TEMPLE INLAND INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001

OR

[ ] 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 001-08634

TEMPLE-INLAND INC.
(Exact name of Registrant as Specified in its Charter)

DELAWARE 75-1903917
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1300 MOPAC EXPRESSWAY SOUTH
AUSTIN, TEXAS 78746
(Address of principal executive offices, including Zip code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (512) 434-5800

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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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 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. [ ]

The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based on the closing sales price of the Common Stock on the New
York Stock Exchange on February 25, 2002, was $1,711,179,826. For purposes of
this computation, all officers, directors, and 5 percent beneficial owners of
the registrant (as indicated in Item 12) are deemed to be affiliates. Such
determination should not be deemed an admission that such directors, officers,
or 5 percent beneficial owners are, in fact, affiliates of the registrant.

As of February 25, 2002, 49,371,261 shares of Common Stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive proxy statement to be prepared in
connection with the Annual Meeting of Shareholders to be held May 3, 2002, are
incorporated by reference into Part III of this report.

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PART I

ITEM 1. BUSINESS

INTRODUCTION

Temple-Inland Inc. ("Temple-Inland" or the "Company") is a holding company
that conducts all of its operations through its subsidiaries. The business of
Temple-Inland is divided among three groups:

- the Paper Group, which manufactures corrugated packaging products,

- the Building Products Group, which manufactures a wide range of building
products and manages the Company's forest resources of approximately 2.1
million acres of timberland in Texas, Louisiana, Georgia, and Alabama,
and

- the Financial Services Group, which consists of savings bank, mortgage
banking, real estate, and insurance brokerage activities.

The Paper Group, which is operated by Inland Paperboard and Packaging, Inc.
("Inland"), is a vertically integrated corrugated packaging operation that
consists of:

- four linerboard mills,

- one corrugating medium mill,

- 53 box plants, and

- eight specialty converting plants.

The Building Products Group is operated by Temple-Inland Forest Products
Corporation ("Temple-Inland FPC") and manufactures a wide range of building
products including:

- lumber,

- particleboard,

- medium density fiberboard,

- gypsum wallboard, and

- fiberboard

The Financial Services Group is operated by subsidiaries of Temple-Inland
Financial Services Inc. ("Financial Services") and consists of

- savings bank,

- mortgage banking,

- real estate, and

- insurance brokerage activities.

The Company's savings bank, Guaranty Bank ("Guaranty"), conducts its
business through 152 banking centers in Texas and California. Mortgage banking
is conducted through Guaranty Residential Lending, Inc. ("Residential Lending"),
a subsidiary of Guaranty that arranges financing of single-family mortgage loans
(primarily Fannie Mae, Freddie Mac, and Ginnie Mae), securitizes the loans, and
sells the loans into the secondary market. Real estate operations include
development of residential subdivisions, as well as the management and sale of
income producing properties. Insurance brokerage activities include selling a
full range of insurance products.

Temple-Inland is a Delaware corporation that was organized in 1983. Its
principal subsidiaries include

- Inland Paperboard and Packaging, Inc.,

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- Temple-Inland Forest Products Corporation,

- Temple-Inland Financial Services Inc.,

- Guaranty Bank, and

- Guaranty Residential Lending, Inc.

Temple-Inland's principal executive offices are located at 1300 MoPac
Expressway South, Austin, Texas 78746. Its telephone number is (512) 434-5800.
Additional information about the Company may be obtained from Temple-Inland's
home page on the Internet, the address of which is http://www.templeinland.com.

FINANCIAL INFORMATION

The results of operations including information regarding the principal
business segments are shown in the financial statements of the Company and the
notes thereto contained in Item 8 of this Annual Report on Form 10-K. Certain
statistical information concerning revenues and unit sales by product line is
contained in Item 7 of this Annual Report on Form 10-K.

NARRATIVE DESCRIPTION OF THE BUSINESS

Temple-Inland is a holding company that conducts all of its operations
through its subsidiaries. The business of Temple-Inland is divided among three
groups:

- the Paper Group, which provided 50 percent of Temple-Inland's
consolidated net revenues for 2001;

- the Building Products Group, which provided 17 percent of Temple-Inland's
consolidated net revenues for 2001; and

- the Financial Services Group, which provided 33 percent of
Temple-Inland's consolidated net revenues for 2001.

The following chart presents the ownership structure for the significant
subsidiaries of Temple-Inland. It does not contain all the subsidiaries of
Temple-Inland, many of which are dormant or immaterial entities. A complete list
of the subsidiaries of Temple-Inland is filed as an exhibit to this annual
report on Form 10-K. All subsidiaries shown are 100 percent owned by their
immediate parent company listed in the chart.

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TEMPLE-INLAND INC.
SELECTED SUBSIDIARY CHART

[TEMPLE-INLAND SUBSID. CHART]

Paper Group. The Paper Group manufactures containerboard that it converts
into a complete line of corrugated packaging and point-of-purchase displays.
Approximately 17 percent of the containerboard produced by the Paper Group in
2001 was sold in the domestic and export markets. The Paper Group converted the
remainder, and containerboard purchased in the domestic markets, into corrugated
containers at its box plants. The Paper Group's nationwide network of box plants
produces a wide range of products from commodity brown boxes to intricate die
cut containers that can be printed with multi-color graphics. Even though the
corrugated box business is characterized by commodity pricing, each order for
each customer is a custom order. The Paper Group's corrugated boxes are sold to
a variety of customers in the food, paper, glass containers, chemical,
appliance, and plastics industries, among others.

The Paper Group's corrugated packaging operation also manufactures
litho-laminate corrugated packaging, high graphics folding cartons, and bulk
containers constructed of multi-wall corrugated board for extra strength, which
are used for bulk shipments of various materials. The Paper Group also
manufactures a tear-resistant and water proof paper packaging product under the
name Tru-Tech(TM).

In the corrugated packaging operation, the Paper Group serves about 7,000
customers with approximately 9,000 shipping destinations. The largest single
customer accounted for approximately five percent and the ten largest customers
accounted for approximately 25 percent of the 2001 corrugated packaging
revenues. Costs of freight and customer service requirements necessitate the
location of box plants relatively close to customers. Each plant tends to
service a market within a 150-mile radius of the plant.

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Sales of corrugated shipping containers track changing population patterns
and other demographics. Historically, there has been a correlation between the
demand for containers and containerboard and real growth in the United States
gross domestic product, particularly the non-durable goods segment.

The Paper Group is a 50 percent owner in Premier Boxboard Limited LLC, a
joint venture that produces light-weight gypsum facing paper and corrugating
medium at a plant in Newport, Indiana.

During May 2001, the Paper Group purchased the converting operations of
Chesapeake Corporation and Elgin Corrugated Box Company for an aggregate
purchase price of $135 million. These operations consist of 11 corrugated
converting plants in eight states. The Paper Group acquired two additional
converting plants through its purchase of assets from ComPro Packaging LLC in
October 2001 for approximately $9 million. These acquisitions will increase
integration for the Paper Group.

The Company and Gaylord Container Corporation ("Gaylord") have signed a
definitive merger agreement pursuant to which Temple-Inland began
cross-conditional tender offers for all of Gaylord's outstanding shares and
outstanding 9 3/8% Senior Notes due 2007 (the "9 3/8% Senior Notes"), 9 3/4%
Senior Notes due 2007 (the "9 3/4% Senior Notes"), and 9 7/8% Senior
Subordinated Notes due 2008 (the "9 7/8% Senior Subordinated Notes" and,
collectively with the 9 3/8% Senior Notes and the 9 3/4% Senior Notes, the
"Notes"). Certain outstanding bank debt and other senior secured debt
obligations of Gaylord will be paid or otherwise satisfied. Assuming that all
shares and all Notes are tendered, the total consideration for the transaction,
excluding any related transaction fees, expenses, and severance amounts, is
approximately $847 million, consisting of $1.17 per share, or approximately $65
million, to purchase the outstanding shares of Gaylord, and approximately $782
million to acquire all the Notes and to satisfy the bank debt and other senior
secured debt obligations.

This transaction is contingent upon, among other things: (i) at least
two-thirds of the outstanding shares of Gaylord being validly tendered and not
withdrawn prior to the expiration date of the offer, and (ii) at least 90% in
aggregate principal amount outstanding of each of the 9 3/8% Senior Notes and
the 9 3/4% Senior Notes being validly tendered and not withdrawn prior to the
expiration of the offer and (iii) at least 82.6% in aggregate principal amount
outstanding of the 9 7/8% Senior Subordinated Notes being validly tendered and
not withdrawn prior to the expiration of the offer. The transaction is also
subject to regulatory approval and satisfaction or waiver of customary closing
conditions. Temple-Inland has received a financing commitment from Citibank,
N.A. to fund its offer for all outstanding shares of Gaylord, to acquire all the
Notes, to satisfy the bank debt and other senior secured debt obligations, and
to pay costs and expenses associated with the transaction. The tender offers for
the outstanding stock and for the Notes are scheduled to expire on February 28,
2002, but may be extended by Temple-Inland under certain conditions.

Late in 2001, the Paper Group indefinitely suspended operating the number
two machine at its Orange, Texas, mill.

Building Products Group. The Building Products Group produces lumber,
particleboard, medium density fiberboard, gypsum wallboard, and fiberboard. The
Building Products Group also manages the Company's 2.1 million acres of
timberland, which are located in Texas, Louisiana, Georgia, and Alabama.

The group sells building products throughout the continental United States
and in Canada, with the majority of sales occurring in the southern United
States. No significant sales are generated under long-term contracts. Sales of
most of these products are made by account managers and representatives to
distributors, retailers, and original equipment manufacturer accounts.
Approximately 84 percent of particleboard sales are to commercial fabricators,
such as manufacturers of cabinets and furniture. The ten largest customers
accounted for approximately 30 percent of the Building Products Group's 2001
sales. The building products business is heavily dependent upon the level of
residential housing expenditures, including the repair and remodeling market.

The Building Products Group is a 50 percent owner in two joint ventures:
Del-Tin Fiber LLC, which produces medium density fiberboard at a facility in
Arkansas; and Standard Gypsum LP, which produces gypsum wallboard at a plant and
related quarry in Texas and a plant in Tennessee.

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During 2001, the Company completed modifications to its facility in
Pineland, Texas. This facility now includes a state-of-the-art sawmill and
produces veneer products. This change completes the exit from plywood production
and permits the Building Products Group to optimize the use of available
sawtimber and produce a higher value product.

Financial Services Group. The Financial Services Group operates a savings
bank and engages in mortgage banking, real estate, and insurance brokerage
activities.

Savings Bank. Guaranty is a federally-chartered stock savings bank that
conducts its business through 152 banking centers. The 108 Texas banking centers
are concentrated in the metropolitan areas of Houston, Dallas/Fort Worth, San
Antonio, and Austin, as well as the central and eastern regions of the state.
The 44 California banking centers are concentrated in Southern California and
the Central Valley. The primary activities of Guaranty include providing deposit
products to the general public, investing in single-family adjustable-rate
mortgages, lending for the construction of real estate projects and the
financing of business operations, and providing a variety of other financial
products to consumers and businesses.

Guaranty derives its income primarily from interest earned on real estate
mortgages, commercial and business loans, consumer loans, and investment
securities, as well as fees received in connection with loans and deposit
services. Its major expense is interest paid on consumer deposits and other
borrowings. The operations of Guaranty, like those of other savings
institutions, are significantly influenced by general economic conditions; the
monetary, fiscal, and regulatory policies of the federal government; and the
policies of financial institution regulatory authorities. Deposit flows and
costs of funds are influenced by interest rates on competing investments and
general market rates of interest. Lending activities are affected by the demand
for mortgage financing and for other types of loans as well as market
conditions. Guaranty primarily seeks assets with interest rates that adjust
periodically rather than assets with long-term fixed rates.

In addition to other minimum capital standards, regulations of the Office
of Thrift Supervision ("OTS") established to ensure capital adequacy of savings
institutions currently require savings institutions to maintain minimum amounts
and ratios of total and Tier I capital to risk-weighted assets and of Tier I
capital to adjusted tangible assets. Management of Guaranty believes that as of
year end, Guaranty met all capital adequacy requirements. In order to remain in
the lowest tier of Federal Deposit Insurance Corporation insurance premiums,
Guaranty must meet a leverage capital ratio of at least 5 percent of adjusted
total assets. At year end 2001, Guaranty had a leverage capital ratio of 7.82
percent of adjusted total assets.

Mortgage Banking. The mortgage banking operation of the Financial Services
Group is headquartered in Austin, Texas, and originates, warehouses, and
services FHA, VA, and conventional mortgage loans primarily on single family
residential property. The mortgage banking operation originates mortgage loans
for sale into the secondary market through 120 offices located throughout the
United States. The Company typically retains the servicing rights on
approximately one-third of the loans it originates and sells the remainder to
third parties. Servicing operations are centralized in Austin, Texas. At the end
of 2001, the mortgage banking operation was servicing $11.4 billion in mortgage
loans. The mortgage banking operation produced $7.6 billion in mortgage loans
during 2001.

Real Estate. The Financial Services Group is involved in the development
of 48 residential subdivisions in Texas, California, Colorado, Florida, Georgia,
Missouri, Tennessee, and Utah. Real estate activities also include ownership of
ten commercial properties, including properties owned by subsidiaries through
joint venture interests.

Insurance Brokerage. Subsidiaries of the Financial Services Group are
engaged in the brokerage of commercial and personal lines of property, casualty,
life, and group health insurance products. One of these subsidiaries is an
insurance agency that administers the marketing and distribution of several
mortgage-related personal life, accident, and health insurance programs. This
agency also acts as the risk manager of Temple-Inland. An affiliate of the
insurance agency sells annuities through Guaranty.

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RAW MATERIALS

The Company's main raw material resource is timber, with approximately 2.1
million acres of owned and leased timberland located in Texas, Louisiana,
Alabama, and Georgia. In 2001, wood fiber required for the Company's paper and
wood products operations was produced from these lands and as a by-product of
its solid wood operations to the extent shown on the following chart:

WOOD FIBER REQUIREMENTS

The balance of the wood fiber required for these operations was purchased
from numerous landowners and other lumber companies.

Linerboard and corrugating medium are the principal materials used by
Inland to make corrugated boxes. The mills at Rome, Georgia, and Orange, Texas,
are solely linerboard mills. The Ontario, California, and Maysville, Kentucky,
mills are traditionally linerboard mills, but can be used to manufacture
corrugating medium. The New Johnsonville, Tennessee, mill is solely a
corrugating medium mill. The principal raw material used by the Rome, Georgia,
and Orange, Texas, mills is virgin fiber. The Ontario, California, and
Maysville, Kentucky, mills use only old corrugated containers ("OCC"). The mill
at New Johnsonville, Tennessee, uses a combination of virgin fiber and OCC. In
2001, OCC represented approximately 38 percent of the total fiber needs of the
Company's containerboard operations. The price of OCC may exhibit volatility due
to normal supply and demand fluctuations for the raw material and for the
finished product. OCC is purchased by the Company and its competitors on the
open market from numerous suppliers. Price fluctuations reflect the
competitiveness of these markets. The Company's historical grade patterns
produce more linerboard and less corrugating medium than is converted at the
Company's box plants. The deficit of corrugating medium is obtained through open
market purchases and/or trades and the excess linerboard is sold in the open
market.

Temple-Inland FPC obtains the gypsum for its wallboard operations in
Fletcher, Oklahoma, from one outside source through a long-term purchase
contract. At its gypsum wallboard plant in West Memphis, Arkansas, and the joint
venture gypsum wallboard plant in Cumberland City, Tennessee, synthetic gypsum
is used as a raw material. Synthetic gypsum is a by-product of coal-burning
electrical power plants. The Company has entered into a long-term supply
agreement for synthetic gypsum produced at a Tennessee Valley Authority
electrical plant located adjacent to the Cumberland City plant. Synthetic gypsum
acquired pursuant to this agreement supplies all the synthetic gypsum required
by the Cumberland City plant and the West Memphis plant.

In the opinion of management, the sources outlined above will be sufficient
to supply the Company's raw material needs for the foreseeable future.

ENERGY

Electricity and steam requirements at the Company's manufacturing
facilities are either supplied by a local utility or generated internally
through the use of a variety of fuels, including natural gas, fuel oil, coal,
wood bark, and in some instances, waste products resulting from the
manufacturing process. By utilizing these waste products and other wood
by-products as a biomass fuel to generate electricity and steam, the Company was
able to generate approximately 63 percent of its energy requirements at its
mills in Rome, Georgia, and Orange, Texas, during 2001. In most cases where
natural gas or fuel oil is used as a fuel, the Company's facilities possess a
dual capacity enabling the use of either fuel as a source of energy.

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The natural gas needed to run the Company's natural gas fueled power
boilers, package boilers, and turbines is acquired pursuant to a multiple vendor
solicitation process that provides for the purchase of gas on an interruptible
basis at rates favorable to spot market rates.

Energy costs began rising during the second quarter of 2000. This trend
continued through the remainder of 2000 and into the first half of 2001. In some
instances, the Company elected to take downtime at certain of its manufacturing
facilities rather than pay the significantly higher energy prices. The Company
continues to explore alternative arrangements and fuel sources in an effort to
contain energy costs.

The Paper Group is a party to a long-term power purchase agreement with
Southern California Edison ("Edison"). Under this agreement, the Paper Group
sold to Edison a portion of its electrical generating capacity from a
co-generation facility operated in connection with its Ontario, California,
mill. Edison was to pay the Paper Group for its committed generating capacity
and for electricity generated and sold to Edison. During the fourth quarter 2000
and the first quarter 2001, the Ontario mill generated and delivered electricity
to Edison but was not paid. During April 2001, the Paper Group notified Edison
that the long-term power purchase agreement was cancelled because of Edison's
material breach of the agreement. Edison has contested the right of the Paper
Group to terminate the power purchase agreement. It has also asserted that it is
entitled to recover a portion of the payments it made during the term of the
agreement from the Paper Group. The parties are currently in litigation to
determine, among other matters, whether the agreement has been terminated and
whether the Paper Group may sell its excess generating capacity to third
parties.

The Paper Group continues to provide power to Edison and has received some
payments from Edison. The Company does not believe that the resolution of these
matters will have a material adverse effect on its consolidated operations or
financial position.

EMPLOYEES

At December 29, 2001, the Company and its subsidiaries had approximately
16,500 employees. Approximately 4,200 of these employees are covered by
collective bargaining agreements. These agreements generally run for a term of
three to six years and have varying expiration dates. The following table
summarizes certain information about the collective bargaining agreements that
cover a significant number of employees:

The Company has additional collective bargaining agreements with the
employees of various of its other box plants, mills, and building products
plants. These agreements each cover a relatively small number of employees and
are negotiated on an individual basis at each such facility.

The Company considers its relations with its employees to be good.

ENVIRONMENTAL PROTECTION

The operations conducted by the subsidiaries of the Company are subject to
federal, state, and local provisions regulating the discharge of materials into
the environment and otherwise related to the protection of the environment.
Compliance with these provisions, primarily the Federal Clean Air Act, Clean
Water Act, Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization
Act of 1986 ("SARA"), and Resource Conservation and Recovery Act ("RCRA"), has
required the Company to invest substantial funds to modify facilities to assure
compliance with applicable environmental regulations. Capital expenditures
directly related to environmental compliance totaled approximately $17 million
during 2001. This amount does not include capital expenditures for environmental
control facilities made as part of major mill modernizations and expansions or
capital expenditures made for another purpose that have an indirect benefit on
environmental compliance.

The Company is committed to protecting the health and welfare of its
employees, the public, and the environment and strives to maintain compliance
with all state and federal environmental regulations in a manner that is also
cost effective. In the construction of new facilities and the modernization of
existing facilities, the Company has used state of the art technology for its
air and water emissions. These forward-looking programs are intended to minimize
the impact that changing regulations have on capital expenditures for
environmental compliance.

Future expenditures for environmental control facilities will depend on new
laws and regulations and other changes in legal requirements and agency
interpretations thereof, as well as technological advances. The Company expects
the prominence of environmental regulation to continue for the foreseeable
future. Given these uncertainties, the Company currently estimates that capital
expenditures for environmental purposes during the period 2002 through 2004 will
average approximately $12 million each year, excluding expenditures related to
the programs discussed below. The estimated expenditures could be significantly
higher if more stringent laws and regulations are implemented.

On April 15, 1998, the U.S. Environmental Protection Agency (the "EPA")
issued extensive regulations governing air and water emissions from the pulp and
paper industry (the "Cluster Rule"). Compliance with various phases of the
Cluster Rule will be required at certain intervals over the next few years.
According to the EPA, the technology standards in the Cluster Rule will cut the
industry's toxic air pollutant emissions by almost 60 percent. The estimated
capital expenditures disclosed above include expenditures needed to comply with
the Cluster Rule. The Company has incurred approximately $15 million toward
Cluster Rule compliance through the end of 2001, excluding such expenditures
related to discontinued operations. Future expenditures related to Cluster Rule
compliance are not expected to be material.

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Not included in the phase I Cluster Rule was the Maximum Achievable Control
Technology ("MACT") II Standard for the control of hazardous air pollutant
emissions from pulp and paper mill combustion sources. Final promulgation of the
MACT II Standard occurred on December 15, 2000, and applies to two kraft mills
operated by the Company. Preliminary estimates indicate that the Company could
be required to make total capital expenditures for monitoring both particulate
matter ("PM") and gaseous hazardous air pollutants ("HAPs") associated with the
reporting and record-keeping activities of the rule of up to $2 million over the
next few years.

Future national emission standards for HAPs will apply to facilities that
are major sources in the plywood and composite wood products ("PCWP") industry.
The proposed standard would limit emissions of HAPs including acetaldehyde,
acrolein, formaldehyde, methanol, phenol, and other HAPs. EPA estimates that
implementation of the proposed standards would reduce HAP emissions from the
PCWP source category industry-wide by approximately 11,000 tons per year. In
addition, the proposed standards would reduce emissions of volatile organic
compounds ("VOCs") industry-wide by approximately 27,000 tons per year. The
estimated capital costs for the Company of these proposed standards are
approximately $25 million over the next five years.

The Company utilizes landfill operations to dispose of non-hazardous waste
at three paperboard and two building products mill operations. At year-end 2001,
the Company estimated the undiscounted total costs it could probably incur to
ensure proper closure of these landfills over the next 25 years to be about $14
million, which is being accrued over the estimated lives of the landfills.

In addition to these capital expenditures, the Company incurs significant
ongoing maintenance costs to maintain compliance with environmental regulation.
The Company, however, does not believe that these capital expenditures or
maintenance costs will have a material adverse effect on the earnings of the
Company. In addition, expenditures for environmental compliance should not have
a material impact on the competitive position of the Company, because other
companies are also subject to these regulations.

COMPETITION

All of the industries in which the Company operates are highly competitive.
The level of competition in a given product or market may be affected by the
strength of the dollar and other market factors including geographic location,
general economic conditions, and the operating efficiencies of competitors.
Factors influencing the Company's competitive position vary depending on the
characteristics of the products involved. The primary factors are product
quality and performance, price, service, and product innovation.

The corrugated packaging industry is highly competitive with almost 1,500
box plants in the United States. Box plants operated by Inland and its
subsidiaries accounted for approximately eight percent of total industry
shipments during 2001. Although corrugated packaging is dominant in the national
distribution process, Inland's products also compete with various other
packaging materials, including products made of paper, plastics, wood, and
metals.

In the building materials markets, the Building Products Group competes
with many companies that are substantially larger and have greater resources in
the manufacturing of building materials.

The Financial Services Group competes with commercial banks, savings and
loan associations, mortgage banks, and other lenders in its mortgage banking and
savings bank activities, and with real estate investment and management
companies in its real estate activities. The financial services industry is a
highly competitive business, and a number of entities with which the Company
competes have greater resources.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the names, ages, and titles of the persons who serve as
executive officers of the Company:

Kenneth M. Jastrow, II became Chairman of the Board and Chief Executive
Officer of the Company on January 1, 2000. Mr. Jastrow previously served the
Company in various capacities since 1991, including President, Chief Operating
Officer, Chief Financial Officer, and Group Vice President. He also serves as
Chairman of the Board of Financial Services, Chairman of the Board of Guaranty,
and a Director of each of Temple-Inland FPC and Inland.

William B. Howes, who was named Executive Vice President and a Director in
August 1996, became a Group Vice President of the Company and the Chairman of
the Board of Inland in July 1993 after serving as the President and Chief
Operating Officer of Inland since April 1992. From August 1990 until April 1992,
Mr. Howes was the Executive Vice President of Inland.

Harold C. Maxwell became Executive Vice President of the Company in
February 2000 after serving as Group Vice President since May 1989. In March
1998, Mr. Maxwell was named Chairman of the Board and Chief Executive Officer of
Temple-Inland FPC after having served as Group Vice President -- Building
Products of Temple-Inland FPC since November 1982.

Bart J. Doney became Group Vice President of the Company in February 2000.
Mr. Doney has served Inland as Executive Vice President, Packaging since June
1998, Senior Vice President from 1996 until 1998, and Vice President, Sales and
Administration, Containerboard Division from 1990 to 1996.

Kenneth R. Dubuque became Group Vice President of the Company in February
2000. In October 1998, Mr. Dubuque was named President and Chief Executive
Officer of Guaranty. From 1996 until 1998, Mr. Dubuque served as Executive Vice
President and Manager -- International Trust and Investment of Mellon Bank
Corporation. From 1991 until 1996, he served as Chairman, President and Chief
Executive Officer of the Maryland, Virginia, and Washington, D.C., operating
subsidiary of Mellon Bank Corporation.

James C. Foxworthy became Group Vice President of the Company in February
2000. Mr. Foxworthy also serves as Executive Vice President, Paperboard of
Inland, a position he has held since June 1998. From 1995 until 1998, he served
as Senior Vice President of Inland.

Dale E. Stahl became Group Vice President of the Company in July 2000 and
serves as the President and Chief Executive Officer of Inland. Mr. Stahl served
as President and Chief Operating Officer of Gaylord Container Corporation for
twelve years prior to joining the Company in 2000.

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Jack C. Sweeny became a Group Vice President of the Company in May 1996. He
also serves as President and Chief Operating Officer and a Director of
Temple-Inland FPC. From November 1982 through May 1996, Mr. Sweeny served as a
Vice President of Temple-Inland FPC and as Executive Vice President from May
1996 to February 2002.

M. Richard Warner became Vice President and General Counsel of the Company
in June 1994 and was named Chief Administrative Officer in May 1999.

Randall D. Levy became Chief Financial Officer of the Company in May 1999.
Mr. Levy joined Guaranty in 1989 serving in various capacities, including
Treasurer and most recently as Chief Operating Officer since 1994.

Louis R. Brill became Vice President and Controller of the Company in
December 1999 and was named Chief Accounting Officer in May 2000. Before joining
the Company in 1999, Mr. Brill was a partner of Ernst & Young LLP for 25 years.

Scott Smith became Chief Information Officer of the Company in February
2000. Prior to that, Mr. Smith was Treasurer of Guaranty from November 1993 to
December 1999 and Chief Information Officer of Financial Services from August
1995 to June 1999. Mr. Smith also serves as the Chief Financial Officer of
Guaranty.

Doyle R. Simons became Vice President -- Administration in November 2000.
Mr. Simons has served as the Director of Investor Relations for the Company
since 1994.

David W. Turpin became Treasurer of the Company in June 1991. Mr. Turpin
also serves as the Executive Vice President and Chief Financial Officer of
Lumbermen's Investment Corporation, a real estate subsidiary of the Company.

Leslie K. O'Neal became Secretary of the Company in February 2000 after
serving as Assistant Secretary since 1995. Ms. O'Neal also serves as Assistant
General Counsel of the Company, a position she has held since 1985. Ms. O'Neal
also serves as Secretary of various subsidiaries of the Company.

Officers are elected at the Company's Annual Meeting of Directors to serve
until their successors have been elected and have qualified or as otherwise
provided in the Company's Bylaws.

ITEM 2. PROPERTIES

The Company owns and operates manufacturing facilities throughout the
United States, five converting plants in Mexico, and a box plant in Puerto Rico.
Additional descriptions as of year-end of selected properties are set forth in
the following charts:

CONTAINERBOARD MILLS

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

* The table shows the full capacity of this facility that is owned by a joint
venture in which a subsidiary of the Company has a 50 percent interest.

11

CORRUGATED CONTAINER PLANTS*

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

* The annual capacity of Inland's box plants is not given because such annual
capacity is a function of the product mix, customer requirements and the
type of converting equipment installed and operating at each plant, each of
which varies from time to time.

** The Tracy, California, and Rome, Georgia, plants each contain two
corrugators.

*** Sheet plants.

(1) Leased facilities.

Additionally, Inland owns a fulfillment center in Gettysburg, Pennsylvania,
a graphics resource center in Indianapolis, Indiana, that has a 100" preprint
press and also leases 50 warehouses located throughout much of the United
States. Inland owns specialty converting plants in Santa Fe Springs, California;
Harrington, Delaware; Indianapolis, Indiana; and Linden, New Jersey, and leases
specialty converting plants in Buena Park, Santa Fe Springs, Ontario, and Union
City, California.

BUILDING PRODUCTS

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

* Includes separate finger jointing capacity of 10 million board feet.

13

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

* The table shows the full capacity of this facility that is owned by a joint
venture in which a subsidiary of the Company has a 50 percent interest.

(1) Leased facilities.

TIMBER AND TIMBERLANDS*
(IN ACRES)

Pine Plantations............................................ 1,301,851
Natural Pine................................................ 107,586
Hardwood.................................................... 121,115
Special Use/Non-Forested.................................... 530,369
---------
Total....................................................... 2,060,921
=========

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

* Includes approximately 231,394 acres of leased land.

During 2001, the Company completed a major study of its forests, which led
to the following classifications: strategic timberland, non-strategic
timberland, and high-value land (with real estate development potential). Based
on the study, 1,800,000 acres has been identified as strategic, 110,000 acres as
non-strategic, and 160,000 acres as high-value with the potential for real
estate development.

During the year, the Company sold 78,000 acres of non-strategic land. The
remaining non-strategic land will be sold over time. A group of real estate
professionals has been assembled in Atlanta, Georgia, to manage the 160,000
acres of high-value land. The remaining 1,800,000 acres of strategic timberland
are important to the Company's converting operations and play a key role in the
Company's competitiveness and ability to meet environmental certification
requirements relating to sound forest management techniques and chain of
custody.

In the opinion of management, the Company's plants, mills, and
manufacturing facilities are suitable for their purpose and adequate for the
Company's business.

Through its subsidiaries, the Company owns certain of the office buildings
in which various of its corporate offices are headquartered. This includes
approximately 150,000 square feet of space in Diboll, Texas,

14

approximately 130,000 square feet in Indianapolis, Indiana, and 445,000 square
feet of office space in Austin, Texas.

The Company also owns 388,000 mineral acres in Texas and Louisiana. Revenue
from lease and production activities on these acres totaled $10.5 million in
2001. Additionally, the Company owns 395,830 mineral acres in Alabama and
Georgia, which produced no lease or production revenue in 2001.

At year end 2001, property and equipment having a net book value of
approximately $14 million were subject to liens in connection with $46 million
of debt.

ITEM 3. LEGAL PROCEEDINGS

GENERAL

The Company and its subsidiaries are involved in various legal proceedings
that have arisen from time to time in the ordinary course of business. In the
opinion of the Company's management, the effect of such proceedings will not be
material to the business or financial condition of the Company and its
subsidiaries.

On May 14, 1999, Inland was named as a defendant in a Consolidated Class
Action Complaint that alleged a civil violation of Section 1 of the Sherman Act.
The suit, captioned Winoff Industries, Inc. v. Stone Container Corporation, MDL
No. 1261 (E.D. Pa.), names Inland and nine other linerboard manufacturers as
defendants. The complaint alleges that the defendants, during the period from
October 1, 1993, through November 30, 1995, conspired to limit the supply of
linerboard, and that the purpose and effect of the alleged conspiracy was
artificially to increase prices of corrugated containers. The plaintiffs have
moved to certify a class of all persons in the United States who purchased
corrugated containers directly from any defendant during the above period, and
seek treble damages and attorneys' fees on behalf of the purported class. The
Court granted plaintiffs' motion on September 4, 2001, but modified the proposed
class to exclude those purchasers whose prices were "not tied to the price of
linerboard." The defendants have filed a petition, currently pending before the
Court of Appeals for the Third Circuit, seeking leave to appeal the Court's
ruling. The case is currently set for trial in January 2003. The Company
believes that the plaintiffs' allegations have no merit and intends to defend
against the suit vigorously. The Company does not believe that the outcome of
this litigation should have a material adverse effect on its financial position,
results of operations, or cash flow.

ENVIRONMENTAL

The facilities of the Company are periodically inspected by environmental
authorities and must file periodic reports on the discharge of pollutants with
these authorities. Occasionally, one or more of these facilities may have
operated in violation of applicable pollution control standards, which could
subject the facilities to fines or penalties in the future. Management believes
that any fines or penalties that may be imposed as a result of these violations
will not have a material adverse effect on the Company's earnings or competitive
position. No assurance can be given, however, that any fines levied against the
Company in the future for any such violations will not be material.

Under CERCLA, liability for the cleanup of a Superfund site may be imposed
on waste generators, site owners and operators, and others regardless of fault
or the legality of the original waste disposal activity. While joint and several
liability is authorized under CERCLA, as a practical matter, the cost of cleanup
is generally allocated among the many waste generators. Subsidiaries of the
Company are parties to nine proceedings relating to the cleanup of hazardous
waste sites under CERCLA and similar state laws, excluding sites to which the
Company's records disclose no involvement or as to which the Company's potential
liability has finally been determined. The subsidiaries have conducted
investigations of the sites and in certain instances believe that there is no
basis for liability and have so informed the governmental entities. The internal
investigations of the remaining sites indicate that the portion of the
remediation costs for these sites to be allocated to the Company are
approximately $2 million and should not have a material impact on the Company.
There can be no assurance that subsidiaries of the Company will not be named as
potentially responsible parties at additional Superfund sites in the future or
that the costs associated with the remediation of those sites would not be
material.

15

All litigation has an element of uncertainty and the final outcome of any
legal proceeding cannot be predicted with any degree of certainty. With these
limitations in mind, the Company presently believes that any ultimate liability
from the legal proceedings discussed herein would not have a material adverse
effect on the business or financial condition of the Company.

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

The Company did not submit any matter to a vote of its shareholders during
the fourth quarter of its last fiscal year.

PART II

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

MARKET INFORMATION

The Common Stock of the Company is traded in the New York Stock Exchange
and The Pacific Exchange. The table below sets forth the high and low sales
price for the Common Stock during each fiscal quarter in the two most recent
fiscal years.

SHAREHOLDERS

The Company's stock transfer records indicated that as of February 25,
2002, there were approximately 5,560 holders of record of the Common Stock.

DIVIDEND POLICY

As indicated above, the Company paid quarterly dividends during each of the
two most recent fiscal years in the amounts shown. On February 1, 2002, the
Board of Directors declared a quarterly dividend on the Common Stock of $0.32
per share payable on March 15, 2002, to shareholders of record on March 1, 2002.
The quarterly dividend has been $0.32 per share since the dividend paid
September 13, 1996. The Board will review its dividend policy periodically, and
the declaration of dividends will necessarily depend upon earnings and financial
requirements of the Company and other factors within the discretion of its Board
of Directors.

16

ITEM 6. SELECTED FINANCIAL DATA

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

(a) Segment operating income for 2001 includes a $27 million reduction in
depreciation expense resulting from a change in the estimated useful lives
of certain production equipment. Of this amount $20 million, applies to the
Paper Group and $7 million applies to the Building Products Group.

(b) Other income (expense) includes (i) in 2001, a $20 million gain from the
sale of non-strategic timberlands and $15 million in losses from the
disposition of under performing assets; (ii) in 2000, a $15 million loss
from the decision to exit the fiber cement business; and (iii) in 1998, a
$24 million loss from the disposition of the Argentine operations and $23
million in losses and charges related to other under performing assets.

(c) Represents the bleached paperboard operations sold in 1999 and includes a
loss on disposal of $71 million.

17

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

Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. The actual results achieved by Temple-Inland may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include general economic, market, or
business conditions; the opportunities (or lack thereof) that may be presented
to and pursued by Temple-Inland and its subsidiaries; the availability and price
of raw materials used by Temple-Inland and its subsidiaries; competitive actions
by other companies; changes in laws or regulations; and other factors, many of
which are beyond the control of Temple-Inland and its subsidiaries.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2001, 2000 AND 1999

SUMMARY

Consolidated revenues were $4.2 billion in 2001, $4.3 billion in 2000 and
$3.8 billion in 1999. Income from continuing operations was $111 million in
2001, $195 million in 2000, and $191 million in 1999. Income from continuing
operations per diluted share was $2.26 in 2001, $3.83 in 2000, and $3.43 in
1999.

BUSINESS SEGMENTS

Temple-Inland manages its operations through three business segments:
Paper, Building Products and Financial Services. Each of these business segments
is affected by the factors of supply and demand and changes in domestic and
global economic conditions. These conditions include changes in interest rates,
new housing starts, home repair and remodeling activities, and the strength of
the U.S. dollar, some or all of which may have varying degrees of impact on the
business segments. As used herein the term "parent company" refers to
Temple-Inland and its manufacturing business segments, Paper and Building
Products with the Financial Services Group reported on the equity method.

CRITICAL ACCOUNTING POLICIES

In preparing the financial statements, Temple-Inland follows generally
accepted accounting policies, which in many cases require Temple-Inland to make
assumptions, estimates and judgments that affect the amounts reported. Many of
these policies are relatively straightforward. There are, however, a few
policies that are critical because they are important in determining the
financial condition and results and they are difficult to apply. Within the
parent company, they include asset impairments and pension accounting and within
the Financial Services Group, they include the allowance for loan losses and
mortgage servicing rights. The difficulty in applying these policies arises from
the assumptions, estimates and judgments that have to be made currently about
matters that are inherently uncertain, such as future economic conditions,
operating results and valuations as well as management intentions. As the
difficulty increases, the level of precision decreases, meaning that actual
results can and probably will be different from those currently estimated.
Temple-Inland bases its assumptions, estimates and judgments on a combination of
historical experiences and other reasonable factors.

Measuring assets for impairments requires estimating intentions as to
holding periods, future operating cash flows and residual values of the assets
under review. Changes in management intentions, market conditions or operating
performance could indicate that impairment charges might be necessary. The
expected long-term rate of return on pension plan assets is an important
assumption in determining pension expense. In selecting that rate, consideration
is given to both historical returns and future returns over the next quarter
century. Differences between actual and expected returns will adjust future
pension expense. Allowances for loan losses are based on loan classifications,
historical experiences and evaluations of future cash flows and collateral
values and are subject to regulatory scrutiny. Changes in general economic
conditions or loan specific circumstances will inevitably change those
evaluations. Measuring for impairment and amortizing mortgage servicing rights
is largely dependent upon the speed at which loans are repaid and market rates
of return. Changes in interest rates will affect both of these variables and
could indicate that impairments or adjustments of the rate of amortization might
be necessary.

18

THE PAPER GROUP

The Paper Group manufactures linerboard and corrugating medium that it
converts into a complete line of corrugated and specialty packaging. The Paper
Group operations consist of 4 linerboard mills, 1 corrugating medium mill, 53
converting plants, 8 specialty-converting plants and an interest in a gypsum
facing paper joint venture. The Paper Group's facilities are located throughout
the United States and in Mexico and Puerto Rico.

During 2001, the Paper Group completed the acquisition of the corrugated
packaging operations of Chesapeake Corporation, Elgin Corrugated Box Company and
ComPro Packaging LLC. These operations consist of 13 corrugated converting
plants in eight states. These acquired operations did not contribute
significantly to the Paper Group's 2001 operating income. During January 2002,
the parent company initiated a tender offer to acquire Gaylord Container
Corporation. The transaction is contingent on several matters including the
tender of at least two-thirds of the outstanding shares and at least 90 percent
in aggregate principal amount of the senior notes and 82.6 percent of the senior
subordinated notes. The tender is scheduled to expire on February 28, 2002, and
will be funded from a bank financing commitment.

The Paper Group's revenues come principally from the sales of corrugated
packaging products and to a lesser degree from the sales of linerboard in the
domestic and export markets. The Paper Group's revenues were $2.1 billion in
2001, $2.1 billion in 2000 and $1.9 billion in 1999. While revenues were flat in
2001 and up 12 percent in 2000, the mix of revenues is changing. Corrugated
packaging revenues represent 93 percent of total revenues in 2001 and 91 percent
in 2000 and 1999. In 2001, the corrugated packaging revenues derived from the
acquired corrugated packaging operations, approximately $100 million, were
offset by declines in domestic shipments due to the weakening economy. Average
box prices were up 2 percent, and box shipments were unchanged. Excluding the
acquired corrugated packaging operations, average box prices would have been up
1 percent, and shipments would have been down 3 percent. Revenues and volumes
were also affected by the poor performance of the specialty packaging
operations. Until the economy improves, box shipments will likely remain weak,
and box prices will likely trend downward. The changes in revenues in 2000 and
1999 were due to increases in average box prices, up 17 percent in 2000 and 3
percent in 1999 with essentially no change in volumes.

The decrease in linerboard revenues in 2001 was due to lower prices, down 7
percent, and lower shipments, down 14 percent. The weakening economy softened
the market for domestic linerboard while increased offshore capacity and a
strong U.S. dollar continued to affect export markets. Until the economy
improves, the downward trend in the domestic linerboard market will probably
continue. It is likely that the downward trend in export demand will continue
during 2002 due to significant new offshore capacity. The changes in revenues in
2000 and 1999 were due to increases in average prices, up 20 percent in 2000 and
6 percent in 1999, with volumes down 10 percent in 2000 and up 61 percent in
1999.

Costs, which include production, distribution and administrative costs,
were $2.0 billion in 2001, $1.9 billion in 2000 and $1.8 billion in 1999. The
change in costs in 2001 was due to the acquired corrugated packaging operations
and higher costs for energy, principally natural gas, up $30 million, labor and
benefit costs, up $19 million, and new technology systems, up $14 million. Costs
were also affected by the poor performance of the specialty packaging
operations. Partially offsetting these increases were lower OCC costs, down $35
million, and lower depreciation expense, down $20 million. The changes in costs
in 2000 were due to higher energy costs, up $10 million, and higher OCC costs
coupled with increased outside purchases of corrugating medium. Energy costs
began to rise during the second quarter 2000 and continued to rise through the
second quarter 2001. Energy costs peaked during the second quarter 2001 and
began to decline the remainder of 2001 reaching more normalized levels by
year-end 2001. OCC represented 38 percent, 41 percent and 46 percent of the
fiber requirements during the last three years. OCC prices began to decline near
the end of the second quarter 2000 and continued to decline through the second
quarter 2001. OCC prices have remained relatively constant since then. OCC costs
averaged $69 per ton in 2001, $107 per ton in 2000 and $89 per ton in 1999.
Year-end OCC prices were $53 per ton in 2001, $67 per ton in 2000 and $99 per
ton in 1999. The reduction in depreciation expense was due to the lengthening of
estimated useful lives of certain production equipment beginning January 2001.

19

Mill production was 2.1 million tons in 2001, 2.3 million tons in 2000 and
2.7 million tons in 1999. Of the mill linerboard production, 83 percent in 2001
and 80 percent in 2000 and 1999 was used by the corrugated packaging operations;
the remainder was sold in the domestic and export markets. Production was
affected by curtailments due to market, maintenance and operational factors in
2001 and 2000 and by the conversion of the Newport medium mill (285,000-ton
annual capacity) in 2000. Production curtailments totaled 327,000 tons in 2001
and 315,000 tons in 2000. Production curtailments were minimal in 1999. The No.
2 paper machine (220,000-ton annual capacity) at the Orange, Texas linerboard
mill was shut down for an indefinite period in December 2001 due to weak market
conditions. Absent an improvement in market conditions, it is likely that the
Paper Group will continue to curtail production in 2002.

The joint venture conversion of the Newport mill to enable it to produce
lightweight gypsum facing paper was completed during third quarter 2000.
Start-up and production issues coupled with weak market conditions have hampered
this venture. Consequently, the mill continues to produce some corrugating
medium, a large portion of which was purchased by the Paper Group, 159,400 tons
in 2001 and 72,000 tons in 2000. The joint venture expects to have the
production issues resolved during the first quarter 2002; however, it is
uncertain when market conditions for gypsum-facing paper will improve.

The Paper Group is continuing its efforts to enhance return on investment,
including reviewing operations that are unable to meet return objectives and
determining appropriate courses of actions. During 2001, the Paper Group sold
its corrugated packaging operation in Chile at a loss of $5 million. The Paper
Group also restructured and downsized its specialty packaging operations at a
loss of $4 million and recognized an impairment charge of $4 million related to
its interest in a glass bottling venture operation in Puerto Rico. These losses
are included in other expenses. Other initiatives included the December 1999
sale of the bleached paperboard operation, which resulted in a loss on disposal
of $71 million.

The Paper Group's operating income was $107 million in 2001, $207 million
in 2000 and $104 million in 1999.

THE BUILDING PRODUCTS GROUP

The Building Products Group manufactures a variety of building products
including lumber, particleboard, medium density fiberboard (MDF) and gypsum
wallboard. The Building Products Group operations consist of 19 facilities
including a particleboard plant and an MDF plant operated under long-term
operating lease agreements and interests in a gypsum joint venture and an MDF
joint venture. The Building Products Group operates in the United States and
Canada and manages the company's 2.1 million acres of owned and leased
timberlands located in Texas, Louisiana, Georgia and Alabama.

The Building Products Group's revenues were $726 million in 2001, $836
million in 2000 and $837 million in 1999. Average prices for lumber,
particleboard, and gypsum fell during 2001. During 2001, prices for lumber were
down 5 percent, particleboard down 14 percent and gypsum down 39 percent while
prices for MDF were up 4 percent due to improved product mix. For 2001,
shipments of lumber were up 15 percent, particleboard down 14 percent, gypsum
down 13 percent and MDF up 5 percent. Lumber shipments were up primarily due to
the new Pineland sawmill, which began operations in second quarter 2001.
Particleboard shipments were down due to the explosion at the Mount Jewett
facility, which closed the facility for about five months during 2001 and weaker
market conditions. Other revenue includes sales of small tracts of high-value
use timberlands ($18 million in 2001, $11 million in 2000 and $14 million in
1999) and deliveries under a long-term fiber supply agreement entered into in
connection with the 1999 sale of the bleached paperboard operations. The lumber,
particleboard and gypsum markets continue to be affected by over capacity and
weak demand. It is likely that these conditions will continue for much of 2002.
The MDF markets could also be affected by new industry capacity coming on line
in 2002.

Costs, which include production, distribution and administrative costs,
were $713 million in 2001, $759 million in 2000 and $648 million in 1999. The
change in costs in 2001 was due to lower production volumes, lower depreciation
expense and the disposition of the fiber cement venture during the third quarter
2000 offset by higher energy costs, principally natural gas. Fiber costs were
relatively unchanged. Depreciation expense was reduced by $7 million due to the
lengthening of estimated useful lives of certain production

20

equipment beginning January 2001. Energy costs were up $8 million. Energy costs
peaked during the second quarter 2001 and began to decline during the remainder
of 2001 reaching more normalized levels by year-end 2001. The change in costs in
2000 was due to additional manufacturing facilities, an increase in energy
costs, up $7 million, and $13 million of operating losses from the fiber cement
venture.

Production was curtailed due to market conditions to varying degrees in
most product lines beginning the third quarter 2000 and continuing through
year-end 2001. For 2001, production averaged from a low of 66 percent to a high
of 77 percent of capacity in the various product lines. Production curtailments
were minimal in 1999. The Building Products Group's joint venture operations
also experienced production curtailments during 2001 due to market conditions.
During the first quarter 2001, the MDF joint venture in El Dorado, Arkansas was
shut down due to market conditions, higher energy prices and reconstruction of
the heat energy system of the plant. Production at this facility resumed in the
second quarter 2001. Absent an improvement in market conditions, it is likely
that the Building Products Group and its joint venture operations will continue
to curtail production to varying degrees in the various product lines in 2002.

The Building Products Group is continuing its efforts to enhance return on
investment, including reviewing operations that are unable to meet return
objectives and determining appropriate courses of action. During 2001, the
Building Products Group performed a review of its 600,000 acres of timberlands
in Georgia and Alabama and identified approximately 110,000 acres of
non-strategic fee and leased timberlands. During September 2001, approximately
78,000 acres of these non-strategic timberlands were sold for $54 million
resulting in a gain of $20 million, which is included in other income. The
remaining non-strategic timberlands will be sold over time. This review also
identified approximately 160,000 acres of timberlands in Georgia that will be
converted over time to higher value use. In addition, the Building Products
Group is addressing production cost issues at its MDF facilities.

The Building Products Group's operating income was $13 million in 2001, $77
million in 2000 and $189 million in 1999.

THE FINANCIAL SERVICES GROUP

The Financial Services Group operates a savings bank and engages in
mortgage banking, real estate and insurance brokerage activities. The savings
bank, Guaranty Bank (Guaranty), primarily conducts business through banking
centers in Texas and California. The mortgage banking operation originates
single family mortgages and services them for Guaranty and unrelated third
parties. Real estate operations include the development of residential
subdivisions and multi-family housing and the management and sale of income
producing properties, which are principally located in Texas, Colorado, Florida,
Tennessee and California. The insurance brokerage operation sells a range of
insurance products.

During 2001, the Financial Services Group acquired an asset-based loan
portfolio and two mortgage production operations. During 2000, the Financial
Services Group acquired American Finance Group, Inc. (AFG), a commercial finance
company engaged in leasing and secured lending. During 1999, the Financial
Services Group acquired Hemet Federal Savings and Loan Association (Hemet) and
the assets of Fidelity Funding Inc. (Fidelity), an asset-based lender.

21

Operations

The Financial Services Group revenues, consisting of interest and
noninterest income, were $1.4 billion in 2001, $1.4 billion in 2000 and $1.1
billion in 1999. Selected financial information for the Financial Services Group
follows:

Net interest income was $426 million in 2001, $389 million in 2000, and
$299 million in 1999. The increases in net interest income are primarily due to
growth and changes in the mix of average earning assets and interest-bearing
liabilities. The changes in the net yield are primarily due to changes in the
mix of the assets and liabilities and the timing of their repricing to market
rates. The following table presents average balances, interest income and
expense, and rates by major balance sheet categories:

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

(1) Nonaccruing loans are included in loans and mortgage loans held for sale.

22

A portion of the increase in average interest-earning assets in 2001 was
the result of the first quarter 2001 acquisition of an asset-based lending
portfolio and the first quarter 2000 acquisition of AFG. The remainder of the
increase in 2001 was due to internally generated growth, primarily in
construction and development loans, mortgage warehouse loans, commercial and
business loans and mortgage loans held for sale. A portion of the increase in
average interest-earning assets in 2000 was the result of the first quarter 2000
acquisition of AFG and the mid-1999 acquisitions of Hemet and Fidelity. The
remainder of the increase in 2000 was due to internally generated growth,
primarily in construction and development loans and commercial and business
loans and purchases of mortgage-backed securities. As a percentage of average
earning assets, loans, which include loans and mortgage loans held for sale,
were 78 percent in 2001, 77 percent in 2000 and 79 percent in 1999.

The decline in average interest-bearing deposits in 2001 was the result of
very competitive markets. Despite paying rates for new deposits at a
historically high spread, non-renewed maturing deposits exceeded new deposits
during 2001. A portion of the increase in average interest-bearing deposits in
2000 was the result of the mid-1999 acquisition of Hemet. The remainder of the
increase was the result of internally generated growth through new product
offerings and marketing campaigns. See Note G to the Financial Services Group
Summarized Financial Statements for further information regarding deposits. The
increase in average borrowings in 2001 resulted from the competitive deposit
market and the growth in average earning assets. The increase in average
borrowings in 2000 resulted from the growth in average earning assets outpacing
the growth in average interest-bearing deposits.

The following table presents the changes in net interest income
attributable to changes in volume and rates of interest-earning assets and
interest-bearing liabilities.

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

(1) The change in interest income and expense due to both volume and rate has
been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.

The provision for loan losses was $46 million in 2001, $39 million in 2000
and $38 million in 1999. The increase in 2001 was primarily the result of a
decline in asset quality related to loans in the construction and development
(senior housing) and commercial and business (asset-based) portfolios. Loan
growth and a change in the mix of the loan portfolio affected both 2000 and
1999.

23

Noninterest income includes service charges, fees, and the revenues from
mortgage banking, real estate and insurance activities. Noninterest income was
$363 million in 2001 and $280 million in 2000 and in 1999. The growth in
noninterest income in 2001 was due to increased mortgage banking and insurance
revenues and fee-based products. Mortgage banking revenues were up almost 200
percent due to acquisitions and the high level of refinance activity resulting
from low interest rates. This was partially offset by a reduction in servicing
revenues due to the sale of $8.6 billion in loans during the second quarter 2001
and an increase in amortization expense and impairment reserves due to the high
level of prepayments. In 2000, the growth in fee-based products was offset by
declines in mortgage banking revenues due to the impact of the higher interest
rate environment on mortgage financing and refinancing activities.

Noninterest expense includes compensation and benefits, real estate
operations, occupancy and data processing expenses. Noninterest expense was $540
million in 2001, $423 million in 2000 and $388 million in 1999. The growth in
noninterest expense in 2001 was primarily due to the acquired mortgage banking
production operations and asset-based portfolios and expenses associated with
new product offerings. The growth in noninterest expense in 2000 was primarily
due to the acquired savings bank operation.

Earning Assets

Securities, which include mortgage-backed and other securities, were $3.4
billion at year-end 2001, $3.3 billion at year-end 2000 and $2.5 billion at
year-end 1999. Purchases and securitizations totaling $948 million offset
payments received on securities in 2001. The increase in 2000 was the result of
purchases of $1.0 billion partially offset by maturities and prepayments. See
Note D to the Financial Services Group Summarized Financial Statements for
further information regarding securities. Mortgage loans held for sale were $958
million at year-end 2001, $232 million at year-end 2000 and $252 million at
year-end 1999. The increase at year-end 2001 resulted from the growth in the
mortgage production operations due to acquisitions and high refinancing
activities due to the lower interest rate environment.

Loans were $10.0 billion at year-end 2001, $10.5 billion at year-end 2000
and $9.4 billion at year-end 1999. The following table summarizes the
composition of the loan portfolio.

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

(1) Includes residential construction

The Financial Services Group continued to alter the mix of the loan
portfolio through increased lending in the construction and development,
mortgage warehouse, and commercial and business areas and the introduction of
new products. These changes to the loan portfolio provide further product and
geographic diversification.

Lending activities are subject to underwriting standards and liquidity
considerations. Specific underwriting criteria for each type of loan are
outlined in a credit policy approved by the Board of Directors of the savings
bank. In general, commercial loans are evaluated based on cash flow, collateral,
market conditions, prevailing economic trends, character and leverage capacity
of the borrower and capital and investment in a particular property, if
applicable. Most small business and consumer loans are underwritten using
credit-scoring models that consider factors including payment capacity, credit
history and collateral. In addition,

24

market conditions, economic trends and the character of the borrower are
considered. The credit policy, including the underwriting criteria for loan
categories, is reviewed on a regular basis and adjusted when warranted.

Construction and development and commercial and business loans by maturity
date at year-end 2001 follow:

Asset Quality

Several important measures are used to evaluate and monitor asset quality.
They include the level of loan delinquencies, nonperforming loans and assets and
net loan charge-offs compared to average loans.

Accruing delinquent loans past due 30 days or more were 1.10 percent of
total loans at year-end 2001, 1.67 percent at year-end 2000 and 1.07 percent at
year-end 1999. There were no accruing delinquent loans past due 90 days or more
at year-end 2001. Accruing delinquent loans past due 90 days or more were 0.06
percent at year-end 2000 and 0.07 percent at year-end 1999.

Nonperforming loans consist of nonaccrual loans (loans on which interest
income is not currently recognized) and restructured loans (loans with below
market interest rates or other concessions due to the deteriorated financial
condition of the borrower). Interest payments received on nonperforming loans
are applied to reduce principal if there is doubt as to the collectibility of
contractually due principal and interest. Nonperforming loans increased in 2001
due to loans in the construction and development (senior housing) and commercial
and business (asset-based) portfolios. One of the asset-based loans was affected
by the events of September 11, 2001, and is currently being restructured. This
increase in nonperforming loans resulted in a

25

decline in the allowance as a percent of nonperforming loans; 83.73 percent at
year-end 2001 compared with 179.73 percent at year-end 2000. The allowance as a
percent of total loans increased to 1.39 percent at year-end 2001 compared with
1.12 percent at year-end 2000. Nonperforming loans declined in both dollars and
as a percent of total loans in 2000; the allowance as a percent of nonperforming
loans increased in 2000. Loans accounted for on a nonaccrual basis, accruing
loans that are contractually past due 90 days or more, and restructured or other
potential problem loans were less than 2 percent of total loans as of the most
recent five year-ends. The aggregate amounts and the interest income foregone on
such loans are immaterial.

The investment in impaired loans was $66 million at year-end 2001 and $6
million at year-end 2000, with a related allowance for loan losses of $28
million and $3 million, respectively. The average investment in impaired loans
during 2001 and 2000 was $37 million and $45 million, respectively. The related
amount of interest income recognized on impaired loans for 2001 and 2000 was
immaterial.

Allowance for Loan Losses

The allowance for loan losses is comprised of specific allowances, general
allowances and an unallocated allowance. Management continuously evaluates the
allowance for loan losses to ensure the level is adequate to absorb losses
inherent in the loan portfolio. The allowance is increased by charges to income
and by the portion of the purchase price related to credit risk on loans
acquired through bulk purchases and acquisitions, and decreased by charge-offs,
net of recoveries.

Specific allowances are based on a thorough review of the financial
condition of the borrower, general economic conditions affecting the borrower,
collateral values and other factors. General allowances are based on historical
loss trends and management's judgment concerning those trends and other relevant
factors, including delinquency rates, current economic conditions, loan size,
industry competition and consolidation, and the effect of government regulation.
The unallocated allowance provides for inherent loss exposures not yet
identified. The evaluation of the appropriate level of unallocated allowance
considers current risk factors that may not be apparent in historical factors
used to determine the specific and general allowances. These factors include
inherent delays in obtaining information and the volatility of economic
conditions.

Changes in the allowance for loan losses were:

26

An analysis of the allocation of the allowance for loan losses follows.
Allocation of a portion of the allowance does not preclude its availability to
absorb losses in other categories of loans.

The allowance allocated to real estate mortgage was down in 2001 due to a
reduction in loans outstanding and improved credit quality and down in 2000 due
to charge-offs of loans previously provided for. The amount allocated to
construction and development was up in 2001 and 2000 due to loans in the senior
housing industry. The amount allocated to commercial and business loans was up
in 2001 due to the growth in asset-based lending partially offset by charge-offs
of syndicated loans previously provided for. The decrease in the unallocated
allowance in 2001 was the result of a more mature construction and development
portfolio reducing construction period and lease-up risk. The unallocated amount
was up in 2000 as a reflection of slowing economic activity and an increase in
the size of the loan portfolio. The allowance for loan losses is considered
adequate based on information currently available. However, adjustments to the
allowance may be necessary due to changes in economic conditions, assumptions as
to future delinquencies or loss rates and intent as to asset disposition
options. In addition, regulatory authorities periodically review the allowance
for loan losses as a part of their examination process. Based on their review,
the regulatory authorities may require adjustments to the allowance for loan
losses based on their judgment about the information available to them at the
time of their review.

Mortgage Banking Activities

Mortgage loan originations were $7.6 billion in 2001, $2.1 billion in 2000
and $3.7 billion in 1999. The record production in 2001 was due to the
acquisition of production operations in the upper mid-west and mid-Atlantic
regions and the high level of refinance activity resulting from the low interest
rate environment. Higher interest rates during 2000 resulted in a significant
reduction in mortgage refinancing activity, contributing to a reduction in
mortgage loan originations. Mortgage servicing portfolio runoff was 26.1 percent
in 2001, 13.9 percent in 2000 and 21.0 percent in 1999. The changes in the
runoff rates are due to the lower interest rate environments in 2001 and 1999,
leading to high levels of refinancing, and a relatively higher interest rate
environment in 2000 resulting in low levels of refinancing. The
mortgage-servicing portfolio was $11.4 billion at year-end 2001 and $19.5
billion at year-end 2000. The decrease was due to the sale of $8.6 billion in
servicing during the second quarter 2001 and the accelerated runoff rate. The
accelerated runoff rate was due to prepayments in the lower rate environment,
partially offset by the retention of servicing on a portion of the mortgage
loans originated.

Other Matters

The Financial Services Group is continuing its efforts to enhance return on
investment, including reviewing operations that are unable to meet return
objectives and determining appropriate courses of action. During January and
February 2002, a plan was enacted to exit certain businesses and product
delivery methods that were not expected to meet return objectives in the near
term. This action resulted in a reduction in force and the write-off of certain
technology investments; however, the ongoing cost savings from these actions is
anticipated to exceed significantly the related severance and write-off
expenses. During 2001, the

27

Financial Services Group completed acquisitions that significantly increased its
mortgage production capacity. In addition, the mortgage loan-servicing portfolio
was reduced by approximately 40 percent during the year through a bulk sale of
servicing and an increase in the sale of servicing with loan production. The
acquisitions and change in the size of the servicing portfolio were designed to
reposition the mortgage banking operations to be more of a production operation
and to minimize impairment risk associated with mortgage servicing rights.

CORPORATE, INTEREST AND OTHER INCOME/EXPENSE

Corporate expenses were $30 million in 2001, $33 million in 2000 and $30
million in 1999. The decrease in 2001 was primarily due to reduced pension
costs.

Parent company interest expense was $98 million in 2001, $105 million in
2000 and $95 million in 1999. The average interest rate on borrowings was 6.3
percent in 2001 and 7.2 percent in 2000. In addition, during 2001, debt was
reduced $43 million. Parent company interest expense for 1999 was reduced $28
million to reflect an allocation of parent company debt to the discontinued
bleached paperboard operation, which was sold at year-end 1999.

Other income/expense primarily consists of gains and losses on the sale or
disposition of under-performing and non-strategic assets. For 2001, it includes
a $20 million gain on the sale of non-strategic timberlands and $13 million of
losses related to under-performing assets. It also includes a $4 million fair
value adjustment of an interest rate swap agreement before its designation as a
cash flow hedge. For 2000, other income/expense consists of a $15 million charge
related to the decision to exit the fiber cement business.

PENSION CREDITS

Non-cash pension credits were $18 million in 2001, $9 million in 2000, $1
million in 1999. The increase in the pension credit in 2001 and 2000 reflects
the cumulative better than expected performance of the pension plan assets
through year-end 2000 and 1999. Based upon the actuarial valuation as of
year-end 2001, the pension credit will revert to a pension expense of
approximately $5 million for 2002. This is due mainly to less than expected
performance of the pension plan assets through year-end 2001.

INCOME TAXES

The effective tax rate was 37 percent in 2001, 39 percent in 2000 and 38
percent in 1999. The difference between the effective tax rate and the statutory
rate is due to state income taxes, nondeductible goodwill amortization and
losses in certain foreign operations for which no financial benefit was
recognized. The 2001 rate reflects a one time, 3 percent, financial benefit
realized from the sale of the corrugated packaging operation in Chile.

AVERAGE SHARES OUTSTANDING

Average diluted shares outstanding were 49.3 million in 2001, 50.9 million
in 2000 and 55.8 million in 1999. The decreases of 3 percent in 2001 and 9
percent in 2000 were due mainly to the effects of share repurchases under the
stock repurchase programs authorized during the fourth quarter 1999 and the
third quarter 2000.

CAPITAL RESOURCES AND LIQUIDITY FOR THE YEAR 2001

The consolidated net assets invested in the Financial Services Group are
subject, in varying degrees, to regulatory rules and regulations including
restrictions on the payment of dividends to the parent company. Accordingly, the
parent company and the Financial Services Group capital resources and liquidity
are discussed separately.

28

PARENT COMPANY

OPERATING ACTIVITIES

Cash from operations was $346 million, down 10 percent. The decrease was
due to lower earnings offset in part by better use of working capital and an
increase in dividends received from the Financial Services Group. Dividends
received from the Financial Services Group totaled $124 million in 2001 and $110
million in 2000.

Depreciation and amortization was $186 million, down $16 million. The
decrease was due to the revisions in the estimated useful lives of certain
production equipment, which reduced depreciation by $27 million, partially
offset by an increase in amortization of new technology systems and new capital
additions.

INVESTING ACTIVITIES

Capital expenditures were $184 million, down 17 percent. Capital
expenditures are expected to approximate $140 million for 2002.

Cash proceeds from the sale of 78,000 acres of non-strategic timberland
were $54 million. Cash used to acquire three corrugated packaging operations
totaled $144 million and $15 million was invested in existing building products
joint ventures.

There were no capital contributions to the Financial Services Group during
2001.

FINANCING ACTIVITIES

Long-term debt was reduced by $43 million, including a $25 million non-cash
reduction arising from the sale of the corrugated packaging operation in Chile.

During 2001, $200 million of 9.0 percent term notes were repaid using $100
million of short-term borrowings and $100 million from an existing three-year
revolving credit agreement. In the fourth quarter 2001, a wholly-owned and
consolidated subsidiary established a new $200 million trade receivable backed
revolving credit due in November 2002. Under this agreement, the subsidiary
purchases, on an ongoing basis, substantially all of the parent company's trade
receivables. As the parent company requires funds, the subsidiary draws under
its revolving credit agreement, pledges the trade receivables as collateral and
remits the proceeds to the parent company. In case of liquidation of the
subsidiary, its creditors would be entitled to satisfy their claims from the
subsidiary's assets before distributions back to the parent company. At year-end
2001, the subsidiary owned $248 million of trade receivables against which it
had borrowed $70 million of the $168 million currently available to borrow under
the agreement.

Cash dividends paid to shareholders were $63 million or $1.28 per share.

There were no treasury stock purchases during 2001 under the August 2000
Board of Directors authorization to repurchase 2.5 million shares. To date a
total of 750,000 shares had been repurchased under this authorization at a cost
of $31 million.

LIQUIDITY AND OFF BALANCE SHEET FINANCING ARRANGEMENTS

The following table summarizes the parent company's contractual cash
obligations at year-end 2001:

29

The parent company's sources of short-term funding are its operating cash
flows, which include dividends received from the Financial Services Group, and
its existing credit arrangements. The parent company operates in cyclical
industries, and its operating cash flows vary accordingly. The dividends
received from the Financial Services Group are subject to regulatory approval
and restrictions. At year-end 2001, the parent company had $505 million in
unused borrowing capacity under its existing credit agreements. Most of the
credit agreements contain terms and conditions customary for such agreements
including minimum levels of interest coverage and limitations on leverage. At
year-end 2001, the parent company complied with all the terms and conditions of
its credit agreements. Of the current credit agreements, $75 million in lines of
credit and the $200 million receivable securitization program could not be
accessed if the long-term debt of the parent company was rated below "investment
grade" by rating agencies. Several supply and lease agreements include similar
rating requirements, which if activated would result in a variety of remedies
including restructuring of the agreements. The long-term debt of the parent
company is currently rated BBB and Baa2 by the rating agencies. Because of the
announced tender offer for Gaylord Container Corporation and its related
financing commitment of $900 million, the current debt rating is being reviewed
by the rating agencies.

The following table summarizes the parent company's commercial commitments
at year-end 2001:

Approximately $17 million in joint venture guarantees, letters of credit
and recourse obligations include rating requirements, which if activated would
result in acceleration. Of the recourse obligations, $6 million relate to
receivables arising from the 1998 sale of the operations in Argentina, which
were subsequently sold with recourse. It is possible that the currency crisis in
Argentina will have some affect on the borrower's ability to repay these notes,
which could lead to these notes being repurchased by the parent company.

The parent company is a participant in three joint ventures engaged in
manufacturing and selling of paper and building materials. The joint venture
partner in each of these ventures is a publicly held company. At year-end 2001,
these ventures had $215 million in long-term debt of which the parent company
had guaranteed obligations and letters of credit aggregating $105 million. The
parent company has no unconsolidated special purpose entities.

The parent company has an interest rate and several commodity derivative
instruments outstanding at year-end 2001. The interest rate instrument expires
in 2008 and the majority of the commodity instruments expire in the third
quarter 2002. These instruments are non-exchange traded and are valued using
either third-party resources or models. At year-end 2001, the fair value of
these instruments is a negative $5 million. Adjustments in their fair value are
recorded in other comprehensive income, a component of shareholders' equity.

The preferred stock issued by subsidiaries of Guaranty Bank is
automatically exchanged into preferred stock of Guaranty Bank upon the
occurrence of certain regulatory events or administrative actions. If such
exchange occurs, each preferred share is automatically surrendered to the parent
company in exchange for senior notes of the parent company. At year-end 2001,
the outstanding preferred stock issued by these subsidiaries totaled $305
million.

THE FINANCIAL SERVICES GROUP

OPERATING ACTIVITIES

Cash used by operations in 2001 was $397 million compared with cash
provided by operations of $217 million in 2000. Higher earnings and an increase
in the change in cash for mortgage loans serviced for

30

others were more than offset by a $673 million increase in mortgage loans held
for sale. Mortgage loans held for sale were $958 million at year-end 2001.

INVESTING ACTIVITIES

Loans and securities decreased $750 million due primarily to a decrease in
mortgage assets resulting from the high level of prepayments in the lower
interest rate environment.

Cash proceeds from the sale of mortgage servicing rights totaled $143
million. During 2001, servicing rights on $8.6 billion in mortgage loans were
sold to mitigate exposure to changes in the valuation of mortgage servicing
rights in the lower interest rate environment.

Cash paid for acquisitions of mortgage production operations and an
asset-based lending portfolio was $364 million. Capital expenditures were $26
million.

FINANCING ACTIVITIES

Borrowings increased $1.1 billion during 2001. Borrowings consist primarily
of long- and short-term advances from Federal Home Loan Banks and securities
sold under repurchase agreements and resulted from funding needs as deposits
declined $766 million and earning assets grew slightly. The decline in deposits
was due to competitive market conditions.

Dividends paid to the parent company totaled $124 million.

CASH EQUIVALENTS

Cash equivalents were $587 million, an increase of $267 million. This
increase was primarily the result of proceeds received on the sale of mortgage
loans on the last day of 2001, which were used in January 2002 to reduce
borrowings.

LIQUIDITY, OFF BALANCE SHEET FINANCING ARRANGEMENTS AND CAPITAL ADEQUACY

The following table summarizes the Financial Services Group's contractual
cash obligations at year-end 2001:

The Financial Services Group's short-term funding needs are met through
operating cash flows, attracting new retail and wholesale deposits, increased
borrowings and converting assets to cash through sales or reverse repurchase
agreements. Assets that can be converted to cash include short-term investments,
mortgage loans held for sale and securities available-for-sale. At year-end
2001, the Financial Services Group had available liquidity of $2.0 billion. The
maturities of deposits in the above table are based on contractual maturities
and repricing periods. Most of the deposits that are shown to mature in 2002 are
comprised of transaction deposit accounts and short-term (less than one year)
certificates of deposit, most of which have historically renewed at maturity.

31

In the normal course of business, the Financial Services Group enters into
commitments to extend credit including loans, leases, and letters of credit.
These commitments generally require collateral upon funding and as such carry
substantially the same risk as loans. In addition, the commitments normally
include provisions that under certain circumstances allow the Financial Services
Group to exit the commitment. At year-end 2001, loan, lease and letter of credit
commitments totaled $5.0 billion with expiration dates primarily within the next
three years. In addition, at year-end 2001, commitments to originate
single-family residential mortgage loans totaled $985 million and commitments to
sell single-family residential mortgage loans totaled $1.1 billion.

At year-end 2001, the savings bank met or exceeded all applicable
regulatory capital requirements. The parent company expects to maintain the
savings bank's capital at a level that exceeds the minimum required for
designation as "well capitalized" under the capital adequacy regulations of the
Office of Thrift Supervision. From time to time, the parent company may make
capital contributions to the savings bank or receive dividends from the savings
bank. During 2001, the parent company received $124 million in dividends from
the savings bank.

At year-end 2001, preferred stock of subsidiaries was outstanding with a
liquidation preference of $305 million. These preferred stocks are automatically
exchanged into $305 million in savings bank preferred stock if federal banking
regulators determine that the savings bank is or will become undercapitalized in
the near term or upon the occurrence of certain administrative actions. If such
an exchange occurs, the parent company must issue senior notes in exchange for
the savings bank preferred stock in an amount equal to the liquidation
preference of the preferred stock exchanged.

Selected financial and regulatory capital data for the savings bank
follows:

Of the subsidiary preferred stock, $298 million qualifies as core
(leverage) capital and the remainder qualifies as Tier 2 (supplemental
risk-based) capital.

ENVIRONMENTAL MATTERS

Temple-Inland is committed to protecting the health and welfare of its
employees, the public and the environment, and strives to maintain compliance
with all state and federal environmental regulations. When constructing new
facilities or modernizing existing facilities, Temple-Inland uses state of the
art technology for controlling air and water emissions. These forward-looking
programs should minimize the effect that changing regulations have on capital
expenditures for environmental compliance.

Temple-Inland has been designated as a potentially responsible party at
nine Superfund sites, excluding sites as to which Temple-Inland's records
disclose no involvement or as to which Temple-Inland's potential liability has
been finally determined. At year-end 2001, Temple-Inland estimated the
undiscounted total costs it could incur for the remediation and toxic tort
actions at Superfund sites to be about $2 million, which

32

has been accrued. Temple-Inland also utilizes landfill operations to dispose of
non-hazardous waste at three paperboard and two building product mill
operations. At year-end 2001, Temple-Inland estimated that the undiscounted
total costs it could incur to ensure proper closure of these landfills over the
next twenty-five years to be about $14 million, which is being accrued over the
estimated lives of the landfills.

On April 15, 1998, the U.S. Environmental Protection Agency (EPA) issued
the Cluster Rule regulations governing air and water emissions for the pulp and
paper industry. Temple-Inland has spent approximately $15 million toward Cluster
Rule compliance through the end of 2001. Future expenditures for environmental
control facilities will depend on additional Maximum Available Control
Technology (MACT) II regulations for hazardous air pollutants relating to pulp
mill combustion sources (estimated at $2 million) and the upcoming plywood and
composite wood products MACT proposal (estimated at $12 million), as well as
changing laws and regulations and technological advances. Given these
uncertainties, Temple-Inland estimates that capital expenditures for
environmental purposes excluding the MACT rules during the period 2002 through
2004 will average approximately $12 million each year.

ENERGY AND THE EFFECTS OF INFLATION

Inflation has had minimal effects on operating results the last three years
except for the increase in energy costs during 2001 and 2000. Energy costs were
up $38 million in 2001 and $17 million in 2000. Energy costs began to rise
during the second quarter 2000 and continued to rise through the second quarter
2001. Energy costs peaked during the second quarter 2001 and began to decline
during the remainder of 2001 reaching more normalized levels by year-end 2001.
In some instances, Temple-Inland elected to take downtime at certain of its
manufacturing facilities rather than pay significantly higher energy prices.

The Paper Group is a party to a long-term power purchase contract agreement
with Southern California Edison (Edison). Under this agreement, the Paper Group
sold to Edison a portion of its electrical generating capacity from a
co-generation facility operated in connection with its Ontario mill. Edison was
to pay the Paper Group for its committed generating capacity and for electricity
generated and sold by Edison. During the fourth quarter 2000 and the first
quarter 2001, the Ontario mill generated and delivered electricity to Edison but
was not paid. During the second quarter 2001, the Paper Group notified Edison
that the long-term power purchase agreement was cancelled because of Edison's
material breach of the agreement. Edison contested the right of the Paper Group
to terminate the agreement. It has also asserted that it is entitled to recover
a portion of the payments it made during the term of the agreement from the
Paper Group. The parties are currently in litigation to determine, among other
matters, whether the agreement has been terminated and whether the Paper Group
may sell its excess generating capacity to third parties. The Paper Group
continues to provide power to Edison and has received some payments from Edison.
Temple-Inland does not believe that the resolution of these matters will have a
material adverse effect on its consolidated operations or financial position.

The parent company's fixed assets, including timber and timberlands, are
reflected at their historical costs. At current replacement costs, depreciation
expense and the cost of timber harvested or timberlands sold would be
significantly higher than amounts reported.

NEW ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ESTIMATE

Beginning January 2001, Temple-Inland adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. This statement requires that derivative instruments be
included on the balance sheet at fair value with the changes in their fair value
reflected in net income or other comprehensive income, depending upon the
classification of the derivative instrument. Temple-Inland uses to a limited
degree, derivative instruments to hedge risks, including those associated with
changes in product pricing, manufacturing cost and interest rates. Temple-Inland
does not use derivatives for trading purposes. The cumulative effect of adoption
was to reduce 2001 net income by $2 million. Additionally, as permitted by this
Statement, the Financial Services Group changed the designation of its portfolio
of held-to-maturity securities, which are carried at unamortized cost, to
available-for-sale, which are carried at fair value. As a result, the carrying
value of these securities was

33

adjusted to their fair value with a corresponding after tax reduction in other
comprehensive income, a component of shareholders' equity, of $16 million.

Beginning January 2001, the parent company began computing depreciation of
certain production equipment using revised useful lives. These revisions ranged
from a reduction of several years to a lengthening of up to five years and were
based on an assessment performed by the manufacturing groups, which indicated
that revisions of the estimated useful lives of certain production equipment
were warranted. The maximum estimated useful lives for production equipment is
25 years. As a result of these revisions, 2001 depreciation expense was reduced
by $27 million.

Temple-Inland adopted Statement of Financial Accounting Standards No. 141,
Business Combinations, on June 30, 2001. This Statement requires business
combinations to be accounted for using the purchase method.

Beginning January 2002, Temple-Inland adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under this
Statement, amortization of goodwill is precluded and goodwill is periodically
measured for impairment. The effect of not amortizing goodwill during 2001 would
have been to increase operating income by $11 million and net income by $9
million or $0.18 per diluted share. While Temple-Inland has not yet determined
the amount of goodwill impairment to be recognized during the first quarter 2002
upon adoption of this new statement, it is likely that up to $20 million of
goodwill associated with pre-2001 specialty packaging acquisitions may be
impaired. Under the new rules, impairment is measured based upon the present
value of future operating cash flows while under the old rules impairment was
measured based upon undiscounted future operating cash flows.

Temple-Inland will be required to adopt Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations, beginning 2003.
The company has not yet determined the effect on earnings or financial position
of adopting this statement. In addition, Temple-Inland will be required to adopt
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets beginning 2002. While Temple-Inland
has not yet determined the effect on earnings or financial position of adopting
this statement, it is likely that the effect of adoption will not be material.

34

STATISTICAL AND OTHER DATA (A)

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

(a) Revenues and unit sales do not include joint venture operations.

35

ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST
RATE RISK

INTEREST RATE RISK

Temple-Inland is subject to interest rate risk from the utilization of
financial instruments such as adjustable-rate debt and other borrowings, as well
as the lending and deposit-gathering activities of the Financial Services Group.
The following table illustrates the estimated impact on pre-tax income of
immediate, parallel and sustained shifts in interest rates for the subsequent
12-month period at year-end 2001, with comparative information at year-end 2000:

The change in exposure to interest rate risk from year-end 2000 is
primarily due to changes in the composition of assets and liabilities in the
Financial Services Group.

The operations of the Financial Services Group's savings bank are subject
to interest rate risk to the extent that interest-earning assets and
interest-bearing liabilities mature or reprice at different times or in
differing amounts. Since year-end 2000, the duration of the liabilities has
lengthened while the duration of the assets has shortened. The lengthened
duration of liabilities is the result of significant originations in longer-
term fixed rate certificates of deposit. The shortened duration of assets is the
result of composition changes caused by increased prepayments on the mortgage
and mortgage-backed securities portfolios, stemming from the lower interest rate
environment, and the growth in the loan portfolio.

Additionally, the fair value of the Financial Services Group's mortgage
servicing rights (estimated at $178 million at year-end 2001) is also affected
by changes in interest rates. Temple-Inland estimates that a 1 percent decline
in interest rates from current levels would decrease the fair value of the
mortgage servicing rights by approximately $37 million.

FOREIGN CURRENCY RISK

The Company's exposure to foreign currency fluctuations on its financial
instruments is not material because most of these instruments are denominated in
U.S. dollars.

COMMODITY PRICE RISK

From time to time the Company uses commodity derivative instruments to
mitigate its exposure to changes in product pricing and manufacturing costs.
These instruments cover a small portion of the Company's volume and range in
duration from three months to three years. Based on the fair value of these
instruments at year-end 2001, the potential loss in fair value resulting from a
hypothetical 10 percent change in the underlying commodity prices would not be
significant.

36

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

37

PARENT COMPANY (TEMPLE-INLAND INC.)

SUMMARIZED STATEMENTS OF INCOME

See the notes to the Parent Company summarized financial statements.

38

PARENT COMPANY (TEMPLE-INLAND INC.)

SUMMARIZED BALANCE SHEETS

See the notes to the Parent Company summarized financial statements.
39

PARENT COMPANY (TEMPLE-INLAND INC.)

SUMMARIZED STATEMENTS OF CASH FLOWS

See the notes to the Parent Company summarized financial statements.

40

NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)

SUMMARIZED FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The summarized financial statements include the accounts of Temple-Inland
Inc. and its manufacturing subsidiaries (the parent company). The net assets
invested in Temple-Inland Financial Services are subject, in varying degrees, to
regulatory rules and restrictions including restrictions on the payment of
dividends to the parent company. Accordingly, the investment in Temple-Inland
Financial Services is reflected in the summarized financial statements on the
equity basis. Related earnings, however, are presented before tax to be
consistent with the consolidated financial statements. All material intercompany
amounts and transactions have been eliminated. These financial statements should
be read in conjunction with the Temple-Inland Inc. consolidated financial
statements and the Temple-Inland Financial Services Group summarized financial
statements.

Certain amounts have been reclassified to conform to the current year's
classifications.

INVENTORIES

Inventories are stated at the lower of cost or market.

The cost of inventories amounting to $99 million at year-end 2001 and $93
million at year-end 2000 was determined by the last-in, first-out method (LIFO).
The cost of the remaining inventories was determined principally by the average
cost method, which approximates the first-in, first-out method (FIFO).

If the FIFO method of accounting had been applied to those inventories that
were determined by the LIFO method, inventories would have been $22 million and
$28 million more than reported at year-end 2001 and 2000, respectively.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation and
depletion. Included in property and equipment are $147 million of assets that
are subject to capital leases. Depreciation, which includes amortization of
assets subject to capital leases, is generally provided on the straight-line
method based on estimated useful lives as follows:

Certain machinery and production equipment is depreciated based on
operating hours or units of production because depreciation occurs primarily
through use rather than through elapsed time.

The parent company completed an assessment of the estimated useful lives of
certain production equipment, which resulted in a revision of estimated useful
lives. These revisions ranged from a reduction of several years to a lengthening
of up to five years. Accordingly, beginning January 2001, the parent company
began computing depreciation of certain production equipment using revised
estimated useful lives. As a result of these revisions in estimated useful
lives, year 2001 depreciation expense was reduced by $27 million and year 2001
net income was increased by $16 million or $0.33 per diluted share.

41

NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)

SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

Timber and timberlands are stated at cost, less accumulated cost of timber
harvested. Cost attributed to standing timber is charged against income as
timber is harvested at rates determined annually, based on the relationship of
unamortized timber costs to the estimated volume of recoverable timber. The
costs of seedlings and reforestation of timberlands are capitalized. The basis
of timberland sold is determined by the area method. The basis of timber sold is
determined by the average cost method.

The cost of significant additions and betterments is capitalized, and the
cost of maintenance and repairs is expensed.

ENVIRONMENTAL LIABILITIES

When environmental assessments or cleanups are probable and the costs can
be reasonably estimated, remediation liabilities are recorded on an undiscounted
basis and are adjusted as further information develops or circumstances change.
The estimated undiscounted cost to close and remediate company-operated
landfills are accrued over the estimated useful life of the landfill.

REVENUE RECOGNITION

Revenue is recognized upon passage of title to the customer.

NOTE B -- LONG-TERM DEBT

Long-term debt consists of the following:

42

NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)

SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

The parent company has various debt arrangements, which are subject to
conditions and covenants customary for such agreements, including levels of
interest coverage and limitations on leverage of the parent company. At year-end
2001, the parent company was in compliance with all such conditions and
covenants.

At year-end 2001, the parent company had credit agreements with banks
totaling $591 million with final maturities at various dates through 2004 that
support commercial paper and other short-term borrowings. Commercial paper and
other short-term borrowings totaling $27 million, trade receivable facility debt
of $70 million and current maturities of medium-term notes totaling $30 million
are classified as long-term debt in accordance with the parent company's intent
and ability to refinance such obligations on a long-term basis.

Stated maturities of the parent company's long-term debt during the next
five years are as follows (in millions): 2002 -- $107; 2003 -- $202;
2004 -- $121; 2005 -- $159; 2006 -- $135; 2007 and thereafter --$615.

During 2001, a wholly owned subsidiary of the parent company established a
$200 million trade receivable backed revolving credit arrangement due in
November 2002. Under this arrangement, the subsidiary purchases, on an on-going
basis, substantially all of the parent company's trade receivables. As the
parent company requires funds, the subsidiary draws under its revolving credit
arrangement, pledges the trade receivables as collateral and remits the proceeds
to the parent company. In the event of liquidation of the subsidiary, its
creditors would be entitled to satisfy their claims from the subsidiary's assets
prior to distributions back to the parent company. At year-end 2001, the
subsidiary owned $248 million in trade receivables against which it had borrowed
$70 million of the $168 million currently available under the revolving credit
agreement. This subsidiary is included in the parent company's summarized
financial statements. In addition to above, at year-end 2001, property and
equipment having a net book value of approximately $14 million were subject to
liens in connection with $46 million of debt.

Capitalized construction period interest in 2001, 2000 and 1999 was $4
million, $4 million and $2 million, respectively, and is deducted from interest
expense. Parent company interest paid during 2001, 2000 and 1999 was $103
million, $108 million and $117 million, respectively.

NOTE C -- JOINT VENTURES

The parent company's significant joint venture investments at year-end 2001
are: Del-Tin Fiber LLC -- a 50 percent owned venture that produces medium
density fiberboard in El Dorado, Arkansas; Standard Gypsum LP -- a 50 percent
owned venture that produces gypsum wallboard at facilities in McQueeny, Texas,
and Cumberland City, Tennessee; and, Premier Boxboard Ltd. -- a 50 percent owned
venture that produces gypsum facing paper and corrugating medium in Newport,
Indiana. The joint venture partner in each of these ventures is an unrelated
publicly held company.

Combined summarized financial information for these joint ventures follows:

43

NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)

SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

The parent company provides marketing and management services to these
ventures. Fees for such services aggregated $5 million, $5 million, and $3
million during 2001, 2000 and 1999, respectively, and are reported as a
reduction of cost of sales and selling expense. The parent company purchases, at
market rates, finished products from one of these joint ventures. These
purchases aggregated $58 million and $29 million during 2001 and 2000,
respectively. The investment in these joint ventures is included in other assets
and the equity in the net loss of these ventures in included in cost of sales.

During 2001, the parent company contributed $15 million to these ventures
and received a $1 million dividend.

Near the end of the second quarter 2000, the parent company transferred
ownership of its corrugating medium mill in Newport, Indiana, and associated
debt of $50 million to Premier Boxboard Ltd. This was done as part of its
agreement to maintain a 50 percent interest in the venture. The fair value of
the assets contributed exceeded their carrying value by $55 million. This
difference is being recognized in earnings at the rate of $5.5 million per year.
At year-end 2001, the unamortized difference was $47 million. In the third
quarter 2000, the venture completed its conversion of the mill so that it could
produce lightweight gypsum facing paper as well as corrugated medium.

NOTE D -- ACQUISITIONS AND DISPOSITIONS

During January 2002, the parent company initiated a tender offer to acquire
Gaylord Container Corporation. The transaction is contingent on several matters
including the tender of at least two-thirds of outstanding shares and at least
90% in aggregate principal amount of the senior notes and 82.6 percent of the
senior subordinated notes. The tender is scheduled to expire on February 28,
2002 and will be funded from a bank financing commitment. At its latest
year-end, September 2001, Gaylord had total assets of $1 billion and a deficit
in stockholders' equity of $114 million. For the year-ended September 2001,
Gaylord had total revenues of $1.1 billion, operating income of $45 million and
a net loss of $27 million.

During May 2001, the parent company completed the acquisitions of the
corrugated packaging operations of Chesapeake Corporation and Elgin Corrugated
Box Company. These operations consist of 11 corrugated converting plants in
eight states. The aggregate purchase price of $135 million was allocated to the
acquired assets and liabilities based on their fair values with $36 million
allocated to goodwill. During October 2001, the parent company completed the
acquisition of Compro Packaging. These operations consist of two corrugated
converting plants. The aggregate purchase price of $9 million was allocated to
the acquired assets and liabilities based on fair values with $9 million
allocated to goodwill. The operating results of these packaging operations are
included in the accompanying summarized financial statements from their
acquisition dates. The unaudited pro forma results of operations, assuming these
acquisitions had been effected as of the beginning of the applicable fiscal
year, would not have been materially different from those reported.

During the third quarter of 1999, the parent company decided to discontinue
its bleached paperboard operation. Accordingly, the results of the bleached
paperboard operation have been classified as discontinued operations, and prior
periods have been restated. The bleached paperboard mill was sold in December
1999 for approximately $576 million in cash and the assumption of $82 million of
debt. The eucalyptus fiber project in Mexico, which was to be a source of
hardwood fiber for the bleached paperboard mill, was sold during 2001 at

44

NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)

SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

a price that approximated its carrying value. For the year 1999, the
discontinued operation reported revenues of $381 million, loss from operations
of $21 million and a loss on disposal of $71 million.

Interest expense of $28 million was allocated to the discontinued
operations, based on debt allocated to the operations. The loss from operations
is net of income tax benefits of $13 million in 1999. The loss on disposal is
net of income tax benefits of $44 million. Included in the loss on disposal were
estimated operating losses of the Eucalyptus fiber project through the
anticipated date of disposal of $2 million.

NOTE E -- OTHER (INCOME) EXPENSE

In connection with the 2001 sale of a box plant in Chile, the parent
company also recognized a one-time benefit of $8 million, which is reflected as
a reduction of income tax expense.

In connection with its decision to exit the fiber cement business, the
parent company retained $53 million of assets that are leased to a third party.
The lease agreement provides for payments of $3.4 million per year and expires
in 2020. At year-end 2001, these assets have a carrying amount of $47 million
and are included in other assets.

NOTE F -- COMMITMENTS AND CONTINGENCIES

The Parent Company leases timberlands, equipment and facilities under
operating lease agreements. Future minimum rental commitments under
non-cancelable operating leases having a remaining term in excess of one year,
exclusive of related expenses, are as follows (in millions): 2002 -- $42;
2003 -- $27; 2004 -- $22; 2005 -- $19; 2006 -- $16; 2007 and thereafter -- $191.
Total rent expense was $49 million, $46 million and $34 million during 2001,
2000, and 1999, respectively.

The parent company also leases two manufacturing facilities under capital
lease agreements with municipalities, which expire in 2022 and 2025. These
capital lease obligations total $188 million and have been offset by the
purchase by the parent company of an equal amount of bonds issued by these
municipalities which are funded with identical terms and secured by the payments
due under the capital lease obligations.

At year-end 2001, the parent company has unconditional purchase
obligations, principally for gypsum and timber, aggregating $16 million that
will be paid over the next 5 years. The parent company also has acquired rights
to timber and timberlands under agreements, which require the parent company to
pay the owners $61 million in 2006; this obligation is included in other
long-term liabilities.

In connection with its joint venture operations, the parent company has
guaranteed obligations and letters of credit aggregating $105 million at
year-end 2001.

The preferred stock issued by subsidiaries of Guaranty Bank is
automatically exchanged into preferred stock of Guaranty Bank upon the
occurrence of certain regulatory events or administrative actions. If such

45

NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)

SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

exchange occurs, each preferred share is automatically surrendered to the parent
company in exchange for senior notes of the parent company. At year-end 2001,
the outstanding preferred stock issued by these subsidiaries totals $305
million. See Note K of the Financial Services Group summarized financial
statements for further information.

The parent company has $75 million in lines of credit and a $200 million
receivable securitization program, which could not be accessed and $17 million
in joint venture guarantees, letters of credit and recourse obligations which
would be accelerated if the parent company was rated below "investment grade" by
rating agencies. Several supply and lease agreements include similar rating
requirements, which if activated would result in a variety of remedies including
restructuring of the agreements.

In connection with the 1999 sale of the bleached paperboard mill, the
parent company agreed, subject to certain limitations, to indemnify the
purchaser from certain liabilities including environmental liabilities and
contingencies associated with the parent company's operation and ownership of
the mill.

In connection with the 1998 sale of its Argentina box plant, the parent
company received $11 million in secured promissory notes, which were
subsequently sold with recourse to a financial institution. At year-end 2001,
the amounts due under these notes totaled $6 million. During 2001, the parent
company also sold, with recourse to financial institutions, $6 million of other
notes receivable.

46

FINANCIAL SERVICES GROUP

SUMMARIZED STATEMENTS OF INCOME

See the notes to Financial Services Group summarized financial statements.

47

FINANCIAL SERVICES GROUP

SUMMARIZED BALANCE SHEETS

See the notes to the Financial Services Group summarized financial statements.

48

FINANCIAL SERVICES GROUP

SUMMARIZED STATEMENTS OF CASH FLOWS

See the notes to the Financial Services Group summarized financial statements.

49

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Temple-Inland Financial Services Group (group) summarized financial
statements include savings bank, mortgage banking, real estate and insurance
brokerage operations. The assets and operations of this group are subject, in
varying degrees, to regulatory rules and restrictions, including restriction on
the payment of dividends to the parent company. All material intercompany
amounts and transactions have been eliminated. Certain amounts have been
reclassified to conform to the current year's classification. These financial
statements should be read in conjunction with the Temple-Inland Inc. (the
company) consolidated financial statements.

DERIVATIVE FINANCIAL INSTRUMENTS

Beginning January 2001, the group adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended. The cumulative effect of adopting this statement was to reduce 2001
net income by $1 million. This loss resulted from recording the fair value of
derivative instruments that do not qualify for hedge accounting treatment.

As permitted by this statement, the group reassessed the classification of
its mortgage-backed and other securities. As a result of that reassessment, on
January 1, 2001, the group transferred $864 million in mortgage-backed
securities from held-to-maturity to available-for-sale. This transfer resulted
in a $16 million after-tax reduction in other comprehensive income, a component
of shareholders' equity.

MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale consist primarily of single-family residential
loans collateralized by the underlying property. Prior to January 1, 2001,
mortgage loans held for sale were carried at the lower of cost or market in the
aggregate. Net unrealized losses were recognized in a valuation allowance by
charges to income. Effective January 1, 2001, in connection with the adoption of
FAS No. 133, the carrying value of mortgage loans held for sale that have been
designated with an effective fair-value hedge, is adjusted for changes in fair
value after the date of hedge designation, based on sale commitments or current
market quotes. Fair value adjustments and realized gains and losses are
classified as noninterest income.

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable are stated at unpaid net principal balances less any
allowance for loan losses. Interest on loans receivable is credited to income as
earned. The accrual of interest ceases when collection of principal or interest
becomes doubtful. When interest accrual ceases, uncollected interest previously
credited to income is reversed. Certain loan fees and direct loan origination
costs are deferred. These net fees or costs, as well as premiums and discounts
on loans, are amortized to income using the interest method over the remaining
period to contractual maturity and adjusted for anticipated prepayments. Any
unamortized loan fees or costs, premiums, or discounts are taken to income in
the event a loan is sold or repaid.

The allowance for loan losses is increased by charges to income and by the
portion of the purchase price related to credit risk on bulk purchases of loans
and on acquisitions. The allowance is decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the allowance is
based on the group's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may have affected the borrower's ability to
repay, estimated value of any underlying collateral, and current economic
conditions.

Loans receivable are assigned a risk rating to distinguish levels of credit
risk and loan quality. These risk ratings are categorized as pass or criticized
grade with the resultant allowance for loan losses based on this

50

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

distinction. Certain loan portfolios are considered to be performance based and
are graded by analyzing performance through assessment of delinquency status.

The allowance for loan losses is comprised of specific allowances for
impaired loans, general allowances for pass graded loans and pools of criticized
loans with common risk characteristics and an unallocated allowance based on
analysis of other economic factors. Specific allowances on impaired loans are
measured by comparing the basis in the loan to: 1) estimated present value of
total expected future cash flows, discounted at the loan's effective rate, or 2)
the loan's observable market price, or 3) the fair value of the collateral if
the loan is collateral dependent.

The group uses general allowances for pools of loans with relatively
similar risks based on management's assessment of homogenous attributes, such as
product types, markets, aging and collateral. The group uses information on
historic trends in delinquencies, charge-offs and recoveries to identify
unfavorable trends. The analysis considers adverse trends in the migration of
classifications to be an early warning of potential problems that would indicate
a need to increase loss allowances over historic levels.

The unallocated allowance for loan losses is determined based on
management's assessment of general economic conditions as well as specific
economic factors in individual markets. The evaluation of the appropriate level
of unallocated allowance considers current risk factors that may not be
reflected in the historical trends used to determine the allowance on criticized
and pass graded loans. These factors may include inherent delays in obtaining
information regarding a borrower's financial condition or changes in their
unique business conditions; the judgmental nature of individual loan
evaluations, collateral assessments and the interpretation of economic trends;
volatility of economic or customer-specific conditions affecting the
identification and estimation of losses for larger non-homogeneous loans; and
the sensitivity of assumptions used to establish general allowances for
homogenous groups of loans. In addition, the unallocated allowance recognizes
that ultimate knowledge of the loan portfolios may be incomplete.

MORTGAGE-BACKED AND OTHER SECURITIES

The group determines the appropriate classification of mortgage-backed and
other securities at the time of purchase and confirms the designation of these
debt securities as of each balance sheet date. Debt securities are classified as
held-to-maturity and stated at amortized cost when the group has both the intent
and ability to hold the securities to maturity. Otherwise, debt securities and
marketable equity securities are classified as available-for-sale and are stated
at fair value with any unrealized gains and losses, net of tax, reported as a
component of shareholder's equity.

The cost of securities classified as held-to-maturity or available-for-sale
is adjusted for amortization of premiums and accretion of discounts by a method
that approximates the interest method over the estimated lives of the
securities. Should any such assets be sold, gains and losses are recognized
based on the specific-identification method.

REAL ESTATE

Real estate consists primarily of land and commercial properties held for
development and sale, although certain properties are held for the production of
income. Interest on indebtedness and property taxes during the development
period, as well as improvements and other development costs, are generally
capitalized. The cost of land sales is determined using the relative sales value
method. Real estate also includes properties acquired through loan foreclosure.

Real estate held for future development and real estate projects being
developed are evaluated for impairment in accordance with the recognition and
measurement provisions governing long-lived assets to be held and used in
operations. Real estate projects that are substantially completed and ready for
their intended

51

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

use are measured at the lower of carrying amount or estimated fair value minus
the cost to sell in accordance with the provisions governing long-lived assets
that are to be disposed of.

MORTGAGE SERVICING RIGHTS

The group allocates a portion of the cost of originating a mortgage loan to
the mortgage servicing right based on its fair value relative to the loan as a
whole. Capitalized mortgage loan servicing rights are amortized in proportion
to, and over the period of, estimated net servicing revenues. The fair market
value of originated mortgage servicing rights is estimated using buyers' quoted
prices for servicing rights with similar attributes, such as loan type, size,
escrow and geographic location. Purchased mortgage servicing rights are recorded
at cost.

To evaluate possible impairment of mortgage servicing rights, the portfolio
is periodically stratified based on the predominant risk characteristics and the
capitalized basis of each stratum is compared to fair value. Predominant risk
characteristics considered include loan type and interest rate. Should the
capitalized mortgage servicing rights, net, exceed fair value, impairment is
recognized through a valuation allowance.

Amortization expense and changes to the valuation allowance are included in
loan origination, marketing and servicing fees, net, in the summarized
statements of income.

INCOME TAXES

The group is included in the consolidated income tax return filed by the
parent company. Under an agreement with the parent company, the group provides a
current income tax provision that takes into account the separate taxable income
of the group. Deferred income taxes are recorded by the group.

NOTE B -- ACQUISITIONS

During the third quarter 2001, the group acquired mortgage loan production
and processing offices for $63 million cash. The excess of the purchase price
over the fair value of the identifiable net assets acquired was $8 million. This
goodwill is not being amortized but will be periodically assessed for
impairment.

On February 1, 2001, the group acquired certain assets (primarily
asset-based loans), totaling $300 million, from FINOVA Capital Corporation
(FINOVA) for $301 million cash. The excess of the purchase price over the fair
value of the net identifiable assets acquired of $1 million was being amortized
on the straight-line method over 10 years.

On March 1, 2000, the group acquired all of the outstanding stock of
American Finance Group, Inc. (AFG) for $32 million cash. AFG, an industrial and
commercial equipment leasing and financing operation, had total assets
(primarily financing leases, loans, and equipment under operating leases) of
$161 million and total liabilities (primarily debt) of $132 million, of which
$128 million was repaid after acquisition. The excess of the purchase price over
the fair value of the identifiable net assets acquired of $1 million was being
amortized on the straight-line method over 10 years.

On June 29, 1999, the group acquired all of the outstanding stock of HF
Bancorp, Inc., the parent company of Hemet Federal Savings & Loan Association
(Hemet) for $119 million cash. Hemet had total assets of $1.2 billion (primarily
loans and securities) and total liabilities of $1.1 billion (primarily
deposits). The excess of the purchase price over the fair value of the
identifiable net assets acquired of $40 million was being amortized on the
straight-line method over 25 years.

On June 11, 1999, the group acquired the assets of Fidelity Funding, Inc.
(Fidelity) for $18 million in cash. Fidelity, an asset based lending operation,
had assets (primarily loans) of $111 million. The excess of the purchase price
over the fair value of the identifiable net assets acquired of $18 million was
being amortized on the straight-line method over 10 years.

52

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

The FINOVA acquisition and all acquisitions in 2000 and 1999 were accounted
for as purchase business combinations in accordance with Accounting Principles
Board Opinion No. 16, Business Combinations. The amortization of goodwill
associated with these acquisitions will cease beginning January 1, 2002 and the
remaining goodwill will be periodically assessed for impairment.

The acquisitions were accounted for under the purchase method of accounting
and, accordingly, the acquired assets and liabilities were adjusted to their
estimated fair values at the date of the acquisitions. The operating results of
the acquisitions are included in the accompanying summarized financial
statements from the acquisition dates. The unaudited pro forma results of
operations, assuming the acquisitions had been effected as of the beginning of
the applicable fiscal year would not have been materially different from those
reported.

NOTE C -- LOANS RECEIVABLE

The outstanding principal balances of loans receivable consists of the
following:

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

(a) Includes residential construction.

Real estate mortgages are primarily single-family adjustable-rate loans
secured by properties located primarily in California and Texas. Construction
and development loans consist primarily of office, multi-family, retail,
industrial, residential and senior housing properties and are predominantly
located in Texas, California, Florida, Georgia, Colorado, Illinois and Arizona.
Commercial and business loans include working capital, equipment financing,
asset-based loans and other business loans. Consumer and other loans include a
variety of products and are primarily secured by real estate.

The recorded investment in impaired loans was $66 million at year-end 2001
and $6 million at year-end 2000, with a related allowance for loans losses of
$28 million and $3 million, respectively. The average recorded investment in
impaired loans during the years ended 2001 and 2000 was approximately $37
million and $45 million, respectively. The related amount of interest income
recognized on impaired loans for the years ended 2001 and 2000 was immaterial.

At year-end 2001, the group had unfunded commitments on outstanding loans
totaling approximately $4.8 billion and commitments to originate loans of $304
million. In addition, at year-end 2001, the group had issued letters of credit
totaling $197 million. The portion of these amounts to be ultimately funded is
uncertain.

53

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

Activity in the allowance for loan losses was as follows:

NOTE D -- MORTGAGE-BACKED AND OTHER SECURITIES

The amortized cost and fair values of mortgage-backed and other securities
consists of the following:

54

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

The average yield on available-for-sale mortgage-backed, debt and equity
securities for 2001 was 5.72 percent, 6.73 percent and 4.49 percent,
respectively. The average yield on held-to-maturity mortgage-backed securities
for 2001 was 5.34 percent.

At year-end 1999, the carrying values of available-for- sale
mortgage-backed securities, debt securities and equity securities were $1.3
billion, $9 million, and $166 million, respectively. The carrying value of held
to maturity mortgage-backed securities at year-end 1999 was $1.1 billion.

Securities are classified according to their contractual maturities without
consideration of principal amortization, potential prepayments or call options.
Accordingly, actual maturities may differ from contractual maturities. Virtually
all mortgage-backed and other securities held at year-end 2001 were classified
as variable/no maturity.

The mortgage loans underlying mortgage-backed securities have adjustable
interest rates and generally have contractual maturities ranging from 15 to 40
years with principal and interest installments due monthly. The actual
maturities of mortgage-backed securities may differ from the contractual
maturities of the underlying loans because issuers or mortgagors may have the
right to call or prepay their securities or loans.

Certain mortgage-backed securities and other securities are guaranteed
directly or indirectly by the U.S. government or its agencies. Other
mortgage-backed securities not guaranteed by the U.S. government or its agencies
are senior subordinated securities considered investment grade quality by
third-party rating agencies. The collateral underlying these securities is
primarily residential properties located in California.

The group securitized and continued to hold $123 million and $297 million
of mortgage loans previously held in the loan portfolio, during 2001 and 2000,
respectively. The transfer to mortgage-backed securities was recorded at the
carrying value of the mortgage loans at the time of securitization. The market
value of the securities generated through these securitization activities are
obtained through active market quotes. The group held $614 million and $689
million in such securities at year-end 2001 and 2000, respectively.

NOTE E -- REAL ESTATE

Real estate is summarized as follows (in millions):

55

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE F -- PROPERTY AND EQUIPMENT

Property and equipment, included in other assets, are summarized as
follows:

NOTE G -- DEPOSITS

Deposits consists of the following:

Scheduled maturities of time deposits at year-end 2001 are as follows:

At year-end 2001, time deposits maturity dates were as follows (in
millions):2002 -- $3,495; 2003 -- $1,703; 2004 -- $242; 2005 -- $139;
2006 -- $218; 2007 and thereafter -- $2.

NOTE H -- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

Securities sold under repurchase agreements were delivered to
brokers/dealers who retained such securities as collateral for the borrowings
and have agreed to resell the same securities back to the group at the
maturities of the agreements. The agreements generally mature within 30 days.

56

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

Information concerning borrowings under repurchase agreements is summarized
as follows:

At year-end 2001, the fair value of securities sold under repurchase
agreements was $782 million for FNMA certificates and $344 million for FHLMC
certificates.

NOTE I -- FEDERAL HOME LOAN BANK ADVANCES

Pursuant to collateral agreements with the Federal Home Loan Bank of Dallas
(FHLB), advances are secured by a blanket floating lien on the savings bank's
(Guaranty) assets and by securities on deposit at the FHLB.

Information concerning short-term Federal Home Loan Bank Advances is
summarized as follows:

In addition to short-term advances, at year-end 2001, $778 million in
long-term amortizing fixed-rate advances were outstanding. These advances had a
weighted average interest rate of 4.3 percent at year-end 2001.

At year-end 2001, the short and long-term advances had maturity dates as
follows (in millions): 2002 -- $2,816; 2003 -- $145; 2004 -- $104; 2005 -- $81;
2006 -- $151; 2007 and thereafter -- $138.

NOTE J -- OTHER BORROWINGS

Other borrowings, which represent borrowings of non-savings bank entities,
consists of the following:

57

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

At year-end 2001, a non-savings bank subsidiary had a $210 million credit
facility, which expires in 2002, with $39 million remaining unused.

At year-end 2001, maturities of other borrowings are as follows (in
millions): 2002 -- $174; 2003 -- $3; 2004 -- $3; 2005 -- $2; 2006 -- $2; 2007
and thereafter -- $30.

NOTE K -- PREFERRED STOCK ISSUED BY SUBSIDIARIES

Guaranty has two subsidiaries that qualify as real estate investment
trusts, Guaranty Preferred Capital Corporation (GPCC) and Guaranty Preferred
Capital Corporation II (GPCC II). Both are authorized to issue floating rate and
fixed rate preferred stock. These preferred stocks have a liquidation preference
of $1,000 per share, dividends that are non-cumulative and payable when
declared, and are automatically exchanged into Guaranty preferred stock, with
similar terms and conditions, if federal banking regulators determine that
Guaranty is, or will become, undercapitalized in the near term or an
administrative body takes an action that will prevent GPCC or GPCC II from
paying full quarterly dividends or redeeming any preferred stock. If such an
exchange occurs, the parent company must issue its senior notes in exchange for
the Guaranty preferred stock in an amount equal to the liquidation preference of
the preferred stock exchanged. The terms and conditions of the senior notes are
similar to those of the Guaranty preferred stock exchanged except that the rate
on the senior notes received by the former GPCC preferred stockholders is fixed
instead of floating. At year-end 2001, the liquidation preference of the
outstanding preferred stock issued by the Guaranty subsidiaries totals $305
million.

In 1997, GPCC issued an aggregate of 150,000 shares of floating rate
preferred stock for an aggregate consideration of $150 million cash. GPCC issued
an additional 75,000 shares in 1998 for an aggregate consideration of $75
million cash. The weighted average rate paid to preferred shareholders was 5.82
percent and 7.94 percent during 2001 and 2000, respectively. Within ten years of
issuance, at the option of GPCC, these shares may be redeemed in whole or in
part for $1,000 per share cash.

At inception in December 2000, GPCC II issued 35,000 shares of floating
rate preferred stock and 45,000 shares of 9.15 percent fixed rate preferred
stock for an aggregate consideration of $80 million cash. The weighted average
rate paid to floating rate preferred shareholders was 6.83 percent during 2001.
Prior to May 2007, at the option of GPCC II, these shares may be redeemed in
whole or in part for $1,000 per share cash plus, under certain circumstances, a
make-whole premium.

NOTE L -- MORTGAGE LOAN SERVICING

The group services mortgage loans that are owned primarily by independent
investors. The group serviced approximately 129,700 and 209,600 mortgage loans
aggregating $11.6 billion and $19.5 billion as of year-end 2001 and 2000,
respectively.

The group is required to advance, from group funds, escrow and foreclosure
costs on loans it services. The majority of these advances are recoverable,
except for certain amounts for loans serviced for GNMA. A reserve has been
established for unrecoverable advances. Market risk is assumed related to the
disposal of certain foreclosed VA loans. No significant losses were incurred
during 2001, 2000 or 1999 in connection with this risk.

58

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

Capitalized mortgage loan servicing rights, net of accumulated
amortization, were as follows:

Amortization expense related to mortgage loan servicing rights totaled $40
million, $34 million and $49 million for 2001, 2000 and 1999, respectively. The
valuation allowance was increased $6 million in 2001 by a charge to operations
and reduced $1 million in 2000 and $16 million in 1999 by a credit to
operations.

The estimated fair value of the capitalized mortgage servicing rights at
year-end 2001 was approximately $173 million. Fair value was determined
utilizing market-driven assumptions for prepayment speeds, discount rates and
other variables.

NOTE M -- INTEREST RATE RISK MANAGEMENT

Guaranty is a party to various interest rate corridor agreements, which
reduce the impact of increases in interest rates on its investments in
adjustable-rate mortgage-backed securities that have lifetime interest rate
caps. Under these agreements with notional amounts totaling $167 million and
$213 million at year-end 2001 and 2000, respectively, Guaranty simultaneously
purchased and sold caps whereby it receives interest if the variable rate based
on the FHLB Eleventh District Cost of Funds (EDCOF) Index (3.37 percent at
year-end 2001) exceeds an average strike rate of 8.81 percent and pays interest
if the same variable rate exceeds a strike rate of 11.75 percent. These
agreements mature through 2003. Guaranty did not receive or pay any amounts
under this agreement in 2001, 2000 or 1999.

Guaranty is also a party to an interest rate cap agreement to reduce the
impact of interest rate increases on certain adjustable rate investments with
lifetime caps. Under this agreement, with a notional amount of $29 million,
Guaranty would receive payments if the EDCOF exceeds the strike rate of 10
percent. This agreement matures in 2004. Guaranty did not receive or pay any
amounts under this agreement in 2001, 2000 or 1999.

59

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

These corridor and cap agreements do not qualify for hedge accounting and
are therefore recorded at fair value with changes in their fair value recorded
in income. The amounts related to these agreements subject to credit risk are
the streams of payments receivable by Guaranty under the terms of the contracts
not the notional amounts used to express the volumes of these transactions.
Guaranty minimizes its exposure to credit risk by entering into contracts with
major U.S. securities firms.

The mortgage banking operation enters into forward sales commitments to
deliver mortgage loans to third parties. These forward sales commitments hedge
volatility of interest rates between the time a mortgage loan commitment is made
and the subsequent funding and sale of the loan to a third party. During the
time these forward sale commitments are hedging a mortgage loan commitment, both
commitments are considered derivative financial instruments and are recorded at
fair value with changes in their fair value recorded in income. Upon origination
of a mortgage loan, the forward sale commitment is designated as a fair-value
hedge of the mortgage loan held for sale and changes in the fair value of both
the forward sale commitment and the mortgage loan held for sale are recorded in
income. At year-end 2001, the mortgage banking operation had commitments to
originate or purchase mortgage loans totaling approximately $681 million and
commitments to sell mortgage loans of approximately $1.1 billion. To the extent
mortgage loans at the appropriate rates are not available to fulfill the sales
commitments, the group is subject to market risk resulting from interest rate
fluctuations.

NOTE N -- COMMITMENTS

The group leases equipment and facilities under various operating lease
agreements. Future minimum rental payments, net of related sublease income and
exclusive of related expenses, under non-cancelable operating leases with a
remaining term in excess of one year are as follows (in millions): 2002 -- $17;
2003 -- $14; 2004 -- $11; 2005 -- $9; 2006 -- $3; 2007 and thereafter -- $6.

Total rent expense under these lease agreements was $19 million, $15
million and $14 million for 2001, 2000 and 1999, respectively.

NOTE O -- REGULATORY CAPITAL MATTERS

Guaranty is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
Guaranty's financial statements. The payment of dividends from Guaranty is
subject to proper regulatory notification.

Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Guaranty must meet specific capital guidelines that involve
quantitative measures of Guaranty's assets, liabilities and certain
off-balance-sheet items such as unfunded loan commitments, as calculated under
regulatory accounting practices. Capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. At year-end 2001, Guaranty met or exceeded all of
its capital adequacy requirements.

60

FINANCIAL SERVICES GROUP

NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)

At year-end 2001, the most recent notification from regulators categorized
Guaranty as "well capitalized." The following table sets forth Guaranty's actual
capital amounts and ratios along with the minimum capital amounts and ratios
Guaranty must maintain in order to meet capital adequacy requirements and to be
categorized as "well capitalized." No amounts were deducted from capital for
interest-rate risk at year-end 2001 or 2000.

61

TEMPLE-INLAND INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See the notes to the consolidated financial statements.

62

TEMPLE-INLAND INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See the notes to the consolidated financial statements.

63

TEMPLE-INLAND INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

See the notes to the consolidated financial statements.

64

TEMPLE-INLAND INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

See the notes to the consolidated financial statements.

65

TEMPLE-INLAND INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See the notes to the consolidated financial statements.

66

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Temple-Inland
Inc. and its manufacturing and financial services subsidiaries (the company).
Investments in joint ventures and other subsidiaries in which the company has
between a 20 percent and 50 percent equity ownership are reflected using the
equity method. All material intercompany amounts and transactions have been
eliminated. Certain amounts have been reclassified to conform to current year's
classifications.

The consolidated net assets invested in financial services activities are
subject, in varying degrees, to regulatory rules and restrictions including
restrictions on the payment of the dividends to the parent company. Accordingly,
included as an integral part of the consolidated financial statements are
separate summarized financial statements and notes for the company's
manufacturing and financial services groups, as well as the significant
accounting policies unique to each group.

The preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the amounts reported in
the financial statements and accompanying notes, including disclosures related
to contingencies. Actual results could differ from these estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and other short-term liquid
instruments with original maturities of three months or less.

TRANSLATION OF INTERNATIONAL CURRENCIES

Balance sheets of the company's international operations where the
functional currency is other than the U.S. dollar are translated into U.S.
dollars at year-end exchange rates. Adjustments resulting from financial
statement translation are reported as a component of shareholders' equity. For
other international operations where the functional currency is the U.S. dollar,
inventories, property, plant and equipment values are translated at the
historical rate of exchange, while other assets and liabilities are translated
at year-end exchange rates. Translation adjustments for these operations are
included in earnings and are not material.

Income and expense items are translated into U.S. dollars at average rates
of exchange prevailing during the year. Gains and losses resulting from foreign
currency transactions are included in earnings and are not material.

INCOME TAXES

Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax purposes computed using current tax rates.

STOCK-BASED COMPENSATION

The company uses the intrinsic value method in accounting for its
stock-based employee compensation plans.

FINANCIAL INSTRUMENTS

The company has, where appropriate, estimated the fair value of financial
instruments. These fair value amounts may be significantly affected by the
assumption used, including the discount rate and estimates of

67

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cash flow. Accordingly, the estimates presented are not necessarily indicative
of the amounts that could be realized in a current market exchange. Where these
estimates approximate carrying value, no separate disclosure of fair value is
shown.

DERIVATIVES

The company uses, to a limited degree, derivative instruments to mitigate
its exposure to risk, including those associated with changes in product
pricing, manufacturing costs and interest rates related to borrowings and
investments in securities, as well as mortgage production activities. Changes in
the fair value of derivative instruments designated as cash flow hedges are
deferred and recorded in other comprehensive income. These deferred gains or
losses are recognized in income when the transactions being hedged are
completed. The ineffective portion of these hedges, which is not material, is
recognized in income. Changes in the fair value of derivative instruments
designated as fair value hedges are recognized in income, as are changes in the
fair value of the hedged item. Changes in the fair value of derivative
instruments that are not designated as hedges for accounting purposes are
recognized in income. The company does not use derivatives for trading purposes.

LONG-LIVED ASSETS

Impairment losses are recognized on assets held for use when indicators of
impairment are present and the estimated undiscounted cash flows are not
sufficient to recover the assets' carrying amount. Assets held for disposal are
recorded at the lower of carrying value or estimated fair value less costs to
sell.

CAPITALIZED SOFTWARE

The company capitalizes purchased software costs as well as the direct
costs, both internal and external, associated with software developed for
internal use. Such costs are amortized using the straight-line method over
estimated useful lives of three to seven years. Costs capitalized were $48
million in 2001, $58 million in 2000 and $31 million in 1999. Amortization of
these costs were $13 million in 2001, $8 million in 2000 and $6 million in 1999.

NEW ACCOUNTING PRONOUNCEMENTS

Derivatives

Beginning January 2001, the company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. The cumulative effect of adopting this statement was to
reduce 2001 income by $2 million, or $0.04 per diluted share, and other
comprehensive income, a component of shareholders' equity, by $4 million. As
permitted by this statement, the company also changed the designation of its
January 2001 portfolio of held-to-maturity securities, which were carried at
unamortized cost, to available-for-sale, which are carried at fair value. As a
result, the $864 million carrying value of these securities was adjusted to
their fair value with a corresponding after-tax reduction of $16 million in
other comprehensive income.

Business Combinations

The company adopted Statement of Financial Accounting Standards No. 141,
Business Combinations, on June 30, 2001. This Statement requires business
combinations to be accounted for using the purchase method.

Goodwill

The company will be required to adopt Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, beginning 2002. Under
this statement, amortization of goodwill would be precluded and goodwill would
be periodically measured for impairment. The effect of not amortizing goodwill

68

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during the year 2001 would be to increase operating income by $11 million and
net income by $9 million or $0.18 per diluted share. While the company has not
yet determined the effect of earnings or financial position of adopting this
statement, it is possible that some portion of the existing goodwill at the
parent company may be impaired.

Other Recently Issued Standards

The company will be required to adopt Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations, beginning 2003
and Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, beginning 2002. The company has not
yet determined the effect on earnings or financial position of adopting these
statements.

NOTE 2 -- TAXES ON INCOME

Taxes on income from continuing operations consisted of the following:

Earnings or losses from operations consisted of the following:

69

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The difference between the consolidated effective income tax rate and the
federal statutory income tax rate include the following:

Significant components of the company's consolidated deferred tax assets
and liabilities are as follows:

The valuation allowance represents accruals for deductions and credits that
are uncertain and, accordingly, have not been recognized for financial reporting
purposes. The change in the valuation allowance is primarily the result of the
sale of a foreign subsidiary, partially offset by the increased foreign net
operating losses, the future realization of which is not assured.

The company has foreign net operating loss carryforwards of $53 million
that will expire from the year 2005 through the year 2011. Alternative minimum
tax credits may be carried forward indefinitely. In accordance with generally
accepted accounting principles, the company has not provided deferred taxes on
approximately $31 million of pre-1988 tax bad debt reserves.

70

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1999, the Internal Revenue Service (IRS) concluded its examination of
the company's consolidated tax returns for the years 1987 through 1992. As a
result of this examination, the company agreed to pay approximately $36 million
in taxes and interest for those years, of which $19 million was paid in 1999 and
the remainder in 2000. The IRS is currently examining the company's consolidated
tax returns for the years 1993 through 1996. The resolution of these
examinations is not expected to have a material adverse impact on the company's
financial condition or results of operations.

Cash income tax payments, net of refunds received, including the payments
related to the IRS exam were $29 million, $88 million and $72 million during
2001, 2000 and 1999, respectively.

NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and the estimated fair values of financial instruments
were as follows:

Differences between fair value and carrying amounts are primarily due to
instruments that provide fixed interest rates or contain fixed interest rate
elements. Inherently, such instruments are subject to fluctuations in fair value
due to subsequent movements in interest rates. All other financial instruments
are excluded from the above table because they are either carried at fair value
or have fair values that approximate their carrying amount due to their
short-term nature. The fair value of mortgage-backed and other securities
held-to-maturity and off-balance-sheet instruments are based on quoted market
prices. Other financial instruments are valued using discounted cash flows. The
discount rates used represent current rates for similar instruments.

At year-end 2001, the company has guaranteed certain joint venture
obligations principally related to fixed-rate debt instruments totaling $50
million and sold with recourse promissory notes totaling $12 million. It is not
practicable to estimate the fair value of these guarantees or contingencies.

NOTE 4 -- SHAREHOLDER RIGHTS PLAN

The company has a Shareholder Rights Plan in which one-half of a preferred
stock purchase right (Right) was declared as a dividend for each common share
outstanding. Each Right entitles shareholders to purchase, under certain
conditions, one one-hundredth of a share of newly issued Series A Junior
Participating Preferred Stock at an exercise price of $200. Rights will be
exercisable only if a person or group acquires beneficial ownership of 20
percent or more of the company's common shares or commences a tender or exchange
offer, upon consummation of which such person or group would beneficially own 25
percent or more

71

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the company's common shares. The company will generally be entitled to redeem
the Rights at $.01 per Right at any time until the 10th business day following
public announcement that a 20 percent position has been acquired. The Rights
will expire on February 20, 2009.

NOTE 5 -- EMPLOYEE BENEFIT PLANS

The company has pension plans covering substantially all employees. Plans
covering salaried and nonunion hourly employees provide benefits based on
compensation and years of service, while union hourly plans are based on
negotiated benefits and years of service. The company's policy is to fund
amounts on an actuarial basis in order to accumulate assets sufficient to meet
the benefits to be paid in accordance with the requirements of ERISA.
Contributions to the plans are made to trusts for the benefit of plan
participants. The annual measurement date of the benefit obligations, fair value
of plan assets and the funded status of employee benefit plans is September 30.
At year-end 2001 and 2000, the pension plan assets included company stock with
market values of $18 million (3 percent of plan assets) and $14 million (2
percent of plan assets), respectively.

The company also provides defined contribution plans for substantially all
employees. Expense for company matching contributions under these plans was
approximately $22 million in 2001, $19 million in 2000 and $18 million in 1999.
The company provides, as a postretirement benefit, medical and insurance
coverage to eligible salaried and hourly employees who reach retirement age
while employed by the company.

72

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The change in benefit obligation, plan assets and the funded status of
employee benefit plans follows:

The net prepaid benefit cost of $84 million at year-end 2001 is comprised
of pension plans with prepaid benefit cost totaling $109 million and accrued
benefit liabilities totaling $25 million. For plans with accumulated benefit
obligations in excess of plan assets, accumulated benefit obligation and fair
value of plan assets were $75 million and $51 million, respectively. For plans
with projected benefit obligations in excess of plan assets, projected benefit
obligation and fair value of plan assets were $477 million and $412 million,
respectively.

Significant assumptions used for the employee benefit plans follow:

73

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A 9 percent annual rate of increase in the per capita cost of covered
health care benefits was assumed for 2002. The rate was assumed to decrease
gradually to 4.5 percent for 2008 and remain at that level thereafter.

Net periodic benefit cost (credit) for pension and postretirement plans
include the following:

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

(a) In addition to the above, in 2001 the company recognized an additional $.4
million expense relating to pension benefits and $.3 million relating to
postretirement benefits from the restructuring of certain of the Building
Products operations. In 2000, the company recognized an additional $.3
million expense relating to postretirement benefits for special termination
benefits resulting from the restructuring of certain of the Building
Products operations. In 1999, the company recognized an additional $4
million credit relating to pension benefits and a $2 million credit
relating to postretirement benefits for curtailments resulting from the
sale of the bleached paperboard operation.

Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement benefits. A one percentage point change
in assumed health care cost trend rates would have the following effects:

NOTE 6 -- STOCK OPTION PLANS

The company has established stock option plans for key employees and
directors. The plans provide for the granting of nonqualified stock options
and/or incentive stock options, and prior to 1994, of stock appreciation rights
with all or part of any options so granted. Options granted after 1995 generally
have a ten-year term and become exercisable in steps from one to five years.

74

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of stock option activity follows:

Exercise prices for options outstanding at year-end 2001 range from $27 to
$75. The weighted average remaining contractual life of these options is eight
years. An additional 1,664,552, 755,956 and 1,727,156 shares of common stock
were available for grants at year-end 2001, 2000 and 1999, respectively.

Under the 1993 restricted stock plan, at year-end 2001, awards of 39,116
shares of restricted common stock were outstanding. The 1997 restricted stock
plan provided for a maximum of 300,000 shares of restricted common stock to be
reserved for awards. Under this plan, at year-end 2001, awards of 118,580 shares
of restricted common stock were outstanding and an additional 171,250 shares
were available for grants.

The fair value of the options granted in 2001, 2000 and 1999 was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions:

Assuming that the company had accounted for its employee stock options
using the fair value method and amortized such to expense over the options
vesting period, pro forma net income and diluted earnings per share would have
been $105 million and $2.12 per diluted share in 2001; $189 million and $3.71
per diluted share in 2000; and $96 million and $1.73 per diluted share in 1999.
The pro forma disclosures may not be indicative of future amounts due to changes
in subjective input assumptions and because the options vest over several years
with additional future option grants expected.

75

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- EARNINGS PER SHARE

Numerators and denominators used in computing earnings per share are as
follows:

NOTE 8 -- ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of other comprehensive income are as follows:

NOTE 9 -- CONTINGENCIES

There are pending against the company and its subsidiaries lawsuits, claims
and environmental matters arising in the regular course of business. The outcome
of individual matters cannot be predicted with certainty.
76

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the opinion of management, recoveries and claims, if any, by plaintiffs
or claimants resulting from the foregoing litigation will not have a material
adverse effect on its operations or the financial position of the company.

NOTE 10 -- SEGMENT INFORMATION

The company has three reportable segments: paper, building products and
financial services. The Paper Group manufactures containerboard and corrugated
packaging. The Building Products Group manufactures a variety of building
materials and manages the company's timber resources. The Financial Services
Group operates a savings bank and engages in mortgage banking, real estate and
insurance brokerage activities.

These segments are managed as separate business units. The company
evaluates performance based on operating income before other income/expense,
corporate expenses and income taxes. Parent Company interest expense is not
allocated to the business segments. The accounting policies of the segments are
the same as those described in the accounting policy notes to the financial
statements. Corporate and other includes corporate expenses, other income
(expense) and discontinued operations.

77

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(a) Operating income includes $27 million reduction in depreciation expense
resulting from a change in the estimated useful lives of certain production
equipment, of which $20 million applies to the paper segment and $7 million
applies to the building products segment.

(b) Includes other expense of $19 million, of which $15 million applies to the
paper segment and $4 million to corporate, and other income of $20 million,
which applies to the building products segment.

(c) Includes other expense of $15 million, which applies to the building
products segment.

The following table includes revenues and property and equipment based on
the location of the operation:

78

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Selected quarterly financial results for the years 2001 and 2000 are
summarized below.

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

(a) Includes a $20 million pre-tax gain from sale of non-strategic timberlands;
a $3 million pre-tax loss related to the disposal of two specialty
packaging operations; a $4 million impairment pre-tax charge related to an
interest in a glass bottling venture in Puerto Rico; a $4 million pre-tax
loss related to the sale of a box plant in Chile; and a $4 million pre-tax
charge related to the fair value adjustment of an interest rate swap
agreement. In connection with the sale of the box plant in Chile, a
one-time tax benefit of $8 million was recognized.

79

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(a) Includes a $15 million pre-tax charge related to the discontinued
fiber-cement operation.

NOTE 12 -- OTHER INFORMATION

Allowance for doubtful accounts were $11 million at year-end 2001, $10
million at year-end 2000 and $9 million at year-end 1999. The provision for bad
debts was $8 million in 2001, $6 million in 2000 and $5 million in 1999. Bad
debt charge-offs, net of recoveries were $7 million in 2001, $5 million in 2000
and $6 million in 1999. The unrealized gain (loss) on available-for-sale
mortgage-backed securities was an unrealized gain of $26 million and $17 million
at year-end 2001 and 2000, respectively, and an unrealized loss of $19 million
at year-end 1999. The unrealized gain increased by $9 million and $36 million
for the years 2001 and 2000, respectively, and decreased by $22 million for the
year 1999.

80

MANAGEMENT REPORT ON FINANCIAL STATEMENTS

Management has prepared and is responsible for the company's financial
statements, including the notes thereto. They have been prepared in accordance
with generally accepted accounting principles and necessarily include amounts
based on judgments and estimates by management. All financial information in
this annual report is consistent with that in the financial statements.

The company maintains internal accounting control systems and related
policies and procedures designed to provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and properly recorded, and that accounting records may be relied
upon for the preparation of financial statements and other financial
information. The design, monitoring and revision of internal accounting control
systems involve, among other things, management's judgment with respect to the
relative cost and expected benefits of specific control measures. The company
also maintains an internal auditing function that evaluates and formally reports
on the adequacy and effectiveness of internal accounting controls, policies and
procedures.

The company's financial statements have been examined by Ernst & Young LLP,
independent auditors, who have expressed their opinion with respect to the
fairness of the presentation of the statements.

The Audit Committee of the Board of Directors, composed solely of outside
directors, meets with the independent auditors and internal auditors to evaluate
the effectiveness of the work performed by them in discharging their respective
responsibilities and to assure their independent and free access to the
committee.

KENNETH M. JASTROW, II
Chairman of the Board and
Chief Executive Officer

LOUIS R. BRILL
Chief Accounting Officer

81

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Temple-Inland Inc.:

We have audited the accompanying consolidated balance sheets of
Temple-Inland Inc. and subsidiaries as of December 29, 2001 and December 30,
2000, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 29,
2001. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits 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 Temple-Inland
Inc. and subsidiaries at December 29, 2001 and December 30, 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 29, 2001, in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, in 2001
the Company changed its method of accounting for derivative instruments and
hedging activities.

Ernst & Young LLP

Austin, Texas
January 25, 2002

82

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The Company has had no changes in or disagreements with its independent
auditors to report under this item.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated herein by reference
from the Company's definitive proxy statement, involving the election of
directors, to be filed pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this Form 10-K (the "Definitive Proxy Statement"). Information
required by this item concerning executive officers is included in Part I of
this report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents Filed as Part of Report.

1. Financial Statements

The financial statements of the Company and its consolidated subsidiaries
are included in Part II, Item 8 of this Annual Report on Form 10-K.

2. Financial Statement Schedule

All schedules are omitted as the required information is either
inapplicable or the information is presented in the Consolidated Financial
Statements and notes thereto in Item 8 above.

83

3. Exhibits

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

* Management contract or compensatory plan or arrangement.

(1) Incorporated by reference to Registration Statement No. 2-87570 on Form S-1
filed by the Company with the Commission.

(2) Incorporated by reference to Post-effective Amendment No. 2 to Registration
Statement No. 2-88202 on Form S-8 filed by the Company with the Commission.

(3) Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement No. 33-25650 on Form S-8 filed by the Company with the
Commission.

(4) Incorporated by reference to Registration Statement No. 33-27286 on Form
S-8 filed by the Company with the Commission.

(5) Incorporated by reference to Registration Statement No. 33-8362 on Form S-1
filed by the Company with the Commission.

(6) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1988.

(7) Incorporated by reference to the Company's Registration Statement on Form
8A filed with the Commission on February 19, 1999.

(8) Incorporated by reference to the Company's Form 8-K filed with the
Commission on December 27, 1990.

(9) Incorporated by reference to Registration Statement No. 33-40003 on Form
S-3 filed by the Company with the Commission.

(10) Incorporated by reference to Registration Statement No. 33-43978 on Form
S-3 filed by the Company with the Commission.

85

(11) Incorporated by reference to Registration Statement No. 33-50880 on Form
S-3 filed by the Company with the Commission.

(12) Incorporated by reference to the Company's Definitive Proxy Statement in
connection with the Annual Meeting of Shareholders held May 6, 1994, and
filed with the Commission on March 21, 1994.

(13) Incorporated by reference to the Company's Form 10-K for the year ended
January 2, 1993.

(14) Incorporated by reference to the Company's Definitive Proxy Statement in
connection with the Annual Meeting of Shareholders held May 2, 1997, and
filed with the Commission on March 17, 1997.

(15) Incorporated by reference to the Company's Form 8-K filed with the
Commission on June 2, 1998.

(16) Incorporated by reference to the Company's Definitive Proxy Statement in
connection with the Annual Meeting of Shareholders held May 7, 1999, and
filed with the Commission on March 26, 1999

(17) Incorporated by reference to the Company's Definitive Proxy Statement in
connection with the Annual Meeting of Shareholders held May 4, 2001, and
filed with the Commission on March 23, 2001

(18) Incorporated by reference to the Company's Form 10-K for the year ended
December 30, 2000.

(19) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 2001.

(20) Incorporated by reference to the Schedule TO filed by the Company on
January 22, 2002, in connection with the proposed acquisition of Gaylord
Container Corporation.

(21) Filed herewith.

(b) Reports on Form 8-K.

The Company did not file any Current Reports on Form 8-K during the fourth
quarter of the fiscal year ended December 29, 2001.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned thereunto
authorized, on February 27, 2002.

TEMPLE-INLAND INC.
(Registrant)

By: /s/ KENNETH M. JASTROW, II
------------------------------------
Kenneth M. Jastrow, II
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

88

INDEX TO EXHIBITS