highly subjective and is dependent upon estimates for future product pricing, raw material costs, volumes of product sold, and residual value of the facility. Management currently estimates that the carrying value for each of its manufacturing facilities is recoverable through future operations and that its estimate of future cash flows is reasonable. However, wood product prices have been at depressed levels over the past year. If product prices remain depressed for an extended period of time, or if other key cash flow assumptions are revised in the future, the company may be required to record an impairment loss for one or more of its manufacturing facilities in a future period.

Other Critical Accounting Policies. For a discussion of the company’s other critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2002 Form 10-K.

Results of Operations

Third Quarter 2003 Compared to Third Quarter 2002

The following table and narrative compares operating results by segment for the quarters ended September 30 (in millions):

Northern Resources Segment. Revenues decreased by $24 million, or 26%, to $68 million in 2003. This decrease was due primarily to a 37% decrease in softwood sawlog sales volume as a result of one of the worst fire season in Montana in decades.

Northern Resources Segment operating income was 21% of its revenues for 2003 and 25% for 2002. This decrease was due primarily to a $4 million fire loss recorded in third quarter as a result of forest fires on approximately 45,000 acres in Montana. The $4 million loss represents the book basis of the timber volume destroyed by fire. Segment costs and expenses decreased by $15 million, or 22%, to $54 million in 2003 due primarily to fire-related harvesting curtailments, offset in part by the $4 million fire loss.

Southern Resources Segment. Revenues decreased by $3 million, or 3%, to $107 million in 2003. This decrease of $3 million was due primarily to lower softwood sawlog prices ($7 million) and lower harvest volumes ($4 million), offset in part by a higher percentage of delivered log sales compared to sales of standing timber ($6 million).

Softwood sawlog prices decreased by 11% due primarily to lower demand as a result of weak lumber markets during the first six months of 2003 and mill curtailments. Sales volume decreased by 7% due to a planned annual reduction in harvest levels. The harvest volume in the Southern Resources Segment for all of 2003 is expected to be approximately 5% lower than the 13.8 million tons that were harvested during the same period in 2002.

Revenues increased by $6 million due to the company’s increased percentage of delivered logs. The company has increased its percentage of delivered log sales by decreasing its percentage of sales of standing timber. Under its delivered log sale agreements, the company is responsible for log and haul costs. When standing timber is sold the buyer incurs the log and haul costs. While revenues are higher when the company is responsible for the logging and hauling of timber, costs of sales generally increase by a similar amount. As a result, the company realizes lower operating income as a percentage of revenue, although operating income is not generally affected.

Southern Resources Segment operating income was 47% of its revenues for 2003 and 52% for 2002. This decrease was due primarily to lower softwood sawlog prices and the increased percentage of delivered log sales. Southern Resources Segment costs and expenses increased by $4 million, or 8%, to $57 million in 2003. This increase of $4 million was due primarily to an increase in log and haul costs as a result of a higher percentage of delivered log sales compared to sales of standing timber.

Real Estate Segment. Revenues decreased by $10 million, or 26%, to $28 million in 2003. This decrease of $10 million was due primarily to the timing of real estate sales and the sale of conservation easements. The timing of real estate transactions is a function of many factors, including the availability of government and not-for-profit funding, the general state of the economy, the plans of adjacent landowners, the company’s expectation of future price appreciation, and the timing of harvesting activities.

Real Estate Segment operating income was 64% of its third quarter revenues for 2003, compared to 71% for 2002. This decrease was due primarily to fewer conservation easement sales and the sale of timberlands with a higher per acre cost basis. During the third quarter of 2003, the company had operating income from the sale of conservation easements of $6 million compared to operating income of $12 million for the third quarter of 2002. Generally, there is no book basis allocated to the sale of conservation easements. Real Estate Segment costs and expenses for the third quarter decreased by $1 million, or 9%, to $10 million.

Manufactured Products Segment. Revenues for both the third quarter of 2003 and the third quarter of 2002 were $101 million. While overall revenues remained unchanged, MDF and plywood revenues both increased by $2 million due primarily to improved prices, whereas lumber revenues decreased by $4 million due primarily to lower sales volume as a result of fire-related log shortages.

Manufacturing Products Segment operating loss was $2 million for the quarter ended September 30, 2003, compared to operating income of $3 million for the third quarter of 2002. The decrease in operating performance was due primarily to higher MDF and lumber costs. Manufactured Products Segment costs and expenses increased by $5 million, or 5%, to $103 million in the third quarter of 2003. This increase in costs was due primarily to higher MDF resin, raw material and maintenance costs, and higher lumber raw material costs.

Other Costs and Eliminations. Other Costs and Eliminations, which consists of corporate overhead and intercompany profit elimination, decreased operating income by $10 million in 2003, compared to a decrease of $14 million in 2002. This change of $4 million was due primarily to the release of $1 million of intercompany profit during the third quarter of 2003 compared to the deferral of $3 million of intercompany profit during the third quarter of 2002. Profit on intercompany log sales is deferred until the lumber and plywood manufacturing facilities convert existing log inventories into finished products and sell them to third parties. The $4 million intercompany profit change is due primarily to extremely low log inventories during the third quarter of 2003 as a result of fire-related harvesting curtailments in Montana.

Interest Expense. Net interest expense increased by $4 million, or 16%, to $29 million for 2003. This increase was due primarily to a higher debt level during the third quarter of 2003 as a result of the acquisition of 307,000 acres of timberlands located in Wisconsin during December 2002 for approximately $141 million and the purchase of 2 million shares of Treasury Stock during the first quarter of 2003 for $43 million.

Provision for Income Taxes. The provision for income taxes was a $2 million benefit for the third quarter of 2003, compared to a $2 million expense for the third quarter of 2002. This change of $4 million was due primarily to the $5 million decline in operating performance for the Manufactured Products Segment and lower operating income from sales of higher and better use lands through our taxable REIT subsidiaries during the third quarter of 2003. Plum Creek has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code, and as such, is generally not subject to corporate-level income tax. However, the company conducts certain non-REIT activities through various taxable REIT subsidiaries, which are subject to corporate-level income tax. These activities include our manufacturing operations, the harvesting and selling of logs, and sales of some of our higher and better use lands.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

The following table and narrative compares operating results by segment for the nine months ended September 30 (in millions):

Northern Resources Segment. Revenues decreased by $15 million, or 7%, to $212 million in 2003. This decrease was due primarily to a 14% decrease in softwood sawlog sales volume as a result of one of the worst fire season in Montana in decades, offset in part by harvesting from timberlands in Wisconsin that were acquired during December 2002. Sales volume from timberlands in Wisconsin that were acquired in December 2002 increased revenues by $11 million.

Northern Resources Segment operating income was 25% of its revenues for 2003 and 24% for 2002. Segment costs and expenses decreased by $13 million, or 8%, to $160 million in 2003 due primarily to fire-related harvesting curtailments and lower depletion rates, offset in part by harvesting of timberlands in Wisconsin that were acquired during December 2002 and a $4 million fire loss. Costs associated with the timberland operations in Wisconsin that were acquired in December 2002 were $8 million for the nine months ended September 30, 2003. During the third quarter of 2003, we recorded a $4 million fire loss as a result of forest fires on approximately 45,000 acres in Montana. The $4 million loss represents the book basis of the timber volume destroyed by fire.

Southern Resources Segment. Revenues decreased by $3 million, or 1%, to $318 million in 2003. This decrease of $3 million was due primarily to lower softwood sawlog prices ($15 million) and lower harvest volumes ($12 million), offset in part by a higher percentage of delivered log sales compared to sales of standing timber ($22 million).

Softwood sawlog prices decreased by 10% due primarily to lower demand as a result of weak lumber markets during the first six months of 2003 and mill curtailments. Sales volume decreased by 6% due to a planned annual reduction in harvest levels. The harvest volume in the Southern Resources Segment for all of 2003 is expected to be approximately 5% lower than the 13.8 million tons that were harvested during the same period in 2002.

Revenues increased by $22 million due to the company’s increased percentage of delivered logs. The company has increased its percentage of delivered log sales by decreasing its percentage of sales of standing timber. Under its delivered log sale agreements, the company is responsible for log and haul costs. When standing timber is sold the buyer incurs the log and haul costs. While revenues are higher when the company is responsible for the logging and hauling of timber, costs of sales generally increase by a similar amount. As a result, the company realizes lower operating income as a percentage of revenue, although operating income is not generally affected.

Southern Resources Segment operating income was 48% of its revenues for 2003 and 55% for 2002. This decrease was due primarily to lower softwood sawlog prices and the increased percentage of delivered log sales. Southern Resources Segment costs and expenses increased by $19 million, or 13%, to $164 million in 2003. This increase of $19 million was due primarily to an increase in log and haul costs as a result of a higher percentage of delivered log sales compared to sales of standing timber.

Real Estate Segment. Revenues increased by $29 million, or 37%, to $108 million in 2003. This increase of $29 million was due primarily to the timing of real estate sales, conservation easement sales and the sale of non-strategic timberlands. The timing of real estate transactions is a function of many factors, including the availability of government and not-for-profit funding, the general state of the economy, the plans of adjacent landowners, the company’s expectation of future price appreciation, and the timing of harvesting activities. During the second quarter of 2003, approximately 29,000 acres of non-strategic timberland were sold for $13 million. See Note 2 of the Notes to Financial Statements.

Real Estate Segment operating income was 40% of its revenues for 2003 compared to 63% for 2002. This decrease was due primarily to the sale of timberlands with a higher per acre cost basis, fewer conservation easement sales and the sale of non-strategic timberlands. Real Estate Segment costs and expenses increased by $36 million, or 124%, to $65 million. This increase is due primarily to an increase in the acres of higher and better use real estate sales, the sale of 29,000 acres of non-strategic timberlands, and a greater percentage of high basis timberland sales. Plum Creek’s historic timberlands, which for accounting purposes were deemed to have been acquired in connection with the October 6, 2001 Timber Company merger, have a significantly higher per acre cost basis than The Timber Company’s historic timberlands.

Manufactured Products Segment. Revenues increased slightly to $292 million in 2003 compared to $291 million in 2002. This increase of $1 million was due primarily to higher MDF sales volume and prices ($12 million) and higher plywood sales prices ($2 million), offset in part by lower lumber prices ($13 million). MDF sales volume increased 10% and sales prices increased 9% due primarily to our new thin-board mill, which began operations during the fourth quarter of 2001 and was in a start-up phase during most of 2002. Lumber prices decreased 10% due primarily to an excess supply of boards as a result of log salvage operations from 2002 forest fires and excess production capacity for stud and dimension lumber throughout North America.

Manufactured Products Segment operating loss was $11 million for the nine months ended September 30, 2003, compared to operating income of $6 million for the same period in 2002. The decrease in operating performance was due primarily to lower lumber prices and higher MDF costs. Manufactured Products Segment costs and expenses increased by $18 million, or 6%, to $303 million in the nine months ended September 30, 2003. This increase in costs was due primarily to higher MDF sales volumes and higher MDF resin and maintenance costs.

Other Costs and Eliminations. Other Costs and Eliminations, which consists of corporate overhead and intercompany profit elimination, decreased operating income by $28 million in 2003, compared to a decrease of $27 million in 2002. This change of $1 million was due primarily to an increase of $2 million in corporate expenses offset by $1 million more of intercompany profit being released in 2003. Profit on intercompany log sales is deferred until the lumber and plywood manufacturing facilities convert existing log inventories into finished products and sell them to third parties. The $1 million intercompany profit change is due primarily to extremely low log inventories during the third quarter of 2003 as a result of fire-related harvesting curtailments in Montana.

Interest Expense. Net interest expense increased by $9 million, or 12%, to $86 million for 2003. This increase was due primarily to a higher debt level during the first nine months of 2003 as a result of the acquisition of 307,000 acres of timberlands located in Wisconsin during December 2002 for approximately $141 million and the purchase of 2 million shares of Treasury Stock during the first quarter of 2003 for $43 million.

Provision for Income Taxes. The provision for income taxes was a $7 million benefit for the first nine months of 2003, compared to a $7 million expense for the first nine months of 2002. This change of $14 million was due primarily to the $17 million decline in operating performance for the Manufactured Products Segment and lower sales of higher and better use lands through our taxable REIT subsidiaries during the first nine months of 2003. Plum Creek has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code, and as such, is generally not subject to corporate-level income tax. However, the company conducts certain non-REIT activities through various taxable REIT subsidiaries, which are subject to corporate-level income tax. These activities include our manufacturing operations, the harvesting and selling of logs, and sales of some of our higher and better use lands.

Financial Condition and Liquidity

Net cash provided by operating activities totaled $299 million for the first nine months of 2003, compared to $306 million for the same period of 2002. The decrease of $7 million was due primarily to lower income before income taxes ($57 million), offset in part by higher basis of real estate sold ($33 million) and a temporary decline in working capital ($20 million). The temporary decline in working capital was due primarily to lower inventories and accounts receivable at September 30, 2003 as a result of the fire-related production curtailments at our manufacturing facilities.

During the first, second and third quarters of 2003, dividends of $0.35 per share were declared and paid, compared to dividends of $0.57 per share during the second and third quarter of 2002. No dividend was declared during the first quarter of 2002. Instead, the dividend that would have been declared in January 2002 was accelerated to December 2001 due to certain REIT requirements in connection with our October 6, 2001 merger with The Timber Company.

During the nine months ended September 30, 2003 the company purchased 71,000 acres of timberlands in Arkansas and New Hampshire for $58 million. The purchases were financed primarily using borrowings under existing lines of credit and $24 million of funds from tax-deferred exchange transactions. In October 2003, Plum Creek acquired 68,000 acres of timberlands located in South Carolina for approximately $104 million, which was financed primarily using borrowings under existing lines of credit. The timberlands were acquired through a qualified tax-deferred exchange transaction that will allow future sales of properties of up to $104 million to qualify as like-kind exchanges.

On October 17, 2002, our Board of Directors authorized the company to repurchase up to $200 million of the company’s common stock. As of September 30, 2003, the company had repurchased approximately 2 million shares of common stock for a total cost of $43 million at an average price of $21.53 per share.

Borrowings on the lines of credit fluctuate daily based on cash needs. Subject to customary covenants, the lines of credit allow for borrowings from time to time up to $750 million, including up to $50 million of standby letters of credit. At September 30, 2003, our lines of credit were comprised of a $600 million revolving line of credit maturing on September 30, 2005 and a $150 million 364-day revolving line of credit maturing on November 25, 2003. The company has elected not to renew the $150 million line of credit. The rates for both revolving lines of credit as of September 31, 2003 were based on LIBOR plus 1.75%, which includes facility fees. Interest rates for both revolving lines are based on a series of borrowings with maturities that can range from one week to six months.

At September 30, 2003, we had $491 million of borrowings and $5 million of standby letters of credit outstanding under our line of credit maturing in 2005; there were no borrowings under the 364-day revolving line of credit. As of September 30, 2003, $104 million remained available for borrowing under our $600 million line of credit. On October 1, 2003, $258 million of the borrowings under our lines of credit was repaid and the interest rate was based on LIBOR plus 1.5%, including facility fees.

On January 22, 2003, the company issued $300 million of senior notes maturing serially in 2008 to 2013 consisting of the following (in millions):

The proceeds from the issuance of these notes were used to repay a portion of the outstanding borrowings under the lines of credit and for general business funding purposes.

Our borrowing agreements contain various restrictive covenants, including limitations on harvest levels, sales of assets, the incurrence of indebtedness and making restricted payments (such as payments of cash dividends or stock repurchases). Our borrowing agreements limit our ability to make restricted payments based on available cash, which is generally our net income after adjusting for non-cash charges (such as depreciation and depletion), changes in various reserves less capital expenditures and principal payments on indebtedness that are not financed. In addition, our lines of credit require that we maintain an interest coverage ratio and maximum leverage ratio. We were in compliance with all of our borrowing agreement covenants as of September 30, 2003.

Cash required to meet our financial needs will be significant. We believe, however, that cash on hand, cash flows from continuing operations and borrowings under our line of credit will be sufficient to fund planned capital expenditures, and interest and principal payments on our indebtedness for the next year.

On October 28, 2003, our board of directors declared a dividend of $0.35 per share, or approximately $64 million, which will be paid on November 26, 2003 to stockholders of record on November 13, 2003. Future dividends will be determined by our board of directors, in its sole discretion, based on consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, debt covenant restrictions that may impose limitations on the company’s ability to make cash payments, borrowing capacity, changes in the price and demand for Plum Creek’s products and the general market for timberlands and those timberland properties that have higher and better uses. Other factors that our board of directors considers include the appropriate timing of timber harvests, acquisition and divestiture opportunities, stock repurchases, debt repayment and other means by which the company could deliver value to its stockholders.

Capital expenditures, excluding the acquisition of timberlands, for the nine months ended September 30, 2003 were $60 million compared to $73 million for the same period in 2002. During the nine months ended September 30, 2003, we acquired 71,000 acres of timberlands in Arkansas and New Hampshire for $58 million. Planned capital expenditures for 2003, excluding the acquisition of timberlands, are expected to be approximately $90 million and include approximately $57 million for our timberlands, $15 million for the development of our coalbed methane assets and $6 million for our manufacturing facilities. The $57 million for our timberlands is primarily for reforestation and other expenditures associated with the planting and growing of trees. Additionally, in October 2003 we acquired 68,000 acres of forestlands located in South Carolina for $104 million. The purchase of timberlands in South Carolina was financed using existing lines of credit.

Risk Factors

Business and Operating Risks

      The Cyclical Nature of Our Business Could Adversely Affect Our Results of Operations

Our results of operations are affected by the cyclical nature of the forest products industry. Historical prices for logs and manufactured wood products have been volatile, and we, like other participants in the forest products industry, have limited direct influence over the time and extent of price changes for logs and wood products. The demand for logs and wood products is primarily affected by the level of new residential construction activity and, to a lesser extent, repair and remodeling activity and other industrial uses. The demand for logs is also affected by the demand for wood chips in the pulp and paper markets. These activities are, in turn, subject to fluctuations due to, among other factors:

Decreases in the level of residential construction activity generally reduce demand for logs and wood products. This results in lower revenues, profits and cash flows. In addition, industry-wide increases in the supply of logs and wood products during favorable price environments can also lead to downward pressure on prices. Timber owners generally increase production volumes for logs and wood products during favorable price environments. Such increased production, however, when coupled with even modest declines in demand for these products in general, could lead to oversupply and lower prices.

Our results of operations may also be subject to global economic changes as global supplies of wood fiber shift in response to changing economic conditions. Changes in global economic conditions that could affect our results of operations include, but are not limited to, new timber supply sources and changes in currency exchange rates, foreign and domestic interest rates and foreign and domestic trade policies.

In addition, the market for and ability to sell or exchange non-strategic timberlands and timberland properties that have higher and better uses could have a significant effect on our results of operations.

The following factors, among others, may adversely affect the timing and amount of income generated by our real estate activities:

      The Forest Products Industry is Highly Competitive

The forest products industry is highly competitive in terms of price and quality. Wood products are subject to increasing competition from a variety of substitute products, including non-wood and engineered wood products. For example, plywood markets are subject to competition from oriented strand board, and U.S. lumber and log markets are subject to competition from other worldwide suppliers.

Historically, Canada has been a significant source of lumber for the U.S. market, particularly in the new home construction market. This source of lumber was constrained in April 1996 when a five-year lumber trade agreement between the U.S. and Canada went into effect. The trade agreement was intended to limit the volume of Canadian lumber exported into the U.S. through the assessment of an export tariff on annual lumber exports to the U.S. in excess of certain levels from the four major producing Canadian provinces.

The trade agreement expired in March 2001, and soon thereafter a U.S. industry coalition submitted anti-dumping and countervailing duty petitions to the International Trade Commission and the U.S. Department of Commerce. In March 2002, the Department of Commerce rendered a final determination in favor of the U.S. industry coalition and set a 19.3% countervailing duty on Canadian lumber imports and an anti-dumping duty on all non-investigated Canadian exporters averaging 9.7% (representing the weighted average of the anti-dumping rates imposed on the investigated Canadian exporters). The Department of Commerce decreased these duties in April 2002 to 18.8% and 8.4%, respectively. In May 2002, the International Trade Commission rendered a final determination that the U.S. industry was threatened with material injury by Canadian lumber imports. Following this determination, the Department of Commerce put into effect the countervailing and anti-dumping duties in May 2002. Reports indicate, however, that the final duties have not had the effect of decreasing Canadian lumber imports into the U.S.

The future of the U.S.-imposed import duties on Canadian lumber remains uncertain. Canada appealed both the anti-dumping duty and the countervailing duty to the WTO and NAFTA appeal boards. Both the WTO and NAFTA recently issued rulings that affirmed the U.S. position that Canadian stumpage practices are, in fact, providing a subsidy to the Canadian industry, and upheld the validity of antidumping duties imposed on most Canadian producers. However, both the WTO and NAFTA rulings included provisions for re-examining the calculation and level of the countervailing and the anti-dumping duties. To avoid protracted litigation, the U.S. and Canadian governments are attempting to negotiate a settlement agreement. There can be no assurance, however, that an agreement will be reached, or that the terms of any such agreement would be favorable to the U.S. lumber industry’s interests. Therefore, other factors remaining unchanged, downward pressure on domestic lumber and log prices caused by Canadian imports could continue or increase.

      Our Cash Dividends are Not Guaranteed and May Fluctuate

In July 1999, we converted from a master limited partnership to a real estate investment trust, or “REIT”. REITs are required to distribute 90% of their net taxable ordinary income. However, unlike ordinary income such as rent, the Internal Revenue Code of 1986, as amended, does not require REITs to distribute capital gain income. Accordingly, we do not believe that the Internal Revenue Code will require us to distribute any material amounts of cash given that the majority of our income comes from timber sales, which generally are treated as capital gains. Our board of directors, in its sole discretion, determines the amount of the quarterly dividends to be provided to our stockholders based on consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, harvest levels, changes in the price and demand for our products and general market demand for timberlands and those timberland properties that have higher and better uses. Consequently, our dividend levels may fluctuate.

      We May Be Unsuccessful in Carrying Out Our Acquisition Strategy

We intend to pursue acquisitions of strategic timberland properties. As with any investment, our future acquisitions, if any, may not perform in accordance with our expectations. In addition, we anticipate financing such acquisitions through cash from operations, borrowings under our unsecured credit facilities, proceeds from equity or debt offerings (including offerings of limited partnership units by our operating partnership) or proceeds from asset dispositions, or any combination thereof. Our inability to finance future acquisitions on favorable terms or the failure of any acquisitions to conform to our expectations, could adversely affect our results of operations.

      We Depend on External Sources of Capital for Future Growth

Our ability to finance growth is dependent to a significant degree on external sources of capital. Our ability to access such capital on favorable terms could be hampered by a number of factors, many of which are outside of our control, including, without limitation, a decline in general market conditions, increases in interest rates, an unfavorable market perception of our growth potential, a decrease in our current or estimated future earnings or a decrease in the market price of our common stock. In addition, our ability to access additional capital may also be limited by the terms of our existing indebtedness, which, among other things, restricts our incurrence of debt and the payment of dividends. Any of these factors, individually or in combination, could prevent us from being able to obtain the capital we require on terms that are acceptable to us, and the failure to obtain necessary capital could materially adversely affect our future growth.

      Our Ability to Harvest Timber May Be Subject to Limitations Which Could Adversely Affect Our       Operations

Weather conditions, timber growth cycles, access limitations and regulatory requirements associated with the protection of wildlife and water resources may restrict harvesting of timberlands as may other factors, including damage by fire, insect infestation, disease, prolonged drought and other natural disasters. Although damage from such natural causes usually is localized and affects only a limited percentage of the timber, there can be no assurance that any damage affecting our timberlands will in fact be so limited. As is common in the forest products industry, we do not maintain insurance coverage with respect to damage to our timberlands.

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

      Our Timberlands and Manufacturing Facilities Are Subject to Federal and State Environmental       Regulations

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

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

The Endangered Species Act and similar state laws protect species threatened with possible extinction. A number of species on our timberlands have been and in the future may be protected under these laws, including the northern spotted owl, marbled murrelet, gray wolf, grizzly bear, mountain caribou, bald eagle, Karner blue butterfly, red-cockaded woodpecker, bull trout, and various salmon species. Protection of threatened and endangered species may include restrictions on timber harvesting, road building and other forest practices on private, federal and state land containing the affected species.

Stock Ownership

      Provisions in Our Certificate of Incorporation and Delaware Law May Prevent a Change in Control

Some provisions of our certificate of incorporation may discourage a third party from seeking to gain control of us. For example, the ownership limitations described in our certificate of incorporation could have the effect of delaying, deferring, or limiting a change of control in which holders of our common stock might receive a premium for their shares over the then prevailing market price. The following is a summary of provisions of our certificate of incorporation that may have this effect.

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

The Ownership Limit in our certificate of incorporation also restricts the transfer of our common stock. For example, any transfer of our equity is null and void if the transfer would:

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

Section 203 of the Delaware General Corporation Law. Section 203 of the Delaware General Corporation Law generally prohibits us from engaging in business transactions with a person or entity that owns 15% or more of our voting stock for a period of three years following the time such person or entity became an “interested stockholder” unless, prior to such time, our board of directors approved either the business combination or the transaction which resulted in such person or entity becoming an interested stockholder. A business transaction may include mergers, asset sales and other transactions resulting in financial benefit to the person or entity that owns 15% or more of our voting stock.

Tax Risks

      If We Fail to Qualify as a REIT, We Would Be Subject to Tax at Corporate Rates and Would Not Be Able to       Deduct Dividends to Stockholders When Computing Our Taxable Income

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

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

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

In addition, the rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the United States Department of the Treasury. Changes to the tax law could adversely affect our stockholders. We cannot predict with certainty whether, when, in what forms, or with what effective dates, the tax laws applicable to us or our stockholders may be changed.

      If We Failed to Distribute the Earnings and Profits of The Timber Company, We Would Be Subject to       Adverse Tax Consequences

In connection with The Timber Company's October 6, 2001 merger with Plum Creek, we were required by January 31, 2002 to distribute the earnings and profits acquired from the six entities that comprised The Timber Company. We believe that the accelerated payment of our fourth quarter dividend for 2001, which we paid on December 28, 2001, was sufficient to distribute these earnings and profits. If we failed to distribute an amount equal to these earnings and profits, we might be subject to adverse tax consequences. We expect that, even if the earnings and profits were subsequently adjusted upward by the Internal Revenue Service, the amount we distributed exceeded such earnings and profits. Nevertheless, such an adjustment may give rise to the imposition of the 4% excise tax on the excess income required to be distributed over the amounts treated as distributed after application of the earnings and profits rule.

Other Risks

      Matters Pertaining to Arthur Andersen

Arthur Andersen served as the independent certified public accountant for The Timber Company prior to The Timber Company’s October 6, 2001 merger with Plum Creek. Because the merger was accounted for as a reverse acquisition, the historical financial statements of The Timber Company are now the historical financial statements of Plum Creek. Although Plum Creek did not engage Arthur Andersen as its certified public accountant following the merger, Plum Creek’s periodic financial statements filed with the SEC include The Timber Company’s historical financial statements, which were audited by Arthur Andersen.

In March 2002, Arthur Andersen was indicted on federal obstruction of justice charges arising from the government’s investigation of Enron. In June 2002, Arthur Andersen was found guilty of obstruction of justice. As a result of this conviction, Arthur Andersen ceased practicing before the SEC in August of 2002. The SEC has provided regulatory relief designed to allow companies that file reports with the SEC to dispense with the filing of a consent or report of Arthur Andersen in certain circumstances. Notwithstanding the SEC’s regulatory relief, the inability of Arthur Andersen to provide a consent or report could negatively affect Plum Creek’s ability to access the capital markets.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Approximately $1.4 billion of debt of the company bears interest at fixed rates, and therefore the fair value of these instruments is affected by changes in market interest rates. The interest rate on the variable rate debt as of September 30, 2003, was LIBOR plus 1.75%, which includes facility fees; however, this rate could range from LIBOR plus 0.75% to LIBOR plus 1.75% depending on our financial results. The following table presents contractual principal cash flows based upon maturity dates of the debt obligations and the related weighted-average contractual interest rates for the fixed rate debt as of September 30 (in millions):

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

The company’s management, with the participation of the company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the company’s management, including the Chief Executive Officer and Chief Financial Officer, has concluded that the company’s disclosure controls and procedures were effective as of the end of such period.

(b) Control over Financial Reporting

There have been no changes in the company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

There is no pending or threatened litigation involving the company that we believe would have a material adverse effect on the company’s financial position, results of operations or liquidity.