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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from              to             

Commission File No. 1-7852

POPE & TALBOT, INC.

Registrant’s telephone number, including area code: (503) 228-9161

NONE

Former name, former address and former fiscal year, if changed since last report.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the close of the latest practicable date.

Common stock, $1 par value – 15,765,529 shares as of April 26, 2004.

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

POPE & TALBOT, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

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POPE & TALBOT, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

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

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POPE & TALBOT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

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POPE & TALBOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004

(Unaudited)

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Effective income tax rates for interim periods are based on the current best estimate of taxable earnings for the full year. This rate is applied to year-to-date income or loss at the end of each quarter. Results for the first three months of the year may not necessarily be indicative of the results that may be expected for the full year.

The balance sheet at December 31, 2003 was derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain reclassifications have been made to the prior year’s data to conform to the current year’s presentation. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Earnings per share

The computation of basic earnings per share is based on net income or loss and the weighted average number of common shares outstanding during each period. The weighted average shares outstanding for the three months ended March 31, 2004 and 2003 were 15,677,000 and 15,618,000, respectively. Diluted earnings per share reflect the assumed issuance of common stock equivalents related to dilutive stock options and restricted stock awards. The computation of diluted earnings per share does not assume conversion or exercise of securities that would have an antidilutive effect on earnings per share. For the first quarter of 2004 and 2003, the computation of diluted net loss per share was antidilutive; therefore, the amounts reported for basic and diluted were the same.

Company stock options were not included in the computation of diluted earnings per share because the impact of their inclusion would be antidilutive as a result of the Company being in a loss position. Stock options, with prices ranging from $5.25 to $30.38 per share, averaged 1,495,000 and 1,524,000 for the three months ended March 31, 2004 and 2003, respectively.

Stock-Based Compensation

As allowed by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, the Company has retained the compensation measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations for stock options. Under APB Opinion No. 25, compensation expense is recognized based upon the difference, if any, at the measurement date between the market value of the stock and the option exercise price. The measurement date is the date at which both the number of options and the exercise price for each option are known. The following table illustrates the

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effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

The Company has followed the practice of using treasury stock to fulfill its obligations under its stock option plans. When stock is issued pursuant to a stock option plan, the difference between the exercise price and the cost of treasury shares is recorded as an increase or decrease to additional paid-in capital.

To calculate stock-based employee compensation expense under SFAS No. 123, the Company estimated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2004 and 2003, respectively: risk-free interest rates of 4.6 and 3.4 percent; dividend yields of 3.6 and 4.1 percent; and expected volatility of 46 percent for both periods. Expected option lives of six years were assumed.

The Company has entered into a Receivable Purchase Agreement with a financial institution to sell at its option up to $30 million of qualifying accounts receivable on a revolving basis. At March 31, 2004 and December 31, 2003, accounts receivable totaling $28.7 million and $27.6 million, respectively, were excluded from accounts receivable in the accompanying Consolidated Balance Sheets. The proceeds available under this program are subject to change based on the level of eligible receivables and restrictions on the concentrations of receivables. The costs under this program vary based on changes in interest rates (LIBOR) and are included in selling, general and administrative expenses.

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Interim LIFO calculations require the estimation of the Company’s year-end inventory quantities and costs. These estimates are revised quarterly and the estimated incremental change in the LIFO inventory reserve is expensed over the remainder of the year. The portion of inventories determined using the last-in, first-out (LIFO) method are reflected in the above table at an aggregate of $25.4 million and $20.6 million using the average cost method, at March 31, 2004 and December 31, 2003, respectively.

The Company’s $15 million U.S. revolving line of credit agreement expired in March 2004 and was replaced by a three-year revolving line of credit agreement with another U.S. bank. The agreement provides for maximum borrowings of $25 million and is secured by certain accounts receivable and inventories. The agreement expires in March 2007 and contains financial covenants, including maximum leverage ratios, net worth tests and maximum capital expenditures. The interest rate associated with the U.S. revolving credit agreement is based, at the option of the Company, on specified market rates plus a margin based on the Company’s debt ratio, as defined.

The components of net periodic benefit cost related to Company administered plans for the three-month periods ended March 31 were as follows:

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The Company classifies its business into two operating segments: pulp and wood products. A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements was as follows:

Import Duties

Approximately 80 percent of the Company’s current lumber capacity is located in British Columbia, Canada. Between April 1996 and April 2001, exporters of softwood lumber from Canada to the U.S. were subject to tariffs on lumber volumes in excess of defined tariff-free volumes under the Canada-U.S. Softwood Lumber Agreement (SLA). Upon expiration of the SLA on April 1, 2001, petitions for the imposition of antidumping duties (ADD) and countervailing duties (CVD) on softwood lumber from Canada were filed with the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC), by certain U.S. industry and trade groups. In response to the petitions, the ITC conducted a preliminary injury investigation and in May 2001, determined that there was a reasonable indication that the lumber industry in the United States was threatened with material injury by reason of softwood lumber imports from Canada.

In August 2001, the DOC issued its preliminary determination on the CVD and imposed a preliminary duty rate of 19.31 percent to be posted by cash deposits or bonds on sales of softwood lumber to the U.S. on or after August 17, 2001. The DOC also made a preliminary determination that certain circumstances existed which would have resulted in duties on sales of softwood lumber applying retroactively to May 19, 2001 (Critical Circumstances). The preliminary duty rate of 19.31 percent was suspended on December 15, 2001, 120 days after the preliminary determination, in accordance with U.S. law.

In October 2001, the DOC issued its preliminary determination on the ADD and imposed a company-specific preliminary duty rate on six companies reviewed ranging from 5.94 percent to 19.24 percent. All other companies, including Pope & Talbot’s Canadian subsidiary, received the weighted average rate of the six companies of 12.58 percent. The preliminary ADD rate applied to all shipments of softwood lumber made to the U.S. on or after November 6, 2001. The DOC did not find Critical Circumstances in its preliminary ADD ruling and, therefore, did not assess those duties retroactively.

In March 2002, the DOC announced revised import duty rates of 19.34 percent and 9.67 percent, respectively in the CVD and ADD cases. The DOC also determined that there would be no retroactive application of the CVD prior to August 17, 2001. In May 2002, the ITC finalized its determination of a threat of material injury from Canadian softwood lumber imports, but also determined to impose ADD and CVD only on shipments into the United States on or after May 22, 2002. Also in May 2002, the DOC finally determined the CVD deposit rate to be 18.79 percent and the ADD deposit rate applicable to the Company to be 8.43 percent, resulting in a combined duty deposit rate of 27.22 percent on the Company’s lumber imports from May 22, 2002 to the present time.

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On May 22, 2002, the Company began expensing and making cash deposits of import duties at the 27.22 percent deposit rate, and incurred duties of $14.1 million in the balance of 2002, $29.4 million in 2003 (including $6.4 million in the first quarter of 2003), and $8.9 million in the first quarter of 2004. Accordingly, the Company has made total cash deposits of $52.4 million with respect to lumber imported into the U.S. from May 22, 2002 through March 31, 2004.

The rulings of the ITC and the DOC have been appealed by Canadian authorities to panels under the North American Free Trade Agreement (NAFTA) and of the World Trade Organization (WTO). In a decision dated April 19, 2004, a NAFTA panel ruled that the ITC’s determination of a “threat of material injury” from subsidized and dumped imports of Canadian softwood lumber is not in accordance with law and not supported by substantial evidence, and remanded the case to the ITC for further proceedings consistent with the panel’s findings. A final decision by this NAFTA panel against the ITC would have the effect of invalidating the duties on Canadian softwood lumber and requiring the refund of all duties deposited to date. Any final decision could be subject to extraordinary appeals by the U.S. government. Two other NAFTA panels have been reviewing the DOC’s determinations regarding the ADD deposit rate and the CVD deposit rate, respectively. In response to decisions of these NAFTA panels, the DOC has preliminarily redetermined the CVD deposit rate, adjusting it down from 18.79 percent to 13.23 percent, and the ADD deposit rate, adjusting it from 8.43 percent to 8.85 percent. However, these adjusted rates are subject to further NAFTA panel reviews and will not be implemented until completion of the respective NAFTA proceedings.

Under U.S. law, the ADD and CVD deposit rates were determined based on historical government subsidies and dumping practices, but the final rates for duties payable on imports during any particular period must be based on government subsidies and dumping during that period. Accordingly, in June 2003, the DOC began conducting administrative reviews to determine the CVD and ADD rates to be applied retroactively to Canadian lumber imports during the initial period of review, consisting of the period from May 22, 2002 to March 31, 2003. Similar administrative reviews will be conducted for each subsequent 12-month period. Depending on the results of the administrative reviews, the Company may receive refunds of excess CVD and ADD deposits or be required to make additional CVD and ADD payments. DOC’s finally determined CVD and ADD rates in any administrative review then become the new deposit rates for subsequent lumber imports. Decisions by the DOC in these administrative reviews will also be subject to potential appeals to NAFTA and WTO panels. Preliminary determinations by DOC on the initial administrative reviews are expected by June 1, 2004.

As of this time, the Company cannot determine the impact the administrative reviews will have on the ADD and CVD rates. Beginning in the second quarter of 2007, both the CVD and ADD orders will be automatically reviewed in a “sunset” proceeding to determine whether dumping or a countervailing subsidy would be likely to continue or recur.

Various NAFTA and WTO rulings, including those discussed above, have been issued to date, but none of these rulings have become final. In the event that final rates differ from the current combined 27.22 percent deposit rate, ultimate costs will be higher or lower than those recorded to date. The ultimate outcome or effect of NAFTA and WTO reviews, or whether a settlement between the Canadian and U.S. governments may be reached, cannot be predicted.

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The Forestry Revitalization Plan

In March 2003, the Government of British Columbia (Crown) introduced the Forestry Revitalization Plan (the “Plan”) that provides for significant changes to Crown forest policy and to the existing allocation of Crown timber tenures to licensees. The changes prescribed in the Plan include: the elimination of minimum cut control regulations, the elimination of existing timber processing regulations, and the elimination of restrictions limiting the transfer and subdivision of existing licenses. In addition, the Crown has legislated that licensees, including the Company, will be required to return 20 percent of their replaceable tenure to the Crown. Because the first 200,000 cubic meters of allowable annual cut (AAC) are not subject to reduction, the timber take-back is expected to result in a reduction of approximately 200,000 cubic meters, or 16 percent, of the Company’s existing annual allowable cut. The Company expects the reductions in its AAC can be made up through market purchases of logs. The Crown has stated that licensees will be fairly compensated for lost harvesting rights and improvements on Crown land, such as roads and bridges, based on the remaining term of the license and calculated according to a regulation that has not yet been enacted. The Minister of Forests has three years from March 31, 2003 to determine reductions to a licensee’s AAC. The effect, if any, on the Company’s financial position, liquidity or results of operations cannot be determined at this time. The Company will record the effects of the Plan at the time the amounts to be recorded are determinable. In addition, the Crown is expected to introduce a market-based timber pricing system for stumpage fees in the British Columbia interior by the end of 2004. It is not known when that change will be implemented, or the extent to which the stumpage fees paid by the Company’s Canadian lumber operations will increase or decrease.

Environmental Matters

The Company is currently participating in the investigation and environmental remediation of several sites where the Company currently conducts or previously conducted business. The ultimate costs to the Company for the investigation, remediation and monitoring of these sites cannot be predicted with certainty, due to the often unknown magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups and the evolving nature of cleanup technologies and governmental regulations. The Company has recognized liabilities for environmental remediation costs for these sites in amounts that it believes are probable and reasonably estimable within a range of amounts. The minimum amount in the range is accrued when no estimate within the range is better than another. As additional information becomes known, it is at least reasonably possible that a change in the estimated liabilities accrued will occur in the near term. Remediation costs incurred are charged against the reserves and the Company has assumed it will bear the entire cost of remediation at these sites.

The Company is working with the Washington Department of Ecology (WDOE) to remediate the Company’s former mill site and surrounding area at Port Gamble, Washington. The Company is responsible for environmental remediation costs related to five landfills used by the Company that contain wood debris and industrial wastes. As of March 31, 2004, the Company’s remediation efforts for four of the five landfills have been completed. The remaining landfill remediation work will be completed in 2004, and the Company expects to receive “no further action” letters from WDOE for all the landfills in 2004. WDOE also requested that the Company perform an investigation of sediments in the adjacent bay to determine the extent of wood waste accumulation. The Company completed the bay sediment characterization during 2002 and, in the second quarter of 2003, submitted a corrective action plan related to the wood waste accumulation in the bay. Remediation dredging was conducted in 2003 as part of the corrective action. The Company received approval of the corrective action plan from WDOE in April 2004. The reserve balance for this site was $0.7 million at March 31, 2004. Remediation costs charged to the reserve in first quarter of 2004 totaled $0.1 million. The Company expects the remaining remediation costs to be incurred in 2004 and expects to incur monitoring costs through 2013.

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In June 2002, the Company was requested by Environment Canada, based on detection of environmental contamination in an effluent treatment pond at the Mackenzie pulp mill, to prepare a remediation plan for this pond. The environmental contamination occurred before the Company acquired the mill as a result of a manufacturing process that was discontinued at the mill in 1993. The Company is working with British Columbia’s Ministry of Land, Water and Air Protection to develop an appropriate remediation plan, with site testing and partial dredging at the pond completed in the third quarter of 2003. The reserve balance was $1.6 million at March 31, 2004, representing the low end of the range of estimated remediation costs. Remediation costs charged to the reserve in first quarter of 2004 totaled $0.1 million. The Company expects the remaining remediation costs to be incurred in 2004 through 2007.

In 1992, the Oregon Department of Environmental Quality (ODEQ), based on detection of creosote and hydrocarbon contamination, determined that a vacant industrial site in St. Helens, Oregon, formerly owned by the Company required further action. The Company is currently participating in the investigation phase of this site. The remediation reserve balance for this site was $3.7 million at March 31, 2004, representing the low end of the range of estimated future remediation and monitoring costs at this site. The reserve is for the estimated costs of soil and groundwater remediation and post remediation monitoring costs. The Company currently expects the majority of the remediation costs to be incurred in 2006, with post remediation monitoring costs to begin in 2007 and to continue for 15 to 20 years.

Benefit Plans

In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) was enacted. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Due to uncertainties in determining the impact the Act could have to the Company’s accumulated postretirement obligation and net periodic postretirement benefit cost, the consolidated financial statements do not reflect the effect the Act may have on the Company’s postretirement plans for its U.S. employees. Upon resolution of such uncertainties, which include the current lack of regulatory guidance, the Company will recognize the effects of the Act, which are not expected to be material.

Other Litigation

In addition to the matters discussed above, the Company is a party to other legal proceedings generally incidental to the business. Although the final outcome of any legal proceeding is subject to a great many variables and cannot be predicted with any degree of certainty, the Company believes that any ultimate outcome resulting from these proceedings would not have a material effect on its financial position, liquidity or results of operations.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Overview

The Company experienced an improvement in the market prices for pulp and lumber during the first quarter of 2004, but continued to be adversely affected by the effect of import duties on Canadian softwood lumber as well as a weaker U.S. dollar as compared to the first quarter of 2003. A weakening U.S. dollar increases the Company’s reported pulp and wood products manufacturing costs that are incurred primarily in Canadian dollars. The Company lost $3.3 million in the first quarter of 2004 on revenues of $177.3 million, compared with a net loss of $7.6 million in the first quarter of 2003 on revenues of $148.2 million and a net loss of $5.7 million in the fourth quarter of 2003 on revenues of $155.0 million. Basic and diluted net loss per share was $0.21 for the first quarter of 2004, $0.49 for the first quarter of 2003 and $0.36 for the fourth quarter of 2003.

Prices for both of the Company’s products were up significantly in the first quarter of 2004 compared with the same period of 2003. The continuing low interest rate environment and strong home building activity led to higher demand for wood products. Average lumber price realizations in the first quarter of 2004 were 30 percent higher than the first quarter of 2003. Market demand for pulp also remained strong, particularly in southeast Asia, China and Japan. Average pulp price realizations in 2004 were 19 percent higher than in the same period a year ago. Sales volumes for both products were down slightly in 2004 compared with the first quarter of 2003.

The average Canadian to U.S. dollar exchange rate in the first quarter of 2004 was 15 percent higher than in the first quarter of 2003, and essentially unchanged from the fourth quarter of 2003. While pulp and lumber sales are made primarily in U.S. dollars, the majority of the Canadian subsidiaries’ expenses are in Canadian dollars. The Company estimates that the change in the Canadian to U.S. dollar exchange rate between the two periods increased first quarter 2004 reported cost of goods sold by approximately $14 million.

Lumber import duties totaled $8.9 million in the first quarter of 2004, compared with $6.4 million in the same quarter of 2003. The higher amount reflected higher lumber sales prices in 2004.

Selected Segment Data

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Selected Segment Data- continued

Pulp

Revenues from the Company’s Pulp business totaled $109.1 million in the first quarter of 2004 compared with $93.4 million in the same quarter of 2003 and $93.1 million in the fourth quarter of 2003, an increase of 17 percent over both quarters. The increase primarily related to higher prices in the first quarter of 2004. Pulp generated an operating income before corporate expenses, interest and income taxes of $0.2 million in the first quarter of 2004 and 2003, compared with an operating loss of $3.9 million in the fourth quarter of 2003. EBITDA from the Company’s pulp operations totaled $7.8 million in the first quarter of 2004 compared with $7.4 million in the first quarter of 2003 and $3.7 million in the fourth quarter of 2003.

According to RISI World Pulp Monthly, an industry trade publication, the average benchmark list price of NBSK pulp delivered into Northern Europe was $590 per metric ton in first quarter of 2004 compared with $478 per metric ton in the same quarter of 2003 and $552 per metric ton in the fourth quarter of 2003. The Company’s average pulp price for its mix of chip and sawdust pulp was $514 per metric ton in the first quarter of 2004 compared with $431 per metric ton in the first quarter of 2003, an increase of $83 per metric ton, or 19 percent. Compared with an average pulp sales price of $494 per metric ton in the fourth quarter of 2003, the Company’s average pulp sales price improved $20 per metric ton, or four percent in the first quarter of 2004. Total metric tons sold in the first quarter of 2004 decreased two percent to 212,200 compared with 216,700 in the same quarter of 2003. Compared with total metric tons sold of 188,700 in the fourth quarter of 2003, pulp sales volume in the first quarter of 2004 increased 12 percent.

Pulp cost of sales was $105.9 million in the first quarter of 2004, compared with $90.2 million in the same quarter of 2003, an increase of 17 percent, and $93.9 million in the fourth quarter of 2003, an increase of

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13 percent. Pulp production totaled 202,400 metric tons in the first quarter of 2004 compared with 205,400 metric tons and 201,700 metric tons in the first and fourth quarters of 2003. As the result of higher prices, no adjustments to pulp inventory carrying values were required at March 31, 2004. Write-downs of pulp inventories totaled $1.5 million at December 31, 2003 and $0.1 million at March 31, 2003. Inventory write-downs reflect the difference between production costs and anticipated sales prices of period-end inventories. Cost of pulp sold in the first quarter of 2004 was reduced by a $1.2 million cash settlement on termination of a transportation contract. Cost of pulp sold in the first quarter of 2003 included a $0.9 million gain on the sale of excess land at the Company’s Harmac pulp mill.

The average cost per metric ton of pulp sold in the first quarter of 2004 increased 20 percent compared with the same period in 2003 and was essentially unchanged compared with the fourth quarter of 2003. A significant factor affecting pulp cost of sales is the average exchange rate used to translate operating costs of the Company’s Canadian pulp mills from Canadian dollars to U.S. dollars. The value of the U.S. dollar relative to the Canadian dollar declined significantly between the first quarter of 2003 and the first quarter of 2004. The Company estimates that the decrease in the average daily U.S. to Canadian dollar exchange rate resulted in an approximately $9.5 million increase in pulp cost of sales, or an 11 percent increase in the average cost per metric ton of pulp sold in the first quarter of 2004. The remaining nine percent increase in pulp cost of sales primarily related to higher fiber costs, which rise and fall with the sales price of pulp, and higher energy costs. In addition, extreme winter weather in British Columbia and performance problems at the Harmac pulp mill resulted in the loss of approximately 7500 metric tons of pulp production and a corresponding increase in the average cost per ton of pulp produced and sold.

Wood Products

Revenues from the Company’s Wood Products business totaled $68.2 million in first quarter of 2004 compared with $54.8 million in the same quarter of 2003, an increase of 24 percent, and $61.8 million in the fourth quarter of 2003, an increase of 10 percent. The increases related primarily to increases in sales prices. Wood Products generated operating income before corporate expenses, interest and income taxes of $3.0 million in the first quarter of 2004, compared with an operating loss of $3.7 million in the same quarter of 2003 and operating income of $1.2 million in the fourth quarter of 2003. EBITDA from Wood Products totaled $4.8 million in the first quarter of 2004 compared with ($1.4) million in the first quarter of 2003 and $3.1 million in the fourth quarter of 2003.

Mill lumber prices in the U.S., as measured by Random Lengths prices for western spruce/pine/fir 2x4 lumber, averaged $359 per thousand board feet for the first quarter of 2004 compared with $239 per thousand board feet for the first quarter of 2003 and $290 for the fourth quarter of 2003. The Company’s lumber sales prices averaged $404 per thousand board feet in the current quarter, an increase of $93 per thousand board feet, or 30 percent, compared with $311 in the first quarter of last year. Compared with an average lumber sales price of $373 per thousand board feet in the fourth quarter of 2003, the Company’s average lumber sales price improved $31 per thousand board feet, or eight percent, in the first quarter of 2004. Lumber sales volume decreased two percent to 147.9 million board feet in the first quarter of 2004 compared with 151.4 million board feet in the same quarter of 2003 and increased three percent compared with 143.9 million board feet in the fourth quarter of 2003.

Wood Products cost of sales was $63.9 million in the first quarter of 2004 compared with $57.3 million in the same quarter of 2003, an increase of 12 percent, and $59.6 million in the fourth quarter of 2003, an increase of seven percent. Included in cost of sales were lumber import duties of $8.9 million in the first quarter of 2004, $6.4 million in the first quarter of 2003 and $7.3 million in the fourth quarter of 2003. Lumber production totaled 161.2 million board feet in the first quarter of 2004, compared with 165.9 million board feet in the same period of last year and 149.8 million board feet in the fourth quarter of 2003. The average cost per thousand board feet of lumber sold was 14 percent higher in the first quarter of 2004 compared with the same quarter of 2003 and four percent higher compared with the fourth quarter of 2003. The change in the amount of lumber import duties included in cost of sales in 2004 compared with 2003

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increased the average cost of lumber sold per thousand board feet by approximately three percent. Another significant factor affecting Wood Products cost of sales is the average exchange rate used to translate operating costs of the Company’s Canadian lumber operations from Canadian dollars to U.S. dollars. The Company estimates that the decrease in the average daily U.S. to Canadian dollar exchange rate between the first quarter of 2003 and the first quarter of 2004 resulted in an approximately $4.9 million increase in Wood Products cost of sales or a 9 percent increase in the average cost per thousand board feet of lumber sold in the first quarter of 2004. The remaining three percent increase in the average cost of lumber sold related primarily to lower volume produced.

Corporate Expenses, Interest and Income Taxes

Selling, general and administrative expenses (SG&A) for the first quarter of 2004 totaled $7.6 million compared with $6.9 million in the same period of 2003 and $7.6 million in the fourth quarter of 2003. SG&A expenses in 2004 increased from the first quarter a year ago due to increases in a number of corporate costs including compensation and benefits, depreciation and banking fees. Net interest expense totaled $5.3 million for the first quarters of 2004 and 2003 and the fourth quarter of 2003.

The Company’s effective tax rate for the first quarter of 2004 was 39 percent compared with 33 percent for the same period of 2003. The Company’s effective tax rate for the year 2003 was 39 percent. Effective income tax rates for interim periods are based on the current best estimate of taxable earnings for the full year. This rate is applied to year-to-date income or loss at the end of each quarter. The Company’s effective tax rate can fluctuate due to the sensitivity of the rate to changing income levels and the mix of domestic and foreign sources of income, and, therefore, the effective tax rate for the year 2004 is subject to change.

Liquidity and Capital Resources

Operating Activities

During the first quarter of 2004, net cash provided by operating activities was $1.8 million compared with net cash used for operating activities of $13.4 million in the first quarter of 2003. The increase in net cash provided by operating activities related primarily to higher sales prices for the Company’s products and favorable changes in working capital items in 2004. In the first quarter of 2004, changes in working capital included an increase in accounts receivable of $11.9 million, primarily due to higher product sales prices and volumes compared with the fourth quarter of 2003. Inventories increased $5.6 million primarily due to higher lumber and log inventories. Accounts payable and accrued liabilities increased $15.1 million from year-end 2003, primarily due to higher accruals for payroll and benefits, interest and maintenance expenses.

Significant changes in working capital in the first quarter of 2003 included an increase in accounts receivable of $13.0 million, primarily due to higher pulp prices and an increase in sales volume. Inventories decreased $2.7 million. In addition decreases in prepaid expenses and other assets were mostly offset by increases in accounts payable and accrued liabilities.

Investing Activities

In the first quarter of 2004, the Company’s revolving credit facility with a U.S. bank and its related restricted cash requirement expired. The Company invested $3.1 million in capital projects in the first quarter of 2004 and estimates that total 2004 capital spending will approximate $20 million to $25 million. These capital projects relate primarily to upgrading of existing operations and include a limited number of relatively small, high-return projects. Capital expenditures for the first quarter of 2003 totaled $2.2 million.

Financing Activities

The long-term debt to total capitalization ratio was 64 percent at March 31, 2004 compared with 63 percent at December 31, 2003. At March 31, 2004, the Company was in compliance with all applicable debt

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covenants, including maximum leverage ratios, net worth tests, minimum interest coverage ratios and minimum liquidity amounts. The debt agreements related to the Company’s 8 3/8% debentures and senior notes do not contain any financial covenants. As of March 31, 2004, Moody’s Investor Service rated the Company’s senior unsecured debt Ba3 with a stable outlook. Standard & Poor’s Rating Services current rating for the Company’s corporate and senior unsecured debt ratings was BB with a negative outlook.

The Company’s $15 million U.S. revolving line of credit agreement expired in March 2004 and was replaced by a three-year revolving line of credit agreement with another U.S. bank. The agreement, expiring in March 2007, provides for maximum borrowings of $25 million and is secured by certain accounts receivable and inventories.

The Company’s Canadian revolving bank line of credit agreement consists of two 364-day extendable revolving credit facilities. The maximum borrowings under one line totals $95.0 million Canadian (approximately $73 million U.S.), and this line is convertible into a two-year term loan upon expiration of the revolving credit provisions. The other line provides $55.0 million Canadian (approximately $42 million U.S.) of revolving borrowings and is convertible into a one-year term loan upon expiration of the revolving credit provisions. The lines expire in June 2004 and are secured by the Mackenzie mill property, plant and equipment and certain inventory and accounts receivable. The Company expects to either extend its Canadian revolving credit facilities prior to their expiration or enter into new credit facilities.

The Company’s ability to borrow additional amounts under its revolving lines of credit at a particular point in time is subject to the amount of cash on hand, the availability of adequate collateral, letters of credit outstanding and compliance with existing financial covenants. As of March 31, 2004, the Company had borrowing capacity under its revolving lines of credit of $56.9 million. The Company expects to meet its cash requirements in 2004 through a combination of cash generated from operations, existing cash balances and existing or future credit facilities or other debt or equity resources.

Cautionary Statement Regarding Forward-Looking Information

Statements in this report that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on present information the Company has related to its existing business circumstances and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from such forward-looking statements. Further, investors are cautioned that the Company does not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. In addition to specific factors that may be described in connection with any particular forward-looking statement, factors that could cause actual results to differ materially include (but are not limited to):

Cyclical Operating Results and Product Pricing

The Company’s financial performance depends primarily on the prices it receives for its products. Prices for both pulp and lumber products are highly cyclical and have fluctuated significantly in the past and may fluctuate significantly in the future. Increases or decreases in production capacity, increases or decreases in operating rates and changes in customer consumption patterns will cause changes in product prices. The economic climate of each region where the Company’s products are sold has a significant impact on the demand, and therefore the prices, for pulp and lumber. Changes in regional economies can cause fluctuation in prices and sales volumes and, as a result, directly affect the Company’s profitability and cash flows. The continued uncertainties in the economic conditions of the United States and other international markets could adversely affect the Company’s results of operations and cash flows. Any future downward fluctuation in prices could have a material adverse effect on the Company’s business, financial condition and results of operations. The amount of downtime that the Company’s mills take fluctuates based on changes in pricing and demand for its products.

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Competitive Markets

The Company’s products are sold primarily in the United States, Europe, Canada and Asia. The markets for the Company’s products are highly competitive on a global basis, with a number of major companies competing in each market with no company holding a dominant position. For both lumber and pulp, a large number of companies produce products that are reasonably standardized; therefore, the traditional basis for competition has been price. Other competitive factors are quality of product, reliability of supply and customer service. Because of greater resources, many of the Company’s competitors may be able to adapt more quickly to industrial changes or devote greater resources to the sale of the products. The Company cannot assure that it will be able to compete successfully against such competitors.

Exchange Rate Fluctuations

Although the Company’s sales are made primarily in U.S. dollars, a substantial portion of its operating costs and expenses are incurred in Canadian dollars. Significant variations in relative currency values, particularly a significant increase in the value of the Canadian dollar relative to the U.S. dollar, could adversely affect the Company’s results of operations and cash flows. A substantial portion of the Company’s pulp customer base is in Europe, Asia and other non-U.S. markets. As such, the value of the U.S. dollar as compared to foreign currencies directly affects the Company’s customers’ ability to pay and the Company’s relative competitive cost position with other regions’ pulps. Any significant exchange rate fluctuation could have a material adverse effect on the Company’s business, financial condition and results of operation. For example, a change in the U.S. to Canadian dollar translation rate from 1.31 to 1.30 would increase pre-tax cost of sales as measured in U.S. dollars by an estimated $3.3 million U.S. on an annual basis.

Fees on Lumber Imports into the United States

In May 2002, the ITC imposed duties on certain types of softwood lumber imported into the United States from Canada after determining that imports of certain types of softwood lumber from Canada threatened U.S. softwood lumber mill operators. Based on findings of the DOC regarding subsidies and dumping margins, the ITC’s decision subjects the Company’s imports of certain types of softwood lumber from Canada on or after May 22, 2002 to a total duty rate of 27.22 percent, which has had a material adverse effect on the Wood Products business result of operations. Various NAFTA and WTO rulings have been issued to date in Canada’s appeals of these duties, but none of these rulings have become final. In the event that final rates differ from the depository rates, ultimate costs may be higher or lower than those recorded to date. The ultimate outcome or effect of NAFTA and WTO reviews, or whether a settlement between the Canadian and U.S. governments may be reached, cannot be predicted.

Environmental Regulations

The Company’s pulp and lumber operations are subject to a variety of national and local laws and regulations, many of which deal with the environment. These laws and regulations impose stringent standards on the Company’s operations regarding, among other things, air emissions, water discharges, use and handling of hazardous materials, use, handling and disposal of waste and remediation of environmental contamination. Changes in these laws or regulations have in the past, and could in the future, require the Company to make substantial expenditures in order to comply, which could have a material adverse effect on the Company’s business.

Environmental Liabilities

The Company is currently participating in the investigation and remediation of environmental contamination at three sites on which it previously conducted business. In addition, the Company is working with the Ministry of Water, Land and Air Protection in British Columbia regarding environmental

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contamination at the Mackenzie mill. The Company may also be required to investigate and remediate environmental conditions at other sites if contamination, presently unknown to the Company, is discovered. The ultimate cost to the Company for site remediation and monitoring of these sites cannot be predicted with certainty due to the difficulties in estimating the ultimate cost of remediation and determining the extent to which contributions will be available from other parties. Expenditures that may be required in connection with these sites could have a material adverse effect on the Company’s business.

Availability and Pricing of Raw Materials

Logs, wood chips and sawdust, the principal raw materials used in the manufacture of the Company’s products, are purchased in highly competitive, price-sensitive markets. These raw materials have historically exhibited price and demand cyclicality. Supply and price of these raw materials are dependent upon a variety of factors, many of which are beyond the Company’s control. Such factors include changing environmental and conservation regulations and natural disasters, such as forest fires, wind storms or other extreme weather conditions. A decrease in the supply of logs, wood chips and sawdust can cause higher raw material costs and, as a result, material fluctuations in the Company’s results of operations.

The Company’s Harmac pulp mill has a long-term fiber supply agreement with Weyerhaeuser that provides for 1.7 million cubic meters of fiber per year through 2019. The Company’s Mackenzie pulp mill purchases approximately 65 percent of its fiber requirements from sawmills also located in Mackenzie, British Columbia and operated by Slocan. Fiber is purchased at market or at prices determined under a formula intended to reflect market value of the fiber. The failure by Weyerhaeuser or Slocan to produce the required fiber pursuant to these contracts could have a material adverse effect on the Company as a whole. The Company has entered into arrangements with other independent fiber suppliers to provide fiber incremental to that provided by Weyerhaeuser and Slocan. There can be no assurance that the Company will be able to obtain an adequate supply of softwood fiber for its pulp operations.

The Forestry Revitalization Plan

In March 2003, the Government of British Columbia (Crown) introduced the Forestry Revitalization Plan (the “Plan”) that provides for significant changes to Crown forest policy and to the existing allocation of Crown timber tenures to licensees. The changes prescribed in the Plan include: the elimination of minimum cut control regulations, the elimination of existing timber processing regulations, and the elimination of restrictions limiting the transfer and subdivision of existing licenses. In addition, the Crown has legislated that licensees, including the Company, will be required to return 20 percent of their replaceable tenure to the Crown. Because the first 200,000 cubic meters of AAC are not subject to reduction, the timber take-back is expected to result in a reduction of approximately 200,000 cubic meters, or 16 percent, of the Company’s existing annual allowable cut. The Company expects the reductions in its AAC can be made up through market purchases of logs. The Crown has stated that licensees will be fairly compensated for lost harvesting rights and improvements on Crown land, such as roads and bridges, based on the remaining term of the license and calculated according to a regulation that has not yet been enacted. The Minister of Forests has three years from March 31, 2003 to determine reductions to a licensee’s AAC. In addition, the Crown is expected to introduce a market-based timber pricing system for stumpage fees in the British Columbia interior by the end of 2004. It is not known when that change will be implemented, or the extent to which the stumpage fees paid by the Company’s Canadian lumber operations will increase or decrease. The effect, if any, on the Company’s future supply and cost of logs, chips and sawdust to its Canadian operations cannot be determined at this time.

Net Operating Loss Tax Asset

Management believes that the Company will have sufficient future U.S. taxable income which makes it more likely than not that the net operating loss deferred tax asset will be realized. In making this

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assessment, the Company has considered the ability to utilize certain tax planning strategies if a net operating loss were to otherwise expire. The realization of the deferred tax asset is not assured and could be reduced in the future if estimates of future taxable income during the carryforward period are reduced or the estimated benefits realizable from tax planning strategies are reduced. The Company’s ability to record tax benefits in full or in part on future U. S. net operating losses is also not assured.

Financial Leverage

The Company’s long-term debt as a percentage of total capitalization at March 31, 2004 was 64 percent. While the Company’s leverage level is not unusual for the forest products and pulp industries, this leverage, or higher leverage if the Company were to incur additional indebtedness, could have important consequences. For example, it could make it difficult to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes. Higher levels of leverage may require a substantial portion of the cash flow from operations to satisfy debt service requirements, thereby reducing the Company’s ability to use cash flow to fund working capital, capital expenditures, development projects, acquisitions, dividends and other general corporate purposes. Higher leverage also limits flexibility in planning for, or reacting to, changes in business and increases vulnerability to a downturn in the business and general adverse economic and industry conditions.

Certain of the Company’s debt agreements contain customary conditions to borrowing, including compliance with financial covenants relating to maximum leverage ratios, net worth tests, minimum interest coverage ratios and minimum liquidity amounts. The Company’s ability to comply with these covenants is subject to various risks, uncertainties and events beyond the Company’s control that could affect its ability to comply with the covenants. Any failure by the Company to comply with all applicable covenants could result in an event of default with respect to, and the acceleration of, a portion of the Company’s debt.

Labor Relations

Approximately 80 percent of the Company’s employees are paid on an hourly basis and most of these employees are covered under collective bargaining agreements. In 2003, the Company negotiated Memorandum of Agreements for six-year terms with the Canadian unions at the Castlegar sawmill and the Arrow Lakes forestry division. The Company is currently in negotiations with the Canadian unions in Midway, Grand Forks and Boundary covering approximately 381 employees. If the Company were unable to reach agreement on the terms of any collective bargaining agreement with any group of its employees, the Company could be subject to work slowdowns or stoppages.

British Columbia’s First Nations People’s Claims to British Columbia Land

The Company’s Canadian forest operations are primarily carried out on public forestlands under forest licenses. Many of these lands are subject to the constitutionally protected treaty or common law rights of the First Nations people of Canada. First Nations groups in British Columbia have made claims of ownership or interests in substantial portions of land in the Province and are seeking compensation from the government with respect to these claims. The Supreme Court of Canada has held that the First Nations groups have a spectrum of aboriginal rights in lands that have been traditionally used or occupied by their ancestors. The Court’s decision did not apply to any particular lands and was stated in general terms. The Court held that aboriginal rights and title are not absolute and may be infringed upon by government in furtherance of a legislative objective, including forestry, subject to meeting a justification test and being consistent with the fiduciary relationship between government and First Nations groups.

To address the claims of the First Nations groups, the governments of Canada and British Columbia instituted a negotiation process under the administration of a treaty commission. In July 2002, the voting public approved a referendum of principles for treaty making. This gave Provincial negotiators the authority to negotiate and make commitments on topics that are consistent with the referendum principles and for which current policies exist. Any settlements that may result from the negotiation process may involve a combination of cash and resources and grants of conditional rights to gather food on public lands

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and some rights of self-government. The issues surrounding aboriginal rights and title are not likely to be resolved by the Canadian governments in the near future. Recently, some aboriginal groups in British Columbia have filed court proceedings against forest companies holding government-granted forest tenures, claiming compensation from the tenure holders for what they claim is the wrongful use of their land and tenures. The Company has not received notice that any such court proceedings have been commenced against it. If significant areas of Canada are found by the courts to be subject to aboriginal title, the Company’s forest tenures and its ability to harvest timber from those tenures could be materially adversely affected. A reduction in the timber supply could have a material adverse effect on the Company’s financial condition, cash flows and results of operations.

Third Party Information

In this report, the Company relies and refers to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources or other third parties. Although the Company believes the information is reliable, it cannot guarantee the accuracy or completeness of the information and has not independently verified it.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk for interest rates relates primarily to short- and long-term debt. The Company’s investment in marketable securities at March 31, 2004 and December 31, 2003 was not significant. The Company’s debt is primarily fixed rate with 20 percent of total debt at variable rates at March 31, 2004, and therefore, net income is not materially affected when market interest rates change.

The Company has exposure to foreign currency exchange rate risk due to its significant operations in Canada. For the Company, a weakening of the Canadian dollar relative to the U.S. dollar has a positive effect on the cost of operating in Canada but has a negative foreign currency translation effect on the Company’s net investment in Canadian operations. The Company’s net investment in Canadian subsidiaries is not hedged. The net assets of Canadian subsidiaries translated into U.S. dollars using the period-end exchange rates were approximately $203.2 million at March 31, 2004. The potential change in fair value resulting from a hypothetical 10 percent change in the Canadian to U.S. exchange rate would be approximately $20.3 million at March 31, 2004. Any gain or loss in fair value would be reflected as a cumulative foreign currency translation adjustment and would not affect cash flows or reported net income or loss of the Company.

The Company is exposed to foreign currency transaction gains and losses primarily in the translation of U.S. dollar denominated cash and accounts receivable of its Canadian subsidiaries and Canadian dollar denominated intercompany loans made by the parent company. The Company periodically uses foreign exchange contracts to manage a portion of its exposure to foreign currency transactions, but historically has not entered into material currency rate hedges with respect to exposure from its operations in Canada. In addition, Canadian dollar-denominated intercompany loans from the Company to its Canadian subsidiaries have the effect of a hedge against the currency risk on its U. S. dollar-denominated cash and accounts receivable of its Canadian subsidiaries. The notional value of foreign currency exchange contracts outstanding at March 31, 2004 and December 31, 2003 was $12.5 million and $10.0 million, respectively.

The Company utilizes well-defined financial contracts in the normal course of its operations as a means to manage certain commodity price risks. The majority of these contracts are fixed-price contracts for future purchases of energy, primarily natural gas and electricity, which meet the definition of “normal purchases or normal sales” and therefore, are not considered derivative instruments for accounting purposes. There were no contracts outstanding at March 31, 2004 or December 31, 2003 that were considered derivative instruments.

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ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, as defined by the Securities and Exchange Commission, as of the end of the period covered by this report. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis.

Change in Internal Controls

There was no change in the Company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures and its internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. Moreover, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events.

Notwithstanding the foregoing limitations, the Company’s management believes that its disclosure controls and procedures provide reasonable assurances that the objectives of its control system are met.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

See Note 8. Legal Matters and Contingencies of the Notes to Condensed Consolidated Financial Statements for information regarding legal proceedings.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K

On January 22, 2004, the Company filed a Form 8-K to furnish the Securities and Exchange Commission its earnings release announcing fourth quarter and annual 2003 financial results.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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